9911796707
TMI Blog2015 (7) TMI 525X X X X Extracts X X X X X X X X Extracts X X X X ..... any. In view of elaborate facts and submissions filed, the provisions of transfer pricing not applicable t the appellant company, the assessment order ought to have been quashed on this ground itself. 2. The Ld. CIT (A) has erred in law and on facts in confirming the addition of Rs. 19,92,355/-being Arms Length Price of loan interest made by the AO while relying upon the findings of the ACIT (TPO) in his order dated 14-10-2010. In view of elaborate facts and submissions filed, more particularly keeping in view the fact that the amount given to Soma Textiles FZE is not a loan but merely contribution towards capital and/or Quasi Equity Capital of the said subsidiary, the order of the ACIT (TPO) is bad in law and consequently the impugned addition of Rs. 19,92,355/ - requires to be deleted. 3. Briefly stated, the relevant material facts are like this. The assessee is engaged in the business of manufacturing of textile cot ton fabrics. During the course of the scrutiny assessment proceedings, it was noticed that the assessee has established a wholly owned subsidiary, by the name of Soma Textiles FZE, in the United Arab Emirates (UAE). The assessee had invested Rs. 21,71,723 in sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by any standard and that it would be the minimum rate at which the AE could have borrowed in UAE in an arm's length transaction. The arm's length adjustment was thus upheld in principle as also in quantum. The assessee is not satisfied and is in further appeal before us. 4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 5. As learned counsel for the assessee rightly points out, so far as Perot System's case (supra) is concerned, the argument of loan being in quasi capital was rejected on facts, though the core legal issue, i.e. whether ALP adjustments will also be warranted in case of interest free loans extended as quasi capital, was left open. It was stated so in the case of Micro Inks Ltd Vs ACIT [(2013) 157 TTJ 289 (Ahd)]. The question, however, arises as to what are the connotations of expression 'qua si capital' in the context of the transfer pricing legislation. 6. Hon'ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)], has begun by quoting the thought provoking words of Justice Felix Frankfurter to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. 9. The expression 'quasi capital', in our humble understanding, is relevant from the point of view of highlighting that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of interest. The comparable uncontrolled price of quasi capital loan, unless it is only for a transitory period and the de facto reward for this value of money is the opportunity for capital investment or such other benefit, cannot be nil. As for the intent of the assessee to treat this loan as investment, nothing turns on it either. Whether assessee wanted to treat this loan as an investment or not does not matter so far as determination of arm's length price of this loan is concerned; what really matters is whether such a loan transaction would have taken place, in an arm's length situation, without any interest being charged in respect of the same. As for the contention regarding crucial role being played by, or visualized for, this AE, there is no material on record to demonstrate the same or to justify that even in an arm's length situation, a zero interest rate loan would have been justified to such an entity. A lot of emphasis has also been placed on the fact that the loan was out of the GDR funds, and, for this reason, the interest free loan was justified. We are unable to see any logic in this explanation either. Even when the loan is given out of the GDR funds held a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant has given a loan out of this amount to its subsidiary in UAE and, therefore, it has not been used for any of the purposes under section 35D of the Act". The assessee is aggrieved and is in further appeal before us. 16. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the appl icable legal position. 17. We find that, as held by Hon'ble Supreme Court in the case of Brooke Bond Limited (supra), the expenses on issuance of share capital are capital expenses in nature and that these expenses cannot be allowed as a deduction as revenue expenses. However, as long as these expenses, even if capital in nature, satisfy the conditions set out in Section 35D, these expenses are eligible for amortization under Section 35D. One of the conditions in Section 35D(1), as it stood at the material point of time, is that either the eligible expenses should be incurred before the commencement of the business, and, in a situation in which the expenses are incurred after the commencement of business, the expenses should be incurred for extension of his undertaking or setting up of a new industrial undertaking. This condition i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He, however, did not leave it at that, and proceeded to reject the claim on merits as well. He noted that in the case of Oil and Natural Gas Corporation Vs CIT [(2010) 322 ITR 180 (SC)], which was relied upon by the assessee, the loss was held to be deductible as the borrowing was for revenue purposes whereas, in the present case, the funds are used for capital purposes. The assessee is not satisfied by the stand of the CIT(A) and is in appeal before us. 21. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the appl icable legal position. 22. The issue involved is a legal issue and just because the assessee has not claimed the deduction in the income tax return, the assessee cannot be debarred from seeking adjudication on the same, on merits, before us. In any event, learned CIT(A) has already examined the matter on merits. We, therefore, proceed to examine the matter on merits. We have noted that, in note no. 24 to the annual accounts, this item of extraordinary loss is explained as follows: Extraordinary item consists of the exchange rate fluctuation on account of funds raised by GDR issue which are lyin ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
