TaxTMI 
TaxTMI 
2017 (4) TMI 1009
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....s filed, the provisions of transfer pricing are not applicable to the appellant company and it be held so. 2. The learned CIT(A) has erred in law and on facts in confirming the addition of Rs. 3,34,28,873/- made by the AO on account of Arms Length Price of loan interest while relying upon the findings of the Addl. CIT (TPO). In view of elaborate facts and submissions filed, more particularly keeping in view the fact that the amount given to Soma Textiles, FZE not being a loan but merely contribution towards capital and/or Quasi Equity Capital of the said subsidiary, the order of the Addl. CIT (TPO) is bad in law and consequently the impugned addition of Rs. 3,34,28,873/- being based on the said order also requires to be deleted. 3. The learned CIT(A) has further erredin confirming the above addition made by the Assessing Officer by charging interest @ 8.7% which is contrary to department's own stand on identical facts in previous year i.e. A.Y. 2007-08 vide order u/s. 92CA(3) of the Act wherein Arm's Length Price in relation to transaction of advances by appellant company to Soma Textile FZE was determined by applying LIBOR+2% rates, which was also initially proposed to be adop....
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.... the cases of 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)] , which refer to the concept of 'quasi capital' but none of these decisions throws any light on what constitutes 'quasi capital' in the context of transfer pricing and its relevance in ascertainment of the arm's length price of a transaction. Lest we may also end up contributing to, as Hon'ble Delhi High Court put it, "rote repetition of this reasoning without an independent analysis of the provisions of the Act and the Rules", let us take briefly deal with the connotations of 'quasi capital', and its relevance, under the transfer pricing regulations. 7. The relevance of 'quasi capital', so far as ALP determi nation under the transfer pricing regulation is concerned, is from the point of view of comparability of a borrowing transaction between the associated enterprises. 8. It is only elementary that when it comes to comparing the borrowing transaction between the associated enterprises, under the Comparable Uncontrolled Price (i.....
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....gth price of such transactions was concerned. The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced. 10. Learned counsel wants to take the concept of 'quasi capital' to a different level now. His contention is that whenever it can be said that the loan transaction is in the nature of quasi capital, its arm's length price should be 'nil' rate of interest, and to decide what is 'quasi capital', he refers to the academic literature on the issue. Learned counsel has taken pains to explain that the grant of loan was intended to be a long term investment in the subsidiary which has a crucial role to play in its business plans. He submits that the arm's length price of this quasi capital investment by the assessee in Soma Textiles FZE should be treated at 'nil'. 11. We are unable to see any merits in his line of reasoning. As the learned counsel himself accepts, on a conceptual note, several types of debts, particularly long term unsecured debts, and revenue participation investments could be termed as 'quasi capital'.....
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.... arm's length interest, the TPO has recommended 8.6% as arm's length interest. 5. The justification for this variation is given as an additional 2% is higher risk in lending to the subsidiary, and is justified as to guarantee which the subsidiary would have required from the assessee. The TPO has observed that even if the subsidiary was to obtain this loan from the bank, in addition to LIBOR plus 2%, the assessee would have needed a guarantee from its parent company, as the subsidiary does not have credit rating, and the effective borrowing rate would thus have been LIBOR+ 2% for bank's margin+ 2% for the guarantee fees. Aggrieved, assessee carried grievance, inter alia, against this effective margin of LIBOR plus 4% to the CIT(A), but without any success. The CIT(A) confirmed the same on the ground that the ALP of corporate guarantee @ 2% is fair and reasonable. The assessee is aggrieved and is in appeal before us. 6. So far as the issue of ALP adjustment being required, in principle, is concerned, learned counsel for the assessee has fairly conceded that this issue must be decided against the assessee at this forum, and that he will carry the matter, if so advised, in further a....
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.... cushion of further 147 basis points before the interest charged can be said to more than the arm's length price, and it is an old matter. It is, therefore, worth exploring whether, even within the limitations of somewhat sketchy information available on the facts of this case, the matter can be decided one way or the other rather than sending it back to the TPO for fresh adjudication. 7. While exploring such possibilities, it will be useful to take note of the fact that in the case of Bharti Airtel Limited Vs ACIT [(2014) 161 TTJ 283], and a coordinate bench had deleted a similar ALP adjustment on account of interest amounting to Rs. 10,11,786 wherein the same approach of adopting 400 basis points above the LIBOR as ALP was adopted. While deleting this ALP adjustment, speaking through one of us, the Tribunal had, inter alia, observed as follows: 62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gathered from websites of financial institutions which, according to him, states that, "for the foreign currency denominated term loans, t....
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....f the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing / rating. 66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by underlining, supplied by us now) 8. When the matter was carried in further appeal, this time by the Commissioner, before Hon'ble Delhi High Court, Their Lordships were, vide judgment dated 25th February 2015- a copy of which was placed before us by the learned counsel, pleased to approve the reasoning adopted by the Tribunal. In doing so,....
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....ion of assuming a corporate guarantee and then proceeding to benchmark the same, is unsustainable in law, even otherwise an adjustment due to assumption about lower credit rating of the subsidiary is not warranted. Perhaps the situation could have been materially different if the credit rating of the subsidiary was demonstrated to be lower but that is not the case before us. IN any case, in the immediately preceding assessment year, the TPO himself has adopted LIBOR plus 2% as an arm's length interest and there is no material change in the facts and circumstances of the case in this year. In view of these discussions, and bearing in mind entirety of the case, we uphold the grievance of the assessee to the limited extent that the ALP adjustment is required to be made on the basis of LIBOR plus 2%. Ground no. 3, therefore, is to be allowed. 9. Ground nos. 1 and 2 are thus dismissed and ground no. 3 is allowed. 10. In ground no. 4 and 7, which we will take up together, the grievances raised by the assessee is as follows: The learned CIT(A) has erred in law and on facts in confirming the addition of Rs. 15,02,592/- made by the AO on account of disallowance of 1/5th of GDR Issue expe....
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....isions of Section 35D", and that "the appellant has given a loan out of this amount to its subsidiary in UAE and, therefore, it has not been used for any of the purposes under section 35D of the Act". The assessee is aggrieved and is in further appeal before us. 16. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 17. We find that, as held by Hon'ble Supreme Court in the case of Brooke Bond Limited (supra), the expenses on issuance of share capital are capital expenses in nature and that these expenses cannot be allowed as a deduction as revenue expenses. However, as long as these expenses, even if capital in nature, satisfy the conditions set out in Section 35D, these expenses are eligible for amortization under Section 35D. One of the conditions in Section 35D(1), as it stood at the material point of time, is that either the eligible expenses should be incurred before the commencement of the business, and, in a situation in which the expenses are incurred after the commencement of business, the expenses should be incurred for extension of his undertaking or setting up of a ....
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.... The Assessing Officer, however, did not agree. He was of the considered view that since the contract was settled, otherwise than through delivery, section 43(5) was attracted, and, accordingly, loss was required to be treated as speculative loss. The Assessing Officer was also of the view that, in the light of CBDT instruction no. 3 of 2010 dated 23rd March 2010, such a loss in foreign exchange derivates cannot be allowed as deduction. It was in this background that the Assessing Officer disallowed deduction of Rs. 57,76,604. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) was of the view that assessee has not been able to link he transactions in foreign exchange derivatives with the foreign exchange realizations, and as the transactions have been settled without delivery and are, as such, speculative transactions in nature. The assessee is aggrieved and is in further appeal before us. 16. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 17. We have noticed that, as evident from a plain reading of the assessment order, the....