TaxTMI 
TaxTMI 
TaxTMI 
2020 (12) TMI 747
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.... a domestic company, is engaged in the business of development of Real estate. A return was filed declaring total income of Rs. 20.08 crore. Certain international transactions and Specified Domestic transactions were reported by the assessee in the requisite form. The AO made a reference to the TPO for determining their Arm's Length Price (ALP). Dispute in the instant appeals is on the international transaction of payment of Interest on debentures to Lobrenco Ltd., Cyprus, amounting to Rs. 2,83,75,007/- and the specified domestic transaction of payment of Interest on debentures to Kolte Patil Developers Ltd. amounting to Rs. 3,48,93,588/-. The assessee applied the Comparable Uncontrolled Price (CUP) method for demonstrating that payment of interest under these transactions was at ALP. The TPO observed that the assessee issued Compulsory Convertible Debentures (CCDs) and Optionally Convertible Debentures (OCDs) to its AEs in India and Abroad. Total interest payment of Rs. 6,32,68,595/- was claimed as deduction. The assessee was show-caused as to why the transaction of funding by the assessee through the issue of debentures be not considered as issue of shares inasmuch as it was in t....
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....nternational/specified domestic transactions of payment of Interest on debentures at Nil leading to proposing transfer pricing adjustment of Rs. 6,32,68,595/-. 4. The ld. CIT(A) reversed the finding of the TPO incorporated in the assessment order re-characterizing the transaction of issuance of OCDs/CCDs to its Associated Enterprises (AEs) into Equity Capital. In reaching this conclusion, he also relied on certain judgments/orders and found the reliance of the TPO on other Tribunal orders misconceived. He further did not agree with the TPO in determining the ALP of the transactions of payment of Interest on debentures at Nil. As against 15% interest paid by the assessee, the ld. CIT(A), applying internal CUP method and taking support from his decision taken in the case of the assessee for the assessment year 2011-12, determined ALP of the transaction at 13.75%, thereby restricting the transfer pricing adjustment to the amount equivalent to 1.25% of the value of transactions. Both the Revenue as well as the assessee have come up in appeal before the Tribunal on their respective stands. 5. We have heard the rival submissions through the Virtual Court and scanned through the relevan....
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....he computation of total income of payer, por otra parte an equity requires its service by payment of dividend, which is not only an application of income and hence not deductible but also requires the payer company to pay dividend distribution tax. The BEPS Action plan 4 notified the device of thin capitalization as a measure adopted by some related companies to erode taxation base from the concerned countries by unnecessarily opting for borrowings rather than capital so as to reduce its burden of taxation. Giving effect to the BEPS Action plan 4 and with an aim to reduce the needless claim of deduction of interest, India has introduced thin capitalization rule for the first time by means of a direct provision in the shape of section 94B by the Finance Act, 2017. This section provides a limit of deductible interest at 30% of earnings before interest, taxes, and depreciation where payment of interest exceeds Rs. 1.00 crore. In the pre-insertion era, there was no direct statutory provision for making any transfer pricing adjustment on this score. Side by side, Chapter X-A of the Act containing GAAR has also been made applicable from the 1st day of April, 2018. Starting with a non-obs....
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....is not prohibited under the Act - generally or specifically - is impliedly permissible. In the absence of any existing provision under the Act at the relevant point of time, the TPO could not have ventured to recharacterize the transaction of debt into equity. 7. At this stage, it is befitting to note that there are different thin capitalization rules adopted by various countries depending upon host of factors, including their financial requirements. Whereas, some countries like Austria provide for a specific debt equity ratio (4:1) only as a thin capitalization rule, others like Norway and Poland only limit the amount of interest on debts not exceeding a particular percentage of earnings before interest, taxes and depreciation etc. if deduction on account of interest exceeds a particular amount. While still some others countries like Denmark have a combination of both the debtequity ratio as well as a cap on the deductibility of interest subject to maximum of certain percentage of a defined base, such as, profit before interest and depreciation etc. India has enshrined thin capitalization rule u/s 94B by providing a limit on the amount of deductible interest at 30% of earnings be....
