TaxTMI 
TaxTMI 
2021 (11) TMI 878
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....sioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in holding that the appellant has purchased the shares from its promoters at discounted price instead of holding that the shares were received as gift by the appellant company. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted. 4. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in holding that the transfer of shares was not without any consideration and hence do not constitute a gift. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserve; to be deleted. 5. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in not accepting the long term capital loss Rs. 1,96,03,448/- as claimed by the appellant company during the course of assessment proceedings 6. On appreciation of the facts and circumsta....
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....ssociated Enterprises (AE) while determining Arm's Length Price of international transaction. The ld.AR of the assessee submits that these grounds of appeal are covered in favour of assessee by the decision of the Tribunal in A.Y. 2010-11 and 2011-12 in ITA no. 1416/AHD/2015 and 795/AHD/2016 respectively. The ld. AR for the assessee submits that the ld.CIT(A) passed the order by following order of his predecessor for the A.Y. 2010-11 and 2011-12. The ld.AR further submits that copy of decision of the Tribunal in assessee's own case for the A.Y. 2008-09, A.Y. 2010-11 and 2011-12 is placed on record. 4. On the other hand, the ld. Sr .Departmental Representative (ld. Sr. DR) for the Revenue, after going through the grounds of appeal, order of ld.CIT(A) and order of the Tribunal in A.Y. 2008-09, 2010-11and 2011-12 submitted that she relied on the order of the ld.CIT(A). 5. We have considered the rival contention of parties and have gone through the order of the Lower Authorities. We find that the Co-ordinate Bench of the Tribunal in assessee's own case for the A.Y.2008-09, the Transfer Pricing Officer (TPO) made similar adjustment on account of interest on loan to Associated Enterpri....
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.... the AE during the year towards day to day expenses and for achieving the above redemption. From the aforesaid foreign loan and quasi-equity contribution from BHPL, the AE redeemed the preference shares held by BHPL and also recovered a sum of Rs. 3,22,19,944/- which is much more than the guarantee charges paid to the bank. In view of these facts, we are of the view that the AE has been created as SPV only to hold shares in company sterling + Hostage Europe and not authorized to carry any other activity. This view is further supported by the letter dated 02.11.2006 placed at Paper Book Page No.18, wherein the proposal submitted by the assessee vide letter dated 07.07.2006 (Placed at Paper Book Page No. 15 to 17] was approved wherein in it is clearly mentioned that M3 Holdings (Singapore) Pte Ltd. is a SPV formed to hold investment and do not propose to engage in any other activity being SPV. Once the above shares are sold as and when decided by BHPL, it has to wind up itself, and bring back the proceeds to India and BHPL has to pay taxes. The perusal of annual accounts for A.Y. 2012-13 [placed at Paper Book Page No. 54 to 82 and particularly Paper Book Page No. 78 note 35 appended ....
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....opportunity to own capital on certain favourable terms. Contrast this reward of owning the capital in the borrower entity with interest simplicitor, which is typically defined as "the reward of parting with liquidity for a specified period" (Prof Keynes) or as "a payment made by the borrower of capital by virtue of its productivity as a reward for his capitalist's abstinences" (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason, that the transactions before us belong to a different genus than the act of simply giving the money to the ^borrower and fall in the category of 'quasi capital'. 11. As for. the connotations of 'quasi capital', in the context of determination of arm''s -length price under transfer pricing regulations, we may refer to the observations made by a coordinate bench of this Tribunal- speaki....
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....is from the point of view of comparability of a borrowing transaction between the associated enterprises. 8. It is only elementary that when it comes to comparing the borrowing transaction between the associated enterprises, under the Comparable Uncontrolled Price (i.e. CUP) method, what is to be compared is a materially similar transaction, and the adjustments are to be made for the significant variations between the actual transaction with the A E and the transaction it is being compared with. Under Rule 10B(l)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something ....
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....capital is a similar transaction of lending money on the same term i.e. with an option to convert the loan into capital on materially similar terms. However, what the authorities below have held, and wrongly held for that reason, is that a quasi capital transaction like one before us can be compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis. 13. Let us, at this stage, take note of the US Tax Court decision, relied upon by the TPO, in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09,13677-09; order dated 20th September 2012). It has been referred to by the TPO as decision of the US Supreme Court but in fac....
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....to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm's length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such the impact of intra AE association cannot have any role to play in determination of arm's length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. 15. As regards the stand of the authorities below that Irish subsidiary has shown huge profits and high operational profits @ 93%, and this fact shows that the assessee should have charged interest on commercial rates, we are unable to even understand, much less approve, this line of reasoning. It is incomprehensible as to what role profits earned from the funds raised can have in determining arm's length consideration of raising the funds, unless profit sharing is implicit in the consideration for raising the funds itself- which is neither the normal commercial practice nor the case before us. The cost of raising funds is determined much before the returns from funds so raised is even known. To hold that cost of funds raised s....
