9911796707
TMI Blog2019 (5) TMI 1542X X X X Extracts X X X X X X X X Extracts X X X X ..... interest u/s 244A of the Act and levying interest u/s 234D of the Act. BUSINESS PROFILE OF THE ASSESSEE "M/s. GE Capital Services India (GECS1) is a company incorporated in India. GECSI is 98.73% owned by GE Capital Services (Mauritius) Ltd.. 0.635% owned by Genera! Electric Capital Services India Holding Inc. and 0.635% owned by General Electric Capital Services Indian Investments, LLC. GE ultimately owns all these companies. GECS was incorporated in India in October 22, 1993 as an NBFC with the primary objective of participating in the development of India's financial services markets as well as in infrastructure and industrial growth. It obtained approval of the Foreign Investment Promotion Board (FIPB) on July 6, 1993 to carry out the following activities:- * To operate in the sphere of project finance, especially in the power sector, industrial and equipment leasing and financing, export and trade finance, consumer finance and corporate finance; * Taking any special deposits through financial institutions but not offering checking deposit/saving deposit facilities as in the case of a bank. 2.1 The company has its head office in New Delhi. It also has 16 other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investments. The DRP further observed that admission of the assessee for disallowance of Rs. 25,819/- u/s 14A r.w.r 8D justifies the Assessing Officer's action in principle. The DRP declined to interfere with the findings of the Assessing Officer regarding disallowance u/s 14A of the Act. However, the DRP directed the Assessing Officer to record specific satisfaction of incorrectness of the working of the assessee for making disallowance u/s 14A of the Act while issuing the final order. 9. Pursuant to the directions of the DRP, the Assessing Officer simply made addition of Rs. 7,94,53,077/- after reducing the suo moto disallowance by the assessee of Rs. 25,817/-. 10. Before us, the ld. DR strongly supported the findings of the AO. The ld. AR vehemently submitted that firstly, the DRP grossly erred in directing the Assessing Officer to record satisfaction and secondly, inspite of this direction, the Assessing Officer simply made the addition without going into the merits of the case. It is the say of the ld. AR that there is no dispute that the assessee has not incurred any expenditure in relation to earning of exempt dividend income of Rs. 78,037/-. The ld. AR concluded by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed as expenses in the Profit and Loss Account. The assessee was asked to explain under which section these expenses are allowable as deduction. 16. The reply of the assessee reads as under: "In this regard, the assessee submits that, during the subject year, it had sold part of its finance receivables to Shri Ram Transport Finance Company Limited ('STFCL'j. All the rights and liabilities along with the finance receivables were also transferred to STFCL without 'recourse', i.e. in the event of default by the borrower in repaying installments to STFCL, STFCL cannot claim such loss from the assessee. The sale resulted in a loss of Rs. 103.45 crores for GBCSI and Rs. 0.93 crores in the case of GE Capital Financial Services. This loss has been debited by the assessee in its Profit & Loss account. In response to the query/ clarification sought by your office regarding the deductibility of the aforesaid loss under the provisions of the Act, the assessee, submits detailed reply as under: Allowability of Losses under section 28 Chapter TV-D of the Act deals with computation of income under the head 'Profits and gains of business or profession'. Section 28 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as on the closing date c) 86% of the accrued but unpaid charges including repossession fee as on the closing date d) 86% of the interest accrued but not due as on the closing date (iii) 100% of the advances received from the obligators as on the closing date, (for avoidance of doubt it is clarified that this advance amount shall be set off against the other amount payable by the buyer and only the difference shall be paid. 1.1.8 "GBCFS Loan Agreement" shall mean the master security and loan agreement entered into between GECFS and the respective GECFS obligators including related loan applications, loan files and under writing document, setting out the terms and conditions for the Rupee loan facility lent and advanced by GECFS to the respective GECFS obligators, for financing the acquisition of construction equipment/ commercial vehicle as the case may be 1.1.16 "GECFS Underlying security" shall mean (i) the security interest of GECFS in the construction equipment or commercial vehicle, securing the loan facility granted by GECFS to the GECFS obligators pursuant to the GECFS loan agreements (ii) the guarantee executed by the surety , if any, to secure the obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any time under this article VII, shall not exceed 20% of their portion of the actual purchase consideration" 19. After examining the aforementioned clauses, the Assessing Officer came to the conclusion that the assessee has not transferred loan facilities in totality. The main reason for coming to this conclusion is that even after the execution of this agreement, the assessee has entered into an interim service agreement for collection and security agent of the buyer with respect to obligator receivables for a specific period of time. The Assessing Officer was of the opinion that the clause of agreement clearly establishes that even after selling receivables, the assessee company continues to carry on the business activities with respect to these receivables as a collection agent of the buyer company. 20. The Assessing Officer further observed that the assessee failed to furnish any details or explanation as to how much amount was charged for these services and as to how the same is appearing in the books of account. The Assessing Officer further observed that the actual purchase consideration is also not verifiable from records as to how this amount of purchase considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority to recover the loan from the borrower as hypothecation is in the name of the assessee. 