TaxTMI 
TaxTMI 
2021 (9) TMI 340
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.... respectfully craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income-tax-1(3), Mumbai ['Learned AO'], under Section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (Act) ('Assessment order'), in pursuance of the directions issued by Dispute Resolution Panel-II ('Hon'ble DRP), Mumbai, on the following grounds: On the facts and in the circumstances of the case and in law, the learned AO/Transfer Pricing Officer (TPO) has: General ground challenging the transfer pricing adjustment 1. erred in determining the total income of the Appellant at Rs. 44,01,17,420/- as against loss of Rs. 34,41,181/- as reported in the revised Return of Income filed by the Appellant. Transfer pricing adjustment on the funds provided to TIML Global Limited (hereinafter referred as 'AE') 2. erred in computing the arm's length interest with respect to the alleged international transaction of provision of loan to the AE resulting in an addition of Rs. 44,35,58,600/- to the total income of the Appellant. No income arising from the alleged loan transaction 3. erred in not....
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....al Bank FD rates. 14. without prejudice to the above, erred in further adjusting Bank FD rate with risk premium. 15. without prejudice to the above, erred in rejecting the LIBOR rates as the arm's length interest rate for benchmarking of the alleged loan transaction as the said loan was given in foreign currency. 16. erred in considering, on a without prejudice basis, EURO LIBOR instead of the GBP LIBOR which was available. 17. erred in adopting ad-hoc 400 basis points over EURO LIBOR as LIBOR plus rate. 18. erred in law and in facts by concluding that LIBOR should be further adjusted for additional 'Transaction Cost' of 3% per annum referring to certain Reserve Bank of India norms for forward contracts which are not applicable to the Appellant's case. 19. erred in concluding that the LIBOR should be further adjusted by 100 basis points towards 'Adjustment for Security'. Levy of interest under section 234B of the Act. 20. erred in levying interest under section 234B of the Act. Initiation of penalty proceedings under section 271(1)(c) of the Act 21. erred in initiating ....
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....gulations can be made applicable to the same. Consequently, the learned AO's reference of the Appellant's case to the learned transfer pricing officer ('learned TPO') and the consequential transfer pricing adjustment, of interest on funds provided by the Appellant to its Associated Enterprise ('AE'), of Rs. 18,21,52,093/- made to the total income of the Assessee for A.Y. 2011-12 is not in accordance with the transfer pricing regulations. No income arising from the alleged loan transaction 3. erred in not considering the fact that no income has been received or accrued from the alleged loan transaction and accordingly, transfer pricing regulations cannot be applicable to the said transaction. Transaction akin to parent support/stewardship activity 4. erred in not appreciating the fact that the alleged loan was given to the AE for the purpose of acquiring a controlling stake in company outside India, which was in the same business of the Appellant, and hence the transaction was akin to stewardship activity which does not require any benchmarking analysis. 5. erred in not appreciating the fact that the funds were pro....
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....tion 234B and 234D of the Act. Non receipt of Refund of Rs. 1,48,480/- 17. erred in stating in the computation of income (I.T.N.S-150A) that a refund of Rs. 148,480/- has been issued but the Appellant had received no such refund order. Initiation of penalty proceedings under section 271(1)(c) of the Act 18. erred in initiating penalty proceedings under section 271(1)(c) of the act. 5. Coming to the appeal for the assessment year 2012-13, which is directed against the order dated 22nd December 2016 passed by the Assessing Officer in the assessment under section 143(3) r.w.s. 144C(13) of the Income Tax Act 1961 for the assessment year 2011-12, grievances raised in this appeal are as follows: Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Income Tax Officer-1(3)(3) (learned AO') under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 (Act') (Assessment order) issued subsequent to the directions issued by the Honourable Dispute Resolution Panel 1 (Hon'ble DRP'), Mumbai, on the following groun....
