Bharti Airtel Ltd. v. Additional Commissioner of Income-tax, Range -2, New Delhi

ORDER

Pramod Kumar, Accountant Member - This appeal is directed against the order dated 19th October 2011 passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'] for the assessment year 2007-08.

2. In the first ground of appeal, the assessee has raised the following grievance:

3. So far as this ground of appeal is concerned, the relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has debited Rs 1638,42,89,000 towards licence fees and spectrum charges, out of which Rs 1157,17,09,913 represent licence fees. The Assessing Officer noted that in earlier years also, similar payments towards licence fees were disallowed but amortization granted under section 35ABB of the Act. It was in this backdrop that the Assessing Officer required the assessee to show cause as to the licence fees not be disallowed as a revenue expenses, and deduction under section 35ABB be granted for amortized expenses. The assessee pointed out that similar disallowances for the earlier years have been disallowed by the Tribunal, and, as such, the issues is settled in favour of the assessee. However, since the matter was in appeal before Hon'ble High Court, and to keep the issue alive, the Assessing Officer disallowed Rs 1157,17,09,913 but allowed a deduction of Rs 2,90,49,95,380 on account of amortization of expenses. The assessee did raise the grievance before the Dispute Resolution Panel, but without any success. Accordingly, a net disallowance of Rs 866,67,12,152 was made by the Assessing Officer. The assessee is not satisfied and is in appeal before us.

4. We have heard the rival contentions, perused the material on record and duly considered the applicable legal position.

5. As learned representatives fairly agree, the issue is now covered, in favour of the assessee, by Hon'ble Delhi High Court's judgment dated 19th December 2013, in assessee's own case. In this judgment, Their Lordships have, inter alia, held as follows:

"47. In view of the aforesaid findings, the substantial questions mentioned above ….. are answered as follows:

6. In the case before us, it is not in dispute that the licence fee in question is on revenue sharing basis and pertains to period post 1st August 1999. In this view of the matter, and in due deference to the esteemed views of Hon'ble jurisdictional High Court, we hold that the impugned disallowance deserves to be deleted and that the entire amount of licence fees is allowable as revenue deduction. The assessee gets the relief accordingly.

7. Ground No. 1 is thus allowed.

8. In ground no. 2, the assessee has raised the following grievance:

"2. That the assessing officer erred on facts and in law in disallowing interest paid on term loans amounting to Rs.4,18,10,255/- by disregarding the fact that the borrowed funds were utilised only for business purpose.

2.1 That the assessing officer erred on facts and in law in not following the binding decisions of the Delhi High Court in the appellant's own case for the earlier assessment years 2001-02 to 2003-04 and 2004-05 in gross violation of principles of judicial discipline."

9. So far as this issue is concerned, it is sufficient to take note of the admitted position that deletion of similar disallowances by this Tribunal has now received finality inasmuch as the revenue's appeals before the Hon'ble High Court, as also special leave petition before Hon'ble Supreme Court, have been dismissed. As a matter of fact, in the assessment order passed for the assessment year 2008-09, pursuant to DRP having taken note of these developments, no such disallowance has been made. A copy of Hon'ble Supreme Court's order dismissing the SLP has also been filed before us. In view of these discussions, as also bearing in mind entirety of the case, we direct the Assessing Officer to delete this disallowance of Rs 4,18,10,255 as well.

10. Ground No. 2 is also thus allowed.

11. In the ground no. 3, the assessee has raised the following grievance:

"3. That the assessing officer erred on facts and in law in disallowing employee compensation expenses of Rs.11,96,23,407 incurred on account of actual issuance of shares to employees under the Employee Stock Option Plan(s) ('ESOP') claimed deduction under section 37(1) of the Act, holding the same to be capital in nature.

3.1 That the assessing officer failed to appreciate that the appellant claimed the aforesaid employee compensation expense only on actual exercise of option(s) and issuance of shares to the employees.

3.2 That the assessing officer further failed to appreciate that since grant of option and issuance of shares was merely in the nature of employee compensation/welfare expense, the same was allowable revenue deduction.

3.3 Without prejudice, that on the facts and circumstances of the case, the difference between the fair market value of the shares and the amount receivable from the employee at the time of issue/or exercise of the Employee Stock Option, debited to the profit and loss account for the year under appeal should, in line with the decision of the Special bench of the Tribunal in the case of Biocon Limited v. DCIT : 25 ITR (Trib) 602 , be directed to be allowed, over the vesting period, i.e. partly in the year under consideration and in the earlier assessment year(s)."

12. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has claimed a deduction of Rs 11.96,23,407 in respect of actual exercise of options by the employees under ESOP plans, and that the said deduction was worked out on the basis of fair value of the ESOP shares, as per SEBI guidelines, multiplied with the actual number of shares issued. The Assessing Officer was of the view that these expenses are capital in nature, and, accordingly, he disallowed the same. While doing so, he also placed reliance on this Tribunal's decision in the case of Asstt. CIT v. Ranbaxy Laboratories Ltd. [2012] 20 taxmann.com 334 (Delhi) . An objection was raised before the DRP but without any success. The assessee is not satisfied and is in appeal before us.

13. Having heard the rival contentions, and having perused the material before us, we find that the issue is now covered in favour of the assessee by a Special Bench decision in the case of Biocon Ltd v. Dy. CIT [2013] 35 taxmann.com 335 (Bang. - Trib.) wherein the Tribunal has, inter alia, held as follows:

"11.3 We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head 'Profits and gains of business or profession'."

14. We have also noted that it is an undisputed position, as evident from the computations reproduced in the assessment order itself, that the amounts claimed as a deduction represent the actual exercise of options. In this view of the matter, and in view of the principles laid down in Special Bench decision in the case of Biocon Ltd. (supra), we uphold the grievance of the assessee. The disallowance of Rs 11,96,23,407 must also, therefore, be deleted. We order so.

15. Ground No. 3 is also allowed.

16. In ground no. 4, the assessee has raised the following grievance:

'4. That the assessing officer erred on facts and in law in disallowing lease charges aggregating to Rs.129,62,06,055 paid to M/s. IBM India and M/s Nortel Networks India (P) Limited.

4.1 That the assessing officer erred on facts and in law in alleging that the transaction entered into by the appellant fell in the category of a disguised purchase, by relying upon similar findings given in the assessment order for assessment year 2006-07.

4.2 That the assessing officer failed to appreciate that the mere fact that the transactions entered into by the appellant were treated as finance lease in the books of accounts as per the binding Accounting Standard on "Finance Lease" was not relevant for determining the nature of the transaction and allowability of the claim under the provisions of the Act.

4.3 That the assessing officer erred on facts and in law in not appreciating that the essence of the composite agreements entered into by the appellant with IBM/Nortel was for outsourcing of information technology services and not for leasing/acquiring any 'asset' so as to constitute finance lease.

