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TMI Blog2016 (7) TMI 760X X X X Extracts X X X X X X X X Extracts X X X X ..... ions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm’s length price. The assessee is not really correct in contending that when the assessee has not reported any income from a particular international transaction, the ALP adjustment cannot compute the same. The computation of income on the basis of arm’s length price does not require that the assessee must report some income first, and only then it can be adjusted for the ALP. Section 92(1) is not an adjustment mechanism; it is a computation mechanism. The arm’s length price principle requires that an arm’s length price is assigned to the transactions between the associated enterprise, and if the income in computed, if any, on the basis of the arm’s length price so assigned. The ALP adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i.e interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income. The point of dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits and not assessing the interest income in the hands of the assessee on arm's length price will cause real loss to the Govt. exchequer? 2. However, when this finally came up for hearing on 19th April 2016, it was noticed that some of these questions are not even raised in the grounds of appeal filed by the assessee and are in the nature of arguments on certain peripheral issues, in support of the core grievance, focussing on certain narrow facets of the issues requiring our adjudication. As all these aspects will have to be dealt with in the course of our adjudication anyway, it is not necessary to have specific questions on each of the arguments. It was in this background, and with a view to succinctly set out the controversy requiring our adjudication, that the need to modify the questions to be answered by the Special Bench was felt. Accordingly, with the consent of the parties, Hon'ble President was pleased to modify the questions for the consideration of special bench, and the question that this Special Bench thus finally adjudicated upon was as set out below: Whether, on the facts and in the circumstances of the case, an arm's length price (ALP) adjustment, of ₹ 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er is enjoined to work out the arm's length price as per sub-sections (1) and (2) of section 92 following the method outlined in section 92C. If he considers necessary or expedient so to do, he may with the previous approval of the Commissioner, refer the computation of arm's length price in relation to the international transaction to the Transfer Pricing Officer under section 92CA. The Transfer Pricing Officer has to determine the arm's length price after notice to the assessee. On the basis of such determination the assessing officer has to compute the total income of the assessee. It is only if the assessing officer comes to the conclusion that the interest of the revenue would be better served by not applying sub-sections (1) and (2) than by adhering to them, sub-section (3) would be attracted and the assessing officer will have to proceed with the assessment without giving effect to sub-sections (1) and (2). Without complying with the statutory requirements it will be too presumptuous to assume the said transaction is beneficial for the Revenue and then invoke sub-section(3) of section 92. 12. To consider the applicability of sub-section (3) of section 92, we have perused t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of interest. The sine qua non for applicability of sub-section (3) of Section 92 is the finding that the computation of income under sub-section (1) or determination of the allowance for any expense or interest under that sub-section read with the explanation or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section(2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. Having regard to the aforementioned provision - proviso (ii) to sub-section (2) of Section 245R of the Act - it is a prohibited exercise for the Authority. Indeed the Authority is enjoined to reject the application if the question involves determination of fair market value of the property. It follows that the Authority cannot pronounce any ruling on the applicability of sub-section (3) of section 92 of the Act. 14. In the light of the above discussion, the applicant has no option but to comply with the provisions of the Act including the legislation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tex India is a loss making concern and that it has, as on 1st April 2003, accumulated unabsorbed business loss of ₹ 12,25,42270 and accumulated unabsorbed depreciation of ₹ 12,77,67,761. It was also noted that the assessee and Datex India, which was wholly owned subsidiary of the assessee and its marketing arm in India, entered into an agreement dated 26th August 2002 under which the assessee extended an interest free loan denominated in US Dollars, which was equivalent to ₹ 36 crores, to Datex India for its general business purposes. The Assessing Officer was of the view that it is not in dispute that the interest free loan granted by the assessee to its subsidiary was not at an arm's length price, and, accordingly, an arm's length price adjustment was normally required to be made in respect of interest earning of the assessee from the grant of this loan. The only defence of the assessee, according to the Assessing Officer, was that "erosion of tax base and consequent loss of tax revenue in India" but then this argument was on the presumption that the Datex was making profits and paying taxes thereon. The Assessing Officer was of the view that this argument is un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CUP method which appears to be the most suited for the purpose of determining the arm's length price of the interest income receivable by the assessee from Datex in the present case. As mentioned in the Transfer Pricing report filed by Datex, the PLR of SBI @ 10.87% was a prime indicator of the interest rate prevailing in the market in F.Y.2002-03. 