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TMI Blog2021 (5) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... to decide these two appeals en masse. 3. Grounds of appeal raised by the assessee in its lead case in ITA No.181/SRT/2017 are as follows: "01. The order imposing penalty U/s. 271(1)(c) of the Act is contrary to the facts of the case and prejudicial to the law. The appellant company has neither concealed its income nor submitted any inaccurate particulars of income and the action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts of the case and law and deserves to be deleted. 02. On appreciation of the facts and circumstances of the case, the Learned Commissioner of Income tax (Appeals) has erred in confirming the action of the Learned Assessing Officer imposing penalty U/s.271(1)(c) to the tune of Rs. 41,81,930/-. 08. The appellant craves leave to add, amend, modify or alter the above grounds of appeal at any stage of appellate proceedings. 09. The appellant humbly prays that the appeal be allowed in toto." 4. Brief facts qua the issue are that assessee filed its return of income for F.Y.2008-09 relevant to A.Y.2009-10 on 29.09.2009, declaring an income of Rs. 19,73,23,971/-. Subsequently the case was selected for scrutiny as per the instructio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal positions, it is apparent that the appellant has not been able to prove its good faith and due diligence in not benchmarking its international transactions as required by provision of sec. 92C of the Act. As noted in the two decisions of ITAT Mumbai referred herein above, the penalty was upheld when the appellant did not benchmark its international transactions as per most appropriate method u/s. 92C of the Act, the appellant's case is even worse as benchmarking was not done at all as sec. 92C of the Act. Therefore, I have no reason to differ with the finding of the AO on levy of penalty u/s.271(1)(c) of the Act and the same is hereby confirmed. Gronds of appeal no. 1 & 2 are dismissed." 9. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before this Tribunal. 10. At the outset, the Ld.Counsel for the assessee submits that the Tribunal in assessee's appeal for A.Y. 2009-10 and 2010-11 vide ITA No.1415/Ahd/2015 for A.Y. 2009-10 and ITA No.1416/Ahd/2015 for A.Y. 2010-11 have deleted the quantum relating to these penalties. Since the quantum have been deleted by the Tribunal in A.Y. 2009-10 and 2010-11, therefore, penalty should not be imposed and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its day to day functioning as it is an SPV not having any cash flow. Similarly, the assessee company provided corporate guarantee for a sum of Rs. 2218.65 million on behalf of M3 for availing loan facilities from the Standard Chartered Bank, Mauritius. The assessee company had considered the aforesaid transactions to be in the shareholder's domain and did not charge any interest or charge from the SPV M3. The transfer pricing officer (TPO) did not accept the contentions of the assessee company that the loan transactions be considered as quasi equity or otherwise falling within the domain of shareholders activity. The TPO relied upon the decision of ITAT Delhi Bench in the case of Perot Systems TSI v. DCIT [2010] 37 SOT 358 (Delhi-Trib), wherein, interest free loans given to 100% foreign subsidiaries were not accepted as quasi capital and arms length price of the loans was determined and added to the total income. It was submitted that the assessee had invested US $ 2 Million in equity shares and US $ 38 Million in redeemable preferential shares as part of equity in Singapore Pte Ltd which has been sold by the company to another related company Meeba Holding Pvt. Ltd., a Finance Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OR pertains to one month of SIBOR which is not applicable to the long term loan given by the assessee. The TPO adopted 12 month average SIBOR for the purpose of bench marking of the interest rate. He thereafter, determined arm's length, risk spread by assuming that the factors of the bank margin/fees and cost of risk being carried by the bank by lending the amount to corporate entity. The TPO thereafter also considered the elements of financial risk credit risk, business risk, and structural risk. The TPO further observed that the study of different type of bonds issued by the Indian Industries and interest paid on such papers gives an indication of interest that could be earned if the amount is lent to the companies. Government Bonds are subject to interest risk. However, corporate bonds are subject to credit risk, in addition to interest rate risk. Accordingly, the TPO for benchmarking the loan transaction, 12 month SIBOR + 0.5% margin + 3.5% risk rate of 3.5% was adopted as the arm's length interest rate which should have been changed from AE over and above the SIBOR plus 0.5% margin plus 3.5% rate adopted as the arm`s length interest which should have been charged from AE. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submitted the TPO has arrived at a risk rate/margin by comparing interest rate of "AAA" Credit rated corporate bonds in India with "BBB" Credit rated corporate bonds in India. However, it was submitted that the AE being SPV, the same credit rating enjoyed by the parent company should be assigned to the SPV, whereas the TPO has assumed credit rating of "AAA" for the assessee being lender and "BBB" for AE being borrower. Since, the credit rating of parent company has assumed at AAA, the same can be notched down by one notch to arrive at credit rating for AE i.e. "AA +" or "AA" for two notches. Conservatively assuming "AA" rating for AE risk rate would be 0.39% (i.e. 9.71%-9.32%) instead of 3.5%. Further, the risk margin spread of each country is different because rate of interest in each country is different which in turn is based on economic and financial condition of such country. Without prejudice to above, it was also submitted that the rate of interest at which AE has actually taken loan from bank can be considered as benchmark rate. Therefore, rate of interest at which AE has taken loan from independent bank should be considered as comparable rating i.e. LIBOR + 0.75%. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry in Singapore as a Special Purpose Vehicle (SPV) known as M3 Holdings (Singapore) Pvt. Ltd (M3). BHPL has invested in equity, preference shares and loan in the subsidiary AE which in turn invested in Sterling + Hostage a printing ink manufacturing company in Europe. Once investments are sold, it has to wind up and bring back entire proceeds to India and pay all applicable taxes as if any other resident company is required to do if it has directly invested from India. As per the terms of the investment applicable to the SPV under FEMA as well in the year 2012-13 (07/09/2012) the said Singapore AE has been wound up and all the capital remitted from India and investment/gains on disposal of investments has been completely brought back to India. Tax at the rate of 15% has been paid in India as per law on the dividend received. During the year, BHPL has redeemed preference shares and brought back of Rs. 174.90 Crores in order to redeem the aforementioned preference shares in the AE and considering the fact that the AE do not have any income or extra funds in its hand, the redemption has been achieved in the following manner i.e. BHPL and the AE arranged a loan from Standard Chartere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chart filed by the assessee. Further the assessee has given loan of Rs. 30,84,56,150/- and has brought back Rs. 32,56,53,750/- as repayments. Similarly investment in preferential shares of Rs. 1,71,68,40,000/- has been brought back by way of redemption of preferential shares for an amount of Rs. 1,74,90,59,944/- during the year under consideration. That case was otherwise a classic case of violation of transfer pricing norms, where profits were shifted to tax heavens or low tax regimes to bring down the aggregate tax incidence of a multi-national group. Whereas, in the case of the assessee, the transaction has resulted into increase in cash inflow into India and possibility of increase of tax base in India. Further, there is no finding of fact that the transactions have been undertaken for shifting of profits to a low tax jurisdiction as against the finding given in Perot System (supra). 17. The transaction in the case of assessee is a quasi-equity in substance based on the transactions considered which has been characterized by the TPO as pure loan simplicitor as given by a financial institution. The quasi-equity as explained in the decision of Cadila Healthcare Limited [20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form shall be considered also a quasi-equity capital for the purpose of determining ALP. The ld. counsel further submitted that in the case of Bartronics India Ltd v. DCIT (2017) 86 taxmann.com 254 (Hyderabad-Trib.). The Tribunal has explained the concept of quasi-equity in Para 20. Therefore, considering the same, as the assessee has also given loan to obtain the benefits of full profits earned by the subsidiary and to ensure full control over the operations of the subsidiary. Therefore, this is not comparable to a bank financing a customer based on their individual financing needs. Further, in the case of BHPL could have very well given the money as a preference capital or as an equity capital but the interest free loan was given to enable the BHPL bring back such money back to India easily so as to increase the asset and tax base in India. In all countries share capital can be brought back only after complying with certain procedure and more so in the case of equity capital. Hence the contention of the assessee that it is a quasi-equity capital has not been right fully considered by the TPO as well as CIT(A). Therefore, both the lower authorities have not considered substance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of Revenue to the Government of India, hence Chapter-X being anti-avoidance provisions are not applicable to the facts of the case. Had interest been paid on the amount brought back to India, profits