2019 (10) TMI 760 - HC - Income Tax

Assessee wins: Share application money not treated as loan for TP adjustment; disallowance under s.36(1)(iii) rejected

The HC upheld the tribunal, ruling for the assessee against the revenue: funds advanced as share application money were not treated as a loan for TP ... TP Adjustment - ALP of the guarantee commission charges provided by the Respondent Co. - tribunal direction that the money advanced to the AE as share application money is not to be considered as loan - HELD THAT:- Issue as concluded against Revenue and in favour of Respondent-assessee in the Respondent’s own case [2018 (9) TMI 293 - BOMBAY HIGH COURT] Disallowance u/s 36(1)(iii) - whether the acquisition of business by way of investing into shares of that company through either Special Purpose Vehicle or directly cannot be considered to be ordinary event of the business and therefore, cannot be termed as expenditure incurred for the purpose of assessee’s business, which is providing ITES services?’ - HELD THAT:- As held in SRISHTI SECURITIES PVT. LTD. [2009 (1) TMI 408 - BOMBAY HIGH COURT] where an assessee claims deduction of interest paid on capital borrowed, all that an assessee has to show is that the borrowed funds were used for business purpose and if so then interest will have to be allowed as a deduction. The submission on behalf of the Revenue that the Petitioner is in the business of BPO and Call Centre activities and not in the business of investment means the prime business of the assessee is of running BPO and Call Centres and as recorded by the Tribunal the entire funds were borrowed so as to expand the business activities of BPO and Call Centres in Canada by acquiring a Canadian Company. Thus the loan was taken for the purpose of business. This is a finding of fact which has not been shown to be perverse. The expansion of ones activities in Canada would require acquisition of a Company by purchasing shares therein so as to expand the assessee's business. The object of the expenditure clearly is for the purpose of the business and therefore the interest incurred on the funds borrowed for investment in M/s.Minacs Canada has to be allowed as a deduction under section 36 (1)(iii) of the Act. So far as the finance expenditure is concerned, it would follow the allowing of interest expenditure. This expenditure is incurred in respect of the above loan taken for purpose of business and allowable u/s 36(1)(iii) Issues:1. Interpretation of transfer pricing rules for guarantee commission charges.2. Classification of money advanced as share application money.3. Disallowance of expenses under section 36(1)(iii) of the Income Tax Act.Issue 1: The Tribunal directed the AO/TPO to adopt 0.5% as the ALP of guarantee commission charges without considering specific risks and leveraged positions. The Revenue challenged this decision, questioning the ALP determination. The Court noted that similar issues had been decided in favor of the Respondent in a previous case. The Revenue failed to establish any factual or legal distinctions, leading to the dismissal of this issue.Issue 2: The Respondent claimed expenses related to interest and finance for acquiring a foreign company. The AO disallowed these expenses, arguing they were not related to the Respondent's business. The CIT(A) upheld the disallowance for one year but allowed it for another. Both parties appealed to the Tribunal. The Tribunal found that the acquisition of shares was for business expansion, and the expenses were incurred for that purpose. Relying on precedent, the Tribunal allowed the deduction of interest and finance expenses. The Court upheld this decision, emphasizing that the loan was taken to enhance the Respondent's business activities, making the expenses allowable under section 36(1)(iii) of the Act.Issue 3: The Court analyzed the nature of the expenses claimed under section 36(1)(iii) of the Act. The Respondent's business involved BPO and Call Centre services, and the acquisition of a company in a similar line of business was deemed a strategic decision for business expansion. The Court agreed that the interest and finance expenses incurred for this acquisition were allowable deductions. The Revenue's argument that the Respondent was not in the business of investment was dismissed, as the loan was utilized to expand the BPO and Call Centre activities. The Court concluded that the expenses were incurred for business purposes and therefore deductible under the Act. The issue did not raise any substantial legal question and was decided in favor of the Respondent.In conclusion, the Appeals were dismissed, and no costs were awarded. The judgment clarified the treatment of expenses incurred for strategic business decisions and upheld the Tribunal's findings regarding the deductibility of interest and finance expenses under section 36(1)(iii) of the Income Tax Act.