AI OCR 
TaxTMI 
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2019 (10) TMI 987
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....nce 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 referring to para No. 4.4 of the Ld.CIT(A) order submits th....
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....or 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 disallowance should be made. However, the Assessing Officer has not r....
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.... 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 disallowed the expenditure of Rs..49,24,573/- which was incurred on clinical....
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....idered 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 shown no doubts about the genuineness of these expenses. It was held by Ld. CIT(A) tha....
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....iled 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 properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only l....
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....ns 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 no 3rd party in the similar circumstances will grant the loan without charging interest at the market rate. (b) The fact that the conversion pr....
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....-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 regard, it is mentioned that even accepting these facts it is noted that from the date loan was advanced to AE till 31.03.2011 the funds were used by the AE without any cost against which assessee was paying interest. In third party situation no entity wou....
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....dvance 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 kinds of Risk associated with such transaction like Forex risk, Country risk, Entity risk, and circumstances further mark up may be added. Similar observations were made by Hon'ble ITAT Mumbai vide their order dt 16.11.2012 in the case of Wipro Ltd. vs. DOT 33 taxmann.com 263. Consideri....
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....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 Jurisdictional High Court in the case of ADIT v. Barclays Bank Plc. In ITA.No. 584/Mum/2012 dated 12.01.2018. It is further submitted by the Ld. Counsel for the assessee that when TPO failed to adopt one of the prescribed methods of the Act, the matter cannot be restored to the file of the as....
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....rice 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 has charged no interest on OCL for the reason that RLSI was setup for developing global business opportunities in the field of pharmaceutical and bio-pharmaceutical, clinical research services and research and development activities. The assessee intended to fulfill its own objective of gaining majority ....
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.... (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 the said concern so far as sales of raw material and semi finished goods is concerned, and it has a significant volume of transaction at almost 50% of entire sales and 90% of entire exports. Micro USA exists only to facilitate the marketing of assessee's products in US markets. The relationship on account of lending o....
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....nded 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 interest free loans could not have been in the nature of quasi capital. As to the position that the relationship between the assessee and Micro USA was not of a lender and borrower simplicitor - a relationship which is essence of a loan transaction, it will be clear from the following observations in the annual financial statement of Micro USA : ....... As of March 31, 2002, the compa....
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....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 materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arms length price in respect of the property transferred or services provided in the international transaction; (Emphasis by underlining supplied by us) 18. Therefore, even when we take LIBOR plus rate as the base rate for an advance in step 1 of the above computation process, such base rate will have to adjusted inter ....
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....nto 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 company which is playing such a vital role in its business plans. It is so for the reason, as we begun by pointing out, the whole purpose of the arm's length price adjustment is to nullify the impact of management, capital and control interrelationship between the associated parties. In our humble understanding, on the pure commercial factors and notwithstanding the management, capital and control relationship between the parties, such non interest bearing advance....
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.... and amounts on which the loans were given is reproduced hereunder:- "It is seen from the Form No.3CEB and Transfer Pricing Study that the assessee company has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:- Date of initial Loan to DGHL Loan (US $) DHHL-DGHL Amount in INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466 7.2. The assessee in support of its claim has stated before the TPO that the loan was advanced with the intention of converting it into equity and has shown that it was converted into equity within 3 months. The assessee as per record has explained that the loan was so structured as the assessee was not sure of the subsidiary company's capacity to utilize the funds for the intended purposes. It has been argued that on the utilization of the funds it was capitalized as equity hence it has been explained that it was never a loan and was always a quasi debt. For ready-reference the relevant extract from the TPO's order incorporating the explanation of the assessee is reproduced hereunder:- "....
