TaxTMI 
TaxTMI 
TaxTMI 
2016 (11) TMI 1031
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....ntially Ld. Assessing Officer in holding that the Arms's Length rate of interest chargeable on the interest free advance given to the subsidiary company is @ 17.26% as computed by the Transfer Pricing Officer, as against nil charged by the assessee. 3. That on the facts and the circumstances of the case, the Ld. Transfer Pricing Officer and Dispute Resolution Panel and consequentially Ld. Assessing Officer has erred in holding that only 20% of the advance is converted into equity and hence charging interest on the balance amount. 4. Without prejudice to the aforementioned ground, the Assessing Officer has erred in ignoring the alternative plea of the assessee that the rate of interest ought to have been at the LIBOR rate prevailing at the time of advancing the money. 5. That the Ld. Transfer Pricing Officer and Dispute Resolution Panel and consequentially Ld Assessing Officer grossly erred in law in not appreciating that the interest rates determined by CRISIL are determined for a different purpose and cannot be taken as comparable to international transactions of quasi equity to a 100% subsidiary. 6. That the determination of Arm's Length Price has not been done as....
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....as submitted that the vision of the parent company was to be India's leading hospitality development and asset Ownership Company. It also aimed to become one amongst the largest such companies globally. For the said purposes it was submitted that the assessee had established a hospitality arm. Elaborating the strategy used for attaining its aims it was submitted that the company not only develops and acquires but also finances and actively manages a rapidly growing hospitality portfolio. Referring to the record and the accepted position it was submitted that approximately 6,000 rooms were under current development in most major cities and tourist destinations in India and the assessee at the relevant point of time was endeavoring to create a portfolio of 25,000 rooms in the next 5 years. This stated background of the assessee's functioning aims it was may kindly be given due consideration while deciding the issues as it is these admitted aims/visions which have been the guidifying factors for each decision and action of the assessee. 3.1. Referring to the synopsis filed, it was submitted that the first tranche of money was advanced towards this aim in August 2007 and thereafter co....
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....on facts the assessee's case was on a better footing then the facts considered in the precedent cited. 3.4. It was further pleaded that the tax authorities in 2009 - 10 and 2010 - 11 assessment year made no such addition. This fact it was submitted would be evident from the copies of the respective assessment orders placed at paper book pages 85-93 and 94-100 respectively. Accordingly it was his submission that there being no change in facts and circumstances the factual position accepted by the Revenue deserves to be followed and no addition by way of adjustment was possible. 4. Arguments on Ground No.2 were advanced stating that in the eventuality the assessee does not succeed in Ground Nos. 1 and 3 by allowing Ground No.2 LIBOR rate may be applied instead of the rate applied by the TPO as the loan was admittedly given in US dollars. The TPO's search by resorting to obtain information by resorting to section 133(6) from Crisil for identifying the correct rate to be applied, it was submitted may be rejected as the application of Crisil BB rate on facts was not justified. The applicability of Libor rate it was submitted has judicial acceptance as would be evident from the decisio....
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....'s length principle, as enunciated in the transfer pricing guidelines as per the Income-Tax Act. The arm's length interest it was submitted, is determined by following the CUP method, wherein the interest rate is determined under the circumstances in which the tax payer and its subsidiaries are operating. Thus what is the interest that would have been earned if such loans were given to unrelated parties in similar situation as that of subsidiaries is the measure which has to be applied. Since the tested party it was submitted is the tax payer in the circumstances the prevalent interest that could have been earned by the tax payer by advancing a loan to an unrelated party in India is to be considered. This has to be factored in with the situation of the tax payer's AE weak financial health as loan at what rate and condition would have been advanced. Thus this would be the relevant factor to be considered. In the circumstances, the assessee it was submitted has correctly chosen to argue on the rate of interest. The main issue it was submitted which needs to be considered is to decide the interest rate which the tax payer would have earned on advancing loan of above amount....
