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TMI Blog2009 (10) TMI 638X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and software solutions and services. The assessee extended two foreign currency loans to its associated enterprises, namely, HPS Global Systems (Bermuda) Limited (HPS Bermuda) and HPS Global Systems Hungary Liquidity Management LLC (HPS Hungary) worth USD 1.5 million and USD 4.6 million respectively in January-February 2001. During the course of assessment proceedings for assessment years 2002-03, 2003-04 and 2004-05, the international transactions entered into by the assessee were referred for scrutiny to the Transfer Pricing Officer (TPO). The TPO held that the international transactions undertaken by the assessee, in relation to the interest free loan were not at arm's length and undertook an upward adjustment to income for all the three financial years. In addition to the adjustment made by the TPO, the Assessing Officer (AO) also made adjustment under section 14A of the Income-tax Act, 1961 (Act), for the assessment years 2002-03 and 2004-05." 4. Since all the orders of the authorities below for these years are on similar lines, the matter is being adjudicated with reference to the orders for assessment year 2002-03. 4.1 The revenue authorities have not accepted the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a tax heaven, i.e., the profit of the AE's are not taxable at all. Non-charging of the interest by the assessee from the AEs would result in higher income in the hands of AE in Bermuda and the income of the assessee in India would be reduced by the corresponding amount. This would bring down the overall tax incidence of the group by shifting profit from Indian jurisdiction to Bermuda which is a tax heaven country with zero rate of tax on corporate profit. It is a classic case of violation of transfer pricing norms where profits are shifted to tax heavens or low tax regimes to bring down the aggregate tax incidence of a multi-national group. (v)It is not sure whether that subsidiary would generate sufficient profits to enable it to declare dividends. Secondly, even if the subsidiary makes profits, it is not mandatory for it to declare dividends, i.e., it may retain the profits in Bermuda for further investments in group companies. In case no dividend is declared, i.e., profits are held back in Bermuda, the tax incidence in India would come down as the assessee would show lower profits in India. (vi)These interest free loans have been used for making investment in the group entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le is again misplaced because the rule for only disallowance of interest expense in order to ensure compliance with thin-capitalization rule. There is no restriction in respect of outward remittances in respect of debt finance. Therefore, the appellant's reliance on "Impossibility of Performance" is totally misplaced. (iv)There is no violation of provisions of Rule 108(2)(d) of the Rules as the Hungarian thin-capitalization Rule no way interfere with the charging of interest and the remittance of the same as contended by the appellant. Thus, the appellant misread the legal restrictions imposed by the Hungarian thin-capitalization rule. (v)Ex-ante documentation by way of ODA application form correctly characterized the transaction as working capital loan. Therefore, the appellant's reliance on various features for treating a transaction as loan/equity mentioned at Para 6.3 of this order is also misplaced. The fund was meant for working capital requirement, the loan agreement provided for repayment on demand and charging of interest. All these factors are pointers to the fact that the transaction was debt in nature and not informal capital or quasi-equity. (vi)RBI's approval does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, hence, the transaction of granting interest free loan is at arm's length. The loan agreements mentioned that these are interest free loans. Reliance in this regard is placed upon the decision of Delhi Tribunal in the case of Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 para 100 that "under fiscal loans actual transaction as entered between the parties is to be considered. Authorities have no right to re-write the transaction unless it is held that it sham or bogus or entered into by the parties to avoid and evade taxes." Further reference has been made to para 1.37 of 1995 of OECD guidelines for the proposition that it is legitimate to consider that economic substance of the transactions. The transactions has been said to be commercially expedient and loan granted to support the subsidiary and obtain returns in future. The assessee had full control over its subsidiary which reduce the credit risk. The loan had been duly granted by the approval of the RBI. The Income-tax Act, 1961 and OECD guidelines support the contention that the effect of Government control/intervention should be considered while determining the arm's length price. Under the thin capitalization rules, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario. The case laws from the Apex Court cited by the ld. Counsel of the assessee are in the context of the proposition that only the real income has to be taxed and interest free advances can be given by companies (domestic) to their subsidiaries on the ground of commercial expediency. But these decisions are not in the context of Chapter-X of the IT Act which relates to special provision relating to computation of income from international having regard to arm's length price. Other case laws cited by the assessee are not germane to the facts of this case. Hence in our considered opinion they do not help the case of the assessee. 11. The first objection of the TPO is that no two persons in normal business situation would grant interest free loan to the other persons. This is a fairly settled position. The assessee's contention in this regard is that no one would have given the AEs loan at that point of time as they were in a start-up stage and that debt ratio was not comfortable. Now, even if one is to accept this argument, there is no case for not providing or char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mination in this context. Thus, clearly the assessee contention seeks to add text to the clear legal position as embodied in statute. Such an interpolation is not permissible, that when an interest free loan is given to the AEs, income on account of interest cannot be attributed from the point of view of arm's length consideration. In this regard we also draw support from the Hon'ble Apex Court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 wherein it was held that when the language of the Act is clear and unambiguous, there is no scope of interpolation. 12.1 Another argument of the TPO is that one of the AEs is situated in a tax heaven and not charging of the interest by the assessee from the AEs, would result in higher income in the hands of the AEs, and the income of the assessee in India would reduce by the corresponding amount. Thus this would bring down the overall tax incidence of the group by shifting profit from Indian jurisdiction to Bermuda which is a tax heaven country with zero rate of tax on corporate profit. It is a classic case of violation of transfer pricing norms where profits are shifted to tax heavens or low tax regimes to bring down the aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his purpose he took rate for 5 companies. The arithmetic mean which came to 1.64 per cent. Accordingly, Assessing Officer computed the arm's length rate to be LIBOR + 1.64 per cent using CUP method. 15.4 The assessee agitated before the ld. CIT(A) that the Assessing Officer had not allowed the variation of +/-5 per cent from the arm's length interest computed and for this the assessee's argument was that proviso to section 92C(2) of the Act gives a right on the assessee to demand such a adjustment. The ld. CIT(A) found that first and foremost reason for not allowing deduction of 5 per cent from the arm's length interest is the fact that there are not more than one price in respect of each of the transaction, as specific one year LIBOR rate has been held to be arm's length price for the transactions. Therefore, he held that 5 per cent allowance itself is infructuous. 15.5 We have carefully considered this aspect, we find ourselves in agreement that no more one price has been used for each transaction. Only one LIBOR rate has been applied which has been adjusted for some basis points as required. This cannot be equated with more than one price in respect of each transaction. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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