2021 (9) TMI 340 - AT - Income Tax

TP Adjustment - interest-free debt funding of the SPV of the assessee - ALP adjustment on account of notional interest on a loan stated to be of this nature by the assessee company to its fully owned foreign subsidiary, which is used as an SPV for overseas acquisitions - HELD THAT - We see no reasons to take any other view of the matter than the view so taken by us in assessee's own case for immediately preceding assessment year. For the sake of completeness, however, we may add that a part of the ALP adjustment here is on account of interest imputation on exchange difference on account of conversion of GBP denominated interest-free funding remittance in INR, and notional adjustment of the subsequent conversions in equity, by converting from GBP to INR. When the base transactions are in GBP, balances reflected on account of exchange difference for such notional conversions cannot be treated as outstanding dues, and, for this reason also, the ALP adjustments on account of interest attributable to resultant exchange difference must stand deleted. In any event, as the very conceptual basis for ALP adjustment for interest, under the CUP method, does not meet our approval and the entire addition stands deleted for this reason also. Respectfully following the order for the assessment year 2009-10, we uphold the plea of the assessee and delete the impugned ALP adjustment. Denial of admission for an additional claim at the stage of DRP on the ground that such a plea could only be raised by way of a revised return - HELD THAT - As Learned representatives fairly agree that the issue in covered in favour of the assessee inasmuch as the Tribunal undisputedly has the powers to admit any new issue, whether or not the same is raised before the authorities below. We, therefore, admit the claim with respect to loss of ₹ 5 written off by the assessee, and remit the issue to the file of the Assessing Officer for adjudication on merits. That is precisely what the assessee is praying for. The assessee succeeds on this point as well.

Issues Involved:
1. Transfer pricing adjustment on funds provided to TIML Global Limited.
2. No income arising from the alleged loan transaction.
3. Transaction akin to stewardship activity.
4. Funds to AE are quasi-equity.
5. Funds provided to the AE out of funds received from holding company.
6. Arm's Length analysis not possible.
7. No shifting of profits outside India.
8. Incorrect reliance on Thin Capitalization rules.
9. Arm's length computation.
10. Levy of interest under section 234B and 234D of the Act.
11. Initiation of penalty proceedings under section 271(1)(c) of the Act.
12. Jurisdiction of the learned AO post-merger.
13. Adjustment made with respect to share application monies pending allotment.
14. Incorrect amounts considered for determination of notional interest adjustment.
15. Non-receipt of refund.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Funds Provided to TIML Global Limited:
The Tribunal addressed the core issue of whether an interest-free debt funding of an overseas company, used as a special purpose vehicle (SPV) for acquiring a target company abroad, can be subjected to an arm's length price (ALP) adjustment. The Tribunal concluded that such a transaction cannot be compared with a loan simpliciter and thus cannot be subjected to an ALP adjustment based on the Comparable Uncontrolled Price (CUP) method. The Tribunal emphasized that the funds provided to the SPV were for a specific purpose and not a commercial loan, thus no interest can be attributed to such funding.

2. No Income Arising from the Alleged Loan Transaction:
The Tribunal noted that no income was derived from the alleged loan transaction. It was highlighted that transfer pricing regulations cannot be applied to a transaction where no income is generated.

3. Transaction Akin to Stewardship Activity:
The Tribunal accepted that the alleged loan was given for acquiring a controlling stake in a company outside India, which was in the same business as the appellant. This transaction was akin to a stewardship activity, which does not require any benchmarking analysis.

4. Funds to AE are Quasi-Equity:
It was argued and accepted that the funds provided by the appellant to its AE were quasi-equity in nature. Therefore, the question of charging any interest on the same did not arise.

5. Funds Provided to the AE out of Funds Received from Holding Company:
The Tribunal noted that the appellant remitted funds to its AE out of the funds received from its holding company, which were provided free of cost for the purpose of acquisition.

6. Arm's Length Analysis Not Possible:
The Tribunal held that the subject transaction of providing funds to the AE cannot be compared to a simple loan transaction between a financial institution and its client. Therefore, an arm's length analysis using the CUP method was not possible.

7. No Shifting of Profits Outside India:
The Tribunal concluded that there was no shifting of profits outside India as alleged by the revenue authorities.

8. Incorrect Reliance on Thin Capitalization Rules:
The Tribunal found that the revenue authorities erred in applying the 'Thin Capitalization' concept to the appellant's case.

9. Arm's Length Computation:
The Tribunal rejected the revenue authorities' computation of arm's length interest rates, including the use of State Bank FD rates plus risk premiums and the rejection of LIBOR rates. The Tribunal concluded that the arm's length interest rate in the present facts of the case should be nil.

10. Levy of Interest under Section 234B and 234D of the Act:
The Tribunal found that the revenue authorities erred in levying interest under sections 234B and 234D of the Act.

11. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act:
The Tribunal noted that the initiation of penalty proceedings under section 271(1)(c) was not warranted.

12. Jurisdiction of the Learned AO Post-Merger:
The Tribunal addressed the issue of jurisdiction post-merger and found that the learned AO did not have jurisdiction over the appellant after the merger of Times Infotainment Media Limited with Bennett Coleman and Company Limited.

13. Adjustment Made with Respect to Share Application Monies Pending Allotment:
The Tribunal held that re-characterizing the transaction of preference/equity share capital as a deemed loan transaction was incorrect. The determination of ALP in respect of the equity/preference share application monies pending allotment was bad in law.

14. Incorrect Amounts Considered for Determination of Notional Interest Adjustment:
The Tribunal found that the revenue authorities erred in considering the INR value of the funds provided for the purpose of calculating interest without appreciating that LIBOR rates should be applied to the foreign currency-denominated value of funds.

15. Non-Receipt of Refund:
The Tribunal noted that the appellant had not received the refund order stated in the computation of income.

Conclusion:
The Tribunal allowed the appeals, deleted the impugned ALP adjustments, and remitted certain issues back to the Assessing Officer for adjudication on merits. The Tribunal emphasized that the arm's length price, under the CUP method and on the facts of this case, of funding the SPVs by the assessee company, is 'nil'.

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