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TMI Blog2018 (11) TMI 1703X X X X Extracts X X X X X X X X Extracts X X X X ..... of multi-micronutrient fertilizers, other nutritional products and major fertilizers. It has five subsidiaries viz. Aries Agro Care Pvt. Ltd., Aries Agro Equipments Pvt. Ltd., Aries Agro Produce Pvt. Ltd., Golden Harvest Middle East FZC and Amarak Chemicals FZC. Since the assessee's transaction with these AEs exceeded Rs. 15 crore, a reference to TPO was made and TPO made the some adjustments as mentioned hereinafter and therefore the draft assessment was framed vide order dated 28.03.2016 which was challenged before the DRP and DRP also confirmed the said additions/adjustments in the assessment. Finally assessment order was framed on 17.01.2017. Aggrieved by the said order the assessee has challenged it before the tribunal us. 4. The first issue agitated is against the confirmation of action of the TPO in making interest adjustments in the interest charged from the AE on the loan advanced by making external commercial borrowing to the tune of Rs. 62,77,368/-. The assessee decided to set up a manufacturing facility at Fujairah. Accordingly for setting up the said facility, the funds were required by Golden Harvest an AE of the assessee. When it was not possible for the Golden Har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest charged from AE and stated that the transaction is at ALP. The assessee further refers to Para 1.65 of the OECD Guidelines (July 2010) and submitted that the analogy taken by the TPO is nothing but re-characterization of investment into loan. 2.17. In this regard, we note that the loan obtained from ICICl Bahrain is secured in nature while the loan advanced to the AE is unsecured in nature. However, the assessee has charged same rate of interest from its AE as it has paid to ICICl Bahrain. Accordingly, it is inferred that since the assessee is risk bearing, it should compensated for the additional risk borne. The above contention of the assessee that the advancing of loan constitutes a shareholder activity is not justified because in case of uncontrolled transaction with any third party, it would have been remunerated for the additional risk borne. Considering a scenario that the assessee advances same Loan to a third party, it would have definitely charged some mark up for covering its administrative expenses and risk borne by it. Moreover, the assessee has also borne hedging Loss on its loan taken from ICICI Bahrain, which itself justifies the point that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the foreign subsidiary without security. The Ld. A.R. submitted that had it been a loan to the third party the assessee would have definitely charged a mark up on the said interest paid to the bank and therefore prayed before the Bench that order of the DRP should be affirmed as the same at arms length. 7. We have heard the rival submissions of both the parties and perused the material on record including the decisions cited by the assessee. The assessee has advanced loan to its subsidiary Golden Harvest to set up a plant at Fujairah by borrowing the same from the ICICI Bank abroad . The assessee has charged the same rate from the AE at which the loan was borrowed from ICICI Bank i.e. LIBOR plus 250 basis points. In our view the issue is squarely covered by the various decisions as referred to hereinabove wherein it has been held that loan transactions to the AR have to be benchmarked on the basis of LIBOR. In the present case the transaction is benchmarked by the assessee by following CUP method by charging LIBOR plus 250 basis points i.e. the same rate of interest which is charged by the ICICI Bank from the assessee and it is for this reason we are not in agreement with the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd issue raised by the assessee is against the action of DRP direction upholding the order of AO disallowing the hedging loss of Rs. 61,63,000/- for hedging transaction with the AE. The AO after perusing the annual report of the assessee observed that a hedging loss of Rs. 61,63,000/- was incurred by the assessee and accordingly details were sought from the assessee which was replied by the assessee vide letter dated 08.01.2016 submitting that it had incurred hedging loss in connection with the loan which was advanced to the foreign subsidiary Golden Harvest and it was also stated that the said loss was not recovered from the AE and borne by the assessee only . The TPO accordingly made an adjustment on account of international transaction to the tune of Rs. 61,63,000/-. The Ld. DRP upheld the addition on account of hedging loss by observing and holding as under: "2.20 We have considered the submission of the assessee. The assessee argued that the said transaction is not an international transaction as per section 92B of the Income Tax Act, 1961. In this regard, we have referred to Section 92B of the Income Tax Act, 1961. Section 92B states as under: Meaning of internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of /the transaction or at any future date; 2.21 Section 92B as stated above clearly explains the term "international transaction", which means a transaction between two or more associated enterprises, either or both of whom are non-residents............ in the nature of lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. In the instant case, the assessee has borne hedging Loss on loan availed from ICIC1 Bahrain. The said loan in-turn was diverted to AE for meeting its fund requirements. Hence, looking into the substance over form, hedging loss is directly attributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and should be allowed by reversing the order of DRP. The Ld. A.R. submitted that the hedging loss is not an international transaction with the AE as the contract is between the assessee and the ICICI Bank, Mumbai and therefore transfer pricing provisions would not apply. The Ld. A.R. further referred to provisions of section 92B of the Act which defines the international transaction as transaction between the two or more AEs whereas the hedging contract was entered into between the assessee and ICICI Bank, Mumbai a independent third party not falling within the definition of AE. The Ld. A.R. also made a without prejudice submission that even if the loan was granted to an independent third party, the loss on account of hedging would not be recovered from such independent third party and therefore the question of recovering the same from its AE or making an adjustment in respect thereof would be incorrect. 10. The Ld. D.R., on the other hand, relied on the order of authorities below. The Ld. D.R. contended that since the assessee has hedged the payment of interest on the loan advanced to the AEs and therefore any expenses/loss incurred in connection therewith is liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of DRP on this issue and direct the AO to delete the disallowance. The ground no 2 is accordingly allowed. 12. The third issue raised by the assessee is against the decision of the DRP upholding the addition on account of notional interest by TPO on share application money invested by the assessee in overseas subsidiary. The TPO observed that assessee has remitted share application money to its AE Golden Harvest in the previous F.Y. 2010-11 and in current F.Y. 201112 and the same was disclosed by way of note in form 3CEB and assessee has not stated anything in the transfer pricing study report to that effect. The AO queried the assessee about the share application money remitted by the assessee till date and details of share allotted against the said share application money. The assessee replied that till date no shares were allotted and the shares are pending allotments before the AO vide written submission dated 22.01.2016 that Golden Harvest has set up a manufacturing facility in free trade zones at Sharjah which was governed by the free trade zone rules. As per the rules investments in any company setting up plant in free trade zones at Sharjah required the approval of fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares to the assessee. 13.9 In India, the deposit of money towards share application of any company was governed by the Rules and regulations under the Companies Act, 1956 (applicable for the financial year in question) and Regulations of the SEBI. These rules and regulations are indicative of the Government intention to protect the interest of the investors and ensuring equity and fair play in allotment of shares. Sec.73 of the Companies Act, 1956 lays down the procedure for the allotment of shares. This section provides that in eventuality of money being refunded, it has to be refunded within 8 days, from the day the company becomes liable to pay it, failing which the company would be liable to pay interest upto @15% per annum. 3.10 Further, the SEBI Regulations (18), 2009 (issue of Capital and Disclosure Requirement) dated 26-08-2009 lays down that allotment of shares and refund of money has to be made within 15 days within the closure of the issue and if the shares are not allotted or application money are not refunded within 15 days then issuer shall pay interest at such rates and within such period as disclosed in the offer documents. Regulations 69 of SEBI (ICDR) l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituation, assessee is entitled to interest on the delayed days for allotment of equity. The assessee has not furnished any document before us to show that in Sharjah, the money in the form of share application money can be retained by a company without issuing any share for months and years together. 3.13 In the case of M/s Perot Systems TSI, the Hon'ble Delhi ITAT has concluded that the cost of funds to the taxpayer and the commercial expediency is not an acceptable reason in international transactions between the assessee and the AE. The ITAT has further observed that one has to see whether the transaction is at Arm's Length under the Transfer Pricing provisions. Here the Hon'ble ITAT has also disregarded the argument that notional interest income is not assessable to tax. The Hon'ble ITAT referring to Sec.92(1) and 92B(1) has arrived at the conclusion that in considering the Arm's Length Price of loans, the rate of interest has to be considered and the income on account of interest can be attributed. These are the aspects of the decision of the Hon'ble ITAT that are squarely applicable to the facts of the case. Hence, the contention of the assessee reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would apply. 