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DLF Hotel Holdings Ltd. Versus DCIT, Circle-10 (1) , New Delhi

2016 (11) TMI 1031 - ITAT DELHI

Existence of international transaction - tpa - interest free loans given to AE - Held that:- If the tax payer claims it is an interest free loan as a share holding activity, to be utilized by the AE for acquiring and increasing its portfolio and on utilization and fulfilling the internal and external requirements by way of permissions and procedures of the regulatory authority etc. it is to be converted into equity and that too at a premium then it is the correctness of this claim which is to be .....

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e interest free loan must necessarily be deemed to be an interest earning activity and not an activity to capitalize the opportunity cost for investing in new territories. We hold that for the tax authorities to consider re-characterizing the transaction the tax authorities must necessarily demonstrate that the transaction as claimed and documented is a sham or on the basis of facts and evidences is at a substantial variance with the stated form. In the absence of any such exercise the tax autho .....

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citor and considered to be an activity for earning interest. The tax authorities must bring on record facts and evidences impacting the veracity of the claim of the assessee and demonstrate the hollowness of the assessee’s claim. No such exercise has been done to counter the consistent claim of the assessee demonstrated by facts on record that the intention was to capitalize the opportunity cost and not to encash the opportunity to best utilize the available funds. - Decided in favour of assesse .....

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urther disallowance on facts is warranted. The fact of suo moto disallowance is evident from the second last page of the AO itself. Accordingly, we hold no further disallowance need be made subject to the verification of the calculation placed on record. - I.T.A .No. 6336/Del/2012 - Dated:- 30-6-2016 - SMT DIVA SINGH, JUDICIAL MEMBER AND SH.L.P.SAHU, ACCOUNTANT MEMBER For The Appellant : Shri R.S.Singhvi, CA For The Respondent : Shri A.M. Govil, CIT(DR) ORDER PER SMT. DIVA SINGH, JUDICIAL MEMBER .....

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nature of interest free short term advance given to the subsidiary company as loan instead of quasi equity considered by the assessee. 2. That on the facts and the circumstances of the case, the Ld. Transfer Pricing Officer and Dispute Resolution Panel and consequentially Ld. Assessing Officer in holding that the Arms's Length rate of interest chargeable on the interest free advance given to the subsidiary company is @ 17.26% as computed by the Transfer Pricing Officer, as against nil charg .....

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prevailing at the time of advancing the money. 5. That the Ld. Transfer Pricing Officer and Dispute Resolution Panel and consequentially Ld Assessing Officer grossly erred in law in not appreciating that the interest rates determined by CRISIL are determined for a different purpose and cannot be taken as comparable to international transactions of quasi equity to a 100% subsidiary. 6. That the determination of Arm's Length Price has not been done as per provisions of section 92C read with r .....

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Income Tax Rules, 1962 at ₹ 2,56,62,215. 9. That the order passed by the AO is bad in law. 10: That on the facts and the circumstances of the case, the Ld. Assessing Officer has erred in initiating the penalty proceedings u/s 271(1)(c) of the Income Tax Act 11. That the appellant craves leave to add to, alter, amend or vary any of the ground(s) of appeal at or before the time of hearing. 2. Summing up the grounds raised in the present appeal the Ld. AR inviting attention to the grounds rai .....

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ts in support of the issues addressed in Ground Nos. 1 to 3. Ground No. 9, it was submitted is general in nature; Ground No. 10 is premature; and Ground No. 11 is a residuary ground, accordingly it was submitted that these grounds would not require any adjudication. 3. Inviting attention to the final assessment order, it was submitted that the assessee on 30.09.2008 in the year under consideration returned an income of ₹ 2,15,39,383/-. Referring to para 4.2 of the said order it was submitt .....

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aimed to become one amongst the largest such companies globally. For the said purposes it was submitted that the assessee had established a hospitality arm. Elaborating the strategy used for attaining its aims it was submitted that the company not only develops and acquires but also finances and actively manages a rapidly growing hospitality portfolio. Referring to the record and the accepted position it was submitted that approximately 6,000 rooms were under current development in most major ci .....

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as advanced towards this aim in August 2007 and thereafter continuously till February 2008, the funds have been advanced towards the above stated aim. It was submitted that since various steps were required to be taken and fulfilled before the amounts initially shown as loan could be converted into Equity which was the ultimately intention. The waiting period it was submitted had to be shown as loan to maintain control over the funds advanced towards a specific purpose. The fact that in the case .....

