- Bookmark
- Share
- CaseIQ
Cit v. Indian Hotels Company Ltd.
Tribunal Order Summary — Revenue Appeals ITA Nos. 6712/Mum/2008 & 2678/Mum/2009
Factual and Procedural Background
This is an order by P.M. Jagtap, Accountant Member, disposing of two appeals filed by the Revenue against orders passed by the learned CIT(A)-XIX, Mumbai dated 17-9-2008 and 10-2-2009 for assessment years (A.Y.) 2003-04 and 2004-05. The two appeals involve several common issues and were heard together and decided by a single composite order.
The appeals arise from additions/disallowances and transfer pricing adjustments made by the Assessing Officer (A.O.) and Transfer Pricing Officer (TPO) and deleted by the CIT(A). The Revenue challenged those deletions on multiple grounds including: (a) disallowance of interest attributable to interest-free advances to group companies; (b) disallowance of interest on share application money pending allotment (alleged diversion of borrowed funds); (c) treatment of expenditure on replacement of carpets and linen as revenue or capital; (d) several transfer pricing (TP) adjustments (interest on outstanding interest, treatment of letters of comfort as guarantees, and benchmarking of sales promotion services); and (e) computation of deduction under section 80HHD by excluding certain receipts.
Legal Issues Presented
- Whether interest attributable to interest-free advances given by the assessee to related group companies (including KTC and Taj & Taida) is disallowable.
- Whether interest on share application money pending allotment (alleged diversion of borrowed funds for non-business purpose) is disallowable.
- Whether expenditure on replacement of carpets and replacement of linen is capital expenditure or revenue expenditure.
- Whether various TP adjustments made by the A.O./TPO should stand, specifically:
- Whether interest charged on outstanding interest by the assessee to its AE at LIBOR is at arm's length or requires adjustment;
- Whether letters of comfort issued by the assessee to banks for AE borrowings are equivalent to guarantees attracting guarantee-fee adjustments;
- Whether payments for sales promotion services to an AE in the US were correctly benchmarked (tested party selection and comparables).
- Whether operating fees and receipts from "Taj Lounge" can be excluded from total business receipts when computing deduction under section 80HHD of the Income-tax Act.
Arguments of the Parties
Revenue (learned Departmental Representative - ld. D.R.)
- Contended that the A.O./TPO's additions and TP adjustments in respect of all three TP issues were justified and should be sustained.
- On the interest-on-interest issue, argued that the RBI approval relied upon by the assessee cannot be treated as specifying an arm's length interest rate (LIBOR) and the arm's length rate should be higher (suggested at least LIBOR plus 2%).
- On letters of comfort, pointed to the letter text and argued the assessee had obligations (such as taking bank approval before disposing of investments) which made the letters akin to guarantees and justified a guarantee-fee TP adjustment.
- On benchmarking of sales promotion services, supported the A.O./TPO's approach and the resultant adjustment based on U.S. comparables and change of tested party.
- In rejoinder, pointed out that the assessee's new argument that letters of comfort are not international transactions had not been considered on the merits by lower authorities and sought remand if the Tribunal were to consider it.
Assessee (learned Counsel for the assessee)
- Conceded there was no case on the disallowance related to interest of Rs. 13,94,869/- attributable to interest-free advance to M/s Taj & Taida and requested that issue be decided against the assessee.
- Argued that earlier Third Member and consistent Tribunal decisions in the assessee's own case (including Dy. CIT v. Indian Hotels Co. Ltd.) established that advances to subsidiaries wholly and exclusively for business purpose did not justify disallowance of interest attributable to such advances; asked Tribunal to follow those decisions for similar years.
- On share application money pending allotment, submitted that the payments were made out of interest-free funds and that earlier Tribunal decisions held there was no diversion of interest-bearing funds; also noted share application money was returned with interest (19%) and offered to tax in relevant year.
- On replacement of carpets and linen, relied on a series of Tribunal decisions and a Rajasthan High Court decision (CIT v. Lake Palace Hotels & Motels) treating replacement as revenue expenditure and urged the Tribunal to follow them.
- On TP issues:
- Argued LIBOR (as per RBI approval) constituted a Comparable Uncontrolled Price (CUP) and should be accepted as arm's length for interest on outstanding interest; cited three tribunal decisions (Hinduja Global Solutions Ltd., Cotton Naturals (I) (P.) Ltd., and Four Soft Ltd.) in support.
- Contended letters of comfort were not international transactions at all (assessee had included them in the TP report without prejudice) and relied on legal provisions and judicial pronouncements to argue they should not attract TP adjustment.