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....and resultantly the TPO could not have altered the form of the transaction. Our view is fortified by the judgment dated 30.08.2012 of the Hon'ble jurisdictional High Court in DIT(IT) vs. M/s Besix Kier Dabhol SA (ITA No. 776 of 2011), copy placed at page 1 of the paper book laying down that the Tribunal was right in holding that in the absence of any specific thin capitalization rules in India, the AO could not disallow the interest payment on debt capital after having observed the abnormal thin capitalization. 10. The TPO has also harped on the concept of `Shareholder activity' and dubbed the financing by the AEs as a shareholder activity. For this proposition, he relied on definition of the term `Shareholder activity' given in the OECD Guidelines, 2010 that has been reproduced at page 8 of his order. The definition refers to an activity that a group member (usually Parent Company or Regional Holding Company) performs solely because of its ownership interest in one or more group members, i.e. in its capacity as shareholders. Thereafter, para 7.10 of the OECD guidelines 2010 gives certain examples constituting shareholding activity, some of which have been quoted by the TPO as und....
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....parties to consider Lobrenco Ltd. as Investor in shares. This argument is sans merits. Primarily, the term "Investor" from the stand point of the person investing does not confine itself to investment in shares only but equally to debentures also. Secondly, hardly any authority is needed to emphasize that nomenclature given in any agreement cannot be decisive of the true nature of the transaction. 14. It is interesting to note that both the authorities as well as the rival counsel have heavily relied on the judgment of Hon'ble Delhi High Court in the case of EKL Appliances Ltd. (supra) for buttressing their respective points of view, viz., the TPO/AO as well as the ld. DR for justifying the recharacterization of the transaction and the ld. CIT(A) and the ld. AR for otherwise. Let us examine that case in a little more detail. The assessee in that case made payment of Brand fee/Royalty to its Sweden Associate Enterprise. The TPO observed that the assessee was incurring huge losses year after year. Considering such perpetual losses, the payment of Royalty to the AE was held to be not justified more so because the Technical Knowhow/Brand fee did not accord any benefit the assessee. Th....
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....ntage. It is in such circumstances that the apparent transaction of loan can be altered so as to bring on record the real or intended transaction of equity. It does not say that in all cases of borrowings made from related entities, it must be invariably taken as equity. If a certain sum of money was understood and accepted as a loan and also reflected in the same way, the case will not fall within the ambit of the first exception. On the facts of the extant case, we find that there is no difference in the form and substance of the transaction. The amount was raised through debentures, reflected in the same way in its accounts and then such debentures also got redeemed by the assessee company. The position would have been different, if the assessee had taken the amount as equity but reflected it only as a debenture and also eventually converted into equity after some time. All the cases relied by the Department fall in such category where the amounts were, in fact, taken as equity but not declared as such and the intention behind the apparent transaction got unearthed due to surrounding circumstances. On the other hand, we are confronted with a situation in which the assessee was i....
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....ee to IDBI Bank as Internal Comparable under the CUP method, determined the ALP of interest at 13.75%. Both the assessee as well as the Revenue preferred appeals against the order passed by the CIT(A) for the assessment year 2011-12. The Revenue did not dispute the determination of the arm's length rate of interest at 13.75% though it preferred appeal on disallowance u/s 14A of the Act. The assessee also preferred appeal against restricting the rate of interest at 13.75%, but, the ld. AR submitted that the assessee has filed application for settlement of the dispute under the Vivad Se Vishwas Scheme. It is thus vivid that the decision of the ld. CIT(A) for the assessment year 2011-12, considering internal comparable instance of interest payment by the assessee to IDBI as a benchmark, has attained finality. On a pointed query as to what rate of interest was paid by the assessee during the year under consideration on the borrowings made from IDBI Bank, the ld. AR could not point out any such rate except referring to the Sanction letter dated 07-02-2011 issued by IDBI bank enhancing the assessee's credit facility to Rs. 24.50 crore. However, on examination of the assessee's Balance sh....