TaxTMI 
TaxTMI 
TaxTMI 
2020 (1) TMI 1718
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....Hon'ble Dispute Resolution Panel ('DRP') erred in making transfer pricing adjustment of INR 13,38,53,244 on account of interest on transaction of loan advanced by the appellant to its associated enterprise ('AE') in Italy, alleging the same to be not at arm's length in terms of the provisions of section 92C(1) and 92C(2) of the Income Tax Act 1961 ('the Act'), read with Rule 10D of the Income Tax Rules, 1962 ('the Rules'). Re-opening of assessment 2. On the facts and circumstances of the case and in law, the learned AO erred in issuing notice u/s 148 of the Act for re-opening the assessment without properly appreciating the facts of the case and in law. 3. On the facts and circumstances of the case and in law, the learned AO erred in re-opening the assessment on the basis of information received from DCIT, Central Circle - 6(3), Mumbai regarding survey action carried out u/s 133 A of the Act on M/s Bombay Rayon Fashions Ltd; the holding company of the appellant, during which statement of Shri Prashant Agarwal in the capacity of Managing Director of M/s Bombay Rayon Fashions Ltd. was recorded on oath u/s 131 of the Act 4. On the fa....
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....hus denying the opportunity to the appellant for making its submissions against the interest rate and thus violating principles of natural justice. The Hon'ble DRP further erred in upholding the action of the learned AO / learned TPO. 10. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon'ble DRP erred in concluding that the loan was advanced by the appellant to its AE in Indian currency i.e. INR. and hence erred in applying SBI PLR + 300 basis points as rate of interest. 11. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon'ble DRP erred in disregarding the fact that the appellant advanced loan to its AE in Euro and interest on loan has to be computed according to the currency of the country in which the loan is utilised. 12. On the facts and in the circumstances of the case and in law, learned TPO/ learned AO / Hon'ble DRP erred in following the rates prescribed under the Safe Harbor Rules which are not applicable to the appellant since the appellant is not an 'eligible assessee' within the meaning of Rule 10TB of the Rules. 13. On the facts and in the circ....
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....ncontrolled transaction thereby violating rule 10B(2) of the Rules. 21. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO / Hon'ble DRP erred in not undertaking a detailed comparability analysis of the comparable companies identified to compute the spread. Interest u/s 234B 22. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234B of the Act. Interest u/s 234C 23. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234C of the Act. Penalty u/s 271(l)(c) 24. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 27I(I)(c) of the Act. Penalty u/s 271BA 25. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 271BA of the Act. Penalty u/s 271FA 26. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 271FA of the Act. The Appellant prays that the additions made by the learned AO / TPO and upheld by the Hon'ble DRP be deleted and consequential r....
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....On the facts and circumstances of the case and in law, the learned AO / TPO have erred in determining the arm's length price of the international transaction of interest free loans on an adhoc basis and not in accordance with section 92C of the Income Tax Act, 1961 read with Rule 10B of the Income Tax Rules, 1962. The Hon'ble DRP has further erred in upholding the action of the learned AO/TPO." 2.3. Assessee prays that it is a legal ground and hence it should be admitted. 2.4. Some facts are similar. We are referring to the facts and findings from A.Y.2009-10. 3. Brief facts of the case are that the assessee is a wholly owned subsidiary of Bombay Rayon Fashions Ltd (BRFL) which is a widely held public limited company. The assessee has two 100% subsidiaries namely BRFL Europe, B.V. and BRFL Italia SRL. The BRFL Italia SRL ('BRFL Italy' herein referred to as 'AE') was formed by the Group ostensibly to have a presence in the European region; to take over the other retail businesses of M/s Jam Session Holding SRL which owned a brand name 'GURU1, (initially BRFL Italia SRL was incorporated as a 100% subsidiary of BRFL Europe BV on 05/08/2008 but w.e.f. 29....
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....he provisions of section 92C(3) of the Act. The TPO noted that lending and borrowing is not the main business of the assessee. Further, the assessee had given loan to its AE without any arm's length compensation even when the loan is unsecured one and the subsidiary has not offered any security for the same. No written agreement concerning the loan has been filed before the TPO on the ground that no Agreement or MOU was entered into by the assessee with its AE (assessee's letter to AO dated 18/1 1/2016). Thus, no agreement is there which could have detailed the terms and conditions of the loan. 6. The assessee made various objections before the Transfer Pricing officer. (i) Interest not charged on loan provided to AE as well as not paid for the loan taken from the holding company. (ii) There is no transfer of profits from the assessee to the AEs. (iii) The AE's into losses and hence, no question of shifting profits. (iv) Assessee has provided loans due to business expediency. (v) Loans provided converted to share capital in subsequent years. (vi) Loans provided written off in subsequent years. Without prejudice the assessee contended that benchmarking of L....
