TMI Blog2021 (4) TMI 1348X X X X Extracts X X X X X X X X Extracts X X X X ..... nvest in associated enterprise like assessee company, no parent company for that matter associate enterprises will analyze the risk factor similar to banks. As discussed above risk factor can never play an important element in benchmarking the transaction with the associate enterprises, it doesn t matter how risky the venture is. Benchmarking has to be done based on the prevailing market rate which a normal bank would lend money with the minimum risk. Since the assessee has already mitigated the risk by investing in the fully convertible debentures when the risk is already mitigated one more time the same risk element cannot be considered for bench marking on the interest payment also. We are in agreement with the findings of the Ld CIT(A) therefore the grounds of appeal raised by the assessee in both the appeals are dismissed. Appeals filed by the assessee are dismissed. - I.T.A. No. 6641 & 6642/Mum/2012 - - - Dated:- 22-4-2021 - SHRI S. RIFAUR RAHMAN, AM AND SHRI RAVISH SOOD, JM Appellant by: Shri Niraj Sheth, AR Respondent by: Shri Sunil Deshpande, DR ORDER PER S. RIFAUR RAHMAN (ACCOUNTANT MEMBER): The present two appeals have been filed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, (a) it did not enjoy any credit facilities from the commercial banks in India, (b) the business activities of the company being a revamping of enterprises having distressed assets, therefore, it could have taken long gestation period before making profits and (c) it did not have to offer any securities to the AE which would have been required while enjoying credit facilities from the Indian banks. After considering the submissions of the assessee TPO rejected the contentions of the assessee and observed as below: (i) The start up enterprises in India are as much open to enjoy credit facilities of the commercial bank in India as other enterprise. (ii) The assessee has not taken a purely unsecured loans from its AE. The money has been raised by way of issue of FCDs which are convertible into cumulative redeemable preference shares any time after three years and within eight years from the date of allotment of the FCDs. Thus, the clement of participation by the AE through equity of the company, by way of subscribing-' to the FCDs, is very much evident. The high risk, if any, gets neutralized through the higher returns which may accrue to the investor (CCP Cyprus) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant as against the observation / findings of the TPO / AO in their order u/s 92CA(3) /143(3) of the Act. The contentions and submission of the appellant are being discussed and decided as under: i. The issues raised by the appellant in its Sub-Grounds 1.1, 1.2 . 1.3 are identical to the once raised by the appellant in its case for A.Y. 2005-06. The same has been decided by me against the appellant vide my order in appeal No. CIT(A)-15/Arv. 212/DCIT Cir3(l)/12-13, dated 16.08.2012. The facts of the case on hand are similar and the issue is identical. Further there is nothing different that has been submitted by the appellant. ii. In the facts of the case the Appellant has issued fully convertible debentures (FCDs) to its AE located in Cyprus. iii. The FCDs have been issued by the Appellant to the AE with the condition of interest payment at 12%. iv. In respect of such FCDs and the borrowing of money by the Appellant, the appellant has debited an amount of Rs. 421,377,773/- as interest in its books of accounts. v. The Appellant has adopted CUP as the most appropriate method for benchmarking its aforesaid international transaction of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact is appreciable but the same does not anyways give leverage to the Appellant not to consider the other rates of interest on which loans have been granted by the Indian Banks to the Indian borrowers, especially when in the year under consideration the appellant had completed its two years of operation. xi. It is the fact of the case that though the Appellant has adopted CUP as the most appropriate method but for the purposes of the application of CUP, the benchmark is the arithmetic mean of the maximum, interest rates available on the RBI websites. It is not the case of the Appellant that it approached any Indian Bank for the purposes of the borrowings that it required and was offered some particular rate of interest given its financial standing, capital adequacy and its passive association with CCP Cyprus. Accordingly, in the given set of facts there is no direct CUP which is available to benchmark the appellant's transaction of payment of interest to the AE. . xii. It is the common knowledge that, the prime lending rate announced by the Banks in respect of the loans given are only indicative rates Further depending on the financial health of the borrower, its bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th mentioning that during the course of the appellate proceedings the AR of the appellant has stated that from A.Y. 2008-09, they have adopted the benchmark as arithmetic mean of all the interest rates at which the Indian Scheduled banks have given loans to its borrowers, which is what has been done by the TPO in the year under consideration. xvi. In view of the facts of the case discussion herein above, it is considered appropriate to bench mark the appellant's international transaction of payment of interest against the FCDs issued to the AE at the arithmetic mean of the interest rates charged by the Indian Banks on such comparable advances given during the quarters when the appellant has borrowed finances in return of issue of FCDs. Accordingly, the benchmarking done by the TPO in this regard is found to be justified. 