Disallowance under s 14A

Written By Indian Tax Home on Tuesday, July 5, 2011 | 9:32 AM


No disallowance can be made under s 14A wherein there was no exempt income (tax free income) in the hands of the assessee — as held by ChenTrib in Siva Industries & Holdings Ltd v ACITIn favour of: The Assessee ; ITA No. 2148/Mds/2010 : Assessment Year: 2006–2007

Transfer pricingALP — If the international transaction between assessee and Associated Enterprises is in foreign currency, transaction would have to be looked upon by applying the commercial principles in regard to international transaction, the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play.

Siva Industries & Holdings Ltd. v ACIT
ITAT BENCH ‘A’, CHENNAI
I.T.A. No. 2148/Mds/2010

Assessment Year: 2006-07
Abraham P. George, AM and George Mathan, JM

Decided on: 20 May 2011

Counsel appeared:
Shri Sriram Seshadri for the appellant
Shri Shaji P. Jacob for the respondent

Order
Per: George Mathan, JM :
This is an appeal filed by the assessee against the assessment order passed by the Assessing
Officer under section 143(3) read with section144C read with section 92CA(4) of the Income Tax
Act, 1961dated 26-10-2010 for the assessment year 2006-07.

2. Shri Sriram Seshadri, CA represented on behalf of the assessee and Shri Shaji P. Jacob, learned
Sr. DR represented on behalf of the Revenue.

3. It was the submission by the learned authorised representative that the issues in the appeal are
three-fold, the first issue being against the disallowance made by the Assessing Officer under
section 14A of the Act, the second being the action of the Assessing Officer in bringing to tax the
addition of Rs. 45,23,817,53 suggested by the TPO on account of the adoption of the prime
lending rate in respect of the charging of interest on the loan given by the assessee to its sister
concern as against the LIBOR rate and the third issue being against the action of the Assessing
Officer in not granting the TDS credit as claimed by the assessee.


 

4. In regard to the first issue being against the action of the Assessing Officer in making a
disallowance u/s. 14A it was submitted by the learned authorised representative that originally the
assessee had filed its return of income on 27.11.2006 wherein it had made disallowance u/s. 14A.
Subsequently on the basis of expert advice the assessee had filed a revised return on 18.3.2008
wherein the assessee had withdrawn the disallowance made u/s 14A to the extent of Rs.
30,89,60,575/- in the original return. It was the submission that as a consequence of the revised
return filed wherein the reason for the filing of the revised return was specifically mentioned.