- On sales promotion services, argued it was permissible to take the assessee as tested party under TNMM using Indian comparables; the assessee's margin exceeded the Indian comparables' average, so transactions were at arm's length; contended the TPO's selection of the U.S. AE as tested party was unjustified and based on incomplete/unreliable U.S. data.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Dy. CIT v. Indian Hotels Co. Ltd. [2005] 92 ITD 97 / 142 Taxman 44 (Mum.) (Third Member) | Advances given to subsidiary wholly and exclusively for business purpose — disallowance of interest attributable to such advances not justified. | The Tribunal followed this Third Member decision and consistent subsequent Tribunal decisions in the assessee's own case to delete disallowance made by the A.O. in respect of interest attributable to interest-free advances (AY 2003-04 issues) and applied the same approach to similar issues. |
| Tribunal order in ITA No. 2527/Mum/2002 (A.Y. 1995-96) — order dated 12-9-2006 | No diversion of interest-bearing funds for non-business purpose in respect of share application money; share application money was returned with interest (19%) and interest offered to tax. | The Tribunal followed this earlier order to hold that the A.O.'s disallowance of interest on share application money pending allotment was not justified and upheld the CIT(A)'s deletion of that disallowance (AY 2003-04). |
| CIT v. Lake Palace Hotels & Motels (P.) Ltd. [2002] 258 ITR 562 / [2003] 131 Taxman 836 (Rajasthan High Court) | Treatment of expenditure on replacement of carpets as revenue expenditure (i.e., allowable deduction). | The Tribunal referred to and relied on this High Court decision in following the line of authorities that replacement of carpets is revenue in nature; the Tribunal upheld the deletion of the A.O.'s disallowance for replacement of carpets (AY 2003-04). |
| Tribunal order in ITA No. 3530/Mum/1996 (A.Y. 1992-93) — order dated 10-9-2009 | Allowed deduction claimed by assessee for expenses incurred on replacement of carpets (following co-ordinate Benches). | Followed as one of the earlier Tribunal orders to treat replacement-costs as revenue expenditure and to uphold the CIT(A)'s allowance (AY 2003-04). |
| Hinduja Global Solutions Ltd. v. Addl. CIT [2013] 145 ITD 361 / 35 taxmann.com 348 (Mum. - Trib.) | CUP method is appropriate for international lending in foreign currency and LIBOR (inter-bank rate) should be adopted as arm's length rate. | The Tribunal followed this co-ordinate Bench decision to hold that LIBOR (as per RBI approval) was an appropriate arm's length rate and upheld deletion of the TP adjustment made by the TPO in respect of interest charged on outstanding interest (AY 2003-04 and followed in AY 2004-05). |
| Cotton Naturals (I) (P.) Ltd. v. Dy. CIT [2014] 146 ITD 662 / [2013] 32 taxmann.com 219 (Delhi - Trib.) | Adopted CUP method and supported the proposition that LIBOR can be treated as arm's length in certain international lending transactions. | Referred to as precedent supporting the use of CUP/LIBOR; the Tribunal relied on the line of reasoning in Hinduja (which followed Cotton Naturals) to accept LIBOR as ALP. |
| Four Soft Ltd. v. Dy. CIT [IT Appeal No. 1495 (Hyd) of 2010] | Accepted LIBOR as arm's length rate in a relevant context (cited by assessee). | Cited by the assessee in support of the proposition that LIBOR has been accepted as ALP in prior Tribunal orders; the Tribunal relied on this line of authorities when upholding deletion of the TP adjustment. |
| CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 / 112 Taxman 511 (Bombay High Court) | Decision concerned inclusion of Excise and Sales Tax in total turnover for computing deduction under section 80HHC (context-specific). | The CIT(A) had relied on this decision to exclude certain receipts from total business receipts for computation under section 80HHD. The assessee's counsel conceded that reliance was misplaced because Sudarshan dealt with sec.80HHC context; the Tribunal therefore set aside the CIT(A)'s order and restored the A.O.'s inclusion of the receipts (AY 2004-05). |
| Commissioner Of Income-Tax v. Lakshmi Machine Works Ltd. 290 ITR 660 | Referenced by the Revenue in grounds as Apex Court authority concerning computation of deduction under the relevant Chapter (cited in grounds). | The Tribunal noted the Revenue's reliance but the CIT(A)'s reliance was elsewhere (Sudarshan) and the assessee conceded lack of merit in the CIT(A)'s reliance. The Tribunal restored the A.O.'s position on the 80HHD points following concession; the Lakshmi Machine Works citation was part of the Revenue's ground but not applied to grant relief to the Revenue in the order summarized. |
Court's Reasoning and Analysis
The Tribunal examined each ground by comparing the facts of the year under appeal with prior decisions in the assessee's own case and other authoritative rulings, and by reviewing submissions of both parties and the materials on record.
Disallowance of interest on interest-free advances: The Tribunal noted that the Third Member decision (Dy. CIT v. Indian Hotels Co. Ltd.) and subsequent Tribunal decisions in the assessee's own case had consistently held that where advances to group/subsidiary companies were made wholly and exclusively for business purposes, disallowance of interest attributable to such advances was not justified. Because the facts for the years under appeal were similar to earlier years, the Tribunal followed those prior decisions. However, the assessee's counsel conceded there was no case in respect of interest attributable to the advance to M/s Taj & Taida; the Tribunal therefore upheld the A.O.'s disallowance in that limited respect while deleting other disallowances per earlier rulings.
Share application money pending allotment (diversion argument): The Tribunal observed that in an earlier Tribunal order (A.Y. 1995-96) it was held there was no diversion of interest-bearing funds; share application money was returned with interest at 19% and that interest was offered to tax. The Tribunal found the issue squarely covered by earlier decisions and upheld the CIT(A)'s deletion of the A.O.'s disallowance.
