TMI Blog2021 (5) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... o as the Act ). 2. Since these appeals pertain to the same assessee for different assessment years, and common issues are involved, therefore these appeals have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. The facts as well as grounds of appeal narrated in ITA No.181/SRT/2010 for A.Y. 2009-10 have been taken into account 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 ₹ 41,81,930/-. 08. The appellant crav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The assessee submitted its reply against the show cause notice dated 23.03.2016. However, the Assessing Officer rejected the contention of the assessee and levied the penalty under section 271(1)(c) of the Act TO THE TUNE OF ₹ 41,81,930/-. 8. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld.CIT(A) who has confirmed the penalty imposed by the AO observing as follows: considering the above factual and 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nature of transaction Amount in Rs.million 1 M3 Holdings (Singapore) Pte Ltd. Redemption of preferential shares of M3 Holdings (Singapore) Pte Ltd 1749.06 2 Meeba Holdings Pte Ltd Transfer of equity shares of M3 Holdings (Singapore) Pte Ltd 47.37 3 M3 Holdings (Singapore) Pte Ltd. Provided corporate guarantee on behalf of M3 Holdings (Singapore) Pte Ltd 2218.65 4 M3 Holdings (Singapore) Pte Ltd. Interest free unsecured loan 281.25 14. The assessee has s hown outstanding loan of Dollar 7 million (₹ 28.125 crore) which were given to M3 for 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 ₹ 2218.65 million on behalf of M3 for availing loan facilities from the Standard Chartered Bank, Mauritius. The assessee company had consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is issue. The TPO further observed that the action of advancing of ₹ 28 crore cannot be said to be a shareholder s activity or an act to ensure continuance of the activities of the company, especially when the company is an SPV without many employees and has no substantive routine expenses. The assessee has failed to explain the reason for advancing such a huge loan. It is also not been able to justify that the loan was essential to ensure running of the AE. Since the AE is an SPV and is engaged in only financial activities, it is clear that the loan would be used for financial activities of the AE's. Hence, assessee needs to advance such a sum at normal arm s length financial level. Hence, with regard to contention of the assessee regarding use of SIBOR for bench marking of the interest rate as against LIBOR proposed in show-cause notice. The TPO noted that data given by the assessee for SIBOR 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction has been shown as an interest free loan, the same amounts to quasi-equity. Therefore, the amount is subject to the same risk that may arise to the equity share holder for a similar type of activity. Reliance was also placed on the extract from the OECD commentary for making such reasonable inference in the circumstances of the case. It was further submitted that even in the event of the transaction being construed as a loan transaction by rejecting the contention of the appellant company, the rate of interest adopted for calculating the ALP shall be the bank lending rates based on Singapore Inter Bank Offer Rate (SIBOR). This was based on the premise that if a third party obtains loan from another third party it will be able to obtain such loans in Singapore at the SIBOR rate. Further, as per Rule 10B to Section 92C of the Act the ALP shall be adopted after benchmarking the same with comparable transactions. It was further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk premium of 4% over and above the SIBOR rate of interest. The TPO has also considered the credit rating of the SPV to be significantly down than the parent company. Admittedly, the SPV is fully owned by the appellant company and has been formed as SPV to hold investments. It does not carry on any other activity and the entire risk and reward of the AE shall be borne and enjoyed by the appellant company. Accordingly, CIT(A) observed that he has agreed with the TPO s observations that the risk premium of 4% over and above the SIBOR rate of interest is justified. Accordingly, the findings of the TPO were upheld. 16. Being aggrieved, the assessee filed an appeal before this Tribunal. The ld. counsel submitted that the Bhilakhia Holdings Pvt. Ltd [in short BHPL ] i.e. an appellant-company is an investment company and was holding 46.2% shares in a Printing Ink Company known as Sterling + Hostag and for that purpose created a wholly owned subsidiary 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 prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest at Nil. The TPO/CIT(A) has rejected the aforesaid T P Study report and arbitrarily adopted the CUP method. The finding in the case of Perot Systems TSI v. DCIT [2010] 37 SOT 358 (Delhi-Trib) that profits are shifted out of India to Bermuda, a Tax Heaven. However, in the instant case, the AE subsidiary has been 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. Therefore, the decision in the case