TaxTMI 
TaxTMI 
2017 (8) TMI 113
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.... Kumar Yadav, defended the addition and placed reliance upon the decision from Delhi Bench of the Tribunal in the case of Baba Global Ltd. vs DCIT (ITA No.1086 to 1091/Del./2015) order dated 05/05/2016. 2.2. We have considered the rival submissions and perused the material available on record. The ld. DR mainly relied upon the decision from Delhi Bench of the Tribunal in the case of Baba Global Ltd. (Supra), therefore, before coming to any conclusion, we are reproducing hereunder the relevant portion of this order for ready reference and analysis:- "These are six appeals filed by the assessee against the action of the learned DRP upholding the order passed by the AO under Section 153A read with section 144C of the Act for assessment years 2006-07 to 2010-11 and under section 143(3) for assessment year 2011-12 consequent to the direction issued by the learned Dispute Resolution Panel. 2. In the appeal filed for assessment years, 2006-07, 2007-08 and 2008- 09, besides questioning the validity of assessment framed under section 153A of the Income-tax Act, 1961, the only issue is the addition of amount of the notional interest on foreign currency loan advanced by t....
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.... with the assessment for assessment years 2006-07 to 2008-09 as these assessments have not abated consequent to the search. The search has taken place on 21st January, 2011. No incriminating material was found during the course of the search as is evident from the assessment order. It was contended that in the absence of any incriminating material, the AO should not have made an addition. In support thereof the learned AR relied upon the order of the jurisdictional Delhi High Court in the case CIT (Central) - III versus Kabul Chawla [2016] 380 ITR 573 (Del). 10. On the issue of the merit, it was contended by the learned AR that the additions are untenable as the assessee has paid the advances to its subsidiary companies out of EEFC accounts. The EEFC account even otherwise does not earn any interest. The advances given to the subsidiary companies were in the nature of quasi capital and were for business consideration. The main purpose of giving advances to its subsidiary companies was to promote its export business and to have foothold in these foreign countries. 11. In the alternative, it was contended by the learned AR that the rate of interest cannot be that of....
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.... Engineering India Ltd., (2015) 370 ITR 0338 (Del). 14. It was further submitted that in any case the disallowance under Section 14A cannot exceed the dividend income earned by the assessee company. 15. The learned DR, on the other hand, supported the order passed by the TPO as modified by the learned DRP. It was contended that the order passed by the TPO as well as the learned DRP on the issue of adjustment of interest is a speaking order. It was further contended that once the search has been initiated all the assessments get reopened consequent to the issue of notice under section 153A and as such the AO is entitled to make adjustment to the income as permissible under the law. 16. On the issue of rate of interest it was contended that the rate of interest has to be that of Indian Rupees as assessee would have earned the interest in Indian Rupees had it not advanced the money to its foreign subsidiary. 17. As regards conversion of the loan into share application money in assessment year 2011-12 it was contended that there is no difference between the loan and the share application money and hence interest has to be charged for that year also. ....
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....disclosed income would be brought to tax". iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material." v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO. ....
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....09 are directed to be deleted. Consequently the appeals filed for these assessment years are allowed. 20. As regards assessment years 2009-10 and 2010-11 are concerned the learned DRP has confirmed the addition applying the base rate of State Bank ofIndia plus 150 basis points. It was the contention of the learned AR that no addition can be made as the advance made was out of the EEFC account which carries no interest. Further amount advanced was for promoting its business. On this issue we are not in agreement with the contention of the learned AR. The amount having been advanced to an Associated Enterprises, the same has to be evaluated by applying arm's length price. Since it was a loan during the assessment years 2009-10 and 2010-11, the assessee company ought to have computed the arm's length price in respect of such loan advanced to its subsidiary companies. However, as regards the interest rate we are in agreement with the contention of the learned AR that this cannot be the interest rate applicable to Indian Rupees. These advances having been made in the foreign currency, the rate of interest has to be with reference to the interest rate on loans and advances in re....
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....ver, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no ‗special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment cou....
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....on money, for the issue of the share capital, then such amount cannot be considered as loan. The TPO is not permitted under the law to re-characterize the transaction and accordingly we are of the view that no interest on such share application money can be charged. The above view is supported by the judgment of the Coordinate Bench of the ITAT in the case of Bharti Airtel Ltd. vs. ACIT, [2014] 161 TTJ 0283 (Del) wherein the ITAT has held as under:- "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 regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustmen....