TMI Blog2019 (10) TMI 987X X X X Extracts X X X X X X X X Extracts X X X X ..... ttributable the general administrative expenditure and in the absence of any suomoto disallowance by the assessee. This issue is restored to the file of the assessing officer for re-quantification of disallowance only from out of general administrative expenditure where a decision making has happened for making investments. We also direct the Assessing Officer to exclude investments on which no exempt income was earned following the decision of ACIT v. Vireet Investments Private Limited [ 2017 (6) TMI 1124 - ITAT DELHI] . We also direct the Assessing Officer to exclude investment in Foreign Companies income from which is taxable and they should be excluded while calculating the average value of investments. This ground is partly allowed. Disallowance made u/s. 35(2AB) OR 37(1) - Assessee claimed to have incurred an expenditure for in-house research facility - HELD THAT:- As observed from the Assessment Order that the assessee in the course of the assessment proceedings vide letter dated 17.01.2011 revised its claim u/s. 35(2AB) of the Act and assessee itself claimed expenditure on clinical trials u/s. 37(1) we allow the claim of the assessee that the said expenditure shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest. Interest charged on the amount paid towards subscription to share capital of AE s - HELD THAT:- The TPO has recharectersied the transaction of investment of preference shares into loan which is not permissible in view of the judgments of the Hon ble Bombay High Court in M/S. CONCENTRIX SERVICES (I) PVT. LTD. [ 2019 (10) TMI 760 - BOMBAY HIGH COURT] . Thus, respectfully following the above decisions, we direct the Assessing Officer to delete the adjustment made towards interest on subscription to share capital of AE s. Determining the arm s length price of net interest chargeable in respect of outstanding balances of the AE M/s. Reliance Genemedix [RGMX] - Non charging interest from both AE's and non-AE'S for the outstanding receivables - HELD THAT:- Assessee has not charged any interest on its receivables from non-AE's i.e. third party business transactions. Assessee has not paid any interest on payables to non-AE's. Further, we observe during the year under consideration assessee has neither charged interest on its receivable nor has paid any interest on its payables to its AE RGMX. Therefore, we observe that there is complete uniformity in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act could only be made in respect of expenditure incurred and cannot extend to notional expenditure which has not been incurred at all. Ld. Counsel for the assessee submits that all the expenses incurred are only in respect of main business of the assessee and not incurred for earning any dividend income. Ld. Counsel referring to para No. 4.4 of the Ld.CIT(A) order submits that, Ld.CIT(A) himself observed that 99% of the dividend has come from group Companies. Therefore, counsel submits that assessee has not incurred any expenditure for earning dividend income. 6. Ld. Counsel for the assessee further submits that in spite of filing detailed reply before the assessing officer why there was no expenditure incurred by the assessee for earning exempt income the Assessing Officer has not recorded any satisfaction in invoking the provision of Rule 8D of I.T. Rules. Ld. Counsel for the assessee referring to page No. 372 of the Paper Book which is the reply furnished before the assessing officer, submits that it was brought to the notice of the Assessing Officer that the assessee s major area of activity is in the field of life sciences and major expenditure was incurred dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... force. We also find that in the course of the assessment proceedings the assessee has furnished a detailed reply as to why there is no expenditure incurred for earning dividend income by the assessee as major expenditure has been incurred only for the purpose of life sciences business and no expenditure was incurred for earning any dividend income and therefore no disallowance should be made. However, the Assessing Officer has not recorded any satisfaction as to why there shall be any expenditure for earning dividend income more so when the assessee has received 99% of its dividend income only from its group Company Reliance Industries Limited. Therefore, what could have been disallowed was only that part of expenditure attributable for earning the dividend income only out of administrative expenses. The direct expenses incurred for earning dividend income i.e. demat charges were already disallowed by the Assessing Officer. The Assessing Officer has not given any justification and satisfaction for invoking the provisions of Rule 8D but applied mechanically referring to the decision of the Hon ble Bombay high court and the special Bench in the case of Daga Capital Management Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;.34,73,31,373/- as deduction u/s. 35(2AB) and assessee claimed to have incurred an expenditure of ₹.23,15,54,249/- for in-house research facility. Further, Assessing Officer also noticed on verification of the details of expenses that assessee has made a payment of ₹.49,24,573/- to M/s. Reliance Clinical Research Services Private Limited for carrying out clinical trial needed for R D activity. Assessing Officer disallowed the expenditure of ₹.49,24,573/- which was incurred on clinical trials outside the R D facilities of the assessee for which weighted deduction was claimed @150%. On appeal the Ld. CIT(A) following his own order for the A.Y. 2007-08 sustained the disallowance. 