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....the transaction of preference/equity capital and transfer pricing regulations cannot be applied to the said transaction. Incorrect reliance on MCA Notification 7. erred in relying on the Ministry of Company Affairs (CMCA') notification for determination of a reasonable period for allotment of shares i.e. 60 days and failed to appreciate that the said MCA notification is only applicable to Indian companies and not to a UK based company (i.e. TIML Global). 8. without prejudice to grounds above, erred in not granting a benefit of 60 days to the Appellant while computing notional interest for delay in issue of equity or preference shares, as the learned AO/TPO himself had relied on the MCA circular which provides a period of 60 days for allotment of shares and based on which he treated such delayed allotment beyond 60 days as deemed loan. Adjustment made in respect to notional interest on outstanding deposits No income arising from the alleged loan transaction 9. erred in not considering the fact that no income has been received or accrued from the alleged loan amounting to INR 1,38,40,43,509 and accordingly, transfer pricing re....
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.... transaction cannot be compared to a simpliciter loan transaction between a financial institution and its client. Computation undertaken to compute the transfer pricing adjustment by the learned AO 18. erred by not appreciating that the arm's length interest rate in the present facts of the case should be Nil. 19. erred in not appreciating that in the event the Appellant had appointed a third party to undertake the said acquisition, such third party would not have paid interest for facilitating a transaction on behalf of the Appellant. On the contrary, the third party would have charged a fee for helping the Appellant execute its business expansion plan and put in place a contractual business structure to protect the Appellant from UK Libel laws. 20. erred by not considering the submissions made by the Appellant against the generic search applied by the learned TPO without providing an opportunity to the Appellant to examine the same, for arriving at the LIBOR plus spread as arm's length interest rate. 21. without prejudice to grounds above, erred in not considering the search provided by Appellant for arriving at the LI....
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....nd Nos. 16 and 17 are not pressed before us, all the remaining grounds of appeal are essentially challenging the ALP adjustment in respect of interest-free debt funding of the SPV of the assessee. Learned representatives fairly agree that whatever we decide in the assessee's appeal for the assessment year 2009-10, which is heard along with this appeal, will apply mutatis mutandis in this appeal as well. 8. Vide our order of even date, for the assessment year 2009-10, we have decided the above issue in favour of the assessee, and, while doing so, observed as follows: 2. The core issue requiring our adjudication, in this case, is whether an interest-free debt funding of an overseas company in the nature of a special purpose vehicle (SPV), with a corresponding obligation to use it for the purpose of acquisition of a target company abroad, can be compared with a loan simpliciter, and be, subjected to an arm's length price adjustment, on the basis of Comparable Uncontrolled Price (CUP) method accordingly,. The issue in dispute is an ALP adjustment of Rs. 44.26 crores on account of notional interest on a loan stated to be of this nature by the assessee company to its ....
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....in, on 30th May 2008, a sale agreement was entered into between Ginger UK, SMG-UK, TIML-India and a company by the name of TML Golden Square Ltd., UK (TIML Golden, in short). The TIML Golden was thus evidently the SPV (special purpose vehicle company) for the purpose of acquiring Virgin Radio. TIML was initially incorporated by a third party, Huntsmoor Nominees Limited, with a paid-up capital of GBP 1, on 22nd May 2008, and it was subsequently acquired by TIML, on 30th May 2008, by purchasing the GBP 1 share. Subsequently, one more UK based SPV came into the picture as the assessee acquired another TIML Global Limited (TIML Global, in short), a company incorporated with a GBP 1 paid-up capital by Huntsmoor Nominees Limited, on 13th June 2008. This company was acquired by TIML-India, by purchased the GBP 1 share on 16th June 2008. On acquisition of TIML Global, and with a view to make TIML Golden a step down subsidiary, the only GBP 1 share of TIML Golden, which was held by TIML-India, was transferred to TIML Global. TIML Golden and TIML Global, at this point of time, were typical GBP 1 companies without substance-which were to be used special purpose vehicles for the acquisition of....
