TMI Blog2009 (10) TMI 638X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions, where two enterprises which are subject to the same centre or direction or control (associated enterprise) maintain commercially or financially relation with other. In such a situation, the possibility exist that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from those which in the same circumstances would have agreed upon between unrelated parties. The aim is to examine whether there is anomaly in the transaction which arise out of special relationship between the creditor and the debtor. Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario. The first objection of the TPO is that no two persons in normal business situation would grant interest free loan to the other persons. This is a fairly settled position . The assessee s contention in this regard is that no one would have given the AEs loan at that point of time as they were in a start-up stage and that debt ratio was not comfortable. Now, even if one is to accept this argument, there is no case for not providing or charging any interest, if assessee is coming to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in favour of revenue. Valuation of LIBOR rate - Whether Assessing Officer/TPO/CIT(A) has erred by not providing the appellant the benefit of 5 per cent range as provided by the proviso of section 92C(2)? - HELD THAT:- We find ourselves in agreement that no more one price has been used for each transaction. Only one LIBOR rate has been applied which has been adjusted for some basis points as required. This cannot be equated with more than one price in respect of each transaction. Hence, we uphold the ld. CIT(A) s order on this issue. In the result, all the three appeals filed by the assessee are dismissed. - A.D. JAIN AND SHAMIM YAHYA, JJ. Mukesh Butani and Manih Khanna for the Appellant. Navneet Soni for the Respondent. ORDER Shamim Yahya, Accountant Member. - These appeals by the assessee are directed against the separate orders of the CIT(A) for the respective assessment years. Since the issues involved in these appeals are common and connected, and these appeals were heard together, these are being consolidated and disposed of together by this common order. 2. One common issue raised is that the CIT(A) erred in not accepting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in excess of three times the equity of a company is treated as equity and not debt. u The Hungarian thin capitalization rules fortify the stand that the funds extended to the subsidiaries were in the nature of equity and not loan." 5. The TPO s conclusion are summarized as under: "( i )If there is no relation between the two persons other than the normal business relation, no person will give loan without charging any interest. Whenever, a person advances a loan to other person, it foregoes its income which it would have earned if the same amount would have been invested in some other financial instrument or deposit. ( ii )Besides foregoing income, the lender also undertakes the risk of loosing - the entire amount if the borrower defaults in repayment of loan. Under the arm s length condition no person would undertake such a big risk without expecting any return. ( iii )The risk/reward matrix of a loan transaction and that of equity subscription is totally different. u In the case of a loan, the return of the lender can never exceed a pre-determined rate and it is not entitled to any share in profits of the borrower. u In case of equity participation, the stakehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to HPS Hungary, the real character of the transaction becomes evident when it was found that the appellant had simultaneously made applications for approval both for equity subscription as well as for remittance of the loan amount. The above documents conclusively prove the nature of transactions between the appellant and two sub-companies as one of debt. Therefore, it is not only the form but also the economic substance of the two transactions, is debt in nature. The appellant s reliance on various other arguments is also misplaced. The rebuttal of the appellant s various arguments is summarized below: ( i )Reliance on Para 1.37 of the OECD Guidelines is misplaced because the analysis contained in the para is from the perspective of the borrower and that of the recipient country. The tax administration in the recipient country can lift the veil of a loan transactions even if it satisfies the arm s length standard for invoking the thin-capitalization rule. In the instant case, the analysis has to be done from the perspective of the lender country in order to ascertain whether the transfer pricing regulations have been complied with or not. ( ii )Even reference to the Tonna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h principles. In view of the foregoing analysis and after taking into account the TPO s reasoning, I am of the considered view that the TPO had correctly characterized the transaction between the appellant and its two sub-companies as debt and not informal capital or quasi-equity. The following are the salient features of the loan: ( i )The debt was a short term working capital loan repayable on demand. ( ii )Being repayable on demand, it would mean that the loan is renegotiated on an annual basis. ( iii )There was provision for charging of interest by the lender in the loan agreement itself." 8. Against this order the assessee is in appeal before us. 9. Before us, the ld. Counsel of the assessee contended that income means real income and not fictitious income and since the assessee has not earned any income, the same cannot be taxed. Reliance in this regard has been placed upon in the case of CIT v. K.R.M.T.T. Thiagaraja Chetty Co. [1953] 24 ITR 525 (SC) and in the case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) for the proposition that liability to tax can arise only when there is income. No tax can be charged as notional income on accrual. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted by the ld. Counsel of the assessee is that it was commercially expedient for assessee to advance interest free loans to the AEs and that since no interest has actually been charged, there is no real income exigible to tax. As observed by the ld. CIT(A) the agreements show that these are loan amounts given by the assessee to Associated Enterprises (AEs). This in fact is an admitted position. There is no case that any special feature in the contract make the transaction as capital in nature. It is also an admitted proposition that the assessee has extended the loan to its AE s who are 100 per cent subsidiaries. The assessee s case is that it has actually not earned any interest and it was commercially expedient to extend these interest free loans. Now it is noted that this is not a case of ordinary business transaction. The question relates to scrutiny of international transaction to determine whether or not the same it as arm s length. The principle of transfer pricing aims at determining the pricing in the situations of cross border international transactions, where two enterprises which are subject to the same centre or direction or control (associated enterprise) mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the arm s length price. Section 92B defines international transaction as under:- "92B(1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-resident, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. We find ourselves in full agreement thereof. Furthermore, as rightly observed by the ld. CIT(A) RBI s approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulation as the substance of the transaction has to be judged as to whether the transaction is at arm s length or not. 14. In the background of the aforesaid discussion and precedent, we uphold the order of the authorities below and decide the issue in favour of the revenue. 15. Another ground raised is that on the facts and circumstances of the case and in law, the Assessing Officer/TPO/CIT(A) has erred by not providing the appellant the benefit of 5 per cent range as provided by the proviso of section 92C(2) of the Act. 15.1 Though the ld. Counsel of the assessee did not put his arguments on this issue, we deem it appropriate to deal with the same as it is there in the grounds of appeal. 15.2 We can gainfully refer here the relevant provisions of section 92C(2) of the IT Act. "Provided that where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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