JUDGMENT

Akil Kureshi, J. - This Appeal is filed by the revenue to challenge a judgment of Income Tax Appellate Tribunal. Following questions were presented for our consideration;

(a) Whether, on the facts and in the circumstance of the case and in law, the Hon''ble Tribunal erred in comparing the overall average rate of interest of 11.30% during the year without appreciating that Nesarikar each series of debentures issued in different years was a separate international transaction and each transaction was required to be benchmarked separately?

(b) Whether, on the facts and in the circumstance of the case and in law, the Hon''ble Tribunal erred in not appreciating the fact that the amount of disallowance under section 14A of the Act has to be computed as per 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 20.10.2011. The Respondent Assessee is a company registered under the Companies Act and it is a Non Banking 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 debentures. The rate of interest of such borrowing from its Associate Enterprises (''AE'' for short) by the assessee was the subject matter of transfer pricing adjustments. It was noticed that the assessee had issued such debentures by paying interest at the rate of 7% in the year 2006. Later borrowings were at higher rate of interest ranging from 9.75 to 14%. Average interest rate of such CCDs came to 11.30%.

The Transfer Pricing Officer undertook Arm''s length adjustments and held that the interest paid by the assessee to the AEs was not at Arm''s length. He made adjustment of a sum of Rs. 48.53 out of total interest payment 98.44 crores paid by the assessee. This issue was therefore carried by the assessee before the tribunal. Tribunal by the impugned judgment deleted the addition making following observations;

"13. Now coming to the issue, whether the arm''s length interest rate arrived at by the TPO and endorsed by the DRP by adopting USD Corporate Bond Rate and LIBOR interest rate based on external commercial borrowing is justified in the present case or not. First of all, as stated in the foregoing paragraphs and reiterated several times that the CCDs have been issued in INR denominated debt and the interest paid / payable is also in terms of INR. Once the tested transaction is in INR denominated debt, then interest rate must necessarily be based on economic and market factors affecting Indian currency and data available for debt issuances in India or INR denominated rather than foreign currency rate or external data. The base rate on which interest rate depends is directly related to the currency or denomination of issuance and, therefore, it should be taken into account according to the market conditions prevalent in the country of such currency, here in this case India. The market conditions capable of capturing best of the rates do not depend much on any place but rather on currency concern, because the supply and demands of funds in a specific currency the price/interest rates for funds denomi