2015 (7) TMI 525 - AT - Income Tax

Transfer pricing adjustment - whether the provisions of transfer pricing not applicable on the appellant company the assessment order ought to have been quashed on this ground itself? - addition of Rs. 19, 92, 355/-being Arms Length Price of loan interest made by the AO - Held that - As the learned counsel himself accepts on a conceptual note several types of debts particularly long term unsecured debts and revenue participation investments could be termed as quasi capital . So far as arm s length price of such transactions are concerned this cannot be nil because under the comparable uncontrolled price method such other transactions between the independent enterprises cannot be at nil consideration either. Nobody would advance loan in arm s length situation at a nil rate of interest. The comparable uncontrolled price of quasi capital loan unless it is only for a transitory period and the de facto reward for this value of money is the opportunity for capital investment or such other benefit cannot be nil. As for the intent of the assessee to treat this loan as investment nothing turns on it either. Whether assessee wanted to treat this loan as an investment or not does not matter so far as determination of arm s length price of this loan is concerned; what really matters is whether such a loan transaction would have taken place in an arm s length situation without any interest being charged in respect of the same. As for the contention regarding crucial role being played by or visualized for this AE there is no material on record to demonstrate the same or to justify that even in an arm s length situation a zero interest rate loan would have been justified to such an entity. A lot of emphasis has also been placed on the fact that the loan was out of the GDR funds and for this reason the interest free loan was justified. We are unable to see any logic in this explanation either. Even when the loan is given out of the GDR funds held abroad the arm s length price of the loan is to be ascertained. The source of funds is immaterial in the present context. We have also noted that the assessee has not offered any assistance on the quantum of ALP adjustment in respect of this loan transaction and that in the subsequent assessment years the assessee himself has accepted ALP adjustment by adopting the LIBOR 2% interest rate. In this view of the matter no interference is warranted on the quantum of the ALP adjustment either. In view of these discussions we confirm the stand of the authorities below on this issue and decline to interfere in the matter. - Decided against assessee. Disallowance of 1/5th of GDR Issue expenses claimed by the company as allowable deduction u/s. 35D - whether the expenses incurred for issue of share capital is capital loss to the company - Held that - As held in the case of Brooke Bond Limited (1997 (2) TMI 11 - SUPREME Court) the expenses on issuance of share capital are capital expenses in nature and that these expenses cannot be allowed as a deduction as revenue expenses. However as long as these expenses even if capital in nature satisfy the conditions set out in Section 35D these expenses are eligible for amortization under Section 35D. One of the conditions in Section 35D(1) as it stood at the material point of time is that either the eligible expenses should be incurred before the commencement of the business and in a situation in which the expenses are incurred after the commencement of business the expenses should be incurred for extension of his undertaking or setting up of a new industrial undertaking. This condition is clearly not satisfied on the facts of the present case as the expenses are incurred after the commencement of the business and it is not even assessee s case that the expenses are incurred for extension of his undertaking or for setting up of new industrial undertaking. As for the decision of a coordinate bench in the case of Mahindra & Mahindra Ltd Vs JVIT 2009 (10) TMI 639 - ITAT MUMBAI this decision was in the context of foreign currency convertible bonds which were debt instruments though convertible into equity at a later stage. That decision has no bearing on the facts of this case. In view of these discussions we see no merits in this grievance of the assessee either. - Decided against assessee. Loss due to foreign fluctuation - capital loss OR revenue loss - Held that - The loss is entirely notional inasmuch as no foreign exchange is brought in India which is required to be repatriated in terms of higher rupee value. In both the Hon ble Supreme Court judgments relied upon by the learned counsel namely CIT Vs Woodward India Limited 2009 (4) TMI 4 - SUPREME COURT and Oil and Natural Gas Corporation Vs CIT 2010 (3) TMI 81 - SUPREME COURT the additional liability had arisen in rupee terms since the funds were brought into India but on account of fluctuation in exchange value making the repayment of these loans required higher rupee payments. In the present case however since the amount is lying abroad in foreign exchange denominated accounted the exchange rate fluctuation has no additional liability for repayment. There is no real loss as such. The loss is purely an accounting loss due to conversion of foreign currency obligations on the basis of different rates. In the light of these discussions as also bearing in mind entirety of the case we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.- Decided against assessee.

Summary

Issues Involved:
1. Applicability of transfer pricing provisions on transactions with a subsidiary.
2. Treatment of loan interest as arms-length price.
3. Disallowance of GDR issue expenses under Section 35D.
4. Classification of foreign exchange fluctuation loss as capital or revenue loss.

Detailed Analysis:

1. Applicability of Transfer Pricing Provisions:
The appellant contested the correctness of the assessment order under Section 143(3) read with Section 144C(1) of the Income Tax Act, 1961, specifically questioning the referral to the Additional CIT (Transfer Pricing) for computing the arm's length price (ALP) of transactions with its wholly-owned subsidiary, Soma Textiles FZE. The appellant argued that the provisions of transfer pricing were not applicable, as the amount advanced was a contribution towards quasi-equity capital and not a loan. However, the Assessing Officer (AO) and the CIT(A) disagreed, treating the transaction as a loan and not recognizing it as quasi-capital.

2. Treatment of Loan Interest as Arms-Length Price:
The AO, supported by the Transfer Pricing Officer (TPO), determined that the transaction should be benchmarked using LIBOR plus 2% as the ALP for the loan interest. The appellant's argument that the loan was a quasi-capital contribution and should not attract interest was rejected. The CIT(A) upheld this view, noting that the appellant failed to provide evidence that the amount was intended as capital contribution. The Tribunal agreed with the lower authorities, emphasizing that in an arm's length transaction, a zero-interest loan would not be justified, especially when the appellant had accepted similar adjustments in subsequent assessment years.

3. Disallowance of GDR Issue Expenses:
The appellant claimed amortization of GDR issue expenses under Section 35D, which was disallowed by the AO on the grounds that such expenses are capital in nature and not eligible under Section 35D. The CIT(A) upheld this disallowance, referencing the Supreme Court decision in Brooke Bond India Ltd Vs CIT, which held that expenses on share capital issuance are capital expenses. The Tribunal concurred, noting that the conditions for amortization under Section 35D were not met, as the expenses were not incurred for the extension of the undertaking or setting up of a new industrial undertaking.

4. Classification of Foreign Exchange Fluctuation Loss:
The appellant claimed a foreign exchange fluctuation loss of Rs. 2,73,28,718 as a revenue loss, which was treated as a capital loss by the AO and CIT(A). The Tribunal noted that the loss was notional, arising from funds raised by the GDR issue lying in foreign bank accounts, and not from actual foreign exchange transactions affecting the company's revenue. The Tribunal held that the loss was purely an accounting loss and not a real loss, thereby upholding the CIT(A)'s decision to treat it as a capital loss.

Conclusion:
The Tribunal dismissed all grounds of appeal, confirming the lower authorities' decisions on the applicability of transfer pricing provisions, treatment of loan interest, disallowance of GDR issue expenses, and classification of foreign exchange fluctuation loss. The appeal was thus dismissed in its entirety.