would have been lesser to that extent and taxes would have been paid to Government of India proportionately lesser to that extent. Hence, there is no loss of Revenue to the Government of India. Further, alternatively if transaction as quasi-equity is not accepted it shall be considered that there is no risk for BHPL in extending the interest free loan as observed by the CIT(A) in Para 9.3 at Page 19 of the Appellate Order. The CIT(A) observed that the transaction is as a loan simplicitor to an un-related party. Since, the loan is consumed in a foreign country, interest rate prevalent in that country shall be considered as ALP. In this case, as per Rule-10B, entire functions are carried out by BHPL and the risks and rewards are also to be borne and enjoyed by BHPL, hence there should not be any risk premium chargeable to the loan as an adjustment. In support of this contentions, the ld. counsel has placed reliance on the following decision of Vibhav Gems Limited (2017) 88 taxmann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India as per laws on the dividend received. During the year, the BHPL has redeemed preference shares and brought back of Rs. 174.90 Cr. In order to redeem the aforementioned preference shares in the AE, and considering the fact that the AE do not have any income or extra funds in its hand, the redemption has been achieved by the assessee company i.e. BHPL and the AE by arranging a loan from Standard Chartered Bank Mauritius to the tune of 35 Million Euro through Standard Chartered Bank Mauritius. This is discernible from the letter dated 30.10.2007 of Standard Chartered Bank Mauritius addressed to M3 Holdings (Singapore) Pte Ltd. that the purpose of financing is that the company will redeem preference capital subscribed by Bilakhia Holding Pvt. Ltd., India. The Standard Chartered Bank, Ahmedabad gave guarantee to Standard Chartered Bank, Mauritius. BHPL has given Corporate Guarantee to Standard Chartered Bank Ahmedabad. BHPL has paid Guarantee charges of Rs. 1,78,86,359/-. BHPL also extended a loan of Rs. 28.125 Cr to the AE during the year towards day to day expenses and for achieving the above redemption. From the aforesaid foreign loan and quasi-equity contribution from BHPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r granting loan was not interest simplicitor on amount advanced but opportunity to own capital on favourable terms, it was to be regarded as quasi capital transaction which could not be compared with simple loan transaction for purpose of determining ALP. The Co-ordinate Bench of Tribunal in Para 10 to 14 of the said decision observed as under: "10. There is no dispute that the transactions in question are not of the transactions of lending money to the associated enterprises. The amount/advanced to the AEs are attached with the obligation of the AEs to sue share capital, in case the assessee exercise option for the same, on certain conditions, which are admittedly more favourable, and at an agreed price, which is admittedly much lower, vis-a-vis the conditions and prices which independent enterprise would normally agree to accept. The lending is thus in the nature of quasi capital in the sense that substantive reward, or true consideration, for such a loan transaction is not interest simplicitor on amount advanced but opportunity to own capital on certain favourable terms. Contrast this reward of owning the capital in the borrower entity with interest simplicitor, which is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to "quasi capitals" There are several decisions of this Tribunal, including in the cases of Perot Systems TSI v. DCIT [(2010) 130 TTJ 685 (Del)]., Micro Inks Ltd. v. ACIT [(2013) 157 TTJ 289 (Ahd)], Four Soft Pvt. Ltd. v. DCIT [(2014)149 ITD 732 (Hyd.)], Prithvi Information Solutions Pvt. Ltd. v. ACIT [(2014) 34 ITR (Tri) 429 Hyd.] , which refer to the concept of 'quasi capital' but none of these decisions throws any light on what constitutes 'quasi capital' in the context of transfer pricing and its relevance in ascertainment of the arm's length price of a transaction. Lest we may also end up contributing to, as Hon'ble Delhi High Court put it, "rote repetition of this reasoning without an independent analysis of the provisions of the Act and the Rules" let us take deal with the connotations of 'quasi capital', and its relevance, under the transfer pricing regulations. 7. The relevance of 'quasi capital', so far as ALP determination under the transfer pricing regulation is concerned, is from the point of view of comparability of a borrowing transaction between the associated enterprises. 8. It is only elementary that when it comes to comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terially different than the loan transactions simplicitor and that is what was decisive so far as determination of the arm's length price of such transactions was concerned. The reward for time value of money in" these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.' 