TMI Blog2014 (12) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... chmark such transactions against a similarly placed transaction and not deem the transaction to be a lending or borrowing transaction - a transaction of advancing loans is within the purview of transfer pricing mechanism and the arm's length price computed thereof is includible in the assessable income of the assessee. Where the character of payment is towards share application money, thereby reflecting a capital investment, and the same not having been disputed by the TPO, such a transaction cannot be subject to an arm's length price adjustment under the plea of it being a transaction of lending or borrowing - the TPO was not justified in treating the aforesaid transaction as being an interest-free lending transaction entered with the associated enterprise - the transaction would have entailed charging of interest for the period between payment of share application and the date of allotment of shares - the approach of the authorities below in the context of the aforesaid amount of ₹ 9,91,39,000/- by treating it to be a transaction in the nature of interest-free lending transaction per se, and subjecting it to an arm's length price adjustment is erroneous and unwarranted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2009-10, which is directed against the order of the Dy. Commissioner of Income Tax, Circle- 7, Pune (in short the Assessing Officer ) passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short the Act ) dated 10.01.2014, which is in conformity with the directions given by the Dispute Resolution Panel, Pune (in short the DRP ) dated 18.12.2013. 2. The substantive dispute in the present appeal is in relation to an addition of ₹ 2,38,00,879/- made by the Assessing Officer on account of adjustment to the stated value of international transaction entered by the assessee with its associated enterprises in order to bring the same to an arm's length price within the meaning of section 92(1) of the Act. 3. In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, interalia, engaged in the business of engineering design and development services. For the assessment year 2009-10, it filed a return of income on 31.10.2009 declaring total income of ₹ 91,20,930/-. The Assessing Officer noticed that assessee had entered into certain international transactions with its assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loan to Tooltech Deutschland Gmbh (in short the TTD ) is ₹ 6,04,85,670/-, which represents the opening balance outstanding as on 01.04.2008. On this aspect, plea of the assessee is that such loan has been given out of internal accruals and other interest-free loans received from promoters/directors in the past years. The second category of advances comprise outstanding Sundry debtors for sales made to TTD amounting to ₹ 1,87,61,274/-, which was converted into loan as on 31.03.2009. The third category of advances comprise of loans of ₹ 66,87,000/- and ₹ 9,24,52,000/- given to TTD during the year for the purpose of making investment in equity of a new company i.e. MBT Sima-Technik (in short MBT ). It has been contended that all the advances were made on account of commercial expediency and therefore there was no justification for making adjustment on account of non-charring of interest. The learned counsel for the assessee submitted that any addition on account of interest can be made only for a real income accruing to the assessee whereas in the present case no actual interest income has accrued to the assessee since no interest has been charged on advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces outstanding from TTD, the details are as follows. As on the first day of the year under consideration i.e. 01.04.2008 an amount of ₹ 6,04,85,670/- was outstanding from the said associated enterprise, and the same has been treated by the TPO as a transaction of loan advanced free of interest. Further, the second limb of loan comprises of advances made during the year under consideration of ₹ 66,87,000/- and ₹ 9,24,52,000/- totaling to ₹ 9,91,39,000/-, for the purpose of making investment in the equity capital of a new company, i.e. MBT. The assessee identified interest in relation to the aforesaid investment at ₹ 1,07,27,321/-, which was not charged to the Profit Loss Account but was debited to the MBT Investment account; and, reflected in the Balance- Sheet under the head Investments as Share Application money . Third category of loan to TTD is a sum of ₹ 1,87,61,274/-, which represented recoverable sale s debtors converted into loan. The assessee had made sales to its associated enterprises and the outstanding sale debtors to the extent of ₹ 1,87,61,274/- has been converted into a loan. 10. In this context, the TPO observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - and ₹ 9,24,52,000/- made during the year, it is explained that the same have been advanced for making investment in the equity capital of a new company, namely, MBT, and the same are not loans but share application money pending allotment. The said amount alongwith interest element of ₹ 1,07,27,321/- thereof totaling to ₹ 10,04,23,222/- has been reflected as Investment in the Balance-Sheet. A reference in this context has been made to the Balance-Sheet for the year under consideration, a copy of which has been placed at page 7 of the Paper Book. 12. In so far as the amount of ₹ 9,91,39,000/- (i.e. ₹ 66,87,000/- + ₹ 9,24,52,000/-) advanced during