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.... loan of above amounts to unrelated third parties with similar financial strength as that of the AE. It is also to be mentioned that there is no security provided by the AE's /subsidiaries against the loans advanced." 7.4. The following extract brings out the reasoning of the TPO justifying the application of the rate which has been upheld by the DRP and heavily relied upon by the Ld.CIT. DR:- 3. "Financial institutions generally weigh four elements in determining whether or not to issue loans and, if so, at what conditions and fees: Financial Risk: In order to gauge the financial risk incurred by the lender, the debtor's financial position is reviewed based on its balance sheet and income statement; Credit Risk: In order to gauge the credit risk, three elements are weighed, namely the availability of guarantees, the purpose of the loan and the loan's term to maturity; Business Risk: The lender's views on the industry in which the debtor operates its business is reflected in this risk; and Structural Risk: In gauging this risk, the qualifications of external rating agencies awarded to the debtor are weighed. 4. Corporate bonds issued by companies in In....
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....judged to carry inadequate safety, with regard to timely payment of financial obligations; they are less likely to default in the immediate future than instruments in lower rating categories, but an adverse change in circumstances could lead to inadequate capacity to make payment on financial obligations. B High Risk Instruments rated 'B' are judged to have high likelihood of default; while currently financial obligations are met, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. C Substantial Risk Instruments rated 'C are judged to have factors present that make them vulnerable to default; timely payment of financial obligations is possible only if favourable circumstances continue. D Default Instruments rated 'D' are in default or are expected to default on scheduled payment dates 5. From the above, it is seen that bonds in the rating range of AAA to BBB have some kind of safety, with a minimum level of 'moderate safety' (BBB). Therefore, it is clear that 'unsecured loan', like that of taxpayer, cannot fall in the credit rating range from AAA to BBB, as the unsecured loan advanced....
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....e using secret comparables." (emphasis provided) 7.6. The assessee's objection that the TPO cannot question the commercial expediency of its activities was not accepted by the TPO. The TPO was of the view that the OECD guidelines clearly held the view that "when independent enterprises transact with each other, the conditions of their commercial and financial relations (e.g. the price of goods transferred or services provided and the conditions of the transfer or provision) ordinarily are determined by market forces. When associated enterprises transact with each other, their commercial and financial relations may not be directly affected by external market forces in the same way, although associated enterprises often seek to replicate the dynamics of market forces in their transactions with each other. (OECD para 1.2). 7.6.1. The TPO was of the view that the OECD Guidelines say that the relationship among members of an MNE group may permit the group members to establish special conditions in their intra group relations that differ from those that would have been established had the group members been acting as independent enterprises operating in open market. Thus, intra group....
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....e was necessitated or relevant on facts before us is an area which, if need be, shall arise later. 7.8. To revert back to the proceedings before the TPO the record shows that he concluded the issue in the following manner:- "In view of the above discussion, while the assessee will be given benefit of conversion of the loan into equity during a reasonable time frame, the benefit will be limited to 20% of the loan. The rest will be treated as a loan on which an appropriate interest, as determined in the show cause notice, needs to be charged. The calculation of the same is as under:- month End Opening balance (Rs.) (after taking to account the revised closing^ balance) Funds extended (Rs.) Conversion into Equity (Rs.) Closing balance (Rs.) (as per assessee) Closing balance after allowance for 20% (as per TPO) Revised interest @ 17.26% 7 -Apr 7-May 7-June 7 -July 2,069,582,691 2,069,582,692 29,767,498 7-Auq 2,069,582,692 2,069,582,692 29,767,498 7-Sep 2,069,582,692....
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....action ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapter II. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.65. However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterisation of the transaction and re-characterise it in accordance with its substance. An example of this c....