Replacement of carpets and linen: The Tribunal relied on the consistent line of Tribunal decisions in the assessee's own case and a High Court decision (Lake Palace Hotels) treating replacement of carpets as revenue expenditure. The Tribunal therefore upheld the CIT(A)'s allowance and rejected the A.O.'s characterization of these expenses as capital expenditure.
Transfer Pricing adjustments — interest on outstanding interest: The Tribunal accepted the co-ordinate Bench decision in Hinduja Global Solutions (which followed Cotton Naturals) that the CUP method is appropriate for lending in foreign currency and that LIBOR, being the inter-bank rate, is to be adopted as the arm's length rate. Respectfully following that co-ordinate Bench authority, the Tribunal sustained the CIT(A)'s deletion of the TP adjustment made by the TPO in respect of the interest on outstanding interest.
Transfer Pricing adjustments — letters of comfort (guarantee-fee issue): The Tribunal noted the assessee's new, preliminary contention that letters of comfort are not international transactions and that neither the A.O./TPO nor the CIT(A) had given any substantive finding on this issue. Because the matter had not been considered on the merits below, the Tribunal agreed with the ld. D.R. that the issue should be restored to the file of the A.O./TPO for examination in the light of relevant provisions and judicial pronouncements, with an opportunity to the assessee to be heard. Accordingly, that issue was remitted to the A.O./TPO.
Transfer Pricing adjustments — sales promotion services (tested party and comparables): The Tribunal reviewed the record and the CIT(A)'s finding that the TPO had changed the tested party to the U.S. AE without giving convincing reasons and that relevant U.S. comparable data was incomplete and unreliable. The Tribunal found that the CIT(A)'s factual finding on the unreliability/incompleteness of the U.S. data was not rebutted by the ld. D.R., and that no justification had been shown for changing the tested party. Accordingly, the Tribunal upheld the CIT(A)'s deletion of the TP adjustment in respect of sales promotion services.
Computation of deduction under section 80HHD: The CIT(A) had excluded operating fees and Taj Lounge receipts from total business receipts for computing the deduction, relying on a Bombay High Court decision (Sudarshan). At the hearing, the assessee's counsel conceded that the CIT(A)'s reliance on Sudarshan was misplaced because Sudarshan concerned sec. 80HHC and excise/sales tax inclusion context. The assessee's counsel accepted there was no case on merit and requested that the issue be decided against the assessee. The Tribunal therefore set aside the CIT(A)'s relief and restored the A.O.'s inclusion of those receipts.
Holding and Implications
Core Ruling: BOTH APPEALS PARTLY ALLOWED.
Direct effects and disposition (by major points appearing in the order):
- For A.Y. 2003-04 (ITA No. 6712/Mum/2008):
- Grounds concerning disallowance of interest attributable to interest-free advances: the Tribunal deleted the disallowance insofar as prior Tribunal authority and facts supported the assessee, but upheld the A.O.'s disallowance of Rs. 13,94,869/- relating to the Taj & Taida advance (assessee conceded no case on that portion). (Grounds 1 & 2 result: Ground No.1 dismissed; Ground No.2 partly allowed as stated in the order.)
- Ground concerning interest on share application money (diversion allegation): deleted by CIT(A) and the Tribunal upheld that deletion following prior Tribunal order (Ground No.3 dismissed).
- Grounds on replacement of carpets and linen: Tribunal upheld CIT(A)'s allowance treating these as revenue expenditure (Grounds No.4 and No.5 dismissed).
- Ground on TP adjustments (interest on outstanding interest, letters of comfort, sales promotion services):
- Interest-on-interest adjustment: deleted (Tribunal followed co-ordinate Bench accepting LIBOR as ALP) — upheld CIT(A) deletion.
- Letters of comfort: remitted/restored to A.O./TPO for fresh consideration because lower authorities had not decided the preliminary contention on merits (issue restored).
- Sales promotion services TP adjustment: deleted — CIT(A) deletion upheld because TPO changed tested party without adequate justification and used incomplete/unreliable U.S. data.
- For A.Y. 2004-05 (ITA No. 2678/Mum/2009):
- Disallowance of interest attributable to interest-free advances: following conclusions in A.Y. 2003-04, the Tribunal sustained the A.O.'s disallowance only to the extent attributable to the advance to M/s Taj & Taida and confirmed deletion for the balance interest (Ground No.1 partly allowed as modified).
- Interest on share application money pending allotment: upheld CIT(A) deletion following the A.Y.2003-04 conclusion (Ground No.2 dismissed).
- Replacement of carpets and linen: upheld CIT(A) deletions/allowances treating them as revenue expenditure (Grounds No.3 and No.4 dismissed).
- Computation under section 80HHD: the Tribunal restored the A.O.'s inclusion of operating fees and Taj Lounge receipts because the CIT(A)'s reliance on Sudarshan was misplaced and the assessee conceded no case on the merits (Grounds No.5 & 6 allowed in favour of the Revenue).
- TP adjustments (interest to TIHK; letters of comfort; sales promotion services):
- Interest to TIHK (similar to AY2003-04 interest-on-interest issue): deletion by CIT(A) upheld (Ground No.7 dismissed).
- Letters of comfort (guarantee-fee issue): restored to A.O./TPO for reconsideration (Ground No.8 treated as allowed for statistical purpose due to remand).
- Sales promotion services: CIT(A) deletion upheld (Ground No.9 dismissed).
