TaxTMI 
TaxTMI 
2019 (10) TMI 987
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.... was claimed as exempt. Therefore, placing reliance on the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd., [328 ITR 81] Assessing Officer computed the disallowance u/s. 14A r.w. Rule 8D at Rs..3,36,78,061/- comprising of direct expenses incurred towards demat charges of Rs..1,24,649/- under Rule 8D(2)(i) and Rs..3,35,53,412/- under Rule 8D(2)(iii) being 0.5% of the average value of investments. 4. On appeal the Ld.CIT(A) sustained the disallowance observing that the assessee has not maintained separate books of accounts and the taxable income has been credited in its books of accounts and also the expenditure was debited in the consolidated books of accounts and no bifurcation has been furnished before the assessing officer. 5. Before us, Ld. Counsel for the assessee submits that disallowance u/s. 14A of the Act could only be made in respect of expenditure incurred and cannot extend to notional expenditure which has not been incurred at all. Ld. Counsel for the assessee submits that all the expenses incurred are only in respect of main business of the assessee and not incurred for earning any dividend income. Ld. Counsel referri....
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.... income from which is taxable should not be considered for average value of investments. Reliance is placed on the decision of the Delhi Bench of Tribunal in the case of ACIT v. Indian Farmers Fertilizer Cooperative Ltd., [95 taxmann.com 114]. 8. Ld. DR vehemently supported the orders of the authorities below. 9. We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the breakup of the dividend income earned by the assessee we notice that assessee has received dividend income of Rs..20,12,92,325/- from its group Company Reliance Industries Limited and dividend of Rs..12,86,468/- from Mutual funds. Therefore, the contention of the assessee that since 99% of the dividend was earned from its group company for which no expenditure has been incurred has considerable force. We also find that in the course of the assessment proceedings the assessee has furnished a detailed reply as to why there is no expenditure incurred for earning dividend income by the assessee as major expenditure has been incurred only for the purpose of life sciences business and no expenditure was incurred for earning any dividend income and therefore no disallowa....
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....general administrative expenditure where a decision making has happened for making investments. 11. We also direct the Assessing Officer to exclude investments on which no exempt income was earned following the decision of the Special Bench of Delhi, ITAT in the case of ACIT v. Vireet Investments Private Limited [165 ITD 27]. We also direct the Assessing Officer to exclude investment in Foreign Companies income from which is taxable and they should be excluded while calculating the average value of investments. This ground is partly allowed. 12. The next ground of appeal is in respect of disallowance made u/s. 35(2AB) of the Act. 13. Briefly stated the facts are that, the Assessing Officer while completing the assessment noticed that assessee claimed Rs..34,73,31,373/- as deduction u/s. 35(2AB) and assessee claimed to have incurred an expenditure of Rs..23,15,54,249/- for in-house research facility. Further, Assessing Officer also noticed on verification of the details of expenses that assessee has made a payment of Rs..49,24,573/- to M/s. Reliance Clinical Research Services Private Limited for carrying out clinical trial needed for R&D activity. Assessing Officer disallow....
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....s deduction u/s. 37(1) of the Act observing as under: - "5.5. We have considered the submissions made by both the sides and gone through the orders passed by the lower authorities and material placed before us for our consideration. Since, main claim of assessee with respect to deduction u/s 35(2AB) was not seriously pressed before us, therefore, same is dismissed. With respect to alternate claim made by the assessee u/s 37(1) of the Act, it is noted that the invoice of M/s. Reliance Clinical Research Services Pvt. Ltd. dated 31.03.2007 is enclosed at page no. 3 of the paper book, showing that payment has been made to the said company under the head "Clinical Trial Fees" - for the month of March, 2007 for time spent on 1st March to 31st March, 2007 for conducting clinical trials, in support of to all 'K projects', for a sum of Rs. 57,65,564/-. It is further noted that on the back side of the invoice, complete details have been given with respect to time spent by 22 employees of RCRS, also giving particulars of the studies done by these employees. Names of these employees have been given along with their rates per hour. It is further noted that ld. Assessing Officer has sho....