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29.01.2015 it was submitted that addition by way of adjustment towards arm s length price in the facts of the present case could not have been made. Copies of these decisions and relevant documents placed at Paper Book pages 7 to 17; Paper Book Page-115 and Paper Book Page-6 respectively were heavily relied upon. Accordingly it was his submission that no transfer pricing adjustment on these facts was warranted. 3.3. Inviting further attention to the DRP s order in the case of the assessee pertai .....

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a wholly-owned subsidiary of the assessee for the purposes of share capital. Thus, relying on the facts and the precedent it was submitted the amounts cannot be treated as loan. Specific attention was invited to the fact that in the facts of Bharti Airtel Ltd. actual conversion took place after a delay of 1.5 years i.e. almost 17 months whereas in the case of the assessee the conversion has taken place within 3 months. Accordingly it was his submission that on facts the assessee s case was on a .....

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no addition by way of adjustment was possible. 4. Arguments on Ground No.2 were advanced stating that in the eventuality the assessee does not succeed in Ground Nos. 1 and 3 by allowing Ground No.2 LIBOR rate may be applied instead of the rate applied by the TPO as the loan was admittedly given in US dollars. The TPO s search by resorting to obtain information by resorting to section 133(6) from Crisil for identifying the correct rate to be applied, it was submitted may be rejected as the applic .....

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a loan from a third-party (Standard Chartered Bank) at an interest rate of 2.5% over the LIBOR and as such TP adjustment, if at all called for, should be restricted to LIBOR +2.5% being rate of an uncontrolled transaction. 5. The Ld. CIT DR relying upon the orders of the tax authorities submitted that both for holding it as an international transaction and for the applicability of correct rate reliance was being placed on the TPO s order and the DRP s order leading to the passing of the final a .....

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certain loans to its AE. DLF Global Hospitality Limited Cyprus (DGHL)/ DLF Cyprus. The loan was shown as an interest-free loan of US dollars 72580000 and has been reflected in Form No. 3CEB as an interest-free loan of ₹ 2,91,99,60,465/-. Accordingly, these disclosures resulted in the issuance of a detailed show cause notice requiring the assessee to explain why arms length adjustment should not be made. It is only after considering the explanation of the assessee that the AO/TPO observed t .....

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terest free loan given is obviously not in keeping with the arm's length principle, as enunciated in the transfer pricing guidelines as per the Income-Tax Act. The arm's length interest it was submitted, is determined by following the CUP method, wherein the interest rate is determined under the circumstances in which the tax payer and its subsidiaries are operating. Thus what is the interest that would have been earned if such loans were given to unrelated parties in similar situation a .....

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circumstances, the assessee it was submitted has correctly chosen to argue on the rate of interest. The main issue it was submitted which needs to be considered is to decide the interest rate which the tax payer would have earned on advancing loan of above amounts to unrelated third parties with similar financial strength as that of the AE. It was submitted that it is also to be considered that there is no security provided by the AE's / subsidiaries against the loans advanced. 5.2. In these .....

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if the amount is lent to the companies. It was submitted that since the loan is advanced by the Indian holding company therefore the rate of interest on the amount if it had been advanced on loan to unrelated parties in India is the relevant rate of interest. Accordingly information thus was sought and considering the financial health of the AE of the taxpayer it was submitted it was considered appropriate that the taxpayer would fall somewhere between BB and D ratings leading to the applicabil .....

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edent cited and the precedent available in assessee s own case thus even on Rule of Consistency the assessee has a good case had above the judicial precedent cited. It was his submission that in the arguments advanced by the Revenue these precedents have not been upset either by citing a contrary view or attempting to distinguish on facts. 7. We have heard the rival submissions and perused the material available on record. It would be appropriate to first bring out the salient facts from the ord .....

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and amounts on which the loans were given is reproduced hereunder:- It is seen from the Form No.3CEB and Transfer Pricing Study that the assessee company has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:- Date of initial Loan to DGHL Loan (US $) DHHL-DGHL Amount in INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466" 7.2. The assessee in support o .....

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an and was always a quasi debt. For ready-reference the relevant extract from the TPO s order incorporating the explanation of the assessee is reproduced hereunder:- As per the Notes to Form 3CEB it is stated that in respect of interest free loan to the associated enterprises, even though the Company granted a loan initially the intention was to always invest and convert the funds to equity within short period of time. The debt funds were converted to equity with in short period of three months. .....

