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TMI Blog2020 (12) TMI 779X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is allowed for statistical purposes. - ITA No. 772/PUN/2018 - - - Dated:- 18-12-2020 - Shri R.S. Syal, VP And Shri Partha Sarathi Chaudhury, JM For the Assessee : Shri Chetan A. Karia Shri Suhas P. Bora For the Revenue : Shri Sangram Gaikwad ORDER PER PARTHA SARATHI CHAUDHURY, JM: This appeal preferred by the assessee emanates from the order of the Ld. CIT(Appeals)-13, Pune dated 21.03.2018 for the assessment year 2013-14 as per the following grounds of appeal on record. The Appellant would like to object to the impugned order of the Hon Commissioner of Income Tax Appeal-13, Pune on the following grounds of Appeal, which are raised without prejudice to each other on the facts and in law. 1. The learned Commissioner of Income Tax Appeal - 13, Pune erred in confirming an addition of ₹ 16,88,23,507/- u/s.92CA on the basis of the order passed by the learned TPO by disallowing the interest paid by the Assessee company to its AEs treating this as a shareholder's activity. 2. The learned Commissioner of Income Tax Appeal -13, Pune erred in holding that the real character of the debentures issued by the Assessee company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) determination of ALP of the assessee company. 3. The brief facts of the case are that the assessee is a domestic company in which public is not substantially interest and engaged in the business activities of Real Estate projects. The assessee company is developing a township a township projects named as Future Tower at Amanora, Pune. The project consists of developing of residential apartments and size of project is around 15 lakhs Sq. Ft. The assessee filed return of income declaring loss of (-) ₹ 2,43,92,018/-. The case was selected for scrutiny and assessment was completed u/s.143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act‟). The Assessing Officer made a disallowance of debenture interest of ₹ 16,88,23,507/- in respect of debentures issued to IIRF ( Cyprus) V Holding Ltd. ( i.e. international transaction) amounting to ₹ 8,24,26,247/- and City Corporation Limited ( i.e. domestic transaction) amounting to ₹ 8,63,97,259/- based on the order passed by the Transfer Pricing Officer (TPO). The TPO made upward adjustment of interest paid on debentures amounting to ₹ 16,88,23,507/- holding that the debentur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currently under consideration is against the reversal by the ld. CIT(A) of the view of the AO/TPO in treating the transactions of issue of OCDs and CCDs into Equity capital. Central facts leading to the dispute are that the assessee was in need of funds because of certain on-going projects on a large scale basis. It issued OCDs to KPDL and CCDs to Lobrenco Ltd. in 2009 and continued to pay interest @15% thereon. KPDL holds 50.01% shares in the assessee company and Lobrenco Ltd. is a subsidiary of Portman holdings (Hyderabad) Ltd., which, in turn, holds remaining 49.99% of the assessee‟s equity. CCDs issued to Lobrenco Ltd. were purchased by KPDL in January, 2013 and thereafter the same were converted into Non-convertible debentures and ultimately redeemed. The OCDs issued to KPDL were not converted into equity shares and were redeemed by the assessee in January, 2013. Thus, the debentures issued by the assessee to both the related parties were never converted into equity and stood redeemed as such. The case of the TPO is that OCDs/CCDs issued by the assessee to its AEs were in true nature of equity shares. Their depiction as debentures and not as shares, in the opinion of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at an arrangement entered into by an assessee may be declared an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter. An Impermissible Avoidance Arrangement (IAA) has been defined in section 96(1) of the Act to mean an arrangement, the main purpose of which is to obtain a tax benefit in certain situations subject to certain conditions. One of the requisites of an IAA is an arrangement lacking commercial substance, which has further been explained in section 97. Clause (a) of section 97(1) states that an arrangement shall be deemed to lack commercial substance, if `the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part‟. In other words, where the form of an arrangement differs from its substance, it can be declared as IAA. Similarly clause (d) states that an arrangement shall be deemed to lack commercial substance, if `it does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore interest, taxes, depreciation, where payment of interest exceeds ₹ 1.00 crore. India has chosen not to statutorily provide any debt equity ratio as a thin capitalization rule. 8. The TPO in the extant case made a transfer pricing adjustment by disallowing the interest paid to the related concerns. Here it is pertinent to mention that Chapter X of the Act having, inter alia, transfer pricing provisions is a special anti-avoidance tax measure. It mandates computing income of an assessee from the transactions with related parties at arm‟s length. Section 92 of the Chapter, which is the first section begins with sub-section (1) providing that: ` Any income arising from an international transaction shall be computed having regard to the arm's length price.‟ Computation of arm's length price has been set out in section 92C. Sub-section (1) of this section states that: ` The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods ..‟. Throughout the Chapter there is a focus on determining the arm‟s length price of the international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholding activity, some of which have been quoted by the TPO as under : (a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; (b) Costs relating to reporting requirements of the parent company including the consolidation of reports; (c) Costs of raising funds for the acquisition of its participations. 11. On going through the ambit of Shareholder activity as given in the OECD guidelines on a general perspective, it becomes imminent that these activities are in the nature of certain acts performed by a parent company SOLELY because of its shareholding in other group companies, which is obviously not the case here. Then the TPO has listed 3 examples of the activities constituting shareholder activities albeit the OECD guidelines outline 5. We will limit ourselves in examining the shareholding activity from the TPO‟s point of view only with the help of 3 examples that he has quoted. 12. The first activity relates to juridical structure of the parent company such as conducting shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be not justified more so because the Technical Knowhow/Brand fee did not accord any benefit the assessee. The order of the AO was reversed by the Tribunal. When the Revenue brought the matter finally before the Hon‟ble High Court for consideration, their Lordships accorded their imprimatur to the Tribunal order by observing that Rule 10B(1)(a) did not authorize disallowance of any expenditure on the ground that it was not necessary or was un-remunerative. That is how, the Hon‟ble High Court set to naught the rule of `necessity‟ resorted to by the authorities for making the disallowance. In the passing, it also dealt with the transfer pricing guidelines issued by the OECD providing for recharacterization of transactions only in two exceptional circumstances. Insofar as the issue before the Hon‟ble High Court on transfer pricing addition was concerned, that was not made by the AO/TPO on recharcterizing the transaction of payment of brand fee/royalty. Thus the ratio decidendi of the decision is that the AO/TPO cannot determine Nil ALP of a transaction of payment of an expenditure by holding that the assessee-company did not require the service etc. fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he apparent transaction got unearthed due to surrounding circumstances. On the other hand, we are confronted with a situation in which the assessee was in need of funding for its ongoing projects. It took loan through debentures, which were eventually redeemed. So the instant case falls in the general provision of accepting the transaction as such and not in the exception requiring recharacterization of the transaction of debt into equity. De hors the provisions of section 94B and the GAAR in the period anterior to their applicability, the obiter in the case of EKL Appliances (supra) also supports the view canvassed by the ld. CIT(A) in not approving the recharacterization of the transaction of debt into equity. Thus, the first issue raised by the Revenue in its appeal is determined against it. 7. The parties herein have agreed that the issue stands covered in favour of the assessee and after analyzing this issue and perusing the findings of the Pune Bench of the Tribunal, we allow these grounds of appeal of the assessee. Thus, grounds pertaining to treatment of optionally and Compulsory Convertible Debentures issued by the assessee company as Equity Share Capital are allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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