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....f taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it was incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it could not confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. Therefore the income from dividend was not assessable during the assessment year 1958-59, but it was assessable in the assessment year 1953-54. It could not, therefore, be taxed in the assessment year 1958-59." Further reliance is placed by us on another judgment of Hon'ble Gujarat High Court, in the case of, S.R. Koshti 276 ITR 165 (Guj) in which relief was granted to assessee with following observations: "The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properl....
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....e assessing officer made a reference u/s. 92CA(1) of the Act to the TPO for determining arm's length price of the international transactions reported by the assessee. The TPO observed that assessee has advanced interest free Loans to RLSI and charged no interest in respect of said loan transactions. The assessee contented that since as per clause (3) of the loan agreement the said loan zero coupon was optionally convertible into share capital at any time not later than 31.03.2011 at a fair value to be determined by independent accountant at the time of conversion as per the terms of the loan agreement, no interest was charged by the assessee from RLSI. The contentions of the assessee have been rejected by the TPO observing as under: - (a) Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. The fact that the activities undertaken by the assessee were a part of the project under development and the capital structure of the company had been decided keeping in mind the project risk this company, does not justify non-charging of interest under the Indian transfer pricing regulations, as ....
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....st taken for benchmar king p.a. (%) Period of charging interest Adjustment (in Rs.) (in USD ) (in Rs.) -On Opening Balance 38,85,000 15,55,37,980 6 1.4.2008 to 31.3.2009 193,32,279 -During the year 43,47,000 18,65,21,883 6 30.4.2008 to 31.3.2009 82,38,363 Total 82,32,000 34,20,59,863 1,75,70,642 21. Accordingly, the TPO charged interest at the rate of 6% per annum and made an adjustment of Rs..1,75,70,642/. Before the Ld. CIT(A), the assessee contented that the entire loan has been converted into equity capital in its books as on 31.03.2011 and hence no interest should be charged. However, the Ld. CIT(A) sustained the adjustment observing as under: - "7.3. I have considered the facts of the case, submission of the appellant as against the findings/ observations of the TPO/AO in orders u/s 92 CA (3) 143(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under: i. The appellant contended that the entire loan has been converted into equity capital in its book as on 31,03.2011 and hence no interest should be charged. In this rega....
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....the interest on FD with the bank for a term equivalent to the term for which the loans given to the AEs. 8.12 It is pertinent to note that in case of FD with the Bank, the investment is safe as it is free from risk of credit and interest. On the other hand, if the loan/advance is given to the unrelated party, then always there is some risk of credit and interest involved in such transaction. There is one more reason for taking the FD as an appropriate and good comparable because the lending rate by financial institutions/bank varies depending upon the credit rating of the borrower and further on the guarantee and security provided to secure the loans". In view of the above observations it may be noted that FD rate has been considered to be one of the methods for benchmarking international transactions relating to interest receivable. Further risk factor has to be considered looking to the fact that the fixed deposits are very secure being with banks as compared to loan advanced to parties like AE of the appellant. Since there is risk associated with the unsecured loan, one has to take into account the risk while deciding ALP. Taking into consideration all the kind....
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....y convertible loan on the basis of one of the methods prescribed u/s. 92C of the Act. It is submitted that the TPO adopted interest rate of 6% per annum charged by the assessee on the loan provided to another AE i.e. RLSBV which is a controlled transaction, as the arm's length price, which is not on the basis of any of the prescribed methods. Ld. Counsel for the assessee submits that adhoc determination of arm's length price by TPO dehors section 92C of the Act cannot be sustained. It is further submitted that arm's length price cannot be determined on the basis of another controlled transaction i.e. transaction with another AE. It is submitted that u/s. 92C of the Act arm's length price can be determined only on the basis of independent and uncontrolled transactions. Reliance was placed on the decision of the Hon'ble Bombay High Court in the case of CIT v. Lever India Exports Ltd., in ITA. No. 1306, 1307 and 1349 of 2014 dated 23.01.2017 and CIT v. Merck Ltd., in ITA.No. 272 of 2014 dated 08.08.2016. 24. Ld. Counsel for the assessee further submits that the approach of TPO in adopting controlled transaction to benchmark another controlled transaction is rejected by the Hon'ble ....
