TMI Blog2018 (11) TMI 1703X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Everest Kanto Cylinder Ltd. v. ACIT [ 2015 (12) TMI 683 - ITAT MUMBAI] - We set aside the DRP direction and direct the AO to delete the addition. The ground no. 1 is resultantly allowed. Disallowance of hedging loss for hedging transaction with the AE - HELD THAT:- The undisputed fact is that the contract is between the assessee and ICICI Bank, Mumbai and not with the AE , therefore we find merit in the contention of the assessee that the this is not an international within the meaning of section 92C - loan was taken for the purpose of advancing it to the foreign subsidiary. Therefore, any expense or loss incurred in connection with that transaction would not be an international transaction between the assessee and the AE as the said loss or expense was incurred under a contract between the assessee and the third party - DRP has taken a incorrect view of the matter in upholding the order of AO on this issue. We definitely feel that the expenses in not in connection with the business of the assessee or out of commercial and business expediency of the business but disallowance by making TP adjustments is not correct . The AO could made the disallowance u/s 37 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exporting and trading of multi-micronutrient fertilizers, other nutritional products and major fertilizers. It has five subsidiaries viz. Aries Agro Care Pvt. Ltd., Aries Agro Equipments Pvt. Ltd., Aries Agro Produce Pvt. Ltd., Golden Harvest Middle East FZC and Amarak Chemicals FZC. Since the assessee s transaction with these AEs exceeded ₹ 15 crore, a reference to TPO was made and TPO made the some adjustments as mentioned hereinafter and therefore the draft assessment was framed vide order dated 28.03.2016 which was challenged before the DRP and DRP also confirmed the said additions/adjustments in the assessment. Finally assessment order was framed on 17.01.2017. Aggrieved by the said order the assessee has challenged it before the tribunal us. 4. The first issue agitated is against the confirmation of action of the TPO in making interest adjustments in the interest charged from the AE on the loan advanced by making external commercial borrowing to the tune of ₹ 62,77,368/-. The assessee decided to set up a manufacturing facility at Fujairah. Accordingly for setting up the said facility, the funds were required by Golden Harvest an AE of the assessee. When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has compared the interest paid to the bank with the interest charged from AE and stated that the transaction is at ALP. The assessee further refers to Para 1.65 of the OECD Guidelines (July 2010) and submitted that the analogy taken by the TPO is nothing but re-characterization of investment into loan. 2.17. In this regard, we note that the loan obtained from ICICl Bahrain is secured in nature while the loan advanced to the AE is unsecured in nature. However, the assessee has charged same rate of interest from its AE as it has paid to ICICl Bahrain. Accordingly, it is inferred that since the assessee is risk bearing, it should compensated for the additional risk borne. The above contention of the assessee that the advancing of loan constitutes a shareholder activity is not justified because in case of uncontrolled transaction with any third party, it would have been remunerated for the additional risk borne. Considering a scenario that the assessee advances same Loan to a third party, it would have definitely charged some mark up for covering its administrative expenses and risk borne by it. Moreover, the assessee has also borne hedging Loss on its loan taken from ICICI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing for the risk to which the assessee was exposed by way of raising loans from the ICICI Bank outside India and advancing the same to the foreign subsidiary without security. The Ld. A.R. submitted that had it been a loan to the third party the assessee would have definitely charged a mark up on the said interest paid to the bank and therefore prayed before the Bench that order of the DRP should be affirmed as the same at arms length. 7. We have heard the rival submissions of both the parties and perused the material on record including the decisions cited by the assessee. The assessee has advanced loan to its subsidiary Golden Harvest to set up a plant at Fujairah by borrowing the same from the ICICI Bank abroad . The assessee has charged the same rate from the AE at which the loan was borrowed from ICICI Bank i.e. LIBOR plus 250 basis points. In our view the issue is squarely covered by the various decisions as referred to hereinabove wherein it has been held that loan transactions to the AR have to be benchmarked on the basis of LIBOR. In the present case the transaction is benchmarked by the assessee by following CUP method by charging LIBOR plus 250 basis points i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength. Additions made by the AO are accordingly set aside. We ,therefore , respectfully following the ratio , set aside the DRP direction and direct the AO to delete the addition. The ground no. 1 is resultantly allowed. 8. The second issue raised by the assessee is against the action of DRP direction upholding the order of AO disallowing the hedging loss of ₹ 61,63,000/- for hedging transaction with the AE. The AO after perusing the annual report of the assessee observed that a hedging loss of ₹ 61,63,000/- was incurred by the assessee and accordingly details were sought from the assessee which was replied by the assessee vide letter dated 08.01.2016 submitting that it had incurred hedging loss in connection with the loan which was advanced to the foreign subsidiary Golden Harvest and it was also stated that the said loss was not recovered from the AE and borne by the assessee only . The TPO accordingly made an adjustment on account of international transaction to the tune of ₹ 61,63,000/-. The Ld. DRP upheld the addition on account of hedging loss by observing and holding as under: 2.20 We have considered the submission of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of /the transaction or at any future date; 2.21 Section 92B as stated above clearly explains the term international transaction , which means a transaction between two or more associated enterprises, either or both of whom are non-residents............ in the nature of lending or borrowing money, or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at no such disallowance was made in the earlier assessment years. The Ld. A.R. primarily harped on the reasoning that hedging agreement was entered into between the assessee and the ICICI Bank , Mumbai and claimed that the profit on hedging, if any, would also have been offered to tax by the assessee and therefore submitted that the loss was rightly claimed by the assessee and should be allowed by reversing the order of DRP. The Ld. A.R. submitted that the hedging loss is not an international transaction with the AE as the contract is between the assessee and the ICICI Bank, Mumbai and therefore transfer pricing provisions would not apply. The Ld. A.R. further referred to provisions of section 92B of the Act which defines the international transaction as transaction between the two or more AEs whereas the hedging contract was entered into between the assessee and ICICI Bank, Mumbai a independent third party not falling within the definition of AE. The Ld. A.R. also made a without prejudice submission that even if the loan was granted to an independent third party, the loss on account of hedging would not be recovered from such independent third party and therefore the question of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We definitely feel that the expenses in not in connection with the business of the assessee or out of commercial and business expediency of the business but disallowance by making TP adjustments is not correct . The AO could made the disallowance u/s 37 of the Act as not wholly and exclusively for the purpose of business. In view our observations , we not setting aside the order of DRP on this issue and direct the AO to delete the disallowance. The ground no 2 is accordingly allowed. 12. The third issue raised by the assessee is against the decision of the DRP upholding the addition on account of notional interest by TPO on share application money invested by the assessee in overseas subsidiary. The TPO observed that assessee has remitted share application money to its AE Golden Harvest in the previous F.Y. 2010-11 and in current F.Y. 201112 and the same was disclosed by way of note in form 3CEB and assessee has not stated anything in the transfer pricing study report to that effect. The AO queried the assessee about the share application money remitted by the assessee till date and details of share allotted against the said share application money. The assessee replied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us any evidence to substantiate its contentions that it was on account of delay in the Sharjah authorities giving approval that the shares have not been issued. No documents/evidence has been furnished by the assessee or any communication with the Sharjah authorities to show that any effort was being made by the assessee/its AEs to obtain the alleged approvals which would enable the AE to issue the shares to the assessee. 13.9 In India, the deposit of money towards share application of any company was governed by the Rules and regulations under the Companies Act, 1956 (applicable for the financial year in question) and Regulations of the SEBI. These rules and regulations are indicative of the Government intention to protect the interest of the investors and ensuring equity and fair play in allotment of shares. Sec.73 of the Companies Act, 1956 lays down the procedure for the allotment of shares. This section provides that in eventuality of money being refunded, it has to be refunded within 8 days, from the day the company becomes liable to pay it, failing which the company would be liable to pay interest upto @15% per annum. 3.10 Further, the SEBI Regulations (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We, however, note that on close analysis of the transaction, what has been advanced to the AE is nothing but money in the nature of loan which has been only characterised by the assessee as share application money. Further, without prejudice to the above, even if for argument sake, it is considered that the money is remitted as share application money and remains share application money, even then, in an arm's length situation, assessee is entitled to interest on the delayed days for allotment of equity. The assessee has not furnished any document before us to show that in Sharjah, the money in the form of share application money can be retained by a company without issuing any share for months and years together. 3.13 In the case of M/s Perot Systems TSI, the Hon'ble Delhi ITAT has concluded that the cost of funds to the taxpayer and the commercial expediency is not an acceptable reason in international transactions between the assessee and the AE. The ITAT has further observed that one has to see whether the transaction is at Arm's Length under the Transfer Pricing provisions. Here the Hon'ble ITAT has also disregarded the argument that notional interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -free loan for such a period of inordinate delay. It is pertinent to note that in such circumstances, the Hon'ble Tribunal is not averse to re-characterizing the transaction a loan , albeit an interest free loan. We are, however, of the opinion that the moment it is re-characterized as a loan for the limited purpose of TP provisions, it would be covered by the Transfer Pricing provisions and all the provisions relating to the computation of ALP would apply. 