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n 92C of the Act. (emphasis provided) 7.3. It is seen from the record that the said explanation was not accepted by the TPO who rejected it holding as under:- From the above statement it is clear that no benchmarking has been carried out in respect of these loans. The fact that the decision regarding the treatment of this amount as loan or debt was to be taken when it was felt this amount could be utilized for the purpose for which it was intended, clearly shows that it was a loan. As no indepen .....

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parties in similar situation as that of subsidiaries. Since the tested party is the tax payer, the prevalent interest that could have been earned by the tax payer by advancing a loan to an unrelated party in India, with the same weak financial health as that of the tax payer 's AE, will be considered. 2. As mentioned above, under the CUP method, the interest that is charged between unrelated parties under similar circumstances would be the arm's length interest. The main issue is to deci .....

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generally weigh four elements in determining whether or not to issue loans and, if so, at what conditions and fees: Financial Risk: In order to gauge the financial risk incurred by the lender, the debtor's financial position is reviewed based on its balance sheet and income statement; Credit Risk: In order to gauge the credit risk, three elements are weighed, namely the availability of guarantees, the purpose of the loan and the loan's term to maturity; Business Risk: The lender's v .....

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sk. Interest rate risk refers to the risk of a bond changing in value due to changes in the structure or level of interest rates. The credit risk of a high yield bond refers to the probability of a default (i.e., debtor unable to meet interest and principal obligations) combined with the probability of not receiving principal and interest in arrears after a default. A credit rating agency attempts to describe the risk with a credit rating such as AAA. In India, CRISIL is the leading credit ratin .....

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r: AAA (Triple A) Highest Safety Instruments rated 'AAA' are judged to offer the highest degree of safety, with regard to timely payment of financial obligations. Any adverse changes in circumstances are most unlikely to affect the payments on the instrument. AA (Double A) High Safety Instruments rated 'AA' are judged to offer a high degree of safety, with regard to timely payment of financial obligations. They differ only marginally in safety from AAA ' issues. A Adequate Sa .....

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apacity to pay interest and repay principal than for instruments in higher rating categories. BB (Double B) Inadequate Safe Instruments rated 'BB' are judged to carry inadequate safety, with regard to timely payment of financial obligations; they are less likely to default in the immediate future than instruments in lower rating categories, but an adverse change in circumstances could lead to inadequate capacity to make payment on financial obligations. B High Risk Instruments rated ' .....

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fault on scheduled payment dates. 5. From the above, it is seen that bonds in the rating range of AAA to BBB have some kind of safety, with a minimum level of 'moderate safety (BBB). Therefore, it is clear that 'unsecured loan', like that of taxpayer, cannot fall in the credit rating range from AAA to BBB, as the unsecured loan advanced by the taxpayer is not backed by any guarantee or security. Under the facts and circumstances of the case and also considering the financial health o .....

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that the assessee s case was to be considered ranging between the range of BB to D where either there is no safety or the safety is inadequate. In the said range, BB rate it was noted denotes the highest level of safety or in other words minimum level of risk. The annual average yield for BB rated bonds for 5 years was calculated at 17.26% and it was held that 17.26% rate of interest appeared to be most reasonable and appropriate which was proposed to be applied on monthly closing balances from .....

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maintain flexibility, in case the funds were not used for the intended activity within the proposed period, it was initially granted as debt. It states that DHHL, being the parent company undertakes stewardship activities through the provision of funds and is not required to be compensated. It is stated that being a new entity, DGHL could not have accessed funds from any other source. This quasi equity was converted into equity and this became the basis to borrow from third party banks. The asse .....

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dent enterprises transact with each other, the conditions of their commercial and financial relations (e.g. the price of goods transferred or services provided and the conditions of the transfer or provision) ordinarily are determined by market forces. When associated enterprises transact with each other, their commercial and financial relations may not be directly affected by external market forces in the same way, although associated enterprises often seek to replicate the dynamics of market f .....

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rovisions contained in Chapter X of the Act and not merely in the context of section 37(1). He was further of the view that there were several highly relevant issues requiring consideration, namely whether the transaction was really a commercial one; whether in similar circumstances an independent person would have paid similar amount; whether the taxpayer really needed the services; whether the taxpayer really got some tangible or direct benefit; whether the amount paid was commensurate with th .....