14. Before us, Ld. Counsel for the assessee submits that Ld. CIT(A) has erred in confirming the action of the Assessing Officer in disallowing the claim for deduction u/s. 35(2AB) of the Act. Referring to the decision of the Hon ble Gujarat High Court in the case of CIT v. Cadila Healthcare Ltd., [31 taxmann.com 300], Ld. Counsel for the assessee submits that even clinical trials conducted outside the approved laboratory facility is eligible for deduction u/s. 35(2AB) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, 2007 for time spent on 1st March to 31st March, 2007 for conducting clinical trials, in support of to all K projects , for a sum of ₹ 57,65,564/-. It is further noted that on the back side of the invoice, complete details have been given with respect to time spent by 22 employees of RCRS, also giving particulars of the studies done by these employees. Names of these employees have been given along with their rates per hour. It is further noted that ld. Assessing Officer has shown no doubts about the genuineness of these expenses. It was held by Ld. CIT(A) that since claim of assessee with respect to deduction u/s.35(2AB) has been denied, therefore, these expenses are capital in nature. It was further observed by ld. CIT(A) that Assessing Officer, as well as assessee, have treated these expenses as capital in nature. In our view, the observations of Ld. CIT(A) are misplaced and without any basis. We have gone through details of these expenses. In our considered view, these expenses are apparently revenue in nature. Ld DR also could not point out as to which expenses are capital in nature. Thus, in our view, these expenses are of revenue nature. 5.6. The oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1953-54. It could not, therefore, be taxed in the assessment year 1958-59. Further reliance is placed by us on another judgment of Hon ble Gujarat High Court, in the case of, S.R. Koshti 276 ITR 165 (Guj) in which relief was granted to assessee with following observations: The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. In the case of Snehlata 192 CTR 50, Hon ble J K High Court held that when the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities. It is settled proposition of law that no tax can be levied or recovered without authority of law. Article 265 of the Constitution of India and section 114 of the State (J K) Constitution imposes an embargo on imposition and collection of tax if the same is without authority of law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged by the assessee from RLSI. The contentions of the assessee have been rejected by the TPO observing as under: - (a) Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. The fact that the activities undertaken by the assessee were a part of the project under development and the capital structure of the company had been decided keeping in mind the project risk this company, does not justify non-charging of interest under the Indian transfer pricing regulations, as no 3rd party in the similar circumstances will grant the loan without charging interest at the market rate. (b) The fact that the conversion price would take care of non-charging of interest, which was not charged by the assessee from its AE, does not justify the same under the Indian transfer pricing regulations. The internal arrangement for issuance of shares in future by taking into consideration of accumulated interest, is not quantified in this loan agreement. Therefore, this claim for compensating for not charging of interest against issuance of shares in future is not acceptable. (c) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43,47,000 18,65,21,883 6 30.4.2008 to 31.3.2009 82,38,363 Total 82,32,000 34,20,59,863 1,75,70,642 21. Accordingly, the TPO charged interest at the rate of 6% per annum and made an adjustment of ₹.1,75,70,642/. Before the Ld. CIT(A), the assessee contented that the entire loan has been converted into equity capital in its books as on 31.03.2011 and hence no interest should be charged. However, the Ld. CIT(A) sustained the adjustment observing as under: - 7.3. I have considered the facts of the case, submission of the appellant as against the findings/ observations of the TPO/AO in orders u/s 92 CA (3) 143(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under: i. The appellant contended that the entire loan has been converted into equity capital in its book as on 31,03.2011 and hence no interest should be charged. In this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case would be the interest on FD with the bank for a term equivalent to the term for which the loans given to the AEs. 8.12 It is pertinent to note that in case of FD with the Bank, the investment is safe as it is free from risk of credit and interest. On the other hand, if the loan/advance is given to the unrelated party, then always there is some risk of credit and interest involved in such transaction. There is one more reason for taking the FD as an appropriate and good comparable because the lending rate by financial institutions/bank varies depending upon the credit rating of the borrower and further on the guarantee and security provided to secure the loans . In view of the above observations it may be noted that FD rate has been considered to be one of the methods for benchmarking international transactions relating to interest receivable. Further risk factor has to be considered looking to the fact that the fixed deposits are very secure being with banks as compared to loan advanced to parties like AE of the appellant. Since there is risk associated with the unsecured loan, one has to take into account the risk while deciding ALP. Taking in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determine the arm s length price of the optionally convertible loan on the basis of one of the methods prescribed u/s. 92C of the Act. It is submitted that the TPO adopted interest rate of 6% per annum charged by the assessee on the loan provided to another AE i.e. RLSBV which is a controlled transaction, as the arm s length price, which is not on the basis of any of the prescribed methods. Ld. Counsel for the assessee submits that adhoc determination of arm s length price by TPO dehors section 92C of the Act cannot be sustained. It is further submitted that arm s length price cannot be determined on the basis of another controlled transaction i.e. transaction with another AE. It is submitted that u/s. 92C of the Act arm s length price can be determined only on the basis of independent and uncontrolled transactions. Reliance was placed on the decision of the Hon ble Bombay High Court in the case of CIT v. Lever India Exports Ltd., in ITA. No. 1306, 1307 and 1349 of 2014 dated 23.01.2017 and CIT v. Merck Ltd., in ITA.No. 272 of 2014 dated 08.08.2016. 