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....rate the business interest and existence of business or commercial expediency. That each of the AE is i.e. assessee company and the foreign AE in Italy are separate entities assessable to tax in separate jurisdictions on independent basis. In this regard the TPO referred to honourable Delhi High Court decision in the case of Sony Ericsson 374 ITR 118 wherein the honourable High Court in paragraph 51 - 56 has deliberated on the difference between section 37 (1) and chapter X of the IT act the TPO noted that it was held by the honourable High Court that arm's-length procedure described in chapter X as applicable has to be given full application. Therefore impact of chapter X cannot be controlled or curtailed by reference to allowability of expenditure under section 37 ( 1), the Transfer Pricing Officer also dealt with the assessee's contention that loan provided were converted to share application money in subsequent years. He noted that the assessee's claim is not tenable as the fact remains that even after a lapse of considerable period of time shares have not been allotted in the name of Indian entity. He noted that it is also a fact that the management and control of the subsidia....
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....ed to offer interest on loans to subsidiary at the rate of LIBOR +200 bps. In this regard the TPO further noted that courts/tribunals have held that the transaction of loan is to be benchmarked based on the prevailing interest rates and the currency in which loan is to be repaid. 9. The TPO noted that the assessee has claimed that it had not incurred any forex gain/loss as it had classified the said 'loans, investment and share application' as long term and had recorded the respective assets at the exchange rates at the date of transaction. The TPO also noted that the loans had been claimed by the assessee to have been given for acquisition of the brand 'Guru' in Europe etc. and the TPO treated the loan as a long-term loan for the purposes of benchmarking taking that the tenure of loan to be five years. The assessee had submitted before the TPO that the loan provided to the subsidiary had been written off by it during FY 2016-17 as the brand 'Guru' was not successful in the European market. The TPO also noted from the financials of the AE for the 31/03/2009 that in the Balance Sheet of the AE a specific remark has been made on the loans mentioning that the ....
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....currency i.e. Euro. For this, the TPO utilised the Bloomberg Database taking the credit rating of the AE to be of 'Non-Investment Grade' the tenure of the loan being long-term; Euro LJBOR of 12 months; and, the TPO calculated a spread over and above the 12-month Euro LIBOR on the basis of certain factors like currency, country, issue date of the loan etc. For determining the spread, the TPO utilised the swap calculator (Currency-Fixed Flat Swap) considering the maturity periods and also the fluctuation in the INR and Euro. The TPO has given the details of the yearly UBOR + Spread for AY 2009-10 to 2014-15 in his order. The TPO has also held that since the AE has never made any payment of interest by the AE, the amount of interest worked out for the first year i.e. AY 2009-10 is to be added to the opening balance of the next year i.e. AY 2010-11 and so on and the TP adjustment was calculated accordingly. The TPO has also copied the screenshots of the Bloomberg Database search in his order and for the FY 2008-09 relevant to AY 2009-10 the Euro LIBOR and the spread was calculated at 160 bps + 652 bps = 812 bps. The TPO has worked out the alternate interest adjustment based on ....
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.... ACIT 21 Taxmann.com 6. Referring to the ITAT decisions as referred above DRP held that these decisions also negate the arguments of the assessee that the interest was not charged since the AE could not get access to the funds from any other source in the international market, that the loans were given from interest free funds or that it was a shareholder function. On similar reasoning as that of the Transfer Pricing officer, it rejected the assessee's contention that no transfer pricing adjustment should be made because the AE was incurring losses and there was no intention to shift profits by the assessee. Thereafter, the DRP referred to the assessee's argument that interest on own transaction should be benchmarked in the currency of the country in which the loan is utilised. In this regard it noted that assessee has relied upon the Mumbai High Court decision in the case of CIT versus Autocomp systems Ltd 56 taxman.com 206. The DRP held that these arguments cannot be accepted. It noted that there is no contemporary evidence in terms of an agreement with the AE to suggest that the loans had been advanced in euros or that the loan were required to be repaid in any foreign currency.....
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.... determine interest rate applicable to the currency in which loan has to be repaid. Hence in this background and considering the absence of loan agreement and documentation and the fact that the AE had a specifically mentioned that the loan is rupees dominated and also considering that the assessee has also maintained its loan account in Indian rupees and keeping in view the Delhi High Court decision above it held that the DRP was correct to benchmark the loan transaction on the basis of SBI PLR only. The DRP also rejected the assessee's contention regarding the claim of credit quality of the borrower to be evaluated. It held that assessee has not given any documentation and it has not discharged its onus. It held that the practice adopted by the TPO was standard practice as it was noted below investment grade. It also noted that subsequent writing off of the investment also proves that credit rating to the AE given by the TPO was fit and proper. That even in these proceedings the assessee has not made any effort to submit any other credit rating. It also considered the assessee's contention of adding interest calculated on the outstanding loan for each assessment year to the openi....