8.1. It would, therefore, be only appropriate to apply rate of 10.87% to determine the interest income of the assessee. However, as indicated above, such interest is chargeable not only on the loan of ₹ 36 crores granted by the assessee to Datex during the year, but also on the opening balance of loan granted earlier i.e. 14,72,87,857/- as on 01.4.2002 on which Datex suddenly stopped making any provision for interest w.e.f. the last Asstt.Year. Interest was, therefore, chargeable on ₹ 36,00,00,000/- w.e.f. 01.09.02 to 31.3.2003 (in absence of the information about the specific date on which Datex received such loan, it is presumed that it was received on the last day of the month in which the agreement was entered in to i.e. 31.08.02) plus on 14,72,87,857/- for the entire F.Y.2002-03. In case any small adjustment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and correct, there can be no intervention by the A.O. However, in the present case, the appellant has failed to discharge the primary onus relating to international transaction. 16. In the Circular No.14 of 2001, the Board has clarified that the second proviso to Section 92C(4) of the Act refers to a case where the amount involved in the international transaction has already been remitted abroad after deducting the tax at source and subsequently, in the assessment of the resident payer, an adjustment is made to the transfer price involved and. thereby the expenditure represented by the amount so remitted is partly disallowed. Under the income Tax Act, a non-resident in receipt of income from which tax has been deducted at source has the option of filing a return of income in respect of the relevant income. In such case, a non-resident could claim a refund of a part of the tax deducted at source on the ground that an arm's length price has been adopted by the A.O. in the case of the resident and the same price should be considered in determining the taxable income of the non-resident. Thus, the appellant was having an option of getting the refund, had it been complied the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us) as fees for technical services, as per the provisions of the India Netherlands tax treaty, with respect to which there is no dispute". In the course of proceedings before the Transfer Pricing Officer, and for the detailed reasons set out in the order passed by the TPO, he was of the view that the intervener should have charged the higher amount of fees for technical services. Accordingly, the TPO proceeded to recommended adjustments of ₹ 8,53,03,582 for the assessment year 2007-08 and of ₹ 29,43,61,998 for the assessment year 2008-09. Aggrieved, the intervener raised his grievance before the Dispute Resolution Panel. The intervener also, inter alia, raised the issue regarding base erosion of tax base in India, as the rate of tax on royalty earning in the hands of the assessee company was 10% whereas the corporate tax rate at the relevant point of time was 34%. It was thus contended that the application of arm's length principle in computation of income in these international transactions, between these associated enterprises i.e. the intervener and its Indian AEs, will result of erosion of tax base by 24%. While Dispute Resolution Panel agreed with these contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to arm's length price adjustment, the Indian tax base will stand eroded by 26.75% of such an ALP adjustment. It is submitted that the fact that the holding company, i.e. the assessee, has provided the interest free loan to its Indian subsidiary, i.e. Datex-India, is not in dispute, and that the genuineness of the loan, its usage and return to the assessee is also not in dispute. It is also pointed out that if the computation of interest is imputed to the loan, the net result will be (a) a withholding tax of 10% on the interest payable, (b) a statutory reduction or deductibility of the said expenses e which will allow benefit of 36.75% tax to the assesse, and (c) a resultant base erosion of 26.75% to the Indian revenue. Learned counsel then invites our attention to the CBDT circular no. 14 of 2001 which, inter alia, states that "..the basic intention underlying the new transfer pricing regulations is to prevent shifting of profits by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base" and that "the new section 92 is, therefore, not intended to be applied in cases where adoption of arm's length price, determined under the reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is no more than, to use his words, a drop in the ocean, our decision on this macro issue of relationship between base erosion and transfer pricing will have a huge impact on the transfer pricing administration in general and it will guide the course of destiny for proper use this anti abuse provision. We are urged to rise to the occasion and lay down sound principles for application of the transfer pricing provisions. Submissions by the intervenor 11. We may, at this stage, take note of the submissions of the learned counsel for the intervener as well. Learned counsel begun by pointing out that his submissions before the special bench are confined to the applicability per se of the transfer pricing on the unique facts of his case which are, to the material extent, common with that of the appellant. He submits that for every additional monetary unit of fees charged by the assessee to its Indian AEs, the Indian AEs will get a tax shield of 34%, whereas