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....t will have to be charged for the same and that any non-charging of interest, in such a situation, will invite ALP adjustment. As for the claim that the assessee had received interest-free funds from its parent company and paid over the same to its wholly-owned subsidiary, for the purposes of making a strategic investment on behalf of the Group, while the Transfer Pricing Officer noted that the assessee had paid only Rs. 13,80,991 as interest during the entire year, he observed that in an arm's length scenario. "not only the would the loaning party meet the cost of serving its loan, it would build a profit element into the rate to be received". As regards the reliance on Reserve Bank of India's approval for the character of remittance, the Transfer Pricing Officer was of the view that the "RBI's approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulations". The Transfer Pricing Officer also rejected the plea that since the funds were given for a specific purpose, no interest can be attributed to the same even in an arm's length situation. The TPO was of the view that "(a) the assessee has prov....
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.... the assessee made maiden entry in the international media business through participation in an auction in March, 2008 for its radio business in the UK. The proposed acquisition of Virgin Radio was for and by TIML India. Therefore, the assessee claimed that the potential sales of Virgin Radio was strictly between SMG Plc and TIML India, though the same got executed through SPV created for effecting the acquisition. The assessee contended that since a direct acquisition by TIML India would have imposed additional legal obligation in the UK on TIML-India, It was decided to effect the acquisition through SPV which are 100% equity financed from the international resources of TIML India/BCCL. 3.4.2 On the other hand, the Ld. TPO has given the fund flow chart of the assessee at Pg. 5 para 6.2 of his order which demonstrates that the assessee has given interest free loan to its AEs. In response to the show cause given by the TPO the assessee reiterated his submissions to the effect that TIML made investment in Virgin Radio via TIGL and TIML Golden for expanding its presence in the UK radio market. It further submitted that FEMA, 1999 permits an Indian company to make an investmen....
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....Ld. TPO and AO have correctly treated the transactions as loan and conducted the TP study based on this finding. 3.5 This brings us further to the issue of quantification of the adjustment on this account. The assessee has contended before the TPO and now again before the DRP that LIBOR rates should be considered for benchmarking outbound loans from India. During the course of hearing the assessee was required to submit the working of the L1BOR rate along with an appropriate spread. It was stated that TIML India funded its AE TIML Global with GBP 55,999,316 on 27/6/2008. Average rate of six months of GBP LIBOR for the period June, 2008 to March, 2009 was 4.515%. As regards the premium over LIBOR, the assessee relied on ECB search. The arithmetic mean of the spread worked out to 102 basis point. Accordingly, it was claimed that LIBOR plus for this tranche worked out to 5.535%. 3.5.1 As regards the funding of GBP 375,000 on 19/9/2008, the six months GBP LIBOR for the period September, 2003 to March, 2009 was 3.861%. ECB search yielded 102 basis points as premium. Accordingly, the LIBOR plus for this tranche worked out to 4.881%. 3.5.2 This working given by ....
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....mparable instances, the LIBOR plus rate as contended by the assessee cannot be applied. As regards application of SBI PLR, it is the rate at which persons other than banks can lend/borrow in India. Further, it is also seen that as per the safe harbor norms recently notified, the rate of interest to be charged on loans is SBI PLR. Though safe harbor norms are not applicable in this year, the same shows the legislative recognition given to the PLR for the purpose of ALP determination. Therefore, the action of the AO for charging interest exceeding that rate cannot be approved. Accordingly, the AO is directed to re-compute the adjustment by applying the rate of 12.25%. 4. The assessee's contention in ground of objection No. 10 is correct in so far as it has pointed out that though TIML India provided funds in two tranches to its AE, the Ld. TPO erred in considering the period of loan for the second tranche of GBP 375,000 from 27/6/08 instead of 19/9/08. The Ld. TPO/AO will cause necessary corrections in this regard besides carrying out the directions in respect of percentage of 12.25% to be applied for working out the interest component. 5. Accordingly, the ALP a....
