TMI Blog2014 (3) TMI 495X X X X Extracts X X X X X X X X Extracts X X X X ..... t - the addition made is deleted – Decided in favour of Assessee. Working of DRP - Held that:- The fact that even such purely factual issues are not adequately dealt with by the DRPs raises a big question mark on the efficacy of the very institution of Dispute Resolution Panel - One can perhaps understand, even if not condone, frivolous additions being made by the Assessing Officers, who are relatively younger officers with limited exposure and experience, but the Dispute Resolution Panels, manned by very distinguished and senior Commissioners of eminence, will lose all their relevance, if, irrespective of their heavy work load and demanding schedules, these forums do not rise to the occasion and do not deal with the objections raised before them in a comprehensive and effective manner. Disallowance of suo-motu commission to cover up corporate guarantee – international transaction - Held that:- The onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the enterprise, and there was not even an effort to discharge this onus - Such an impact on profits, income, losses or assets has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act – Held that:- ABN- S did not have any locality related attachment in Sweden which could lead to residence type taxation on global basis - ABN-S cannot be treated as tax resident of Indo Swedish tax treaty – thus, the benefit of Article 11 (3) of Indo Swedish tax treaty cannot be applicable on the ground that the interest remittances are made to ABN-S - the authorities below were clearly in error in treating ABN Amro Bank as recipient and as beneficial owner of the entire interest paid by the assessee remitted to ABN-S - even though interest is remitted to ABN-S, since ABN -S has mainly acted as a conduit, it is to be treated as having been paid to the beneficial owners of such interest i.e. original lenders under the financing arrangement - though through the ABN-S – the matter is remitted back to the AO for adjudication – Decided in favour of Assessee. Amortization of expenses u/s 35ABB of the Act - Disallowance of variable license fees - Deduction u/s 37(1) of the Act - Disallowance of interest paid on term loans – Loans utilized only for business purpose – Held that:- As already decided by the HC that the expenditure incurred towards licence fee is partly revenue and part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the AO for adjudication – Decided in favour of Assessee. Admission of additional ground - Deduction of liability u/s 201(1) of the Act – Default in deduction of TDS on various expenses - Held that:- The additional ground of appeal is purely a legal issue as to whether or not the liability borne by the assessee, under section 201 and which is not recovered from the recipients of payments without deduction of tax at source, is deductible in computation of assessee's income - as it involves factual verifications – the matter is remitted back to the AO for adjudication – Decided partly in favour of Assessee. - I.T.A. No.: 5816/Del/2012 - - - Dated:- 11-3-2014 - Pramod Kumar and Rajpal Yadav, JJ. For the Appellant : Ajay Vohra, with Neeraj Jain, Rohit Jain and Anshul Sachar For the Respondent : Yogesh Kumar Verma ORDER Per Pramod Kumar: 1. This appeal challenges correctness of the order dated 31st October 2012, passed by the Additional Commissioner of Income Tax, Range 2, New Delhi (hereinafter referred to as 'the Assessing Officer') under section 143(3) r.w.s. 144C(13) of the Income Tax Act 1961 (hereinafter referred to as ' the Act'), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced to determine the correct taxable income under the provisions of the Act. 10.3 Without prejudice, that the assessing officer erred on facts and in law in passing the impugned assessment order in haste, without waiting for the clarification sought by the appellant from the DRP. 4. Briefly stated, the relevant material facts are like this. The assessee before us is a company engaged in the business of telecommunication services. On 30th September 2008, the assessee filed an income tax return disclosing taxable income of Rs 1,608.58 crores (Rs 1608,58,05,679). In its computation of taxable income, the starting point was the profit as per profit and loss account. In the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has booked an expenditure of Rs 5739,60,05,089 on account of loss on transfer of telecom infrastructure to Bharti Infratel Limited as a reduction in WDV ( i.e. written down value) of fixed assets and that the same is disallowable from the profit and loss account, as per provisions of the Income Tax Act, as it is clearly a capital loss . It was explained by the assessee that the reflecting the loss in the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Profit Loss Account under the head ' Loss on transfer of telecom infrastructure of Bharti Infratel Limited'. Pursuant to the Scheme of Arrangement Reserve of Business Restructuring had been created by debiting ' Value of investment and crediting the Reserve for Business Restructuring . An amount equivalent to the Profit Loss Account as explained above was transferred from the Reserve for Business Restructuring to the credit of the Profit Loss Account thereby having a Nil consequence on the profit as per profit Loss Account. As both the debit and credit appeared in the Profit Loss Account, in the Computation of Income, the loss had to be added back to the profit which was done and the transfer from the Reserve had to be reduced from the Computation of Income so as to determine the correct