the assessee will suffer tax only @ 10% on gross basis. There is thus base erosion of the Indian tax revenue to the extent of 24%, and this base erosion defeats the very intent and objective of introducing the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taken into account for computing the base erosion. A reference is then made to a ruling issued by the Australian Tax Office (ATO, in short), i.e. ruling no. 2007/1, which holds that no ALP adjustment needs to be made in the case of non-resident lender giving an interest free loan to the Australian domestic company, and this principle will apply even if the Australian domestic company was to incur a genuine tax loss since the tax loss eligible to being carried forward. He submits that the said ruling of the ATO, which is also the opinion of the Government of Australia- a country well experienced in the field of transfer pricing when compared to India, "squarely applies" to the case of the assessee. He hastens to add that even though this ruling does not bind the Tribunal, it should be treated as having persuasive effect and should be given due consideration. Learned counsel then makes an interesting reference to the decision of Hon'ble Supreme Court, in the case of DIT Vs Morgan Stanley & Co Ltd [(2007) 292 ITR 416 (SC)], and contends that, in the light of this decision, the transfer pricing provisions cannot be applied on the facts of this case as long as the additional income, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... play only when the income of the assessee, in whose hands income from international transactions is to be computed, stands reduced or the loss in his hands stands increased. Learned DR also submits that in the light of a five member bench decision of this Tribunal in the case of Aztech Software & Technology Limited Vs ACIT [(2007) 107 ITD SB 141 (Bang)], the application of transfer pricing, which must be applied no matter how inequitable the legal provisions are, in the present case cannot be questioned. He further points out just because ALP adjustments are made in the hands of the non-resident associated companies, these ALP adjustments will not entitle the Indian AEs to get any deductions in respect of the ALP adjustments. It is contended that learned counsel has misinterpreted the second proviso to suggest that corresponding deduction will be available in the hands of the AE on the ground that no arm's length price has actually been paid by the Indian AE. It is stated that there is no provision in the statue enabling such a deduction on account of the ALP adjustment and in the hands of the affected AE. There is thus no loss, real or notional, to the Indian tax revenue by makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs in respect of ALP adjustments made in the hands of the assessee non-resident companies, there is no reduction in overall incidence of taxation as a result of the ALP adjustments being made in the hands of the non-resident companies earning income from their Indian AEs- which is sine qua non for the non application of transfer pricing provisions in such cases. Learned DR submits that as far as the circulars are concerned, these circulars at best deal with such situations in which there is overall reduction of tax incidence- which is certainly not the case before us. Coming to the Morgan Stanley decision (supra), leaned counsel points out that admittedly this decision is in the context of the profit attribution to the permanent establishment and it does not, therefore, have any bearing on the issue before us. He points out that the short issue before us is applicability of Section 92(3) which was not even the subject matter of consideration by Hon'ble Supreme Court. As for the loss to the revenue as a result of the impugned ALP adjustments, learned DR submits that it is for the revenue to decide what is best for the revenue, and just as much as the revenue is prevented from sitti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that there are no disputes about bonafides of interest free loan, the fact of the matter is that the assessee has not even given the basic details of dealings with the Indian AE and it was left to the Assessing Officer to compile information from the secondary sources and frame the assessment on that basis. 13. On the strength of these submissions, learned Commissioner (DR) urges us to hold that the transfer pricing provisions have been rightly invoked in these cases and that the theory of non applicability of TP provisions on the basis of base erosion of Indian revenue is neither correct in principle nor applicable on the facts of these cases. Rejoinder of the assessee on base erosion theory 14. Learned counsel submits that while it is true that Indian AE was making losses in the relevant assessment years, one cannot lose sight of the fact that the Indian AE had the statutory right to carry forward the loss for a period of 8 years and set off the same against the profits within the stipulated time frame. It is, therefore, clear that learned DR has erred in assuming that tax advantage to the Indian AE of the assessee is purely hypothetical. He then points out that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel, section 92(3) cannot be given such a restrictive meaning so as to examine the impact of taxability only in the hands of the assesse rather than of all the AEs put together. As for the impact of Aztec decision (supra) by a five member bench of this Tribunal, learned counsel submitted that the Tribunal did not have any occasion to examine the impact of Section 92(3), and, therefore, this decision cannot have any bearing on the interpretation of Section 92(3). In the light of these submissions, learned counsel for the assessee once again urges us to hold that the