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TMI Blog2015 (5) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... of the share certificate by the AO, the share application money cannot be treated as loan amount merely because there is a delay in issuance of shares by the subsidiary in the name of the assesse, which was duly explained by the assesse. Accordingly, this ground of the assesse’s appeal is allowed in above terms. Expenditure on loan taken for Investment of USD 15.4 Million for the acquisition of Minacs Canada - whether is capital in nature hence not allowable? - Held that:- As it is clear from the additional ground raised by the assesse that the same pertains to subsequent assessment years when the assesse earned some foreign exchange gain, therefore, for the year under consideration, no such gain has arisen to the assesse on account of the said investment and, therefore, no adjudication of this ground is required for the year under consideration. Accordingly, we reject the additional ground raised by the assesse being not arisen from the impugned orders of authorities below for the A.Y. under consideration - Decided against assessee. Allowance of deduction u/s 10A - whether the deduction u/s 10Aof the Act, should be restricted to the profit of the unit eligible for deduction? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of the case, the Hon'ble CIT(A) ought not to have made the said adjustment of LlBOR plus 2% on interest chargeable on loan given to AVTL Canada. Your appellant prays that the DClT be directed to delete the said addition made on account of interest of LlBOR plus 2%. 3. The DCIT / TPO erred and Hon'ble CIT (A) erred in confirming the adjustment of ₹ 6,15,669/- by erroneously considering share application money of ₹ 4,48,01,190/- given to the appellant's AE Transworks BPO Philippines Ltd [TBPO Philippines] to be in the nature of loan and calculating the arm's length interest chargeable on the same at ₹ 6,15,669/- @10.09% being 6 month USD LlBOR + 4.45% . Your appellant submits that on the facts and the circumstances of the case, the DCIT/ TPO and Hon'ble CIT(A) ought not to have made the said adjustment of ₹ 6,15,669/- by erroneously determining the interest on the amount of share application money given to Minacs Philippines. Your appellant prays that the DClT be directed to delete the addition made on account of interest chargeable of ₹ 6,15,669/-. 4. The CIT(A) has erred in not adjudicating the ground relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities below and submitted that the assessee has undertaken the risk by providing the guarantee for the loan obtained by the AE from the bank, therefore, the differential rate adopted by the TPO is justified. 2.5 Having considered the rival submissions as well as relevant material on record, we agree with the alternative plea of the Ld. AR that the arm s length guarantee commission charges can be considered at the rate of 0.5% as held by this Tribunal in a series of decisions referred above. In the case of Everest Kanto Cylinder Ltd (supra), the Tribunal while considering an identical issue has held in para 9 as under:- 9. Now, coming to the merit of the addition so made, we found that the issue has already been decided by the Tribunal in immediately preceding year in assessee s own case, wherein charging of 0.5% guarantee commission from AE was held to be quite near to 0.6%, where assessee has paid independently to the ICICI bank and charging of guarantee commission @0.5% from its AE was held to be at arm s length. The precise observation of the bench for the assessment year 2007-08 are as under :- The universal application of rate of 3 percent for guarantee commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g TP adjustment in respect of interest on loan given to AE. 3.1 During the year, the assesse has advanced a loan, under automatic route, to its wholly owned subsidiary AVTL Canada in order to accomplish the acquisition of Minacs Canada. In the TP documentation, the assesse bench marked the said transaction of providing loan to AE by using internal CUP of LIBOR+0.65%. The internal CUP was stated to have been determined by the assesse based on the loan availed from the DBS Bank at the rate of LIBOR+0.45% plus 0.20% each year for a period of 5 years. The assesse charged the interest from the AE at the rate of CAD LIBOR+1% which is more than LIBOR+0.65% ALP adopted by the assesse being internal CUP and accordingly, the assesse claimed that the transaction is at arm s length. The TPO did not accept the ALP determined by the assesse and adopted the ALP rate of interest at LIBOR+4.45% which includes LIBOR+0.45% plus 1% fee plus 3% mark up as against CAD LIBOR+1% charged by the assesse. Accordingly, the TPO made an upward adjustment of ₹ 2,79,,53,572/-. Since there was some calculation mistake in computing the adjustment, therefore, the TPO passed rectification order u/s 154 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above decisions, the rate to be used for undertaking an adjustment should be LlBOR and not the average yield rates considered by the learned TPO. The LlBOR rate for March 2008 was 2.6798%. However the assessee has charged 7% from its AE as per the internal CUP available. Thus, the assessee has charged interest to EKC Dubai and EKC China at the rate higher than existing LlBOR rates. Accordingly, the said transaction of providing loan to EKC Dubai and EKC China is at arm's length. Additions made by the AO are accordingly set aside. 