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....s subsidiary which was converted into equity. 28. Further reliance was also placed on the decision of the Ahmadabad Bench of the Tribunal in the case of Micro Inks Ltd v. ACIT in ITA.No. 1688/AHD/2006 dated 06.08.2013 reported in 92 DTR 186 wherein the Ahmadabad Bench while deciding arm's length price of advance given by holding Company to its wholly owned subsidiary, held that, on pure commercial factors, CUP for interest on such transaction where subsidiary plays strategically commercial role in assessee's business would be Nil. It is submitted that the Tribunal deleted the adjustment holding that the interest was not applicable in the said case. It is submitted that similar view is upheld in the case of Prithvi Information Solution Ltd v. ACIT in ITA.No. 1816/HYD/2012 dated 08.08.2014 by the ITAT Hyderabad Bench. 29. We have heard the rival submissions and perused the orders of the authorities below. It is an undisputed fact that the assessee advanced optionally convertible loans to its AE i.e. RLSI. It is not in dispute that the OCL has been converted into Equity in subsequent years before the due date and before the prescribed date as agreed in the agreement. Assessee ha....
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....l, and it was so given because out of EEFC (Exchange Earners Foreign Currency) account, while the assessee could have given loan upto US $ 50 million, it was not open to the assessee to subscribe to the equity capital without the permission of the Reserve Bank of India. There was thus, unlike the case of Perot Systems (supra) discussed above, indeed a technical problem in subscribing to the capital directly. It is also important to note that immediately upon obtaining the permission of the Reserve Bank of India, which assessee did obtain at later stages, the advances were converted into shares. Except for an amount of US $ 10,000, entire advances received by the step down subsidiary were converted into shares. It is also not in dispute that when RBI permission to convert loan into equity was sought it was sought effective from the date on which remittance was made. The second very important aspect of this interest free loan is this. In the present case, the entity receiving the interest free advances is not only a wholly owned subsidiary of the assessee company but is also playing a very significant role in its sale and distribution chain inasmuch as the assessee is sole vendor to ....
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....paid to the parent in March 2004. The company purchased approximately US $ 34.13 million and US$ 40.12 million of materials from HIRL for the year ended March 31, 2004 and 2003 respectively. The company pays HIRL for these materials 165 days from the bill of lading date. These purchases account for the majority of the company's inventory expenditure for the year ended March 31, 2004 and 2003 respectively. ....... 16. It is also important to bear in mind the fact that at the relevant point of time the assessee could not have invested in the shares of the step down subsidiary, without the permission of the Reserve Bank of India - as is uncontroverted stand of the assessee, and, therefore, the assessee could not also have, without the permission of the Reserve Bank of India, entered into loan agreements with a provision of conversion of such loans equity either. It is only elementary legal position that what could not have been done directly could not have done indirectly also. There is thus not much of a merit in the stand of the revenue authorities that in the absence of a specific mention about conversion of loan into equity, it cannot be presumed that the interes....
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....t best for advance of money by holding to step down subsidiary , let us examine the correctness of the arm's length price adjustment in this cas e. In such a case, CUP method can be applied and the LIBOR or other bank rate linked rate is generally taken as a rate for comparable uncontrolled transaction. As has been held in a large number of cases, including in VVF (supra) and Perot Systems (supra), in the cases of arm's length prices of loans and advances, costs of funds have no relevance and it is only the rate applicable for comparable uncontrolled transaction that is to be taken into account. However, even while applying CUP method, one has to bear in mind the fact that in terms of Rule 10B (1) computation of ALP under the CUP method is a three step process which requires that (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could mater....