5. There was a survey on the premises of the assessee on 20.8.2009. It was the submission that a
draft assessment order was issued on the assessee on 29.12.2009 which was the subject matter of
reference before the Dispute Resolution Panel, Chennai. The Dispute Resolution Panel, Chennai
vide its order dated 28.9.2010 had approved the additions proposed by the Assessing Officer in the
draft assessment order. Consequently, the assessment order in the assessee’s case came to be
passed on 26.10.2010. It was the submission that in respect of the disallowance under section 14A
the Assessing Officer had made a disallowance of Rs. 33,86,85,626/-. The learned authorized
representative submitted that the disallowance was out of the interest paid by the assessee on the
loans borrowed for business purposes. It was submitted that the total interest payment during the
relevant assessment year was about Rs. 42 crores. It was the submission that the Assessing Officer
had accepted the claim of interest payments as incurred for business purposes and excludible from
the disallowance u/s 14A to an extent of Rs. 8.14crores. It was the submission that the balance of
Rs. 33.86 crores was considered for disallowance by the Assessing Officer. The learned authorised
representative of the assessee placed before us the chart showing the break up of the interest
disallowed by the Assessing Officer to the extent of Rs. 33.86 crores. This is as follows:
Sr. No. Break up of interest disallowed bA.O. Amount of Paper Book
to the extent of INR 33.86 crores Interest (INR reference
in crores) U
1. IDFC Limited (Break-up given below) 25.18 27
2. Standard Chartered Bank 3.43 28
3. Standard Chartered Investment and Loans Ltd. 2.37 29
4. Processing fees paid to Standard Chartered Bank 2.00 32
5. Kalimati Investment Company Ltd. 0.30 22
6. ATVL 0.53 19
7. Interest on IL&FS Subscription Finance Ltd. 0.05 23
Total 33.86
It was the submission that out of Rs. 33.86 crores, Rs. 25.18 crores relating to IDFC Ltd. was in
no way connected to the investments in shares. It was fairly agreed that the balance of Rs. 8.68
crores was connected to the investment in shares. He further drew out attention to a chart showing
the details of the investment during the financial year 2005-06 in the shares of companies. It was
the submission that as on 1.4.2005 the investment in the shares of companies was to the tune of
Rs. 97.63 crores. He drew our attention to page 6 of the paper book which is copy of the schedule
attached and forming part of the Balance Sheet for the years ended 31.3.2005 and 31.3.2006
wherein the investments as on 31.3.2005 was to the extent of Rs. 97.63 crores. It was the
submission that during the relevant assessment year the assessee had purchased shares in various
companies to the extent of Rs. 18.21 lakhs. The main investment during the year was in the
investment of shares of Tata Tele Services Ltd. (TTSL) to an extent of Rs. 884 crores. It was the
submission that the said investment was through a share subscription agreement for the
preferential allotment of shares. It was the submission that the shares had been purchased at a
premium of 70%. It was the submission that the assessee had also swapped shares held by the
assessee company in Dishnet Wireless Ltd. of a value of Rs. 34.40 crores for shares in Aircel
Televentures Ltd., a wholly owned subsidiary by the swap by which the assessee received the
shares to the value of Rs. 129 crores. It was the further submission that the assessee had also
disposed of certain other investments in some companies. It was the submission that as on the year
ended 31-3-2006 the investments in the shares held by the assessee went up to Rs. 1075 crores. It
was the submission that the shares swapped by which the assessee got Rs. 129 crores worth of
M/s. Aircel Televentures Ltd. shares as against the Dishnet Wireless Ltd. shares during the year
did not involve any fund transfer. It was on the basis of a share swap agreement which was found
at pages 99 to 102 of the paper book. It was the submission that the main addition during the year
was investment in the shares of Tata Tele Services Ltd. to the extent of Rs. 884 crores for which
the assessee had sourced its own funds to an extent of Rs. 35 crores representing a repayment of
loan from M/s. Aircel Televentures Ltd. and share application money received from Shri C.
Shivsankaran, who is the promoter shareholder to an extent of Rs. 67.10 crores. It was the
submission that Rs. 102 crores out of Rs. 884 crores was clearly out of the non-interest bearing
funds and it was also not out of any loans taken. The balance 782 crores was sourced by taking a
short term loan from M/s. Kalimati Investment Co. Ltd. to an extent of Rs. 132 crores and the
balance of Rs. 650 crores was a loan taken from M/s. Standard Chartered Investment and Loans
Ltd. as an ICD (Inter Corporate Deposit) of 10.5% per annum for an amount of Rs. 250 crores and
9.5% per annum for Rs. 400 crores. The break up of the same was found at pages 109, 110 and
114 of the paper book. It was thus the submission of the learned authorised representative that the
loan from Standard Chartered Bank was taken on 27.2.2006 and the purchase of preferential
shares in TTSL was also paid for on 27.2.2006. It was the submission that Rs. 25.18 crores interest
repayment to IDFC Ltd. was on account of Rs. 300 crores secured loan which was taken by the
assessee company yon 30.3.2005 from M/s. IDFC Ltd. He drew our attention to the copy of the
loan agreement which was found at pages 38 to 71 of the paper book. It was the submission that
this amount of Rs. 300 crores was used for granting a loan to the subsidiary Aircel Tele Vemtire
Ltd. to an extent of Rs. 128.75 crores as also repayment of the loan taken for business purposes
from Hitech Housing Projects P. Ltd. to an extent of Rs. 10.45 crores. Another Rs. 150 crores was
used for the repayment of Inter Corporate Deposits from TTSL. Another Rs. 2.25 crores was used
for the upfront fee for the loan taken from IDFC Ltd. About Rs. 8.34 crores was in fixed deposits
with HDFC Bank and around Rs. 66 lakhs was utilized for business purposes. It was the
submission that that Rs. 300 crores taken from IDFC Ltd. was not used for any investment in the
shares as the same had been taken on 31.3.2005 and had also been used up substantially on
31.3.2005 itself and this loan amount was not available for making any investment prior to
31.3.2005 or immediately after 31.3.2005. It was thus the submission that from the Balance Sheet
as on 31.3.2005 it is clear that if Rs. 300 crores secured loan which was the only secured loan was
removed, then Rs. 97.62 crores representing the opening balance of the investment was also not
out of any borrowed funds. It was the submission that during the year the assessee had taken a
loan of Rs. 650 crores from Standard Chartered Bank and another Rs. 132 crores from Kalimati
Investment Co. Ltd. Then Rs. 782 crores was used for making the investment in the preferential
shares of Tata Teleservices Ltd. The investment in TTSL had also been done on 27-02-2006. It
was thus the submission that the interest paid to IDFC Ltd. to an extent of Rs.. 28.18 crores could
not be considered for disallowance of interest under section 14A as no portion of the same had
been used for making the investment. Regarding the balance of Rs. 8.68 crores it was fairly agreed
that the said interest related to the interest payments to Standard Chartered Bank, M/s. Kalimati
Investment Co. Ltd. etc. the funds from which it had been used for making the investments in the
shares of TTSL. It was the submission that if at all a disallowance u/s 14A was called for it should
be restricted to the said amount of Rs. 8.68 crores and nothing further as the direct linking of the
loans to the purpose for which the same had been used had been clearly shown by the assessee.
The learned authorised representative further drew our attention to the financial results of TTSL. It
was the submission that during the financial year 2004-05 relevant for the assessment year 2005-
06 the profit after taxation was a loss of Rs. 1664.07 crores. For the assessment year 2006-07 it
was a loss of Rs. 1878.21 crores. For the assessment year 2007-08 it was a loss of Rs. 2062.52
crores. For the assessment year 2008-09 it was a loss of Rs. 1813.76 crores and for the assessment
year 2009-10 it was a loss of Rs. 1814.31 crores. It was the submission that from the financial
results of TTSL clearly showed that it would not be turning the corner into a profit any time in the
near future. It was the submission that the investment in the shares of TTSL by the assessee was
purely a venture capital investment. The learned authorised representative drew our attention to
the financial results of TTSL for the various assessment years which was found at pages 118 to
150 of the paper book. He further drew our attention to section 5 of the Companies Act which
clearly states that a company cannot declare dividend if it has carried forward losses during the
relevant assessment years for which it wishes to declare any dividend. It was the further
submission that the assessee had also not received any dividend nor claimed any amount received
by the assessee as dividend. It was the submission that as the assessee had not claimed any
dividend income as exempt from tax, the provisions of sec. 14A could not be invoked on the
assessee. The learned authorised representative drew our attention to section 115-O of the Act
which provided the special provision for tax on distribution of profits of a domestic company. It
was the submission that as per sec. 115-O the words used were “declared, distributed or paid by
such company by way of dividends (whether interim or otherwise)”. It was the submission that no
amount had been declared, distributed or paid by TTSL by way of dividend in any manner
whatsoever. He further drew our attention to section 8 of the Income Tax Act, 1961 under the
head “dividend income” which also uses the words “declared by a company or distributed or paid
by it”. He also drew our attention to section 10(34) of the Act to support his contention that what
was not includible in the total income of the previous year of any person was “any income by way
of dividends referred to in sec. 115-O”. He further drew our attention to sec. 14A(1) to submit that
as per the said section it was only when there was any income which did not form part of the total
income under the Act during any relevant assessment year no deduction in respect of the
expenditure incurred for earning such income which does not form part of the total income, was
allowable. It was the submission that during the relevant assessment year the assessee did not have
any income which did not form part of the total income under the Act and therefore no
disallowance by invoking the provisions of sec. 14A could be made on the assessee. For this
proposition he relied upon the decision of the Hon'ble Punjab & Haryana High Court in the case of
CIT vs. Winsome Textile Industries Ltd., reported in 319 ITR 204 (P&H) wherein it has been held
that where the assessee did not make any claim for exemption section 14A could have no
application. He also placed reliance upon the decision of the Hon'ble Supreme Court in the case of
CIT v. Walfort Share and Stock Brokers P. Ltd. reported in 233 CTR 42 (S C) wherein in para 18
of the said order the Hon'ble Supreme Court has held that “for attracting section 14A, there has to
be a proximate cause for disallowance, which is its relationship with the tax exempt income.” It
was the submission that there was no proximate connection between the interest paid by the
assessee and any dividend income as the assessee had not received any dividend income nor it had
claimed any income as not includible in its total income. He also placed reliance on the circular
No. 14 of 2001 dated 22.11.2001 issued by the CBDT to submit that in the said circular also the
Board had explained that the provisions of sec. 14A were for restricting the claim of expenses in
relation to the exempt income. It was the submission that as there was no exempt income no
disallowance u/s 14A was liable to be made in the hands of the assessee.

