TMI Blog2022 (5) TMI 1514X X X X Extracts X X X X X X X X Extracts X X X X ..... debenture is materially different vis- -vis a debenture simplicitor, and that it s the opportunity to subscribe to equity which, in such a case, becomes pre-dominant motive for subscription of the optionally convertible debenture. There is not even a dispute that the OCD s in question have been subsequently been converted into equity capital at par value. The actual value of OCD being in the convertibility of OCD in the equity capital is thus not even in doubt. We uphold the plea of the assessee and delete the impugned ALP adjustment - Decided in favour of assessee. Disallowing the amount of sundry advances written off - Amount written off by the appellant in its books of accounts considering the same as prior period expenses though accepting that same are for the purpose of business and are revenue in nature - AO disallowed the claim for write off of the advances written off with the short observation that the assessee could not provide enough justification for these write off - HELD THAT:- CIT(A) has given a categorical finding to the effect that the expenses are revenue in nature and pertain to business of the assessee, but has disallowed the write off only on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l (Judicial Member)] For the Appellant : Nimesh Vora along with Moksha Mehta For the Respondent : Tejinder Pal Singh Anand ORDER Per Pramod Kumar VP 1. These cross appeals are directed against order dated 6th September 2021 passed by the learned CIT(A) in the matter of assessment under section 143(3) r.w.s 144C of the Income Tax Act 1961, for the assessment year 2012-13. 2. We will take up appeal filed by the assessee first.In ground nos 1 to 5 of the appeal filed by the assessee, the grievances raised by the assessee are as follows:- 1. erred in determining the ALP by imputing interest in respect of OCD's at LIBOR plus 150 bps; 2. erred in disregarding the aforesaid transaction and in re-characterizing of OCDs as a loan simplicitor and consequently holding that interest at LIBOR+150 bps is chargeable; 3. failed to appreciate that the investment by the appellant in form of OCDs to its AEs 4. emanates out of ownership and is quasi equity in nature; failed to appreciate that the investments by way of OCDs is in the nature of shareholder activity which does not require any compensation 5. failed to appreciate that these O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt and should be benchmarked on that basis. He computed the weighted average cost of capital as an arm s length consideration for the optionally convertible debenture issued by the assessee company, and this rate, according to the TPO, worked out to 3.20% p.a. Granting reduction of .01% notional coupon rate of the assessee, the TPO computing an arm s length price adjustment of Rs. 2,46,40,344. Aggrieved by the resultant adjustment carried out by the Assessing Officer, assessee carried the matter in appeal before the learned CIT(A) but without complete success. Learned CIT(A) upheld the ALP adjustment in principle but rejected the quantum of adjustment. In his brief order, learned CIT(A) observed as follows:- I have considered the facts of the case and submissions of the assessee. During the previous year under consideration, the Appellant Assessee has subscribed to OCD of its wholly owned subsidiary company, viz. IBN 18 (Mauritius) Ltd. The Appellant has submitted that the OCDs in question were ultimately converted into equity FY 2015-16. In this regard, I am of a considered opinion that since the OCD was not converted during the financial year relevant to the captioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment made by the borrower of capital by virtue of its productivity as a reward for his capitalist‟s abstinence (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 valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward, as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason that the transactions before us belong to a different genus than the act of simply giving the money to the borrower and fall in the category of quasi capital‟. 11. As for the connotations of quasi capital‟, in the context of determination of arm‟s length price under transfer pricing regulations, we may refer to the observations made by a coordinate bench of this Tribunal- speaking through one of us (i.e. the Accountant Member), in the case of Soma Textile Industries Ltd Vs ACIT [(2015) 154 ITD 745 (Ahd)], as follows: 5. ..The question, however, arises as to what are the connotations of expression quasi capital‟ in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice (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(1)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction 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, opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis. 8. While the learned Transfer Pricing Officer had discussed, at length, nature of debenture being a debt instrument, what he has missed out is the fact the character of an optionally convertible debenture is materially different vis- -vis a debenture simplicitor, and that it s the opportunity to subscribe to equity which, in such a case, becomes pre-dominant motive for subscription of the optionally convertible debenture. There is not even a dispute that the OCD s in question have been subsequently been converted into equity capital at par va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elief that an acknowledgement for payment of fees would be required to back-up the claim, the amount paid to MIB remained in the advances ledger in the balance-sheet. During the finalization of books of accounts for the financial year relevant to the captioned assessment