TMI Blog2019 (6) TMI 1536X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of loan also and vice versa) , based on fixed conversion rate, (or in a band). It is a mix of debt and equity features. There is a dominance of the equity feature in FCCDs with some entirely classifying it as an equity instrument. However, true characterization and quantification of Debt/Equity feature in FCCDs would depend on the deeper analysis of its substance over form. Therefore comparing the interest payment on FCCD with bond interest rates is fallacious. AR relied upon the safe of the rules issued by the Ministry of Finance central board of direct taxes by notification number 07/06/2017 that applies only to the transaction of loan. In the present case, it is the mixed transaction of loan as well as of equity and therefore the safe harbour rule does not apply, as they do not deal with such instrument. Assessee as well as the ld TPO should look in to this aspect. Ground number 1 4 allowed for statistical purposes. Notional interest income - Accrual of interest income - Addition to the total income of the assessee on account of inter corporate loan given by the appellant to its related party - HELD THAT:- In the present case it is evident that assessee has wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer passed u/s 143 (3) read with section 144C of the income tax act, 1961 (the act) dated 24/10/2018. In the assessment order against the returned income of the assessee of rupees for 1674470/ transfer pricing adjustment of INR 3 4682874/ and addition on account of accrued interest on loan of INR 3 8413000/ was made and consequently the total income was assessed at rupees 114770344/ . Aggrieved by the order of the learned assessing officer assessee has raised the following grounds of appeal:- 1. That on facts, in circumstances of the case and in law, the Learned Dispute Resolution Panel ( Ld. DRP ) grossly erred in issuing directions to the Learned Assessing Officer ( Ld. AO )/ Learned Transfer Pricing Officer ( Ld. TPO ) for making further enquiry while passing the final assessment order in complete disregard to provisions of section 1440(8) of the Income Tax Act, 1961 ( the Act ) and thereby rendering the final assessment order passed by Ld. AO as void ab-initio. 1.1 Without prejudice to the Ground of appeal No. 1, the Ld. AO/TPO grossly erred in violating the principles of natural justice in not providing the Appellant with necessary data to confirm compliance to the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost appropriate method and submitted that interest rate at the rate of 15% per annum paid by the assessee to the associated enterprise is at arm s-length. The assessee adopted the average base rate of Punjab national bank during financial year 2013 14 at 10.25 percentage and further selected 2 comparables wherein adding to the Base rate spread rate of 4.50% and 3.75% found that average rate of effective interest paid by this company is 14.375 % and therefore the rate of interest given by the assessee that is 15% on the issue of FCCD was stated to be at arm s length. 3. On a reference made by the learned assessing officer, the learned assistant Commissioner of income tax, transfer pricing officer 3 (2) (2), New Delhi (the learned TPO) examined the international transaction of the assessee and issued a show cause notice on 20/9/2016 wherein he stated that the assessee has paid in interest of INR 9 7241700/ @ of 15% towards the issue of fully convertible compulsorily debentures to Ti Themba Investments Limited , Cyprus is not at arm s-length. The learned transfer pricing officer was of the view that the market based approach advocated by the honourable Delhi High Court would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment A B C D=b-c E=d*A 1 2007 08 622100000 15% 9.65% 5.35% 33282350 2 2009 10 10771000 15% 9% 6% 646260 3 2010 11 15407000 15% 9.35% 5.65% 870496 Total 34799106 4. Consequent to order of the learned transfer pricing officer the draft assessment order was passed on 25 SC/12/2017 wherein the above addition of 34799106 was made. 5. It was further found that assessee has given an interoperate loan of INR 214,000,000 to M/s Red Fort Akbar properties private limited. Assessee has not received any income on such loans and advances during the year. It was further found that assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder u/s 143 (3) read with section 144C of The Income Tax Act was passed on 24/10/2018, wherein learned Transfer Pricing Officer revised the adjustment on account of the interest paid to a foreign associated enterprise from INR 3, 48,00,183/ to INR 3,46,82,874/ . consequently the addition of INR 3,46,82,874/ was made on account of the transfer pricing adjustment on interest paid to an associated enterprises. Further the learned AO according to the direction of the learned DRP made an addition of INR 3,84,13,000/ on account of accrued interest on loan given to Red Fort Akbar properties private limited. Accordingly, the total income of the assessee was assessed at ₹ 11,47,70,344/ . Assessee aggrieved with that order has preferred an appeal before us. 7. On the TP issues , learned authorised representative vehemently argued before us that a. The learned TPO has grossly erred in selecting all debentures issued during the relevant year without giving relevance to the debentures issued by the borrowers in the same industry in which the appellant operates. b. He has ignored the critical filters necessary for the purpose of determining the arm s-length price of the rate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the evidences, the AO/TPO is required to make fresh calculation of arm s-length price of the international transactions noted hereinabove. We therefore restore this issue to the file of the AO/TPO to examine and calculate the AMP of the international transactions after considering the additional evidences furnished by the assessee before us. The assessee is directed to produce the same before the AO/TPO. