TaxTMI 
TaxTMI 
2020 (9) TMI 276
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....the Appellant; PART B -TRANSFER PRICING GROUND: 2. Adjustment of Rs. 20.58.028/- pertaining to providing of Corporate Guarantee (CG) to Associated Enterprise (AE) 2.1 erred in making an adjustment under Section 92CA(3) of the Act of Rs. 20,58,0287- in respect of CG given by the Appellant to its AE, Laqshya Media International, Mauritius ('LMI') against the guarantee given by LMI to HSBC Bank Middle East Ltd and National Bank of Dubai for the amount borrowed by the Appellant's step down Dubai subsidiary Right Angle Media FZ LLC('RAM' or 'AE') which has been withdrawn with effect from 1 April 2012; 2.2 erred in not appreciating the fact that the Appellant has withdrawn the corporate guarantee provided to its AE with effect from 1 April 2012 and hence no guarantee existed for the year under consideration and thereby no adjustment is warranted in this regard; Without prejudice grounds: 2.3 erred in not appreciating the fact that the transaction of providing corporate guarantee to AE is not an International Transaction within meaning of Section 92B; 2.4 erred in not considering the overall financi....
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....red in not appreciating the fact that interest rate in respect of advances given to AE should be based on LIBOR. PART II - CORPORATE TAX GROUNDS: 4. Disallowance of Interest of Rs. 64,95,182/- under section 36(1)(iii) of the Act 4.1 erred in making disallowance of interest expenditure claimed by the assessee under section 36(1){iii) of the Act amounting to Rs. 64,95,182 on the ground that interest free funds were advanced to the subsidiaries of the Assessee out of interest-bearing funds and hence, the same were not used for business purposes; 4.2 erred in not following principles of judicial discipline by not following the order of Hon'ble ITAT in Appellant's own case for earlier years, wherein such disallowance has been deleted; 4.3 erred in making a disallowance of the interest expenditure claimed by the appellant, without appreciating the commercial expediency in advancing interest free loans to its subsidiaries; 4.4 erred in not appreciating the fact that the advances to Subsidiary Companies were made from own surplus funds and no portion of the borrowed funds was used for the same; and 4.5 erred in not appr....
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....ssed income as claimed by the Appellant 9. Levy on Interest under section 234A 9.1 erred in levying interest under section 234A of the Act of Rs. 2,85,932, without appreciating the fact that the Appellant had filed the return of income, within the time limit prescribed under section 139(1) of the Act. 10. Levy on interest under section 234B 10.1 erred in levying interest under section 234B of the Act of Rs. 78,63,130. 11. Penalty under section 271 (1 )f c) of the Act 11.1 erred in initiating penalty under section 271{1)(c) of the Act." 3. Brief facts of the case are that the assessee, a company engaged in the business of outdoor media advertising services, filed its return of income for A.Y. 2014-15 declaring loss of Rs. 8.55 crores under the normal provisions of the Act. The assessee, along with the return of income, furnished report in Form No. 3CEB reporting international transactions with its Associated Enterprises (AE). Consequent upon reporting international transaction, the assessing officer (AO) made reference to the Transfer Pricing Officer (TPO) for computation of arms length price (ALP) with regard to international....
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....essee has not reported this corporate guarantee in its report in Form No. 3CEB on the grounds that the assessee has not charged any guarantee fees. On show cause notice by the TPO, the assessee explained that no claim was raised by the assessee on AE against the corporate guarantee and the assessee has not incurred any cost or financial loss on the issuance of the said guarantee. The corporate guarantee was a bilateral agreement between the assessee and its step down AE. The TPO disregarded the contention of the assessee and held that corporate guarantee given by assessee to its AE was withdrawn by way of mutual consent. The TPO took his view that the intimation of withdrawal of guarantee to RAM was communicated only in August, 2013. The TPO benchmarked the transaction of guarantee fees @1.25% which is average of fees charging for bank guarantee by banks. The DRP affirmed the action of the TPO. 6. The learned A.R. of the assessee submits that no adjustment of corporate guarantee is warranted as the same has been withdrawn w.e.f. 01.04.2012. The learned A.R. of assessee further submits that similar issue was raised in appeal for A.Y. 2013-14. However, the Tribunal has not acce....