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....ing loans to DLF Cyprus at the time of set-up, advanced loans to DLF Cyprus only on the basis of restructured capital gearing of the company. The assessee wishes to submit that it was commercially expediency which necessitated DHHL to provide advances to DLF Cyprus. These advances were made as a part of capital for further investment by its associated enterprise and to obtain return in future. The assessee had full control over its associated enterprise which reduces the credit risk." (emphasis provided) 7.10.1. Elaborating the argument that by way of this funding the assessee was engaged in stewardship activities, the following submissions have been advanced:- "As explained above, stewardship activities do not require any payment since they directly benefit the shareholder, and in an independent scenario, a recipient of any corresponding benefit would not have been required to pay any charge for the same. In the instant case, since DHHL is the sole shareholder in DLF Cyprus, the provision of funding may be considered to be part of its shareholder activity, since it is providing support to its subsidiary as a shareholder. Additionally, any benefit accruing to DLF Cyprus fr....
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....lowing dates:- "It is seen from the Form No.3CEB and Transfer Pricing Study that the assessee company has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:- Date of initial Loan to DGHL Loan (US $) DHHL-DGHL Amount in INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466 7.13. Admittedly these loans were converted into equity within 3 months as per the following chart:- Month End Opening (Rs.) Funds Extended (Rs.) Conversion into equity (Rs.) Closing Balance Apr-07 May-07 June-07 July-07 2,069,582,691 2,069,582691 Aug-07 2,069,582,691 2,069,582691 Sep-07 2,069,582,691 20,306,910 2,089889602 Oct-07 2,089,889,602 2,069,582,692 20.306910 Nov-07 20,306,910 6,29,918,780 650.225690 Dec-07 650,225,690 200,152,084 850377774 Jan-08 850,377,774 850377774 Feb-08 850,377,774 850,377,774 NIL Mar-08 Nil ....
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.... converted in equity after fulfilling the necessary legal requirements within three months is an evidence on record. 7.16.1. In the facts as they stand we are now called upon to decide whether in the peculiar facts and circumstances of the case it is an International Transaction or not. The Revenue claims that the fact of showing the interest free loan as an International Transaction to its subsidiary AE in Form 3CEB ipse dixit as considered in Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.) and also VVF Ltd. attracts the provisions of Chapter X of the Income Tax Act, 1961. The consistent objections posed by the tax payer though have been acknowledged by way of reproduction in the orders have not been considered necessary to address whether adjustment under Chapter X is warranted. The specious and facile reasoning that international transaction is acknowledged in Form 3CEB by the assessee itself cannot form the basis of the conclusion. At best it can form the starting point of the enquiry. In the light of the evidences on record and considering the arguments, we are inclined to hold that mere disclosure of the interest free loan as an international transaction by the tax paye....
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....been done. Thus the arguments that the funds advanced till then as an interest free loan, if it has to be disbelieved, has to be shown as sham or bogus transaction. The facts are not so. In the face of the above consistent claim demonstrated by the assessee by way of facts and supporting evidences which stand unassailed by the Revenue on record, we therefore find no justification either in fact or law to uphold the Revenue's stand that the tax payer must necessarily be bound by the disclosure made in Form No.3CEB Report. There is nothing on record to support the conclusion that the interest free loan must necessarily be deemed to be an interest earning activity and not an activity to capitalize the opportunity cost for investing in new territories. We hold that for the tax authorities to consider re-characterizing the transaction the tax authorities must necessarily demonstrate that the transaction as claimed and documented is a sham or on the basis of facts and evidences is at a substantial variance with the stated form. In the absence of any such exercise the tax authorities are entering at their peril in the realm of arbitrariness. In the facts of the present case there is not e....
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....asi-capital. The Co-ordinate Bench examined and considered the decisions rendered in Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.); Micro Inks Ltd vs ACIT [2013] 157 TTJ 289 (Ahd.); Four Soft Pvt. Ltd. vs DCIT [2014] 149 ITD 732 (Hyd); Prithvi Information Solutions Pvt. Ltd. vs ACIT [2014] 34 ITR (Tri) 429 (Hyd.) and thereafter came to the conclusion that none of these decisions had thrown any light on what constitutes "quasi capital" in the context of transfer pricing and its relevance in ascertainment of the arms length sales price of a transaction in the said context. The Coordinate Bench has quoted the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)] wherein their Lordships have begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that "A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas". The reference so made to the words of Justice Frankfurter was in the context of the conc....
