TaxTMI 
TaxTMI 
2016 (11) TMI 1031
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....er and Dispute Resolution Panel and consequentially 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 determinatio....
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....esorts, serviced apartments, and family recreational clubs. It was 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 mo....
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....s taken place within 3 months. Accordingly it was his submission that 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 ....
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....on. Thus the interest free loan given is obviously not in keeping with the arm'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 interes....
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....closure in its Form No. 3CEB:- S. No. Nature of transaction Method used by Assessee 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 c....
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....situation as that of subsidiaries. Since the tested party is the tax payer, the prevalent interest that could have been earned by the tax payer by advancing a loan 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 d....
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....fety, with regard to timely payment of financial obligations. However, changes in circumstances can adversely affect such issues more than those in the higher rating categories. BBB (Triple B) 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 '....
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....granted as debt. It states that DHHL, being the parent company undertakes stewardship activities through the provision of funds and is not required to be compensated. It is stated that being a new entity, DGHL could not 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, t....
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....r vested with the AO in the proceedings under section 143(3) was correct as the wording is almost the same in both the sections i.e. 92CA(3) and 143(3). Further we find that the view that subsection (7) of section 92CA empowers the 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....
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....provided as under: "Debt that is either unsecured or has a lower priority than that of another debt claim on the same asset or property, also called junior debt." The assessee entered into a written arrangement in the form of agreement with its associated enterprise that the funds provided would be in the nature of quasi equity and not in the nature of debt. In assessee's case, it was clear that the funds would be converted into equity within the next 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....
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....rcial expediency etc.:- 5.3.9. Factual and legal arguments against the addition proposed by the Learned TPO "During FY 2007-08, since DLF Cyprus was a newly formed company, it could not manage to obtain funds initially from third parties. Hence, in order to further the business objectives of DLF Cyprus, the assessee advanced loans in the form of quasi equity to retain control and have absolute ownership of profits subsequent to conversion. In addition to the above, assessee 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 ....
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....en established as the hospitality arm of DLF Limited, which is its holding company. The company develops, acquires, finances and actively manages a rapidly growing hospitality portfolio. With approximately 6,000 rooms under current development in most major cities and tourist destinations in India, DHHL is on track to create a portfolio of 25,000 rooms in the next 5 years. DLF Hotels recently acquired controlling stake in Amanresorts, one of the pre-eminent and most innovative luxury 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-DG....
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....r * Copy of Certificate of Shareholding of Register of Companies * Notification dated 06.08.2007 for conversion of shares given to Registrar of companies * Certificates dated 25.08.2007 for change of name from Gunbarrel Investment Ltd. to DLF Global Hospitality Ltd. issued by ROC, Cyprus 81-84 7.16. We find that the documents filed by the assessee right from the stage of assessment before the AO/TPO till date have not been assailed by the Revenue. We note that neither there is a rebuttal on facts nor is there any effort to assail their correctness. In the light of the above facts, we find that the assessee has successfully demonstrated that the explanations offered were supported by actual conduct. The 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 with....
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....ces and experience was clearly lacking is not in doubt. Though the commercial expediency by way of need or necessity of the same cannot be questioned by the Revenue however facts leading to and justifying the argument need to be addressed. It is well settled that the tax assessors cannot sit in the arm chair of the businessman. We hold considering the provisions that it is not within the domain of the tax authorities to insist that the aim of enhancing the global reach of the portfolio should be attained through a pure loan and not by way of shareholding activity. There is nothing on record to disbelieve the explanation that the AE did not have the demonstrated capability to fully utilize the funds for the intended 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 int....
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..... A brief reference to the said order at this place would be relevant as it is seen that the Co-ordinate Bench was also seized of facts where investment in share capital by the assessee holding company in India in its subsidiary in United Arab Emirates was held by the tax authorities to be covered within the scope of "international transactions" as defined in Section 92CA(3). Therein also the commercial expediency for advancing of interest free loans by the assessee was not accepted by the tax authorities and as in the facts of the present case reliance therein was also placed on Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.) and also VVF Ltd. (cited supra) wherein more or less identical claim of the assessee 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 ....
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....tal can be said to be a category of debt taken by a company which in the context of transfer pricing issues is not only an instrument of legitimate funding but is also a hybrid instrument pre-stipulated to be a loan for a transitory period, the economic purpose of which is a future capital investment in all its forms including contribution to equity or subscription of capital and cannot be justifiably be treated as a debt simplicitor. 7.17. Reliance has also been placed on the case of Bharti Airtel Ltd. vs ACIT in ITA No.5816/Del/2012 dated 11.03.2014 (Copy of which has been placed at book pages 38 to 94). Though reliance on the said decision has primarily been placed qua Ground No.2 in order to argue that without 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 ....
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....th of the associated enterprises was weak and further in determining the credit rating of the associated enterprises as ranging between BB to D, being high risk category, without providing any cogent or germane reason for the same; (d) making additional arbitrary and adhoc adjustments to the rate of interest on account of security and single customer and transaction cost, thereby completely ignoring the on-ground reality of the inter--company transaction that there is no significant risk in advancing loans to 100% subsidiary companies and demonstrating an intention to arrive at a very high interest rate of 17.26% p.a. with the single-minded intention of making an addition to the returned income of the appellant. 15.3 That the assessing officer/TPO 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 appreci....
