TMI Blog2019 (6) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... e are of the view that the DRP has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Addition of notional interest on investment in subsidiary as deemed loan - HELD THAT:- We noticed that the issue has been decided on the basis of decision of Hon ble ITAT in the assessee s own case for A.Y. 2009-10 [ 2014 (11) TMI 845 - ITAT MUMBAI] . Accordingly, we are of the view that the DRP has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Disallowance of ESI u/s 2(24)(x) r.w.s 36(1)(va) - HELD THAT:- On appraisal of the above mentioned finding, we noticed that the assessee deposited the contribution towards employees ESIC earlier to the due date of filing the return of income, therefore, no doubt in the said circumstances, the same is not liable to be disallowed. DRP has also relied upon the decision of the various authorities which has been mentioned in the order. The facts are not distinguishable at this stage. Therefore, in the said circumstances, we are of the view that the DRP has decided the matter of controversy judiciously an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The assessee has raised the following grounds: - GROUND NO. I: ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF GUARANTEE COMMISSION AMOUNTING TO ₹ 1,79.190/-: 1. On the facts and in the circumstances of the case and in law, the AO erred in following the erroneous direction of the DRP in making an adjustment of ₹ 1,79.190/- on account of commission on corporate guarantee provided on behalf of its Associated Enterprise ( AE'). The TPO has charged commission @ 1.75% normally charged by banks for guarantees and 1.25% charged for risk involved on account of exchange rate risk, country specific risk and AE risk involved in giving guarantee on loans. 2. The AO failed to appreciate and ought to have held that, the transaction of a corporate guarantee is not an international transaction. 3. The Appellant therefore humbly prays that the addition of guarantee commission be deleted or be appropriately reduced. GROUND NO. II: INCORRECT COMPUTATION OF TAX DEMAND, INTEREST U/S. 2348 234C OF TILE ACT AND NON-GRANT OF REFUND: The AO erred in computing the tax demand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of guarantee commission amounting to ₹ 1,79,190/-. The assessee has given the corporate guarantee to one of its step down subsidiary M/s.Northpoint DCO2 s.r.o. Czech Republic of ₹ 59.73 lakh towards guarantee commission @ 1.75% towards guarantee commission which is 1,79,190/-. The objection was raised before DRP who confirmed the finding of the TPO. The Ld. Representative of the assessee has argued that the corporate guarantee is not a international transaction, therefore, no guarantee is liable to be assessed. It is specifically argued that the amendment to Section 92B(1) is prospective in nature, therefore, the said amendment is applicable to the facts of the present case. The Ld. Representative of the assessee has also argued that the without prejudice the guarantee commission being restricted to the extent of 0.5% of the guarantee paid in view of the judgment of the CIT Vs. M/s. Everest Kento Cylinders Ltd. 232 Taxman 307)(Bom) and CIT Vs. Asian Paints (India) Ltd. (243 Taxman 348) (Bom). However, on the other hand, the Ld. Representative of the Department has refuted the said contention. The factual position is not in dispute, the assessee provided corporate gua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and circumstances of the case and in law, the Hon'ble ITAT erred in directing the AO/TPO to adopt the LIBOR rate plus 2% as the rate of interest, for making adjustment to ALP, without having regard to the following factors which affect the relevant? (i) That LIBOR cannot be the benchmark where the currency of the origin country of loan is not the currency in which the loan is finally extended. (ii) That in such cases, LIBOR would have to be adjusted for country risk, currency risk, force market fluctuations, etc. (iii) That the element of commission for conversion of currency has to be considered, as the LIBOR based rates do not capture this clement. (3) Whether on the facts and circumstances of the case, the Hon'bie ITAT was justified in directing the AO/TPO to adopt the LIBOR rate as the benchmark without fully appreciating the factual matrix of the case. This direction of the Hon'ble ITAT issued without fully appreciating the factual matrix tantamount to being a direction which is perverse in facts . (4) Whether on the facts and circumstances of the case and in law, the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections of DRP 4.3.1 We have gone through the assessee's submission, the Hon'ble ITAT's order in the assessee,s own case and various other decisions of Hon'ble ITAT and the decision of Hon'ble Delhi High Court in the case of M/s. Cotton Natural (India) Pvt. Ltd. The Hon ble Delhi High Court and Hon'ble ITAT have decided the principle regarding international transactions of interest on loan advanced in foreign jurisdiction on the basis of LIBOR plus basis. The market / country in which such loan is to be raised by the borrower should be considered as the place where transactions was carried out and the comparable unrelated transactions in the same foreign currency should be used to find out the Internal / External CUP in this regard. The CUP Method has been approved by various ITAT s Mumbai ITAT in the case of DCIT vs. Tech Mahindra 46 SOT 141(Mum) been so upheld implied by the Hon'ble Delhi High Court. Thus the CUP method the most appropriate method to ascertain the ALP of such international loan transactions after taking into account basis at which similar transactions with other (elated parties have been entered into. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est for a value in excess of its book value. Further, the Id. TPO held that the investment is equivalent to interest free loan and in an uncontrolled third party scenario, interest would be charged on such an amount. vi. It is most humbly submitted that such a view is inexplicable and it only shows that the addition is made in a pre-conceived manner without any base and even without a whisper as to how an investment in capital can be re- characterized as loan'. vii. The assessee humbly submits the subscription of shares cannot be re-characterized as loan . characterized as a loan transaction. It is humbly submitted that there is an inherent difference between a loan and capital contribution by way of equity. In this regard, attention is invited to the decision of the Hon'ble Punjab High Court in Pepsu Road Transport Co Vs. CIT (130 ITR 18) wherein it was held as under: wherein it was held as under: Though an element of refund or repayment is inherent in the concept of borrowing. in the instant case, the RTCA not only provided nothing for the repayment of the impugned loan, but it also made distinction be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein similar issue was involved by following the decision of Jurisdictional High Court in the case of Besix (supra) has held as under: 'The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here iris a case or investment in snares and If cannot be given ainerem colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now, whether in a third party scenario. if an independent enterprise subscribes to a share, can it be characterize as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon'ble jurisdictional High Court in the case of Dexiskier Dhboal SA, ITA No. 776 of 2011 order dated 30th August. 2012 and by various other decisions. as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble DRP still feels that the action of the Id. TPO/A0 is correct, the assessee would most humble request, in the interest of natural justice, to provide some cogent reason as to how an investment in capital can be treated as loan of the assessee so as to enable the assessee to provide a well-considered reply in the matter. xiii. Further. in A.Y. 2009-10, Hon'ble Tribunal in the Assessee's own case has deleted such adjustment of interest. Also, Hon'ble DRP for AY. 2010- 11, has directed the Id. AO to delete such proposed addition. xiv. In view of the foregoing, the assessee humbly prays that the proposed adjustment of notional interest of ₹ 2,97,88,389/- on equity investment made in overseas subsidiaries be deleted. xv. Without Prejudice, as stated above in Objection no. 1, addition of notional interest cannot exceed amount calculated based on LIBOR rate. 5.2 Discussion and Directions of the DRP: Following the Hon'ble Tribunal's order for A.Y.2009-10 in the Assesses own case and also respectfully following the Hon'ble DRP for A.Y. 2010-11, the AO is directed to delete the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The A0 had disallowed such payment as the same had been made beyond the period allowed under the ESIC Rules. However, the assessee has pointed out that payments made after the period stipulated under the ESIC Act are permissible as a deduction if the same had been paid on or before the due date for furnishing of the return of income, as had been done in the facts of this case. The assessee has sought reliance in this regard on the above decisions. In terms of the provisions of section 43B of the Act and the decisions relied upon by the assessee company in this behalf the contention of the assessee is found to be correct by the DRP and the AC is hereby directed to delete such disallowance. 15. On appraisal of the above mentioned finding, we noticed that the assessee deposited the contribution towards employees ESIC earlier to the due date of filing the return of income, therefore, no doubt in the said circumstances, the same is not liable to be disallowed. The DRP has also relied upon the decision of the various authorities which has been mentioned in the order. The facts are not distinguishable at this stage. Therefore, in the said circumstances, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order passed u/s. 143(3) r.w.s. 144C of the Act as bad-in-law. Thus, the Appellant prays that made by the Ld. AO to the Ld. TPO u/s. 92CA(I) of the Act to be declared as null void and consequently the draft assessment order to be considered as bad-in-law. WITHOUT PREJUDICE TO GROUND NO. I II: GROUND NO. III: ADDITION ON ACCOUNT OF TREATING EQUITY INVESTMENTS IN OVERSEAS SUBSIDAIRY AS A LOAN AND THEREBY MAKING AN ADDITION OF NOTIONAL INTEREST INCOME AMOUNTING TO RS. 93,23,585/-: On the facts and in circumstances of the case in law, the 14. AO, pursuant to the directions of the IA. DRP, erred in treating equity capital investment made in wholly owned subsidiary in the previous years as an international transaction u/s 92B(1) and re- characterizing the same as a loan and calculating notional interest on such loan amounting to ₹ 93,23,585/-. 2. The Ld. AO failed to appreciate and ought to have held that: The Assessee had made investment in its subsidiary in previous years is on capital account. No further infusion was done in the year under consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investments, it is presumed that investments are made out of such interest free funds and therefore no disallowance of interest u/s. I4A is called for. 5. Without prejudice to above, while computing average investments for the purpose of Rule 8D of the Rules, investments which are strategic in nature are to be excluded. WITHOUT PREJUDICE TO GROUND NO. I II: GROUND NO. VI: ADDITION OF DISALLOWANCE U/S 14A OF THE ACT OF ₹ 29,22,272/- TO THE COMPUTATION OF 1300K PROFIT U/S. 115.113 OF THE ACT: I. On the facts and in the circumstances of the case and in law the Ld. AO, pursuant to the directions of the Id. DRP, erred in adding the disallowance made u/sI4A to the book profits on the alleged ground that expenditure pertains to earning exempt income. 