4.4 Without prejudice, that the assessing officer failed to appreciate that the entire exercise of seeking to disturb the year of allowability of expenditure was, in any case, revenue neutral.

4.5 Further, without prejudice, that assessing officer erred on facts and in law in not allowing depreciation on lease rentals disallowed in the earlier assessment year(s) consistent with the finding given in the said assessments that the transaction entered into by the appellant was in the nature of finance lease on which depreciation was allowable under the provisions of the Act.'

17. The relevant material facts, so far as this grievance of the assessee is concerned, are like this. The assessee is engaged in the business of telecommunication providing landline, cellular and broadband services etc. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had entered a composite agreement with IBM India for provision of information technology, and that the assessee has accounted for this composite outsourcing agreement as finance lease, following Accounting Standard 19. Accordingly, in the books of accounts of the assessee, an addition has been made for Rs 194,01,07,865, and depreciation thereon amounting to Rs 140,48,58,730 has been charged. It was further noted that additionally an amount of Rs 206,20,45,487 was debited on account of services rendered under the said composite contract. However, while computing under the normal provisions of the Act, these amounts have been added back and consequently, total amount paid to the vendor as lease rental, i.e. Rs 510.40,49,662 has been claimed as revenue deduction. Similarly, the company had an arrangement with Nortel Networks India Pvt Ltd for outsourcing its call centre activity. While the company has accounted for Nortel outsourcing agreement as finance lease, following AS 19, the company had added fixed assets by Rs 38,18,94,395 and provided for depreciation amounting to Rs 2,16,52,503 thereon. Additionally, Rs 6,07,80,057, being Norton call centre expenses, were debited to the legal and professional charges. All these amounts debited to the profit and loss account were, however, added back in the process of computing profits under normal provisions of the Act, and amounts paid to the vendor as lease rental, aggregating to Rs 17,35,61,495, were claimed as a deduction. The assessee's grievance to the DRP did not yield any success. The DRP rejected the grievance and observed as follows:

"The assessee has objected to addition on account of the lease rent paid to M/s IBM and M/s Nortel.

It is seen that this matter was raised for the first time in AY 2006-07 and the DRP, after considering facts which are very similar to this year also, holds that addition was justified. The assessee had filed an appeal in the ITAT against the addition. However, the ITAT has referred the matter back for fresh assessment after considering the revised return of the merged entity. The present DRP agrees with the decision of the DRP for the assessment year 2006-07 and, therefore, the objection of the assessee is rejected. The assessee, without prejudice, alternatively claims that depreciation is to be allowed to it on reasonable basis since lease rental expenses have been disallowed. The AO shall recompute depreciation accordingly."

18. Accordingly, the Assessing Officer disallowed the claim, though after adjusting for depreciation on the entire amount, in the computation of income. Aggrieved by the disallowance of Rs 129,62,06,055 so made, the assessee is in appeal before us.

19. Even as learned representatives have argued the matter at length on merits, we are not inclined to go into merits of the case for the simple reason that the Assessing Officer has not given any adjudication on merits and nor has he dealt with the contentions of the assessee by way of a speaking order. The Assessing Officer and the DRP have simply followed the order of the earlier years, and the matter for that year stands restored to the file of the Assessing Officer. In our considered view, in such a situation, it will be inappropriate for us to deal with the matter on merits. We, therefore, deem it fit and proper to remit the matter to the file of the Assessing Officer for adjudication on merits, by way of a speaking order specifically dealing with contentions of the assessee and after giving yet another opportunity of hearing to the assessee. We also make it clear that the assessee shall have the liberty to take up all the related issues, as the assessee may deem fit, and the Assessing Officer will be required to deal with all these contentions. We remit the matter to the file of the Assessing Officer with these directions.

20. Ground no 4 is thus allowed for statistical purposes.

21. In ground no. 5, the assessee has raised the following grievance:

"5. That the assessing officer erred on facts and in law in disallowing interest of Rs.87,83,92,587 paid to ABN Amro Bank, Stockholm, on its own account and in trust for other lenders under section 40(a)(i) of the Act.

5.1 That the assessing officer failed to appreciate that there was no obligation to deduct tax at source since the interest paid to ABN Amro Bank, Stockholm, was not chargeable to tax in India under the provisions of the Act read with the overriding provisions of Article 11 of the applicable DTAA.

5.2 That the assessing officer failed to appreciate that the appellant being under bona fide belief that ABN Amro being tax resident of Sweden was eligible for benefits available under the DTAA and the alleged non deduction of tax at source did not attract invoking of section 40(a)(i) of the Act.

5.3 That the assessing officer erred on facts and in law in not appreciating that the interest paid on loans procured from ABN Amro, which were subsequently novated by ABN Amro in favour of third parties ('the new lenders'), who were tax residents of the respective countries, was, in any case, not liable to tax in India in terms of relevant Article of the respective Tax Treaty and consequently, there was no default in not deducting tax at source.

5.4 Without prejudice, that the assessing officer failed to appreciate that disallowance under section 40(a)(ia) of the Act should have, if at all, been restricted to the amount remaining as payable as on the last date of the relevant previous year."

22. So far as this ground of appeal is concerned, the relevant material facts, as culled out from material before us, are as follows. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has paid a sum of Rs 87,83,92,587 as interest on borrowings to ABN Amro Bank, Stockholm branch (ABN-S, in short), but has not deducted any tax at source from the same. When Assessing Officer probed the matter further, he found that the assessee had acquired certain supplies of telecommunication equipment form Ericsson, a Sweden based company. This transaction involved large financing, and, as an export promotion measure by the Government of Sweden, export of equipment was facilitated by Swedish Export Credit Guarantee Board, i.e. Exportkreditnamnden (EKN, in short). ABN Amro Bank, Stockholm branch, was willing to enter into a contract for advancing this term loan, but EKN was to guarantee this loan, and the actual financing of the loan was to be done by certain other lenders. The assessee, for the purpose of arranging the borrowings to finance the purchase of equipment, entered into a multilateral agreements. The parties to these agreements were the assessee (the borrower), ABN Amro Bank Stockholm branch (the arranger) and the financial institutions actually funding the loan (the original lenders). These agreements were guaranteed by t EKN. The assessee's case was that since the assessee made the payment of interest to ABN Amro Bank NV, Stockholm branch, and since, in terms of Article 11(3) of the India Sweden Double Taxation Avoidance Agreement (229 ITR Statute 11) any interest paid, on borrowings endorsed by EKN, to a Swedish resident is not taxable in India, the assessee was not required to withhold any taxes under section 195. The assessee had also produced a certificate dated 11th September 2002 from the Swedish tax authorities to the effect that ABN Amro Bank NV Branch, Stockholm, is "a company resident in Sweden within meanings of the convention to avoid double taxation between Sweden and India" and that "the company is registered for taxes as a firm under number 516401-9761". This plea was rejected by the Assessing Officer on the ground that the ABN Amro Bank NV was in fact a Dutch resident and it had a limited tax liability in Sweden in respect of its Swedish sourced income only. Reliance was also placed on the letter dated 17th April 2008 received from the Swedish Tax Authority, in terms of exchange of information provisions under the Indo Swedish tax treaty, which confirmed that the Stockholm branch of ABN Amro bank is liable to income tax Sweden within the meanings of the tax treaty, i.e. Article 7, and that it not a resident of Sweden as required by Article 4 of the treaty. It appears that the demands under section 201(1) r.w.s 195 were also raised on the assessee which are right now pending in appeal before this Tribunal. It was in this backdrop of facts that the claim of deduction for interest paid to ABN Amro Bank, amounting to Rs 87,83,92,587 was disallowed under section 40(a)(i). The assessee's objection, raised before the DRP, was also rejected. Aggrieved by the disallowance so made, the assessee is in appeal before us.

23. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

24. We find that so far as assessee's dealings with ABN-S are concerned, these are to be examined in accordance with the provisions of the India Netherlands Double Taxation Avoidance Agreement, rather than India Sweden Double Taxation Avoidance Agreement, for the reason that the ABN Amro Bank is a tax resident of the Netherlands and ABN Amro Bank's Stockholm branch is an integral part of the AB Amro Bank NV. ABN-S's taxability in Sweden is confined to the taxability of its profits in Sweden, whereas under Article 4(1) of Indo Swedish tax treaty, an enterprise can be treated as resident of Sweden only when, inter alia, such a person "under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature". Clearly, the mere fact that such profits of an enterprise are taxable in Sweden cannot lead to the conclusion that the enterprise is tax resident of Sweden. Elaborating upon the scope of expression 'liable to tax by the reason of domicile, residence, place of management or any other criterion of similar nature', a coordinate bench of this Tribunal, in the case of Dy. CIT v. General Electric Co. plc. [2001] 119 Taxman 137 (Cal.)(Mag.) and speaking through one of us (i.e. the Accountant Member), has observed as follows:

'16. Art. 4(1) of the Indo-Dutch DTAA clearly provides that "for the purpose of this Convention, the term 'resident of one of the states' means any person who, under the laws of that state, is liable to taxation therein by reasons of his domicile, residence, place of management or any other criterion of a similar nature". The requirements for fiscal domicile cannot be satisfied by mere liability to tax in that country, but as clearly provided by art. 4(1) of the Indo-Dutch DTAA, such a liability to taxation has to be on account of domicile, residence, place of management or any other criterion of a similar nature. The question, then, is as to what are the connotations of these terms and whether source taxability of dividend income per se can generate 'treaty entitlements' of the country in which such taxes on dividends have been paid. The wordings of art. 4(1) leave no doubt about the fact that merely because a person is tax-payer in one of the countries which are party to the Indo-Dutch DTAA, i.e. in India or in Netherlands, such a person cannot be treated as 'resident of one of the states' for the purposes of the DTAA. Coming to specific tests laid down in the DTAA, as far as 'domicile test' is concerned, in common law, 'domicile' has a somewhat restricted meaning, denoting a fixed and lasting attachment to a country or state with its own separate legal system-one only in each case-which initially is acquired by birth ('domicile by origin'), and capable of being altered later by a personal decision ('domicile by choice'). In the case before us, the assessee-companies were incorporated in United Kingdom and there is nothing on record to even remotely suggest that the assessee-company was domiciled in the Netherlands. Since there can only be one country of domicile and since the assessee-companies are already domiciled in United Kingdom by the virtue of its incorporation in that country, the assessee-companies cannot be said to be domiciled in the Netherlands. Coming to the 'residence test', it is admittedly not the assessee's case that the assessee-companies are residents of Netherlands. Similarly, it is also not in dispute that 'place of effective management' is United Kingdom and the case of the assessee-companies cannot even be covered by this criterion. That leaves us only with 'any other criterion of similar nature'. It may be useful to first refer to the principle of 'ejusdem generis' in interpretation of statutes. Simply stated, the principle of ejusdem generis is that where there are general words following particular and specific words, the general words will have restricted meaning which will be confined to the things of the same kind as specified. In other words, the general expression is to be read as 'comprehending only things of the same kind as that designated by preceding particular expressions, unless there is something to show that wider sense was intended. In the case before us, the principle of ejusdem generis have been incorporated in the text of the treaty provision itself, 'any other criterion' referred to in the treaty has to be restricted to the genus of three earlier expressions i.e. domicile, residence and place of effective management. The key question, therefore, is whether 'earning of dividends earned from the Netherlands' can be said to belong to the same genus to which 'domicile, residence and place of effective management' belong ? No. doubt, as observed by Dr. Klaus Vogel in his Commentary to the Double Taxation Conventions, the term 'other criterion of similar nature' makes clear that the enumerated criterion of domestic law which attracts tax liability are no more than examples for the rule, but Dr. Vogel has further stated that, "The term should be understood to mean any locality-related attachment that attracts residence-type taxation." An illustration given in this commentary refers to "statutory seat which, under German law, serves as an alternative point of attachment in the absence of a place of management within the domestic territory." We are in considered agreement with Dr. Vogel's observation that 'any other criterion of similar nature' should be understood to mean any locality related attachment that attracts residence type taxation. In the light of these discussions, it is clear that only 'locality related attachment' ('locality related' being the genus to which expressions 'domicile' 'residence' and 'place of effective management' belong) can be covered by the scope of expressions 'any other criterion of similar nature' in terms of art. 4(1) of the Indo-Netherlands DTAA. We are also of the considered view that cases before us clearly fail on this test.'

25. In view of the above discussions and bearing in mind the fact that ABN-S did not have any locality related attachment in Sweden which could lead to residence type taxation on global basis, in our considered view, ABN-S cannot be treated as tax resident of Indo Swedish tax treaty. Accordingly, the benefit of Article 11 (3) of Indo Swedish tax treaty cannot be applicable on the ground that the interest remittances are made to ABN-S. However, for the reasons we will now set out, the mere fact that the interest has been remitted to ABN-S and that the benefit of Article 11(3) of Indo Swedish tax treaty or benefit of Article 11(3) of the Indo Dutch tax treaty are not available in respect of these remittances, does not imply that the amounts so paid are taxable in India.