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....ee Value of Transaction (USD) Method PLI 1. Interest free loan NA NA 72,580,000 7.1. The advancing of interest free loan of USD 72580000 to its AE, DLF Global Hospitality Ltd., Cyprus (DHHL/DLF) Cyprus has been reflected as an interest free loan of Rs. 2,91,99,60,465. The relevant extract from the TPO's order addressing the specific date and amounts on which the loans were given is reproduced hereunder:- "It is seen from the Form No.3CEB and Transfer Pricing Study that the assessee company has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:- Date of initial Loan to DGHL Loan (US $) DHHL-DGHL Amount in INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466" 7.2. The assessee in support of its claim has stated before the TPO that the loan was advanced with the intention of converting it into equity and has shown that it was converted into equity within 3 months. The assessee as per record has explained that the loan was so structured as the assessee was not sure of the subsidiar....
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.... to an unrelated party in India, with the same weak financial health as that of the tax payer 's AE, will be considered. 2. As mentioned above, under the CUP method, the interest that is charged between unrelated parties under similar circumstances would be the arm's length interest. The main issue is to decide the interest rate at which the tax payer would have earned, in advancing loan of above amounts to unrelated third parties with similar financial strength as that of the AE. It is also to be mentioned that there is no security provided by the AE's /subsidiaries against the loans advanced." 7.4. The following extract brings out the reasoning of the TPO justifying the application of the rate which has been upheld by the DRP and heavily relied upon by the Ld.CIT. DR:- 3. "Financial institutions generally weigh four elements in determining whether or not to issue loans and, if so, at what conditions and fees: Financial Risk: In order to gauge the financial risk incurred by the lender, the debtor's financial position is reviewed based on its balance sheet and income statement; Credit Risk: In order to gauge the credit risk, three elements are weighed, na....
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....) Moderate Safety Instruments rated 'BBB' are judged to offer moderate safety, with regard to timely payment of financial obligations for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rating categories. BB (Double B) Inadequate Safe Instruments rated 'BB' are judged to carry inadequate safety, with regard to timely payment of financial obligations; they are less likely to default in the immediate future than instruments in lower rating categories, but an adverse change in circumstances could lead to inadequate capacity to make payment on financial obligations. B High Risk Instruments rated 'B' are judged to have high likelihood of default; while currently financial obligations are met, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. C Substantial Risk Instruments rated 'C are judged to have factors present that make them vulnerable to default; timely payment of financial obligations is possible only if favourable circumstances continue. D Default Instruments rated 'D&#....
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....have accessed funds from any other source. This quasi equity was converted into equity and this became the basis to borrow from third party banks. The assessee has stressed on the commercial expediency of the transaction. The assessee has objected to the use of S.133(6) to gather information stating that it might not be authentic, it is not available in the public domain and it is like using secret comparables." (emphasis provided) 7.6. The assessee's objection that the TPO cannot question the commercial expediency of its activities was not accepted by the TPO. The TPO was of the view that the OECD guidelines clearly held the view that "when independent enterprises transact with each other, the conditions of their commercial and financial relations (e.g. the price of goods transferred or services provided and the conditions of the transfer or provision) ordinarily are determined by market forces. When associated enterprises transact with each other, their commercial and financial relations may not be directly affected by external market forces in the same way, although associated enterprises often seek to replicate the dynamics of market forces in their transactions with ea....
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.... TPO to utilize the same under section 133 (6)/131 and any falsity in the information given under the provisions of the Income Tax Act, 1961 is liable for penal action. Accordingly, we find that the conclusion drawn by the TPO that he had the power to seek information u/s 133(6) in principle is the correct view in law and the conclusion so drawn by the TPO is upheld by us. Whether the same was necessitated or relevant on facts before us is an area which, if need be, shall arise later. 7.8. To revert back to the proceedings before the TPO the record shows that he concluded the issue in the following manner:- "In view of the above discussion, while the assessee will be given benefit of conversion of the loan into equity during a reasonable time frame, the benefit will be limited to 20% of the loan. The rest will be treated as a loan on which an appropriate interest, as determined in the show cause notice, needs to be charged. The calculation of the same is as under:- Month End Opening balance (Rs.) (after taking to account the revised closing balance) Funds extended (Rs.) Conversion into Equity (Rs.) Closing balance (Rs.) (as per assessee) Closing balance after allowance fo....