of Perot System TSI (India) Limited vs. DCIT (2010) 37 SOT 358 (Delhi) relied by the TPO/ CIT(A) is distinguishable on fact as in that case the result of the transaction was that the income of the assessee in India would be reduced, while in the case of the assessee the income would be increased. It is seen that the assessee has brought back an amount of ₹ 1,31,30,08,025/- as dividend during the assessment year 2012-13 and in assessment year 2013-14 as could be seen from financial accounts chart filed by the assessee. Further the assessee has given loan of ₹ 30,84,56,150/- and has brought back ₹ 32,56,53,750/- as repayments. Similarly investment in preferenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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- -vis the terms available or to put it more realistically, hypothetically available, to an independent enterprise. It was further submitted that the TPO has not considered Rule 10A(d) which includes number of closely linked transactions. The nature of transaction carried out by BHPL as per its objective effected a redemption of preference shares held by it to bring back its money to India which will increase its asset base and income into India. In order to redeem the preference shares, the AE do not have any funds and the BHPL has extended the loan of ₹ 22.125 crores and carried out all necessary activities to a facilitated redemption of preference shares. This is a closely linked integrated transaction under Rule 10A(d) i.e. functioning his shareholder s function and as well as the loan extended for 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 Bartroni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod. In this case the AE is not authorised by law to undertake any functions or pursue any business. Once BHPL decides to sell investments held, the AE has to wind up and BHPL has to bring back the entire proceeds to India. Thus, the aforesaid FAR analysis as required under Rule 10B has not been carried out by the TPO/CIT(A) while rejecting the contention of BHPL that even though in form the transaction is structured as a loan, in substance this is a quasi-equity capital. Thus, the aforesaid material differences and considerations for extending the loan to AE as compared to a loan simplicitor has not been considered by the TPO/CIT(A) as required by Rule 10B, which is more particularly analyzed by the Hon ble Ahmedabad Tribunal in the case of Cadila Healthcare Ltd. v. ACIT-Circle-1, Ahmedabad [2017] 80 taxmann.com 24 (Ahmedabad-Trib) in Para 11 12 of the judgement. The ld. counsel further, without prejudice, as an alternative argument stated that in the event if 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and perused the relevant material available on record. We find that the assessee is an investment company and was holding 46.2% shares in a Printing Ink Company known as Sterling + Hostag and for that purpose created a wholly owned subsidiary in Singapore as a Special Purpose Vehicle (SPV) known as M3 Holdings (Singapore) Pvt. Ltd (M3). The 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 the 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 as applicable to the SPV under FEMA as well in the year 2012-13 (07.09.2012) the said Singapore AE has been winded up and all the capital remitted from India and investment/gains on disposal of investments has been completely brought back to India during year 2012-13 and 2013-14 and paid tax at the rate of 15% in India as per laws on the dividend received. During the year, the BHPL has redeemed preference shares and brought back of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been duly reflected in annual accounts placed at Paper Book Page No. 55 (and Chart filed with written submissions filed by the counsel). Therefore, we are in agreement with the assessee that as per OECD guidelines, the substances over form has to be considered. The transaction in the case of assessee is therefore, be considered as a quasi-equity in substance, as against the transactions considered and characterized by the TPO as pure loan simplicitor as given by a financial institution. The finding recorded by the AO, that the AE of the assessee company was engaged in the financial services activities in Singapore is not found to be correct as it is clearly borne out from the letter of disbursement of loan and purpose as setout the terms of loan as discussed herein above. The term of quasi-equity was explained by the Co-ordinate Bench of Ahmedabad in the decision of Cadila Healthcare Limited [2017] 80 taxmann.com 24 (Ahmedabad-Trib.), wherein, it was held that where assessee-company advanced loan to its AE within option to convert same into equity at par, since real consideration for granting loan was not interest simplicitor on amount advanced but opportunity to own capital o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otations of expression 'quasi capital in the context of the transfer pricing legislation. 