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....of shareholder activities cannot be treated as omnibus vehicle to subsume all kind of commercial activities. It referred that a similar view has been taken by ITAT Delhi bench in the case of GE Money Financial Services (P) Ltd. vs. ACIT (2016) 69 Taxmann.com 420. DRP further observed that in the instant case the BRFL Italia SRL is a 100% subsidiary of the assessee and its entire capital is controlled by the assessee from before. The assessee has been infusing funds into its AE in the shape of loans and advances which stood at Rs. 205.07 crores as on 31.03.2009; Rs.291.29 crores as on 31.03.2010; Rs. 272.59 crores as on 31.03.2011; Rs. 296.43 crores as on 31.03.2012; Rs. 309.93 crores as on 31.03.2013; and Rs. 314.05 crores as on 31.03.2014. These loans had been advanced to the AE without interest claiming that it is part of the shareholder activity. However, the assessee already held Euro 5010000 equity in the AE, giving it hundred percent control over the AE. It is obvious that the further 'Share Application Money' declared as given to the AE is actually funding which is required by the AE but it serves no need of the assessee since its ownership for the purposes of maintainin....
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....terest based LIBOR rate for advances given on account of share application. It was claimed that since a part of the interest free loan given to the AE had been converted into share application money, the transaction is a single transaction and the TPO has to apply only one consistent rate to the entire transaction. The DRP however held that however it is noted that these amounts (now termed as Share Application Money) represent part and parcel of the total loans advanced to the AE and hence retain the same character as that of the other portion which has already been declared to be in the nature of loans and advances. Hence, the DRP directed the TPO to apply SBI PLR +300 rate on all the loans and advances including on the sums transferred in the books of the AE as the Share Application Money. 19. Against the above, assessee is in appeal before us. 20. We have heard both the Counsel and perused the records. Ld. Counsel of the assessee reiterated the submissions made before the authorities below. He submitted that assessee had not paid any interest for funds received from the holding company, which was advanced for the purpose of business and it has been clarified that sums were ob....
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...., 101 Taxmann.com 357 23. We have carefully considered the submissions. As regards with assessee's challenge to reopening of the assessment, we find that no such objection has been raised before the Dispute Resolution Panel. Even the assessment order does not contain any mention of the issue of challenge to reopening by the assessee. Be as it may the only challenge to reopening is that the revenue has erred in relying upon the survey proceedings and statement obtained from the M.D during the survey proceedings. In this regard, reliance has been placed upon the decision of S.Kadar Khan (supra). We find that this reference to the said decision is wholly irrelevant here. In the said decision, the exposition was that statement obtained on survey is not conclusive proof of addition to be made. We fail to understand how this decision renders reliance by the revenue upon survey proceedings as basis for reopening illegal. As it is settled law that at the time of reopening, there has to be a reasonable belief that income has escaped assessment, the same need not be proved to the hilt. Hence, assessee's submission in this regard has no merit and they are liable to be dismissed. 24. As rega....
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....e of Perot Systems TSI (India) Ltd. [2010] 37 SOT 358 (Delhi) is relevant. In that case, the ITAT did not accept the arguments of commercial expediency as well as the reliance on the Hon'ble Supreme Court in the case of SA Builders. Similar view has been taken in other decisions referred above including Tata Autocomp systems Ltd 21 taxmann.com 6 (Mum.) vide order dated 30/04/2012. This decision was affirmed by Bombay High Court in 56 Taxman.com 206. 25. In this regard we may also gainfully refer to the decision of ITAT Special Bench in the case of Instrumentarium Corporation Ltd. supra which reads as under:- 37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. The judicial precedents relied by the assessee, such as in the case of SA Builders Ltd. -(supra), in support of t....
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....the present case the entire amount has been written off as non-refundable. So the decision of KSS Ltd. does not help the case of the assessee. Rather it has been rightly relied upon by the ld. departmental representative in support of the proposition that interest free sums given to the AE dehors any cogent documentation of purpose are liable for determination of arm's length price as per provisions of Section 92B Explanation C. 27. Another issue in this regard for A.Y.2010-11 onwards is that the loan has been converted into share application money. In this regard, the ld. Counsel of the assessee has placed reliance upon several case laws that share application money is shareholder fund and no interest should be attributable to the same. In the present case, we find that authorities below have given a clear finding that the plea that so called share application money which is said to be given for strategic purpose for acquiring control is not sustainable at all. Assessee has full control over the AE. It could not be said that giving further loans and considering it as share application advance can strengthen assessee's control over the same. Hence, the plea that the loan was advan....