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.... in support of the primary issue for the proposition that the activity of interest free advances ultimately to be converted into equity by a holding company to a subsidiary company does not give rise to an international transaction. 7.18. Considering the said decision, we find that the Co-ordinate Bench was called upon to decide whether Chapter X was attracted in facts where the assessee had advanced interest free loans to its AE for the stated purpose of share application. These material facts and issue would be evident from the very wordings of Ground No.15 and 15.1 raised by the assessee before the Co-ordinate Bench. These grounds when read alongwith other related grounds agitated before the Co-ordinate Bench are being reproduced so as to bring out the gamut of issues agitated and considered:- 43. "In ground no. 15, the assessee has raised the following grievance: 15. That the assessing officer/TPO erred on facts and in law in making addition of Rs. 19,15,45,943 on account of notional interest calculated @ 17.26% p.a. on the amount of share application money advanced by the appellant to its AEs. 15.1. That the assessing officer/TPO erred on facts and in law in not apprec....
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....reciating that such information was not available in the public domain and therefore, could not have been relied upon for the purpose of determining the arm's length price. 15.5. Without prejudice, that the assessing officer/TPO erred in computing the amount of interest at Rs. 19,15,45,943, by applying rate of interest of 17.26% p.a. for the whole year on the consolidated amount of share application money, without considering the monthly balance of share application money. 15.6 That the assessing officer/TPO erred on facts and in law by disregarding established judicial pronouncements in India in making the Transfer Pricing adjustment." 7.18.1. The facts and the legal precedent with which the Coordinate Bench was seized of are set out in Paras 44 to 45 of the said order and are reproduced hereunder for the purposes of bringing out the similarity on the material facts:- 44. So far as this grievance of the assessee is concerned, the relevant material facts, to the extent necessary for our adjudication, are as follows. It is not in dispute that during the relevant previous year the assessee has made following payments towards share application money in its foreign subsidia....
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....he nature of loan". It was in this backdrop that payments for share application money were treated as interest free loans given to the AEs and ALP adjustment was made for interest thereon. Aggrieved, assessee is in appeal before us." (emphasis provided) 7.18.2. Considering the arguments on these facts and the legal precedent the Coordinate Bench came to the following conclusion:- 46. "We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with 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 ....
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....ith the core issue before us i.e. whether a capital contribution can be deemed to be partly an interest free loan, for the period till the shares were actually allotted, and partly as capital contribution, after the subscribed shares were issued by the subsidiary in which capital contribution was made. In the case of Perot Systems TSI India Ltd Vs. DCIT (supra), a coordinate bench of this Tribunal had an occasion to deal with the arm's length price adjustment with regard to interest free advances to the subsidiaries. That was a case in which the assessee, an Indian company, advanced interest-free loans to its 100% foreign subsidiaries. The subsidiaries used those funds to make investments in other step- down subsidiaries. On the question whether notional interest on the said loans could be assessed in the hands of the assessee under the transfer pricing provisions of Chapter X, the assessee argued that the said "loans" were in fact "quasi - equity" and made out of commercial expediency. It was also argued that notional income could not be assessed to tax. However, both of these arguments were rejected by a coordinate bench of this Tribunal. While doing so, the coordinate bench obse....
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....ly the subscribed shares capital has indeed been allotted to the assessee. The transaction is thus accepted to be genuine in effect. 50. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the authorities below were in error in treating the payment of share application money, as partly in the nature of interest free loans to the AEs, and, accordingly, ALP adjustment based on that hypothesis was indeed devoid of legally sustainable merits. We delete the impugned adjustment of Rs. 19,15,45,943. The assessee gets the relief accordingly. As we have decided this ground of appeal on the fundamental issue that the payment of share application money could not be partly treated as interest free loan to AE, we see no need to deal with other aspects of the matter." (emphasis provided) 7.18.3. When the facts as considered by the Co-ordinate Bench in the case of Bharti Airtel Ltd. are seen and the facts of the present case are considered, we find that there is a striking similarity on the material issues and the above conclusion and reasoning fully supports the view taken. In fact as argued on behalf of the assessee the facts of the....