2. The Appellant therefore prays that the addition of ₹ 29,22,272/- made to the Book Profit computed u/s 115JB be deleted. 18. The facts of the present case are quite similar to the facts of the case as discussed in ITA. No.229/M/2016, therefore, there is no need to repeat the same. However, the figure is different. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted or deemed to have been earned from the transaction with the AEs. The underlining principle of determining the ALP is based on the transaction between the unrelated parties. The income of the assessee should not be effected as reduced and therefore, the same is compared with the income or expenditure as the case may be earned or incurred by the assessee, if it would have been between the assessee and the unrelated parties. Therefore, tested party for the purpose of determination of ALP is the assessee and not the AEs. 8.8 In the case in hand, the assessee has advanced loans to the AEs without charging any interest; therefore, the transaction has to be tested with a situation, had the assessee invested or advanced or deposited the said amount with an unrelated third party and thereby the income, which would have been earned by the assessee is expected to have been earned from the transaction of advancing loans to the AEs. 8.9 Thus, on principle, we do agree with the DRP on the point of the tested party for determining the Arm's Length interest rate that would have been earned by the assessee by advancing loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule of consistency, we follow the decision of the coordinate Benches of this Tribunal, and accept LIBOR for benchmarking interest on interest free loans to AEs. Since the LIBOR is a rate applicable in the transactions between the banks and further the loans advanced by the bank to clients are secure by security and guarantee; therefore, a loan which has been advanced without any security or guarantee as in the case of the assessee has to be benchmark by taking the Arm's Length interest rate as LIBOR plus. Thou M/s PMP Auto Components P. Ltd can be made under arm s length price. It is pertinent to note that when the transaction betweeen the assessee and its AE falls under the ambit of International transaction as per the provisions of section 92B, then the arm s length price has to be determined by considering the comparable uncontrolled price and, therefore, the reason for non charging the interest on loan given to the AE has no bearing so far as the determination of arm s length price under the transfer pricing provisions and regulations is concerned. The Tribunal in the case of Aurionpro Solutions Ltd. vs. ACIT (supra) has observed in para 8 to 8.3 as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia) Ltd. v. DCIT (supra) had considered identical argument and held as follows: M/s PMP Auto Components P. Ltd, 10. Before us, the ld. Counsel of the assessee contended that income means real income and not fictitious income and since the assessee has not earned any income, the same cannot be taxed. Reliance in this regard has been placed upon in the case of CIT v. KRMTT Thiagaraja Chetty Co. reported in 24 ITR 525 (SC) in the case of Morvi Industries Ltd. v. CIT reported in 82 ITR 835 (SC) for the proposition that liability to tax can arise only when there is income. No tax can be charged as notional income on accrual. Further reliance has been placed upon the ruling of Authority for Advance Rulings delivered in the case of Veneburg Group B.V. v. CIT 727 of 2006 for the proposition that in the absence of any income, Transfer Pricing provisions being machinery provision shall not apply. It has further been argued that Transfer Pricing document maintained by the assessee clearly mentioned that these loans/advances are in the nature of quasi-equity and hence the transaction of granting interest free loan is at arm's length. The loan agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that the assessee has extended the loan to its AE's who are 100% subsidiaries. The Assessee's case is that it has actually not earned any interest and it was commercially expedient to extend these interest free loans. Now it is noted that this is not a case of ordinary business transaction. The question M/s PMP Auto Components P. Ltd, relates to scrutiny of international transaction to determine whether or not the same it as arm's length. The principle of transfer pricing aims at determining the pricing in the situations of cross-border international transactions, where two enterprises which are subject to the same centre or direction or control (associated enterprise) maintain commercially or financially relation with other. In such a situation, the possibility exist that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from those which in the same circumstances would have agreed upon between unrelated parties. The aim is to examine whether there is anomaly in the transaction which arise out of special relationship between the creditor and the debtor. Hence the contention of having actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aphs 3 and 4 of this Article, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State. 3. Interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by: a. the Government or a local authority of the other Contracting State; b. any agency or entity created or organised by the Government of the other Contracting State; or c. any bank carrying on a bonafide banking business which is a resident of the other Contracting State. 