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2020 (4) TMI 522 - AT - Income TaxMAT Computation - surplus on sale of shares received as gift to the book profit for taxation under section 115JB - HELD THAT - As decided in own case 2016 (4) TMI 348 - ITAT AHMEDABAD Ld.AO has rightly added the long term capital gain from sale of shares to the book profits u/s 115JB of the Act, and accordingly this grounds of appeal is decided against the assessee. TP Adjustment - upward adjustment of interest on loan to the AE to the income of the appellant company on account of determining the Arm s Length Price of International Transactions - HELD THAT - Transactions under consideration is in the nature of quasi capital. Hence, there was no requirement charge an arm's length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arms length price adjustment in respect of interest on loan to AE, which, according to the revenue authorities, should have charged on the loan granted to the AE s to bring back preferential shares capital in India. Upward adjustment of guarantee fee charges - determining the arm s length price of the international transactions - HELD THAT - Corporate guarantee has been given for obtaining a loan from a bank which is used for redeeming assessee preference shares in the AE. BHPL has brought back moneys invested as preference shares guarantee charges paid to the Bank. Hence, the ALP of that transaction equivalent to the guarantee commission expenses paid is not justified. BHPL not claimed guarantee charges paid as deduction against any taxable income. Chapter X Section 92 and 92Cconstitute anti-avoidance provisions which result in determination of ALP and adding back the ALP and the price recorded in the books of accounts to the total income to levy tax. In the instant case BHPL itself has not claimed it as a deduction from any income and guarantee charges accordingly has been offered to taxation. The amount paid as guarantee charges has already suffered disallowance while filling return of income itself. Hence, again addition the same to total income results in double taxation. TP Study report rejected without a speaking order. BHPL has filed Transfer Pricing Documentation and has undertaken T P Study on the basis of Interest Saver (IS) approach. In view of the foregoing, the upward adjustments on account of bank guarantee are therefore, deleted.
Issues Involved:
1. Addition of surplus on sale of shares received as a gift to book profit under section 115JB. 2. Upward adjustment of interest on loan to Associated Enterprises (AE) for determining Arm’s Length Price (ALP) of international transactions. 3. Upward adjustment of guarantee fee charges for determining ALP of international transactions. Issue-wise Analysis: 1. Addition of Surplus on Sale of Shares Received as Gift to Book Profit under Section 115JB: - The assessee company disclosed income by way of long-term capital gain from the sale of shares received as a gift from Bilakhia family members, who are promoters and directors of the company. The AO treated the transfer of shares as non-voluntary and not fulfilling the conditions of a gift, thereby adding the long-term capital gain to book profit under section 115JB. - The CIT(A) upheld the AO's decision, referencing the Honourable Madras High Court in Kay Arr Enterprise and the Apex Court in Kale & Others v. Deputy Director of Consolidation, which recognized family arrangements as genuine and gifts as valid. - The Tribunal found that the issue was already decided against the assessee in previous years by the Co-ordinate Bench, which held that the AO rightly added the long-term capital gain from the sale of shares to the book profits under section 115JB. 2. Upward Adjustment of Interest on Loan to AE for Determining ALP of International Transactions: - The assessee provided an interest-free unsecured loan to its AE, M3 Holdings (Singapore) Pte Ltd, for day-to-day functioning. The TPO did not accept the loan as quasi-equity and determined an ALP with an interest rate benchmarked at 6.42%, resulting in an upward adjustment. - The CIT(A) upheld the TPO's decision, considering the AE's credit rating and the risk premium. - The Tribunal, referencing the case of Cadila Healthcare Limited, concluded that the loan was quasi-equity in nature, intended to ensure the continuity of the AE’s operations and bring back capital to India. The Tribunal held that the TPO did not carry out a proper FAR analysis and that the transaction should not be considered a simple loan transaction. The Tribunal deleted the ALP adjustment of ?1,80,56,250. 3. Upward Adjustment of Guarantee Fee Charges for Determining ALP of International Transactions: - The assessee provided a corporate guarantee for a loan taken by its AE from Standard Chartered Bank Mauritius and paid guarantee charges of ?1,78,86,359/-. The TPO made an upward adjustment, treating the guarantee as an international transaction. - The CIT(A) upheld the TPO's decision, stating that the cost incurred for the guarantee should be recovered from the AE. - The Tribunal, referencing the case of Bartronics India Ltd and Cadila Healthcare Ltd, held that the corporate guarantee provided before 2012 is not an international transaction even after the amendment in 2012. The Tribunal noted that the guarantee facilitated the redemption of preference shares and increased the asset and tax base in India. The Tribunal deleted the upward adjustment of ?1,78,86,359. Conclusion: - The Tribunal allowed the appeals for all assessment years, concluding that the AO and CIT(A) did not correctly interpret the nature of the transactions and the applicable legal principles. The Tribunal emphasized the importance of considering the substance over the form of transactions, especially in the context of quasi-equity and shareholder functions.
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