TMI Blog2013 (8) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... ving 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 - investment in shares in e-Capital Solution were through Share Swap and not shares investment were made in cash. That the assessee acquired shares in e-Capital Solution not by payment of cash but by issue of its own shares to the sellers of the said shares after taking approval from Reserve Bank of India. Thus, question of using of borrowed funds for acquiring shares in e-Capital Solution does not arise - there is no infirmity in the order of ld. CIT(A) in deleting the disallowance of interest expenditure made by AO - Decided against Revenue. Transfer Pricing adjustment - CIT deleted addition - Held that:- issue requires reconsideration by TPO and therefore matter be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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) had collapsed. It would also have had a severe repercussion on the employees of the company, which may have prompted them to move on to some other companies whereby the business of the company would have been affected. Keeping in mind the above mentioned reasons, a business decision was taken to fund the environment in which such business decision was taken. It would not be fair to disallow the interest on the ground that the advances made to the subsidiaries was not in the course of business. It is submitted that for allowance of interest as per the provisions of sec. 36(1)(iii) the following conditions needs to be satisfied (i) money should have been borrowed by the company (ii) that it must have been borrowed for the purpose of business and (iii) that the company has paid the interest on the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. 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 net block of fixed assets stood at Rs.1,25,62,893/ - and current assets in the form of loans advances, sundry debtors, cash and bank balances, etc. stood at Rs.9,08,48,948/-. That the investment in quoted and unquoted equity shares stood at Rs.47,94,23,600. AO has stated that while going through para 9 of Notes to the Financial Statements for the year ended 31.03.2004, it is seen that the assessee has made long tern investment (at cost) at Rs.649,13,45,454/- as under : "7350000 equity shares of eCapital Solution(Bermuda)Ltd Rs.606,47,16,375/- 150000 equity shares of Applisoft Inc. USA Rs.4,26,29,079/- 500000 equity shares in Leading Edge Infotech Ltd. Rs.50,00,000/- Rs.649,13,45,454/- Less : Provision for decline other than temporary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt 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. 6. On behalf of he assessee it was contended that the interest expenditure incurred was purely for the business purposes and out of commercial expediency. It was submitted that the interest of Rs.7,98,19,398/- is paid on the assessee's borrowings, comprises of : (a) term loan from Global Trust Bank and Exim Bank : Rs.32,72,67,818/- (b) Lease obligation : Rs. 2,73,562/- aggregating to Rs.32,75,41,380/-. The assessee also stated in respect of investment in shares as under : "Shares in e-Capital Solution Applisoft Inc (USA) are shares of foreign companies and hence, disallowance provision u/s.14A would not apply (because dividend foreign companies is not exempt). - Shares in e-Capital So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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) or to relatives. The assessee has infused money in the same line of business, but in a foreign country, through the medium of its foreign subsidiary. The assessee has also distinguished the case law of CIT V/s Orissa Cement Ltd (258 ITR365), and R. Dalmia V/s CIT (133 ITR 169) (Del) relied on by AO and wherein it was held that the onus is on the assessee to prove that the advances interalia to its subsidiary were made from non-interest bearing funds. 8. Ld. CIT(A) considered the submissions of assessee vide paras 2.4 to 2.6 of the impugned order and has deleted the disallowance of interest expenses made by the AO. The said paras 2.4 to 2.7 of the order of ld. CIT(A) read as under : "2.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 purpose. He submitted that the assessing officer has stated that the assessee's own funds were wiped out due to accumulated losses. He submitted that it is not clear as to how the investment made by the assessee in subsidiaries are for business purposes. He submitted that AO has rightly made disallowance of interest of borrowed funds. On the other hand, ld. AR supported the order of the ld. CIT(A) by stating facts as stated before him. He submitted that the investment in subsidiaries were made for commercial consideration and the same were made in the assessment year 2001-02 and the present year is the fourth year of making such investment. He submitted that in earlier years, the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 investment in shares in e-Capital Solution were through Share Swap and not shares investment were made in cash. That the assessee acquired shares in e-Capital Solution not by payment of cash but by issue of its own shares to the sellers of the said shares after taking approval from Reserve Bank of India. Thus, question of using of borrowed funds for acquiring shares in e-Capital Solution does not arise. The above facts were not disputed by the ld. DR at the time of hearing. We also observe that the shares in Applisoft Inc (USA) were acquired on 1.1.2001 and out of US$ (USD) 9 million, US$ 1.52 million was funded from Company's own EEFC A/c again. We observe that assessee stated tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so 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 as made by assessee before ld. CIT(A) and the operational arrangement between the assessee and its Associated Enterprises are stated in paras 3.2 to 3.6 of the impugned order and ld. CIT(A) after considering the submissions of assessee vide para 3.8 has held that international transaction of assessee with its Associated Enterprises are at ALP and accordingly deleted the addition made on account of transfer pricing adjustment. Hence, department is in appeal before the Tribunal. 18. At the time of hearing, ld.DR submitted that assessee did not furnish external CUP data before TPO and the same were furnished before ld.CIT(A). He submitted that ld. CIT(A) accepted additional ev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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