6. In reply the learned DR submitted that as per the decision of the Hon'ble Supreme Court in the
case of CIT v. Rajendra Prasad Moody reported in 115 ITR 519 wherein it had been held that just
because there is no income the expenditure cannot be disallowed. It was the submission that as per
sec. 14A if an assessee has exempted income, then the expenditure in relation to such exempted
income is liable to be disallowed. It is not required to be seen as to whether the assessee has
exempted income during the relevant assessment year if the expenditure has been incurred to
make an investment which helped the assessee to derive exempted income at a future point of time
also the expenditure in relation to such exempted income is to be disallowed in view of the
provisions of sec. 14A. It was the submission that the decision of the Hon'ble Punjab & Haryana
High Court in the case of Winsome Textile Industries Ltd., referred to supra, was not liable to be
followed as it was not a jurisdictional High Court decision and it had not considered the decision
of the Hon'ble Supreme Court in the case of Rajendra Prasad Moody. He placed reliance on the
decision of the Hon'ble jurisdictional High Court in the case of Visvas Promoters (P) Ltd. v. ITAT
And Another reported in 323 ITR 114 (Mad) to support his contention that the decision of one
High Court is neither binding precedent for another High Court nor for courts or Tribunals outside
its own territorial jurisdiction. He also relied upon the decision of the Hon'ble Bombay High Court
in the case of Geoffrey Manners And Co. Ltd. v. CIT reported in 221 ITR 695 for the same
proposition. It was the further submission that as per the decision of the Hon'ble Supreme Court in
the case of Mrs. Bacha F. Guzdar, Bombay v. CIT reported in 27 ITR 1 (SC) the Hon'ble Supreme
Court had categorically held that a shareholder who buys shares does not buy any interest in the
property of the company which is a juristic person entirely distinct from the shareholders. The true
position of a shareholder in a company is that on buying shares he becomes entitled to participate
in the profits of the company if and when the company declares, subject to the articles of
association, that the profits or any portion thereof should be distributed by way of dividends
among the shareholders. He has a further right to participate in the assets of the company which
would be left over after winding up. It was the submission that the fact that the assessee has
invested in the shares by using borrowed funds, the expenditure in the form of interest on the
borrowals was liable to be disallowed by invoking the provisions of section 14A. It was the
submission that as a result of the survey on the assessee on 20-08-2009 the Assessing Officer had
directed the assessee to give the details of the interest on the investments. It was the submission
that the assessee had given the break up vide a letter dated 26-08-2009 and again by a letter dated
10-09-2009 which were shown at pages 1 and 2 of the paper book. It was the submission that this
was to an extent of R 30.89 crores and the assessee had also paid taxes to the tune of Rs. 40 crores
keeping in view the disallowance of interest under sec. 14A. It was the submission that the
assessee after having made a declaration should not be permitted to go back from such declaration.
It was the further submission that when the assessee had invested its interest-free funds for the
purchase of shares and had borrowed money for running its business, it automatically made the
investment by the assessee of its interest-free funds in the investments which derived the assessee
income which was not includible in the total income of the assessee, to be for non-business
purposes and consequently the interest disallowance out of the interest paid on the interest bearing
funds has been rightly made. He relied on the decision of the Hon'ble Kerala High Court in the
case of CIT v. Accelerated Freeze Drying Co. Ltd. reported in 324 ITR 326 (Ker) as also the
decision of the Hon'ble Delhi High Court in the case of Punjab Stainless Steel Inds. v. CIT
reported in 324 ITR 396 (Delhi) for this proposition. The learned DR relied on the decision of the
Bombay High Court in the case of Godrej And Boyce Mfg. Co. Ltd. v. Deputy Commissioner of
Income-tax reported in 328 ITR 81 (Bom) wherein it had been held that the disallowance of
expenditure by invoking the provisions of section 14A was applicable to dividend income and
income from mutual funds exempt under section 10(33) of the Act. It was the submission that the
Hon'ble Bombay High Court had taken into consideration the decision of the Hon'ble Supreme
Court in the case of Walfort Share and Stock Brokers P. Ltd., referred to supra to come to the
conclusion that the plain meaning of sec. 14A is that no deduction can be allowed in respect of
expenditure incurred by an assessee in relation to an income which does not form part of the total
income under the Act. It was the submission that in the decision of the Hon'ble Punjab & Haryana
High Court in the case of Winsome Textile Industries Ltd., referred to supra, the assessee therein
had used its own funds whereas in the present case the funds have clearly been admitted to be
borrowed funds. It was the further submission that the assessee had in its own letter agreed that
Rs. 32 crores of interest relates to the investments and now the assessee cannot be permitted to go
back on the same. He also relied upon the decision of the co-ordinate Bench of this Tribunal in the
case of M/s. Siva Ventures Ltd., a sister concern of the assessee in ITA No. 1950 and
941/Mds/2008 dated 31-7-2009 wherein, it was submitted, the issue of sec. 14A had been held
against the assessee. It was the further submission that the Assessing Officer did not apply the
provisions of sec. 8D as one to one linking of the funds was possible. He vehemently supported
the order of the Assessing Officer.

