TMI Blog2019 (5) TMI 1542X X X X Extracts X X X X X X X X Extracts X X X X ..... agent - assessee entered into an assignment agreement with Shriram Transport Finance Company Ltd [STFCL] for outright sale of each of these receivables for an agreed consideration and in terms of the above arrangement, all rights, title and interest with respect to these loan facilities were transferred to STFCL without any recourse to the assessee. The aggregate book value of loans is at ₹ 10,11,71,94,000/- after adjusting the sale consideration of ₹ 9,08,29,87,000/- received from STFCL and resultant loss at ₹ 103,42,07,000/- has been claimed as expenses in the Profit and Loss Account. HELD THAT:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the relevant time but introduced later by retrospective amendment. We draw support from the judgment in the case of NGC Networks [India] Pvt Ltd [ 2018 (5) TMI 1148 - BOMBAY HIGH COURT] wherein followed the view taken by it in CIT Vs. Cello Plast [ 2012 (8) TMI 527 - BOMBAY HIGH COURT] 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. 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 . Since the facts are not coming out from the orders of the authorities below, we deem it fit to restore this issue to the file of the TPO. The TPO is directed to furnish details of substantial amount which, according to him, has been outstanding for a prolonged period. Application filed u/s 155(4) - improper cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regional offices/branches spread in other parts of the country. GECSI has been delivering financial solutions and offers a range of products and services that meet the diverse needs of corporate and retail customers. 3, Details of international transactions: The transactions entered into by the taxpayer with its AEs during the year under consideration are as follows; Nature of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no expenditure is incurred in relation to the average investments, then also it cannot be ruled out that the assessee has not incurred any expenditure directly or indirectly on upkeep/updated/maintain/look after the investments. The DRP further observed that admission of the assessee for disallowance of ₹ 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 ₹ 7,94,53,077/- after reducing the suo moto disallowance by the assessee of ₹ 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration and in terms of the above arrangement, all rights, title and interest with respect to these loan facilities were transferred to STFCL without any recourse to the assessee. The aggregate book value of loans is at ₹ 10,11,71,94,000/- after adjusting the sale consideration of ₹ 9,08,29,87,000/- received from STFCL and resultant loss at ₹ 103,42,07,000/- has been claimed 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 ₹ 103.45 crores for GBCSI and ₹ 0.93 crores in the case of GE Capital Financial Services. This loss has been d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y one) calendar days as on the record date.; a) 87% of the principle outstanding as on the closing date, b) 87% of the delinquent installment as on the closing date c) 87% of accrued but unpaid charges including repossession fee as on the closing date d) 87% of the interest accrued but not due as on the closing date (ii) In relation to the obligator from whom amount are due for a period greater than or equal to ninety one calendar days as on the record date; a) 86% of the principle outstanding as on the closing date, b) 86% of the delinquent installment 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 Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause its employee s to cooperate with and assess the indemnified party or the indemnifying party as the case may be in connection with any third party claim, including attending conferences , discovery proceedings, hearing, trial and appeals and furnishing reports, information and testimony, as may reasonably may requested ; provided, that each patty shall use its reasonable effort, in respect of any third party claim on which it has assumed the defense to preserve the confidentiality of all confidential information and the attorney client and work product privileges. 7.8 Except for the buyer looses arising due to claim under sub clause 5:1.2 for which the seller shall indemnify the buyer up to the outstanding amount of the relevant obligator receivable at the time of such claim , the liability of the each of the seller to the buyer for all buyer losses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. 24. The following issues need consideration in so far as Revenue s stand is concerned: (i) STFCL has no authority to recover the loan from the borrower as hypothecation is in the name of the assessee. (ii) Loanees were not informed before close of the accounting year. (iii) Valuation of sale consideration is not properly explained. (iv) When loan portfolio has been sold by the assessee, then why het purchaser has right to indemnity @ 20% 25. We have given a thoughtful consideration to the orders of the authorities below. However, after going through the relevant documentary evidences, we do not find any force in the contention of the Revenue and we will address each issue one by one as under. (i) STFCL has no authority to recover the loan from the borrower as hypothecation is in the name of the assessee. 