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....ction and control over the AE's activities. 9. without prejudice to the above, erred in not considering the LIBOR rates as the arm's length interest rate for benchmarking of the alleged loan transaction as the said loan was given in foreign currency. 6. We have heard the rival contentions at considerable length, perused the material on record and duly considered facts of the case in the light of the applicable legal position. The basic plea of the assessee, on which we are deciding this appeal, is the limited scope of application of the CUP method, and whether any commercial interest can be attributed, as an ALP adjustment, to such interest-free debt funding on the peculiar facts of this case. There have been considerable arguments on judicial precedents on the broad proposition that there can not be any arm's length price adjustments, under the transfer pricing legislation, on the interest-free debt funding to the SPVs, but, for the reasons we will set out in a short while, it is not really required to deal with that aspect of the matter. Learned counsel for the assessee has highlighted the peculiar nature of this transaction, emphasized that no inter....
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....9;s length price adjustment is incorrect, the Tribunal has to delete the same. As for what other remedies are available to the authorities below to correct their mistakes, it is not for the Tribunal to do anything parallel or to override the same. He thus reminds us, in his inimitable subtle way, of our role as a neutral forum and our limitation of not being able to supplement or improve the case of the Assessing Officer and the Transfer Pricing Officer. In addition to these arguments, many other facets of the matter have been argued before us, but then, in our considered view, it is not really necessary to deal with those facets. 7. On a conceptual note, the determination of arm's length price is essentially an effort to neutralize the impact of intra-AE relationship in a transaction between two associated enterprises as also the impact of controlled conditions in such a transaction. In other words, the entire ALP ascertainment exercise is to determine if a hypothetical or real but same or materially similar transaction was to take place between two independent enterprises in uncontrolled conditions, whether such a hypothetical transaction would have been any differen....
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....of the transactions. That only incongruity in that approach, incongruity if it is, will be that the expression 'controlled conditions' will then be rendered infructuous, unless viewed as a measure of abundant caution (ex abundanti cautela), inasmuch as Section 92F(ii) specifically refers to the situations in which the transactions are between persons other than associated enterprises. Be that as it may, given the facts of this case in which CUP method is applied, which specifically does not refer to the transaction between independent enterprises separately, and uses the expression 'uncontrolled transaction', rather than 'transaction between persons other than associated enterprises (i.e. independent enterprises) in the uncontrolled conditions', and the expression 'uncontrolled transaction' on a standalone basis, can reasonably refer to the transaction simply being between independent enterprises, the issue regarding the impact of neutralizing other 'controlled conditions', even if that expression is seen independent of Section 92A, may not really arise, and we need not, therefore, be drawn into this aspect of the matter any further. ....
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.... independent enterprise, and visualize the terms of the materially similar transaction in an uncontrolled situation. 12. It is important to understand the true nature of this transaction because everything hinges on what is the true nature of the transaction in question. The transaction is a remittance of Rs. 477.10 crores to a wholly-owned subsidiary for making further payment of the cost of acquisition of a target company in the name of a step-down subsidiary which is fully owned by this fully owned subsidiary of the assessee company. Let us not forget the fact that the assessee company was one of the successful bidders in the purchase of the entire equity capital of Virgin Radios, which was held by Ginger Group plc UK-a wholly-owned subsidiary of the Scottish Media Group plc. Upon carrying the due diligence, and completion of other prerequisite steps, the assessee makes a final proposal, on 10th March 2008, with respect to the acquisition of Virgin Radios from Ginger Group plc UK, when TIML Global UK was not even in existence. TIML Global, the AE to which the remittance in question is made, was incorporated on 13th June 2008 in the UK and acquired by the assessee on 18t....
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....hese funds, for the strictly limited purposes, by the TIML-Global. 13. If at all, therefore, this transaction can be compared with any other transaction, such other transaction can only be for the purpose of making remittance to an independent enterprise with the corresponding obligation to use the funds so remitted for acquiring a target company already selected by, and on the terms already finalized by, the entity remitting the funds. The essence of the transaction is a targeted acquisition and providing enabling funds for that purpose. Such a transaction, in our humble understanding, cannot be equated with providing funds to another enterprise as a loan simpliciter, on a commercial basis, which essentially implies that such a borrower can use the funds so received in such manner, even if subject to broad guidelines for purpose test, in furtherance of borrower's business interests. Ironically, however, that is precisely what the Transfer Pricing Officer has done and has been approved by the Dispute Resolution Panel as well. 14. It is also an admitted position that TIML-Global is a special purpose vehicle. A special purpose vehicle, or SPV as it is commonly c....