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ourt, the view expressed by the TPO does not have judicial acceptance. 7.7. The TPO concluded that the benefit of conversion into equity could be granted only to the extent of 20% of the loan. We find no rationale has been brought out in the order for arriving at this magic figure of 20%. In order to decide what rate of interest was to be charged to the remaining amount. Information u/s 133(6) was obtained over ruling the objections of the assessee who had pleaded that no such powers were vested .....

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ity in the information given under the provisions of the Income Tax Act, 1961 is liable for penal action. Accordingly, we find that the conclusion drawn by the TPO that he had the power to seek information u/s 133(6) in principle is the correct view in law and the conclusion so drawn by the TPO is upheld by us. Whether the same was necessitated or relevant on facts before us is an area which, if need be, shall arise later. 7.8. To revert back to the proceedings before the TPO the record shows th .....

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) Funds extended (Rs.) Conversion into Equity (Rs.) Closing balance (Rs.) (as per assessee) Closing balance after allowance for 20% (as per TPO) Revised interest @ 17.26% 7-Apr 7-May 7-June 7-July 2,069,582,691 2,069,582,692 29,767,498 7-Aug 2,069,582,692 2,069,582,692 29,767,498 7-Sep 2,069,582,692 20,306,910 2,089,889,602 30,059,579 7-Oct 2,089,889,602 2,069,582,692 20,306,910 1,675,973,064 24,106,079 7-Nov 1,675,973,064 629,918,780 650,225,690 2,305,891,844 33,166.411 7-Dec 2,305,891,844 200, .....

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instrument of hybrid funding having traits of equity. The alleged modification misconstruing of facts by the TPO was assailed to be incorrect and misleading. Extracts from these Objection numbering 5.2.2 and 5.2.3 which has further being elaborated in Objection 5.2.9 before the DRP are extracted hereunder:- 5.2.9. Factual and legal arguments against the addition proposed by the Learned TPO …………………………………&h .....

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angement in the form of agreement with its associated enterprise that the funds provided would be in the nature of quasi equity and not in the nature of debt. In assessee's case, it was clear that the funds would be converted into equity within the next 3 to 4 months which clearly reflects that it was actually meant to be a capital contribution. The support was also sought by the assessee from the guidelines issued by the Organisation for Economic Cooperation and Development on Transfer Pric .....

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ax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.65. However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for .....

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debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterise the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. From the above, it can be clearly inferred that the funds provided by DHHL to DLF Cyprus can be considered to be quasi e .....

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ipal factors that will be taken into account in determining whether a particular loan agreement should be treated as equivalent to a contribution to equity are detailed below..... 7.10. The reproduction of the following extract of Objection No.5.3.9 further brings out the fact that the tax payer justified its action of advancing of loan as a shareholders activity guided by commercial expediency etc.:- 5.3.9. Factual and legal arguments against the addition proposed by the Learned TPO During FY 2 .....

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anks. This was critical for DLF Cyprus since the additional funds were required for completion of acquisitions, and the independent banks would not have provided any funds to DLF Cyprus without it having an acceptable debt/equity ratio. The third party banks which may have refrained from providing loans to DLF Cyprus at the time of set-up, advanced loans to DLF Cyprus only on the basis of restructured capital gearing of the company. The assessee wishes to submit that it was commercially expedien .....

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vities do not require any payment since they directly benefit the shareholder, and in an independent scenario, a recipient of any corresponding benefit would not have been required to pay any charge for the same. In the instant case, since DHHL is the sole shareholder in DLF Cyprus, the provision of funding may be considered to be part of its shareholder activity, since it is providing support to its subsidiary as a shareholder. Additionally, any benefit accruing to DLF Cyprus from use of the fu .....

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find that the consistent claim of the assessee has been that it had aims and goals focused towards building its portfolio in premium segment hotels, resorts, serviced apartments, family recreational clubs in major cities and tourist destination. The decisions so taken had been guided by a vision to make its mark globally in countries like Sri Lanka, Thailand, Moracco, Bhutan, France, USA, Indonesia etc. We find that this is an accepted position as brought out from the following extract from the .....

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is its holding company. The company develops, acquires, finances and actively manages a rapidly growing hospitality portfolio. With approximately 6,000 rooms under current development in most major cities and tourist destinations in India, DHHL is on track to create a portfolio of 25,000 rooms in the next 5 years. DLF Hotels recently acquired controlling stake in Amanresorts, one of the pre-eminent and most innovative luxury hotel groups in the world. "Aman" - an outstanding brand and .....