assessable income. The assessee company had accordingly done so which has not been understood by the AO. Whereas the AO has accepted the add back of the loss as explained above but has not accepted the reduction of the transfer from Reserve thereby incorrectly increasing the assessable income by Rs.5739,60,05,089 3.9.2.1 It has been further clarified before DRP as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition of the above sum, is incorrect . As for the DRP's directions to the Assessing Officer to make verifications with respect to not reducing the claim of assessee of not reducing the equivalent sum from the computation of income , the Assessing Officer noted that after verifications, it is ascertained that these are the same documents and papers which were available before the Assessing Officer during the course of assessment proceedings leading to draft assessment order and that there are no fresh or additional documents except the written submissions . The Assessing Officer then took note of the fact that in the computation of income attached to the return of income, the assessee has first added Rs 5739,60,05,089 as Loss on transfer of telecom infrastructure to Bharti Infratel Limited and then reduced Rs 5739,60,05,089 as amount withdrawn from Reserve for Business Restructuring . Effectively thus, according to the Assessing Officer, there was a debit and credit of the same amount and he was justified in adding back the loss of transfer of telecom infrastructure debited to the profit and loss account. He thus concluded that in view of the above and consequent up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss account at all. In effect thus, we are dealing with a situation that here is a Rs 5,739.60 crore addition, which has been made by the Assessing Officer and sustained by the Dispute Resolution Panel, and effectively there is no argument to defend it. 9. It is not an uncommon sight that even the most distinguished and learned Departmental Representatives, as also other revenue authorities appearing before us, simply place their bland reliance on the impugned orders- as in this case, rather than dealing with specific justification for the additions or disallowances made therein and with the arguments advanced by the taxpayer's representatives. By such a conduct, any transparent debate about correctness or otherwise of such additions impugned in appeal is pre-empted. Of course, such an exercise does render our adjudication process a one way street but, as long as legal and factual position warrants due relief to the assessee and as long as impugned additions are so frivolous, there is nothing wrong in it. However, if an action of the Assessing Officer is so blatantly unreasonable that such seasoned senior officers well versed with functioning of judicial forums, as the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Administrative and Other expenditure 17 19.429,499 Total Expenditure 124,343.012 Profit before Licence Fee, Other Income, Finance Expense (Net). Depredation, Amortisation, Charity and Donation and Taxation 1,32,686,084 Licence fee a Spectrum charges (revenue share) 25,333,212 Profit before Other Income. Finance Expense (Net), Depreciation, Amortisation, Charity and Donation and Taxation 106,847,872 Other Income 18 2,358,581 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transferred from Debenture Redemption Reserve 413,623 62,855,545 Profit: brought forward 55,339.252 Profit carried to Balance Sheet 118,194,797 Note 2 (b) to Schedule 21 of the annual accounts Scheme of arrangement for Transfer of Telecom Infrastructure The scheme of arrangement ( the Scheme ) between Bharti Airtel Limited and Bharti Infratel Limited ('BIL') for transfer of assets and liabilities of passive telecom infrastructure undertaking, as defined in the Scheme ('the Telecom Infrastructure'), from Bharti Airtel to BIL was approved by the Hon'bie High Court of Delhi vide order dated November 26, 2007 and filed with the Registrar of Companies, Delhi and Haryana on January 31, 2008 i,e. the Effective Date of the Scheme, The Scheme has, accordingly, been given effect to in these financial statements and pursuant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, the resultant income would have been the same, but the adjustments, if at all required for the sake of completeness and transparency, were required for both the entries, i.e. loss on transfer of assets as also amount withdrawn from business restructuring. This is precisely what the assessee has done. As much as the loss on transfer of assets is not a tax deductible item, the amount transferred from reserves is also not a taxable item. The assessee thus reversed both these entries, as depicted above, in the computation of income. The Assessing Officer has taken note of the fact that in the computation of income attached to the return of income, the assessee has first added Rs 5739,60,05,089 as Loss on transfer of telecom infrastructure to Bharti Infratel Limited and then reduced Rs 5739,60,05,089 as amount withdrawn from Reserve for Business Restructuring , but then, instead of taking note of the unambiguous fact that these two distinct entries representing two facets duly reflected in the profit and loss account, the Assessing Officer assumes that since debit and credit of the same amount, resulting in neutralizing each other, he is justified in adding the loss of transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at even such purely factual issues are not adequately dealt with by the DRPs raises a big question mark on the efficacy of the very institution of Dispute Resolution