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....es, for tax purposes, shall not be allocated the profits associated with those risks and will be entitled to no more than a risk-free return. The profits or losses associated with the financial risks would be allocated to the entity (or entities) that manage those risks and have the capacity to bear them". 17. What this provision does support, as its foundational basis, is the fact that capital-rich low function companies, which SPVs inherently are, despite their legal independence, are not seen in isolation with the companies bearing the related risks, that is, owners of these structures. The transactions between the owner of SPV and the SPV are, in that sense, belong to a genus different from the transactions between lenders and borrowers. 18. There are three fundamental questions that arise in this context-first, whether there can be such a funding transaction between the parties which are not associated enterprises, or, to put it differently, whether there can be valid comparables, under the CUP method, for such a transaction of SPV funding; second, whether if such a transaction is hypothetically possible, what could be the rate of interest in such financing i....
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....lled conditions. When a strict condition about end-use, and that too end-use being decided by the owner of the SPV so much in advance that the SPV was not even in existence when the end-use decision was taken, is an inherent part of the transaction of funds being remitted, this is anything but an uncontrolled condition. Viewed thus, there could indeed be a valid school of thought that the requirement of arm's length standards can, therefore, never be met, under the CUP method, so far as the nature of the present transaction is concerned. 20. As for the second question, even if one proceeds on the basis that one can assume or hypothesize a transaction similar to SPV funding in a non-AE relationship situation and fiduciary in nature-and such a hypothesis may also have some merits, it is important to bear in mind the fact that interest is compensation for the time value of money in the sense that when lender puts the money at the disposal of the borrower for a certain period, the interest that the borrower pays the lender is compensation for placing the money at the disposal of the borrower for borrower's use during this period. In a situation in which a borrower has ....
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....such risks would be allocated to the owner(s) of the SPV. This approach addresses the dichotomy in the SPV structure business model in the sense that while risks of an SPV investment are assumed by the owner(s) of the SPV, all the rewards, in whatever form, go to the SPV itself, by removing the gap, or ectopia in tax law, between the assumption of risks and the taxation of rewards thereof. It proceeds on the hypothesis that in an arm's length situation, the risks and rewards for the risks go hand in hand, and when someone assumes particular risks, the rewards for that risk cannot be assigned to someone else. The hypothesis underlying such an approach appeals to us, and, in our humble understanding, perhaps it truly reflects the arm's length compensation for the role played by the owner of the SPV in providing all the requisite wherewithal to the SPV to achieve its objectives. Therefore, when the CUP method is to be adopted for ascertaining arm's length price of providing wherewithal to the SPV, for achieving its objectives and purpose, the arm's length consideration thereof could at best be the corresponding gain to the SPV concerned-whether directly or indirectly. ....
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.... a price of a hypothetical independent transaction, which will also be a hypothetical price in nature, is taken as arm's length price, and when comparable price based method, or traditional methods-as these are termed, cannot be pressed into service, transactional profit methods, of computing arm's length price, are pressed into service. Thus, when one is unable to find a comparable independent transaction, real or hypothetical, that is not the end of the road, and there is an arm's length price determination nevertheless, and that is where indirect methods or transactional profit methods such as TNMM (transactional net margin method) and PSM (profit split method), may actually have a critical role to play. The tested party, as is by and large a settled legal position, need not be the assessee and even its AE, when it is least complex party, can be a tested party. There could thus be several ways in which the SVP funding can be benchmarked, and we are not inclined to adjudicate whether or not such a benchmarking is possible. It is so for the reason that, in our considered view, such an adjudication is not really warranted on the facts of this case. In the present case, ....