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....pellant prays that the transfer pricing adjustment confirmed by the CIT(A), of charging interest on the amount paid towards subscription to share capital of the AE's is unjustified and ought to be deleted." 34. Briefly stated the facts are that, during the financial year 2008-09, the assessee had paid share application money towards subscription of Paid-in-Equity/ Capital surplus of RLS Inc [for short "RLSI"] and towards subscription of preference shares of RLSBV and since no shares were allotted against the share application money TPO treated the amounts as interest free loan and calculated interest at the rate of 6% p.a., which was charged by the assessee in respect of loans provided to its AE RLSBV. The Ld. CIT(A) upheld the adjustment made by the TPO. 35. Ld. Counsel for the assessee submits that pursuant to the share application money paid by the assessee the amount has been converted into paid-in-equity/ Capital surplus by RLSI and preference shares were allotted by RLSBV to the assessee as on 31st March 2011. This is evidenced from CPA certificate dated 12.10.2011 and deed of issue of preference shares by RLSBV which are placed at pages 220 and 221 of the Factual paper ....
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....al of subsidiaries outside India as there is no income arising from the transaction. Reliance in this regard is placed on following decisions: (i) Aries Agro Ltd v/s DCIT (ITA No. 1452/M/2017) (delay in allotment was more than 5 years) (ii) Hill County Properties Ltd (ITA No 1644/Hyd/2014) (Hyderabad ITAT) 38. Without prejudice to the above, even if it is treated as an international transaction, since the TPO has not brought any comparable on record to show that an unrelated share applicant was to be paid any interest for the period between making payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of any legally sustainable merits. It is submitted that this view is upheld by the Jurisdictional Tribunal in the case of Pan India Network Infravest Pvt Ltd., in ITA.No. 7026/Mum/2013 dated 04.12.2015 wherein the delay on allotment was 3 years 6 months. 39. Without prejudice to the above, it is submitted that even if capital financing is to be held as an international transaction, even then the provision cannot be applied retrospectively. The provisions of the Act which were on the Statute as on 1.04.2012 only will apply for the FY 2012-13 (....
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....h price. Assessee also contended that since subscription to equity shares does not have a bearing on the determination of income of the assessee the provisions of section 92(1) of the Act are not applicable to the international transaction of such nature as defined in section 92B(1) of the Act. However, the TPO held that since no shares have been allotted by AE's to the assessee in respect of the amount paid towards share application the same would be characterized as being in the nature of interest free loan provided to AE's. TPO also observed the fact that AE's were setup for developing global business opportunities for further expanding the assessee's business operations outside the India is not a valid ground for non-allotment of shares by AE's to the assessee. Therefore, in the absence of allotment of shares the share application money is treated as loan given by the assessee to its AE's and applied interest rate at 6% per annum and accordingly made adjustment. The Ld.CIT(A) upheld the adjustment. 43. Before us, Ld. Counsel for the assessee placing reliance on the decision of the Hon'ble Bombay High Court in the case of Director of Income-tax v. Besix Kier Dabhol Stay Applica....
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....by the Head Office to the branches was not allowable as a deduction. 6) In appeal, the Commissioner of Income Tax (Appeals) by an order dated 29/3/2007 upheld the order of the Assessing officer and disallowed the deduction on account of interest of Rs. 5.73 crores paid to Joint Venture Partners. The Commissioner of Income Tax (Appeals) held that Article 7(3)(b) of the Double Taxation Avoidance Agreement forbids allowance of any interest paid to the head office by permanent establishment in India as a deduction. Further, the payment of interest also directly violates the conditions imposed by RBI in its letter dated 3/11/1998. Therefore, the order of the Assessing Officer was upheld. 7) However, the Tribunal allowed the respondent-assessee's appeal. During the course of the proceedings before the Tribunal the revenue contended that the borrowings on which the interest has been claimed as a deduction are in fact capital of the assessee and brought only under the nomenclature of loan for tax consideration. It was the case of the appellant-revenue before the Tribunal that debt capital is required to be re-characterized as equity capital. However, the Tribunal held that in India....