26. We find that there is no dispute about the fact that the ABN- S, was arranger of the loan and there were also other financial institutions termed as 'original lenders' who had actually financed this transaction. The role of the ABN-S, except to the extent of financing of its own funds in this arrangement, was confined to that of a facilitator. We have also noted that it is an undisputed position that subsequently these loan agreements were novated and the original lenders came into direct agreements with the assessee. Under these circumstances, in our considered view, the interest received by the ABN-S, except to the extent received for the financing done by itself, was not entirely in his own right but merely as a conduit for making onwards payments to identified original lenders in a transparent manner. As we take note of these facts, it is also important to bear in mind the fact that the liability under section 201(1) r.w.s. 195, which has been invoked in this case for non deduction of tax at source from payments to ABN-S - which is the bedrock of disallowance impugned in this appeal, is based on taxability of ABN Amro Bank @ 10% (before grossing up) under Article 11(2) of the Indo- Dutch tax treaty and by thus treating ABN Amro Bank as beneficial owner of the interest. It may be noted that under Article 11 of the Indo Dutch tax treaty, interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. Article 11(2), however, provides that such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount, amongst other, in the cases of the interest on loans made or guaranteed by a bank or other financial institution carrying on bona fide banking or financing business. It is thus beyond doubt that the taxation of interest, even according to the revenue authorities, is being done in the hands of the beneficial owner. In these circumstances, the authorities below were clearly in error in treating ABN Amro Bank as recipient and as beneficial owner of the entire interest paid by the assessee remitted to ABN-S In our considered view, even though such interest is remitted to ABN-S, since ABN -S has mainly acted as a conduit, it is to be treated as having been paid to the beneficial owners of such interest i.e. original lenders under the financing arrangement - though through the ABN-S. The taxability of interest is to be examined in the light of factual findings to be so arrived at, and in the light of the applicable legal position as per the relevant provisions of the tax treaties that India has with the jurisdictions in which original lenders are resident in. Once again, we have to acknowledge the fact that learned counsel for the assessee has filed elaborate documentation in support of their stand about tax residency status of beneficial owners of the interest paid by the assessee and has also addressed the arguments on merits, but, in the absence of this aspect of the matter having been examined by the authorities below, we are not inclined to deal with the matter on merits. In our considered view, the right course of action is to identify the factual aspects to be looked into, set out the legal principles, and remit the matter to the file of the Assessing Officer for adjudication de novo by way of a speaking order, in accordance with the law and after giving yet another fair and reasonable opportunity of hearing to the assessee. While doing so, the Assessing Officer shall specifically deal with all the contentions of the assessee as the assessee may raise before him. We order so.

27. Learned counsel has also raised some arguments, said to be supported by some judicial precedents, on the question whether disallowance under section 40(a)(i) can be made in a situation in which even if the foreign remittance had tax withholding obligations under section 195 but the assessee had bonafide reasons to believe that there were no tax with withholding obligations. However, as we have remitted the matter to the file of the Assessing Officer for adjudication on the basic question as to whether there were tax withholding obligations, this aspect of the matter is academic at this stage. However, in the event of the Assessing Officer coming to the conclusion that there was indeed tax withholding obligation, whether in part or in full, in respect of interest payments, this aspect of the matter will also have to be adjudicated upon. The assessee is at liberty to take up this aspect of the matter also, if so advised, before the Assessing Officer.

28. Ground No. 5 is thus allowed for statistical purposes.

29. In ground no. 6, the assessee has raised the following grievance:

"6. That the assessing officer erred on facts and in law in disallowing under section 40(a)(ia) of the Act, sum of Rs. 5,05,47,21,495 representing free airtime given as discount/trade margin to the distributors on maximum retail price of prepaid coupons.

6.1 That the assessing officer erred on facts and in law in holding that discount/trade margin given to the distributors on retail price of the prepaid products was in the nature of commission expense, on which tax was required to be deducted at source under section 194H of the Act.

6.2 That the assessing officer erred on facts and in law in holding that the business relationship between the appellant and distributors of prepaid products was in the nature of agency as against actual relationship of principal to principal, which does not fall within the purview of section 194H of the Act.

6.3 That the assessing officer erred on facts and in law in not appreciating that the appellant sold, on principal to principal basis, prepaid card/coupons, which comprised of the 'right to use airtime', a marketable product capable of being transferred, and consequently, the provisions of section 194H of the Act were not applicable

Without Prejudice

6.4 That the assessing officer erred on facts and in law in not appreciating that no 'income' per se accrued in favour of the distributor, requiring deduction of tax at source under section 194H of the Act.

6.5 That the assessing officer failed to appreciate that no tax could have possibly been deducted at source by the appellant under section 194H of the Act, as income accruing in the hands of the distributors was indeterminable.

6.6 That the assessing officer failed to appreciate that in the absence of any actual payment or credit of any amount in the books of the appellant, the machinery provisions contained in section 40(a)(ia) of the Act failed and accordingly, the appellant was not required to deduct tax at source.

6.7 That the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act was, in any case, not warranted, since non-deduction of tax at source was on account of bona fide view taken by the appellant.

6.8 That the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act should have, if at all, been restricted to the amount remaining as payable as on the last date of the relevant previous year.

6.9 That in any case deduction in respect of the amount of discount on which tax has ultimately been paid by the payees/distributors, either in the year under consideration or in the year of filing their return of income, ought to have been allowed in view of amendment to section 40(a)(ia) of the Act."

30. So far as this grievance of the assessee is concerned, the relevant material facts are as follows. During the course of assessment proceedings, the Assessing Officer noted that the assessee has allowed free airtime to its distributors amounting to Rs 505,47,21,495. This free airtime was given as a discount to the distributors on the retail price of prepaid products. The Assessing Officer, accordingly, concluded that this amount is in the nature of commission and the assessee ought to have deducted tax at source under section 194 H in respect of the same. In this backdrop, the Assessing Officer required the assessee to show cause as to why disallowance under section 40(a)(ia) not be made in respect of the commission expenses so incurred by the assessee. The assessee's explanation was that since the transactions between the assessee and the distributors were in the nature of principal to principal transactions, these transactions were outside the ambit of Section 194 H, and, accordingly, disallowance under section 40(a)(ia) does not come into play. This explanation, however, was brushed aside by the Assessing Officer on the ground that, on materially identical facts and in the case of Commissioner Of Income Tax-Xvii… v. Idea Cellular Ltd.…. [2010] 325 ITR 148/189 Taxman 118 (Delhi) , Hon'ble Delhi High Court has decided the issue against the assessee. The assessee carried his objection to this disallowance before the DRP but without any success. The assessee is not satisfied and is in appeal before us.

31. Having heard the rival contentions and having perused the material on record, and having noted that the issue is covered against the assessee by Hon'ble High Court decisions in the case of Idea Cellular Ltd (supra) as in assessee's own case, we see no reasons to interfere in the matter. Learned counsel for the assessee has pointed out that there is no element of agency, that talk time is traded and distributed, that it's a principal to principal relationship that the assessee has with his distributors, that flow of payment is in the reverse direction which is contrary to the concept of commission payment and that the assessee had a bonafide belief that section 40(a)(ia) will not come into play as the distributors have honoured their tax liability. However, as the issue is covered against the assessee by direct decision of Hon'ble jurisdictional High Court, we are not inclined to deal with all these arguments. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, We hold that the assessee was required to deduct tax at source from the commission so allowed by the assessee, and, accordingly, his failure to do so is to be visited with the consequence of disallowance under section 40(a)(ia) r.w.s. 194 H. The disallowance is thus confirmed.