24. Ld. Counsel for the assessee further submits that the approach of TPO in adopting controlled transaction to benchmar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt simplicitor and deleted interest on the interest free loan given by the assessee to its subsidiary which was converted into equity. 28. Further reliance was also placed on the decision of the Ahmadabad Bench of the Tribunal in the case of Micro Inks Ltd v. ACIT in ITA.No. 1688/AHD/2006 dated 06.08.2013 reported in 92 DTR 186 wherein the Ahmadabad Bench while deciding arm s length price of advance given by holding Company to its wholly owned subsidiary, held that, on pure commercial factors, CUP for interest on such transaction where subsidiary plays strategically commercial role in assessee s business would be Nil. It is submitted that the Tribunal deleted the adjustment holding that the interest was not applicable in the said case. It is submitted that similar view is upheld in the case of Prithvi Information Solution Ltd v. ACIT in ITA.No. 1816/HYD/2012 dated 08.08.2014 by the ITAT Hyderabad Bench. 29. We have heard the rival submissions and perused the orders of the authorities below. It is an undisputed fact that the assessee advanced optionally convertible loans to its AE i.e. RLSI. It is not in dispute that the OCL has been converted into Equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some detail. The first important aspect of this interest free advance is that the loan is said to be in the nature of quasi capital, and it was so given because out of EEFC (Exchange Earners Foreign Currency) account, while the assessee could have given loan upto US $ 50 million, it was not open to the assessee to subscribe to the equity capital without the permission of the Reserve Bank of India. There was thus, unlike the case of Perot Systems (supra) discussed above, indeed a technical problem in subscribing to the capital directly. It is also important to note that immediately upon obtaining the permission of the Reserve Bank of India, which assessee did obtain at later stages, the advances were converted into shares. Except for an amount of US $ 10,000, entire advances received by the step down subsidiary were converted into shares. It is also not in dispute that when RBI permission to convert loan into equity was sought it was sought effective from the date on which remittance was made. The second very important aspect of this interest free loan is this. In the present case, the entity receiving the interest free advances is not only a wholly owned subsidiary of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consent of the Board of Directors resolution dated February 27,2004, US $ 4,160,000 of the above loan was converted into Series A Preferred Stock and the remaining US $ 10,000 was repaid to the parent in March 2004. The company purchased approximately US $ 34.13 million and US$ 40.12 million of materials from HIRL for the year ended March 31, 2004 and 2003 respectively. The company pays HIRL for these materials 165 days from the bill of lading date. These purchases account for the majority of the company s inventory expenditure for the year ended March 31, 2004 and 2003 respectively. ....... 16. It is also important to bear in mind the fact that at the relevant point of time the assessee could not have invested in the shares of the step down subsidiary, without the permission of the Reserve Bank of India as is uncontroverted stand of the assessee, and, therefore, the assessee could not also have, without the permission of the Reserve Bank of India, entered into loan agreements with a provision of conversion of such loans equity either. It is only elementary legal position that what could not have been done directly could not have done indirectly als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lationship on that count, the assessee was a de facto and de jure promoter of the Micro USA. In the light of this undisputed position, an d in the light of the admitted position that, even as per revenue authorities, the transaction is at best for advance of money by holding to step down subsidiary , let us examine the correctness of the arm s length price adjustment in this cas e. In such a case, CUP method can be applied and the LIBOR or other bank rate linked rate is generally taken as a rate for comparable uncontrolled transaction. As has been held in a large number of cases, including in VVF (supra) and Perot Systems (supra), in the cases of arm s length prices of loans and advances, costs of funds have no relevance and it is only the rate applicable for comparable uncontrolled transaction that is to be taken into account. However, even while applying CUP method, one has to bear in mind the fact that in terms of Rule 10B (1) computation of ALP under the CUP method is a three step process which requires that (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or two fundamental reasons (i) first, that it is not a simplictor financing transaction between the assessee and Micro USA, as it is a transaction of investing in a step down subsidiary as quasi capital pending formal capital subscription with the approval of Reserve Bank of India; and (ii) second, that it is not a case of granting advance to a business concern without significant and decisive commercial considerations, as the monies are given for strengthening assessee s marketing apparatus in US and to keep alive its biggest exports customer. There is a difference in the nature of transaction and there is also a difference in the nature of the enterprises, including their inter se commercial relationship, entering into this transaction. The differences are so fundamental that these differences, to use the phraseology employed in Rule 10 B (1)(a)(ii), could materially affect the price in the open market . On account of these peculiar factors, the application of LIBOR plus rate or, for that purpose, any bank rate will be inappropriate to this case. 19. The next logical question, therefore, is as to what would be the price at which such interest free advances could