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....e Bank of India; and (ii) second, that it is not a case of granting advance to a business concern without significant and decisive commercial considerations, as the monies are given for strengthening assessee's marketing apparatus in US and to keep alive its biggest exports customer. There is a difference in the nature of transaction and there is also a difference in the nature of the enterprises, including their inter se commercial relationship, entering into this transaction. The differences are so fundamental that these differences, to use the phraseology employed in Rule 10 B (1)(a)(ii), "could materially affect the price in the open market". On account of these peculiar factors, the application of LIBOR plus rate or, for that purpose, any bank rate will be inappropriate to this case. 19. The next logical question, therefore, is as to what would be the price at which such interest free advances could be given in comparable uncontrolled transactions. In other words, in case the assessee and the Micro USA were not associated enterprises in legal sense of that expression, at what rate the assessee would have granted advances pending approval for capital subscription in a ....
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.... seen that the assessee made the following disclosure 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 ....
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....parties in similar 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 financi....
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....ated 'A' are judged to offer an adequate degree of safety, 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 o....
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....were not used for the intended activity within the proposed period, it was initially 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 transfe....
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.... him to use the information in his possession and the power to gather material under the said provision was similar to the power 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 w....
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....subordinated debt." The definition/meaning of subordinated debt is 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 inso....
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....urther brings out the fact that the tax payer justified its action of advancing of loan as a shareholders activity guided by commercial 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....
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....y recreational clubs- DHHL has a vision to be. India's leading hospitality development and asset Ownership Company, and amongst the largest such companies globally. The company has been 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 T....
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....th the AO/TPO and the DRP)the assessee had also placed the following supporting documents:- S.No. Particulars. Page No 1 Details of Original shareholders of DLF Global Hospitality Ltd. * Copy of Instrument of Transfer * 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 bene....
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.... fact on record is that the tax payer was the sole shareholder in its newly created subsidiary AE whose success in the venture of increasing its portfolio directly impacted the business interests. The fact that incapability to generate resources 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 sta....
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....es and Industries Ltd vs CIT in ITA 262/AHD/2012 supports the view taken as the assessee's conduct in exploiting the opportunity for capital investment in the peculiar facts takes the issue out of the purview of Chapter X of the Income Tax Act, 1961. 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 bei....
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....le as "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." We find that quasi capital 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 Jur....
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....n India to an intercompany transaction of advancement of money outside of India, thereby completely ignoring the difference in the, economic environment and geographical conditions prevalent in India and overseas jurisdictions; (c) alleging that the financial health 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) o....
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....e after the initial advancement". It was also noted that time taken in actual allotment of shares has taken place as much as 13, 16 and 14 months in the cases of UK, US and Hong Kong based subsidiaries, and that the assessee has not earned any interest for this long period. The TPO 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, ....
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....assume that there was an unreasonable delay in allotment of shares, the capital contribution could have, at best, been treated as an interest free loan for such a period of 'inordinate delay' and not the entire period between the date of making the payment and date of allotment of shares. Even if 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 betwe....
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....yments for share application money have been made. Similarly, in VVF's case (supra), the transaction was admittedly in the nature of interest free loan between AEs and the commercial expediency in advancing interest free loans was on account of ownership and control of subsidiary being in the hands 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 tra....
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....TPO. Therefore, respectfully following the above decisions, we hold that no interest ought to have charged on the OCL advanced to payee RLSI and thus we direct the Assessing Officer to delete the adjustment made towards interest. 33. Ground No. 4 is in respect of interest charged on the amount paid towards subscription to share capital of AE's. In the grounds of appeal assessee contends as under: - (i) The learned CIT(A) erred in confirming the action of the A.O., in re-characterizing the transaction of amount being paid by the appellant towards subscription to share capital of its AE's M/s. RLS BV and M/s. RLS Inc, by treating the same as interest free loan. (ii) The learned CIT(A) erred in confirming the action of the A.O., in determining the ALP of interest chargeable in respect of the amount paid towards subscription to share capital of its AE's M/s. RLS BV and M/s. RLS Inc, at Rs. 60,87,235/- and Rs. 10,65,5547-, respectively. (iii) He failed to appreciate that that subscription money was paid towards subscribing to the shares of M/s. RLS BV and M/s. RLS Inc, which have been subsequently allotted by the respective AE's as on 31st March....