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.... 3 to 4 months which clearly reflects that it was actually meant to be a capital contribution. The support was also sought by the assessee from the guidelines issued by the Organisation for Economic Cooperation and Development on Transfer Pricing in 2010 ("OECD Guidelines"), an extract of which is appended below: "D.2 Recognition of the actual transactions undertaken 1.64. A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapter II. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.65. However, there are two particular circumstances in which it may, exceptionally, be ....
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....essee wishes to submit that after the conversion of the quasi-equity into equity, DLF Cyprus was able to secure additional funds from third party banks. This was critical for DLF Cyprus since the additional funds were required for completion of acquisitions, and the independent banks would not have provided any funds to DLF Cyprus without it having an acceptable debt/equity ratio. The third party banks which may have refrained from providing loans to DLF Cyprus at the time of set-up, advanced loans to DLF Cyprus only on the basis of restructured capital gearing of the company. The assessee wishes to submit that it was commercially expediency which necessitated DHHL to provide advances to DLF Cyprus. These advances were made as a part of capital for further investment by its associated enterprise and to obtain return in future. The assessee had full control over its associated enterprise which reduces the credit risk." (emphasis provided) 7.10.1. Elaborating the argument that by way of this funding the assessee was engaged in stewardship activities, the following submissions have been advanced:- "As explained above, stewardship activities do not require any payment since they....
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....hotel groups in the world. "Aman" - an outstanding brand and winner of over 500 awards since 1968, such as Conde Nast, "The Gold List", Gallivanter's Guide "Best Hotel Worldwide" etc. - owns and operates 18 boutique resorts across countries such as Indonesia, Thailand, Sri Lanka, India, Morocco, Bhutan, France and the USA." (emphasis provided) 7.12. Guided by the above aims and vision, funds were advanced to its AE in Cyprus on the following dates:- "It is seen from the Form No.3CEB and Transfer Pricing Study that the assessee company has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:- Date of initial Loan to DGHL Loan (US $) DHHL-DGHL Amount in INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466 7.13. Admittedly these loans were converted into equity within 3 months as per the following chart:- Month End Opening (Rs.) Funds Extended (Rs.) Conversion into equity (Rs.) Closing Balance Apr-07 May-07 June-07 ....
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....he loans were advanced as an activity of increasing its foothold in opportunities outside as part of capital to be converted into equity. The stated intent of realizing the aims and vision of the assessee company was to fund its AE so that the benefits of the efforts of the AE in increasing the foothold/portfolio would directly benefit the tax payer in India and the fact that the interest free loan has been converted in equity after fulfilling the necessary legal requirements within three months is an evidence on record.. 7.16.1. In the facts as they stand we are now called upon to decide whether in the peculiar facts and circumstances of the case it is an International Transaction or not. The Revenue claims that the fact of showing the interest free loan as an International Transaction to its subsidiary AE in Form 3CEB ipse dixit as considered in Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.) and also VVF Ltd. attracts the provisions of Chapter X of the Income Tax Act, 1961. The consistent objections posed by the tax payer though have been acknowledged by way of reproduction in the orders have not been considered necessary to address whether adjustment under Chapter X is war....