4. Interest arising in a Contracting State shall be exempt from tax in that Contracting State to the extent approved by the Government of that State if it is derived and beneficially owned by any person (other than a person referred to in paragraph 3) who is a resident of the other Contracting State provided that the transaction giving rise to the debt-claim has been approved in this regard by the Government of the first-mentioned Contracting State. 5. The term ' interest ' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the same is subjected to tax in the other state when it is paid. In other words, the provisions of Article 11 defers the taxability of the interest arising but not received and, therefore, it is taxed only when it is received. Article 11 does not exempt the interest arising in a contracting state and accrued to a resident of other contracting state but it makes the same taxable on the event of payment. In the case in hand, when the assessee has not even admitted the interest arises and accrued to the assessee on the loan given to the AE for the assessment year under consideration, therefore, the provisions of Article 11 of Indo-Mauritius treaty cannot be pressed into service. 22. In view of the decision of the Hon ble ITAT in the assessee s own case in ITA. No. 1484/M/2014 for the A.Y.2009-10 (supra), we are of the view that the case of the assessee duly been covered. The relevant finding has been given below.;_ 17 We have considered the rival submissions and relevant material on record. At the outset, we note that an identical issue has been considered by Delhi Benches of this Tribunal in the case of Bharti Airtel Limited Vs. Addl. CIT in IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ateria with an interest free loan on commercial basis between the share applicant 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 also deal with two judicial precedents which have been heavily relied upon by the TPO, as also by the learned Departmental Representative, on which their case rests. None of these decisions, however, deal with the core issue before us i.e. whether a capital contribution can be deemed to be partly an interest free loan, for the period till the shares were actually allotted, and partly as capital contribution, after the subscribed shares were issued by the subsidiary in which capital contribution was made. In the case of Perot Systems TSI India Ltd Vs. DCIT (supra), a coordinate bench of this Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This was also not a case in which a capital contribution was deemed to be partly an interest free loan [i.e. for the period till the shares were actually allotted) and partly as capital contribution [i.e. when the subscribed shares were allotted by the subsidiary). Revenue, therefore, does not derive any advantage from these judicial precedents either. 49. In any event, it is not open to the revenue authorities to re-characterize the transaction unless it is found to be a sham or bogus transaction. While there are no specific powers vested in the TPO to re-characterize the transaction, even under the judge made law, such re-characterization 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, as also bearing in mind entirety of the case, we are of the considered view that the authorities below were in error in treatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra), we remit the issue to the AO/TPO to determine the issue on the similar guideline as discussed above. This issue is decided in favour of the assessee against the revenue. ISSUE NO. 4:- 24. Issue no. 4 is in connection with the addition on account of transfer pricing adjustment of corporate guarantee commission. This issue has been already discussed and decided while deciding the issue no. 1 in ITA. No.229/M/2016 above. Therefore, the finding given in the said appeal specifically on the issue raised therein is quite applicable as mutatis mutandis. Therefore, we restrict the addition to the extent of 0.5% of the amount of guarantee. Accordingly, this issue is decided in favour of the assessee against the revenue. ISSUE NO. 5:- 25. Issue no.5 is in connection with the disallowance of u/s 14A of the Act. The assessee has earned the dividend income of ₹ 1,11,636/- and suo-motu disallowed the sum of ₹ 88,542/-. At the very outset, the assessee agreed to restrict the disallowance to the extent of dividend income, therefore, in the said circumstances and by relying upon the law settled in PCIT Vs. State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd no fault can be found with the same. Accordingly, no substantial question of law arises in question (a). Hence dismissed. 4. So far as Question (b) is concerned, the impugned order of the Tribunal followed its decision in M/s. Essar Teleholdings Ltd. v/s. DCIT in ITA No. 3850/Mum/2010 to held that an amount disallowed under Section 14A of the Act cannot be added to arrive at book profit for purposes of Section 115JB of the Act. The Revenue s Appeal against the order of the Tribunal in M/s. Essar Teleholdings (supra) was dismissed by this Court in Income Tax Appeal No.438 of 2012 rendered on 7th August, 2014. In view of the above, question (b) does not raise any substantial question of law. 27. Moreover, the matter of controversy has already been discussed and decided in the case of ACIT vs. Vireet Investment Pvt. Ltd. (Delhi Tribunal). In view of the above mentioned decision, we are of the view that the provisions of u/s 14A r.w. Rule 8D of the Act is not applicable upon the books profit u/s 115JB of the Act. Accordingly, we delete the said addition raised against the assessment u/s 115JB of the Act. Accordingly, we decide this issue in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