12. It is thus quite clear that the considerations for extending a loan simplictor are materially distinct and different from extending a loan which is given in consideration for, or mainly in consideration for, option to convert the same into capital on certain terms which are favourable vis-a-vis the terms available, or, to put it more realistically, hypothetically available, to an independent enterprise. On a conceptual note, the entire purpose of the exercise of determination of arm's length price is to neutralize the impact of intra AE relationship in a transaction, the right comparable for such a transaction of quasi capital is a similar transaction of lending money on the same term i.e. with an option to convert the loan into capital on materially similar terms. However, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, therefore, turns on this decision, and whatever be its persuasive value, or lack thereof, the authorities below were in error even in relying upon this decision. 14. We have noted that, as noted by the TPO, it is wholly immaterial as to whether or not the assessee, by the virtue of this transaction, is entitled to subscribe to capital of the AE on certain concessional terms, because, in any case, the AE is a wholly owned subsidiary of the assessee and none else can subscribe to the AE's capital. What has been overlooked, however, in this process of reasoning is that the very concept of arm's length price is based on the assumption of hypothetical independence between AEs. Essentially, what is, therefore, required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm's length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm's length price is hypothetical price at w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the interest so charged by the assessee, in a situation in which the right to exercise the option has come to an end, is not an arm's length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arms length price adjustment of Rs. 5,00,35,270 in respect of interest which, according to the revenue authorities, should have charged on the optionally convertible loan granted to the AE's. 21. Thus, applying the ratio of above decision, it would emerge that the consideration for extending the loan simplicitor is materially distinct and different from extending a loan which is given in consideration for or mainly in consideration for, option to convert the same into capital on certain terms which are favourable vis-à-vis the terms available or to put it more realistically, hypothetically available, to an independent enterprise. Therefore, quasi capital loan or advance are not routine transaction of loan simplicitor. The substantive reward for such a loan transaction is not loan but opportunity to own capital. In the case of the assessee, the loan transaction is therefore, quasicapital and substantive reward as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as various case laws submitted by the assessee. Assessee has provided corporate guarantee to its AE in the current AY without charging any fees for the same. The term 'guarantee' was inserted in the definition of international transaction by inserting an explanation in the Finance Act, 2012 with retrospective effect from 01/04/2002. There is no dispute that the corporate guarantee is an international transaction and different assessees are adopting different methods of treatment. Some assessees charges nominal rate to the AEs, whereas other assessees are treating this as shareholder service. Here, the assessee has objected to include this transaction as international transaction for the reason that the Finance Act, 2012, which has inserted an explanation, which will be applicable prospectively from AY 2013-14 and the corporate guarantee transaction will not be applicable to the current AY. The same view was upheld by the coordinate bench in the case of Dr. Reddy Laboratories and other benches of Tribunal. The findings given by the coordinate bench in the case of Dr. Reddy Laboratories (supra) are extracted below: 29. We have carefully considered the rival submissions and per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary. He submitted that transaction of investment is not international transaction u/s 92B of the Act and hence no interest can be charged on such investment. He relied on the following cases: 19 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. 1. CIT Vs. EKL Appliances Ltd., ITA No. 1068/2011 2. M/s Vijay Electricals Ltd., Vs. Additional CIT, ITA No. 842/Hyd/2012, order dated 31/05/2013. 3. GSS Infotech Ltd. Vs. ACIT, Hyd. ITA No. 497/Hyd/2015 4. KAR Therapeutics & Estates Pvt. Ltd., Vs. DCIT, ITA No. 86/Hyd/2016. 