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2015 (7) TMI 525 - ITAT AHMEDABAD

2015 (7) TMI 525 - ITAT AHMEDABAD - [2015] 43 ITR (Trib) 205 (ITAT [Ahm]) - Transfer pricing adjustment - whether the provisions of transfer pricing not applicable on the appellant company, the assessment order ought to have been quashed on this ground itself? - addition of ₹ 19,92,355/-being Arms Length Price of loan interest made by the AO - Held that:- As the learned counsel himself accepts, on a conceptual note, several types of debts, particularly long term unsecured debts, and revenu .....

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acto reward for this value of money is the opportunity for capital investment or such other benefit, cannot be nil. As for the intent of the assessee to treat this loan as investment, nothing turns on it either. Whether assessee wanted to treat this loan as an investment or not does not matter so far as determination of armís length price of this loan is concerned; what really matters is whether such a loan transaction would have taken place, in an armís length situation, without any interest be .....

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anation either. Even when the loan is given out of the GDR funds held abroad, the armís length price of the loan is to be ascertained. The source of funds is immaterial in the present context. We have also noted that the assessee has not offered any assistance on the quantum of ALP adjustment in respect of this loan transaction, and that in the subsequent assessment years, the assessee himself has accepted ALP adjustment by adopting the LIBOR + 2% interest rate. In this view of the matter, no in .....

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- SUPREME Court), the expenses on issuance of share capital are capital expenses in nature and that these expenses cannot be allowed as a deduction as revenue expenses. However, as long as these expenses, even if capital in nature, satisfy the conditions set out in Section 35D, these expenses are eligible for amortization under Section 35D. One of the conditions in Section 35D(1), as it stood at the material point of time, is that either the eligible expenses should be incurred before the comme .....

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ial undertaking. As for the decision of a coordinate bench, in the case of Mahindra & Mahindra Ltd Vs JVIT [2009 (10) TMI 639 - ITAT MUMBAI ], this decision was in the context of foreign currency convertible bonds which were debt instruments, though convertible into equity at a later stage. That decision has no bearing on the facts of this case. In view of these discussions, we see no merits in this grievance of the assessee either. - Decided against assessee.

Loss due to foreign fluc .....

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ere brought into India but, on account of fluctuation in exchange value, making the repayment of these loans required higher rupee payments. In the present case, however, since the amount is lying abroad in foreign exchange denominated accounted, the exchange rate fluctuation has no additional liability for repayment. There is no real loss as such. The loss is purely an accounting loss due to conversion of foreign currency obligations on the basis of different rates. In the light of these discus .....

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e matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2008-09. 2. In first and second grounds of appeal, which we will take up together, the assessee has raised the following grievances: 1. The Ld. CIT (A) has erred in law and on facts in dismissing the appellant s ground challenging the order u/s. 143(3) r.w.s. 144C(1) of the Act more particularly the action of the A.O. in referring the case to Addl. CIT (Transfer Pricing), Ahmedabad for computation of .....

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pon the findings of the ACIT (TPO) in his order dated 14-10-2010. In view of elaborate facts and submissions filed, more particularly keeping in view the fact that the amount given to Soma Textiles FZE is not a loan but merely contribution towards capital and/or Quasi Equity Capital of the said subsidiary, the order of the ACIT (TPO) is bad in law and consequently the impugned addition of ₹ 19,92,355/ - requires to be deleted. 3. Briefly stated, the relevant material facts are like this. T .....

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ons are covered by the scope of international transactions , as defined under section 92CA(3 ) of the Act, and, accordingly, a reference was made to the Transfer Pricing Officer for ascertaining the arm s length price of these transactions. In the proceedings before the TPO, the basic contention of the assessee has been that the entire amount of ₹ 16.75 crore advanced to the Soma Textiles FZE was out of the foreign exchange proceeds of assessee s Global Depository Receipts (GDRs) issue and .....

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ent enterprises. As regards the claim for the advance being in the nature of quasi capital, the TPO referred to, and relied upon, a coordinate bench s decision in the case of Perot Systems TSI Vs DCIT [(2010) 130 TTJ 685 (Del)]. In the said case, it was held that the argument that the loans were in reality not loans but quasi capital cannot be accepted because the agreements show them to be loans and there is no special feature in the contract to treat them otherwise . It was in this backdrop th .....

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company and that the appellant has also not given any evidence to show that the amount was not loan but the intention was to treat the same as capital contribution . Learned CIT(A) also held that the rate of LIBOR+ 2% was very reasonable by any standard and that it would be the minimum rate at which the AE could have borrowed in UAE in an arm s length transaction. The arm s length adjustment was thus upheld in principle as also in quantum. The assessee is not satisfied and is in further appeal b .....

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was stated so in the case of Micro Inks Ltd Vs ACIT [(2013) 157 TTJ 289 (Ahd)]. The question, however, arises as to what are the connotations of expression qua si capital in the context of the transfer pricing legislation. 6. Hon ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)], has begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that A phrase begins life as a literary expression; its .....

