TaxTMI 
TaxTMI 
2019 (9) TMI 920
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....er Rule 8D of the I.T. Rules, 1962 as held in the order of the Hon'ble High Court in the case of M/s Godrej & Boyee Manufacturing Co. Ltd.? (c) Whether, on the facts and in the circumstance of the case and in law, the Hon'ble Tribunal erred in deleting the addition on account of interest accrued from (1) Brandhouse Retails Ltd. (2) Sanghi Inds Ltd. and (3) Ganesh Benzoplast Ltd. holding that these three parties had become NPA? 2. Regarding question (a) : The issue relates to assessment year 2010-2011. The RespondentAssessee is a company registered under the Companies Act and it is a NonBanking Finance Company ('NBFC' for short). The assessee is engaged in the business of identifying the investment opportunities in financially distressed companies, which otherwise have inherent viable business proposition. The assessee acquires and invests in such medium size enterprises which are in financial distress. This essentially makes the investments of the assessee company a high risk investment. The credit rating of the assessee company therefore is categorized as 'BBB'. The assessee raised funds through debt instruments from group companies by issuing compulsory convertible debenture....
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....ted party" and secondly, relying upon USD Corporate Bond Rates to benchmark the ALP of the interest rate because the interest rates for bonds or loan has to be seen from the point of view of borrowers creditworthiness and not the lender's creditworthiness. Thus, the entire approach of the TPO/DRP in applying USD Corporate bond rates to benchmark the interest transaction in a blanket manner is not correct. As pointed out by Ld. Senior counsel, now, Hon'ble Delhi High Court in the case of Cotton Naturals P Ltd. (supra) have held that, arm's length interest rate should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. The relevant observation of the Hon'ble High Court in this regard reads as under:" 39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending 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....
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.... the assessee is correct or not and whether the average rate of interest of 11.30% paid by the assessee to its AE is at ALP or not. So far as the assessee's benchmarking analysis as done in TP Study report based on external data using Thomson Reuters' DealScan, and Bloomberg Database, we find that such an approach is not correct, firstly, there are no INR denominated debt issuance available on such databases and; secondly, in absence of such a data the assessee has to carry out huge adjustments on account of country risk, currency risk and tenor risk. With all these factors of adjustments, it would be difficult to arrive at an appropriate arm's length range of price; therefore, in our opinion such an approach of the assessee for benchmarking the arm's length interest rate may not be correct. However, as regards the search undertaken for comparable debt issuances in BSE data, we find that the assessee has shortlisted two comparables namely; Starlight Systems Private Limited and Share Microfin Limited which have a coupon rate of 15% and 13.75%. Since these data belong to year 2013, the assessee had made minor tenor adjustment to factor the time period to arrive at interest rate of 15....
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....en on comparison found that the average rate of interest of 11.30% paid by the assessee to its AEs was not excessive and was in any case lower than in the comparable instances. The tribunal rejected the transfer pricing adjustment comparing the rate of return for the assessee's US based AE. This later conclusion of the Tribunal is supported by following decisions. 4. Division Bench of Delhi High Court in case of Commissioner of Income Tax Vs. M/s Cotton Naturals (I) Pvt. Ltd., reported in (2015) 55 Taxmann.com 523, had held and observed as under; "39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending 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....
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....relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to _eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., 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." " 5. Similarly this Court in case of Commissioner Income Tax2, Vs. Tata Autocomp Systems Ltd., reported in 374 ITR 516, had observed as under; "7. We find that the impugned order....
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....d by the revenue. The assessee however argues that it was under the directives of RBI not to recognize interest of such NPAs on accrual basis but to offer the receipt on actual basis which the assessee in the later year had done and offered it to tax. 9. In a recent judgment dated 02/04/2019 in Income Tax Appeal No.237/17 and connected Appeal in case of Principal Commissioner of Income Tax5 Vs. Bajaj Finance Limited, this Court in context of a similar issue had held as under; "6. Gujarat High Court in case of Principal CIT Vs. Mahila Sewa Sahakari Bank Ltd1 had held that in case of a co-operative bank, the interest on NPAs would not be chargeable to tax on mere accrual. The Court referred to and relied upon the decision of the Supreme Court in the case of Southern Technologies Ltd Vs. Joint CIT2 . We may note that the decision concerns the assessment year 2010-11 when a co-operative bank was not included under Section 43D of the Act which was inserted by Finance Act, 2017 w.e.f 1.4.2018. 7. In case of CIT Vs. Deogiri Nagari Sahakari Bank Ltd & Ors. 3, this Court had expressed a similar view. We may further clarify that in the said case, the Court was concerned with a similar....