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M/s TVS Logistics Services Ltd. Versus The Deputy Commissioner of Income Tax

2016 (6) TMI 558 - ITAT CHENNAI

Determination of arm's length price with regard to commission for Corporate Guarantee given by the assessee to its Associate Enterprises - Held that:- Tribunal is of the considered opinion that this is a method adopted by the assessee to reduce the tax burden in India by paying interest to the extent of ₹ 10.05 Crores on the borrowed funds. If the equity capital funds raised from its shareholders are not diverted to its Associate Enterprises outside India, there may not be any necessity fo .....

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situation, the profit of the assessee will increase to the extent of ₹ 10.05 Crores in India and the assessee is liable to pay tax on that.

By diverting the equity capital raised to its Associate Enterprises, the assessee is claiming the payment of interest on the borrowed funds to the extent of ₹ 10.05 Crores as expenditure. Therefore, this Tribunal is of the considered opinion that it is an attempt on the part of the assessee to reduce the tax burden to that extent. The .....

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on to interfere with the order of the lower authority and accordingly the same is confirmed.

Corporate Guarantee given by the assessee to its Associate Enterprises - Held that:- It is not in dispute that the assessee has offered Corporate Guarantee to its Associate Enterprises at UK. An identical fact was considered by this Tribunal in Redington (India) Limited (2015 (11) TMI 853 - ITAT CHENNAI ) found that the Corporate Guarantee given by the assessee to its Associate Enterprise does .....

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tained any separate books of account for the investment made by the assessee. Even though the assessee claims that major investment was made in Associate Enterprise, no details of such investment are available on record. Therefore, the claim of the assessee that major investment was made in Associate Enterprise is not substantiated. The fact remains that the assessee has made investment in the Associate Enterprise and it is also an admitted fact that the assessee has paid interest to the extent .....

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bsence of any other details, the DRP has rightly found that disallowance has to be made by applying Rule 8(2) of Income-tax Rules, 1962. Therefore, we find no infirmity in the order of the lower authority and accordingly the same is confirmed.

Letter of Comfort issued by the assessee-company to its Associate Enterprise - Held that:- Letter of Comfort is nothing but a guarantee given by the assessee-company to its Associate Enterprise to avail loan from financial institutions so as to .....

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ny cost to the assessee, therefore, it is outside the ambit of international transaction. By following the order of this Tribunal in Redington (India) Limited (supra) and for the reason stated therein, this Tribunal is of the considered opinion that there may not be any need to make any adjustment in respect of Letter of Comfort. Accordingly, the orders of the lower authorities are set aside the and Assessing Officer is directed to delete the addition made with regard to Letter of Comfort on not .....

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ses for consideration is determination of arm's length price with regard to commission for Corporate Guarantee given by the assessee to its Associate Enterprises. 3. Shri M. Viswanathan, the Ld. representative for the assessee, submitted that the assessee-company is a subsidiary of T.V. Sundaram Iyengar & Sons Limited. According to the Ld. representative, the assessee-company advanced a sum of ₹ 44,41,750/- to its Associate Enterprise M/s TVS Americas Inc. USA without charging any .....

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xpansion. The Ld. representative further clarified that the advances made to Associate Enterprises were not from borrowing. According to the Ld. representative, the assessee had surplus funds in the form of equity capital raised through issuance of share to Private Equity Investors. The Ld. representative further submitted that the assessee utilised the funds only for the purpose of expansion of its business through inorganic growth irrespective of the geographical boundaries. Therefore, adoptio .....

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on the borrowed loan, naturally, the profit of the assessee-company to the extent of payment of interest is reduced and the profit was shifted to outside the jurisdiction of the country. Therefore, according to the Ld. D.R., the Assessing Officer has rightly found that the advancement of interest-free loan to its Associate Enterprises outside the country is for reducing/shifting the taxable profit in India. Accordingly, the Transfer Pricing Officer computed the interest at LIBOR rate on the adva .....

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e that the assessee advanced interest-free loan / advance to its Associate Enterprises outside the country. It is also not in dispute that the assessee has not charged any interest on the loan given to its Associate Enterprises. The assessee claims before this Tribunal that the borrowed funds were not diverted for making advance to its Associate Enterprises. The assessee contends that it had surplus funds in the form of equity capital raised through issuance of share to Private Equity Investors. .....

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ngth price is to prevent the assessee from shifting the profit from one taxable jurisdiction to other taxable jurisdiction. In this case, the assessee advanced funds to its Associate Enterprises and claiming before this Tribunal that it is mandatory for the assessee to advance for its expansion of business as per the shareholding arrangement in the form of equity capital raised. There may be an obligation, being shareholder of the Associate Enterprises, to advance money for expansion of its busi .....

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business and there is no compulsion for the assessee to utilize the funds raised in the form of equity capital in India. In other words, the funds raised from equity capital can also be utilized outside India since no cost involved in such capital. There is no prohibition for expanding the assessee s business outside India by investing its own funds outside India after observing necessary formalities. However, when the assessee borrowed funds in India and paid interest to the extent of ₹ .....