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....ing to step down subsidiaries Rs. 78.72 crores @14% and Rs. 2.83 @13% and Rs. 13 crores for acquiring shares of overseas entity by AE at 13%. Out of Rs. 94.55 cores an amount of Rs. 81.55 crores was lent to RAM through LMI and subsequently through Gulf Media Holding, Mauritius and remaining Rs. 30 crores was given to LMI to acquire shares of APJ Digital. The learned A.R. for the assessee submits that the assessee grated to loan of Rs. 78.72 crore to LMI for the purpose of lending to RAM through Gulf Media Holding. The assessee agreed to grant loan to LMI aggregating Rs. 159.04 crores vide Board Resolutions dated 10.02.2009 and 14.04.2009 and loan agreement dated 17.07.2009 for the purpose of lending to RAM @14%. The loan was unsecured in nature and would remain outstanding until such time as: - (i) LMI repays the loan to LML, in its entirety including accrued interest (ii) LML and LMI mutually agree to restructure the loan by way of revised loan agreement Remaining outstanding loan of Rs. 2.83 crores was granted to LMI vide Board Resolution dated 09.04.2007 and Loan Agreement dated 11.04.2007 @ 13%. The loan advanced to LMI and Gulf Media Holding has further gr....
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....the loan from RAM in line with its long term project and its ability and capacity to recover from the economic crisis in Dubai. • Appellant has made substantial provision against the loan given to RAM - LML had provided Rs. 13.00 crores in FY 2009-10 and Rs. 39.63 crores in FY 2011-12 and Rs. 0.25 Crores in FY 2013-14 aggregating to 52.88 Crores against outstanding loan of Rs. 94.55 Crores. • Appellant also made provision for the accrued interest of Rs. 2.61 crore in FY 2009-10 and Rs. 23.53 crores in FY 2011-12 in the books of LML, as principal loan itself was doubtful of recovery for the reasons mentioned above. The provision for accrued interest was increased to Rs. 26,29 crores and Rs. 26.61 crores during the financial year 2012-13 and 2013-14 respectively. • Since the financial position of the AE and step- down subsidiaries further deteriorated as explained above, the AE waived of all the loans granted to step down subsidiaries during FY 2014-15 and LML also converted its entire loan of Rs. 94.55 Crores extended to LMI into Preference Share Capital on 11 June 2014 and also made provision of Rs. 59.15 Crores for investment in equity and pr....
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....at comparables like stressed company should be considered, wherein the loans advanced by banks were turned into stressed assets as there was no recovery of principal as well as interest on loans and hair-cut was also taken on the principal amount due to the bankers. The learned AR of the assessee also gave the examples of a comparables companies like Alok Industries, Bhushan Steel, Electrosteel Steels, Synergy Doory Automotive and Jet-Airways. 13. In alternative and without prejudice submission the learned AR for the assessee submits that interest on the loans given to AE to be benchmark by using the prevalent rate in the country where loans utilised for appropriate LOBOR rates as per the decision of Bombay High Court in case of Tata Auto Comp Limited (374 ITR 516 Bom). The loans were ultimately utilised in Dubai. 14. The learned AR of the assessee submits that TPO and ERP made adjustment of Rs. 13.07 crore by disregarding the factual matrix and principal of commercial expediency and real income theory, without undertaking any benchmarking analyses. In his all fairness the learned AR of the assessee submits that the Tribunal in assessee's own case for AY 2012-13 in ITA No. 19....
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....horities below. We have also deliberated on the decision of Tribunal for assessment year 2012-13, which was followed in assessment year 2013-14. We have seen that the similar submission of learned AR of the assessee with regard to commercial expediency of loan given to subsidiary, was repudiated by coordinate bench of Tribunal in assessment year 2012-13 by holding that the commercial expediency of loan to subsidiaries is wholly irrelevant in ascertaining arm's length price of interest on loan to AE's by following the decision of Special Bench of Kolkata Tribunal in Instrumentarium Corporation Ltd versus ADIT (71 taxmann.com and 93). The coordinate bench of Tribunal in assessee's own case for AY 2012-13 in ITA No. 1984/Mum/2017 passed the following order; "5.6 We have carefully considered the submissions and relevant material on record. The undisputed facts are that pursuant to contractual terms, the assessee had advanced loans to its AE in furtherance of business interest i.e. for the purpose of further lending to step down subsidiary as well as to acquire the stake in another entity. It is also undisputed fact that as per the contractual terms, the assessee was entitled f....