the year is concerned, the treatment given by the assessee is in the nature of share application money . The aforesaid amount of share application money is outstanding as the investee company has not issued shares to the assessee till the close of the previous year under consideration. The nature of the aforesaid transaction is share application money, and clearly it is not in the nature of a lending or borrowing. The TPO has treated such transaction in the nature of interest-free loan primarily f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed consideration of sales made by assessee to its associated enterprise. The addition on this count has been computed by the lower authorities by considering that the amount represented a loan transaction for the complete period of 12 months comprised in the year under consideration. In-fact, as per the appellant, the outstanding amount was converted into loan only on the last day of the previous year under consideration. No doubt, a transaction of interest free lending is liable to be subject to arm's length price adjustment, so however, where the lending has occurred on the last day of the previous year under consideration, no adjustment would be necessary for the relevant year. However, in this context, we do not find any determination by the TPO or the Assessing Officer regarding assessee s plea that outstanding debtor s balance has been converted into loan on the last day of previous year under consideration. As the same involves a factual appreciation, we deem it fit and proper to restore the matter back to the file of the Assessing Officer. The assessee shall satisfy the Assessing Officer that the amount of ₹ 1,87,61,274/- was converted into an interest-free loan o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domestic bank rate is not a sound basis and instead internationally accepted rate of LIBOR is certainly a better benchmark in order to compute the arm's length price interest rate in respect of the impugned transactions. Therefore, we direct the Assessing Officer to cull out the average of the LIBOR rate for the period under consideration and thereafter compute appropriate arm's length price adjustment with respect to interest component of the transactions of advancing interest-free loans to associated enterprises. 16. Before parting, we may also make a reference to another amount of ₹ 32,91,354/-, which has also been considered as a lending transaction by the TPO. The said sum is advanced to another associated enterprise, namely, Tooltech Europe OY, Finland. The claim of the assessee before the lower authorities as well as before us has been that the sum of ₹ 32,91,354/- has been advanced to Tooltech Europe OY, Finland by way of conversion of sundry debtors outstanding from them. In this context, neither the material on record and nor the discussion in the orders of the lower authorities reveal as to the date on which the amount of sundry debtors outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is in further appeal before us. 19. Before us, the learned Representative for the assessee has referred to page 11 of the Paper Book for explaining the details of the finance cost of ₹ 80,01,233/- debited in the Profit Loss Account. The said amount represents interest on foreign bill discounting, bank charges, interest on vehicle loan, interest on cash credit facility and interest on factoring, etc.. The plea of the assessee is that the corresponding funds have been put to use in the business of the assessee and that the interest-free advances referred to in the Balance-Sheet were in-fact advances made in the course of business and therefore the entire finance cost of ₹ 80,01,233/- reflects expenditure incurred in the course of business activity only. 20. On the other hand, the learned Departmental Representative has referred to the following observations of the DRP in order to support the stand of the Assessing Officer :- 2.4.5 We have considered the arguments of the assessee. We are unable to agree with the assessee for three reasons. Firstly, the learned AO in the draft assessment order has stated that the assessee did not prove that the advances w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate determination of the issue, in the interest of justice and fair play, we deem it fit and proper to set-aside the order of the Assessing Officer and restore the matter back to his file with directions to reappraise the factual matrix and thereafter pass a speaking order in the context of the Finance costs of ₹ 80,01,233/- debited in Profit Loss Account. Needless to say, Assessing Officer shall allow the assessee an appropriate opportunity of being heard and furnish material and submissions in support of its claim and only thereafter the Assessing Officer shall pass an order afresh on this aspect in accordance with law. Thus, on this aspect also assessee succeeds for statistical purposes. 23. In the course of hearing, assessee referred to the following Additional Ground of Appeal :- (1) The Hon ble Dispute Resolution Panel (DRP) has erred in law and on the facts of the case in directing the Assessing Officer to make an addition of ₹ 11,57,367/- as notional corporate guarantee fee on account of transfer pricing adjustments. The action is unjustified, unwarranted and without prejudice the addition is excessive. 24. The aforesaid Additional Ground of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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