TaxTMI 
TaxTMI 
2019 (6) TMI 1536
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....wing grounds of appeal:- "1. That on 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 securit....
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....is company is 14.375 % and therefore the rate of interest given by the assessee that is 15% on the 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 meth....
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....ound that assessee has given an interoperate loan of INR 214,000,000 to M/s Red Fort Akbar properties private limited. Assessee has not received any income on such loans and advances during 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 fr....
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....without giving relevance to the debentures issued by the borrowers in the same industry in which the appellant operates. b. He has ignored the critical filters necessary for the purpose of determining 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 th....
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....er company with similar credit rating. These data needs to be provided by assessee. Further on careful consideration of the order of the coordinate bench and respectfully following the same we also set aside the whole issue back to the file 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 feature....
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....d then pass final order , on receipt of direction of the learned dispute resolution panel or in case the assessee does not approach dispute resolution panel, then pass the final assessment order in accordance with the law. Accordingly, ground number 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....
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.... purposes of the advance and loan. The assessee has simply diverted the interestbearing funds. The 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 that how the commencement 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 l....
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.... - 15. iv. AO made the disallowance on following basis:- * the assessee company has own funds of Rs. 285190486 and liabilities to the extent of INR 1118834614 while current assets are amounting to INR 780827463 as at 31/03/2014. * The assessee has diverted the interest-bearing funds * the 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 ....
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....the assessment year 2013 - 14 reveals that assessee credited interest income of INR 4841090/- in profit and loss account, which had been charged on loan given to Red Fort Akbar properties private limited for the period of 46 days at the rate of 17.95% as mentioned above and the note number 16 - 'other current assets' - forming part of the audited balance sheet for the assessment 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....
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....vs Intercontinental India (ITA number 2033/AHD/2007) and d. chachar Drugs Distributors vs ITO 63 taxmann.com 98 (2015) . 18. In the end, he submitted that appellant has not received the said interest income during the assessment year and assessee has decided to waive of its right to charge interest income from red Fort Akbar of borrowing as it faced serious liquidity issues faced by that borrower company. Further, the appellant has also written 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 office....
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....ng finding of the ITAT:- "6. On further appeal, the Tribunal by the impugned order takes into account the fact that even in mercantile system of accounting an item would be regarded as accrued income only if there is certainty of receiving Page No : 0669 it and not when it has been waived. The Tribunal has in the impugned order very succinctly set out the principles to be applied while recovering income in following the mercantile system of accounting : "(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....
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.... the respondent. The decision rendered by the Tribunal in the impugned order is a decision on facts and nothing has been shown to us which would warrant interference by this court on account of any finding being perverse or arbitrary." 21. In the present case it is evident that assessee has written off the principal itself subsequently. Resolution is also produced to the effect that assessee has not recorded interest income. Generally , Income accrues when it becomes due but it must also be accompanied by a corresponding 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 accrua....
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....10/-. With respect to the availability of the land on looking at note number 2 titled as Advance For Land, it is apparent that vide letter dated 3/7/2010, DILL has handed over the possession of 10 acres of alternate lands at the rate of Rs. 11.61 core Per acre. Therefore, it is apparent that assessee has acquired land. But the learned authorised representative submitted that the assessee could not commence the project. The notes on accounts of the borrower and the argument of the learned authorised representative are contradictory. 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 bo....
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....ther as we have already held that accrual of income is based on the facts of the case. Therefore, merely relying on judicial precedents it cannot be held that whether a particular income has accrued to the assessee or not. Even otherwise in the present case it cannot be said there is no liability on the other party to pay the interest because, it is for the loan accepted by that party and bound by the agreement to pay the interest. Naturally Income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the Income is not hypothetical and it has really accrued to the assessee. 32. In view of above facts, we set aside the whole issue back to the file of the learned assessing officer with a direction to the assessee to show before the learned assessing officer that how the interest has not accrued to the assessee for assessment year 2014 - 15 and also to show the various correspondence between the lender and the borrower to substantiate the case that interest income was waived before it accrued to the assessee. In view of this ground number 5 of t....