3.6 Following, the orders of this Tribunal, we confirm the impugned order of CIT(A) qua this issue. 4. Ground no. 3 is regarding the TP adjustment on account of interest on re-characterization of share application money as loan advanced to AE. 4.1 During the year, the assesse has advanced a sum of ₹ 4,48,01,190/- to its subsidiary, Transworks BPO Phillipines Ltd.. in the form of share application money. The TPO was of the view that although the said amount given by the assesse in the garb of share application money, however, this amount was actually in the nature of loan as the shares were not allotted till 2 subsequent years and AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation money. The delay was due to obtaining necessary approval from the Securities and Exchange Commission, Phillipines. Finally, the shares were issued as per the share certificate dated 25.05.2008 which has been produced by the assesse as additional evidence. Since the document of issuance of equity shares in the name of the assesse by the subsidiary/AE vide share certificate were not before the authorities below, therefore, to the extent of limited purpose of considering the said document, we set aside this issue to the record of AO/TPO to consider the same. As far as the re-characterization of the share application money as loan, we note that the Hon ble Jurisdictional High Court in the case of DIT Vs. Besix Kier Dabhol S.A. vide its decision dated 30th August 2012 in ITA No. 776 of 2011 has considered an identical issue in para 6 to 8 as under:- 6. In appeal, the Commissioner of Income Tax (Appeals) by an order dated 29/3/2007 upheld the order of the Assessing officer and disallowed the deduction on account of interest of ₹ 5.73 crores paid to Joint Venture Partners. The Commissioner of Income Tax (Appeals) held that Article 7(3)(b) of the Double Taxation Avoidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assesse s appeal is dismissed as not pressed. 5.3 Accordingly, we dismiss the ground no. 4 of the assesse s appeal being not pressed. 6. The assesse has also raised an additional ground vide application/letter dated 23.06.2014 which reads as under:- 1. On the facts and in the circumstances of the case and in law, if it is held in subsequent years (AY 2008-09 onwards) that expenditure on loan taken for Investment of USD 15.4 Million for the acquisition of Minacs Canada is capital in nature hence not allowable, the Income in relation to the same of ₹ 52,927,844/- must also be treated as capital receipt and not be taxable in the year under consideration. 6.1 We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. This additional ground is only with respect to the treatment of the investment made by the assesse in its foreign subsidiary AVTL Canada which was treated as capital in nature and accordingly the interest and other cost of the loan obtained by the assesse for such acquisition was disallowed. By way of this additional ground the assesse is raising an alternative plea that if the said investment is treated as capital in nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the said decision. 7.1 Ground No. 1 is regarding the arm s length interest rate adopted by the CIT(A) at LIBOR+ 2% instead of LIBOR+4.45% adopted by the TPO. 7.2 This ground is common to the ground no. 2 of the assesse s appeal, in view of our finding on this issue in ground no. 2 of assesse s appeal, this ground of revenue s appeal is dismissed. 8 Ground no. 2 to 4 are regarding the allowance of deduction u/s 10A. 8.1 During the year, the assesse had two STPI units eligible for claiming deduction u/s 10A of the Act. These units were set up in Mumbai and Bangalore. The assesse has set off total profit from Domestic business against the loss from the non STPI unit and the balance loss was claimed as carry forward at ₹ 4.66 crore. The AO observed that the deduction u/s 10Aof the Act, should be restricted to the profit of the unit eligible for deduction u/s 10A of the Act and the total income have been shown at nil instead of claiming of loss. 8.2 The assesse challenged the action of AO before the CIT(A). The CIT(A) has allowed the claim of loss of the assesse. 8.3 We have heard the Ld. DR as well as Ld. AR and considered the relevant material on record. At ..... X X X X Extracts X X X X X X X X Extracts X X X X
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