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TMI Blog2014 (12) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... jecting 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 - 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. Where the character of payment is towards share application money, thereby reflecting a capital investment, and the same not having been disputed by the TPO, such a transaction cannot be subject to an arm's length price adjustment under the plea of it being a transaction of lending or borrowing - the TPO was not justified in treating the aforesaid transaction as being an interest-free lending transaction entered with the associated enterprise - the transaction would have entailed charging of interest for the period between payment of share application and the date of allotment of shares - the approach of the authorities below in the context of the aforesaid amount of 9,91,39,000/- by treating it to be a transaction in the nature of interest-free lending transaction per se, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the assessment year 2009-10, which is directed against the order of the Dy. Commissioner of Income Tax, Circle- 7, Pune (in short 'the Assessing Officer') passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short "the Act") dated 10.01.2014, which is in conformity with the directions given by the Dispute Resolution Panel, Pune (in short 'the DRP') dated 18.12.2013. 2. The substantive dispute in the present appeal is in relation to an addition of ₹ 2,38,00,879/- made by the Assessing Officer on account of adjustment to the stated value of international transaction entered by the assessee with its associated enterprises in order to bring the same to an arm's length price within the meaning of section 92(1) of the Act. 3. In brief, 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 ₹ 91,20,930/-. The Assessing Officer noticed that assessee had entered into certain international transactions with its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other interest-free loans received from promoters/directors in the past years. The second category of advances comprise outstanding Sundry debtors for sales made to TTD amounting to ₹ 1,87,61,274/-, which was converted into loan as on 31.03.2009. The third category of advances comprise of loans of ₹ 66,87,000/- and ₹ 9,24,52,000/- given to TTD during the year for the purpose of making investment in equity of a new company i.e. MBT Sima-Technik (in short 'MBT'). It has been contended that all the advances were made on account of commercial expediency and therefore there was no justification for making adjustment on account of non-charring of interest. The learned counsel for the assessee submitted that any addition on account of interest can be made only for a 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 en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a transaction of loan advanced free of interest. Further, the second limb of loan comprises of advances made during the year under consideration of ₹ 66,87,000/- and ₹ 9,24,52,000/- totaling to ₹ 9,91,39,000/-, for the purpose of making investment in the equity capital of a new company, i.e. MBT. The assessee identified interest in relation to the aforesaid investment at ₹ 1,07,27,321/-, which was not charged to the Profit & Loss Account but was debited to the MBT Investment account; and, reflected in the Balance- Sheet under the head 'Investments' as 'Share Application money'. Third category of loan to TTD is a sum of ₹ 1,87,61,274/-, which represented recoverable sale's debtors converted into loan. The assessee had made sales to its associated enterprises and the outstanding sale debtors to the extent of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount alongwith interest element of ₹ 1,07,27,321/- thereof totaling to ₹ 10,04,23,222/- has been reflected as 'Investment' in the Balance-Sheet. A reference in this context has been made to the Balance-Sheet for the year under consideration, a copy of which has been placed at page 7 of the Paper Book. 12. In so far as the amount of ₹ 9,91,39,000/- (i.e. ₹ 66,87,000/- + ₹ 9,24,52,000/-) advanced during the year is concerned, the treatment given by the assessee is in the nature of 'share application money'. The aforesaid amount of share application money is outstanding as the investee company has not issued shares to the assessee till the close of the previous year under consideration. The nature of the aforesaid transaction is share application money, and clearly it is not in the nature of a lending or borrowing. The TPO has treated such 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 opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration. In-fact, as per the appellant, the outstanding amount was converted into loan only on the last day of the previous year under consideration. No doubt, a transaction of interest free lending is liable to be subject to arm's length price adjustment, so however, where the lending has occurred on the last day of the previous year under consideration, no adjustment would be necessary for the relevant year. However, in this context, we do not find any determination by the TPO or the Assessing Officer regarding assessee's plea that outstanding debtor's balance has been converted into loan on the last day of previous year under consideration. As the same involves a factual appreciation, we deem it fit and proper to restore the matter back to the file of the Assessing Officer. The assessee shall satisfy the Assessing Officer that the amount of ₹ 1,87,61,274/- 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to cull out the average of the LIBOR rate for the period under consideration and thereafter compute appropriate arm's length price adjustment with respect to interest component of the transactions of advancing interest-free loans to associated enterprises. 16. Before parting, we may also make a reference to another amount of ₹ 32,91,354/-, which has also been considered as a lending transaction by the TPO. The said sum is advanced to another associated enterprise, namely, Tooltech Europe OY, Finland. The claim of the assessee before the lower authorities as well as before us has been that the sum of ₹ 32,91,354/- has been advanced to Tooltech Europe OY, Finland by way of conversion of sundry debtors outstanding from them. In this context, neither the material on record and nor the discussion in the orders of the lower authorities reveal as to the date on which the amount of sundry 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents interest on foreign bill discounting, bank charges, interest on vehicle loan, interest on cash credit facility and interest on factoring, etc.. The plea of the assessee is that the corresponding funds have been put to use in the business of the assessee and that the interest-free advances referred to in the Balance-Sheet were in-fact advances made in the course of business and therefore the entire finance cost of ₹ 80,01,233/- reflects expenditure incurred in the course of business activity only. 20. On the other hand, the learned Departmental Representative has referred to the following observations of the DRP in order to support the stand of the Assessing Officer :- "2.4.5 We have considered the arguments of the assessee. We are unable to agree with the assessee for three reasons. Firstly, the learned AO in the draft assessment order has stated that the assessee did not prove that the advances were made 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the context of the Finance costs of ₹ 80,01,233/- debited in Profit & Loss Account. Needless to say, Assessing Officer shall allow the assessee an appropriate opportunity of being heard and furnish material and submissions in support of its claim and only thereafter the Assessing Officer shall pass an order afresh on this aspect in accordance with law. Thus, on this aspect also assessee succeeds for statistical purposes. 23. In the course of hearing, assessee referred to the following Additional Ground of Appeal :- "(1) The Hon'ble Dispute Resolution Panel (DRP) has erred in law and on the facts of the case in directing the Assessing Officer to make an addition of ₹ 11,57,367/- as notional corporate guarantee fee on account of transfer pricing adjustments. The action is unjustified, unwarranted and without prejudice the addition is excessive." 24. The aforesaid Additional Ground of Appeal seeks to challenge an arm's length price adjustment determined by the TPO in his order u/s 92CA(3) of the Act dated 23.01.2013 on account of notional corporate guarantee fee. The learned counsel for the assessee submitted that though the TPO had determined such arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X
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