7. In reply the learned authorised representative submitted that loan taken in relation to the
investments in shares was only to an extent of Rs. 782 crores and the loan was taken only on
25.2.2006. It was the submission that the assessee had no intention to earn dividend. The letters
referred to by the Assessing Officer were the letters wherein the assessee was asked to give the
details of the interest attributable to the funds used for making the investments. Nowhere was the
assessee asked to link the interest expenditure to the loans if any utilized for making the
investments. It was the further submission that the decision in the sister concern’s case had no
applicability insofar as the issue in the said decision was in relation to the carry forward of short
term capital loss for which purpose he drew our attention to paras 4 to 4.6 of the order of the
Tribunal in the case of M/s. Siva Ventures Ltd., referred to supra. It was the submission that the
decision of the Hon'ble Punjab & Haryana High Court in the case of Winsome Textile Industries
Ltd., referred to supra, squarely applied insofar as the assessee has not claimed any exemption and
consequently no disallowance u/s 14A could be made. He relied on the decision of the Hon'ble
Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd., referred to supra.

8. We have considered the rival submissions. At the outset a perusal of the decision of the Hon'ble
jurisdictional High Court in the case of Visvas Promotors (P) Ltd., referred to supra, clearly shows
that the decision of the Hon'ble Punjab & Haryana High Court in the case of Winsome Textile
Industries Ltd., referred to supra as also the decision of the Hon'ble Bombay High Court in the
case of Godrej And Boyce Mfg. Co. Ltd., referred to supra, would not have the force of binding
precedent on this Tribunal. However, a further reading of the said decision of the Hon'ble
jurisdictional High Court clearly shows that the said decisions of the Hon'ble High Courts would
have a persuasive effect. Keeping in mind this position, if we see the decision of the Bombay High
Court in the case of Godrej And Boyce Mfg. Co. Ltd. it is noticed that the Hon'ble Bombay High
Court has considered the decision of the Hon'ble Supreme Court in the case of Walfort Share and
Stock Brokers P. Ltd., referred to supra, and the following principles have been shown to emerge
from section 14A and the decision in Walfort Share and Stock Brokers P. Ltd.:
“(a) the mandate of section 14A is to prevent claims for deduction
of expenditure in relation to income which does not form part of the total
income of the assessee;
(b) section 14A(1) is enacted to ensure that only expenses incurred
in respect of earning taxable income are allowed;
(c) the principle of apportionment of expenses is widened by
section 14A to include even the apportionment of expenditure between
taxable and non-taxable income of an indivisible business;
(d) the basic principle of taxation is to tax net income. This
principle applies even for the purposes of section 14A and expenses
towards non-taxable income must be excluded;
(e) once a proximate cause for disallowance is established – which
is the relationship of the expenditure with income which does not form
part of the total income- a disallowance has to be effected.”
As per the said decision, one of the main principles are that sec. 14A is to prevent claims of
deduction of expenditure in relation to income which does not form part of the total income of the
assessee. Similarly, sec. 14A(1) is enacted to ensure that only expenses incurred in earning taxable
income are allowed. Similarly, the basic principle of taxation is to tax the net income and this
principle applies even for the purpose of sec. 14A and expenses towards non taxable income must
be excluded. A perusal of the provisions of sec. 5(1) of the Act provides for the scope of the total
income. It includes all incomes from whatever source derived which is received or deemed to be
received, accrues, arises or is deemed to accrue or arise in India or accrues or arises outside India
during “such year”. Thus what is to be understood is that the total income is relating to such year.
If the assessee does not have any income as falling within the scope of “total income” during any
year the provisions of the Act could not be applied to him. A perusal of the provisions of sec. 14A
clearly shows that the words used therein are “for the purpose of computing the total income under
this Chapter, …….expenditure incurred in relation to income which does not form part of the total
income under this Act.” Thus for the applicability of sec.14A there must be (i) income which is
taxable under the Act for the relevant assessment year and (2) there should also be income which
does not form part of the total income under the Act during the relevant assessment year. If either
one is absent, then sec. 14A(1) has no applicability. If we have to assume that section 14A(1)
would apply, even when the assessee does not have any income which does not form part of the
total income, then it would reach in a position where if the assessee makes any investment in any
shares even though the assessee does not receive dividend income, the expenditure in relation to
the investment in the shares would stand to disallowance. This disallowance would continue year
after year as long as the assessee holds the investment, whether he gets any income out of such
investment or not. At a future point of time if the assessee liquidates that investment and derives a
profit on investment which would be liable for taxation under the head “long term capital gains”,
then the profit on the investment would also be taxed. This is not what is contemplated u/s 14A.
What is taxable during the relevant assessment year is the total income computed as per the
provisions of the Act. When computing the total income as per sec.5 the income should be
received or deemed to be received or accrued or arise or deemed to arise any income during the
year or accrue or arise to him outside India during the year. An investment which does not give
rise to any income deemed to accrue or arise cannot form part of the total income and therefore
cannot form income which does not form part of the total income under the Act. Thus once there
is no claim of income which does not form part of the total income under the Act, there cannot be
any disallowance in relation to an investment which may or may not give rise to any income
which does not form part of the total income. In the present case it is noticed that none of the
investments made by the assessee has generated any dividend income which has been claimed by
the assessee to be not to form part of the total income. In the circumstances, as it is noticed that the
assessee does not have any income which does not form part of the total income nor has the
assessee made such a claim, we are of the view that no disallowance under sec. 14A can be made
on the assessee for the relevant assessment year. This view of ours also finds support from the
decisions of the Hon'ble Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd.,
referred to supra, of the Hon'ble Bombay High Court in the case of Godrej And Boyce Mfg. Co.
Ltd., referred to supra, and is also supported by the view expressed by the Punjab & Haryana High
Court in the case of Winsome Textile Industries Ltd. The other decisions relied upon by both the
sides are not being discussed as they are found to have no specific relevance to the issue in the
appeal before us.

