TaxTMI 
TaxTMI 
2016 (7) TMI 247
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....f the notional interest, the issue also is that of addition under Section 14A of the Income Tax Act. 3. The assessee company is engaged in manufacturing of flavoured chewing tobacco, kiwam, scented elaichi, etc. under the brand name 'BABA' and 'TULSI' and exported its 100% of production during the years under consideration. 4. The original assessments under section 143(3) were completed in respect of assessment years 2006-07, 2007-08 and 2008-09. Thereafter a search took place on 21st January, 2011. 5. The AO thereafter took up the assessment by issuing notice under section 153A. During the course of the assessment the AO referred the matter to the Transfer Pricing Officer. The learned TPO noted that the assessee company has extended loans to its subsidiary companies and held that the assessee ought to have charged interest in respect of such loans and accordingly the TPO recommend that interest as per the Prime Lending Rate of State Bank of India be added as income on account of adjustment of arm's length price. Thereafter the AO passed the draft assessment order making additions as recommended by the TPO. 6. Aggrieved by the order of the TPO, the assessee filed object....
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.... be LIBOR. In respect of advances in Euro the interest rate has to be EUR (LIBOR) and in respect of advances given in Swiss Franc the interest rate has to be that of CHF (LIBOR). In support of its contention the learned AR relied upon the judgment of the Coordinate Bench of the ITAT in the case of Cotton Natural India Pvt. Ltd. vs. DCIT, Circle 3(1), New Delhi 142 ITD (Del) 662 which has also been confirmed by the jurisdictional Delhi High Court. The learned AR also relied upon the following judgments of the ITAT:- (i) Siva Industries & Holdings Limited Vs ACIT (2011) 59 DTR 0182 (ii) Tata Autocomp Systems Limited Vs ACIT (2012) 73 DTR 0220 (iii) Four Soft Ltd. Vs DCIT (2014) 106 DTR 0137(Hyd) (iv) Aurionpro Solutions Limited 12. It was further contended that the amount of loan outstanding to its subsidiary companies has been converted into share application money in the assessment year 2011-12. The said loan having become share application money, the TPO cannot change the characteristic of the transaction so as to treat the share application as loan money so as to charge interest thereon. In support thereof, the learned AR placed reliance on the judgment of the Coor....
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....passed by the authorities below. The first issue is addition made by the AO in the assessment years which have not abated consequent to the search i.e. assessment years 2006-07, 2007-08 and 2008-09. As per the facts on record, the search took place on 21.1.2011. Assessments for all these three years have been completed under section 143(3) of the Act. No incriminating material was found during the course of the search. As is evident from the assessment order the addition has been made consequent to the reference made by the AO to TPO. The issue which arises for consideration is whether the AO could have made addition in these assessment years without there being any incriminating material and in absence of the abatement of assessment orders already framed. This issue is now squarely covered by the judgment of the jurisdictional Delhi High Court in the case of CIT (Central) - III vs. Kabul Chawla (Supra) wherein the Hon'ble High Court has been pleased to hold as under:- "37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a ....
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....nown in the course of original assessment. Conclusion 38. The present appeals concern AYs, 2002-03, 2005-06 and 2006- 07.On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed. 39. The question framed by the Court is answered in favour of the Assessee and against the Revenue." The above view has been reiterated by the Hon'ble Delhi High Court in the case of CIT-7 vs. RRJ Securities Ltd. in [2016] 380 ITR 612 (Del) where the Hon'ble Court has been pleased to hold as under:- "In respect of such assessments which have abated, the AO would have the jurisdiction to proceed and make an assessment. However, in respect of concluded assessments, the AO would assume jurisdiction toreassess provided that the assets/documents received by the AO representor indicate any undisclosed income or possibility of any income that may have remained undisclosed in the relevant assessment years. This Court in Commissioner of Income Tax (Central)-III v. Kabul Chawla: ITA707/2014, decided on 28th August, 2015 has held that completed assessments cou....
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....ng rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- The existing differences in ....
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.... whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates va....
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....rd to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pricing legislation or on the facts of this case. We donot find so. We donot find any provision in law enabling such deeming fiction. In view of the above facts and the judgment of coordinate bench, the AO is directed to verify the date of conversion of loan to share application money and not to make any adjustment on account of interest post conversion of loan to share application money and accordingly this ground of the assessee is allowed for statistical purpose. 23. As regar....