transfer pricing provisions per se are not applicable on the facts of this case. Our analysis of the base erosion argument 15. We find that Section 92(1)) requires that "any income arising from an international transaction shall be computed having regard to the arm's length price". To this extent, there is no dispute that the transactions before us are international transactions between the associated enterprises, and the income arising from these transactions is, therefore, required to be computed having regard to the arm's length price. The case of the assessee, however, at best is that the assessee is covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " should be de facto read as reducing the tax liability on income or increasing the tax shield for the losses. In effect, thus, not only the actual tax impact but also the possible tax advantage, de hors the time value of money, should be taken into account. This interpretation, according to the assessee, will advance the intent of the legislature and objectives of the transfer pricing. 19. A plain reading of Section 92(3), however, indicates that what is to be seen is impact on profits or losses for the year in consideration itself as it is to "be computed on the basis of entries made in the books of accounts in respect of previous year in which the international transaction was entered into". There is thus no scope at all for taking into account the impact on taxes for the subsequent years. The tax shield available to the assessee's AE, as a result of accumulated losses- even if any, can only affect the income of the subsequent years, which, for the reasons noted above, are not relevant for the purpose of Section 92(3). The manner in which the argument of the assessee is placed, a part of the section is being interpreted in isolation without appreciating the impact of the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing really turns on that. The reasoning given by the CIT(A) was incorrect, the conclusion arrived at him by was not. He was right, even if serendipitously. The deduction for the ALP adjustment will not be available to the Indian AE because there is no provision enabling deduction for ALP adjustments. The second proviso to Section 92C(4) refers to a situation in which let us say an a resident assessee paid ₹ 100 for interest to its AE abroad, and duly deducted tax from the same or the tax was deductible from the said payment, but the arm's length price of the interest was ascertained at ₹ 40. In such a situation, while deduction, as per arm's length principle, is to be allowed only for ₹ 40, the taxability in the hands of the AE shall continue to be for ₹ 100. Clearly, therefore, reference to second proviso to Section 92C(4), as made by the learned CIT(A), was wholly unwarranted. However, learned counsel of the assessee is also equally in error when he contends that since the second proviso to Section 92C(4) does not come into play on the facts of this case, "there is nothing in the Act which prohibits Datex (i.e. Indian AE) to recompute its income and clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the assessee was to be so certain of the tax benefit to the Indian revenue by this transaction structure by way of interest free loan to Indian AE, the transaction would not have been structured in this manner; after all the underlying motive in the activities of the assessee is to maximise gains for its shareholder rather than broaden the tax base of Indian revenue. Of course, even this tax shield of accumulated losses is wholly academic inasmuch as the deduction has not been claimed, nor can it be claimed at this stage. 22. Let us, at this stage, turn to the ATO ruling on which both the parties before us have placed so much of reliance. This ruling is issued by the Australian Tax Office, (https://www.ato.gov.au/law/view/document?docid=TXR/TR20071/NAT/ATO/00001), for the Australian taxpayers and it provides as follows: 15. In an interest free loan situation, for example, where interest could have been charged by a non-resident company to an Australian resident company, if the Commissioner were to make a determination and adjustment under subsection 136AD(2) against the non-resident company so as to deem an interest withholding tax liability, no consequential adjustment could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "(b) the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm's length with each other in relation to the supply (c) consideration was received or receivable by the taxpayer in respect of the supply but the amount of that consideration was less than the arm's length consideration in respect of the supply; and (d) the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the supply" (https://www.legislation.gov.au/Details/C2013C00040/Html/Volume_3#_Toc346211123).. The provisions of the Indian Income Tax Act 1961 and the Australian Income Tax Assessment Act 1936 are thus not at all in pari materia in this context. This aspect of the matter will be more glaring from the following extracts from ATO ruling 94/14 referred to, and relied upon, in the aforesaid ruling: https://www.ato.gov.au/law/view/document?DocID=TXR/TR9414/NAT/ATO/00001 The Commissioner has a discretion whether or not to apply section 136AD 114. In exercising the discretion in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AEs, is mandatory. The only rider is that these provisions are not to be applied only in the event of the exclusion clause in Section 92(3) being satisfied, but then, as we have seen earlier in our analysis, this exclusion clause does not come into play on the facts of these cases at all. 25. It is also useful to note that in the event of ALP adjustments, under the Australian Income Tax Assessment Act, 1936, consequential adjustments are permissible in certain conditions under section 136 AF of the said Act. No such adjustments are permissible under the Indian Income Tax Act, 1961. It is sufficient to take note of the fact that the situation in the Australian law, so far as this aspect of the matter is concerned, is materially different. When the relevant legal provisions are not in pari materia, the clarifications issued by the ATO are not even relevant. Of course, even when the provisions were to be in pari materia, nothing really turns on these clarifications issued by the ATO. At best, the approach adopted in these clarifications could be taken as arguments in support of the assessee. 