TaxTMI 
TaxTMI 
TaxTMI 
2019 (6) TMI 1536
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....facts, in circumstances of the case and in law, the Learned Dispute Resolution Panel ('Ld. DRP') grossly erred in issuing directions to the Learned Assessing Officer ('Ld. AO')/ Learned Transfer Pricing Officer ('Ld. TPO') for making further enquiry while passing the final assessment order in complete disregard to provisions of section 1440(8) of the Income Tax Act, 1961 ('the Act') and thereby rendering the final assessment order passed by Ld. AO as void ab-initio. 1.1 Without prejudice to the Ground of appeal No. 1, the Ld. AO/TPO grossly erred in violating the principles of natural justice in not providing the Appellant with necessary data to confirm compliance to the directions of the Ld. DRP before issuance of the final assessment order. 2. On a further without prejudice basis, the Ld. DRP grossly erred in confirming the arbitrary and self-contradicting approach of the Ld. AO/TPO in making transfer pricing adjustment of INR 3,46,82,874 on interest payment on Fully and Compulsory Convertible Debentures ('FCCDs') by Appellant to its Associated Enterprise ('AE') without reference to actual terms of comparable security issuance, a necessary requirement in terms of Rule 10B of ....
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....e issue of FCCD was stated to be at arm's length. 3. On a reference made by the learned assessing officer, the learned assistant Commissioner of income tax, transfer pricing officer - 3 (2) (2), New Delhi (the learned TPO) examined the international transaction of the assessee and issued a show cause notice on 20/9/2016 wherein he stated that the assessee has paid in interest of INR 9 7241700/- @ of 15% towards the issue of fully convertible compulsorily debentures to Ti Themba Investments Limited , Cyprus is not at arm's-length. The learned transfer pricing officer was of the view that the market based approach advocated by the honourable Delhi High Court would be considered for benchmarking. He was of the view that as assessee is situated in Cyprus and the money or the currency which it receives in the form of interest is Indian rupees. However, the assessee has provided interest to its associated enterprise at the rate of 15% per annum and computed the arm's-length price of the above transaction using the prime lending rate of the Indian bank for FY 2013 - 14 adopting the CUP method. It was further noted that as the price negotiation of interest has been made during the initial....
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....ng the year. It was further found that assessee has borrowed money from out of India on which assessee is paying 15% interest, whereas assessee has given an interest free advances to its associate company in India. The assessee was asked above query, which was replied by it. The assessee submitted that it has been charging interest from the above company in the past years which has been duly offered to tax as income, however, nowadays the company has been represented that it has been not been able to acquire the land parcel from M/s Deccan infrastructure and land Holdings Ltd and hence it is not able to commence the project. It was further stated that as the borrower has not been able to commence the project it has not been able to commence development and sale of the project and therefore it is facing serious liquidity crunches. The learned assessing officer rejected the explanation of the assessee for the reason that assessee had raised a loan for its business purpose and has given interest free loan to the associate concern which has also advanced the loan to some other party for nonbusiness purposes on interest free bases. Therefore the interest paid by the assessee is not all....
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....ng the arm's-length price of the rate of interest in its fresh search. c. He also raised an issue about the ignoring the spread and the safe harbour rules to consider the credit risk spread to determine the arm's-length interest rate. d. Additional evidences submitted during the hearing before the learned DRP being a fresh search conducted by assessee with National securities database Ltd wherein the comparables have been identified using appropriate filters were ignored. e. In the and he submitted that the issue is that for assessment year 2012 - 13 the coordinate bench on the identical facts and circumstances are set aside the whole issue back to the file of the learned transfer pricing officer in ITA number 918/del/2017 dated 25/3/2009. 8. The learned CIT DR supported the order of the lower authorities. He submitted that benchmarking of the assessee is fallacious. It has applied CUP method but compared FCCD with loan. He further submitted that there is no comparability of the product by the assessee so TP benchmarking is rejected. He submitted that it is not necessary that same industry must always be compared with such financial instruments. He submitted that even assess....
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....of the learned transfer pricing officer with a direction to re-determine the arm's-length price of interest payment on fully compulsorily convertible debentures issued by the assessee with a comparable product such as credit rating, size, timing etc. . The assessee is also directed to advance all the arguments, which it would like, to place before him along with any additional evidences. The learned TPO will also examine the whole issue with respect to whether fully compulsorily convertible debentures are comparable with simple debentures or are required to be benchmarked differently. According to us FCCD (Fully compulsorily convertible debenture ) is not a traditional debt, but a complex financial instrument wherein the final repayment is through the issuance of common equity to investors ( which has a high value than the amount of loan also and vice versa) , based on fixed conversion rate, (or in a band). It is a mix of debt and equity features. The unique feature of a FCCD is that the owners of the debentures must convert their debentures into equity. The risk and return profile of such security is entirely dependent on the characteristics or feature of the instrument in questio....
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....mber 1 - 4 of the appeal are set aside to the file of the learned assessing officer/transfer pricing officer and therefore allowed accordingly. 13. Ground number 5 relates to the order of the learned assessing officer where the notional interest income amounting to INR 3 8413000/- has been added to the total income of the assessee on account of inter corporate loan given by the appellant to its related party. The brief facts of the issue show that assessee is engaged in the business of development and construction of real estate projects in India. In past the appellant has issued 648278 fully compulsorily convertible debentures holding 15% coupon rate of face value of INR 1000 each to its associated enterprise in Cyprus. The learned assessing officer on examination of the details in the draft assessment has made the addition holding as under:- "4. Disallowance of interest u/s 36 (1) (iii) of the income tax act, 1961 on perusal of information available on the record, it was found that assessee has given inter corporate loan of Rs. 414000000/- to M/s Red Fort Akbar properties private limited. Further, the assessee has not received any income on such loans and advances. On further ....