6. Hon'ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd. v. ACIT [(2015) 56 taxmann.com 417 (Delhi)], has begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that A phrase begins life as a literarily expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas . The reference so made to the words of Justice Frankfurter was in the context of the concept of super profits but it is equally valid in the context of concept of quasi capitals also. As in the case of the super profits, to quote the words of Their Lordships, many decisions of different benches of the ITAT indicate a rote repetition (in the words of Felix Frankfurter J, quoted in the beginning of this judgment a lazy repetition ) of this reasoning, without an independent analysis of the provisions of the Act and the rules the same seems to be the position with regard to quasi capitals There are several decisions of this Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rently than the normal loan transactions. 9. The expression 'quasi capital', in our humble understanding, is relevant from the point of view of highlighting that a quasi capital loan or advance is not a routine loan transaction simplilcitor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the coordinate benches, wherein references have been made to the advances being in the nature of'quasi capital', these cases referred to the situations in which (a) advances were made as capital could not subscribed to due to regulatory issues and the advancing of loans was only for the period till the same could be converted into equity, and (b) advances were made for subscribing to the capital but the issuance of shares was delayed, even if not inordinately. Clearly, the advances in such circumstances were materially different than the loan transactions simpl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were (1) whether advance agreements issued by Pepsi Co's Netherlands subsidiaries to certain Pepsi Co domestic subsidiaries and PPR are more appropriately characterized as debt than as equity; and, (2) if the advance agreements are characterized as debt, whether, and to what extent payments on the advance agreements constitute original issue discount, relating to contingent payment debt instruments under section 1.1275-4(c), Income Tax Regulations. This provision is a deduction provision and not a provision relating to determination of arm's length price. Nothing, therefore, turns on this decision. In any event, it is nobody's case that the transaction before us is of the debt. The case of the assessee is that since in consideration of this transaction, the assessee is entitled to own the capital at certain admittedly favourable terms, the true reward of this debt is the availability of such an option, and, therefore, it cannot be compared with a debt simplictor for the purpose of determining arm's length price. Nothing, therefore, turns on this decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articipation of profits, and it does not vary because of the profits made by the borrower from monies so raised. In any event, while determining arm's length price of a transaction, it is immaterial as to what 'benefit* an AE subsequently derives from such a transaction. What is to be determined is the consideration of a transaction in a hypothetical situation, in which AEs are independent of each other, and not the benefit that AEs derive from such transactions. It is not even the case of the authorities below that in the event of hypothetically dealing with an independent enterprise, no independent enterprise would not have given him an interest free loans even if there was an option, coupled with such a deal, to subscribe to the capital of the AE on the terms as offered by the AE to the assessee. Unless that happens, there is not even a prima facie case made out for an ALP adjustment. 16. We have also noted that, in any event, whenever the assessee's right to exercise the option of converting the loan into equity comes to an end, the assessee is entitled to interest on the commercial rates. It is not even the case of the authorities below that the interest so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te guarantee given to AE does not fall within the scope of international transaction u/s 92B. He submitted that the corporate guarantee is provided to AE for commercial and business expediency and the assessee has not incurred any cost for providing such guarantee. 15.1 Without prejudice to the above, ld. AR submitted that the Corporate Guarantee was brought under section 92B under Finance Act, 2012 w.e.f. AY 2013-14. It is not applicable to the current AY. For this proposition, he relied on the following cases: 17 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. 1. Dr. Reddy s Laboratories, ITA No. 294/Hyd/2014 ITA No. 458/Hyd/2015. 2. Siro Clinpharm Pvt. Ltd. Vs. DCIT, ITA No. 2876/Mum/2014 3. Bharati Airtel Ltd. Vs. ACIT, ITA No. 5816/Del/2012 4. Asian Paints Ltd. Vs. ACIT, ITA No. 7801/Mum/2010 5. Lanco Infratech Ltd. Vs. DCIT, ITA No. 450/hyd/2016 16. Ld. DR, on the other hand, submitted that even though the amended section is introduced in Finance Act, 2012, but, it is introduced with retrospective effect from 01/04/2002. Accordingly, he supported the findings of revenue authorities. 