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....his regard is placed on the decision of the Hon'ble Bombay High Court in the case of Pr CIT v. Aegis Ltd in ITA.No. 1248 of 2016 dated 28.01.2019 wherein the assessee had made payments towards subscription of preference shares of its AEs, the TPO treated this as interest free loan to AEs and determined the addition towards notional interest. The Jurisdictional High Court has disapproved of this action of recharacterization by the TPO. Reliance is also placed on the decision in case of Pr CIT v. PMP Auto Components Pvt Ltd in ITA.No. 1685 of 2016 dated 20.02.2019 (Bombay HC). 36. It is also the contention of the Assessee that a transaction of capital contribution, the character of which is not under dispute, cannot be treated as interest free loan merely due to delay in allotment of shares. It is submitted that the Jurisdictional Tribunal in case of ITO v/s Sterling Oil Resources Pvt Ltd in ITA.No. 1791/Mum/2014 dated 29.02.2016 observed that as long as the subsidiary is a wholly owned subsidiary, non-allotment or delay in allotment of shares does not prejudice the interests of the Assessee. The Tribunal also observed that revenue's reliance on Perot System's case, wa....
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....as share application money is evidenced from the RBI filings. Referring to page Nos. 9 and 17 of the Paper Book Ld. Counsel for the assessee submits that the finances of RVSBV and RLSI also reported the amounts under shareholders paid in equity. He further submits that the TPO in the order itself has given a finding that he is recharactersing the transaction to one of loans. Ld. Counsel for the assessee further submits that preference share form part of share capital and not debt of the Company. Therefore, even though they may carry the preferential coupon rate the same cannot be regarded as loan. Referring to Page No. 25 of the Ld.CIT(A) order Ld. Counsel for the assessee submits that as per the terms of the issues of preference shares there shall carry coupon of 5% in case of distribution of profits. It is submitted that this cannot be equated with interest coupon. It is submitted that the dividend is payable only on the availably of sufficient profits itself proves that the investment is in the nature of share capital and not debt. 42. We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the order of the Ld. TPO, we find that as....
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....rved the abnormal thin capitalization ratio of 248:1? ..... 4) The respondent-assessee is a company incorporated under the laws of Belgium. The sole business of the respondent assessee is to carry out the project of construction of fuel jetty near Dabhol in India. The respondent-assessee had fully paid capital of 25.00 lacs (Belgium Francs) divided into 2500 shares of 1000 Belgium Francs each. This equity capital was divided in the ratio of 60:40 between the two joint venture partners N V Besix SA, Belgium and Kier International (Investment) Limited of U.K. The respondent assessee also borrowed from its shareholders in the same ratio as the equity share holding amount of Rs. 57.09 crores from N.A. Basix SA and Rs. 37.01 crores from Kier International Investment Limited. In the circumstances, the respondent had equity capital of Rs. 38.00 lacs and debt capital of Rs. 9410 lacs. Thus, debt equity ratio worked out is to 248:1. 5) The respondent assessee paid interest of Rs. 5.73 crores on the aforesaid borrowing of Rs. 57.09 crores and Rs. 37.01 crores from NV Basix SA and Kier International (Investments) Limited respectively. However, the Assessing Officer ....
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.... no substantial question of law and is therefore, dismissed." 45. In the case of PCIT v. Aegis Limited (supra) the Hon'ble Jurisdictional High Court while answering the following question observed as under: - "Q1. Whether on the facts and circumstances of the case and in law, the Income Tax Appellate Tribunal erred in not considering the fact that the assessee had actually advanced/lent money to its AE in the garb of preference shares leading to attraction of provisions relating to Transfer Pricing in the ease of the assessee in view of Section 92B of the Act, without appreciating the fact that these preferential shares do not carry any dividend and are beyond scope of any capital appreciation ? .... 2. The respondent-assessee is a Company registered under the Companies Act. For the Assessment Year 2009 10, the assessee was subjected to transfer pricing regime. Question no.1 arises out of the action of the Revenue to tax notional interest in the hands of the assessee through transfer pricing. The facts are that, during the period relevant to the assessment year in question, the assessee had subscribed to redeemable preferential shares of its Associ....