26. There is no dispute that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Revenue highlighted by the Revenue before us is also not acceptable for the fact that vide submissions dated 24.01.2014, the assessee has specifically replied to the Assessing Officer that the assessee has issued letters to individual borrowers informing of the fact that their loans have been transferred by the assessee to STFCL. Samples of such letters were also furnished. This reply of the assessee finds place at pages 182 to 184 of the paper book and sample letters are exhibited at page 194 of the paper book. (iii) Valuation of sale consideration is not properly explained. 32. It appears that the Assessing Officer/DRP has not appreciated the following clauses of the sale agreement in true perspective: Estimated Purchase Consideration shall mean an estimate determined by the Sellers of the Actual Purchase Consideration, which shall be equivalent to the value of the Obligor Receivables as on the Pre-Closing Valuation Date and shall be calculated as follows: (i) In relation to the Obligors from whom amounts are due for a period lesser than 91 (ninety-one) calendar days as on the Record Date: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent which reads as under: Except as disclosed by the Sellers, each of the Sellers hereby represent and warrant the following to the Buyer, respectively, as of the Signature Date and the Closing Date: 5.1.1 Organization. Power and Qualification (i) The Seller is a non-banking financial company, duly organized and validly existing under the laws of India and is qualified and authorized to do and carry on its business; (ii) The Seller has the full corporate power and authority to enter into this Agreement and exercise its rights and perform and comply with its obligations under this Agreement; (iii) This Agreement has been validly and duly executed and delivered by the Seller and the executants of this Agreement have been duly empowered and authorized to execute this Agreement; (iv) This Agreement constitutes a legal, valid and binding obligation of the Seller; (v) No consent, approval, order, registration or qualification of, or with, any court or regulatory authority or other governmental body having jurisdiction over the Seller, the absence of which would ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts rights and perform and comply with its obligations under this Agreement; (iii) This Agreement has been validly and duly executed and delivered by the Buyer and the executants of this Agreement have been empowered and authorized to execute this Agreement; (iv) This Agreement constitutes a legal, valid and binding obligation of the Buyer; (v) No consent, approval, order, registration or qualification of, or with, any court or regulatory,- authority or other governmental body having jurisdiction over the Buyer, the absence of winch would adversely affect the legal and valid execution, delivery and performance by the Buyer of this Agreement or the taking by the Buyer of any actions contemplated herein, is required; (vi) The execution and delivery of this Agreement and the consummation of the transactions contemplated herein, do not conflict with or result in a breach of or a default under any of file terms, conditions or provisions of any legal restriction (including, without limitation, any /segment, order, injunction, decree or ruling of any court or governmental authority, or any applicable law) and does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rival submissions and have perused the record of the case. The assessee was engaged in the business of consumer and auto finance. Accordingly, in course of its business it financed the consumer goods and automobiles. Thus, the debtors were created in ordinary course of business and there was out flow of money from assessee's coffers. It is well accepted commercial fact that realization of loan is one of the most difficult task faced by any money lender. Therefore, entrepreneurs consider various avenues for realization of their dues. Under such circumstances those who are in a position to realize non-performing assets take over loans from entrepreneurs. It is well settled commercial practice to invest in stressed assets which is presently gaining momentum on account of upsurge in NPAS in business and financial institutions. High profile fund managers are finding lot of business prospectus in acquiring non-performing portfolio at considerable discounts. Thus, fund managers are, therefore, investing in the stressed assets space. The government has also eased norms in this regard. Thus, selling of delinquent loan portfolio was purely a commercial prudent decision taken by assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that had there been direct loss or repossession of assets then the loss would have been allowed. Therefore, on the same footing loss arising out of sale of delinquent assets portfolio also is to be allowed. Admittedly, assessee had right to receive money from its debtors on account of financing of assets. This right had accrued in favour of assessee in ordinary course of business and not on capital account. Further, we are in agreement with ld. counsel for the assessee that the conditions laid down u/s 36(1)(vii) read with section 36(2)(i) are also fulfilled because of following reasons: - The debt or loan was in respect of a business which was carried on by the assessee in the relevant accounting year; - The debt represented money lent in the ordinary course of the business, which was akin to money lending; - The amount was written off as irrecoverable in the accounts of the assessee for that accounting year in which the claim for deduction was made for the first time. 38.3. In view of above discussion this ground is allowed. 