3.16 Coming to the facts of the present case, the assessee has not brought any material on record to show that the AEs intended to issue equity shares to the assessee immediately at the time when the investments towards the shares by way of share application money was claimed to have been made by the assessee. It has not been explained as to why, if the money towards the shares were accepted by the AEs, they did not issue the shares to the assessee within a reasonable time, especially when shares were to be issued only to the holding company and no one else, and all matters would have been discussed and decided beforehand. Nothing has been brought on record to show as to the terms of the allotment of the shares. Mere entries in the books of accounts and records of the company cannot be accepted as reliable and conclusive evidence in the absence of the assessee substantiating the same with the documents relating to the terms of the issue and allotment of shares. As stated earlier, it has not been explained satisfactorily by the assessee as to why substantial amounts were advanced to the AEs without the shares having been allotted for substantially long periods of tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other entity without same being converted into equity within a reasonable period and it is only on that basis, the share application money was treated as interest free loan. The Ld. A.R. further stated that if there is no income arising from the international transactions, the transfer pricing provision could not apply. The Ld. A.R. relied on a series of decisions in defence of his arguments as under: 1. Vodafone India Services (P) Ltd. Vs. Add CIT - 368 ITR 001 (Bom) 2. Shell India Markets(P) Ltd Vs. Asst. CIT 369 ITR 516 (Bom) 3. Equinox Business Parks (P) Ltd. Vs. Union of India - 230 Taxman 191 (Bom) 4. SG Asia Holdings (lndia)(P)Ltd. Vs. DCIT - 229 Taxman 452 (Bom) 14. The Ld. A.R. further stated that the co-ordinate bench of the Tribunal has held in a couple of decisions that investment in share application money/capital of AE where no income accruing from the said investments; the said transactions are beyond the scope of Indian TP regulations. In defence of his argument the Ld. A.R. relied on the following decisions: 1. Hill County Properties Ltd. Vs. Add CIT 48 taxmann.com 94 (Hyd) 2. Vijai Electricals Vs. Add CIT - 60 SOT 77 (Hyd) 15. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer pricing provisions. The Ld. D.R. also tried to distinguish various decisions relied upon by the assessee and submitted that all said decisions were rendered on different facts and circumstances and are not applicable to the present case. Finally, the Ld. D.R. prayed before the Bench that the order of DRP should be upheld. 18. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has advanced money as share application money to Golden Harvest a foreign AE to set up a plant in free trade zone in Sharjah. It is also undisputed that the AE could not convert the share application money into share capital by issuing shares to the assessee as the permission from the free trade zone authorities with whom the AE was registered was pending and this was the only sole reason for not issuing the shares in favour of the assessee. Now the issue before us is whether the share application money could be treated as loan and could be subjected to the transfer pricing provisions. After perusing the facts on record and going through the decision relied on by the Ld. A.R., we find that no income has accrued from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeding to tax such shortfall on capital account is without jurisdiction. In this case, an exactly opposite stand is being taken by the State. The State is expected to be consistent and not change its stand from case to case. Be that as it may, the petitioner herein had not disclosed the transaction in Form 3CEB as, according to the petitioner, it was not an international transaction for the reason that it did not give no rise to any income. The fact that the petitioner chose not to declare issue of shares to its non-resident associated enterprises in Form 3CEB as in its understanding it fell outside the scope of Chapter X of the Act now stands vindicated by the decision of this court in Vodafone IV. If the petitioner did not file a particular transaction in Form 3CEB when so required to be filed, the consequences of the same as provided in the Act would follow. However, the mere not filing of Form 3CEB on the part of the petitioner would not give jurisdiction to the Revenue to tax an amount which it does not have jurisdiction to tax. Therefore, we do not find any substance in this objection also. 11. The last objection taken by the Revenue was that in view of the variation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its." 19. The Hon'ble Bombay High Court further in the case of Equinox Business Parks (P.) Ltd. vs. Union of India has held as under: "This has been accepted by the Revenue and is evident from the order of DRP dated 30 October 2014 in Petitioner's case for A.Y. 2010-11. In the A.Y.2010-11 also the Petitioner had issued CCDs and equity-shares and the basis was identical to the present Petition. The Revenue sought to tax the Petitioner in terms of Chapter X of the Act. However, the Petitioner objected to the Draft Assessment order before DRP. On 30 October 2014, DRP issued directions under Section 144C(5) of the Act to the Assessing Officer for the A.Y. 2010-11 and on identical facts qua equity shares and CCDs holding as under: "3.4 We find that the issue under consideration of applying Transfer Pricing Provisions on 'issue of shares' has been decided in favour of the assessee by the Hon'ble Bombay High Court in the case of M/s Vodafone India Services Private Limited in Writ Petition number 871 of 2014 dated 10th October 2014. The honourable High Court has held that the amounts received on issue of shares is a capital account transaction not separately brought ..... X X X X Extracts X X X X X X X X Extracts X X X X
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