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.... a use of borrowed funds can be said to be for the purposes of business, and, accordingly, whether interest on borrowings for funds so used can be allowed as a deduction in computation of business income of the assessee. That is not the issue here, and these judicial precedents on the commercial expediency, therefore, have no relevance in computation of arm's length price of loan given to an associated enterprise. Similarly, learned counsel's contention that a notional income cannot be taxed, and reliance on Shoorji Vallabhdas & Co.'s case (supra) in this regard, is wholly misplaced because that proposition is in the context of tax laws in general, whereas, transfer pricing provisions, being anti abuse provisions with the sanction of the statute, come into play in the specific situation of certain transactions with the associated enterprise. The general provisions of the law have to give way to these specific anti abuse provisions. While a notional interest income cannot indeed be brought to tax in general, the arm's length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. ....
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.... 18. We have noted that subsequent to the aforesaid order the assessee filed MA vide MA No. 11/Mum/2019, which was disposed off vide order dated 12.03.2019, the relevant part of the order is extract below; - "3. We have carefully considered the same. Upon careful consideration of para 5.6 of the stated order, we find that only a principle has been drawn on the strength of statutory provisions to arrive at a conclusion that so long as the transactions is an international transaction within the framework of law, the computation of income there-from has to be on the basis of arm's length principle. While arriving at such a conclusion, strength has been drawn from the cited decision of the special bench. This being the case, the submission that the cited decision was factually different and distinguishable, in our opinion, carry no weight. 4. Proceeding further, in para 5.7, the matter of quantification of appropriate applicable rate has been remitted back to the file of Ld. AO / TPO with certain observations in the light of additional evidences submitted by the assessee. It is made clear that the Arm's Length Price of the stated transactions shall be determined with....
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....dentified any exempt income, therefore, following the decision of the Tribunal in assessee's own case for A.Y. 2013-14, wherein the Coordinate Bench has followed the decision of the Hon'ble Delhi High Court in the case of Chem Invest Ltd. vs. CIT (378 ITR 33 Bom) and the decision of the Hon'ble Bombay High Court in the case of Principal CIT vs. Ballarpur Industries Ltd. in (ITA No. 51 of 2016), no disallowance in this regard for the year under consideration is warranted. Therefore, the AO is directed to delete the entire disallowance under section 14A. Since we have deleted the entire disallowance under section14A, similarly no adjustment on account of disallowance of section 14A in the book profit under section 115JB is warranted as per the decision of the Special Bench of the Delhi Tribunal in Vireet Investments Pvt. Ltd. (82 taxmann.com 415 [Delhi - Trib.) (SB)]. In the result this ground of appeal is allowed. 24. Ground No. 5 relates to disallowance of interest under section 36(1)(iii) of the Act. During the assessment, the AO noted that assessee has incurred interest of Rs. 6.71 crore. It was further noted that the assessee has advanced interest free loan to its sub....
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....- 13 has held that no disallowance in this regard is warranted as the interest free loan advanced to the subsidiaries was out of commercial expediency. Furthermore, the tribunal had also held that assessee's interest free funds to grant loans were sufficient and in this regard it had placed reliance upon Hon 'ble Bombay High Court decision in the case of CIT vs HDFC bank. In these circumstances learned counsel contended that no disallowance in this regard is warranted. He further contended that facts are identical and assessee's interest free funds are more than the advances given to AE's. 23. Upon careful consideration we find that since facts are identical and DRP has also followed its earlier year order which has been reversed by the ITAT, respectfully following the above said precedent we direct that no disallowance in this regard is to be made 28. Respectfully following the decision of the Coordinate Bench in earlier assessment years, wherein it was held that the assessee has sufficient interest free funds available with it and the advances was given for commercial expediency; hence we are in agreement with the submissions of the assessee that this ....