6. Aggrieved with the above order, assessee is in appeal before us rising following grounds of appeal: Aggrieved by the order passed by the Commissioner of Income-tax (Appeals)-15, Mumbai [hereinafter referred to as the learned CIT(A)], under section 250 of the Income-tax Act, 1961 (Act) and based on the facts and circumstances of the case, Clearwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate method and used lending rates for advances (other than export credit) offered by commercial banks in India at which at least 60 percent of the business is conducted (as published on the website of the Reserve Bank of India) [Page 86 and 87 of the paper book dated 9 February 2021]. 3. Any investment into CCP India would be inherently risky due to the following reasons CCP India was in its start-up stage. It had received its NBFC licence only in January 2005 and had not even completed 1 full year of its operations as on March 31, 2005; CCP India did not have past performance record which could induce investors to invest; CCP India's business activities mainly comprised of revamping distressed assets, hence, the quality of assets would be low and risk of recovering money would be high. Further, the business activities of CCP India would have a long gestation period of say 3-4 years before it would start making profits; CCP India did not have any securities to offer which the banks in India would normally require for advancing money. 4. In view of the abovementioned overwhelmingly challenging circumstances, no bank would have ordinaril ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the range of 12.43% to 15.37% during 2004 2005 [Page 9 and 10 of the Paper book dated 9 February 2021]. D. Further, as per the statistics published in an article published in The Times of India entitled 'How to Fund a Start-up', finance companies offer collateral free working capital loan to companies with at least three years of operations at the interest rates of 16-20%. The relevant extract of the said article is reproduced below for ready reference How bank loans work Usually banks and finance companies fund up to 80-90% of the loan-to-value ratio (borrowed amount divided by the asset value you are purchasing or refinancing), depending on the credit history of the borrower and the collateral put up, be it property, machinery or marketable securities. Bank loans can be availed of for short or long term, but the latter is usually given to established start-ups. However, Muthuraman says banks now give importance to cash How rather than the primary security or additional collateral. Recognising the fact that the collateral requirement deters many a start-up, particularly in the early stages, the government and SIDBI have set up a Credit Guar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest rates applicable to the currency in which the loan is granted/ repaid. H. The Appellant submits that being in the start-up phase during the first three years of its operations, i.e., during the previous years relevant to the assessment years 2005-06 to 2007-08, the Appellant benchmarked the interest payment against mean of maximum rates as explained above. Thereafter, from the assessment year 2008-09 onwards, it has benchmarked its rates against average rates as per the TPO's method since it was no longer in the start up phase and had a performance / track record. While an adjustment was made for the assessment years 2005-06 and 2007-08, no adjustment was made in the assessment year 2006-07. 8. Prayer: In light of the above, the Appellant prays that its determination of the arm's length price of interest on FCDs be upheld and the transfer pricing adjustment made by the learned TPO and upheld by the learned CIT(A) be deleted for the assessment years under consideration. 8. On the other hand, Ld DR relied on the findings of Ld CIT(A) and submitted that Ld CIT(A) has given a detailed findings. 9. Considered the rival submissions and material on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in agreement with the submissions of the assessee that no Indian bank will invest in the start-up company like the assessee having the risk factors. It is not brought on record assessee has really approached any Indian bank for such proposal. It is in the interest of the associate enterprise to invest in the start-up companies, in which it has interest and wanted to expand the business in India. To invest in associated enterprise like assessee company, no parent company for that matter associate enterprises will analyze the risk factor similar to banks. As discussed above risk factor can never play an important element in benchmarking the transaction with the associate enterprises, it doesn t matter how risky the venture is. In our considered view the benchmarking has to be done based on the prevailing market rate which a normal bank would lend money with the minimum risk. Since the assessee has already mitigated the risk by investing in the fully convertible debentures when the risk is already mitigated one more time the same risk element cannot be considered for bench marking on the interest payment also. Based on the above discussion, we are in agreement with the findings of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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