TaxTMI 
TaxTMI 
2020 (12) TMI 779
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctivity. 2. The learned Commissioner of Income Tax Appeal -13, Pune erred in holding that the real character of the debentures issued by the Assessee company to its AEs was equity and not debt and the Assessee had adopted a colourable device and hence, the ALP of the interest paid on such debentures was to be determined at Rs. NIL. 3. The learned Commissioner of Income Tax Appeal -13, Pune erred in holding that the debentures issued by the Assessee company to its AEs was in substance investment in equity by the AEs and hence, the Assessee company was not required to pay any interest on these debentures and accordingly, the learned Commissioner of income Tax Appeal- 13, Pune erred in confirming the entire interest expenditure of Rs. 16,88,23,507/-. 4. The learned Commissioner of Income Tax Appeal -13, Pune failed to appreciate that the interest paid at 17.5% to the AEs on the debentures issued was at ALP and hence, there was no reason to make any adjustment in respect of the said interest paid by the Assessee company. 5. The learned Commissioner of Income Tax Appeal -13, Pune erred in holding that the Arm's length Price(ALP) of the interest pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Transfer Pricing Officer (TPO). The TPO made upward adjustment of interest paid on debentures amounting to Rs. 16,88,23,507/- holding that the debentures issued by the assessee are in essence Equity and no interest is payable on the same. The assessee is a subsidiary of City Corporation Limited and was incorporated on 29.02.2012 for a specific project in Amanora Township called Amanora Future Towers. During the year the shareholding structure of the assessee company is as follows: Sr. No. Name Consideration charged/paid for issue of Equity Share Consideration charged/paid for compulsorily convertible debentures Interest paid on Debenture 1 M/s. City Corporation Limited 4,08,000 Number of shares for total consideration of Rs. 2,00,00,000 ( i.e. 51% of shareholding) 53,00,00,000 8,63,97,260/- (Covered under Specific domestic transaction) 2 IIRF India Realty XXIV Ltd. 3,89,256/- Number of share for total consideration of Rs. 58,66,47,718/- (i.e. 48.66% of share Holding) Nil Nil 3 IIRF (Cyprus) V Holding Limited. Nil 50,56,40,000 8,24,26,247/- (Covered under international transactions) 4. That with regard to the issue ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ort his point of view. 6. At this juncture, it is pertinent to note that both the borrowing and raising of equity share capital are well recognized modes of funding business requirements. Every businessman has to take several circumstances into consideration before deciding as to whether he needs to borrow or issue capital. There is no legal bar in accepting loans from shareholders/related concerns in the same way in which it is open to issue fresh shares to its existing lenders who are non-shareholders. Thin capitalization is a state of financial position of a company in which proportion between its capital and borrowings is unevenly poised towards debts. Thin capitalization can also be loosely called as thick borrowings. There are advantages and disadvantages of both the streams of funding, namely, capital and debts. However, in tax regime, their consequences are varying. Por una parte, a debt entails its service by interest, which is deductible in the 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 div....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... can be, inter alia, recharacterized. It is apposite to note that the AO cannot simply at his sweet will declare a transaction as an IAA. There is a strict procedure enshrined in section 144BA, which needs to be followed for taking recourse to the GAAR. Thus it is overt that the legislation has been provided with teeth to tackle the excess payment of interest in case of transactions of borrowing and lending between two associated enterprises specifically with section 94B and generally with the GAAR. However, it is pertinent to note that both these provisions have been brought in the statute prospectively w.e.f.1.4.2018. The TPO, for treating the assessee‟s debt as equity, drew support from the assessee‟s debt equity ratio in the light of the RBI‟s debt equity ratio for ECBs. However, section 94B, even after insertion at a later point of time, does not prescribe any debt equity ratio as a thin capitalization rule, thereby rendering the action of the TPO meritless. Whatever 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 coul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing suitable comparables. There is no mandate for changing the colour of transaction from X to Y. This Chapter does not call for redetermining the nature of transaction in a way different from what has been actually entered into between two related enterprises. It simply requires redetermining the price of the transaction actually entered into. Thus, save and except a case falls within the purview of specific or general tax avoidance provision, the authorities cannot dub a genuine transaction as sham or anti-avoidance and proceed to disregard or recharacterize the same. 9. Reverting to the facts of the case it is seen that the assessee issued debentures to its AEs, which were eventually redeemed. The TPO/AO changed the complexion of the transaction from borrowing to equity by resorting to the Thin capitalization rule and the GAAR. We have noticed supra that section 94B containing specific thin capitalization rules and GAAR came into force w.e.f. 1.4.2018. The assessment year under consideration is 2013-14. Obviously, these provisions are not applicable and resultantly the TPO could not have altered the form of the transaction. Our view is fortified by the judgment dated 30....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of reports. These two activities are obviously not relevant in the present context. The third activity talks of costs of raising funds for the acquisition of its participations. This applies where a parent company borrows money for introducing equity in another group concern. This example also is far away from the situation under consideration because here the AEs of the assessee have not borrowed any money for investing in the shares of the assessee company but the assessee company has borrowed money from its related enterprises through debentures. Ex consequenti, it is simple and plain that the transaction of subscribing by the related companies to the debentures issued by the assessee does not fit into the description of a "Shareholder activity". Thus, the view point canvassed by the TPO in this regard cannot be countenanced. 13. In the like manner, the ld. DR has referred to Securities Subscription Agreement dated 16-10-2009 to accentuate the point that Lobrenco Ltd. has been referred to in this Agreement as "Investor". In his opinion, the nomenclature used for describing Lobrenco Ltd. in the Agreement depicts the intention of the parties to consider Lobrenco Ltd. as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....um. 15. Now we turn to the obiter in the case of EKL Appliances (supra) at a little length. The general rule is to recognize the actual transaction undertaken as such and not to rewrite it. The first exception is where the economic substance of a transaction differs from its form. An example of it, as given in the Guidelines is: "an investment in an AE in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way.‟ In such a case, the tax administration can recharacterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The focus of the Revenue in the instant case is on such first exception. It goes without saying that the obiter of a judgment of a higher forum also needs utmost respect. The first exception, which the ld. DR has vigorously accentuated, applies where the amount is, in fact, taken as equity but because of close relation between the assessee and its lender, the same has been reflected in the accounts as a borrowing or vice-versa so as t....