9. In regard to the second issue it was submitted by the learned authorised representative that the
assessee had granted a loan of Rs. 50 crores to its subsidiary in Mauritius for the purpose of
making investments and has charged interest @ 6% per annum. The issue was referred to the
TPO. Before the learned TPO it was submitted that the average of 12 months US $ denominated
LIBOR rate for the period 1.4.2005 to 31.3.2006 was 4.42% and consequently no addition on
account of the arm’s length interest rate was liable to be made. It was the submission that the
Assessing Officer had taken a view that the US $ denominated LIBOR rate could not be
considered as the loan was given from India and the prime lending rate in India was to be
considered. It was the submission that consequently the Assessing Officer had determined the rate
at 11.75% and the difference to the extent of R 45,23,817.53 was added to the assessee’s income.
It was the submission that the prime lending rate was a domestic rate and the transaction done by
the assessee was an international transaction for which the LIBOR rate was to be applied. It was
the submission that the RBI had also given directions wherein it was specifically mentioned that
the LIBOR rate was to be applied. He drew our attention to pages 151, 153, 169 and 172 of the
paper book which were circulars of the RBI, wherein the rate of interest on export credit in foreign
currency by bankers themselves was at LIBOR, EURO LIBOR or EURIBOR rate which was
applicable. It was the submission that as the transaction was an international transaction, as per the
RBI guideline itself the LIBOR rates had been applied. It was the submission that the addition to
the total income as made by the Assessing Officer by relying upon the TPO’s order was liable to
be deleted.