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....O cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction. 3. We are broadly in agreement with the view of the Tribunal. The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon on notional basis. No question of law arises." 46. Similar view has been taken by the Hon'ble Bombay High Court in a recent Judgement in the case of Pr.CIT v. Concentrix Services India Pvt. Ltd., in ITA.No. 778 of 2017 and 867 of 2017 dated 04.09.2019. Further, the Ld. DR has not brought any contrary decisions to our notice. The ratio of the above decisions squarely applicable to the facts of the assessee's case. The TPO has rechar....
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....fied that for the purpose of invocation of the provisions of section 14A of the IT Act, the AO has applied the formula only in respect of disallowance of proportionate interest expenditure. There was no allegation of the AO that the exempt income was earned by the assessee. In the light of the undisputed finding on facts, we have perused the decision of the Hon'ble Courts. We may like to mention that a view has been expressed consistently that if there is no exempted profit then there is no question of invocation of the provisions of section 14A of the IT Act but, we have also carefully perused that very decision of the Tribunal namely Cheminvest Ltd. (supra) was reversed by the Hon'ble Delhi High Court, copy placed in the compilation. The Hon'ble Delhi High Court in ITA No.749/2014 vide order dated 02-09-2015 titled as "Cheminvest Ltd. Vs CIT" has decided the substantial question of law that whether disallowance u/s 14A of the Act can be made in a year in which no exempt income has been earned or received by the assessee. The Final verdict was as under: - "23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression....
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....stments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded by both the Authorities do not give rise to any substantial question of law. Since no substantial question of law arises in this income tax appeal, the income tax appeal is dismissed with no order as to costs." 51. The Hon'ble Jurisdictional High Court held that if there is no exempt income there cannot be any disallowance. Respectfully following the said decision, we direct the Assessing Officer to delete the disallowance made u/s. 14A of the Act. Ground raised by the assessee is allowed. 52. The next ground of appeal is in respect of disallowance u/s. 35(2AB) of the Act. 53. Briefly stated the facts are that, the Assessing Officer while completing the assessment noticed that assessee claimed Rs..10,35,105/-as deduction u/s. 35(2AB) and find that assessee claimed to have incurred an expenditure of Rs..17,89,22,845/- for in-house research facility. Further, he also noticed on verification of the details of expenses that assessee has made a payment of Rs..20,70,211/- to M/s. Reliance ....
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....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 shown no doubts about the genuineness of these expenses. It was held by Ld. CIT(A) that since claim of assessee with respect to deduction u/s.35(2AB) has been denied, therefore, these expenses are capital in nature. It was further observed by ld. CIT(A) that Assessing Officer, as well as assessee, have treated these expenses as capital in nature. In our view, the observations of Ld. CIT(A) are misplaced and without any basis. We have gone through details of these expenses. In our considered view, these expenses are apparently revenue in nature. Ld DR also could not point out as to which expenses are capital in nature. Thus, in our view, these expenses are of revenue nature. 5.6. The other ar....
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....ld 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 properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected." In the case of Snehlata 192 CTR 50, Hon'ble J&K High Court held that "when the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities. It is settled proposition of law that no tax can be levied or recovered without authority of law. Article 265 of the Constitution of India and section 114 of the State (J&K) Constitution imposes an embargo on imposition and collection of tax if the same is without authority of law." Lastly, we find it useful to refer to judgment of Hon'ble Bombay Hig....