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y has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:- Date of initial Loan to DGHL Loan (US $) DHHL-DGHL Amount in INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466 7.13. Admittedly these loans were converted into equity within 3 months as per the following chart:- Month End Opening (Rs.) Funds Extended (Rs.) Conversion into equity (Rs.) Closing Balanc .....

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teness it is worth referring that this claim has been supported by following documents placed before the TPO/AO; the DRP and now before us in the Paper Book filed:- S.No. Particulars Page No. 1. Documents relating to share capital in the wholly owned subsidiary i.e. DLF Global Hospitality Ltd. 1-47 (A) Initial Investment for equity shares: • Debt Authority to HSBC Bank alongwith ODI Form • Form A2-Application for remittance abroad • Chartered Accountants Certificate • Declara .....

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Global Hospitality Ltd. • Copy of Instrument of Transfer • Copy of Certificate of Shareholding of Register of Companies • Notification dated 06.08.2007 for conversion of shares given to Registrar of companies • Certificates dated 25.08.2007 for change of name from Gunbarrel Investment Ltd. to DLF Global Hospitality Ltd. issued by ROC, Cyprus 81-84 7.16. We find that the documents filed by the assessee right from the stage of assessment before the AO/TPO till date have not bee .....

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to fund its AE so that the benefits of the efforts of the AE in increasing the foothold/portfolio would directly benefit the tax payer in India and the fact that the interest free loan has been converted in equity after fulfilling the necessary legal requirements within three months is an evidence on record.. 7.16.1. In the facts as they stand we are now called upon to decide whether in the peculiar facts and circumstances of the case it is an International Transaction or not. The Revenue claim .....

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ous and facile reasoning that international transaction is acknowledged in Form 3CEB by the assessee itself cannot form the basis of the conclusion. At best it can form the starting point of the enquiry. In the light of the evidences on record and considering the arguments, we are inclined to hold that mere disclosure of the interest free loan as an international transaction by the tax payer in Form 3CEB would neither act as an estoppel nor fore close the tax payer from claiming the same as not .....

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. The tax authorities cannot shy away from addressing the arguments that it was a shareholder activity necessitating immediate availability of funds in the hands of the AE in order to attain the aims and vision of the holding company. The law does not permit or contemplate an Appellate forum or an Authority any justification for ignoring the arguments of the tax payer based on facts made available to them. The consistent fact on record is that the tax payer was the sole shareholder in its newly .....

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old considering the provisions that it is not within the domain of the tax authorities to insist that the aim of enhancing the global reach of the portfolio should be attained through a pure loan and not by way of shareholding activity. There is nothing on record to disbelieve the explanation that the AE did not have the demonstrated capability to fully utilize the funds for the intended purpose in a new area being a new territory. Thus the argument that in order to maintain control and command .....

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bove consistent claim demonstrated by the assessee by way of facts and supporting evidences which stand unassailed by the Revenue on record, we therefore find no justification either in fact or law to uphold the Revenue s stand that the tax payer must necessarily be bound by the disclosure made in Form No.3CEB Report. There is nothing on record to support the conclusion that the interest free loan must necessarily be deemed to be an interest earning activity and not an activity to capitalize the .....

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hisper of a suggestion that it was a bogus transaction, as admittedly shares have been allotted. There is nothing in the provisions of the Act which empowers the tax authorities to insist that the interest free loan towards its AE for capitalization the opportunity of cost of entering in new territories must necessarily by modified and re-characterized into a loan simplicitor and considered to be an activity for earning interest. The tax authorities must bring on record facts and evidences impac .....

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of Soma Textiles and Industries Ltd vs CIT in ITA 262/AHD/2012 supports the view taken as the assessee s conduct in exploiting the opportunity for capital investment in the peculiar facts takes the issue out of the purview of Chapter X of the Income Tax Act, 1961. A brief reference to the said order at this place would be relevant as it is seen that the Co-ordinate Bench was also seized of facts where investment in share capital by the assessee holding company in India in its subsidiary in Unite .....

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the TPO and the said finding had been upheld by the CIT(A). The Co-ordinate Bench considering the facts accepted the assessee s argument that in the case of Perot Systems (cited supra) the argument that loan being quasi-capital was rejected on facts and the core legal issue was left open namely whether ALP adjustments will also be warranted in case of interest free loan extended as quasi-capital. The Co-ordinate Bench examined and considered the decisions rendered in Perot Systems TSI vs DCIT [ .....

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d the decision of the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)] wherein their Lordships have begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas" .....

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also. 7.16.3. We find that the Co-ordinate Bench considering the term quasi capital has correctly understood that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own 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 .....

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te funding but is also a hybrid instrument pre-stipulated to be a loan for a transitory period, the economic purpose of which is a future capital investment in all its forms including contribution to equity or subscription of capital and cannot be justifiably be treated as a debt simplicitor. 7.17. Reliance has also been placed on the case of Bharti Airtel Ltd. vs ACIT in ITA No.5816/Del/2012 dated 11.03.2014 (Copy of which has been placed at book pages 38 to 94). Though reliance on the said dec .....

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primary issue for the proposition that the activity of interest free advances ultimately to be converted into equity by a holding company to a subsidiary company does not give rise to an international transaction. 7.18. Considering the said decision, we find that the Co-ordinate Bench was called upon to decide whether Chapter X was attracted in facts where the assessee had advanced interest free loans to its AE for the stated purpose of share application. These material facts and issue would be .....

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ulated @ 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 investm .....

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ing to these variables; (b) Undertaking a flawed analysis by applying the rate of interest used in relation to - Indian currency loan given in India to an intercompany transaction of advancement of money outside of India, thereby completely ignoring the difference in the, economic environment and geographical conditions prevalent in India and overseas jurisdictions; (c) alleging that the financial health of the associated enterprises was weak and further in determining the credit rating of the a .....

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interest rate of 17.26% p.a. with the single-minded intention of making an addition to the returned income of the appellant. 15.3 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. 15.4 That the assessing officer/TPO erred in relying u .....

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onsidering the monthly balance of share application 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. 7.18.1. The facts and the legal precedent with which the Coordinate Bench was seized of are set out in Paras 44 to 45 of the said order and are reproduced hereunder for the purposes of bringing out the similarity on the material facts:- 44. So far as this grievance of the as .....

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9 Bharti Airtel (Singapore) Ltd. 2,01,39,150 24,09.2007 1.04.2009 Bharti Airtel (Hongkong) Ltd. 1,81,48,200 24.09.2007 10.12.2008 Bharti Airtel (Lanka) Ltd. 63,51,93,795 Various dates 31.07.2008 Total 110,97,67,920 45. These transactions were not benchmarked as, according to the assessee, these were in the nature of share application money payments. While the TPO did not question the character of payment, he noted that from the information on record, it is seen that these amounts were extended b .....

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uity within a reasonable period or receiving interest on the same . It was in this backdrop that the TPO proceeded to treat these amounts as interest free loans extended to the AEs. He then referred to the provisions of Section 92 B, in the light of which, according to the TPO, lending or borrowing of the money comes within the ambit of international transactions . He thus justified determination of arm s length price of the transaction of, what he termed, as interest loans to the AEs. Reliance .....

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we agree with the TPO that capital locked up for want of transfer of shares for reasonably long period would partake the nature of loan . It was in this backdrop that payments for share application money were treated as interest free loans given to the AEs and ALP adjustment was made for interest thereon. Aggrieved, assessee is in appeal before us. (emphasis provided) 7.18.2. Considering the arguments on these facts and the legal precedent the Coordinate Bench came to the following conclusion:- .....

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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 assesse .....

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is case also, there is no finding about what is the reasonable and permissible time period for allotment of shares, and even if one was to assume that there was an unreasonable delay in allotment of shares, the capital contribution could have, at best, been treated as an interest free loan for such a period of inordinate delay and not the entire period between the date of making the payment and date of allotment of shares. Even if ALP determination was to be done in respect of such deemed intere .....

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and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE. Since the TPO has not brought on record anything to show that an unrelated share applicant was to be paid any interest for the period between making the share application payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits. 48. Let us .....

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was made. In the case of Perot Systems TSI India Ltd Vs. 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 c .....

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e 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 contribution. It was observed that, "It is not the case that there was any technical problem that the loan could not have been contributed as capital originally, if it was meant to be a capital contribution". The argument of loan being in the nature of quasi capital was thus rejected on facts. It was not even a case of .....

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unt of ownership and control of subsidiary being in the hands of the assessee, which was recognized as a significant factor for commercial expediency. However, as we have seen in the earlier discussions, such commercial expediency of granting interest free loans is wholly irrelevant because it is the impact of this interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital .....