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....saction is not loan but opportunity to own capital. In the case of the assessee, the loan transaction is therefore, quasi-capital and substantive reward as interest thereon is opportunity to redeem its preferential shares capital and bring back the same into India. We also note that the TPO has not considered Rule 10A(d) according to transaction which includes number of closely linked transactions. Hence, the nature of transaction as carried out by BHPL as per its objective effected a redemption of preference shares held by it to bring back its money to India which will increase its asset base and income into India. In order to redeem the preference shares, the AE do not have any funds and the BHPL has extended the loan of Rs. 22.125 Crores and carried out all necessary activities to a facilitated redemption of preference shares. This is a closely linked integrated transaction under Rule 10A(d) i.e. functioning his shareholder's function and as well as the loan extended for form shall be considered also a quasi-equity capital for the purpose of determining ALP. 22. The ld. counsel relied in the case of Bartronics India Ltd v. DCIT (2017) 86 taxmann.com 254 (Hyderabad - Trib.). ....
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....e coordinate bench in the case of Dr. Reddy Laboratories (supra) are extracted below: 29. We have carefully considered the rival submissions and perused the record. The ITAT, Delhi Bench in the case of 18 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. Bharati Airtel Ltd. (supra) has considered an identical issue which was re-affirmed in the case of Siro Clinpharma Pvt. Ltd., Vs. DCIT (order dated 31 st March, 2016). The bench observed that transfer pricing is a legislation seeking the tax-payers to organise their affairs in a manner compliant with the norms setout. In short, it is an anti abuse legislation which tells you as to what is the acceptable behaviour but it does not trigger levy of tax in a retrospective manner because no party can be asked to do an impossibility.. Analysing further the Bench observed that though Explanation to Section 92B is stated to be clarificatory, it has to be necessarily treated as effective from the A.Y. 2013- 2014 and in this regard, relied upon the observations of the Hon'ble Delhi High Court in the case of Skies Satellite. We have also analysed the case law relied upon by the Ld. D.R. and also the provisions of the Act. In our considere....
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....rused the material facts on record. Assessee has transferred funds to its AE as investment and the same was classified in the balance sheet as' loans and advances. However, it is only a classification of accounting entry in the books, but, what is relevant and important is whether such transfer of funds were duly treated as investment and accordingly shares were allotted in the subsequent AY. Assessee has submitted share allotment certificate as evidence. Since the transfer of funds were duly accounted by the AE and there is no restriction on the part of the AE to allot shares in the same AY of receipt of funds, as long as the shares allotted, it gives true nature of the transaction. In the given case, even there is no outstanding balance in the books of assessee as loans and advances, the same transaction was duly justified by receiving allotted shares in the subsequent AY. In our considered view, there is no element of profit in the above transaction. Moreover charging of interest is depending upon the contractual obligations between the parties. In the given case, 20 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. assessee has transferred funds with an intention to make inves....
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....ncome. Accordingly, we set aside the order passed by the CIT u/s 263 and that of the AO is restored and the grounds raised by the assessee in this regard are allowed." 21 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. As held in the above, we are inclined to treat the above transaction as not an international transaction and accordingly ground No. 1 of the assessee is allowed. Since we have adjudicated ground No. 1 as allowed, the ground Nos. 2 & 3 are only academic in nature and accordingly, dismissed." Respectfully following the decision of the coordinate bench in the said case, we are inclined to treat the above transaction as not an international transaction and accordingly the ground raised on this issue is allowed." 23. In the light of ratio of above decision, we find that the Tribunal has held that the advancing interest free loans must not necessarily be deemed to be interest earning activity and activity to capitalize opportunity cost for investing in new territories-The funds were raised for the purpose of investment in subsidiaries and on the fact that these funds were interest free and ultimately, shares were allotted, it shows that there is no adjustment need to ....
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....Further, in that case the result of the transaction was that the income of the assessee in India would reduce while that of the AE would increase. That was also a classic case of violation of transfer pricing norms where profits are shifted to tax heavens or low tax regimes to bring down the aggregate tax incidence of a multi-national group, whereas in the present case, the transaction have resulted into increase in cash inflow into India and possibility of increase of tax base in India. Further, there is no finding of fact that the transactions have been undertaken for shifting of profits to a low tax jurisdiction as against the finding given in Perot System (supra). Therefore, on an analysis of transaction as a whole and considering the observations and analysis by Hon'ble Tribunal Ahmedabad and Hyderabad in the decisions relied upon by the assessee, the transaction has to be considered as quasi-equity in nature. It was further contended that the TPO has not carried out any FAR analysis as in the case of assessee, the AE is just an extension of BHPL to hold investments and have not carried out any functions. The entire risks are borne by the assessee company only and the entire i....
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....nt in that country shall be considered as ALP. In this case as per Rule 10B entire functions are carried out by BHPL and the risks and rewards are also to be borne and enjoyed by BHPL, hence there should not be any risk premium chargeable to the loan as an adjustment. Therefore, reliance placed by the Learned Counsel ld. counsel has placed reliance on the following decision of Vibhav Gems Limited (2017) 88 taxmann.com 12 (Raj.)- SLP dismissed (2018) 99 taxmann.com 2 (SC) also supports his case. We have noted that, as noted by the TPO, it is wholly immaterial as to whether or not the assessee, by the virtue of this transaction, is entitled to subscribe to capital of the AE on certain concessional terms, because, in any case, the AE is a wholly owned subsidiary of the assessee and none else can subscribe to the AE's capital. What has been overlooked, however, in this process of reasoning is that the very concept of arm's length price is based on the assumption of hypothetical independence between AEs. Essentially, what is, therefore, required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pr....