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TMI Blog2013 (6) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... er. The assessee also challenged the TP adjustment towards interest on funds given to subsidiaries and also interest on loans given to subsidiaries. 4. The Assessing Officer disallowed communication, internet, travelling and other expenditure from export turnover while calculating the deduction u/s 10 of the Act. The CIT(A) relying upon the decision in the case of Patni Telecom Pvt. Ltd. Vs. ITO [2008] 22 SOT 26 (Hyd.), on which reliance placed by the assessee, held that the communication charges, internet charges and travelling expenditure should be reduced both from export turnover as well as from total turnover for the purpose of calculation of exemption u/s 10A of the Act. 5. As regards the addition with regard the interest on funds given to subsidiaries of Rs. 18,36,38,251/-, the CIT(A) deleted the addition on the ground that there is no evidence to show that the this amount was actually a loan given by the assessee. 6. As regards the addition with regard to the interest on loan given to subsidiaries of Rs. 2,31,66,591/-, the CIT(A) confirmed this addition by holding that the assessee could not substantiate its claim by showing evidence regarding the lower level of risk in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was absolutely no justification with regard to payment of share premium and it is a deemed loan given without interest. According to the TPO it is not an arm's length transaction. 13. On appeal, the CIT(A) observed as follows:- "7.6 The first issue is whether the share premium paid was actually a disguised loan as has been held by the Transfer Pricing Officer. According to the order of the Transfer Pricing Officer, there is not a shred of evidence to prove that the share premium was actually a loan. The Transfer Pricing Officer has not even analyzed the accounts of the subsidiaries, nor has he calculated at any stage, the share value of the subsidiaries in question. He has merely stated that the "taxpayer could not explain the economic rationale behind the payment of huge amounts of share premium in the subsidiaries in question with reference to recognized methods of share price valuation." With these conjectures the Transfer Pricing Officer concluded that the share premium was actually a loan. 7.6.1 From the above discussion, I do not find any evidence whatsoever which would give me any indication to conclude that the share premium was actually a loan. Even in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a profit which was 4229% or 42 times of the actual profits. Similarly, for Axilllnc for the FY 2006-07 the projection is 283% of the actual profits. Similar is the case with all the projections shown in the chart above. A simple perusal of the aforementioned chart will clearly show that when the discounted cash flow method is applied the share price projections will nowhere be close to the prices which the appellant has shown on which a huge share premium of 131 crores has been paid. 7.6.6 During the course of appeal proceedings, the appellant explained that there was a general downtrend in economy in the subsequent years and as such the projections of profits were proven to be inaccurate. 7.6.7 After having perused the considered the facts and arguments carefully, find that the share price calculations are not accurate and in fact there was absolutely no reason to give such a huge share premium. Clearly, the appellant has resorted to huge over projections of the future earnings in order to show an inflated share price relating to the subsidiaries. This has resulted in an absolutely wrong transfer of funds from the appellant to the subsidiaries. This needs to be considered for ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Expenses ('OE') 42.02 51.74 27.77 13.38 Operating Profits ('OP') 9.77 30.18 52.80 48.56 % of OP/Sales Turnover 19% 37% 66% 78% % of OP/OE 23% 58% 190% 363% * The previous year (2005 & 266) immediately preceding the financial year 2006-07, in which the investments in subsidiaries were made. 17. We have heard the arguments of both the parties and perused the record. The main contention of the department is that the fund transferred to the subsidiaries on account of share premium without any interest and the assessee could not furnish any such analysis to show that the premium paid was at arm's length. The assessee has to prove the amounts advanced was actually towards premium and to substantiate that the shares of the subsidiaries actually command such premium in the open market in term of fair market value worked out as per the guidelines issued by the Controller of Capital Issues in the case of unquoted shares. The prescribed methods for determination of fair market value are either by net asset value (NAV) or by profit earning capacity value (PECV) methods. The taxpayer failed to furnish the valuation of the subsidiary companies in which shares were acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer to adopt the LIBOR plus for the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries [supra]. We do not find any merit in the arguments of the learned counsel for the assessee that the DRP should have adopted the EURIBOR for the purpose of the TP adjustments, as we find that the mostly used and recognised benchmark rate for international loan is LIBOR based. Hence, the DRP rightly directed the assessing officer to adopt the LIBOR rates. We confirm the directions of the DRP. However, by considering the contentions of the learned counsel for the assessee that the actual LIBOR was 4.42% as against the 5.78% approved by the DRP, we find it proper to restore this issue to the file of the assessing officer, to verify the correctness of the claim made by the assessee company. In view of this matter, we remit this matter to the file of the assessing officer to verify the actual average LIBOR prevailed in the financial year relevant to the assessment year under consideration and adopt the interest rate 4.42% if the claim of the assessee is found correct. The ground raised by the assessee on this issue is partly allowed f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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