TMI Blog2021 (11) TMI 878X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 for the Assessment Year (AY) 2012-13. The assessee raised the following grounds of appeal: 1. The order of assessment is contrary to the facts and prejudicial to the assessee. 2. On appreciation of the facts and circumstances of the case and law, the additions made by the Learned Assessing Officer and confirmed by the Learned Commissioner of Income Tax (Appeals) are contrary to law and based on erroneous understanding of the facts. 3. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in holding that the appellant has purchased the shares from its promoters at discounted price instead of holding that the shares were received as gift by the appellant company. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted. 4. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in holding that the transfer of shares was not without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee are covered either against the assessee or in favour of the assessee. The ld.AR submits that Ground No.1 and 2 of the appeal are general in nature and needs no adjudication and may be dismissed as such. The ld.AR further submits that Ground No.2 to 6 are also covered against the assessee by the decisions of the Tribunal in earlier years and the same ay be dismissed by following the earlier years order. Considering the submission of the ld.AR of the assessee, the Ground No.2 to 6 are dismissed. 3. Ground No. 7 8 relates to upward adjustment @2.29% on account of interest on loan to Associated Enterprises (AE) while determining Arm s Length Price of international transaction. The ld.AR of the assessee submits that these grounds of appeal are covered in favour of assessee by the decision of the Tribunal in A.Y. 2010-11 and 2011-12 in ITA no. 1416/AHD/2015 and 795/AHD/2016 respectively. The ld. AR for the assessee submits that the ld.CIT(A) passed the order by following order of his predecessor for the A.Y. 2010-11 and 2011-12. The ld.AR further submits that copy of decision of the Tribunal in assessee s own case for the A.Y. 2008-09, A.Y. 2010-11 and 2011-12 is placed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 1,78,86,359/-. BHPL also extended a loan of ₹ 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, the AE redeemed the preference shares held by BHPL and also recovered a sum of ₹ 3,22,19,944/- which is much more than the guarantee charges paid to the bank. In view of these facts, we are of the view that the AE has been created as SPV only to hold shares in company sterling + Hostage Europe and not authorized to carry any other activity. This view is further supported by the letter dated 02.11.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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 typically defined as the reward of parting with liquidity for a specified period (Prof Keynes) or as a payment made by the borrower of capital by virtue of its productivity as a reward for his capitalist's abstinences (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... si 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 comparing the borrowing transaction between the associated enterprises, under the Comparable Uncontrolled Price (i.e. CUP) method, what is to be compared is a materially similar transaction, and the adjustments are to be made for the significant variations between the actual transaction with the A E and the transaction it is being compared with. Under Rule 10B(l)(a), as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 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, what the authorities below have held, and wrongly held for that reason, is that a quasi capital transaction like one before us can be compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, oppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 15. As regards the stand of the authorities be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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- -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, quasi-capital and substantive reward as interest thereon is opportunity to redeem its preferential shares capital and bring back the same into India. We also note that the TPO has not considered Rule 10A(d) according to transaction which includes number of closely linked transactions. Hence, the nature of transaction as carried out by BHPL as per its objective effected a redempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 perused the record. The ITAT, Delhi Bench in the case of 18 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. Bharati Airtel Ltd. (supra) has considered an identical issue which was re-affirmed in the case of Siro Clinpharma Pvt. Ltd., Vs. DCIT (order dated 31 st March, 2016). The bench observed that transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lectricals 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 loans and advances. However, 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 share allotment certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diary 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 regard are allowed. 21 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. As held in the above, we are inclined to treat the above transaction as not an international transaction and accordingly ground No. 1 of the assessee is allowed. Since we have adjudicated ground No. 1 as allowed, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 increase. That was also a classic case of violation of transfer pricing norms where profits are shifted to tax heavens or low tax regimes to bring down the aggregate tax incidence of a multi-national group, whereas in the present case, the transaction have resulted into increase in cash i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 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. Therefore, reliance placed by the Learned Counsel ld. counsel has placed reliance on the following decision of Vibhav Gems Limited (2017) 88 taxmann.com 12 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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