Implications: The Tribunal predominantly followed prior Tribunal and High Court decisions in the assessee's own case and co-ordinate Bench authority (notably on transfer pricing methodology and LIBOR as ALP for certain lending transactions). Where the facts for the year under appeal matched those earlier decisions, the Tribunal applied those precedents and upheld the CIT(A)'s relief to the assessee. Where a new or preliminary legal point (letters of comfort not being international transactions) had not been considered on the merits by the lower authorities, the Tribunal remitted the matter to the A.O./TPO for fresh consideration with opportunity to be heard. On the section 80HHD points, because the CIT(A)'s reliance was conceded by the assessee as misplaced, the A.O.'s inclusion of the receipts was restored.
The opinion resolves the specific disputes between the Revenue and the assessee for the two assessment years and follows prior judicial/tribunal authority; the order does not create a new legal principle beyond the application of existing precedents and remand directions stated above.
Order delivered in writing. (Signature block in original omitted.)
ORDER
P.M. Jagtap, Accountant Member - These two appeals preferred by the Revenue against two separate orders passed by the ld. CIT(A) - XIX, Mumbai dated 17-9-2008 and 10-2-2009 for assessment years 2003-04 and 2004-05 involve some common issues and the same therefore have been heard together and are being disposed of by this single composite order for the sake of convenience.
2. First, we shall take up the appeal of the Revenue for A.Y. 2003-04 being ITA No. 6712/Mum/2008.
3. Ground No. 1 & 2 of this appeal involve the issue relating to disallowance of interest amounting to Rs. 16,83,978/-, Rs. 25,90,000/- and Rs. 13,94,869/- attributable to the interest free advances given by the assessee to its other group companies, KTC and Taj & Taida respectively which has been deleted by the ld. CIT(A).
4. We have heard the arguments of both the sides and also perused the relevant material placed on record. The ld. Counsel for the assessee has fairly and frankly conceded that the assessee has no case on the issue of disallowance of Rs. 13,94,869/- made on account of interest attributable to the interest free advance given to M/s Taj & Taida. He has urged that this issue may therefore be decided against the assessee. Accordingly, the impugned order of the ld. CIT(A) on this issue is set aside and that of the A.O. making a disallowance of Rs. 13,94,869/- is upheld.
5. As regards the disallowance of balance interest of Rs. 25,90,000/- and Rs. 16,83,978/- attributable to the interest free advances given to KTC and other group companies, it is observed that similar disallowance was made in the case of the assessee for the earlier years. In A.Y. 1989-90, this issue was referred to a Third Member and vide the Third member decision reported as Dy. CIT v. Indian Hotels Co. Ltd. [2005] 92 ITD 97/142 Taxman 44 (Mum.) , the same was decided in favour of the assessee by a majority view holding that the relevant advances having been given by the assessee to its subsidiary company wholly and exclusively for the purpose of its business, the disallowance of interest attributable to the said advance was not justified. Following this Third Member decision for A.Y. 1989-90, the Tribunal has consistently decided a similar issue in favour of the assessee in the subsequent years up to A.Y. 2002-03. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of the earlier years, we respectfully follow the decision rendered by the Tribunal in assessee's own case for the earlier years and uphold the impugned order of the ld. CIT(A) deleting the disallowance made by the A.O. on this issue. Ground No. 1 of the Revenue's appeal is accordingly dismissed while ground No. 2 is partly allowed.
6. In ground No. 3, the Revenue has challenged the action of the ld. CIT(A) in deleting the disallowance of interest amount of Rs. 1,48,000/- on share application pending allotment made by the A.O. alleging that there was diversion of borrowed funds by the assessee for non-business purpose.
7. The amount paid by the assessee on account of share application money to several companies was held by the A.O. as not for the purpose of its business and the interest attributable to the funds so diverted was disallowed by him after rejecting the contention of the assessee that the entire share application money was paid by it out of interest free funds. On appeal, the ld. CIT(A) accepted the contention of the assessee and held that the entire share application money having been paid by the assessee out of interest free funds available at the relevant time, the disallowance of interest made by the A.O. was not justified.
8. We have heard the arguments of both the sides and also perused the relevant material placed on record. As agreed by the ld. Representatives of both the sides, this issue is squarely covered in favour of the assessee by the decision of the Tribunal rendered in assessee's own case for earlier years. In A.Y. 1995-96, it was held by the Tribunal vide its order dated 12th September, 2006 passed in ITA No. 2527/Mum/2002 that there being no diversion of interest bearing funds for non-business purpose as alleged by the A.O., there was no justification in making any disallowance on account of interest paid on the borrowed funds. It was noted by the Tribunal that the share application money was finally returned to the assessee with interest @ 19% and the interest so received was duly offered by the assessee in the relevant year. A similar view has been taken by the Tribunal in the subsequent years i.e. assessment years 1996-97 to 2002-03. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to the earlier years, we respectfully follow the orders of the Tribunal for the said years and uphold the impugned order of the ld. CIT(A) giving relief to the assessee on this issue. Ground No. 3 of the Revenue's appeal for A.Y. 2003-04 is accordingly dismissed.
9. The next issue raised in ground No. 4 of the Revenue's appeal for A.Y. 2003-04 relates to the deletion by the ld. CIT(A) of the addition made by the A.O. on account of disallowance of expenditure of Rs. 53,42,708/- incurred by the assessee on the replacement of carpets.