26. Let us now turn to the CBDT circulars relied upon by the assessee. When transfer pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into international transactions and definitions of certain expressions occurring in the said sections. 55.4 The newly substituted section 92 provides that income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price. Any expense or outgoing in an international transaction is also to be computed having regard to the arms length price. Thus in the case of a manufacturer, for example, the provisions will apply to exports made to the associated enterprise as also to imports from the same or any other associated enterprise. The provision is also applicable in a case where the international transaction comprises only an outgoing from the Indian assessee. 55.5 The new section further provides that the cost or expenses allocated or apportioned between two or more associated enterprises under a mutual agreement or arrangement shall be at arm's length price. Examples of such transactions could be where one associated enterprise carries out centralized functions which al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities. 28. Having said that, the role of 'intent of legislature' at best comes into play only when there is any ambiguity in the words of the statute which are being sought to be interpreted. That is not the case here. If intention of the law is not implemented by the plain words of the statute, and unless there is an ambiguity requiring some violence with the words, such an intention, no matter how noble it is, is of no relevance in the judicial interpretation. In such a situation, rejecting the relevance of intent of legislature in interpreting a statute, a division bench of this Tribunal, in the case of Tata Tea Ltd Vs JCIT [(2003) 87 ITD 351 (Kol)], has observed as follows: The House of Lords itself, in a later judgment in the matter of Magor & St Mellons Rural District Council vs. Newport Corporation (1951) 2 All ER 839, did not approve the proposition advanced by Lord Denning. It is interesting to note the articulate expressions of Lord. Simonds, supporting the majority view and at p. 841 of 2 All ER (1951), unequivocally and categorically rejecting Lord Denning's theory on the relevance of intent of legislature: "My Lords, the criticism which I venture to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would appear to incline away from the Denning approach. These views are also echoed by Hon'ble Supreme Court of India from time to time. In the case of State of Kerala vs. Mathai Verghese AIR 1987 SC 33, Hon'ble Supreme Court has taken a view that the Court cannot reframe the legislation for the very good reason that it has no power to legislate. In Jumma Masjid vs. Kodiamaniandra AIR 1962 SC 847, at p. 850 Hon'ble Supreme Court referred to, with approval, Lord Loreburn's observation, "we are not entitled to read words into an Act of Parliament unless clear reasons for it is to be found within the four corners of the Act itself." [Vickers Sons and Maxim Ltd. vs. Evans (1910) AC 444 (HL) at p. 445]. Lord Simonds rejection of Denning's approach was cited, with approval, by Hon'ble Supreme Court in the case of Punjab Land and Development Corporation vs. Presiding Officer, Labour Court (1990) 3 SCR 111, at pp. 153-4. We leave it at that. 29. We are in considered agreement with the view so stated by the division bench. In this view of the matter, even if it is indeed intent of the legislature that transfer pricing provisions are not to be invoked in the cases where there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completely non-cooperative and defiant in approach. The assessee did not file the tax return, the assessee did not submit the requisitioned information, and the assessee did not respond to any notice issued by the Assessing Officer. The conduct of the assessee leaves a lot to be desired. Yet, the assessee claims that the interest free loan granted by the assessee to its Indian AE was a bonafide business decision without any tax motive. When even basic facts about the assessee's dealings with the Indian AE are not furnished by the assessee, and had to be collected by the Assessing Officer from the secondary sources, it is difficult to have faith in these wholly unsubstantiated claims of the assessee; there is no material before us to support these claims either. 