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, the grounds involving this issue are allowed for statistical purposes. 10. We reject the argument of the ld AR that interest on FCCD issued in only industry similar to the assessee must be taken for benchmarking. We do not find any support for the argument of the assessee. In fact in CUP only product comparability is to be seen i.e. Comparison of interest on FCCD of similar size and time with FCCD raised by any other company with similar credit rating. These data needs to be provided by assessee. Further on careful consideration of the order of the coordinate bench and respectfully following the same we also set aside the whole issue back to the file of the learned transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis of its substance over form. Therefore comparing the interest payment on FCCD with bond interest rates is fallacious. 11. Further, the learned authorised representative relied upon the safe of the rules issued by the Ministry of Finance central board of direct taxes by notification number 07/06/2017 that applies only to the transaction of loan. In the present case, it is the mixed transaction of loan as well as of equity and therefore the safe harbour rule does not apply, as they do not deal with such instrument. 12. Thus, assessee as well as the ld TPO should look in to this aspect. Needless to say, the assessee should be granted proper opportunity of hearing before deciding the issue. The learned transfer pricing officer shall determine ALP and thereafter the learned AO should pass a draft assessment order giving proper opportunity of approaching the learned dispute resolution panel to the assessee and then pass final order , on receipt of direction of the learned dispute resolution panel or in case the assessee does not approach dispute resolution panel, then pass the final assessment order in accordance with the law. Accordingly, ground number 1 4 of the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng serious liquidity. With a view to examine whether as per provisions of section 36 (1) (iii) the assessee should be allowed the deduction of interest paid on unsecured loans from its associated enterprise company, the relevant legal and factual position as discussed hereunder. In the case of the assessee, it is established that the assessee had raised a loan for its business purpose and has given interest on that and on the other hand the funds were advanced to M/s Deccan infrastructure and land Holdings Ltd, associate concern for non-business purposes and interest free basis, then the interest payable to the assessee to M/s Tie Themba investments Ltd, Cyprus to the extent cannot be held to be use of fund for business purposes and no deduction accordingly can be permitted under section 36 (1) (iii) of the act. In this case, the assessee has failed to establish the commercial expediency and business purposes of the advance and loan. The assessee has simply diverted the interestbearing funds. The assessee has failed to file any evidence showing the benefit which the assessee will get out of such transaction. The assessee has failed to demonstrate that how the commencement of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had made significant profits and development of housing project during FY 2011 12 and FY 2012 13 and also had significant funds through internal accruals (reserves and surplus amount, as on 31/03/2012 was INR 363930737). Accordingly the assessee gave an intercorporate loan of INR 214000000 to one of its group entity which is Red Fort Akbar properties private limited (red Fort Akbar) out of the said internal accruals out of profits earned by the assessee. iii. Further, the assessee had charged interest income of ₹ 48,00,000 on such loan from red Fort Akbar during AY 2013 14 and offered the same to tax in the return of income filed by the assessee for the said assessment year. However, owing to liquidity issues faced by the red Fort Akbar, management of the assessee decided to waive of its right to charge interest on intercompany loan provided to red Fort Akbar during AY 2014 15. iv. AO made the disallowance on following basis:- the assessee company has own funds of ₹ 285190486 and liabilities to the extent of INR 1118834614 while current assets are amounting to INR 780827463 as at 31/03/2014. The assessee has diverted the interest-beari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est income on loan furnished by the assessee wherein it was found that interest at the rate of 17.95% was charged by the assessee on the loan given to above party in assessment year 2013 14. The interest income of INR 4841090/ was booked by the assessee in assessment year 13 14 for 46 days at the rate of 17.95% per annum on the loan amount of ₹ 214900000 given by the assessee. Therefore, the learned assessing officer noted that it is clear that the assessee was required to recognize interest income accrued to it in FY 2013 14 from the loan given to M/s red Ford Akbar properties private limited. Since assessee, company has been following the mercantile method of accounting, as per which income is recognize when it accrues, irrespective of actual receipt of the same. Furthermore, perusal of the audited accounts of the assessee for the assessment year 2013 14 reveals that assessee credited interest income of INR 4841090/ in profit and loss account, which had been charged on loan given to Red Fort Akbar properties private limited for the period of 46 days at the rate of 17.95% as mentioned above and the note number 16 other current assets forming part of the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Modipon Ltd 171 ITR 658 g. Highway Construction Co Private Limited vs CIT 199 ITR 702 17. The learned authorised representative also submitted that the board resolution dated 29/09/2018 has also written off the principal amount of loan amounting to ₹ 21,40,00,000 is given to red Fort Akbar private limited in view of the fact that the chances of the recovery of even the principal amount of loan is negligible. In this regard various Courts have held that no tax is payable in the hands of the appellant unless interest income is real income and not merely accrued income, especially when principal amount on loan had been written off as bad debt in subsequent years. He placed reliance upon a. CIT vs Eicher Ltd 185 taxmann 243, b. CIT vs Goyal MG gases private limited, c. DCIT vs Intercontinental India (ITA number 2033/AHD/2007) and d. chachar Drugs Distributors vs ITO 63 taxmann.com 98 (2015) . 