17. Considered the rival submissions and perused the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the possible views on the matter and so long as there is no binding decision of any other Higher Forum taking a contrary view, the one which is favourable to the assessee has to be adopted even though other Benches have taken a different view. We, therefore, hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute International Transaction within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect. Respectfully following the above decision, we reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect. Accordingly, the ground raised by assessee is allowed. 18. As regards addition of ₹ 48,10,26,558/- towards interest on advances given to AE, ld. AR submitted that the TPO erred in recharacterizing the nature of transactions from investment to loan which is not permissible u/s 145 of the Act. He submitted that if the amount is advanced as the share capital, the same wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious courts, particularly, in the case of KAR Therapeutics Estates Pvt. Ltd. (supra) wherein the coordinate bench has held as under: 9. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. There is no dispute that the assessee had remitted $ 3387182 towards investment in share capital. The shares were allotted to the extent of $ 2654797 in the same AY. The subsidiary company has treated the balance remittance as interest free unsecured loan and repayable on demand in their financial statement. In the next AY, the subsidiary company has allotted the shares on 15/03/2012. Now, can these transactions be treated as international transaction, which qualifies for ALP adjustment. In our considered view, the amount $ 732.385 is towards investment in share capital of the subsidiary outside India and the transactions are not in the nature of international transaction referred to section 92-B of the IT Act and transfer pricing provisions are not applicable as there is no income as well as there is no mutual agreement between the companies for such payment of interest. Moreover, the subsidiary company also d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction is considered as one that of international transaction. (AY. 2008-09 to 2011-12). We also note that it is only a classification of accounting entry in the books, but, what is relevant and important is whether such transfer of funds were duly treated as investment and accordingly shares were allotted in the subsequent AY. Assessee has submitted brought back the preferential shares Since the transfer of funds were duly accounted by the AE and there is no restriction on the part of the AE to allot shares in the same AY of receipt of funds, as long as the shares allotted, it gives true nature of the transaction. therefore, in our considered view, there is no element of profit in the above transaction. Moreover charging of interest is depending upon the contractual obligations between the parties. Further, we find the amount representing loan was 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. Therefore, considering the same, as the assessee has also given loan to obtain the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as equity capital, preference capital and loan only by BHPL as part of its shareholder function. The AE itself has not employed any assets. As per the contractual terms and law, the moment this investment is sold the entire proceeds of capital and profits are to be repatriated to India compulsorily and subject the same to taxation in India. Therefore, in this manner the entire risks are to be borne by and rewards accrue to BHPL only as a result of the investments made. As per Rule10B adjustment for contractual terms are to be considered while applying CUP method. In this case the AE is not authorised by law to undertake any functions or pursue any business. Once BHPL decides to sell investments held, the AE has to wind up and BHPL has to bring back the entire proceeds to India. Thus, the aforesaid FAR analysis as required under Rule 10B has not been carried out by the TPO/CIT(A) while rejecting the contention of BHPL that even though in form the transaction is structured as a loan, in substance this is a quasi-equity capital. Thus, the aforesaid material differences and considerations for extending the loan to AE as compared to a loan simplicitor has not been considered by the TPO/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 which independent enterprises would have entered the transaction, and, as such the impact of intra AE association cannot have any role to play in determination of arm s length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. We have also noted that the assessee has given loan of ₹ 30,84,40,000/- and brought back ₹ 32,56,53,750/- as repayments. Similarly, investment in preferential shares were at ₹ 1,71,68,40,000/- as against which the assessee has brought back by way of redemption of preference shares for an amount of ₹ 1,74,90,59,944/-. Therefore, the transactions under consideration is in the nature of quasi capital. Hence, there was no requirement charge 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 pric ..... X X X X Extracts X X X X X X X X Extracts X X X X
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