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....ntended purpose in a new area being a new territory. Thus the argument that in order to maintain control and command over the funds advanced fulfilling regulatory conditions at Cyprus etc. were required to be given due consideration. The stated intent of the tax payer that when the funds were fully utilized and exhausted by applying towards the intended purposes it was to be converted into equity which has been done. Thus the arguments that the funds advanced till then as an interest free loan, if it has to be disbelieved, has to be shown as sham or bogus transaction. The facts are not so. In the face of the above consistent claim demonstrated by the assessee by way of facts and supporting evidences which stand unassailed by the Revenue on record, we therefore find no justification either in fact or law to uphold the Revenue's stand that the tax payer must necessarily be bound by the disclosure made in Form No.3CEB Report. There is nothing on record to support the conclusion that the interest free loan must necessarily be deemed to be an interest earning activity and not an activity to capitalize the opportunity cost for investing in new territories. We hold that for the tax author....
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....ssee was rejected by the TPO and the said finding had been upheld by the CIT(A). The Co-ordinate Bench considering the facts accepted the assessee's argument that in the case of Perot Systems (cited supra) the argument that loan being quasi-capital was rejected on facts and the core legal issue was left open namely whether ALP adjustments will also be warranted in case of interest free loan extended as quasi-capital. The Co-ordinate Bench examined and considered the decisions rendered in Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.); Micro Inks Ltd vs ACIT [2013] 157 TTJ 289 (Ahd.); Four Soft Pvt. Ltd. vs DCIT [2014] 149 ITD 732 (Hyd); Prithvi Information Solutions Pvt. Ltd. vs ACIT [2014] 34 ITR (Tri) 429 (Hyd.) and thereafter came to the conclusion that none of these decisions had thrown any light on what constitutes "quasi capital" in the context of transfer pricing and its relevance in ascertainment of the arms length sales price of a transaction in the said context. The Coordinate Bench has quoted the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)] wherein their Lordships have ....
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....out prejudice to the main issue if at all interest was to be charged on the interest free advances then the LIBOR rate would apply. The said proposition it has been argued is also supported by the decision of the Jurisdictional High Court in the case of Cotton Naturals India P. Ltd.(cited supra). However, apart from the issue agitated in Ground No.2, Bharti Airtel Ltd. (cited supra) has also been relied in support of the primary issue for the proposition that the activity of interest free advances ultimately to be converted into equity by a holding company to a subsidiary company does not give rise to an international transaction. 7.18. Considering the said decision, we find that the Co-ordinate Bench was called upon to decide whether Chapter X was attracted in facts where the assessee had advanced interest free loans to its AE for the stated purpose of share application. These material facts and issue would be evident from the very wordings of Ground No.15 and 15.1 raised by the assessee before the Co-ordinate Bench. These grounds when read alongwith other related grounds agitated before the Co-ordinate Bench are being reproduced so as to bring out the gamut of issues agitated an....
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.... erred in relying upon the rate of interest charged by various domestic banks on advancement of foreign currency loans obtained by the TPO under section 133(6) of the Act, without affording opportunity to the appellant to rebut the same, in violation of principles of natural justice. 15.4 That the assessing officer/TPO erred in relying upon the information obtained under section 133(6) of the Act, without appreciating that such information was not available in the public domain and therefore, could not have been relied upon for the purpose of determining the arm's length price. 15.5. Without prejudice, that the assessing officer/TPO erred in computing the amount of interest at Rs. 19,15,45,943, by applying rate of interest of 17.26% p.a. for the whole year on the consolidated amount of share application money, without considering the monthly balance of share application money. 15.6 That the assessing officer/TPO erred on facts and in law by disregarding established judicial pronouncements in India in making the Transfer Pricing adjustment." 7.18.1. The facts and the legal precedent with which the Coordinate Bench was seized of are set out in Paras 44 to 45 of the sai....