32. Ground No. 6 is thus dismissed.

33. In ground no. 7, the assessee has raised the following grievance:

"7. That the assessing officer erred on facts and in law in disallowing under section 40(a)(ia) of the Act roaming charges of Rs.2,47,31,57,620 paid to other telecom operators.

7.1 That the assessing officer erred on facts and in law in holding that roaming charges paid by the appellant were on account of technical services provided by other telecom operators on which tax was required to be deducted at source under section 194J of the Act.

7.2 That the assessing officer failed to appreciate that the telecom operators were only sharing their revenue in relation to use of their gateway/networks, which did not constitute 'technical service' within the meaning of section 194J of the Act.

Without Prejudice

7.3 That the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act was, in any case, not warranted, since non-deduction of tax at source was on account of bona fide view taken by the appellant.

7.4 That the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act should have, if at all, been restricted to the amount remaining as payable as on the last date of the relevant previous year.

7.5 That in any case deduction in respect of the amount of discount on which tax has ultimately been paid by the payees/distributors, either in the year under consideration or in the year of filing their return of income, ought to have been allowed in view of amendment to section 40(a)(ia) of the Act.

7.6 That the assessing officer should be directed to allow deduction in respect of the amount of roaming charges on which tax has ultimately been paid by the payees/recipient, either in the year under consideration or in the year of filing of their return of income, in view of the amendment to section 40(a)(ia) of the Act."

34. It is important to take note of the fact that the issue as to whether the amounts paid for roaming charges will attract tax deduction at source under section 194 J was before Hon'ble Supreme Court in assessee's own case, Commissioner Of Income Tax, Delhi v. Bharti Cellular Limited. [2011] 330 ITR 239/193 Taxman 97 and the issue was decided against the assessee in principle but the matter was remanded to the Assessing Officer (TDS) with certain directions for de novo adjudication. When this was pointed out to the learned counsel for the assessee, he invited our attention to the following observations made by Their Lordships in this judgment:

'8. There is one more aspect that requires to be gone into. It is the contention of respondent No. 1 herein that interconnect agreement between, let us say, M/s Bharti Cellular Ltd. and BSNL in these cases is based on obligations and counter obligations, which is called a "revenue sharing contract". According to respondent No. 1, s. 194J of the Act is not attracted in the case of "revenue sharing contract". According to respondent No. 1, in such contracts there is only sharing of revenue and, therefore, payments by revenue sharing cannot constitute "fees" under s. 194J of the Act. This submission is not accepted by the Department. We leave it there because this submission has not been examined by the Tribunal.' (Emphasis supplied)

35. Learned counsel for the assessee then made elaborate submissions on the proposition that the payment of roaming charges to the other operators is a revenue sharing contract. He begun by pointing out that the roaming services are rendered to assessee's subscriber and not the assessee, and the assessee only shares a part of the charges recovered from the subscriber, and proceeded to argue the matter at length on merits. However, as the authorities below have not examined this matter at any of the stages nor this specific argument was taken before them, we are not inclined to take up this plea for adjudication on merits for the first time directly before this Tribunal. It is purely a factual matter which needs to be examined in detail. In our considered view, in such a situation, the matter deserves to be remitted back to the file of the Assessing Officer for fresh adjudication in the course of which the Assessing Officer will also give specific finding, by way of a speaking order, on assessee's plea to the effect that the payment of roaming charges is a revenue sharing arrangement. While doing so the Assessing Officer shall give due and fair opportunity of hearing to the assessee, decide the matter in accordance with the law and by way of a speaking order dealing specifically with all such contentions as the assessee may raise. We order so.

36. Ground No. 7 is thus allowed for statistical purposes in the terms indicated above.

37. In ground no. 8, the assessee has raised the following grievances:

"8. That the Assessing officer erred on facts and in law in bringing to tax a sum of Rs.3,46,00,000, being non refundable security deposits received from customers in the assessment year under consideration.

8.1 That the assessing officer failed to appreciate that since the service were to be rendered over the span of the customer relationship period, the entire amount received by the appellant did not represent income which accrued in the assessment year under consideration.

8.2 Without prejudice, that the assessing officer failed to appreciate that the amount of security deposit was ultimately offered to tax in the subsequent assessment years and the entire exercise of seeking to disturb the year of taxability of income was, in any case, revenue neutral."

38. During the course of assessment proceedings, the Assessing Officer noted that the assessee had received non refundable deposits amounting to Rs 3,46,00,000, in respect of fixed line service, but, instead of treating it as a revenue receipt taxable as income, has amortized the same over estimated period of customer's relationship, as derived from estimated customer churn period, in accordance with the Generally Accepted Accounting Policies. The assessee also relied upon the exposure draft of technical guide on revenue recognition for telecommunication operators, as issued by the Institute of Chartered Accountants of India. It was also noted that activation fees was also accounted on similar basis and that direct activation cost is also deferred and amortized over the same period as of activation revenue. None of these submissions, however, impressed the Assessing Officer. He was of the view that there is no specific recommendation, in the said exposure draft, with regard to non refundable security deposit and that the activation fees cannot be treated as in parity with non refundable security deposit since activation fees is in the nature of 'joining fees' for being eligible to use the services. The assessee also raised an objection before the DRP but without any success. It was in this backdrop that an addition of Rs 3,46,00,000 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us.

39. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

40. We find that the non refundable security deposit received from the landline subscribers is in respect of the services rendered by the assessee over the period in which the connection is in use, and, therefore, its being amortized over the estimated customer churn period is in consonance with generally accepted accounting principles inasmuch as it would indeed present a distorted picture of financial affairs when entire amount of non refundable security deposit is treated as income relatable to the year in which it is received, This is the practice that the assessee has consistently followed, and the revenue has also accepted the same in the other years. As reiterated by Hon'ble Supreme Court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295/219 Taxman 379/38 taxmann.com 100 , it would be inappropriate to allow reconsideration of an issue for a subsequent year when the same fundamental aspect permeates in the different assessment years. In view of these discussions, as also bearing in mind entirety of the case, we are not inclined to approve the addition made by the Assessing Officer. We direct the AO to delete the same. The assessee gets the relief accordingly.

41. Ground No. 8 is thus allowed.

42. In ground no. 9, the assessee has raised the following grievance:

"9. That the assessing officer/TPO erred on facts and in law in making addition/adjustment of Rs.7,14,84,331 on account of the alleged difference in arm's length price of international transaction of sale of carriage and termination of voice traffic to the associated enterprise in Singapore, viz., Singapore Communications Ltd. (Singtel).