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....nted u/s. 14A of the Act. Reliance was placed on the decision of the Hon'ble Bombay High Court in the case of Pr.CIT v. M/s. Ballarpur Industries Limited in ITA.No. 51 of 2016 dated 13.10.216. 48. We have heard the rival submissions, perused the orders of the authorities below. We agree with the submissions of the Ld. Counsel for the assessee that since assessee has not earned any exempt income and therefore no disallowance is warranted u/s. 14A of the Act. In the case of Joint Investments Pvt. Ltd. v. CIT [372 ITR 694] the Hon'ble Delhi High Court held that the disallowance u/s. 14A of the Act should not exceed the exempt income. The Revenue filed SLP against this decision and the Hon'ble Supreme Court dismissed the SLP filed by the Revenue. Similar view has been taken by the Hon'ble Delhi High Court in the case of Cheminvest Limited v. CIT [378 ITR 33]. 49. In the case of ACIT v. M/s. Ballarpur Industries Ltd., in ITA.No. 346 to 379/NAG/2014 dated 04.12.2015 the Nagpur Bench of the Tribunal following the decision of the Hon'ble Delhi High Court in the case of Cheminvest v. CIT (supra) held as under: - "6. We have heard both the sides at some length ....
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.... said basis do not survive any more. As a result, we hereby confirm the findings of the learned CIT (A) on this issue. We hereby also hold that in view of the numbers of decisions on this issue in favour of the tax payers, we find no force in this ground of appeal of the Revenue. The same is dismissed." 50. This decision of the Tribunal has been affirmed by the Hon'ble Bombay High Court in the case of Pr.CIT v. M/s. Ballarpur Industries Limited in ITA.No. 51 of 2016 dated 13.10.216 by rejecting the appeal of the Revenue and held that no substantial question of law arises. While holding so the Hon'ble High Court observed as under: - "On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression "does not form part of the total income" in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includib....
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.... decision of the Hon'ble Gujarat High Court in the case of CIT v. Cadila Healthcare Ltd., [31 taxmann.com 300], Ld. Counsel for the assessee submits that even clinical trials conducted outside the approved laboratory facility is eligible for deduction u/s. 35(2AB) of the Act. 55. Without prejudice to the above, the Ld. Counsel for the assessee submits that the said expenditure is allowable as deduction u/s. 37(1) of the Act. Ld. Counsel for the assessee submits that for the A.Y. 2007-08 the Tribunal in ITA.No. 1575/MUM/2013 dated 19.10.2015 allowed the alternative claim of the assessee that the expenditure be allowed as deduction u/s. 37(1) of the Act. Copy of the order is placed on record. 56. Ld. DR vehemently supported the orders of the authorities below. 57. We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the order of the Tribunal, we find that identical issue arouse for the A.Y. 2007-08 and the tribunal allowed the alternative claim of the assessee that expenditure incurred on clinical trials outside the in-house facility is eligible for deduction u/s. 37(1) of the Act observing as under: - "5.5. We have co....
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....ition of law. In our view, there are no estoppels against law. Even if, assessee agrees or consents for something contrary to law, the A.O. is obliged under the law, to discharge his duty of making fair assessment of income and to compute amount of tax payable as per law. As per Article 265 of the Constitution of India, "No tax can be collected except by authority of law". Hon'ble Supreme Court in the case of Ramlal vs Rewa Coalfield Ltd (AIR 1962 SC 361), held that the state authorities should not raise technical pleas if the citizens have a lawful right, which is being denied to them merely on technical grounds. The state authorities cannot adopt the attitude which private litigants might adopt. Further, we place our reliance on the judgment of Hon'ble Delhi High Court in the case of CIT vs Bharat General Reinsurance Co Ltd 81 ITR 303 (Del.) Relevant portion is reproduced below: "It was true that the assessee itself had included that dividend income in its return for the year in question, but there was no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken....