Panel. One can perhaps understand, even if not condone, such frivolous additions being made by the Assessing Officers, who are relatively younger officers with limited exposure and experience, but the Dispute Resolution Panels, manned by very distinguished and senior Commissioners of eminence, will lose all their relevance, if, irrespective of their heavy work load and demanding schedules, these forums do not rise to the occasion and donot deal with the objections raised before them in a comprehensive and effective manner. While we delete the impugned addition of Rs 5739,60,05,089, we also place on record our dissatisfaction with the way and manner in which this issue has been handled at the assessment stage. Let us not forget that the majesty of law is as much damaged by not rendering justice to the conduct which cannot be faulted as much it is damaged by a wrongdoer going unpunished; not giving relief in deserving cases is as much of a disservice to the cause of justice and the cause of nation as much a disservice it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. That the assessing officer/TPO erred on facts and in law in enhancing the income of the Appellant by Rs.33,10,161 on the ground that the commission suo-motu disallowed/offered to tax by the appellant @ 0.65 % to cover the corporate guarantee to lender bank (Deutsche Bank) on behalf of its AE [M/s. Bharti Airtel Lanka (P) Limited] does not satisfy the arm's length principle envisaged under the Act. 13.1 That the assessing officer/TPO erred on facts and in law in disregarding the fact that: (a) corporate guarantee been advanced by the appellant as a matter of commercial prudence primarily to protect the business interest of the group by fulfilling the shareholder's obligation as any financial incapacitation of the subsidiary would jeopardise the investment of Bharti Airtel Limited; (b) in the absence of corporate guarantee, the appellant being the holding company would have provided the funds to the subsidiary by increasing the share capital, hence provision of corporate guarantee does not lead to any additional risk for the appellant warranting a compensation; (c) misinterpreting the concept of shareholder services contained in the Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the shareholder activity, the same was issued for NIL consideration. However, based on market quote of such corporate guarantee the appellant in it transfer pricing study determined arm's length commission for issuing such guarantee @ 0.65% p.a. of the guarantee amount and accordingly offered to tax Rs. 5,33,897. The TPO while benchmarking the international transaction of issue of corporate guarantee has relied on Para 7.13 of the OECD guidelines which state that but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member . The TPO observed that by issuing the corporate guarantee, the appellant has benefitted its associated enterprise by increasing its credit rating. The TPO held that such transactions being independent transactions held to be benchmarked applying CUP method, and, accordingly, determined arm's length price of the guarantee commission income @ 2.68% plus a mark-up of 200 basis points on the basis of data obtained from various banks under section 133(6) of the Act. A reference was also mad3 to the decision of the Tax Court of Canada in the case of GE Capital Canada Inc v The Queen (2009 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see would have made if the transactions were AEs were entered into at an arm's length price with a rank outsider. Our attention was also invited to some rulings by the coordinate benches when similar arguments were said to have been rejected by the coordinate benches. It was also contended that as regards the proposition that issuance of guarantees could be outside the ambit of scope of ' international transaction' itself, there were large number of judicial precedents from the coordinate benches upholding ALP adjustments in respect of corporate guarantees issued as also from foreign judicial forums, such as Tax Court of Canada, referred to in the transfer pricing order itself . Learned counsel for the assessee submitted that there is no judicial ruling, in the context of Indian transfer pricing legislation, which specifically holds that even in respect of the corporate guarantees issued for the benefit of the AEs, which do not cost the assessee anything, ALP adjustment can be made. This issue has not been raised or decided in the cases in which ALP adjustments have been upheld and, therefore, those decisions can not be put against the assessee. As for the decisions fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction shall include - (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion can be between two or more AEs, at least one of which should be a non-resident. 2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in the nature of provision of services, c. in the nature of lending or borrowing money, or d. in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises 3. An international transaction shall include 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. 4. Section 92B (2), covering a deeming fiction, provides that even a transaction with non AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the terms agreed with the AE. 26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92 B(1), which covers any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises . 30. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression ' international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words irrespective of the fact that it ( i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date . What is implicit in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay fall within the description set out in clause (c) of Explanation to Section 92 B, and yet it may not constitute an international transaction as the condition precedent with regard to the ' bearing on profit, income, losses or assets' set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees donot cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus donot have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. One may have also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profits, income, losses or assets, for example, when these receivab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il. 35. When it was put to the learned Departmental Representative that there could be a view that issuance of guarantees could be outside the ambit of scope of ' international transaction' itself, he submitted that there are large number of decisions in India and abroad, notably in Canada, dealing with the determination of arm's length price of guarantees. His argument seemed to be that even such a view is to be upheld, entire transfer pricing jurisprudence will be turned upside down. There does not seem to be any legally sustainable merits in this argument either. As for the decisions dealing with quantum of ALP adjustments in the guarantee charges, in none of these cases the scope of ' international transactions' under section 92B(1) has come up for examination. A judicial precedent cannot be an authority for dealing with a question which has not even come up for consideration in that case. It is only elementary that, as was also held by Hon'ble Bombay High Court in the case of CIT v. Sudhir Jayantilal Mulji (214 ITR 154), that a judicial precedent is an authority for what it actually decides and not what may what come to follow from some observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of ' international transaction' to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us. 36. For the reasons set out above, and as we have held that the issuance of corporate guarantees in question did not constitute ' international transaction' within meanings thereof under section 92B, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 33,10,161. The assessee gets the relief accordingly. 37. Ground No. 13 is thus allowed. 38. In ground no. 14, the assessee has raised the following grievances: 14. That the assessing officer/ TPO erred on facts and in law in making addition/adjustment of Rs.62,15,019 on account of difference in interest charged on loan advanced to associated enterprises by applying intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onds. 14.3 That the assessing officer/TPO erred on facts and in law in rejecting the alternate analyses, arguments, explanations, evidences, etc. submitted by the appellant in the form of internal CUP i.e. rates charged for the foreign currency loans taken by the appellant from unrelated parties and Transactional Net Margin Method ('TNMM') analysis, in support of the arm's length nature of its inter-company transaction of advancement of loans, without providing any cogent reasons for the same. 14.4 That the assessing officer/TPO erred in relying upon the rate of interest charged by various domestic banks on advancement of foreign currency loans obtained by the TPO under section 133(6) of the Act, without affording opportunity to the appellant to rebut the same, in violation of principles of natural justice. 14.5 That the assessing officer/TPO erred in relying upon the information obtained under section 133(6) of the Act, without appreciating that such information was not available in the public domain and therefore, could not have been relied upon for the purpose of determining the arm's length price. 14.6 That the assessing officer/TPO erred on facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that could be earned by the taxpayer by advancing loan to an unrelated party in India with the same weak financial health as that of the taxpayer's subsidiaries is considered . It was in this backdrop, and after an elaborate survey of Indian financial market, that the TPO opined that a rate of interest of 14% could be considered reasonable and representative of market after considering corporate bond market and financial health of the subsidiary. When it was put to the assessee, the assessee objected to the same, inter alia, on the ground that the loans were in foreign currencies, and therefore interest rate on rupee loans have no relevance, that interest has been charged from the subsidiaries over and above the costs of borrowings and in accordance with the international market standards, and that comparison with BBB grade bonds, as was done by the TPO, was not warranted as the advances were to assessee's subsidiaries. None of these submissions impressed the TPO. He was of the view that costs of borrowings were wholly irrelevant for the purpose of deciding ALP of the borrowing costs, that the risks for a single transaction is much more than the risks taken by banks in mult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP is of the view that the TPO has rightly rejected the CUP used by the assessee. The rate of 14% charged by the TPO as a CUP is found to be based on sound methodology and needs no interference. 59. It was in this backdrop that the Assessing Officer made an ALP adjustment of Rs 10,11,786 to the interest charged from the AEs in respect of loans given to them. The assessee is aggrieved and is in appeal before us. 60. We have heard the rival contentions, perused the material on record, including elaborate written submissions filed by the assessee, and duly considered factual matrix of the case as also the applicable legal position. 