5. Topsgrup Electronics Systems Ltd. Vs. ITO, 67 Taxmann.com 310 (Mum.) 6. Mylan Laboratories Ltd. Vs. ACIT, [2015] 63 Taxmann.com 179 (Hyd.) 19. Ld. DR, on the other hand, relied on the orders of revenue authorities and submitted that this transaction is recorded in the books of account as loan and not as investment. He referred to page 203 of paper book to submit that it is classified as loans & advances. He further submitted that the claim of the assessee is only an after thought. Considered the rival submissions and perused the material facts on record. Assessee has transferred funds to its AE as investment and the same was classified in the balance sheet as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trolled transaction, the allottee company in normal course of transaction will not be expected to receive any interest leave away the international transaction. Without any certainty or any agreement on receiving any interest but merely relying on the accounting method and disclosure of the subsidiary in their financial statement cannot lead to this transaction as international transaction which require ALP adjustment. Assessee had relied on the case of Prithvi Information Solutions Ltd. (supra) wherein on the similar set of facts and circumstances, the coordinate bench of this Tribunal has held as below: "10. We have considered the rival submissions, perused the record and have gone through the orders of the authorities below as well as decisions cited. In our opinion, the amount representing 2118.84 is towards investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pricing provisions are not applicable as there is no income. Accordingly, we set aside the order passed by the CIT u/s 263 and that of the AO is restored and the grounds raised by the assessee in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erations of the subsidiary. Therefore, this is not comparable to a bank financing a customer based on their individual financing needs. Further, in the case of BHPL could have very well given the money as a preference capital or as an equity capital but the interest free loan was given to enable the BHPL bring back such money back to India easily so as to increase the asset and tax base in India. In all countries share capital can be brought back only after complying with certain procedure and more so in the case of equity capital. Hence the contention of the assessee that it is a quasi-equity capital has not been right fully considered by the TPO as well as CIT(A). 24. The findings given in the case of Perot Systems TSI v. DCIT [2010] 37 SOT 358 (Delhi-Trib) are distinguishable as in that case profits were shifted out of India to Bermuda, a Tax Heaven. Where in the instant case, the AE subsidiary is formed with the intention and the structure of the transaction is to bring back the capital and profits to India after payment of due taxes. Further, in that case the result of the transaction was that the income of the assessee in India would reduce while that of the AE would increa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of Cadila Healthcare Limited in Para 11 & 12 of the judgement as reproduced above. The ld. counsel further without prejudice as an alternative argument that for the event in the transaction is not considered as quasi-equity in nature then there is no loss of Revenue to the Government of India hence Chapter X being anti-avoidance provisions are not applicable to the facts of the case. Had interest been paid on the amount brought back to India profits would have been lesser to that extent and taxes would have been paid to Government of India proportionately lesser to that extent. Hence, there is no loss of Revenue to the Government of India. Further, alternatively if transaction as quasi-equity is not accepted it shall be considered that there is no risk for BHPL in extending the interest free loan as observed by the CIT(A) in Para 9.3 at Page 19 of the Appeal Order. The CIT (A) observed that the transaction is as a loan simplicitor to an un-related party. Since the loan is consumed in a foreign country interest rate prevalent in that country shall be considered as ALP. In this case as per Rule 10B entire functions are carried out by BHPL and the risks and reward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should have charged on the loan granted to the AE's to bring back preferential shares capital in India. Thus, Ground No. 4 of the appeal of the assessee is allowed." 13. The Tribunal for A.Y. 2009-10 and 2010-11 relying on the findings for the A.Y.2008-09 in para no.12 to 24, as noted above, has deleted the quantum additions. Since the quantum additions have been deleted for A.Y. 2008-09 on the identical issue, therefore, the Tribunal has held that the decision for the A.Y. 2008-09 would be applicable for the A.Y. 2009-10 and 2010-11 mutatis,-mutandis and therefore deleted the quantum addition for the A.Y. 2009-10 and 2010-11 observing as follows: "37. Ground No. 1 & 2 are general in nature; hence, does not require our separate adjudication. 38. Ground No. 3 & 4 are against the confirmation of upward adjustment of Rs. 1,23,03,414/- out of total upward adjustment of Rs. 1,94,15,214/- made by AO/TPO on account of interest on loan to AE's while determining arm's length price of international transactions. 39. We have heard the rival submissions and perused the relevant material on record. We find that both parties have agreed that the fact for this assessment year are identica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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