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nds and pay interest of ₹ 10.05 Crores on the borrowed funds. From the material available on record, it is obvious that just to shift the profit outside India and reduce the tax liability in India, the assessee diverted its funds raised through equity capital outside India, and borrowed funds in India. Had the assessee used the equity capital in India, there is no necessity to borrow funds in India and pay interest to the extent of ₹ 10.05 Crores. In such a situation, the profit of t .....

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e considered opinion that interest on the funds advanced to Associate Enterprise outside India has to be computed on notional basis by applying LIBOR rate. LIBOR is one of the internationally accepted rates for the loan advanced in the international market. Therefore, the TPO has rightly determined the arm's length price for the advance made by the assessee to its Associate Enterprises by adopting LIBOR rate of interest. Therefore, this Tribunal do not find any reason to interfere with the o .....

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guarantee was for a bridge loan obtained by Multipart Solutions Limited from Export & Import Bank. The loan was obtained by the Multipart Solutions Limited, UK for meeting its working capital requirements. For providing the guarantee, according to the Ld. representative, the assessee has not charged any fee. Since the guarantee was provided to its Associate Enterprise, the assessee-company believed that the transaction was at arm's length as provided in Section 94C of the Act. The Ld. r .....

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On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that the Transfer Pricing Officer found that the assessee gave a Corporate Guarantee in favour of TVS Logistics Investments UK limited. The said guarantee, however, was not outstanding at the end of the relevant financial year. According to the Ld. D.R., the acceptance of the guarantee does not result in implicit support to the recipient entity. According to the Ld. D.R., the Transfer Pricing Officer further foun .....

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the jurisdiction of the country. The Ld. D.R. further submitted that guarantee to the banker in most cases result in a loan with lower rate of interest. Therefore, according to the Ld. D.R., there is a cost saving to the group concern which would reflect in the books of account as well. The Ld. D.R. further submitted that the decision of this Tribunal in Redington (India) Limited (supra) has not reached finality and the matter is pending before the High Court. Moreover, the opinion of this Trib .....

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orporate Guarantee to its Associate Enterprises at UK. An identical fact was considered by this Tribunal in Redington (India) Limited (supra). This Tribunal, after considering the decision of Delhi Bench of this Tribunal in Bharati Airtel Ltd. v. Addl. CIT (2004) 43 taxmann.com 150 found that the Corporate Guarantee given by the assessee to its Associate Enterprise does not involve any cost to the assessee, therefore, it was outside the ambit of international transaction. In view of this decisio .....

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different view on the subject. Therefore, by following the decision of co-ordinate Bench of this Tribunal in Redington (India) Ltd. (supra), the orders of the lower authorities are set aside. The adjustment made by the Transfer Pricing Officer as confirmed by the Dispute Resolution Panel is not justified. Accordingly, the addition made by the Transfer Pricing Officer is deleted. 11. The next ground of appeal is with regard to disallowance made under Section 14A of the Act. 12. Shri M. Viswanatha .....

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further submitted that the investment was made by the assessee in the Associate Enterprise, therefore, the dividend income earned from the Associate Enterprise are taxable in India. Hence, the DRP is not justified in confirming the order of the Transfer Pricing Officer. 13. On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that the assessee has not maintained any separate books of account with regard to investment from which the income was earned. The claim of .....

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t executives of the company and the investment was managed by its key management personnel and executives. The corporate structure itself requires an administrative establishment, which requires incurring of multifarious expenses including establishment, general and administrative expenses. The decision on investment and how and where to be invested need considerable time and expertise. Therefore, the decision taken at the high level of the corporate entity involves time and cost. Hence, it is n .....

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ng to the Ld. D.R., the Transfer Pricing Officer has rightly disallowed the expenditure for earning the exempted income. 15. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims that major portion of investment was made in the Associate Enterprise outside the country. The assessee also claims that no expenditure was incurred for making the investment. The assessee has also claimed that if at all any income was generate .....

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ssessee that major investment was made in Associate Enterprise is not substantiated. The fact remains that the assessee has made investment in the Associate Enterprise and it is also an admitted fact that the assessee has paid interest to the extent of ₹ 10.05 Crores on the loan borrowed for the business. In the absence of any direct link between the payment of interest and the income earned by the assessee, this Tribunal is of the considered opinion that the provisions of second and third .....

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e last issue arises for consideration is with regard to Letter of Comfort issued by the assessee-company to its Associate Enterprise. 17. Shri M. Viswanathan, the Ld. representative for the assessee, submitted that a Letter of Comfort was issued by the assessee-company as a procedural formality to be complied with by wholly owning shareholder to enable the subsidiary company to borrow funds from banks. According to the Ld. representative, the assessee has not derived any benefit out of this Lett .....

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from financial institutions. The Ld. representative submitted that there is no element of profit involved in giving the Letter of Comfort, therefore, it cannot be a subject matter of international transaction. 18. On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that the Transfer Pricing Officer made adjustment in respect of the payment actually made by the assessee. The notional adjustment was made to the extent of ₹ 21 lakhs which is for the risk taken .....

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