year, the Appellant realized that the MIB does not issue separate acknowledgement for payment of fees. Hence, on the basis of permissions granted, the Appellant wrote off the said balance lying in account of MIB and debited the expenditure to its profit and loss account. b) Business News Asia Pvt. Ltd ( BNA ): During the concerned financial year, Television Eighteen India Limited ( TEIL ) got amalgamated with the Appellant company. TElL was in the business of running the news channel, namely 'CNBC TV18' and 'CNBC Awaaz', for which it had to pay royalty to BNA annually. Pursuant to the amalgamation, outstanding balances of BNA in the books of TElL were also taken over by the Appellant. During the finalization of accounts, it was noticed that outstanding debit balance Rs. 23,63,812 could not be reconciled in the ledger of BNA. Therefore, the Appellant could not even recover the same. Event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions in this context, were as follows:- I have carefully considered the matter and submission of the Appellant. From the submission of the Appellant, it appears that all the items, though relating to the business of the Appellant and revenue in nature, the same pertains to the earlier assessment years. Prior period expenditure cannot be allowed as a deduction in the assessment year in question. Accordingly, I uphold the disallowance made by the AO. 14. The assessee is not satisfied and is in further appeal before us. 15. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 16. We have noted that the CIT(A) has given a categorical finding to the effect that the expenses are revenue in nature and pertain to business of the assessee, but has disallowed the write off only on the ground that expense pertains to the earlier years. What he has apparently missed out is the fact that so far as write off of dues on Business News Asia Pvt Ltd., and Seachange International is concerned, the write off is for the amounts which are unrecoverable. The claim for deduction therefore ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dismissed. We order accordingly. 132. In the result, appeal of the Revenue is dismissed. 22. We see no reasons to take any other view of the matter than the view so taken by the co-ordinate bench in assessee s own case. Respectfully following the same, we uphold the plea of the assessee. The assessee gets the relief accordingly. 23. Ground no (i) is thus allowed. 24. In ground nos (ii) (iii) the Assessing Officer has raised the following grievances:- ii. Whether on the facts and in the circumstances of the case and as per law, the learned CIT(A) has erred in holding that no disallowance u/s. 14A of the I.T Act read with Rule 8D(2)(ii) of I.T. Rules on account of interest disallowance is required, without taking into consideration the fact that the funds of assessee need to be considered as mixed one‟ and accordingly the interest expenditure relatable to activity of investments in share/mutual funds need to be disallowed u/s. 14A r.w.r. 8D(2)(ii). iii. Whether on the facts and in the circumstances of the case and as per law, the Learned CIT(A) has erred in ignoring the fact that - as per the provisions of Rule 8D(2) (i), in case the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) is required in view of the decisions of the Hon'ble Jurisdictional High Court in the cases of CIT v. HDFC Bank Lid and CIT v. Reliance Utilities Power Limited (supra). Similarly, the Special Bench in the case of ACIT v. Vireet Investments Private Limited held that only those investments which yielded dividend income should be considered for disallowance under Rule 8D2(in). Thus, respectfully following the Special Bench decision, we direct the Assessing Officer to recompute the disallowance under Rule 8D2(ii) following the Special Bench. Accordingly, we set- aside this issue to the file of the Assessing Officer with the above observations. This ground of appeal is allowed for statistical purposes. 123. Respectfully following the said decision of the Hon'ble Jurisdictional High Court, we hold that when assessee has sufficient own and interest free funds for making the investments no disallowance is warranted under Rule 8D(2) (ii) of I.T. Rules. Subject to verification the claim of the assessee is allowed. Thus, the Assessing Officer is directed to verify the claim of the assessee and recompute the disallowance u/s. 14A of the Act if any and the income for the year ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Bench of Delhi in the case of Vireet Investment Pvt. Ltd., (supra) consistently holding that only those investments which yielded dividend income should be considered for disallowance under Rule 8D(2) (ili) of I.T. Rules. In the case of M/s. Revashanakar Gems Ltd (supra) on identical situation the Coordinate Bench held as under: 6 We have heard the rival submissions, perused the orders of the authorities below. The contention of the assessee that, the Capital Reserves and interest free funds are much more than the investments have to be examined by the Assessing Officer. It is true that the Hon'ble Jurisdictional High Court in the cases of CIT v. HDFC Bank Lid (supra) and CIT v. Reliance Utilities Power Limited (supra) held that, if assessee had adequate interest free funds available with it, no disallowance needs to be made under Rule 8D2(i). In the circumstances, we remit this issue to the file of the Assessing Officer who shall examine the contentions of the assessee that the interest free funds are much more than the investments. If the submissions of the assessee are found to be correct, no disallowance under Rule 8D2(ii) is required in view of the decisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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