Tribunal Upholds Decision on Interest Rate & Cess Deductibility, Revenue's Appeal Dismissed

The tribunal dismissed the revenue's appeal on both grounds. Regarding the adjustment of interest on the loan to ZAO Classic Russia, the tribunal upheld the CIT(A)'s decision to use the LIBOR rate for foreign currency loans, not the domestic prime lending rate. Concerning the deductibility of green leaf cess, the tribunal supported the CIT(A)'s decision based on precedents from the Calcutta High Court and the Supreme Court. The judgments were in line with established legal precedents, and the appeal was dismissed on 12.05.2017.

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Issues Involved:
1. Adjustment of interest charged to the subsidiary company ZAO Classic Russia.
2. Allowability of cess on green leaf as an expenditure.

Issue-Wise Detailed Analysis:

1. Adjustment of Interest Charged to the Subsidiary Company ZAO Classic Russia:
The core issue was whether the interest rate charged by the assessee on a loan given to its subsidiary, ZAO Classic Russia, adhered to the Arm's Length Price (ALP) as mandated by Section 92 of the Income Tax Act, 1961. The assessee had provided a foreign currency loan at an interest rate of 8% per annum, which was higher than the average LIBOR rate of 4.68%. The Transfer Pricing Officer (TPO) argued that the arms-length rate should be 14.12%, leading to an adjustment of Rs. 40,32,011. However, the CIT(A) deleted this adjustment, referencing multiple tribunal decisions, including the ITAT Chennai's decision in Siva Industries & Holdings Limited, which emphasized that for foreign currency loans, the LIBOR rate should be considered, not the domestic prime lending rate. The tribunal upheld the CIT(A)'s decision, citing consistent legal precedent that the LIBOR rate applies to international transactions between associated enterprises. Thus, ground no.1 raised by the revenue was dismissed.

2. Allowability of Cess on Green Leaf as an Expenditure:
The second issue pertained to whether the cess on green leaf amounting to Rs. 1,44,03,221 was deductible. The AO contended that this cess, being attributable to agricultural activities, was beyond the purview of Central Income Tax. However, the CIT(A) allowed the deduction, following the precedent set by the Hon'ble Calcutta High Court in AFT Industries Ltd. vs CIT, which held that green leaf cess should be deducted before applying Rule 8(1) of the Income Tax Rules, 1962. The tribunal supported the CIT(A)'s decision, noting that the issue was conclusively decided by the jurisdictional High Court and upheld by the Hon'ble Supreme Court in CIT Vs. M/S. Apeejay Tea Co. Ltd. Consequently, ground no.2 raised by the revenue was also dismissed.

Conclusion:
The tribunal dismissed the appeal by the revenue on both grounds, affirming the CIT(A)'s decisions regarding the adjustment of interest on the loan to ZAO Classic Russia and the deductibility of green leaf cess. The judgments were based on established legal precedents and consistent tribunal decisions. The order was pronounced on 12.05.2017.

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