b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hotel Holdings Ltd v. DCIT (supra) the Delhi Bench of the Tribunal held as under: - 7. We have heard the rival submissions and perused the material available on record. It would be appropriate to first bring out the salient facts from the orders available on record. It is seen that the assessee made the following disclosure in its Form No. 3CEB:- S.No. Nature of transaction Method used by Assessee Value of Transaction(USD) Method PLI 1. Interest free loan NA NA 72,580,000 7.1. The advancing of interest free loan of USD 72580000 to its AE, DLF Global Hospitality Ltd., Cyprus (DHHL/DLF) Cyprus has been reflected as an interest free loan of ₹ 2,91,99,60,465. The relevant extract from the TPO s order addressing the specific date and amounts on which the loans were given is reproduced hereunder:- It is seen from the Form No.3CEB and Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.3. It is seen from the record that the said explanation was not accepted by the TPO who rejected it holding as under:- From the above statement it is clear that no benchmarking has been carried out in respect of these loans. The fact that the decision regarding the treatment of this amount as loan or debt was to be taken when it was felt this amount could be utilized for the purpose for which it was intended, clearly shows that it was a loan. As no independent enterprise would extend an interest free loan to a third party this action is obviously not in keeping with the arm s length principle, as enunciated in the transfer pricing guidelines as per the Income Tax Act. The arm s length interest is determined by following the CUP method, wherein the interest rate is determined under the circumstances in which the tax payer and its subsidiaries are operating i.e. what is the interest that would have been earned if such loans were given to unrelated parties in similar situation as that of subsidiaries. Since the tested party is the tax payer, the prevalent interest that could have been earned by the tax payer by advancing a loan to an unrelated party in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency. The rating scales vary; the most popular scale uses (in order of increasing risk) ratings of AAA, AA, A, BBB, BB, B, C, with the additional rating D for debt already in arrears. Government bonds are often considered to be in a zero-risk category i.e. above AAA; and categories like AA and A may sometimes be split into finer subdivisions like AA- . Bonds rated BBB and higher are called investment grade bonds. The safety level of these grading, as adopted by CRISIL, are as under: AAA (Triple A) Highest Safety Instruments rated 'AAA' are judged to offer the highest degree of safety, with regard to timely payment of financial obligations. Any adverse changes in circumstances are most unlikely to affect the payments on the instrument. AA (Double A) High Safety Instruments rated 'AA' are judged to offer a high degree of safety, with regard to timely payment of financial obligations. They differ only marginally in safety from AAA ' issues. A Adequate Safety Instruments rated 'A' are judged to offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Information about the average yield on long term instrument during FY 2007-08 was collected u/s 133(6) of the IT Act from M/s CRISIL. 7.4.1. Accordingly, Considering the information received from CRISIL which is the Credit Rating Agency in India where the ratings were ranging from AAA; AA+; AA-; BB; BBB; BBB-; BBB; A+; A- to A the TPO was of the view that the assessee s case was to be considered ranging between the range of BB to D where either there is no safety or the safety is inadequate. In the said range, BB rate it was noted denotes the highest level of safety or in other words minimum level of risk. The annual average yield for BB rated bonds for 5 years was calculated at 17.26% and it was held that 17.26% rate of interest appeared to be most reasonable and appropriate which was proposed to be applied on monthly closing balances from the period 01.04.2007 to 31.03.2008. 7.5. It may be pertinent to consider the purpose of the interest free loan to the AE as per the reply of the assessee before the TPO and the DRP. A perusal of the record shows that on behalf of the assessee the following reply was given:- 5. Reply of the Assessee: Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there were several highly relevant issues requiring consideration, namely whether the transaction was really a commercial one; whether in similar circumstances an independent person would have paid similar amount; whether the taxpayer really needed the services; whether the taxpayer really got some tangible or direct benefit; whether the amount paid was commensurate with the benefit (or the expected benefit) from such services, etc. We need not directly address the entire sweep of issues referred to by the TPO at this stage. Suffice it to say that the said broad sweeping view of the tax authorities has not been approved judicially by various High Courts. Thus though we have quoted the view expressed by the TPO. We take note that it is not the correct view as admittedly in various decisions including CIT vs Cushman Wakefiled India Pvt.Ltd. of the Delhi High Court, the view expressed by the TPO does not have judicial acceptance. 7.7. The TPO concluded that the benefit of conversion into equity could be granted only to the extent of 20% of the loan. We find no rationale has been brought out in the order for arriving at this magic figure of 20%. In order to decide what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 -July 2,069,582,691 2,069,582,692 29,767,498 7-Auq 2,069,582,692 2,069,582,692 29,767,498 7-Sep 2,069,582,692 20,306,910 2,089,889,602 30,059,579 7-Oct 2,089,889,602 2,069,582,692 20,306,910 1,675,973,064 24,106,079 7-Nov 1,675,973,064 629,918,780 650,225,690 2,305,891,844 33,166.411 7-Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 3 to 4 months which clearly reflects that it was actually meant to be a capital contribution. The support was also sought by the assessee from the guidelines issued by the Organisation for Economic Cooperation and Development on Transfer Pricing in 2010 ( OECD Guidelines ), an extract of which is appended below: D.2 Recognition of the actual transactions undertaken 1.64. A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapter II. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.65. However, there are two particular circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to retain control and have absolute ownership of profits subsequent to conversion. In addition to the above, assessee wishes to submit that after the conversion of the quasi-equity into equity, DLF Cyprus was able to secure additional funds from third party banks. This was critical for DLF Cyprus since the additional funds were required for completion of acquisitions, and the independent banks would not have provided any funds to DLF Cyprus without it having an acceptable debt/equity ratio. The third party banks which may have refrained from providing loans to DLF Cyprus at the time of set-up, advanced loans to DLF Cyprus only on the basis of restructured capital gearing of the company. The assessee wishes to submit that it was commercially expediency which necessitated DHHL to provide advances to DLF Cyprus. These advances were made as a part of capital for further investment by its associated enterprise and to obtain return in future. The assessee had full control over its associated enterprise which reduces the credit risk. (emphasis provided) 7.10.1. Elaborating the argument that by way of this funding the assessee was e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tourist destinations in India, DHHL is on track to create a portfolio of 25,000 rooms in the next 5 years. DLF Hotels recently acquired controlling stake in Amanresorts, one of the pre-eminent and most innovative luxury hotel groups in the world. Aman - an outstanding brand and winner of over 500 awards since 1968, such as Conde Nast, The Gold List , Gallivanter's Guide Best Hotel Worldwide etc. - owns and operates 18 boutique resorts across countries such as Indonesia, Thailand, Sri Lanka, India, Morocco, Bhutan, France and the USA. (emphasis provided) 7.12. Guided by the above aims and vision, funds were advanced to its AE in Cyprus on the following dates:- It is seen from the Form No.3CEB and Transfer Pricing Study that the assessee company has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:- Date of initial Loan to DGHL Loan (US $) DHHL-DGHL Amount in INR 30.07.2007 51,000,000 2,069,582,692 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.14. Though we find that the claim that these advances were converted into equity is not disputed by the Revenue, however, for the sake of completeness it is worth referring that this claim has been supported by following documents placed before the TPO/AO; the DRP and now before us in the Paper Book filed:- S. No. Particulars. Page No 1 Documents relating to share capital in the wholly owned subsidiary i.e. DLF Global Hospitality Ltd. (A) Initial Investment for equity shares: Debt Authority to HSBC Bank alongwith ODI Form Form A2-Application for remittance abroad Chartered Accountants Certificate Declaration cum undertaking under FEMA 1999 (B) Copies of resolution and other documents relating to issue of equity shares; Written resolutions taken by the sole shareholder of DGHL 1-47 48-49 7.15. Apart from placing on record the copy of the audited balance sheet and profit and loss account of DLF Global Hospitality Limited for financial year 2007- 08 at pages 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that international transaction is acknowledged in Form 3CEB by the assessee itself cannot form the basis of the conclusion. At best it can form the starting point of the enquiry. In the light of the evidences on record and considering the arguments, we are inclined to hold that mere disclosure of the interest free loan as an international transaction by the tax payer in Form 3CEB would neither act as an estoppel nor fore close the tax payer from claiming the same as not being an international transaction. The transaction will become international transaction necessitating arm s length adjustment if the ingredients of the transaction bring it within the purview of Chapter X. The disclosure made by way of abundant caution or due to ignorance of law on facts cannot be the basis of the decision of the tax authorities more so if the assessee raises objections questioning the same. The decision of the tax authorities has to be based on facts supporting the conclusion. The tax authorities cannot shy away from addressing the arguments that it was a shareholder activity necessitating immediate availability of funds in the hands of the AE in order to attain the aims and vision of the holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction the tax authorities must necessarily demonstrate that the transaction as claimed and documented is a sham or on the basis of facts and evidences is at a substantial variance with the stated form. In the absence of any such exercise the tax authorities are entering at their peril in the realm of arbitrariness. In the facts of the present case there is not even a whisper of a suggestion that it was a bogus transaction, as admittedly shares have been allotted. There is nothing in the provisions of the Act which empowers the tax authorities to insist that the interest free loan towards its AE for capitalization the opportunity of cost of entering in new territories must necessarily by modified and re-characterized into a loan simplicitor and considered to be an activity for earning interest. The tax authorities must bring on record facts and evidences impacting the veracity of the claim of the assessee and demonstrate the hollowness of the assessee s claim. No such exercise has been done to counter the consistent claim of the assessee demonstrated by facts on record that the intention was to capitalize the opportunity cost and not to encash the opportunity to best utilize th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provoking words of Justice Felix Frankfurter to the effect that A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas . The reference so made to the words of Justice Frankfurter was in the context of the concept