9911796707
TMI Blog2014 (12) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... rief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, interalia, engaged in the business of engineering design and development services. For the assessment year 2009-10, it filed a return of income on 31.10.2009 declaring total income of Rs. 91,20,930/-. The Assessing Officer noticed that assessee had entered into certain international transactions with its associated enterprises which fell within the scope of section 92B of the Act. The international transactions with the associated enterprises were as follows :- International Transaction Amount (Rs.) Export of engineering service 5,99,45,293 Loans and advances - Tooltech Deutschland Gmbh, Germany 9,91,51,472 Conversion of debtors in loan - Tooltech Deuschland Gmbh 1,87,61,275 Loans and advances - Tooltech Europe OY, Finland 32,91,354 Reimbursement of expenses 4,98,201 4. In terms of section 92(1) of the Act, the Assessing Officer was required to compute income arising from the international transactions, having regard to the arm's length price of such transactions. The Assessing Officer referred the matter to the Transfer Pricing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real income accruing to the assessee whereas in the present case no actual interest income has accrued to the assessee since no interest has been charged on advances given to the associated enterprises. 6. On the other hand, the learned Departmental Representative has pointed out that the impugned adjustment on account of non-charging of interest on an international transaction of loans to associated enterprises under the Transfer Pricing Regulation is to be examined in the light of similar transactions entered in an uncontrolled situation between two independent parties and thus, assessee's plea of commercial expediency for non-charging of interest is not a ground of defence against a transfer pricing adjustment. 7. In this context, in-principle, we find that the plea of the assessee is indefensible. The question before us is relating to determination of income arising from an 'international transaction', which is required to be computed having regard to the arm's length price, as per the mandate of section 92(1) of the Act. The case of the Assessing Officer is that the impugned international transactions are in the nature of lending or borrowing between associated enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing sale debtors to the extent of Rs. 1,87,61,274/- has been converted into a loan. 10. In this context, the TPO observed that the non-charging of interest on the aforesaid loans was not an arm's length price transaction and therefore according to him an adjustment was required to be made in order to bring such transactions to arm's length price by way of interest. In so far as the interest adjustment in relation to Rs. 6,04,85,670/-, representing opening balance is concerned, the TPO computed it by applying an interest rate of 14.78% on the basis of the prevailing rate of interest charged by State Bank of India. With regard to the advances of Rs. 66,87,000/- and Rs. 9,24,52,000/- made during the year for the purposes of making investment in the equity capital of a new company, i.e. MBT, the TPO noted that assessee had itself identified interest expenditure to the tune of Rs. 1,07,27,321/- in this regard, though not reflected in the Profit & Loss Account but shown as part of 'Investment' in the Balance-Sheet. As per the TPO, the aforesaid amount of interest represented an internal comparable transaction and considering the same to be an internal CUP considered a sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h transaction in the nature of interest-free loan primarily for the reason that till the close of the previous year under consideration no shares have been actually allotted to the assessee. Accordingly, arm's length price adjustment has been made on account of interest element on such amount. In our considered opinion, the action of the TPO in changing the characteristic of the transaction of payment of share application money as an interest-free loan is unwarranted and beyond his jurisdiction which carrying out the transfer pricing proceedings. There is no provision of law which enables the TPO to change the character of a transaction while subjecting it to the process of determination of arm's length price. The TPO was required to benchmark such transactions against a similarly placed transaction and not deem the transaction to be a lending or borrowing transaction. No doubt, a transaction of advancing loans is within the purview of transfer pricing mechanism and the arm's length price computed thereof is includible in the assessable income of the assessee. So however, where the character of payment is towards share application money, thereby reflecting a capital inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74/- was converted into an interest-free loan only at the close of the year under consideration and if the Assessing Officer is so satisfied then the impugned arm's length price adjustment made by treating it as an interest-free loan for the entire period of twelve months under consideration, would be unsustainable. If the Assessing Officer is not so satisfied then he shall free to proceed as per law. Needless to mention, the assessee shall be allowed an opportunity to submit appropriate material and evidence in support of its plea and only thereafter the Assessing Officer shall pass an order afresh on this aspect as per law. 14. The only other limb of the loan advanced to TTD is a sum of Rs. 6,04,85,670/-, which is the opening balance. The nature of such payment being a lending transaction is not disputed. It is also not disputed that the said loan is interest-free. The plea of the assessee has been that the said sum was advanced in the earlier periods out of funds which did not have any interest costs. It is also canvassed that in the past, a portion of the aforesaid loan was converted from outstanding debtors balances. The aforesaid pleas of the assessee, in our considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undry debtors outstanding from associated enterprise has been converted into interest-free loan. From the date on which the sundry debtors have been converted into loan and upto the close of the previous year under consideration, the impugned sum certainly partakes the character of a lending transaction, which is liable to be subject to the arm's length price adjustment. Therefore, we deem it fit and proper to restore the matter back to the file of the Assessing Officer, who shall consider the date on which the balance of sundry debtors outstanding has been converted into loan and only thereafter determine the arm's length price adjustment for the required period upto the close of the year under consideration. Needless to say, the assessee shall furnish the requisite material and evidence so as to enable the Assessing Officer to cull out complete facts and thereafter determine an arm's length price adjustment, if required, for non-charging of interest on such lending transaction. 17. In the aforesaid manner, the impugned Ground of the assessee relating to the addition of Rs. 2,38,00,879/- on account of arm's length price adjustment in respect of interest-free loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of business. When the assessee has not proved facts before the AO, there is no question of taking decision in favour of the assessee at this order approval stage, which would amount to accepting that the advances were made for the purposes of business. Secondly, as mentioned, the assessee has not made any arguments either before us during the hearing or in the written submission. Therefore, there is no material with us to take the decision in favour of the assessee. Thirdly, the assessee's argument of double taxation is misconceived because the interest relatable to interest free advances made to the AE of Rs. 1,07,27,321/- has not been debited to Profit and Loss account but is debited to ledger account TTD. Therefore, the interest amount of Rs. 80,01,233/- is not relatable to the interest free advances made to AEs. Therefore, it is not a case of double taxation as contended by the assessee." 21. On the basis of the aforesaid, it is sought to be made out that assessee could not establish that the advances have been made for the purposes of business. 22. In the context of the aforesaid Ground, we have perused the orders of the authorities below and also the materi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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