61. We have noted, as has been noted in the assessment order, DRP order and TPO orders as well, that the advances to subsidiaries are in foreign currencies i.e. in British Pounds, US Dollars and Canadian Dollars. In these circumstances, the interest rates on rupee bonds and debts, which has been extensively referred to in the order of the TPO, have no relevance at all. It is only elementary that interest is nothing but time value of money and when inflation pressure on a currency is lower, as is the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted. 63. As for the second adjustment of 300 points for transaction cost, this adjustment is sought to be justified by the following observations of the TPO: 7.9 Transaction Cost The company, which is considering a foreign currency loan, has to bear an additional transaction cost in each year. This is because under Reserve bank of India norms, it is mandatory for borrowers to buy such forward contracts and thus banks insist that the borrower must book a forward dollar contract to hedge the position. Forward cover is assort of insurance against currency fluctuations. If the borrower does not take such cover and the rupee depreciates against the dollar, costs will go up substantially as it would need to buy dollars from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his can also be considered as the guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing / rating. 66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. 67. We have taken note of the fact that the assessee's claim is that his borrowings in the same or sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y us for the immediately preceding assessment year. Following this judicial precedent, we uphold the grievance of the assessee and delete the impugned ALP of Rs 62,15,019. The assessee gets the relief accordingly. 42. Ground No. 14 is thus allowed. 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 Rs.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion money. 15.6 That the assessing officer/TPO erred on facts and in law by disregarding established judicial pronouncements in India in making the Transfer Pricing adjustment. 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 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. 2,01,39,150 24,09.2007 1.04.2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee loans given to the AEs and ALP adjustment was made for interest thereon. Aggrieved, assessee is in appeal before us. 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 capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary in which capital contribution was made. In the case of Perot Systems TSI India Ltd v. 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 rejected by a coordinate bench of this Tribunal. While doing so, the coordinate bench observed that there was no material on record to establish that the loans were in reality not loans but were quasi-capital and that there is also no reason why the loans were not contributed as capital if they were actually meant to be a capital contribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs.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. 51. Ground No. 15 is thus allowed. 52. We now turn to other grounds of appeal in this appeal. In ground no.1, 2 and 3, the assessee has taken up the following grievances: 1. That the Assessing Officer [AO] erred on facts and in law in completing the impugned assessment vide order dated 30.10.2012 under section 143(3) read with section 144C of the Income-tax Act ( the Act ) at an income of Rs. 7819,34,10,408 as against income of Rs.1998,06,29,257 declared by the appellant. 2. That in framing the assessment the learned AO has erred in making the following additions and disallowances: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was on account of bona fide view taken by the appellant. 4.3 Without prejudice, the assessing officer erred on facts and in law in not appreciating that the interest paid on loans taken by the appellant from ABN Amro, which were subsequently novated by ABN Amro in favour of third parties ( the new lenders ), who were tax residents of the respective countries, was not liable to tax in India in terms of Article 11 of the respective Tax Treaty and consequently therefore, there was no default in not deducting tax at source. 56. This issue also came up before us for adjudication in the immediately preceding Assessment Year i.e. 2007-08 and vide our order of even date we have remitted the matter to the file of the A.O. for fresh adjudication in the light of the directions set out therein. Learned representatives fairly agreed that whatever is decided in the said Assessment Year i.e. 2007-08 will equally apply for the present year also. In this view of the matter and respectfully following our decision for the Assessment Year 2007-08, we remit the matter to the file of A.O. for adjudication de novo in the light of directions set out in our order for Assessment Year 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indo-Dutch DTAA, i.e. in India or in Netherlands, such a person cannot be treated as ' resident of one of the states' for the purposes of the DTAA. Coming to specific tests laid down in the DTAA, as far as ' domicile test' is concerned, in common law, ' domicile' has a somewhat restricted meaning, denoting a fixed and lasting attachment to a country or state with its own separate legal system - one only in each case - which initially