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te repetition (in the words of Felix Frankfurter J, quoted in the beginning of this judgment a "lazy repetition") of this reasoning, without an independent analysis of the provisions of the Act and the rules , the same seems to be the position with regard to quasi capital . There are several decisions of this Tribunal, including in the cases of Perot Systems TSI Vs DCIT [(2010) 130 TTJ 685 (Del)]., Micro Inks Ltd Vs ACIT [(2013) 157 TTJ 289 (Ahd)], Four Soft Pvt Ltd Vs DCIT [ (2014)149 .....

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Act and the Rules , let us take briefly deal with the connotations of quasi capital , and its relevance, under the transfer pricing regulations. 7. The relevance of quasi capital , so far as ALP determination under the transfer pricing regulation is concerned, is from the point of view of comparability of a borrowing transaction between the associated enterprises. 8. It is only elementary that when it comes to comparing the borrowing transaction between the associated enterprises, under the Com .....

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ccount for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplicto .....

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n capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the coordinate benches, wherein references have been made to the advances being in the nature of quasi capital , these cases referred to the situations in which (a) advances were made as capital could not subscribed to du .....

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ney in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced. 10. Learned counsel wants to take the concept of quasi capital to a different level now. His contention is that whenever it can be said that the loan transaction is in the nature of quasi capital, its arm s length price should be nil rate of interest, and to decide what is quasi capital , he refers to the .....

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particularly long term unsecured debts, and revenue participation investments could be termed as quasi capital . So far as arm s length price of such transactions are concerned, this cannot be nil because, under the comparable uncontrolled price method, such other transactions between the independent enterprises cannot be at nil consideration either. Nobody would advance loan, in arm s length situation, at a nil rate of interest. The comparable uncontrolled price of quasi capital loan, unless it .....

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m s length situation, without any interest being charged in respect of the same. As for the contention regarding crucial role being played by, or visualized for, this AE, there is no material on record to demonstrate the same or to justify that even in an arm s length situation, a zero interest rate loan would have been justified to such an entity. A lot of emphasis has also been placed on the fact that the loan was out of the GDR funds, and, for this reason, the interest free loan was justified .....

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erest rate. In this view of the matter, no interference is warranted on the quantum of the ALP adjustment either. In view of these discussions, we confirm the stand of the authorities below on this issue and decline to interfere in the matter. 12. Ground nos. 1 and 2 are thus dismissed. 13. Ground no. 3 is not pressed. 14. In ground no. 4, the assessee has raised the following grievance: The ld. CIT (A) has erred in law and ion facts in confirming the addition of ₹ 15,02,592/- made by the .....

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proceedings, the Assessing Officer noted that the assessee has incurred expenses of ₹ 75,12,960 on GDR issue and the treated the same as preliminary expenses eligible for amortization under section 35D of the Act. However, the Assessing Officer declined the deduction of ₹ 15,02,592, claimed by the assessee under section 35D, by observing that it is settled law that whatever expense is incurred for issue of share capital is capital loss to the company and is neither revenue expenditur .....

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, and that the appellant has given a loan out of this amount to its subsidiary in UAE and, therefore, it has not been used for any of the purposes under section 35D of the Act . The assessee is aggrieved and is in further appeal before us. 16. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the appl icable legal position. 17. We find that, as held by Hon ble Supreme Court in the case of Brooke Bond Limited (supra), the ex .....

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and, in a situation in which the expenses are incurred after the commencement of business, the expenses should be incurred for extension of his undertaking or setting up of a new industrial undertaking. This condition is clearly not satisfied on the facts of the present case as the expenses are incurred after the commencement of the business and it is not even assessee s case that the expenses are incurred for extension of his undertaking or for setting up of new industrial undertaking. As for t .....

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so dismissed. 19. In ground no. 5, the assessee has raised the following grievance: The Ld. CIT (A) has erred in law and on facts while giving a finding that the loss due to foreign fluctuation amounting to ₹ 2,73,28,718/- is a capital loss as against revenue loss claimed by the company. In view of the legal position and facts of the case, the said loss requires to be considered in revenue in nature. 20. The relevant material facts are like this. During the course of the scrutiny assessmen .....

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this amount could not be capitalized. However, that had no impact on the computation of taxable income since the assessee had not claimed any deduction in respect of this loss. Aggrieved by the observations made by the Assessing Officer, assessee carried the matter in appeal before the CIT(A). In appeal, the assessee contended that revenue deduction should be allowed in respect of the said loss of ₹ 2,73,28,718 as not claiming this loss as deduction was an inadvertent error on the part of .....

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s. The assessee is not satisfied by the stand of the CIT(A) and is in appeal before us. 21. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the appl icable legal position. 22. The issue involved is a legal issue and just because the assessee has not claimed the deduction in the income tax return, the assessee cannot be debarred from seeking adjudication on the same, on merits, before us. In any event, learned CIT(A) has al .....

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