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....etermine ALP of the deemed interest free loans to the AE, but, for the reasons we will set out in a short while, it is not really necessary to deal with facts relating to ALP determination part. When assessee raised the objection before the DRP on this issue, it was rejected by observing that," we agree with the TPO that capital locked up for want of transfer of shares for reasonably long period would partake the nature of loan". It was in this backdrop that payments for share application money were treated as interest free loans given to the AEs and ALP adjustment was made for interest thereon. Aggrieved, assessee is in appeal before us." (emphasis provided) 7.18.2. Considering the arguments on these facts and the legal precedent the Coordinate Bench came to the following conclusion:- 46. "We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with....
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....o be paid any interest for the period between making the share application payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits. 48. Let us also deal with two judicial precedents which have been heavily relied upon by the TPO, as also by the learned Departmental Representative, on which their case rests. None of these decisions, however, deal with the core issue before us i.e. whether a capital contribution can be deemed to be partly an interest free loan, for the period till the shares were actually allotted, and partly as capital contribution, after the subscribed shares were issued by the subsidiary in which capital contribution was made. In the case of Perot Systems TSI India Ltd Vs. DCIT (supra), a coordinate bench of this Tribunal had an occasion to deal with the arm's length price adjustment with regard to interest free advances to the subsidiaries. That was a case in which the assessee, an Indian company, advanced interest-free loans to its 100% foreign subsidiaries. The subsidiaries used those funds to make investments in other step- down subsidiaries. On the question whether notional interest on the said....
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....und to be a sham or bogus transaction. While there are no specific powers vested in the TPO to recharacterize the transaction, even under the judge made law, such rechracterization can be done by the revenue authorities when the transactions are found to be substantially at variance with the stated form. In the present case, there cannot even a suggestion to hold that this is a bogus transaction because admittedly the subscribed shares capital has indeed been allotted to the assessee. The transaction is thus accepted to be genuine in effect. 50. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the authorities below were in error in treating the payment of share application money, as partly in the nature of interest free loans to the AEs, and, accordingly, ALP adjustment based on that hypothesis was indeed devoid of legally sustainable merits. We delete the impugned adjustment of Rs. 19,15,45,943. The assessee gets the relief accordingly. As we have decided this ground of appeal on the fundamental issue that the payment of share application money could not be partly treated as interest free loan to AE, we see no need to....
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.... that the tested party being the assessee i.e. the lender, the prevalent interest that could be earned by the taxpayer by advancing loan to an unrelated party in India was also considered and held to be inappropriate in view of the fact that since the interest rate on foreign currency loans necessarily being qualitatively different, thus it was held that even if the interest that the assessee would have earned was to be considered then such interest would be the interest that the assessee would have earned on foreign currency loans and not rupee denominated loans. In the facts of the present case the assessee has argued without prejudice to the main issue that if at all interest is to charged then judicial precedent sets out that it has to be the LIBOR rate + 2.5% interest as the rate charged by an independent Bank in the facts of the present case as the assessee's own CUP being the best CUP on record cannot be ignored. As addressed earlier, we are not called upon to decide the issue in the facts of the present case. 7.19. Reverting back to the main issue, we note that on behalf of the assessee, reliance has also been placed on the judicial precedent as considered by the Hon'ble B....
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....he activity of advancing funds for earning interest. As opposed to that we find that in the facts of the present case, the tax payer has made its case easily understandable and simpler by resorting to explain its activity of advancing interest free loan to its AE by the use of the expression "quasi equity" and "mezzanine financing" which terms are well understood in financial circles. For the sake of completeness, reference may be made to the definition as found available on "Investopedia" http://www.investopedia.com/term which defines "quasi equity" as "a category of debt taken on by a company that has some traits of equity, such as having flexible repayment options or being unsecured Examples of quasi-equity include mezzanine debt and subordinated debt". It further defines "Mezzanine financing" as a hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture ....