9.1 That the assessing officer/TPO erred on facts and in law in holding that the rate charged to Singtel for sale of carriage and termination of voice traffic could only be compared with the rate charged by the appellant to the unrelated party, located in Malaysia, viz., Maxis International, which was geographically closer.

9.2 That the assessing officer/TPO erred on facts and in law in not appreciating that geographical location of the customer has no bearing on the rate charged by the appellant for sale of carriage and termination of voice traffic.

9.3 Without prejudice that the assessing officer/TPO erred on facts and in law in not considering volume discount while benchmarking the international transaction of sale of carriage and termination of voice traffic.

9.4 Without prejudice that the assessing officer/TPO erred on facts and in law in not appreciating that Singapore, like US, too, is a high income economy as opposed to Malaysia, which, therefore, cannot be characterized in the same economic bracket as Singapore.

9.5 Without prejudice that the assessing officer/TPO erred on facts and in law in not holding that that transaction of payment and receipt for carriage and termination of voice traffic being closely linked and ought to have been benchmarked together.

9.6 Without prejudice, that the assessing officer/TPO erred on facts and in law in not appreciating that the international transaction of sale of carriage and termination of voice traffic is to be regarded as at arm's length applying Transactional Net Margin Method (TNMM)."

43. To adjudicate on grievances against this addition, only a few material facts need to be taken not of. The assessee before us is in the business of providing telecommunication services in India. In the course of business so carried out in India, the assessee provides its customers facilities for making calls to, and receiving calls from, the overseas subscribers. However, the assessee's own network is used, in such overseas calls, only to the extent domestic segment of these calls. When a customer of the assessee makes the call abroad, the assessee's network carries the call till the shores of India, and, thereafter, call is transferred to the overseas operator. Similarly, so far as incoming calls of the assessee are concerned, these calls are carried, till the shore of India, by the overseas operator, and then calls are picked up for domestic segment by the assessee's network. The services so rendered by the assessee are referred to as carriage and termination of calls for voice traffic.

44. The appellant has entered into several bilateral arrangements, with respect to these services, with various overseas operators. One such arrangement was with an associated enterprise by the name of Singapore Telecommunications Ltd (Singtel, in short). During the relevant previous year, the assessee received Rs 82,66,60,605 from Singtel for sale of carriage and termination of voice traffic. The assessee claims that the above transaction is entered into within tolerance range of ± 5% of arm's length price computed on the basis of Internal Comparable Uncontrolled Prices available with the assessee as the assessee has entered into similar arrangement with various other operators worldwide and the arithmetic mean of such prices is only US $ 0.061, as against US $ 0.060 charged to the AE i.e. Singtel. This plea of the assessee has been rejected by the Transfer Pricing Officer on the ground that, for the purpose of valid CUP analysis, the rate charged to the AE should be the compared with non AE in the same market or the geographically nearest market.

45. It was in this backdrop that the Transfer Pricing Officer concluded that the rates charged to Singtel should be compared with the rates charged to a Malaysian company, i.e. Maxis International, and that all other cases of Europe and USA based telecommunication operators should be rejected for CUP analysis. The TPO also noted that the assessee has charged US $ 0.071, in the cases of Maxis International, and, therefore, the valid arm's length price, under CUP method, is US $ 0.071. On this basis an ALP adjustment of Rs 7,14,84,331 was computed. Aggrieved, assessee carried the matter before the Dispute Resolution Panel, but without any success. Relying upon rule 10B (2)(d), the DRP concluded that, "(f)or the purpose of comparability using CUP as a method, the requirement is that the comparables should be from same geographic location, as the associated enterprise is" and since "there was no company in Singapore with which the assessee was dealing with, other than the associated enterprise", the TPO has rightly "selected the geographically closest country i.e. Malaysia, with which the assessee was having international transaction of the same type". It is in this background that the Assessing Officer has made the impugned addition of Rs 7,14,84,331 aggrieved by which the assessee is in appeal before us.

46. We have heard the rival contentions, perused the material on record, including elaborate written submissions filed by the assessee, and duly considered factual matrix of the case as also the applicable legal position.

47. The short point that needs to be adjudicated in this case thus narrows down to the issue whether, for the purposes of applying CUP method, all the internal comparables are to be taken into account or whether only one of these comparables, namely sale to Maxis International (Malaysia), is to be taken into account. In order to decide this question, it is useful to take a look at rule 10 B(2)(d) which is reproduced below:

"10B. Determination of arm's length price under section 92C.

(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:

(a) comparable uncontrolled price method, by which,-

(2) For the purposes of sub-rule (1) the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely :

(3) An uncontrolled transaction shall be comparable to an international transaction if-

48. A plain reading of the above provisions would show that geographical location of the market is one of the significant factor to the extent comparability of uncontrolled comparable transaction is to be judged, inter alia, on the basis of "conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail". Clearly, however, it is certainly not geographical location per se which is determinative of the comparability of the uncontrolled transaction. Geographical location, by itself, is not an important factor for deciding comparability of an uncontrolled transaction, its importance lies in being one of the factors which could affect the market conditions in which respective parties operate. Unless market conditions, in which uncontrolled transactions have taken place, are materially different vis-à-vis conditions in which international transaction has taken place, and such a difference is on account of geographical location of the market, geographical location of the market is of no consequence in judging comparability of an uncontrolled transaction for the purpose of applying CUP method. The decisive factor, on the basis of which comparability is to be judged, is the state of 'conditions prevailing in the markets in which the respective transactions to the parties operate'. These market conditions could be affected by a number of factors, as the sub rule itself suggests, including (a) geographical location and size of market; (b) overall economic development and level of competition in the market; and (c) whether the market are wholesale or retail. The true test, therefore, is whether the market in which uncontrolled transactions have taken place are materially different than the market in which the market in which controlled transactions have taken place. In a situation in which there are indeed material differences, including, of course, for the reason of geographical location and size of markets, in our humble understanding, those uncontrolled transactions cannot constitute valid comparables for benchmarking similar transactions between the AEs. In our considered view, merely because markets of uncontrolled transactions and controlled transactions are at different locations, and irrespective of the geographical distance between the markets, the transactions in such markets do not cease to be good comparables for determining the arm's length price under the CUP method. In the light of this analysis, let us revert to the facts of the case before us.

49. The assessee has used as many as thirty internal comparables for the purpose of determining arm's length price under the CUP method. These comparables are in respect of transactions with operators from various parts of the world. The TPO has rejected all but one of these comparables on the ground that the remaining comparables are with respect to geographically different markets but, as we have seen above, a difference in geographical location of the market, unless resulting in different market conditions, is not a reason good enough to reject a comparable under the CUP method. There is no mention whatsoever of any commercial differences, i.e. differences in market conditions, in the market of the uncontrolled transaction and the intra AE transaction. Since the TPO has rejected these comparables, the onus is on him to demonstrate that the market conditions are so different that the uncontrolled transactions cease to be comparable with the intra AE transactions. Not only that this onus is not discharged, there is not even a suggestion that the market conditions of the uncontrolled transactions are materially different. In view of these discussions, as also bearing in mind entirety of this case, the very basis of exclusion of other comparables is devoid of legally sustainable reasons.

