TaxTMI 
TaxTMI 
2020 (8) TMI 919
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....9;DRP'). GROUNDS RELATING TO TRANSFER PRICING MATTERS: 2. The TPO/AO/DRP erred in making an adjustment of Rs.5,22,146/- for interest on outstanding receivables from Essar Africa Holding Ltd and considering the same as a separate international transaction and charging notional interest. 3. The TPO/AO/DRP erred in making an adjustment of Rs.2,79,88,575/- by charging Interest @ 4.19% on Outstanding Share application money paid by assessee to its AE Essar Power Overseas Ltd. GROUNDS RELATING TO CORPORATE TAX MATTERS: 4. The Assessing Officer has erred in assessing the interest income of Rs.49,03,51,025/-under the head "income from other sources" instead of business income. 5. The Assessing Officer has erred in disallowing Rs.204,32,67,630/- u/s. 14A of the Act read with Rule 8D while computing normal income under the Act and adding the same while determining book profit u/s. 115JB of the Act. 6. The Assessing Officer has erred in making addition of Rs. 1,30,81,163/- in respect of provision for income tax recoverable from Gujarat Electricity Board and Essar Steel Ltd. while computing normal income under the Act as well as computing book profit u/s. 115JB of the A....
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....having its observation at page No. 6 to 11 of its direction. 4. At the outset, the ld AR of the assessee has placed on record the order of the Tribunal in assessee's own case for the A.Y. 2013-14 wherein the Tribunal have held that the interest on outstanding receivables has to be computed by applying LIBOR plus 0.5%. 5. We have considered the rival contentions and carefully gone through the orders of the authorities below and found that the TP adjustment was made by the AO on account of interest on outstanding receivables. In this regard, we found that exactly similar issue has been dealt with by the Tribunal in assessee's own case for the A.Y. 2013-14 in ITA No. 7329/Mum/2017 order dated 15/04/2019 wherein the Tribunal has held that interest on outstanding receivables has to be computed by applying LIBOR plus 0.5%. The precise observation of the Tribunal was as under: "9. We have considered rival submissions and perused material on record. Undisputedly, the Transfer Pricing Officer has determined the arm's length price of the interest chargeable on outstanding receivable from the AE by applying the rate of 6.56% as per Bloomberg database. However, it is noticed that befor....
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....ssessment proceedings the Assessing Officer noticed that interest income received by the assessee from ICDs, margin deposits from bank and other amounted to Rs. 27,47,80,861 have been shown by the assessee as business income. Referring to the treatment given to such income by him in assessment year 2006-07 to 2012-13, the Assessing Officer treated the aforesaid interest income as income from other sources. 12. The learned DRP also upheld the decision of the Assessing Officer. 13. The learned Authorised Representative submitted, while deciding identical issue in assessee's own case in the preceding assessment year, the Tribunal has held that interest income from margin money deposit is to be assessed as business income, whereas, interest income from bank deposits and ICDs have to be treated as income from other sources. In this context, he drew our attention to the appeal order passed by the Tribunal for assessment years 2009-10 to 2012-13. 14. Learned Departmental Representative submitted, the issue has been decided partly in favour of the assessee by the Tribunal in the preceding assessment years. 15. We have considered rival submissions and perused material on record. ....
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....tain other High Courts. Section 14A of the said Act provides that for the purpose of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the said Act. In other words, Section 14A provides that if there is an income which does not form a part of the total income under the said Act, the expenditure which is incurred for earning the income is not an allowable deduction. Therefore, during the relevant year, if the assessee has not earned any tax-free income, the corresponding expenditure incurred cannot be taken into consideration for disallowance." 13. In the instant case before us, there is no dispute to the fact that the assessee was not in receipt of any exempt income, therefore, applying the proposition of law laid down by the Hon'ble Jurisdictional High Court, no disallowance is warranted U/s 14A of the Act r.w.r. 8D of the Rules under normal provisions as well as while computing income u/s 115JB of the Act, since assessee was not in receipt of any exempt income during the year under consideration 14. The next grievance of the assessee relates to add....
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....hall pay the invoice amount within 30 days of the date of receipt of invoice. During the transfer pricing proceedings, the TPO observed that there was a delay in realization of the export invoices and the assesse had not charged any interest for the delayed realization of export proceeds. In view of the same, the TPO adopted an interest rate of 3.64% (as per Bloomberg database) and proposed transfer pricing adjustment of Rs. 5,22,146/- (Pgnos 4 to 7 of TPO). The Hon'ble DRP upheld the addition proposed by the TPO by relying on their own order for the immediately preceding year i.e. A.Y. 2013-14. It was argued by the ld AR of the assessee that the assessee has made advance to its AE for allotment of shares. Shares were allotted within six months. The TPO has computed interest on the advance given for share application money which was confirmed by the ld. DRP. 19. We have considered the rival contentions and carefully gone through the orders of the authorities below and found that the TPO has made adjustment of Rs. 6,74,47,878/- by charging interest @ 4.19% on outstanding share application money paid by the assessee to its AE Essar Power Overseas Limited. We found that during th....
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....in the impugned orders. The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. The TPO has redeemed some of these shares at par. The TPO has re-characterized the said transaction of subscription of shares into advancing of unsecured loan by terming it as an exceptional circumstance and has charged/imputed interest, on the reasoning that in an uncontrolled third party situation, interest would have been charged. We are unable to appreciate such an approach of TPO and under what circumstances, leave above any exceptional circumstances, a transaction of subscription of shares can be re-characterized as Loan transaction. The TPO /Assessing Officer cannot disregard any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed. The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour....
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....gly. As we have decided this ground of appeal on the fundamental issue that the payment of share application money could not be partly treated as interest free loan to AE, we see no need to deal with other aspects of the matter. 9. There is one more aspect of the matter. In the present case, allotment of shares does not make any change to the position of the assessee, as the subsidiary is admittedly a wholly owned subsidiary of the assessee. A delay in allotment of shares by the subsidiary company, as long as the subsidiary is a wholly owned subsidiary, does not prejudice the interests of the assessee. It is, therefore, wrong to even allege that an assessee does not behave in a commercially rationale manner, as expected in an arm's length situation, when the assessee does not ask for payment of interest for the period of delay in allotment of shares. We have noted that the TPO's stand that since the assessee was not issued shares during the period, the assessee did not derive any benefit from this investment and, for this reason, the arm's length price adjustment has been made for notional interest for the money which should be assessee's reward for the investment. What the TPO a....
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....se. The form and substance of the transactions are the same. The assessee has behaved in a commercially rational manner inasmuch as whether the new shares are allotted at x point of time or y point of time, it does not make a difference to the position of the shareholder so far as the subsidiary is wholly owned by a single shareholder- as is the factual position in this case. The nominal value of shares, as long as all the shares are held by the assessee is entirely benefit neutral from a commercial point of view. The very foundation of the adjustment made by the Assessing Officer is, therefore, wholly devoid of legally sustainable merits and factually correct assumptions. 10. In view of these discussions, as also bearing in mind entirety of the case, we hold that the adjustment on account of notional interest on the share application money, which has been recharacterized as loan, is not sustainable in law. We, therefore, direct the Assessing Officer to delete the same. As the recharacterization itself is held to be unsustainable in law and on facts of this case, all other issues raised in the assessee's appeal are rendered academic. With these observations, and in these terms, ....