10. We have heard the arguments of both the sides and also perused the relevant material placed on record. It is observed that a similar disallowance on account of expenditure incurred by the assessee on replacement of carpets was made by the A.O. treating the same as capital expenditure in the earlier years and the Tribunal consistently gave relief to the assessee by holding the expenditure on replacement of carpets as revenue expenditure. In A.Y. 1992-93, the Tribunal vide its order dated 10th September, 2009 passed in ITA No. 3530/Mum/1996 upheld the order of the ld. CIT(A) allowing the deduction claimed by the assessee for expenses incurred on replacement of carpets following the orders of the co-ordinate Benches of the Tribunal in assessee's own case for the earlier years up to A.Y. 1991-92. Similarly, in the subsequent years upto A.Y. 2002-03, the Tribunal has followed its orders for the earlier years and decided a similar issue in favour of the assessee. The decision of Hon'ble Rajasthan High Court in the case of CIT v. Lake Palace Hotels & Motels (P.) Ltd. [2002] 258 ITR 562/[2003] 131 Taxman 836 was also referred to and relied upon by the Tribunal wherein a similar issue was decided in favour of the assessee. Respectfully following these judicial pronouncements, we uphold the impugned order of the ld. CIT(A) allowing the claim of the assessee on account of expenses incurred for replacement of carpets and dismiss ground No. 4 of the revenue's appeal for A.Y. 2003-04.
11. In ground No. 5, the Revenue has challenged the action of the ld. CIT(A) in treating the expenditure of Rs.3,60,00,638/- incurred by the assessee on the replacement of linen as Revenue expenditure instead of capital expenditure.
12. After considering the rival submissions and perusing the relevant material on record, it is observed that this issue is similar to the issue relating to the assessee's claim for deduction on account of expenditure incurred on replacement of carpets and the same has also consistently decided by the Tribunal in favour of the assessee in earlier years. Respectfully following the orders of the Tribunal in assessee's own case for the earlier years upto A.Y. 2002-03 on a similar issue, we uphold the impugned order of the ld. CIT(A) allowing the deduction claimed by the assessee on account of expenditure incurred on replacement of linen treating the same as revenue expenditure. Ground No. 5 of the Revenue's appeal for A.Y. 2003-04 is accordingly dismissed.
13. The issue raised in ground No. 6 of the revenue's appeal for A.Y. 2003-04 relates to the addition made by the A.O. on account of three transfer pricing adjustments aggregating to Rs. 1,60,85,045/- which has been deleted by the ld. CIT(A).
14. During the year under consideration, the assessee had entered into certain international transactions with its AEs within the meaning of section 92 of the Act and the said transactions were duly reported in the TP study report filed by the assessee in Form No. 3CEB along with the return of income. A reference in this regard was made by the A.O. u/s 92 CA(1) to the TPO for determining the Arm's Length Price (ALP) of these international transactions. One of the international transactions entered into by the assessee with its AE was of loan given by the assessee to M/s Taj International Hotels (HK) Ltd. (TIHK) of USD 40 million. The said AE was to be financed from the euro-equity issue of the assessee for investing in St. James Court Hotels and Apartments on London. Since the euro-equity issue was delayed, the assessee obtained short term bridge loan from ICICI and SCICI to finance TIHKs investments into St. James Court Hotel and Apartments. The loan taken by Taj International Hotels (HK) Ltd. from the assessee was duly repaid by that AE in the financial year 1995-96 and even part of the total outstanding interest was also paid by it to the assessee in financial year 2001-02. The balance amount of interest amounting to USD 2.362 million was recovered by the assessee during the year under consideration along with interest thereon at LIBOR as per the approval given by the RBI. The transaction involving receipt of such interest was bench marked by the assessee by following Comparable Un-controlled Price (CUP) method and the RBI approval was cited as a comparable. It was noticed by the TPO in this regard that the assessee company had also advanced loan of USD 1.5 million to another AE Taj Asia Ltd. on interest @ 9% per annum and taking this case as a comparable, he determined 9% interest rate as ALP instead of LIBOR charged by the assessee and made a TP adjustment of Rs. 74,21,000/- in respect of transaction involving receipt of interest by the assessee from its AE.
15. On appeal, the ld. CIT(A) agreed with the stand of the assessee that the interest rate charged by the assessee company to its another AE i.e. TAL could not be taken as comparable as the same was a controlled transaction. He also observed that it was not appropriate on the part of the TPO to compare the interest on loan with interest on interest. He agreed with the contention of the assessee that the RBI approval received in respect of interest to be charged from TIHK should be considered as CUP since it amounted to a direction given by the RBI to the assessee to receive interest on the outstanding amount of interest at LIBOR. The ld. CIT(A) therefore held that the interest charged by the assessee to its AE TIHK at LIBOR was at arm's length and the TP adjustment made by the TPO in respect of this transaction was deleted by him.
16. During the year under consideration, the assessee company had provided letters of comfort to Standard Chartered Bank, HSBC and Citi Bank in respect of the borrowings by its AE namely Taj Maldives Pte. Ltd. (TMPL) for USD 14 million and TIKH for USD 3 million. The said letters of comfort were treated by the T.P.O. as guarantees and taking the guarantee fees rate of 0.6% at ALP, he made a TP adjustment of Rs. 45,90,000/-.