26. There is no dispute that the assessee has lent money to around 45000 borrowers who gave security of vehicles in the form of hypothecation to the assessee. In this line of trade, the lender takes post dated cheques from the borrowers in advance. Since on the date of sale agreement executed with STFCL the assessee was holding post dated cheques of the borrower, therefore, for the period to which post dated cheques were with the assessee, the assessee collected installments for and on behalf of STFCL and after retaining the commission at 1.75%, the assessee remitted the amount to STFCL. 27. For this reason, the assessee acted as collection agent of STFCL. In so far as hypothecation of vehicle is concerned, in our understanding, the vehicles are hypothecated only as security against loan given. Hypothecation of around 45000 vehicles to be transferred in the name of STFCL would take a substantial period of time and moreover, it is for STFCL to get hypothecation transferred in its name, the assessee cannot be held liable after sale of receivables to STFCL. 28. Moreover, we find that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Percent) of the principal outstanding as on the Pre-Closing Valuation Date; (b) 87% (Eighty-Seven Percent) of the Delinquent installment as on the Pre-Closing Valuation Date; (c) 87% (Eighty-Seven Percent) of accrued but unpaid charges including repossession fee as on the Pre-Closing Valuation Date; and (d) 87% (Eighty-Seven Percent) of the interest accrued but not due as on the Pre-Closing Valuation Date. (ii) In relation to the Obligors from whom amounts are due for a period greater than or equal to 91 (ninety-one) calendar days as on the Record Date: (a) 86% (Eighty-Six Percent) of the principal outstanding as on the Pre-Closing Valuation Date; (b) 86% (Eighty-Six Percent) of the Delinquent installment as on the Pre-Closing Valuation Date; (c) 86% (Eighty-Six Percent) of accrued but unpaid charges including repossession fee as on the Pre-Closing Valuation Date; and (d) 86% (Eighty-Six Percent) of the interest accrued but not due as on the Pre-Closing Valuation Date. (iii) 100% (hundred percent) of the advances received from the Obligors as on the Pre- Closing Valuation Date. (For avoidance of doubts it is clarified that this advance amount shall be se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt in a breach of or a default under any of the terms, conditions or provisions of any legal restriction (including, without limitation, any judgment, order, injunction, decree or ruling of any court or governmental authority, or any applicable law) and does not violate or result in the violation of the Seller's Memorandum and Articles of Association.. Obligor Receivables and Underlying Documents (i) The Seller is the full and absolute legal and beneficial owner of the applicable Obligor Receivables and has a clear and marketable title thereto; (ii) The Seller has not sold, transferred or assigned or disposed off or agreed to sell, transfer, assign or dispose off any of the applicable Obligor Receivables to any person other than the Buyer and has the full and absolute right to sell, transfer and assign the applicable Obligor Receivables to the Buyer, (iii) The Obligor Receivables are not subject to any charge, hypothecation or any other encumbrances of any nature whatsoever or any third party interest whatsoever whether by way of sale, transfer, assignment or as security interest; (iv) The applicable Underlying Documents constitute a legal, valid and binding obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd warranties to each other." 36. In the light of the aforesaid clauses, it was agreed that the buyer [STFCL] will retain 20% if the title in loan account is found defective or if for some other reason STFCL is sued by the borrower and to safeguard itself, it was mutually agreed that the liability of each of the seller [assessee] to the buyer STFCL for all the buyer losses at any time shall not exceed 20% of their portion of actual purchase consideration. 37. After addressing to the objection of the Assessing Officer/DRP/DR, we are of the considered opinion that if the Revenue is objecting to the appointment of the assessee as Debt Recovery Agent, then, principally the revenue has accepted that the transfer of loan has taken place. Further, when the Revenue is objecting to indemnity of 20%, then also the revenue is accepting that actual transfer has taken place. 38. After considering the facts in totality, in the light of the sale agreement and various relevant clauses discussed hereinabove, we are of the considered opinion that transaction has taken place during the year under consideration and loss has crystallized during the year under consideration and the assessee is ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... primarily a trading loss arising during the ordinary course of assessee's business. Further, we find that different clauses of memorandum of association reads as under:- "6.4 It was submitted that the aforesaid activity of the Appellant is in line with the objects stated in its Memorandum of Association ("MOA"). It was explained that Clause III of the MOA lists down the main and incidental/ancillary Objects for which the Appellant Company has been formed. The following relevant Clauses of the MOA were also reproduced for Ld. AO's ready reference:- "1. To carry on and undertake the business as financers to provide finance for purchase of all types of consumer durables, office plant and equipment, vehicles (including commercial vehicles, automobiles, four wheelers, two wheelers). chattels, hospital equipments, home appliances, industrial plant and equipment, machinery by way of (but not limited to) lease and hire purchase finance. 2. ...... 3. ....... 4. ......... 5. .......... 