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in the TPO to recharacterize the transaction, even under the judge made law, such rechracterization can be done by the revenue authorities when the transactions are found to be substantially at variance with the stated form. In the present case, there cannot even a suggestion to hold that this is a bogus transaction because admittedly the subscribed shares capital has indeed been allotted to the assessee. The transaction is thus accepted to be genuine in effect. 50. In view of these discussions .....

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sue 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. (emphasis provided) 7.18.3. When the facts as considered by the Co-ordinate Bench in the case of Bharti Airtel Ltd. are seen and the facts of the present case are considered, we find that there is a striking similarity on the material issues and the above conclusion and reasoning fully supports the view taken. In fact as argued on behal .....

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w of our finding may not arise. However for the sake of completeness, we note that in the facts of that case also the assessee had advanced the interest free loan in foreign currencies to its subsidiary which is identical to the facts of present case. Herein also the assessee who was the tested party had advanced loans to its foreign AE in foreign currencies. The Co-ordinate Bench after giving due consideration to the geographic; economic and financial realities of the tested party and the forei .....

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ng the basic fact that interest is nothing but time value of money and when inflation pressure on a currency is lower, as is the case with most strong currencies, the time value of money, i.e. interest, tends to be lower too. Therefore, comparing interest rate on rupee loans cannot at all be compared with interest rates on strong currencies like GBP, USD and CAD. The erudite discussions by the tax authorities about the Indian bond market and interest rate were held to be wholly irrelevant. The T .....

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ssessee would have earned on foreign currency loans and not rupee denominated loans. In the facts of the present case the assessee has argued without prejudice to the main issue that if at all interest is to charged then judicial precedent sets out that it has to be the LIBOR rate + 2.5% interest as the rate charged by an independent Bank in the facts of the present case as the assessee s own CUP being the best CUP on record cannot be ignored. As addressed earlier, we are not called upon to deci .....

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even if shares have been issued at a premium to the foreign holding company by an India subsidiary the amounts received from non-resident being capital in nature cannot be subjected to transfer pricing provisions. The Hon ble High Court in categoric terms considering the issues on facts have held that the alleged shortfall between fair market of shares and the issue price of shares cannot be considered income on the basis of supposed intent of legislature. Form No.3CEB filed by the assessee by .....

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ents cited by the tax authorities, has made an erudite discussion on quasi capital as in the facts of the said decision the use of the said expression was one of the reasons for relying on precedent to oust the assessee s claim. As observed the material facts were similar as, like in the present case, in the facts before the Co-ordinate Bench also interest free advances had been advanced by the assessee to its subsidiary AE for the intended purpose of exploiting the opportunity cost in the terri .....

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was held to be an instrument entered for exploiting the opportunity cost of investment as opposed to exploiting the activity of advancing funds for earning interest. As opposed to that we find that in the facts of the present case, the tax payer has made its case easily understandable and simpler by resorting to explain its activity of advancing interest free loan to its AE by the use of the expression quasi equity and mezzanine financing which terms are well understood in financial circles. For .....

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f existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. Thus considering the explanation of the assessee, we find that in form and substance the conduct of the assessee suggests no deviation with the stated form. In the face of the abo .....

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rs but in reality discarded for all practical purposes without assigning any reason. We note with pain that such a mechanical disregard of the explanation offered and evidences relied upon will make the whole exercise of just and fair hearing, a meaningless exercise of justice dispensation. Addressing the facts and evidences is imperative and the inherent strength of justice dispensation system lies in the unbiased and fair consideration of every case by the dispensers of justice. Faith in their .....

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only encourage the classical Biblical dislike of a tax collector . The effort on the contrary should be to promote an attitude best put in the words of Oliver Wendell Holmes Jr. who observes I Like to pay taxes. With them, I buy civilization . The policy makers through the policies of the country make frequent and valiant endeavours to shun this tag of a reviled tax collector and any carelessness in justice dispensation strikes a body blow to these small tentative steps. The acceptance or reject .....

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xpected to reproduce the explanation as a mere meaningless rhetoric and arrive at a conclusion without addressing and meeting the explanation and evidences relied upon by the assessee. If the tax payer claims it is an interest free loan as a share holding activity, to be utilized by the AE for acquiring and increasing its portfolio and on utilization and fulfilling the internal and external requirements by way of permissions and procedures of the regulatory authority etc. it is to be converted i .....