17. On appeal, the ld. CIT(A) held that the Comfort letters required the assessee mainly to intimate the banks in case it decides to divest/dilute its stake in the subsidiaries and there was no mention/obligation or liability on the assessee to repay the loans in case its subsidiaries failed to do so. He held that the letters of comfort thus could not be equated with guarantee and addition made by the A.O./TPO by way of TP adjustment treating the same as bank guarantee was deleted by the ld. CIT(A).
18. During the year under consideration, the assessee had paid a sum of Rs. 2,93,68,773/- to its AE IHMS Inc. for availing of sales promotion services in the US. For the said services, the assessee company paid the sales promotion fees to IHMS with a mark-up of 10% on cost. In its TP study report, this transaction was bench marked by the assessee by following TNMM method using Indian comparables. Since the operating margin of the assessee was higher than the arithmetic mean of the operating margin of the comparable companies as shown in the TP study report, these international transactions involving payment made for availing sales promotion services in the US were claimed to be at ALP by the assessee. The TPO rejected the assessee's claim of selecting itself as the tested party and required the assessee to carry out a fresh search for comparables on a US database by taking IHMS as the tested party. As per the requirement of the TPO, the assessee company carried out a search on US database under protest and arrived at a set of 16 comparable companies. The arithmetic mean of OP/TC of the US comparable companies selected by the assessee was found to be higher at 11.49% that that paid by the assessee to IHMS. The TPO, however, rejected two entities out of the 16 entities selected by the assessee and since the average OP/TC of the remaining 14 comparables was 6.78% as against 10% paid by the assessee to IHMS, the TP adjustment of Rs. 40,74,045/- was made by the TPO in respect of international transactions involving payment of sales promotion fees to its AEs.
19. On appeal, the ld. CIT(A) held that there was nothing wrong on the part of the assessee to take itself as tested party since the data of Indian comparable companies was easily available in the public domain. He held that the relevant data in the case of US comparable companies, on the other hand, was available to the limited extent and there was no justification given by the A.O./TPO to take the AE of the assessee in US as a tested party. He observed that reliable data of the Indian comparable companies was available in the public domain and since the profit margin earned by the assessee at 8.75% was higher than that of the average profit margin earned by Indian comparable companies at 2.36%, the relevant international transactions of the assessee company with its AE involving availing of sales promotion services from its AE in US were at arm's length. Accordingly, the TP adjustment made by the A.O./TPO on this issue was deleted by the ld. CIT(A).
20. The ld. D.R., at the time of hearing before us, strongly supported the orders of the A.O./TPO in support of the Revenue's case that the addition made to the total income of the assessee on account of all the three TP adjustment is fully justified. He submitted that in case of interest rate charged by the assessee company to its AE on outstanding interest, LIBOR cannot be taken as ALP relying on the RBI approval since the said approval given in the different context and for the specific purpose cannot be taken as specifying arm's length rate of interest. He contended that such arm's length rate of interest should be taken atleast at LIBOR plus 2% instead of LIBOR charged by the assessee.
21. As regards the letter of comforts, he invited our attention to the copy of the said letter placed on record to point out that the assessee was obliged to take approval of the concerned bank before disposal of its investment/asset. He contended that this obligation contained in the letter of comforts made it akin to guarantee given by the assessee and addition on account of TP adjustment for guarantee commission was rightly made by the A.O./TPO.
22. As regards the TP adjustment made in respect of the international transactions of the assessee involving availing of sales promotion services from its AE in US, he strongly relied on the order of the A.O. in support of the Revenue's case on this issue.
23. The ld. Counsel for the assessee, on the other hand, submitted that interest on outstanding interest was recovered by the assessee from its AE at LIBOR rate as per the approval given by the RBI and this approval given by the RBI itself clearly indicated CUP. He contended that the LIBOR in any case has been accepted by the Tribunal as ALP of the international transactions of loans in the following three cases:—
24. As regards the letter of comforts issued by the assessee company for the loans availed by its AE, the ld. Counsel for the assessee submitted that the same cannot be regarded as international transactions at all. He submitted that even though in the TP study report, these transactions were identified by the assessee as international transactions, a foot-note was given indicating clearly that the same was done without prejudice to the assessee's stand that Chapter - X is not applicable to these transactions. He then proceeded to explain the case of the assessee as to how the transactions involving issue of letters of comfort are not the international transactions as per the relevant provisions of the Act and also cited certain judicial pronouncements in support.
25. As regards the TP adjustment made by the A.O./TPO in respect of the transactions involving availing of sales promotion services by the assessee from its AE in US, he submitted that these transactions were bench marked by the assessee in the TP study report by following TNMM and taking the assessee company as a tested party. He submitted that since the profit margin earned by the assessee from its international transactions was higher than the average margin of the comparables selected in the TP study report, the price charged in these transactions was claimed to be at ALP. He contended that the TPO, however, taken the AE of the assessee in US as tested party without giving any justification and made TP adjustment on the basis of profit margin earned by the US comparable companies overlooking completely that the relevant data of the said comparables was not fully available. He contended that the ld. CIT(A) appreciated this position in the right perspective and deleted the TP adjustment made by the A.O./TPO after having found that the price charged by the assessee was at ALP as shown in the TP study report submitted by the assessee and the ALP worked out by the TPO of these transactions on the basis of incomplete and unreliable data of US comparable companies was not correct.