18. In the end, he submitted that appellant has not received the said interest income during the assessment year and assessee has decided to waive of its right to charge interest income from red Fort Akbar of borrowing as it faced serious liquidity issues faced by that b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment years 2007-08 and 2009-10 on the ground that waiver of interest for the six year period was unbelievable. The Commissioner (Appeals) upheld the order of the Assessing Officer for both the assessment years. On further appeal, the Tribunal held that even in the mercantile system of accounting, income could be regarded as accrued only if there was certainty of receiving it and not when it was waived. Honorable High court upheld the order of the coordinate bench deletion the above addition. The Honourable court approved the finding of the tribunal on mercantile system of accounting stating that accrual means somebody has right to receive and other party has obligation to pay. There has to be reasonable certainty of receipt. The honourable High court approved the following finding of the ITAT:- 6. On further appeal, the Tribunal by the impugned order takes into account the fact that even in mercantile system of accounting an item would be regarded as accrued income only if there is certainty of receiving Page No : 0669 it and not when it has been waived. The Tribunal has in the impugned order very succinctly set out the principles to be applied while recovering i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest revenues till the point of time when the uncertainty to realize the revenues vanished. The Tribunal further referred to the fact that the various resolutions, which were passed, by the company as well as the communication exchanged between the parties would establish on facts that interest has been waived. Further, on facts it holds that there is no reason to disbelieve the resolution passed by the respondent-assessee waiving interest. The Tribunal further adverted to the fact that subsequently, M/s. Marketing and Brand Solutions (I) Pvt. Ltd. had amalgamated with the respondent-assessee which would also establish that the debentures issuing company was in serious financial difficulties which was incidentally a group company of the respondent. The decision rendered by the Tribunal in the impugned order is a decision on facts and nothing has been shown to us which would warrant interference by this court on account of any finding being perverse or arbitrary. 21. In the present case it is evident that assessee has written off the principal itself subsequently. Resolution is also produced to the effect that assessee has not recorded interest income. Generally , Income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated annually and sell be payable by the borrower on each anniversary of the effective date after duly deducting applicable withholding taxes. Therefore the interest due date for the assessment year 2014 15 would be 14th day of February 2014. In the earlier period in AY 2013 14, the assessee was paid interest 446 days whereas in the present A.Y. No interest was received. 25. The assessee has also supported the argument by submitting the copy of the annual result of the borrower for the year ended on 31st of March 2014. According to the annual accounts of the borrower, it is apparent that same are prepared on the basis of going concern assumption. In the profit and loss account the assessee has shown work in progress of ₹ 3280988810/ . With respect to the availability of the land on looking at note number 2 titled as Advance For Land, it is apparent that vide letter dated 3/7/2010, DILL has handed over the possession of 10 acres of alternate lands at the rate of ₹ 11.61 core Per acre. Therefore, it is apparent that assessee has acquired land. But the learned authorised representative submitted that the assessee could not commence the project. The notes on accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is different tax treatment and if the waiver is before the accrual of income there are different judicial precedent. In the present case, it is not known that when the interest accrued and when it is waived. 30. Further the factum of write off loan on 29/10/2018 for which assessee has produced the copy of the resolution naturally was not available with the assessing officer or the learned dispute resolution panel. The resolution placed before us also mentions that that the borrower has not been able to acquire the land till the date, however , annual accounts of the borrower shows a different picture wherein the land of 10 acre was offered and acquired by the borrower. 31. All the judicial precedents relied up on rest on its own facts. Further as we have already held that accrual of income is based on the facts of the case. Therefore, merely relying on judicial precedents it cannot be held that whether a particular income has accrued to the assessee or not. Even otherwise in the present case it cannot be said there is no liability on the other party to pay the interest because, it is for the loan accepted by that party and bound by the agreement to pay the interest. Naturall ..... X X X X Extracts X X X X X X X X Extracts X X X X
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