of super profits . The Co-ordinate Bench observed that it is equally valid in the context of concept of quasi capital also observing that as in the case of the super profits there has been a lazy repetition (in the words of Felix Frankfurter J.) with regard to quasi capital as there appears to be no independent analysis of the provisions of the Act and the rules with regard to quasi capital also. 7.16.3. We find that the Co-ordinate Bench considering the term quasi capital has correctly understood that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated and considered:- 43. In ground no. 15, the assessee has raised the following grievance: 15. That the assessing officer/TPO erred on facts and in law in making addition of ₹ 19,15,45,943 on account of notional interest calculated @ 17.26% p.a. on the amount of share application money advanced by the appellant to its AEs. 15.1. That the assessing officer/TPO erred on facts and in law in not appreciating that the transaction of advancement of share application money was not in the nature of international transaction as defined in section 92B and hence was outside the purview and scope of Chapter X of the Act. 15.2. That the assessing officer/TPO erred on facts and in law in treating the amount of investments made by the appellant in its associated enterprises in the form of share application money for allotment of shares as interest free loans and consequently, applying transfer pricing provisions to the said transaction(s) and while doing so making an improper comparison by: (a) Considering rate of interest suggested by rating agency and banks to general investor which are subject to various conditions li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.18.1. The facts and the legal precedent with which the Coordinate Bench was seized of are set out in Paras 44 to 45 of the said order and are reproduced hereunder for the purposes of bringing out the similarity on the material facts:- 44. So far as this grievance of the assessee is concerned, the relevant material facts, to the extent necessary for our adjudication, are as follows. It is not in dispute that during the relevant previous year the assessee has made following payments towards share application money in its foreign subsidiaries: Name of associated Enterprises Amount of advance (Rs.) Date of share application Date of issue of shares Bharti Airtel (U.S.A.) Ltd. 40,45,14,1 09 29.11.2007 31.03.2009 Bharti Airtel (U.K.) Ltd. 3,17,72,666 31.01.2008 12.03.2009 Bharti Airtel (Singapore) Ltd. 2,01,39,15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r reasonably long period would partake the nature of loan . It was in this backdrop that payments for share application money were treated as interest free loans given to the AEs and ALP adjustment was made for interest thereon. Aggrieved, assessee is in appeal before us. (emphasis provided) 7.18.2. Considering the arguments on these facts and the legal precedent the Coordinate Bench came to the following conclusion:- 46. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Representative, on which their case rests. None of these decisions, however, deal with the core issue before us i.e. whether a capital contribution can be deemed to be partly an interest free loan, for the period till the shares were actually allotted, and partly as capital contribution, after the subscribed shares were issued by the subsidiary in which capital contribution was made. In the case of Perot Systems TSI India Ltd Vs. DCIT (supra), a coordinate bench of this Tribunal had an occasion to deal with the arm s length price adjustment with regard to interest free advances to the subsidiaries. That was a case in which the assessee, an Indian company, advanced interest-free loans to its 100% foreign subsidiaries. The subsidiaries used those funds to make investments in other step- down subsidiaries. On the question whether notional interest on the said loans could be assessed in the hands of the assessee under the transfer pricing provisions of Chapter X, the assessee argued that the said loans were in fact quasi - equity and made out of commercial expediency. It was also argued that notional income could not be assessed to tax. However, both of these arguments were reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, there cannot even a suggestion to hold that this is a bogus transaction because admittedly the subscribed shares capital has indeed been allotted to the assessee. The transaction is thus accepted to be genuine in effect. 50. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the authorities below were in error in treating the payment of share application money, as partly in the nature of interest free loans to the AEs, and, accordingly, ALP adjustment based on that hypothesis was indeed devoid of legally sustainable merits. We delete the impugned adjustment of ₹ 19,15,45,943. The assessee gets the relief accordingly. 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. (emphasis provided) 7.18.3. When the facts as considered by the Co-ordinate Bench in the case of Bharti Airtel Ltd. are seen and the facts of the present case are considered, we find that there is a striking similarity on the material issues and the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of re-characterizing a transaction, is not permitted under the provisions of the Income-tax Act, 1961 for said assessment year and hence the same ought to have been rejected. Consequently, the appellant prays that the transfer pricing adjustment confirmed by the CIT(A), of charging interest on the amount paid towards subscription to share capital of the AE's is unjustified and ought to be deleted. 34. Briefly stated the facts are that, during the financial year 2008-09, the assessee had paid share application money towards subscription of Paid-in-Equity/ Capital surplus of RLS Inc [for short RLSI ] and towards subscription of preference shares of RLSBV and since no shares were allotted against the share application money TPO treated the amounts as interest free loan and calculated interest at the rate of 6% p.a., which was charged by the assessee in respect of loans provided to its AE RLSBV. The Ld. CIT(A) upheld the adjustment made by the TPO. 35. Ld. Counsel for the assessee submits that pursuant to the share application money paid by the assessee the amount has been converted into paid-in-equity/ Capital surplus by RLSI and preference shares were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares. Thus, Hon'ble Tribunal deleted the adjustment of notional interest on the share application money. 