30. Coming to the Morgan Stanley (supra) decision of Hon'ble Supreme Court, we find that it was on a wholly unrelated issue of permanent establishment profit attribution. It is only elementary that a decision on an authority on what is actually decides and not on what logically follows from the same. What Their Lordships were deciding, in the case of Morgan Stanley, was the scope and impact of a tax treaty provision, and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In H.H. Maharajadhiraja Madhav Rao Jiwaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9 this Court cautioned: "It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment." 32. Ironically, however, this is precisely what the learned counsel for intervener has en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of this Tribunal in the case of Abhishek Auto Industries Vs DCIT [(2011) 15 ITR Trib 168 (Del)], in support of the proposition that legally binding arrangements between the parties cannot be disregarded by the revenue authorities, without assigning cogent reasons. In substance, according to the learned counsel, a non interest bearing loan cannot be re-characterized as, even for transfer pricing purposes, an interest bearing loan. His contention is that an interest free loan being treated as an interest bearing loan amounts to re-characterization of a transaction- which is not permissible under the scheme of the law. Learned counsel refers to, and relies upon, judgments of Hon'ble Delhi High Court in the cases of CIT Vs Cotton Naturals India Pvt Ltd [(2015) 118 DTR 1 (Del)] and CIT Vs EKL Appliances Ltd [(2015) 345 ITR 241 (Del)] in this regard. His next argument is that taxation laws in India do not mandate the chagrining of interest on loan advanced to its associated enterprises. Furthermore, according to the learned counsel, where there is no income, there cannot be any tax. He then refers to judicial precedents in the cases of CIT Vs Shoorji Vallabhdas & Co [(1962) 46 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material on record. We are once again reminded that the assessee has not made any factual submissions at the assessment and first appellate stage, and it is only now that all sort of factual issues are being raised- and that too without any evidence in support of these claims. As for the interest free loan being in the nature of shareholder service, learned Departmental Representative submits that it is a new case being made out at this stage, and it is important to bear in mind the fact that, as evident from uncontroverted facts set out in the assessment order, the Indian AE was earlier paying interest on loans from the assessee. It is the fact of AE incurring the losses which has apparently triggered non charging of interest. He also submits that bonafides of the change in interest policy is far from established; even the basic details have not been filed by the assessee. He then submits that it is not the commercial expediency of the interest free loans which is being questioned by the revenue authorities. The assessee is indeed free to advance interest free loan to a subsidiary and even such a usage of funds by the assessee is to be considered to be commercially expedient use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ail it out of financial distress. It is submitted that, while taking a call on submission of the assesse, we should bear in mind these business realities as well. In the light of these discussions, according to the learned counsel, it was indeed not a fit case for making an ALP adjustment even on merits. We are urged to hold so. 37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. The judicial precedents relied by the assessee, such as in the case of SA Builders (supra), in support of the proposition that interest free advance to the subsidiary, in which assessee has deep interest, are justified on the grounds of commercial expediency are in the context of the question whether such a use of borrowed funds can be said to be for the purposes of business, and, accordingly, whether in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest was all along charged by the assessee on its loans to Datex but, for some unexplained reasons, the assessee has stopped charging interest in the assessment year 2003-04. The commercial bonafides of the present transactions are not established. As regards the assessee's claim that the revenue authorities have re-characterized the transaction, and that they do not have the powers to do so, we find that the claim of the assessee is ill conceived inasmuch as there is no re-characterization of the transaction, inasmuch as it continues to be a loan transaction and inasmuch as the substitution of zero interest by arm's length interest does not alter the basic character of transaction. The question of re-characterization arises only when the very nature of transaction is altered, such as capital subscription being treated as loan or such a trade advance received being treated as a borrowing. There is no change in the character of transaction in this case. Learned counsel's reliance on EKL Appliances decision (supra) and Cotton Natural decision (supra) is thus irrelevant. In the case of Abhishek Auto (supra), what was done was that of the joint venture agreement, which was duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm's length interest must substitute this zero interest. The answer is obvious. As long as the transaction is an international transaction between the AEs, the computation of income has to be on the basis of arm's length interest. Therefore, in our considered view, even when no income is reported in respect of an item in the nature of income, such as interest, but the substitution of transaction price by arm's length price results in an income, it can very well be brought to tax under Section 92. This plea of the assessee is also, therefore, unsustainable in law. 40. In view of the foregoing discussions, and for the detailed reasons set out above, we reject the contention of the assessee that, in principle, no arm's length price adjustments can be made in respect of the interest free advances granted by the assessee to its Indian AE, i.e. Datex Ohmeda India Pvt Ltd. However, so far as quantification of the arm's length price adjustment is concerned, the same will have to be dealt with the division bench as no arguments, with respect to the quantification part, were advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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