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2017 (11) TMI 1443 - AT - Income TaxInternational transaction of investment in equity shares of an AE - whether it would not fall within the purview of Sec.92 because no income arises out of such international transactions? - Held that - Computation of ALP will arise income arises from an International transaction between AEs. It does not warrant determination or re-computation of a consideration received / given on capital account. Thus, going by the above, the transaction of investment in shares being payment on capital account falls outside the purview As case relied upon by DR of First Blue Home Finance Ltd. Vs. DCIT 2015 (9) TMI 1041 - ITAT DELHI wherein held that in a case of issue of shares by Indian resident company to its AE Nonresident, there is no provision in Chapter X mandating addition on account of less share premium received also consequential interest on resultant deemed loan. The decision cited by the learned DR in fact supports the case of the Assessee. We however agree with the learned DR that the transaction of investment in shares of AE per se is an international transaction but the condition that income does not arise out of a capital account is the basis on which Courts have held that . To tHis submission is correct but the principle laid down is that the transaction of investment in shares being payment on capital account falls outside the purview of Chapter X of the Act. In that view of the matter, we hold that the determination of ALP in the present case cannot be sustained as the transaction in question is on capital account and determination of ALP in respect of such transactions is outside the purview of Chapter X of the Act. Consequently, the addition made by the AO in this regard is directed to be deleted. Transaction of providing guarantee by the Assessee in respect of a loan taken by its AE - whether it can be said to be an international transaction? - Held that - the addition made by the AO ought to have been deleted by the CIT(A) as the Guarantee Commission charged by the Assessee has to be regarded as at Arm s Length. We therefore direct the addition made in this regard be deleted. Further, it is worthwhile to mention that the recent Safe Harbour Rules notified by the Central Board of Direct Taxes (Notification No. 46/2017 dated 7 June 2017) the guarantee commission / fee declared in relation to the eligible international transaction is at the rate not less than 1% per annum on the amount guaranteed. Thus, based on the above, it is evident that the guarantee fees charged by the Assessee is at arm's length. We therefore direct that the adjustment proposed by the Ld. TPO/AO be deleted. Nature of expenditure - expenses made on account of preparation of offer document for IPO - Held that - We are of the view that the expenditure in question was rightly directed to be allowed by CIT(A). It is not disputed that the expenditure was incurred as part of the restructuring exercise. The assessee wanted to raise moneys from the public through the issue of shares. The IPO was postponed due to poor market conditions. The IPO proposed to meet the capital cost of business restructuring. Because of the poor market conditions the IPO was abandoned so also the proposal for restructuring the business of the assessee was also abandoned. The expenditure incurred in this regard were in the nature of advertising expenses, legal expenses, crediting analysis research fees, payment to Company Secretaries and other professional organizations in connection with the proposed IPO. The restructuring exercise was abandoned and the expenses incurred were written off in the books of account during the previous year relevant to A.Y.2010-11. In the light of the decision in the case of Binani Cement Ltd.(2015 (3) TMI 849 - CALCUTTA HIGH COURT) as well as Graphite India ltd.(1996 (6) TMI 73 - CALCUTTA High Court), we are of the view that the expenditure incurred on the abandoned project development should be treated as a revenue expenditure and allowed as a deduction. Restricting the interest in loan advanced to AE @ LlBOR 350 bps - not considering the cost of funds of the lender-assessee and creditworthiness of borrower using data on public domain relied upon by the TPO, for determining the ALP of interest on loan advanced - Held that - Since it has already been held that there was no loan transaction at all, the question of computation of ALP interest on such loan transactions does not arise for consideration. Therefore grounds no.3 and 4 raised by the revenue are infructuous and are accordingly dismissed. Revenue appeal dismissed.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Applicability of transfer pricing provisions to share transactions. 3. Computation of ALP for guarantee fees. 4. Deductibility of expenses related to an abandoned IPO. Issue-wise Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The Assessee entered into multiple international transactions, including the purchase of shares and providing guarantees. The Transfer Pricing Officer (TPO) disputed the valuation method used by the Assessee, favoring the Net Asset Valuation (NAV) method over the Discounted Cash Flow Method (DCFM). The TPO revalued the shares and considered the excess payment as a loan, requiring the Assessee to charge interest. The Assessee contested this, citing that such transactions do not generate income and thus fall outside the purview of transfer pricing provisions. The Tribunal upheld the Assessee's contention, referencing the Bombay High Court's decisions in Vodafone and Shell India, which clarified that capital transactions do not generate income and thus are not subject to transfer pricing adjustments. 2. Applicability of Transfer Pricing Provisions to Share Transactions: The Tribunal examined whether the transaction of purchasing shares from an Associated Enterprise (AE) falls under the transfer pricing provisions. The Assessee argued that such transactions are on capital account and do not generate income. The Tribunal agreed, citing the Bombay High Court's rulings that capital receipts are not income unless specified by law. Consequently, the Tribunal held that the determination of ALP for such transactions is outside the scope of Chapter X of the Income Tax Act. 3. Computation of ALP for Guarantee Fees: The Assessee provided a corporate guarantee for a loan taken by its AE and charged a guarantee fee. The TPO increased the guarantee fee rate, but the Assessee argued that providing a guarantee is a shareholder activity and should not attract transfer pricing adjustments. The Tribunal, referencing the Special Bench decision in Instrumentarium Corporation Ltd., held that providing a guarantee is an international transaction. However, it concluded that the guarantee fee charged by the Assessee was at arm's length, supported by various judicial precedents and the Safe Harbour Rules, which set a standard rate of 1% per annum for such transactions. 4. Deductibility of Expenses Related to an Abandoned IPO: The Assessee incurred expenses for a proposed IPO, which was later abandoned. The Assessing Officer (AO) disallowed the deduction, considering the expenses capital in nature. The CIT(A) allowed the deduction, treating the expenses as revenue expenditure since the IPO was abandoned and did not result in any capital asset. The Tribunal upheld the CIT(A)'s decision, referencing the Calcutta High Court's rulings in Binani Cement Ltd. and Graphite India Ltd., which support the deductibility of expenses related to abandoned projects as revenue expenditure. Conclusion: The Tribunal allowed the Assessee's appeal, holding that the transaction of investment in shares is on capital account and outside the purview of transfer pricing provisions. The guarantee fee charged by the Assessee was deemed at arm's length, and the expenses related to the abandoned IPO were allowed as revenue expenditure. The Revenue's appeal was dismissed.
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