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....mencement of the project is relevant to the business of the assessee and how the commencement in development and sale of the project is relevant. In the case of Commissioner of income tax vs Punjab tractors the honourable Punjab and Haryana High Court gave a judgment in favour of revenue on the basis of judgment of the same High Court in the case of M/s Abhishek industries in which it was held that once it is established that the assessee had raised certain loans for its business purposes, on which interest liabilities being incurred and on the other hand the funds were advanced to sister concern for non- business purposes on interest free basis, then the interest payable by the assessee to the financial institutions to that extent cannot be held to be use of fund for the business purposes and no deduction accordingly can be permitted under section 36 (1) (iii) of the act. The contention of the assessee that loan and advances has been given out of reserve and surpluses is not acceptable that the assessee company has own fund of Rs. 28,51,90,486/- and liabilities are to the extent of Rs. 111,88,34,614/-. Further, the current assets are amounting to INR 78,08,27,463/- itself. In vi....
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....assessee has failed to file any evidence showing the benefit which the assessee will get out of such transaction * the assessee has failed to demonstrate how the commencement of the project is relevant to the business of the assessee and also how the commencement in development and sale of the project is relevant, and * the assessee failed to establish the commercial expediency and business prudence of the inter corporate loan v. The panel has considered the issue. The assessee issued FCCDs to its associated enterprise in FY 2007 - 08, FY 2009 - 10 and FY 2010 - 11 on which interest was paid. These funds were used in earlier years. The loan to Red Fort Akbar was forwarded in assessment year 2013 - 14 out of own funds and interest was received in AY 2013 - 14. This interest was waived for assessment year 2014 - 15 as Red Ford Akbar was facing liquidity issues. The AO has brought out the asset and liability status of the company. vi. On the one hand, the assessee in the TP grounds is claiming that it is operating in high risk industry, the real estate sector was in slump during this assessment year, the borrowing rate was 17 - 18% per annum. On the other hand, the assessee de....
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....ment year 13 - 14 reflects that the said amount of interest of INR 4841090/- was accrued on advances given by the assessee. Therefore, he held that there has been no deviation in the method of accounting employed by the assessee in the assessment year 2014 - 15 from that of the preceding year, therefore, assessee cannot treat the same income differently in two assessment years as it has to abide by the principles of consistency thus it has to recognize the interest accrued on the loan given to Red Fort Akbar properties private limited in the assessment year 2014 - 15. Consequently, learned assessing officer made an addition of INR 3,84,13,000/- on loan given to Red Ford Akbar properties private limited. 16. The learned authorised representative submitted that the appellant has given inter-corporate loan of Rs. 214000000 to Red Ford Akbar as per loan agreement dated 14/02/2013. The term of the loan was for one year and interest was to be paid at the end of the term. The said loan was utilized by that company to acquire the land parcel from Deccan industrial and land Holdings limited. However, Red Fort Akbar was not able to acquire the land parcel from that company and was not able ....
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.... off entire principal amount of loan given to red Fort Akbar in subsequent financial year 2018 - 19. Thus in view of the principle laid down by various Courts as mentioned above, addition of such notional interest is bad in law and due relief should be granted to the appellant. 19. The learned departmental representative vehemently supported the order of the lower authorities and submitted that the interest has accrued to the assessee and thereafter it has been waived by the assessee. It is not the case of the assessee that interest income is not at all accrued to the assessee. He further submitted that the write off the amount has been made in financial year 2018 - 19, which was not the case before the learned assessing officer, or learned Dispute Resolution Panel and therefore it is new evidence placed by the assessee before the coordinate bench and therefore it should not be considered. Even otherwise , he submitted that merely write off the loan does not waive the interest already accrued to the assessee in financial year 2013 - 14. He therefore submitted that the order of the learned assessing officer and the learned dispute resolution panel should be upheld. 20. We have car....
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....A) that merely because the assessee was following the mercantile system of accounting, it could not be held that income had accrued to it. (B) earning of the income, whether actual or notional, has to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides not to charge interest in order to safeguard the principal amount and ensure its recovery, it cannot be said that he has acted in a manner in which no reasonable person can act. (C) The guidance note on accrual of income on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made. (D) Non recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of accounting, when the same is in accordance with ASI notified by the Government. (E) It is one of t....
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....ponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability, the income is not hypothetical and it has really accrued to the assessee. Issue also arose before Honourabel Calcutta High court in 334 ITR 280 in Bagoria Udyog V Cit where the interest was waived before it accrued to the assessee and it was held that it is chargeable to tax as it did not accrue to the assesse. Therefore moot issue is whether the interest has accrued to the assessee or not. 22. Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income. 23. In the mercantile system of accounting, no doubt the interest which has accrued has to be shown as income but in a case where, with....
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....tory. 26. Further, on careful analysis of the independent auditor's report in case of the assessee, it is also reported that the rate of interest under the terms and conditions of such loan in opinion of the auditor are not prime facie prejudicial to the interest of the company. When no interest is paid , the advances are prejudicial to the interest of the company whether there is a stipulation of interest payment. Further looking at the note number 30 of the annual account of the assessee the following note appears:- "The company has given on intercorporate loan amounting to INR 2 14000000 to Red Fort Akbar properties private limited (the borrower). The borrower is facing difficulties in payment of interest and has approached the company for deferment of interest. The company has agreed to defer the accrual and payment of interest by the borrower until the said due date as mutually agreed. Accordingly, the company has not accrued any interest income on said loan. Due to uncertainty of realization, interest accrued during the financial year 2012 - 13 has been provided for." 27. On careful reading of the above note to accounts, it is apparent that the interest is only deferred by ....