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....sessee u/s 37 of the Act. Therefore, the AO is directed to allow these expenses u/s 37 of the Act. Accordingly, ground no.2 of the assessee's appeal is partly allowed." 58. Facts being identical following the order of the Tribunal we allow the claim of the assessee that the said expenditure should be allowed u/s. 37 of the Act. Thus, the Assessing Officer is directed to allow this expenditure u/s. 37 (1) of the Act. This Ground is allowed. 59. Ground No.3 is general in nature and no adjudication is required. 60. Ground No. 4 is in respect of Interest-free loans provided to AE, M/s. Reliance Life Science Inc., USA ('M/s. RLSI). In the grounds of appeal assessee contends as under: - (i) The learned CIT(A) erred in determining the arm's length price (ALP) of interest chargeable in respect of interest free loan advanced to M/s. RLS Inc at INR 1,30,16,828. (ii) Further, the learned CIT(A) failed to appreciate that no interest was chargeable on the above referred loan, since the same loan was optionally convertible into share capital. (iii) Without prejudice to the above, the learned CIT(A) erred in determining the arm's length rate at LIBO....
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....te furnished by the Appellant of 165 basis points. 63. Ground Nos. 5 & 6 are identical to Ground No. 4 for the A.Y. 2009-10. Facts' being identical to the case of assessee for the A.Y. 2009-10, the decision rendered therein applies mutatis mutandis to the appeal for the Assessment year under consideration i.e. A.Y. 2010-11. We order accordingly. 64. Coming to the last Ground of appeal i.e. Ground No. 7, assessee challenged the order of the Ld.CIT(A) in determining the arm's length price of net interest chargeable in respect of outstanding balances of the AE M/s. Reliance Genemedix [RGMX] and the ground reads as under: - "Ground no 7: (i) Learned CIT(A) erred in determining the arm's length price (ALP) of net interest chargeable in respect of outstanding balance of the AE, M/s Reliance GeneMedix at INR 3,80,129/-. (ii) Further, the learned CIT(A) failed to appreciate that no interest was chargeable on the above referred outstanding balance, since the balances are in respect of debtors and creditors which are a part of routine day to day business activities and cannot be equated with loan; (iii) Without prejudice to the above, the learned....
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..... Hence, on application of the ALP, taking the Assessee as a tested party and CUP as the most appropriate method, the adjustment for interest made by the TPO cannot be sustained. In support of his contention assessee placed reliance on the following decisions wherein the Hon'ble High Court and Tribunal has held that if there is complete uniformity in the act of the Assessee in not charging interest from both the AEs and Non AEs for the outstanding receivables, no adjustment of notional interest is called for - (i) CIT vs Indo American Jewellery Ltd (ITA No. 1053 of 2012) (Bombay HC) (ii) CIT v/s Livingstones (ITA No 887 OF 2014) (Bombay HC) (iii) ACIT v/s Gitanjali Exports Corporation Limited (ITA No. 7662/Mum/2013) (Mumbai Tribunal) 67. Ld. Counsel for the assessee further submits that the CIT(A) has not given any finding on the merits of the issue and merely proceeded to determine ALP interest rate on the basis of alternative plea of the Assessee. Therefore, the adjustment confirmed by the CIT(A) cannot be sustained. 68. Ld. Counsel for the assessee further without prejudice to the above, submits that if at all any interest should be charged, ....
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....h the amount outstanding from the Associated Enterprises was to the extent of Rs. 5.11 Crores and the balance amount of Rs. 3.62 Crores was outstanding from non Associated Enterprises. Relying on the Board Circular no. 12 of 2001, the CIT(A) further held that in the present case, the profit of one Associated Enterprise is negligible and the other Associated Enterprise has incurred losses and therefore it cannot be said that the assessee had transfered any profit to the Associated Enterprises outside India by not charging interest on the outstanding payment which has been realised after the due date and accordingly deleted the interest charged on late realisation of the export proceeds. 5. On appeal filed by the Revenue, the ITAT upheld the order of CIT (A). While, upholding the order of CIT (A), the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in no....