40. Ground No. 2 is accordingly allowed. 41. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, a. The details of such expenditure for each of the services should be furnished. b. Please state as to why a separate payment has been made for such services to the AE. (xi) Please furnish details and documentary evidence of cost incurred by the AE for rendering each type of sendees received by the assessee company and the mark up applied, if any by the AE. Please also state as to whether the cost incurred by the AE is audited. (xii) Whether AE is rendering such sendees to any other AEs/independent parties also. If yes the details thereof including the rates/amount charged from such AEs along with mark up if any. (xiii) If the AE has rendered services to more than one entity including the assessee company, then the basis of allocation amongst various entities may be furnished. Please also furnish the basis of choosing a particular allocation key. (xiv) Please inform the basis on which the AP has benchmarked the international transaction. If the above information is not furnished, complete in all respects, along with contemporaneous documentary evidences, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital Markets iii) Legal Department iv) Commercial Department v) Risk Management Department vi) Compliance Department vii) Business Development Department viii) Quality and Operations Department ix) Information and Technology Department x) Human Resources Department xi) Finance Department 44. The TPO was convinced with the claim of the assessee and was of the opinion that no transfer price can be charged if a subsidy corporation utilizes services taking into consideration only the circumstances of the parent corporation and if the subsidiary corporation considering only its own circumstances, would not have utilised the services had it been and independent enterprise. The TPO further observed that the services must actually be performed. The TPO concluded by holding that the assessee has not been able to show the genuineness for such a service or the need and the cost effectiveness of such arrangement or that the money charged by the AE was at arm s length. No independent party would have made a payment for such an arrangemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision 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 section 92 (2) of the act Arms‟ length price of such payments for services are not satisfied because in such circumstances such services will not have any value and no independent party would pay for such services. All the decision cited by the assessee that benefit cannot be judged from the view point of the revenue also supports the above propositions. 46. For adoption of most appropriate method, the bench observed as under: m. For determination of arms Length pricing assessee has adopted TNMM as the most appropriate method and has chosen the foreign AE as the tested party. Ld. TPO has rejected this approach and has held that as these services have been availed in India hence, assessee should be taken as tested party and secondly the method applied should be CUP method. For this ld. TPO has not given any reasoning. Before us the assessee has contested that the foreign AE shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 contended that considering the delayed payments as unsecured loans is inappropriate and based on assumptions. 53. All the contentions of the assessee were dismissed by the TPO who supported his findings strongly drawing support from the amendment to section 92CA(2A) introduced by Finance Act 2011 w.e.f. 01.06.2011 and retrospective amendment 92CA(2B) introduced by Finance Act 2012 w.e.f. 01.06.2002. 54. Justifying interest @ 13% per annum, the arm s length interest due from the AE was computed as under: Name of the AE Interest i) GE Equity International Mauritius ₹ 15,58,551/- ii) GE Capital International Mauritius ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied 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 ₹ 41,890/- ii) GE Capital International Mauritius ₹ 25,459/- iii) GE Commercial Distribution Finance ₹ 16,411/- 63. Since the facts are not coming out from the orders of the authorities below, we deem it fit to restore this issue to the file of the TPO. The TPO is directed to furnish details of substantial amo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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