50. There is one more reason, on the facts of this case, which leads us to the same conclusion.

51. It is important to bear in mind the fact that even though end consumer of an international call being made to India could be in Singapore, Malaysia, Brazil, US or anywhere else outside India, the international transaction by the assessee is a business to business service with respect to Indian market. It is only Indian domestic segment of an international call for which the assessee has charged the international call provider. As we have noted earlier, the international call provider carries the incoming call to Indian upto Indian shore and the assessee carries the international call from Indian shores to the end subscriber. The services being provided to the international telecommunication companies are with respect to the activity performed in India, and, irrespective of the area from which such international calls originate, the activity remains the same. The origin of the call does not make any difference to the activity performed by the assessee. Therefore, there cannot be any difference in the market conditions in such a case merely because the international call originates a different countries. It is a business to business service, without direct involvement of the end customer in call originating location, and, therefore, even if there is a difference in retail telecom market in countries of origin of call, such a difference cannot have any impact so far as determination of price for Indian segment of such a call is concerned.

52. As we have upheld the determination of arm's length price by the assessee, on the basis of CUP method as discussed above, we see no need to deal with other arguments by the assessee.

53. In view of the above discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustment of Rs 7,14,84,331 in respect of sale of 'carriage and termination of voice traffic'. The assessee gets the relief accordingly.

54. Ground No. 9 is thus allowed.

55. The second transfer pricing issue in this appeal is assessee's grievance against arm's length price adjustment of Rs 10,11,786 on account of interest on inter corporate deposits with the AEs. This grievance is raised by way of the grounds of appeal no. 10, as set out in the modified grounds of appeal, as reproduced below:

"10. That the assessing officer/TPO erred on facts and In law in making addition/adjustment of Rs.10,11,786 on account of the alleged difference in interest charged on loan advanced to associated enterprises by applying interest rate of 14% p.a. as against interest rate of 7.33% p.a. charged by the appellant.

10.1 That the assessing officer/TPO erred on facts and in law in disregarding internal comparable uncontrolled transaction, placed on record, for benchmarking of international transaction of payment of interest applying CUP method.

10.2 Without prejudice, that the assessing officer/TPO erred on facts and in law in not appreciating that the international transaction of interest on loans advanced to the associated enterprises, denominated in foreign currency, was required to be benchmarked considering the rate prevailing in the international market, viz., LIBOR rate.

10.3 Without prejudice, that the assessing officer/TPO erred on facts and in law in not appreciating that the rate of interest charged by the appellant was at arm's length in view of the fact that the interest received from its associated enterprises was higher than rate of return on investments in fixed deposits and corporate bonds.

10.4 That the assessing officer/TPO erred on facts and in law in alleging that the financial health of the associated enterprises was weak and further in determining the credit rating of the associated enterprises as ranging between BB to D, being high risk category, without providing any cogent or germane reason for the same.

10.5 That the assessing officer/TPO erred in relying upon the rate of interest charged by various domestic banks on advancement of foreign currency loans obtained by the TPO under section 133(6) of the Act, without affording opportunity to the appellant to rebut the same, in violation of principles of natural justice.

10.6 That the assessing officer/TPO erred on facts and in law in disregarding the fact that amounts had been advanced by the appellant to its associated enterprise(s) as a matter of commercial prudence to further its business interests.

11. Without prejudice, that the transfer pricing adjustment made by the assessing officer/PO by applying interest rate of 14% p.a. is excessive."

56. The relevant material facts, so far as this grievance of the assessee is concerned, are like this. The assessee has advanced following loans to its associated enterprises:

57. The assessee's claim that the loans have been advanced at an arm's length price as, according to CUP method and on the basis of external comparables, the arm's length interest rate in such situations is LIBOR plus 160 points which works out to 6.82% whereas the assessee has charged interest @ 7.33%. The Transfer Pricing Officer was not impressed by this claim. He was of the view that, "…..the arm's length interest is to be determined by following CUP method wherein the interest rate is determined under the circumstances in which the taxpayer and the subsidiaries are operating, i.e. what is the interest rate that would have been earned if such loans are given from surplus funds to unrelated parties under similar situations as that of the subsidiaries" and that, "since the tested party is taxpayer, the prevalent interest that could be earned by the taxpayer by advancing loan to an unrelated party in India with the same weak financial health as that of the taxpayer's subsidiaries is considered". It was in this backdrop, and after an elaborate survey of Indian financial market, that the TPO opined that a rate of interest of 14% could be considered reasonable and representative of market after considering corporate bond market and financial health of the subsidiary. When it was put to the assessee, the assessee objected to the same, inter alia, on the ground that the loans were in foreign currencies, and therefore interest rate on rupee loans have no relevance, that interest has been charged from the subsidiaries over and above the costs of borrowings and in accordance with the international market standards, and that comparison with BBB grade bonds, as was done by the TPO, was not warranted as the advances were to assessee's subsidiaries. None of these submissions impressed the TPO. He was of the view that costs of borrowings were wholly irrelevant for the purpose of deciding ALP of the borrowing costs, that the risks for a single transaction is much more than the risks taken by banks in multiple client situation, that the additional costs are liable to be incurred for forward exchange contracts to hedge the position and that rate adjustments are also required to be done for the absence of any security. He also referred to the CRISIL information regarding interest to BBB grade bonds which was 15.13% in the relevant period. However, he adopted the rate of 14% as ALP of the intra AE borrowings by observing as follows:

Keeping in view that no security is offered by the subsidiary and also that the taxpayer is not into lending and borrowing money, I consider a reasonable interest of 14%.

58. When this ALP adjustment was proposed by the Assessing Officer, the assessee did raise objection before the Dispute Resolution Panel. It was also contended by the assessee that interest charged is comparable based upon the rates charged by the foreign financial institution on foreign loans taken by the assessee company. The DRP rejected the objections and, inter alia, stated as follows:

"As regards the comparability, the DRP has considered the arguments of the assessee and has examined the findings of the TPO in his order dated 12.10.2010. The assessee has used the CUP which is LIBOR +1.60%. The TPO has noted that the loans have been given in Indian currency and the same have been benchmarked using LIBOR which was not found to be in accordance with the comparability principles established by the TPO. The TPO also noted that the assessee company has taken loans from unrelated parties. The TPO was of the view that the loans given by the assessee company cannot be benchmarked using LIBOR as a CUP.