37. Ld. Counsel for the assessee submits that transfer pricing provisions are not applicable to amount paid towards capital of subsidiaries outside India as there is no income arising from the transaction. Reliance in this regard is placed on following decisions: (i) Aries Agro Ltd v/s DCIT (ITA No. 1452/M/2017) (delay in allotment was more than 5 years) (ii) Hill County Properties Ltd (ITA No 1644/Hyd/2014) (Hyderabad ITAT) 38. Without prejudice to the above, even if it is treated as an international transaction, since the TPO has not brought any comparable on record to show that an unrelated share applicant was to be paid any interest for the period between making payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of any legally sustainable merits. It is submitted that this view is upheld by the Jurisdictional Tribunal in the case of Pan India Network Infravest Pvt Ltd., in ITA.No. 7026/Mum/2013 dated 04.12.2015 wherein the delay on allotment was 3 years 6 months. 39. Without pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO that since the basic objective of the above investment in the form of share application was to fund its AE s for developing global business opportunities for further expanding the assessee s business operations outside India, the specification to the shares of AE s at fair value has been shown at arm s length price. Assessee also contended that since subscription to equity shares does not have a bearing on the determination of income of the assessee the provisions of section 92(1) of the Act are not applicable to the international transaction of such nature as defined in section 92B(1) of the Act. However, the TPO held that since no shares have been allotted by AE s to the assessee in respect of the amount paid towards share application the same would be characterized as being in the nature of interest free loan provided to AE s. TPO also observed the fact that AE s were setup for developing global business opportunities for further expanding the assessee s business operations outside the India is not a valid ground for non-allotment of shares by AE s to the assessee. Therefore, in the absence of allotment of shares the share application money is treated as loan given by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al letter dated 3/11/1998 granting approval to the assessee to do business in India. The approval letter dated 03/11/1998 specifically provided that India Branch Office will not borrow or lend from/to any person in India without specific permission of the Reserve bank of India. The Assessing officer further observed that in view of India Belgium Double Taxation Avoidance Agreement interest on monies paid by the Head Office to the branches was not allowable as a deduction. 6) In appeal, the Commissioner of Income Tax (Appeals) by an order dated 29/3/2007 upheld the order of the Assessing officer and disallowed the deduction on account of interest of ₹ 5.73 crores paid to Joint Venture Partners. The Commissioner of Income Tax (Appeals) held that Article 7(3)(b) of the Double Taxation Avoidance Agreement forbids allowance of any interest paid to the head office by permanent establishment in India as a deduction. Further, the payment of interest also directly violates the conditions imposed by RBI in its letter dated 3/11/1998. Therefore, the order of the Assessing Officer was upheld. 7) However, the Tribunal allowed the respondent-assessee's appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of its shares at par. The Transfer Pricing Officer ( TPO for short) held that the preference shares were equivalent to interest free loans advanced by the assessee and accordingly charged the interest on notional basis. The Tribunal by the impugned judgment, deleted the addition observing that the TPO had re-characterised the transaction of subscription of shares into advancing of unsecured loans. The Tribunal did not accept such conclusion, inter-alia on the grounds that the TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction. 3. We are broadly in agreement with the view of the Tribunal. The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at some length and carefully perused the orders of the authorities below in the light of the precedence cited. As far as the exemption for the years under consideration were concerned, it was an admitted factual position that the AO has not mentioned any such amount. Meaning thereby, there was no exempt income earned by the assessee for the years under consideration. In reply to one of our questions, the learned AR, Mr. K. P. Dewani has also made a statement at Bar that no dividend was declared, hence, there was no earning of exempted dividend income. He has also clarified that for the purpose of invocation of the provisions of section 14A of the IT Act, the AO has applied the formula only in respect of disallowance of proportionate interest expenditure. There was no allegation of the AO that the exempt income was earned by the assessee. In the light of the undisputed finding on facts, we have perused the decision of the Hon ble Courts. We may like to mention that a view has been expressed consistently that if there is no exempted profit then there is no question of invocation of the provisions of section 14A of the IT Act but, we have also carefully perused that very decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded by both the Authorities do not give rise to any substantial question of law. Since no substantial question of law arises in this income tax appeal, the income tax appeal is dismissed with no order as to costs. 