26. In the rejoinder, the ld. D.R. submitted that the new issue raised by the ld. Counsel for the assessee that the letters of comforts issued by the assessee for the loans taken by its AE are not international transaction has not been considered by the A.O./TPO or even by the ld. CIT(A) on merit. He contended that if the Tribunal is inclined to entertain this new argument of the ld. Counsel for the assessee, the matter may be sent back to the A.O./TPO in order to give them an opportunity to examine the same.
27. We have considered the rival submissions and also perused the relevant material on record. As regards the issue relating to arm's length rate of of interest charged by the assessee company to its AE on the outstanding interest, it is observed that the same is squarely covered by the decision of co-ordinate Bench of this Tribunal rendered in the case of Hinduja Global Solutions Ltd. (supra) wherein it was held, following the decision of Delhi Bench of this Tribunal in the case of Cotton Naturals (I) (P.) Ltd. (supra), that the CUP method is the most appropriate method to determine the arm's length rate of interest of the international transaction involving lending of money by the assessee company in foreign currency to its AE and LIBOR being inter-bank rate fixed for the international transaction has to be adopted as arm's length rate. Respectfully following this decision of the co-ordinate Bench of this Tribunal, we uphold the impugned order of the ld. CIT(A) deleting the addition made by the A.O./TPO in respect of international transaction involving interest charged by the assessee on outstanding interest from its AE.
28. As regards the issue of letters of comfort issued by the assessee company for the loans taken by its overseas AEs, the ld. Counsel for the assessee has raised a preliminary issue that the same are not in the nature of international transactions. Although he has made an attempt to support and substantiate this argument relying on the relevant provisions of law as well as citing certain judicial pronouncements in support, it is observed that neither the A.O./TPO nor the ld. CIT(A) in their respective orders have given any finding/observation on this issue although the same was raised by the assessee before them as a passing reference. We, therefore, agree with the ld. D.R. that this preliminary issue should go back to the A.O./TPO in order to give them an opportunity to examine the same. Accordingly, this issue is restored to the file of the A.O./TPO with a direction to decide the same after taking into consideration all the facts of the case in the light of the relevant provisions of the Act as well as judicial pronouncement after giving the assessee a proper and sufficient opportunity of being heard.
29. As regards the international transactions involving availing services by the assessee company from its AE in US for sales promotion services, it is observed that the same were bench marked in the T.P. study report submitted by the assessee by following TNMM. The assessee company was taken as tested party and since its profit margin earned from the relevant transactions at 8.75% was higher than the average profit margin of 2.36% of the Indian comparable companies, the price charged for these transactions to its AE was claimed to be at ALP. It is observed that the TPO, however, took the AE of the assessee company in US as tested party without giving any convincing reason to justify this action and made the TP adjustment on the basis of higher margin earned by comparable companies in US. As found by the ld. CIT(A) in his impugned order, the relevant data of these US comparable companies was incomplete and unreliable to justify the TP adjustment made by the A.O./TPO and this finding recorded by the ld. CIT(A) has not been rebutted or controverted by the ld. D.R. The ld. D.R. has also not been able to point out any reason given by the A.O./TPO to justify the change of tested party from the assessee company to the AE in US. We, therefore, find no justifiable reason to interfere with the impugned order of the ld. CIT(A) deleting the TP adjustment made by the A.O./TPO in respect of the international transactions involving availing of sales promotion services by the assessee from its AE in US. Ground No. 6 of the revenue's appeal for A.Y. 2003-04 is accordingly treated as partly allowed for statistical purpose.
30. Now, we shall take up the appeal of the Revenue for A.Y. 2004-05 being ITA No. 2678/Mum/2009.
31. As regards ground No. 1 of this appeal, it is observed that the issue involved therein relating to disallowance of interest of Rs. 16,05,188/- attributable to the interest free advance given by the assessee company to the other group companies is similar to the one involved in ground no. 1 & 2 of the Revenue's appeal for A.Y. 2003-04. Following our conclusion drawn in A.Y. 2003-04, we sustain the disallowance made by the A.O. on this issue only to the extent of interest, if any, attributable to the interest free advance given by the assessee company to M/s Taj & Taida. The deletion by the ld. CIT(A) of the disallowance of balance interest is confirmed. The impugned order of the ld. CIT(A) on this issue is accordingly modified and ground No. 1 of the Revenue's appeal is partly allowed.
32. As regards ground No. 2, it is observed that the issue involved therein relating to deletion by the ld. CIT(A) of the disallowance made by the A.O. on account of interest of Rs. 61,400/- on share application money pending allotment is similar to the one involved in ground No. 3 of the Revenue's appeal for A.Y. 2003-04. Following our conclusion drawn in A.Y. 2003-04, we uphold the impugned order of the ld. CIT(A) giving relief to the assessee on this issue and dismiss ground No. 2 of the Revenue's appeal for A.Y. 2004-05.