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ply Chapter X the Court accepted that Form 3CEB having been filed by way of abundant caution did not give jurisdiction to the department. The decision is based on first principles that either an Authority has the jurisdiction or it does not have it, the acts of a person ex abundati cautela will not be the basis of jurisdiction of an Authority. The consistent objection posed by the assessee that the act of advancing interest free loan as quasi equity for the stated purpose was supported by docume .....

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took place after a delay over 1 year. We find that neither the facts have been rebutted nor the judicial precedent has been distinguished. 7.21. We further find that the assessee, apart from justifying the arguments and demonstrating the correctness of its claim on judicial precedent cited, has also relied upon the CBDT instruction No. 2/2015 dated 29.01.2015. Relying on the same it has been argued that the tax authorities having communicated to the world at large their acceptance of the decisio .....

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argued by the Revenue challenging the principles of consistency relied upon by the assessee. For ready-reference, the relevant extract is reproduced hereunder:- Ground of Objection l to 10 are adjudicated together as these are interrelated. The TPO has justified his modification of taxpayers economic analysis (page 9 onwards) and issued a detailed showcause notice dated 1-12-2014. Replies filed by the Taxpayer have been examined and the reasons due to which the TP study had to be modified under .....

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applicable as per the Hon'ble High Court's prescription would be based on the interest rate applicable to the currency in which the loan is repayable i.e since this is a foreign currency loan, in such cases DRP typically directs the TPO to benchmark case using LIBOR plus after marking it up for transaction costs, risk and credit rating but not below Libor plus 400 points. Since there is an internal CUP available in this case i.e 10.31 % on a loan advanced to a sister concern in the same .....

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the taxpayer using CUP method. Since this is higher than the High Court's prescription in Cotton Naturals and thus is presumed at arms length without requiring further adjustment by TPO. TPO is directed to allow relief accordingly. Transaction of subscription of shares of AE now stands covered by CBDT Instruction vide. FNO 500/15/2014/APA-l Instruction No 2/2015 New Delhi, Dated 29th January 2015 whereby Bombay High Court decision in the case of Vodafone India Services Pvt Ltd has been acce .....

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n be built. In the words of Benjamin Franklin ……..but in this world nothing can be said to be certain, except death and taxes . The decision of the Hon ble Bombay High Court in the aforesaid case of Vodafone India Services Pvt.Ltd. has been the basis for bringing out the CBDT Instruction vide. FNO 500/15/2014/APA-l Instruction No 2/2015 New Delhi, Dated 29th January 2015. Not only the Instructions issued by the CBDT are binding on the Revenue in interpreting and executing the provi .....

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t of facts, circumstances, arguments, judicial precedent, we find that Ground No.1, 3 and 7 of the assessee are allowed. In the absence of any rebuttal on material facts and law, judicial precedent cited and considered, we find that no case has been made out by the Revenue to justify dismissal of the aforesaid grounds raised by the assessee. 7.23. We find that in view of the conclusion arrived at in Ground No.1, 3 & 7 we were not called upon to decide Ground No.2 of the assessee. However, si .....

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on to decide is addressed in Ground No.8 which has been extracted in the earlier part of this order. In support of the said ground, it was submitted by the Ld.AR that the AO has made an addition u/s 14 read with Rule 8D of the ITAT Rules. Addressing the same it was submitted that the AO while making the addition and the DRP while upholding the same have ignored certain material facts which may first be required to be highlighted so as to bring out the issue before the Tribunal. 8.1. Inviting att .....

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Paper Book page 19. Accordingly it was his submission that these investment of ₹ 4,42,80,11,360/- should be excluded from the computation of disallowance under Rule 8D. The said claim it was submitted was supported by the decision of the Hon ble Delhi High Court in the case of ACB India 374 ITR 108 [Del.] (copy of the said decision is placed at pages 34 to 37 of the paper book filed). Relying upon the computation placed at Paper Book page 18, it was submitted that in case Rule 8D is applie .....

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200 ITR 455 (SC). Referring to the facts on record, it was submitted that the earning of exempt income cannot be said to be an activity of passive nature requiring no real time inputs. It was his argument that in fact in the present situation making of Investment, maintaining or continuing investment and timing the exit from investment are all well informed and well coordinated management decisions involving not only inputs from various source but also acumen of senior management functionaries. .....

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