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....was of the view that "any independent entity would not have left the amount in the hands of another entity without the same being converted into equity within a reasonable period or receiving interest on the same". It was in this backdrop that the TPO proceeded to treat these amounts as interest free loans extended to the AEs. He then referred to the provisions of Section 92 B, in the light of which, according to the TPO, lending or borrowing of the money comes within the ambit of 'international transactions'. He thus justified determination of arm's length price of the transaction of, what he termed, as interest loans to the AEs. Reliance was placed on the decisions of the coordinate benches in the cases of VVF Ltd Vs DCIT (2010 TIOL 55 ITAT MUM TP) and Perot Systems TSI India Ltd Vs DCIT (2010 TII 3 ITAT TEL TP). The TPO then proceeded to determine 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 w....
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....ALP determination was to be done in respect of such deemed interest free loan on allotment of shares under the CUP method, as has been claimed to have been done in this case, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant if, despite having made the payment of share application money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is not in pari materia with an interest free loan on commercial basis between the share applicant and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE. Since the TPO has not brought on record anything to show that an unrelated share applicant was to 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 Represen....
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....of the assessee, which was recognized as a significant factor for commercial expediency. However, as we have seen in the earlier discussions, such commercial expediency of granting interest free loans is wholly irrelevant because it is the impact of this interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital contribution was deemed to be partly an interest free loan (i.e. for the period till the shares were actually allotted) and partly as capital contribution (i.e. when the subscribed shares were allotted by the subsidiary). Revenue, therefore, does not derive any advantage from these judicial precedents either. 49. In any event, it is not open to the revenue authorities to recharacterize the transaction unless it is found 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....
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.... loans as interest rates on strong currencies like USD etc. could not be held to be comparable. It has been held that what is relevant is what the assessee would have earned on foreign currency loans and not what the assessee could have earned on rupee denominated loans. The rationale for the said conclusion, we find has been set out in acknowledging the basic fact "that interest is nothing but time value of money and when inflation pressure on a currency is lower, as is the case with most strong currencies, the time value of money, i.e. interest, tends to be lower too. Therefore, comparing interest rate on rupee loans cannot at all be compared with interest rates on strong currencies like GBP, USD and CAD." The erudite discussions by the tax authorities about the Indian bond market and interest rate were held to be wholly irrelevant. The TPO's reasoning 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,....
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.... material facts were similar as, like in the present case, in the facts before the Co-ordinate Bench also interest free advances had been advanced by the assessee to its subsidiary AE for the intended purpose of exploiting the opportunity cost in the territories outside India. The financial transaction was claimed to be "quasi capital", a term which was required to be defined as the judicial precedent relied upon by the Revenue in the context of the said expression did not have an occasion to consider the peculiarities on facts sought to be addressed by the use of the said expression by the assessee. Its meaning was considered to be not clear in the judicial precedent cited by the Revenue. Accordingly, considering the facts and the explanation it was held to be an instrument entered for exploiting the opportunity cost of investment as opposed to exploiting the 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 financi....
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.... dangerous trend should be nipped in the bud. No doubt the justice dispenser is not expected to be careless in allowing relief but to deny where it ought to be given will only encourage the classical Biblical dislike of a "tax collector". The effort on the contrary should be to promote an attitude best put in the words of Oliver Wendell Holmes Jr. who observes "I Like to pay taxes. With them, I buy civilization". The policy makers through the policies of the country make frequent and valiant endeavours to shun this tag of a reviled tax collector and any carelessness in justice dispensation strikes a body blow to these small tentative steps. The acceptance or rejection of facts canvassed and argued should be a just, fair and transparent exercise. No doubt, the tax authorities are expected to address contradictions in facts pleaded and wherever evidences are found 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 ex....
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....ities having communicated to the world at large their acceptance of the decision of the Court in the case of Vodafone India Services P.Ltd. now cannot resile from the position in the case of the assessee. Further the fact that in assessee's own case for 2011-12 assessment year this position has been accepted by the DRP vide its order dated 28.12.2015 wherein the AO was directed to delete the addition on account of valuation of shares has been heavily relied upon by the assessee, which position too has not been disputed by the Revenue. We further find that nothing has been argued by the Revenue challenging the principles of consistency relied upon by the assessee. For ready-reference, the relevant extract is reproduced hereunder:- "Ground of Objection l to 10 are adjudicated together as these are interrelated. The TPO has justified his modification of taxpayers 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....
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.... be built. In the words of Benjamin Franklin "........but in this world nothing can be said to be certain, except death and taxes". The decision of the Hon'ble Bombay High Court in the aforesaid case of Vodafone India Services Pvt.Ltd. has been the basis for bringing out the CBDT Instruction vide. FNO 500/15/2014/APA-l Instruction No 2/2015 New Delhi, Dated 29th January 2015. Not only the Instructions issued by the CBDT are binding on the Revenue in interpreting and executing the provisions of the Act, but even otherwise the tax authorities cannot act in derogation of such Instruction or whittle them down. Certainty on issues and Consistency on identical facts and law is a sine quo non of a transparent just and fair governance on all issues including tax administration. Thus, we find that this plank of the argument probably has consciously not been rebutted by the Revenue. 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....
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.... to the assessment order itself it was submitted that since the assessee itself has made disallowance of Rs. 2,28,777/-, no further disallowance was called for. 9. The Ld.CIT DR heavily relying upon the orders of the tax authorities submitted that the AO has placed reliance upon the decision of the Hon'ble Supreme Court in the case of CIT vs. United General Trust Ltd 200 ITR 455 (SC). Referring to the facts on record, it was submitted that the earning of exempt income cannot be said to be an activity of passive nature requiring no real time inputs. It was his argument that in fact in the present situation making of Investment, maintaining or continuing investment and timing the exit from investment are all well informed and well coordinated management decisions involving not only inputs from various source but also acumen of senior management functionaries. Relying upon the 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 substantia....