9911796707
TMI Blog2013 (8) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... requisite details to the AO which are stated by AO in para 4.1 at pages 2 to 4 of the Assessment Order as under : "The position of the loans and advances to the subsidiaries and employees as on 31/03/2003 and 31/03/2004 is as under: Loans to subsidiaries As on 31.3.2003 As on 31.3.2004 Considered goods Rs. 7,82,09,545 Rs. 4,21,44,086 Considered doubtful Rs.24,50,16,615 Rs.21,86,98,434 Loans/ advances to employees Considered goods Rs. 2,23,11,422 Rs. 82,930 Considered doubtful Rs.10,10,036 Rs.1016,528 Rs.34,65,47,618 Rs.26,19,41,978 The company has advanced the amounts to its subsidiaries in the course of its business activities as the survival of these companies is crucial to the activities and business of the company. The gamut of the relationship of the Company and its subsidiaries is as under: "The company is engaged in the business of development of software as well as providing software services where the main driving force is the skilled man power. The business is fully dependent on the skilled technicians and the whole software sector has a huge labour turnover. In case the business of the subsidiaries (which are in heavy losses) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced in course of business, it is submitted that the funds have been advanced from its own resources or interest free funds available with the company. Loans to Subsidiaries are Rs.42,144,086/ - (Rs.4.2 Crores - Refer Sch. 13 to Accounts). The company's own funds i.e., Share Capital + Share Application Money + Reserves & Surplus amount to Rs.6,740,973,648/-. The accumulated losses (debit balance of Profit & Loss A/c) are Rs.6,609,239,107/-. Thus the net owned funds of the company are Rs.131,734,541/- i.e., about Rs.13 crores. Hence far in excess of loans to subsidiaries. The doubtful advances to subsidiaries are already written off, and are reflected in accumulated losses. If doubtful advances to subsidiaries are to be considered then proportionate reduction in accumulated losses will take place. Without prejudice to the above, it is submitted that what should be considered is only the interest in respect of advances made during the year and not on the balance outstanding as at the end of the year. " 4. AO has stated that on perusal of balance-sheet, it is seen that the assessee has its own funds in the form of share capital and reserves and surplus at Rs.6,54,24,74,898/-. The ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for giving interest free advances and without any purpose. That the assessee has given generalised statement that the interest bearing funds are not utilized for non-business purposes. AO has stated that the deduction or allowances are to be allowed on the basis of facts and not on the basis of generalised submissions. That the assessee has not produced factual details about the borrowed funds utilised for business purposes, hence the onus is not discharged. AO has referred the decision of Hon'ble Kerala High Court in the case of CIT V/s V I Baby and Co. (248 ITR 248), the decision of the Hon'ble Delhi High Court in the case of R.Dalmia V/s CIT (133 ITR 169) and the decision of Hon'ble Madras High Court in the case of Mir Mohammad Ali V/s CIT (383 ITR 413) (Madras) and has stated that wherein it is not possible to establish the correlation, the disallowance could be estimated out of the full amount of interest payable, on such borrowed money. Accordingly, the interest expenses amounting to Rs.7,98,19,398/- was disallowed by the AO u/s 36(1)(ii) of the Act, and added back to the total income of the assessee. Being aggrieved, assessee filed appeal before the First Appellate Authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusively proves the "business purpose" of the investment being made in the said company." 7. Assessee submitted before ld. CIT(A) that the Hon'ble Apex Court has held in the case of S.A.Builders Ltd V/s CIT - (288 ITR 1) that interest free loans given to subsidiary/sister concerns does not give rise to any interest disallowance,if such loans were given out of "commercial expediency". The assessee referred the decision of the Hon'ble Calcutta High Court in the case of Rajeeva Lachan Kanoria (208 ITR 616) wherein it has been held by Their Lordships that the activity of controlling, managing, investing and financing companies is nothing but is business/profession/vocational activity. Thus, acquiring and controlling interest was held to be a business purpose by the Hon'ble High Court. The assessee also distinguished the case laws relied by AO and stated that in the case of V I Baby and Co.(supra), the assessee firm borrowed funds from banks and also transferred sizeable amount of money to personal accounts of its partners and advance to their relatives of partners and sister concerns and not charged interest. However, the assessee has not given advances to partners( or directors) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited by the appellant. The Appellant's application to RBI for acquisition of Applisofts shares demonstrates that the Appellant expected a substantial business from Applisoft on account of Technical services/ Consultancy fees in next 5 years. This conclusively proves the "business purpose" of the investment being made in the said company. I agree that the case laws relied upon by the A.O. are distinguishable on facts from the case of the appellant. In case of V.I baby and others (Supra) cited by the AO, the loans were advanced to partners and relatives of the firm as well as sister concerns interest free and no commercial expediency could be proved. The facts of other judgments relied upon by the AO are also different. The recent decision of the Apex Court in S.A. Builders" case clinches the issue in favour of the Appellant. In view of the above discussion disallowance of interest expenditure made by the AO is deleted Hence, the department is in appeal before the Tribunal. 9. Ld. DR while supporting the order of the AO submitted that assessee stated that advances were given for the purpose of business but no details were filed that borrowed funds were utilized for business purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. It is relevant to state that the Tribunal has stated that ld. CIT(A) in the next assessment year viz assessment year 2003-04 himself allowed the relief to the assessee. Tribunal allowed the claim of the assessee in AY 2002-03 after observing that in case business of subsidiary is collapsed it will have severe repercussions on the assessee company. That the synergies of the business operation of the assessee company and its subsidiaries were re-aligned and the functions of the various companies were made complimentary and supplementary to each other, so as to avoid duplication of interest and deriving maximum value in its operation. That each company is inter dependent on the other. That the survival of assessee is also at stake, if the subsidiaries fail. The Tribunal also observed that section 14A of the Act would also not come in the way for the reasons that the majority of the subsidiaries are foreign subsidiaries and the question of section 14A being applied for dividend received from them does not arise. The Tribunal also held that section 14A and section 36(1) (iii) operate in different fields. 11. During the course of hearing, it was also pointed out before us that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.73,92,756/- by considering that the Transactional Net Margin Method (TNMM) is the most appropriate method for determining ALP as against comparable uncontrolled price method (CUP) adopted by assessee. 16. In view of above adjustment proposed by TPO, AO made addition of Rs.73,92,756/-. It is relevant to state that assessee filed its objections against the proposed adjustment before AO and stated that TPO has erroneously resorted to TNMM method for determining ALP even though direct comparables using the Comparable Uncontrolled Price (CUP) method were available for determining ALP and accordingly no adjustment should have been made to the value of transactions. It is also relevant to state that assessee also filed details of price charged from the Associated concern, but we do not consider it relevant to state the same in detail for the reasons to be mentioned hereinafter. The assessee disputed the said addition made by AO of Rs.73,27,756/- before ld. CIT(A). 17. On behalf of assessee, it was contended that TPO adopted TNMM and selected certain comparables to arrive at arithmetic mean of 9.92 % as against CUP method selected by assessee for determining ALP. The submissions a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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