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....ound to be not relevant or reliable then they must be rebutted/disproved by evidences. No authority need be cited to hold that the explanation of the assessee is to be accepted or rejected by the tax authorities by addressing the facts and not avoiding to address the same. The tax authorities are not expected to reproduce the explanation as a mere meaningless rhetoric and arrive at a conclusion without addressing and meeting the explanation and evidences relied upon by the assessee. If the tax payer claims it is an interest free loan as a share holding activity, to be utilized by the AE for acquiring and increasing its portfolio and on utilization and fulfilling the internal and external requirements by way of permissions and procedures of the regulatory authority etc. it is to be converted into equity and that too at a premium then it is the correctness of this claim which is to be specifically addressed and decided. Merely because it is shown as an international transaction itself will not decide the claim. As observed earlier this principle stands settled by the Bombay High Court where the assessee in Vodafone India Services P.Ltd. (cited supra) had shown the issue of share capi....
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....s economic analysis (page 9 onwards) and issued a detailed showcause notice dated 1-12-2014. Replies filed by the Taxpayer have been examined and the reasons due to which the TP study had to be modified under rule 92C(3)(c) rws 92CA(3) are comprehensively discussed. While share application money was advanced on 16-11-2010, shares were allotted on 15-05-2011. Even in AY 2008-09 the DRP had affirmed order of TPO that advancement of share application money to AE was an interest free loan. The share application money advanced to DLF Global Hospitality Ltd Cyprus treated as a deemed loan is approved by DRP, however in view of decision in the case of Cotton Naturals(I) P Ltd 2015-TII-09-HC-DEL-TP. The rate applicable as per the Hon'ble High Court's prescription would be based on the interest rate applicable to the currency in which the loan is repayable i.e since this is a foreign currency loan, in such cases DRP typically directs the TPO to benchmark case using LIBOR plus after marking it up for transaction costs, risk and credit rating but not below Libor plus 400 points. Since there is an internal CUP available in this case i.e 10.31 % on a loan advanced to a sister concern ....
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....venue. We accordingly find no merit in the case of the Revenue. 7.22. Thus on a consideration of the above gamut of facts, circumstances, arguments, judicial precedent, we find that Ground No.1, 3 and 7 of the assessee are allowed. In the absence of any rebuttal on material facts and law, judicial precedent cited and considered, we find that no case has been made out by the Revenue to justify dismissal of the aforesaid grounds raised by the assessee. 7.23. We find that in view of the conclusion arrived at in Ground No.1, 3 & 7 we were not called upon to decide Ground No.2 of the assessee. However, since arguments of both the sides have been brought out and also while considering the facts in Bharti Airtel Ltd. for deciding the issues in Ground No.1, 3 & 7 the facts qua Ground No.2 being interlinked have been considered, we find ourselves in agreement with the view taken by the Co-ordinate Bench and therefore, Ground No.2 stands allowed. Ground No.4, 5 & 6 being arguments in support of Ground No.1 & 3 do not need any specific adjudication. 8. The next issue which we are called upon to decide is addressed in Ground No.8 which has been extracted in the earlier part of this order. I....
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.... impugned order it was submitted that cost is inbuilt into even these so called "passive" Investment. It was his argument that necessarily there must be incidental expenditures of collection, telephone, follow up etc. Since in the present case, out of total funds available/ raised by the assessee, a substantial portion of it amounting to Rs. 484,88,54,275/- has been invested in Shares and Mutual Funds, therefore, it can be held that expenditure in relation to earning of exempt dividend income are embedded in indirect expenses. 9.1. It was further his submission that the decision of the Special Bench in the case of Cheminvest Ltd. vs ITO, Ward-3(3), New Delhi further supports the view taken. 10. On a consideration of the rival submission and the material available on record, we find that the aforesaid decision of the Special bench in view of the decision of the Jurisdictional High Court in Cheminvest Ltd. (cited supra) following CIT vs Holcim is no longer good law. Reverting to facts, we find that the Ld.AR for exclusion of Rs. 4,428,011,360/- from the computation of disallowance under Rule 8D of the Income Tax Rules has invited our attention to Paper Book page 19 so as to canvass....