33. As regards ground No. 3 of the Revenue's appeal for A.Y. 2004-05, it is observed that the issue involved therein relating to deletion by the ld. CIT(A) of the disallowance of Rs. 95,99,982/- made by the A.O. by treating the expenditure incurred on replacement of carpets is similar to the one involved in ground No. 3 of the Revenue's appeal for A.Y. 2003-04. Following our conclusion drawn in A.Y. 2003-04, we uphold the impugned order of the ld. CIT(A) giving relief to the assessee on this issue and dismiss ground No. 3 of the revenue's appeal.
34. As regards ground No. 4, it is observed that the issue involved therein relating to the deletion by the ld. CIT(A) of the disallowance made by the A.O. by treating the expenditure of Rs. 3,49,60,045/- incurred by the assessee on account of replacement of linen as capital expenditure is similar to the one involved in ground No. 5 of the Revenue's appeal for A.Y. 2003-04. Following our conclusion drawn in A.Y. 2003-04, we uphold the impugned order of the ld. CIT(A) and dismiss ground No. 4 of the revenue's appeal.
35. Ground No. 5 & 6 of the Revenue's appeal for A.Y. 2004-05 involve the issues relating to the computation of deduction u/s 80HHD of the Act and the same read as under:—
"5. The ld. CIT(A) has erred in excluding operating fee of Rs. 32,70,93,451/- from total receipts of business for computing deduction u/s 80HHD without appreciating that the said receipt being part of total receipts of the business cannot be excluded from the purview of total receipts for the purpose of computation of deduction u/s 80HHD of the I.T. Act. He has failed to appreciate the ratio of decision of the Apex Court in the case of Commissioner Of Income-Tax v. Lakshmi Machine Works Ltd. 290 ITR 660 .
6. The ld. CIT(A) has further erred in excluding receipt of Rs. 4,16,04,715/- from Taj Lounge from total receipt of business for computation of deduction u/s 80HHD without appreciating the ratio of the Apex Court decision in the case lf Lakshmi Machine Works (supra)."
36. While computing the deduction u/s 80HHD of the Act, the assessee company had excluded operating fees of Rs. 32,70,93,451/- and receipt from Taj Lounge of Rs. 4,16,04,715/- from the total business receipts. The A.O., however, included both these amounts in the total business receipts for the computation of deduction u/s 80HHD of the Act on the presumption that these receipts gave rise to business income. On appeal, the ld. CIT(A) accepted the stand of the assessee on this issue relying on the decision of Hon'ble Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769/112 Taxman 511 and directed the A.O. to exclude both these amounts from the total business receipts of the assessee for the purpose of deduction u/s 80HHD of the Act.
37. At the time of hearing before us, the ld. Counsel for the assessee has fairly and frankly conceded that the reliance of the ld. CIT(A) on the decision of Hon'ble Bombay High Court in the case of Sudarshan Chemicals Industries Ltd. (supra) to give relief to the assessee on these issues was clearly misplaced as the same was rendered in the context of inclusion of Excise and Sales Tax in the total turnover for the purpose of computation of deduction u/s 80HHC of the Act. He has contended that the assessee has no case on merit on these issues and requested that the same may be decided against the assessee. Keeping in view the submission of the ld. Counsel for the assessee, the impugned order of the ld. CIT(A) giving relief to the assessee on these issues is set aside and that of the A.O. is restored. Ground No. 5 & 6 of the Revenue's appeal for A.Y. 2004-05 are accordingly allowed.
38. As regards ground No. 7 of the revenue's appeal for A.Y. 2004-05, it is observed that the issue involved therein relating to the TP adjustment of Rs. 77,85,779/- made by the A.O./TPO on account of interest charged by the assessee to its AE M/s TIHK is similar to the one involved in ground No. 6 of the Revenue's appeal for A.Y. 2003-04 which has already been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y. 2003-04, we uphold the impugned order of the ld. CIT(A) giving relief to the assessee on this issue and dismiss ground No. 7 of the Revenue's appeal.
39. As regards ground No. 8 of the revenue's appeal for A.Y. 2004-05, it is observed that the issue involved therein relating to the TP adjustment of Rs. 36,12,338/- made by the A.O./TPO on account of non-charging of guarantee fee by the assessee from its AE for providing letter of comfort to the banks for the loans granted to the AEs is similar to the one involved in ground No. 6 of the Revenue's appeal for A.Y. 2003-04 which has already been decided boy us in the foregoing portion of this order. Following our conclusion drawn in A.Y. 2003-04, we restore this issue to the file of the A.O. with the same direction as given in A.Y. 2003-04. Ground No. 8 of the Revenue's appeal is accordingly treated as allowed for statistical purpose.
40. As regards ground No. 9 of the Revenue's appeal for A.Y. 2004-05, it is observed that the issue involved therein relating to deletion by the ld. CIT(A) of the TP adjustment of Rs. 15,21,495/- made by the A.O./TPO on account of payment made by the assessee for sales promotion services availed from its AE in US is similar to the one involved in ground No. 6 of the Revenue's appeal for A.Y. 2003-04 which has already been decided by us in the foregoing portion of this order. Following out conclusion drawn in A.Y. 2003-04, we uphold the impugned order of the ld. CIT(A) giving relief to the assessee on this issue and dismiss ground No. 9 of the Revenue's appeal.
41. In the result, both the appeals filed by the Revenue are partly allowed.
POOJA
Alert