is acquired by birth ('domicile by origin'), and capable of being altered later by a personal decision ('domicile by choice'). In the case before us, the assessee-companies were incorporated in United Kingdom and there is nothing on record to even remotely suggest that the assessee-company was domiciled in the Netherlands. Since there can only be one country of domicile and since the assessee-companies are already domiciled in United Kingdom by the virtue of its incorporation in that country, the assessee-companies cannot be said to be domiciled in the Netherlands. Coming to the ' residence test', it is admittedly not the assessee's case that the assessee-companies are residents of Netherlands. Sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; residence' and ' place of effective management' belong) can be covered by the scope of expressions ' any other criterion of similar nature' in terms of art. 4(1) of the Indo-Netherlands DTAA. We are also of the considered view that cases before us clearly fail on this test. 25. In view of the above discussions and bearing in mind the fact that ABN- S did not have any locality related attachment in Sweden which could lead to residence type taxation on global basis, in our considered view, ABN-S cannot be treated as tax resident of Indo Swedish tax treaty. Accordingly, the benefit of Article 11 (3) of Indo Swedish tax treaty cannot be applicable on the ground that the interest remittances are made to ABN-S. However, for the reasons we will now set out, the mere fact that the interest has been remitted to ABN-S and that the benefit of Article 11(3) of Indo Swedish tax treaty or benefit of Article 11(3) of the Indo Dutch tax treaty are not available in respect of these remittances, does not imply that the amounts so paid are taxable in India. 26. We find that there is no dispute about the fact that the ABN- S, was arranger of the loan and there were also oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngement - though through the ABN-S. The taxability of interest is to be examined in the light of factual findings to be so arrived at, and in the light of the applicable legal position as per the relevant provisions of the tax treaties that India has with the jurisdictions in which original lenders are resident in. Once again, we have to acknowledge the fact that learned counsel for the assessee has filed elaborate documentation in support of their stand about tax residency status of beneficial owners of the interest paid by the assessee and has also addressed the arguments on merits, but, in the absence of this aspect of the matter having been examined by the authorities below, we are not inclined to deal with the matter on merits. In our considered view, the right course of action is to identify the factual aspects to be looked into, set out the legal principles, and remit the matter to the file of the Assessing Officer for adjudication de novo by way of a speaking order, in accordance with the law and after giving yet another fair and reasonable opportunity of hearing to the assessee. While doing so, the Assessing Officer shall specifically deal with all the contentions of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Their Lordships have, inter alia, held as follows: 47. In view of the aforesaid findings, the substantial questions mentioned above .. are answered as follows: (i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable upto 31st July 1999 should be treated as capital expenditure, and licence fee on revenue sharing basis, after 1st August 1999, should be treated as revenue expenditure. (ii) Capital expenditure will qualify for deduction as per section 35 ABB of the Act. 6. In the case before us, it is not in dispute that the licence fee in question is on revenue sharing basis and pertains to period post 1st August 1999. In this view of the matter, and in due deference to the esteemed views of Hon'ble jurisdictional High Court, we hold that the impugned disallowance deserves to be deleted and that the entire amount of licence fees is allowable as revenue deduction. The assessee gets the relief accordingly. 7. Ground No. 1 is thus allowed. 60. We see no reasons to take any other view than the view taken by us in the immediately preceding year. Respectfully following the same we uphold the grievance of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head ' Profits and gains of business or profession'. 14. We have also noted that it is an undisputed position, as evident from the computations reproduced in the assessment order itself, that the amounts claimed as a deduction represent the actual exercise of options. In this view of the matter, and in view of the principles laid down in Special Bench decision in the case of Biocon Ltd (supra), we uphold the grievance of the assessee. The disallowance of Rs 11,96,23,407 must also, therefore, be deleted. We order so. 64. We see no reasons to take any other view than the view taken by us in the immediately preceding year. Respectfully following the same we uphold the grievance of the assessee and direct the A.O. to delete the impugned disallowance. 65. Ground no.6 is thus allowed. 66. In ground no.7 the assessee has raised the following grievances :- 7. That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court decisions in the case of Idea Cellular Ltd (supra) as in assessee's own case, we see no reasons to interfere in the matter. Learned counsel for the assessee has pointed out that there is no element of agency, that talk time is traded and distributed, that it's a principal to principal relationship that the assessee has with his distributors, that flow of payment is in the reverse direction which is contrary to the concept of commission payment and that the assessee had a bonafide belief that section 40(a)(ia) will not come into play as the distributors have honoured their tax liability. However, as the issue is covered against the assessee by direct decision of Hon'ble jurisdictional High Court, we are not inclined to deal with all these arguments. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, We hold that the assessee was required to deduct tax at source from the commission so allowed by the assessee, and, accordingly, his failure to do so is to be visited with the consequence of disallowance under section 40(a)(ia) r.w.s. 194 H. The disallowance is thus confirmed. 68. We see no reasons to take any other view than the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the proviso to sub-section (1) of Section 201. 71. This issue also came up before us for adjudication in the immediately preceding Assessment Year i.e. 2007-08 and vide our order of even date we have remitted the matter to the file of the A.O. for fresh adjudication in the light of the directions set out therein which are reproduced as follows :- 34. It is important to take note of the fact that the issue as to whether the amounts paid for roaming charges will attract tax deduction at source under section 194 J was before Hon'ble Supreme Court in assessee's own case, reported as CIT v. Bharti Cellular Limited (330 ITR 239), and the issue was decided against the assessee in principle but the matter was remanded to the Assessing Officer (TDS) with certain directions for de novo adjudication. When this was pointed out to the learned counsel for the assessee, he invited our attention to the following observations made by Their Lordships in this judgment: 8. There is one more aspect that requires to be gone into. It is the contention of respondent No. 1 herein that interconnect agreement between, let us say, M/s Bharti Cellular Ltd. and BSNL in these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 9. That the assessing officer erred on facts and in law in disallowing lease charges aggregating to Rs.182,22,28,069 paid to M/s. IBM India and M/s. Nortel Networks India (P) Limited. 9.1. That the assessing officer erred on facts and in law in alleging that the transaction entered into by the appellant fell in the category of a disguised purchase, by relying upon similar finding given in the assessment order for assessment year 2006-07. 9.2 That the assessing officer failed to appreciate that the mere fact that the transactions entered into by the appellant were treated as finance lease in the books of accounts as per the binding Accounting Standard on Finance Lease , such treatment in books of accounts was not relevant for determining the nature of the transaction and allowability of the claim under the provisions of the Act. 9.3 Further, without prejudice, that the assessing officer erred on facts and in law in allowing deprecation as claimed in the books of accounts rather than allowing depreciation at rates prescribed under the Act. 9.4 Further, without prejudice, that assessing officer erred on facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That in the facts and Circumstances of the case and in law, the assessee ought to be allowed deduction of liability borne by the assessee in pursuance of order(s) passed under section 201 (1) of the Income Tax Act, 1961 ('the Act'). Tax demands under section 201(1) of the Act has been raised against the applicant for various assessment years, for alleged default in deduction of tax at source under the provisions of the Act, in respect of the following transactions : (a) Discount allowed to distributors on sale of pre-paid products -Alleged non-deduction of tax under section 194H of the Act; (b) Roaming charges paid to other cellular service providers -Alleged non-deduction of tax under section 194J of the Act; (c) Interest payments made to ABN Amro Bank, Netherlands -Alleged non- deduction of tax under section 195 of the Act. The issue whether tax was actually deductible at source on the aforesaid transactions is, it is submitted, still under dispute, which is pending adjudication before various appellate authorities and no finality has been reached on the issues as yet. However, in pursuance of proceedings initiated under section 201 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT : 229 ITR 383. 79. Having heard the rival contentions on this petition, we are inclined to admit the additional ground of appeal as it is purely a legal issue as to whether or not the liability borne by the assessee, under section 201 and which is not recovered from the recipients of payments without deduction of tax at source, is deductible in computation of assessee's income. However, as it involves factual verifications, we are not inclined to deal with the same, on merits, at this stage. We, therefore, deem it fit and proper to remit this issue to the file of the Assessing Officer to adjudication de novo, by way of a speaking order, in accordance with the law and after giving a fair and reasonable opportunity of hearing to the assessee. The assessee is directed to make all such legal and factual submissions on this aspect, as he may deem appropriate, and the Assessing Officer shall adjudicate on the same by specifically dealing with the same by way of a speaking order. We direct so. 80. The additional ground of appeal, as set out above, is thus admitted in principle but remitted to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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