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....ed thereon. 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 subscription to equity share capital of M/s. RLS Inc at INR 50,11,071/-. (ii) The learned CIT(A) erred in confirming the action of the learned AO in treating the subscription money as a deemed interest free loan on which interest is chargeable. (iii) Without prejudice to the above, the learned CIT(A) erred in determining the arm's length rate at LIBOR plus 300 basis points without providing any reasons for considering mark-up of 300 basis points over LIBOR instead of determining the arm's length rate of interest at LIBOR plus comparable mark-up rate furnished by the Appellant of 165 basis points. Ground NO.6: Subscription to share application money paid to M/s. Reliance Life Science BV, Netherlands ('M/s RLS BV) treated as a deemed loan and interest charged thereon (i) The learned CIT(A) erred in determining the arm's length price (ALP) of interest chargeable in respect of subscription to preference share capital of M/s. RLS Inc at INR 1 ,55,20,711/-. (ii) The learned CIT(A) err....
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....urnished those details before the assessing officer. The TPO treated the outstanding balances of AE RGMX both in respect of sundry debtors and creditors as loan and determined the arm's length price of interest at 12% per annum by applying the PLR instead of adopting rate applicable in respect of the short term borrowing, since balance in respect of sundry debtors and creditors according to him were part of routine day to day business activities and cannot be equated with loan. Assessee contended that as per its consistent policy it has not charged/paid any interest on its receivables/payable from non-AE's i.e. 3rd party business transactions. It was also contended that during the year under proceedings the assessee neither charged interest on its receivable nor it has paid any interest on its payables to its AE RGMX. Thus, it is contended that on application of the arm's length price taking assessee as a tested party and CUP as the most appropriate method, no interest adjustment can be made. However not convinced with the submissions of the assessee Ld. TPO made adjustment for receivable by calculating the net interest on net balances outstanding debtors and creditors with AE RGMX....
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.... circumstances cannot be taken as CUP. In reply Ld. Counsel for the assessee submitted that different geography filter shall be a factor of consideration while determining the arm's length rate of interest to be charged for the amount advanced/outstanding to/from the AE and non AE. When the consistent policy of the assessee is not to charge interest from AE as well as non-AE and there is outrightly, no charge of interest on outstanding balances from the AE as well as non AEs, geography filter does not come into picture. In light of the aforesaid submissions, the assessee prays, that no interest ought to have been charged on amounts due from the AE, RGMX and consequently, the adjustment to the income be deleted. 70. We have heard both the parties perused the orders of lower authorities and the case law relied on. We find that in the case of CIT v. Indo American Jewellery Ltd. in ITA. No. 1053 of 2012 dated 08.01.2013 the Hon'ble Bombay High Court held as under: "3 As regards the second question is concerned, the Transfer Pricing Officer while determining the Arms Length Price of the international transactions, noticed that the outstanding balance from Associated Enterprises ....
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....eeds to be added to the declared consideration to arrive at an arms length price 4. The Tribunal by the impugned order rendered a finding of fact that the respondent-assessee has not charged any interest from third parties i.e. Non Associated Enterprises on delayed payments exceeding more than 300 to 400 days from the sale of goods. Consequently, it holds that once such delayed payment in respect of sale of goods made to third parties carries no interest, then adding of notional interest to delayed payments made by the Associated Enterprises is not called for 5. Further, the impugned order places reliance upon the order of this Court in Income Tax Appeal (L) No. 1053 of 2012 (Commissioner of Income Tax-9 vs. M/s .Indo Amercian Jewellery Ltd.) rendered on 8th January, 2013. In the above case a similar question was not entertained by this Court on the ground that there is complete uniformity in the act of the assessee therein in not charging interest from Associated Enterprises and Non Associated Enterprises for delay in recovery of its sale proceeds. 6. In the present case also the Tribunal has rendered a finding of fact that the interest is not being charged in case of sales ....