6. To negotiate loans, to draw, accept, endorse, discount buy, sell and deal in bill of exchange, promissory notes, bonds, debentures, coupons and other instruments and securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence to show that these services have actually been received by the assessee company. (v) Please justify the need for the receipt of such sendees for which payment has been made. (vi) Please state with documentary evidence as to when and how these sendees were requisitioned from the AEs. (vii) Please state as to how the rate or payment for IGS has been determined at the time of entering in to the agreement ? Please also furnish the basis thereof. (viii) Please state as to whether any cost benefit analysis was done while entering into the agreement and while requisitioning the sendees for payment of IGS? a. If so the details of such cost bene fit analysis should be furnished. The cost benefit analysis should include the expected benefit from the IGS vis-a-vis the payment made for the same. b. Please specifically state as to whether any benchmarking analysis was done at the time of entering into the agreement so as to compare the payment of IGS to the AE vis-a-vis an independent party under similar circumstance. If so, the details thereof. (ix) Please show with evidence as to what tangible and direct benefit has been derived by the assessee company from the use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k up, if any: GEII Japan does not render such regional head-quarter sendees to independent parties under same or similar terms and conditions. It however renders this service to its other affiliates across the world. The basis of fees it charges from such affiliates is given in agreement enclosed as Annexure-2. (d) If the AE has rendered service to more than entity including the assessee company then the basis of allocation amongst various entities may be furnished: The basis of allocation of cost among various group entities is given in agreement entered between GEII Japan and various General Electric affiliates including GECSI, enclosed as part of Annexure-2." 43. It was explained that during the year, the assessee has received Regional Head Quarter Services from its AE General Electric International Inc. Japan. In this respect, a Master Service Agreement was entered into with the AE by which the AE has agreed to provide certain common share services to the various participating GE group entities. The Services are : i) Chief Executive Officers Office ii) Capital Markets iii) Legal Department iv) Commercial Department v) Risk Management Department vi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06-07 2007-08 & 2008-09 of honourable high court has held that the benefit test cannot be applied from the perspective of revenue and ld. TPO does not have the right to question the wisdom of the assessee. Therefore it is apparent that assessee cannot be asked to demonstrate it with 100 % mechanical precision. If assessee has expected potential benefits out of his business prudence at the time of receipt of services which he can demonstrate from commercial point of view, according to us that satisfies the benefit test for intra Group services. Meaning thereby that the 'benefit" needs to be identified from the view point of the assessee which can be potential, reasonably foreseeable, may not be quantifiable in money alone, may be strategic but it cannot be incidental. The benefit also cannot have the qualification such as "substantial" , "direct" and 'tangible" because we do not find any such words in the provision of section 92 (2) of the act. But where the assessee's contentions are bereft of any documentation to show that at the time of availing the services about benefits which were expected, foreseen, visualized, we are of the view that conditions of provision of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statistical purposes. 50. Brief facts of Ground No. 4 are that on perusing the financials of the assessee, the TPO found that the assessee has substantial amount of outstanding receivables from the AEs which remained outstanding for a prolonged period and no interest had been charged on such amount. The TPO was of the opinion that the assessee has allowed credits to its AEs for a prolonged period. The TPO was of the firm belief that such receivables are within the ambit of international transactions. 51. For this proposition, he drew support from the retro clarificatory amendment to section 92B of the Act by which receivables are to be considered as an international transaction as per Explanation (i)(c) to section 92B which has been inserted with retrospective effect from 01.04.2002. 52. The assessee strongly objected to this action of the TPO contending that at the time of preparation of TP documentation, based on applicable legislation, outstanding receivables was not an international transaction. It was further submitted that early or late realisation of sale proceeds is incidental to the transaction of sale/service and not a separate transaction in itself. It was also con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt time but introduced later by retrospective amendment. 61. For this proposition, we draw support from the judgment of the Hon'ble Bombay High Court in the case of NGC Networks [India] Pvt Ltd in ITA No. 397 of 2015 dated 29.01.2018 wherein the Hon'ble High Court has followed the view taken by it in CIT Vs. Cello Plast 209 Taxmann 617 wherein the court has applied the legal maxim Lex non cogit impossibilia [law does not compel a man to do that which he cannot possibly perform. 62. Secondly, we find that though the TPO has computed the interest by observing that substantial amount of outstanding receivables from the AEs remained outstanding period for a prolonged period. However, no such substantial amount has been mentioned nor the delay considered as delay for a prolonged period has been mentioned. On the contrary, we find force in the contention of the ld. AR. Exhibit 42 of the paper book under the head 'Service Income Receivable', we find the following: i) GE Equity International Mauritius Rs. 41,890/- ii) GE Capital International Mauritius Rs. 25,459/- iii) GE Commercial Distribution Finance Rs. 16,411/- 63. Since the facts are not coming out from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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