51. The Hon'ble Jurisdictional High Court held that if there is no exempt income there cannot be any disallowance. Respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on clinical trials outside the in-house facility is eligible for deduction u/s. 37(1) of the Act observing as under: - 5.5. We have considered the submissions made by both the sides and gone through the orders passed by the lower authorities and material placed before us for our consideration. Since, main claim of assessee with respect to deduction u/s 35(2AB) was not seriously pressed before us, therefore, same is dismissed. With respect to alternate claim made by the assessee u/s 37(1) of the Act, it is noted that the invoice of M/s. Reliance Clinical Research Services Pvt. Ltd. dated 31.03.2007 is enclosed at page no. 3 of the paper book, showing that payment has been made to the said company under the head Clinical Trial Fees for the month of March, 2007 for time spent on 1st March to 31st March, 2007 for conducting clinical trials, in support of to all K projects , for a sum of ₹ 57,65,564/-. It is further noted that on the back side of the invoice, complete details have been given with respect to time spent by 22 employees of RCRS, also giving particulars of the studies done by these employees. Names of these employees have been given along with thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it was incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it could not confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. Therefore the income from dividend was not assessable during the assessment year 1958-59, but it was assessable in the assessment year 1953-54. It could not, therefore, be taxed in the assessment year 1958-59. Further reliance is placed by us on another judgment of Hon ble Gujarat High Court, in the case of, S.R. Koshti 276 ITR 165 (Guj) in which relief was granted to assessee with following observations: The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est was chargeable on the above referred loan, since the same loan was optionally convertible into share capital. (iii) Without prejudice to the above, the learned CIT(A) erred in determining the arm's length rate at LIBOR plus 300 basis points without providing any reasons for considering mark-up of 300 basis points over LIBOR instead of determining the arm's length rate of interest at LIBOR plus comparable mark-up rate furnished by the Appellant of 165 basis points. 61. Ground No.4 is identical to Ground No. 3 for the A.Y. 2009-10. Facts being identical to the case of assessee for the A.Y. 2009-10, the decision rendered therein applies mutatis mutandis to the appeal for the Assessment year under consideration i.e. A.Y. 2010-11. We order accordingly. 62. Ground Nos. 5 6 are in respect of subscription to share application money paid to RLSI RLSBV treated as deemed loan and interest was charged thereon. In the grounds of appeal assessee contends as under: (i) The learned CIT(A) erred in determining the arm's length price (ALP) of interest chargeable in respect of subscription to equity share capital of M/s. RLS Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned CIT(A) failed to appreciate that no interest was chargeable on the above referred outstanding balance, since the balances are in respect of debtors and creditors which are a part of routine day to day business activities and cannot be equated with loan; (iii) Without prejudice to the above, the learned CIT(A) erred w determining the arm's length rate at LIBOR plus 300 basis points without providing any reasons for considering mark-up of 300 basis points over LIBOR instead of determining the arm's length rate of interest at LIBOR plus comparable mark-up rate furnished by the Appellant of 165 basis points 65. Briefly stated the facts are that, during the F.Y. 2009-10 relevant to assessment year 2010-11 a sum of ₹.2,47,28,860/- was shown as due from RGMX as sundry debtor and a sum of ₹.96,52,341/- was shown as due to the said party as sundry creditor as on 31.03.2010 in the books of accounts by the assessee. Assessing Officer noticed that said amount due from RGMX was received and paid during various dates in the subsequent financial year. Assessee also furnished those details before the assessing officer. The TPO treated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmits that the CIT(A) has not given any finding on the merits of the issue and merely proceeded to determine ALP interest rate on the basis of alternative plea of the Assessee. Therefore, the adjustment confirmed by the CIT(A) cannot be sustained. 68. Ld. Counsel for the assessee further without prejudice to the above, submits that if at all any interest should be charged, the following should be considered: (i) Hon'ble Bombay HC in the case of Pr CIT v/s Tecnimont Pvt Ltd in ITA No 56 of 2016 dated 03.07.2018 has upheld LIBOR as ALP for interest bearing loans given to the AE in foreign currency. Therefore, in the case of the Assessee, Libor should be adopted as ALP. (ii) Alternatively, the Assessee's AE Reliance Pharmaceuticals Pvt Ltd had taken a loan from the third party Axis Bank Ltd @ LIBOR plus 1.65% p.a. which has been accepted as a valid CUP for interest bearing loans given to the AE. The same may be adopted. 69. Ld. DR vehemently supported the orders of the authorities below. Ld. DR further submits that the geography in which the AE and the Non AE operate are different and therefore the assessee not charging inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT upheld the order of CIT (A). While, upholding the order of CIT (A), the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and Non Associated Enterprises- debtors and the delay in realization of the export proceeds in both the cases is same. In these circumstances, the decision of the Tribunal in deleting the notional interest on outstanding amount of export proceeds realized belatedly cannot be faulted. 71. Similarly, in the case of CIT v. M/s. Lingingstones in ITA. No. 887 of 2014 dated 28.11.2016 the Hon'ble Jurisdictional High Court held as under: - 3. The grievance of the revenue is that the respondent-assessee granted longer period of credit to its Associated Enterprises on sale of goods as compared to the period of credit granted to Non Associated Enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X
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