Having considered the arguments of the assessee and the findings of the TPO, the DRP is of the view that the TPO has rightly rejected the CUP used by the assessee. The rate of 14% charged by the TPO as a CUP is found to be based on sound methodology and needs no interference."

59. It was in this backdrop that the Assessing Officer made an ALP adjustment of Rs 10,11,786 to the interest charged from the AEs in respect of loans given to them. The assessee is aggrieved and is in appeal before us.

60. We have heard the rival contentions, perused the material on record, including elaborate written submissions filed by the assessee, and duly considered factual matrix of the case as also the applicable legal position.

61. We have noted, as has been noted in the assessment order, DRP order and TPO orders as well, that the advances to subsidiaries are in foreign currencies i.e. in British Pounds, US Dollars and Canadian Dollars. In these circumstances, the interest rates on rupee bonds and debts, which has been extensively referred to in the order of the TPO, have no relevance at all. It is only elementary that interest is nothing but time value of money and when inflation pressure on a currency is lower, as is the case with most strong currencies, the time value of money, i.e. interest, tends to be lower too. Therefore, comparing interest rate on rupee loans cannot at all be compared with interest rates on strong currencies like GBP, USD and CAD. All these erudite discussions about Indian bond market and interest rate are thus wholly irrelevant. As for TPO's observation to the effect that the tested party being the assessee before us, i.e. lender, the prevalent interest that could be earned by the taxpayer by advancing loan to an unrelated party in India, we can only point out that the interest rate on foreign currency loans being qualitatively different, even if we have to see the interest that the assessee would have earned, we have to see the interest that the assessee would have earned on foreign currency loans and not rupee denominated loans. Having said that, we are alive to the fact, as we have noted earlier in this order, the TPO has computed the ALP on the basis of LIBOR as well, but the variations in LIBOR based CUP as per assessee's computations and LIBOR based CUP as per TPO's computations are on account of following factors:

62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gathered from websites of financial institutions which, according to him, states that, "for the foreign currency denominated term loans, the maximum rate of interest is 4% over 6 months LIBOR", and then proceeded to adopt this maximum interest rate as a fair basis for his computing the arm's length price. On the other hand, the assessee has taken two specific comparables of USD borrowings, i.e. L&T and Seri Infrastructure, on the interest rate of LIBOR + 150 bps and 1.4% to 1.7% band over LIBOR respectively. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted.

63. As for the second adjustment of 300 points for transaction cost, this adjustment is sought to be justified by the following observations of the TPO:

"7.9 Transaction Cost

The company, which is considering a foreign currency loan, has to bear an additional transaction cost in each year. This is because under Reserve bank of India norms, it is mandatory for borrowers to buy such forward contracts and thus banks insist that the borrower must book a forward dollar contract to hedge the position. Forward cover is assort of insurance against currency fluctuations. If the borrower does not take such cover and the rupee depreciates against the dollar, costs will go up substantially as it would need to buy dollars from the market for repaying the loan.

During the FY 2006-07, the forward premia increased reflecting growing interest rate differential in view of the increased domestic interest rates. In March, 2007, three month forward premium was at 5.12% p.a., from a low of less than one percent per annum in July, 2006. Thus on an average, the 3-month forward premium can be considered as 3% p.a. for the FY 2006-07. Thus a company availing foreign currency loan has to bear additional cost of 3% p.a. towards premium payable on entering into forward contracts of 3-months tenure."

64. However, what the TPO overlooks is the fact that such a transaction cost is relevant only to the domestic borrower who borrows in foreign currency from outside India. It has nothing to do with the arm's length interest rate for foreign currency borrowing by an overseas subsidiary. In any event, the interest rate is independent of incidental costs, and since TPO has taken lender as the tested party, the transaction cost to the borrower is wholly irrelevant. This adjustment is, therefore, devoid of any legally sustainable basis.

65. That leaves us with third point of difference between the assessee and the TPO and that is with regard to adjustment of 177.60 points, as balancing figure, towards lack of security and lender not being in the business of borrowing and lending money. This adjustment is justified by the TPO on the following ground:

"7.10 Adjustment between a banker and non-banker

As the taxpayer is not in the business of lending and borrowing money, his risk is higher in advancing loan to a single customer than a bank, which spreads its risk among its various customers. Thus, the difference between banker and non-banker is to be kept in mind while arriving at the arm's length CUP rate based on bank rates.

7.11 Adjustment for security

Usually, bankers extending loans in foreign currency also insist on sufficient security. In this case, no security is offered by the AE. Keeping in view the financial health of the subsidiary, it may not be in a position to offer security. Thus an adjustment is required to be made for not offering a security. This may be computed as the difference between the interest rates prevailing for the bonds of equivalent credit rating of the AE and sovereign government bonds in the country in which the AE is located. This can also be considered as the guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing/rating."

66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO.

67. We have taken note of the fact that the assessee's claim is that his borrowings in the same or similar currencies are at much lower costs. Such a rate, as is noted by a coordinate bench in the case of VVF Ltd. v. Dy. CIT IT Appeal No. 673 (Mum.) of 2006, dated 8-1-2010, constitutes acceptable internal CUP. While holding so, the co-ordinate bench has, inter alia, observed as follows:

"On the given facts, in our considered view, it would be appropriate to accept internal CUP, i.e. the rate at which the assessee has resorted to foreign exchange borrowings from the ICICI, as arm's length price under CUP method. The fact, as painstaking brought on record by the authorities below that this loan from ICICI bank was not used for the purposes of remittance to subsidiaries as interest free loans has no bearing for the purposes of computing ALP of interest free loan. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company, and, therefore, the precise rate at which the ICICI Bank has advanced the foreign currency loans to the assessee company can be adopted at arm's length price of interest free loans advanced by the assessee company to its foreign subsidiaries."

68. Undoubtedly, the proposition that the credit rating of the parent company and subsidiary company will be the same is not of universal application but it is certainly a good indicator, in the absence of anything else to the contrary, of the credit rating of the subsidiary as well. Viewed thus, when parent company is able to raise foreign exchange borrowings at a certain rate, it is reasonable to assume that such rates can constitute valid comparable for similarly placed borrowings by the subsidiary as well - more so when subsidiaries are under management and control of the lender parent company, and the business risk is thus much lower. From this perspective also, and bearing in mind the fact that the borrowing costs by the parent company for similar foreign currency loans were admittedly much lower than the rate on which advances have been given to the subsidiaries- as noted in the orders of the authorities below, the impugned ALP adjustments to interest rate for loans to subsidiaries are not warranted.

69. In view of the above discussions, as also bearing in mind entirety of the case, we delete the impugned ALP adjustment of Rs 10,11,786 as well. The assessee gets the relief accordingly

70. Ground no. 10 is thus allowed.

71. In the result, the appeal is partly allowed in the above terms.

SUNIL