3.16 Coming to the facts of the present case, the assessee has not brought any material on record to show that the AEs intended to issue equity shares to the assessee immediately at the time when the investments towards the shares by way of share application money was claimed to have been made by the assessee. It has not been explained as to why, if the money towards the shares were accepted by the AEs, they did not issue the shares to the assessee within a reasonable time, especially when shares were to be issued only to the holding company and no one else, and all matters would have been discussed and decided beforehand. Nothing has been brought on record to show as to the terms of the allotment of the shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication money converted into shares as the same are subject to the local rules and regulations of the free trade zone. The assessee also contended that in the earlier years the assessment was framed in scrutiny proceedings and no such addition was made on account of interest on share application money. The Ld. A.R. stated that the only plea on the basis of which the said notional interest was added by the TPO was that no independent entity would leave the money in the hands of the other entity without same being converted into equity within a reasonable period and it is only on that basis, the share application money was treated as interest free loan. The Ld. A.R. further stated that if there is no income arising from the international transactions, the transfer pricing provision could not apply. The Ld. A.R. relied on a series of decisions in defence of his arguments as under: 1. Vodafone India Services (P) Ltd. Vs. Add CIT - 368 ITR 001 (Bom) 2. Shell India Markets(P) Ltd Vs. Asst. CIT 369 ITR 516 (Bom) 3. Equinox Business Parks (P) Ltd. Vs. Union of India - 230 Taxman 191 (Bom) 4. SG Asia Holdings (lndia)(P)Ltd. Vs. DCIT - 229 Taxman 452 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com 404 (Chennai) xii. Siva Ventures Ltd v ACIT - (2013) 36 taxmann.com 498 (Chennai) xiii. Apollo Tyres Ltd v ACIT - (2014) 45 taxmann.com 337 (Cochin) 17. The Ld. D.R., on the other hand, heavily relied on the order of DRP by submitting that the assessee has advanced money to the foreign AE as share application money which remained unadjusted for a very long period of time due to non allotment of shares. The Ld. D.R. contended that the DRP has rightly upheld the order of TPO making adjustment on account of notional interest on the said share application money by treating the same as interest free loan and therefore clearly falls within the ambit of transfer pricing provisions. The Ld. D.R. also tried to distinguish various decisions relied upon by the assessee and submitted that all said decisions were rendered on different facts and circumstances and are not applicable to the present case. Finally, the Ld. D.R. prayed before the Bench that the order of DRP should be upheld. 18. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has advanced money as share a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaining the petition. 10. The second distinguishing feature from that of Vodafone IV, as canvassed by the Revenue, is that Form 3CEB in respect of the transaction of issue of shares to its associated enterprises, is not disclosed as an international transaction. This the petitioner was obliged to do as the transaction is an international transaction. This was in fact done by the petitioners in Vodafone IV. This stand by the Revenue is a little curious as in Vodafone IV the Revenue contended that as the petitioners therein had filed Form 3CEB in respect of issue of shares to its associated enterprise, they had submitted to the jurisdiction of Chapter X of the Act and cannot now contend that the proceeding to tax such shortfall on capital account is without jurisdiction. In this case, an exactly opposite stand is being taken by the State. The State is expected to be consistent and not change its stand from case to case. Be that as it may, the petitioner herein had not disclosed the transaction in Form 3CEB as, according to the petitioner, it was not an international transaction for the reason that it did not give no rise to any income. The fact that the petitioner chose no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount not received when benchmarked to the arm's length price. Accordingly, we set aside the draft assessment order dated March 30, 2013, to the extent it seeks to bring to tax the arm's length price of the share issued by the petitioner to its non-resident associated enterprises and also deemed interest which is sought to be brought to tax on the ground of nonreceipt of the consideration equivalent to the arm's length price by the petitioner on issue of equity shares. It is further clarified that the petitioner's objection before the Dispute Resolution Panel filed on April 25, 2013, on all issues save and except the issue covered by this order would be considered by the Dispute Resolution Panel on its own merits. 19. The Hon ble Bombay High Court further in the case of Equinox Business Parks (P.) Ltd. vs. Union of India has held as under: This has been accepted by the Revenue and is evident from the order of DRP dated 30 October 2014 in Petitioner's case for A.Y. 2010-11. In the A.Y.2010-11 also the Petitioner had issued CCDs and equity-shares and the basis was identical to the present Petition. The Revenue sought to tax the Petitioner in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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