10. In reply the learned DR submitted that LIBOR was applicable if the assessee advances loans in
foreign currency. It was the submission that the source of funding is in Indian rupees and therefore
prime lending rate was to be applied and not LIBOR. He vehemently supported the order of the
Assessing Officer and relied upon the order of the TPO.

11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows
that the assessee had raised the funds by way of issuance of 0% optional convertible preferential
shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India
Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary
company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has
given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest
from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and
the Associated Enterprises is in foreign currency and the transaction is an international transaction,
then the transaction would have to be looked upon by applying the commercial principles in
regard to international transaction. If this is so, then the domestic prime lending rate would have
no applicability and the international rate fixed being LIBOR would come into play. In the
circumstances, we are of the view that it LIBOR rate which has to be considered while
determining the arm’s length interest rate in respect of the transaction between the assessee and
the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1.4./2005 to
31.3.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR
rate, we are of the view that no addition on this count is liable to be made in the hands of the
assessee. In the circumstances, the addition as made by the Assessing Officer on this count is
deleted.
12. In regard to the third issue it was submitted that the Assessing Officer has not granted TDS
credit as claimed by the assessee. It was the submission that before the DRP the issue had been
raised and the DRP called for a remand report and the remand report was received on 27-8-2010
as per para 16 of its order and the remand report had not been granted for its rebuttal. It was the
submission that the assessee had no objection if the issue was restored to the file of the Assessing
Officer for re-verification to grant the assessee opportunity to rectify any defects in the TDS
certificates, if any.

13.In reply, the learned DR submitted that he had no objection to the restoring of this issue to the
file of the Assessing Officer for re-adjudication.

14. We have considered the rival submissions. As it is noticed that the remand report has been
received by the DRP on 27-8-2010 and the same has not been granted to the assessee for its
rebuttal, this issue is restored to the file of the Assessing Officer for re-adjudication. The
Assessing Officer shall re- consider the issue of grant of credit for the TDS certificates and if he
finds any of them to be defective, he shall give the assessee adequate opportunity to rectify the
same and re-adjudicate the issue in accordance with law.

15. In the result, the appeal of the assessee is allowed for statistical purposes.

16. The order was pronounced in the court on 20-05-2011.

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