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TMI Blog2021 (9) TMI 340X X X X Extracts X X X X X X X X Extracts X X X X ..... esultant exchange difference must stand deleted. In any event, as the very conceptual basis for ALP adjustment for interest, under the CUP method, does not meet our approval and the entire addition stands deleted for this reason also. Respectfully following the order for the assessment year 2009-10, we uphold the plea of the assessee and delete the impugned ALP adjustment. Denial of admission for an additional claim at the stage of DRP on the ground that such a plea could only be raised by way of a revised return - HELD THAT:- As Learned representatives fairly agree that the issue in covered in favour of the assessee inasmuch as the Tribunal undisputedly has the powers to admit any new issue, whether or not the same is raised before the authorities below. We, therefore, admit the claim with respect to loss of ₹ 5 written off by the assessee, and remit the issue to the file of the Assessing Officer for adjudication on merits. That is precisely what the assessee is praying for. The assessee succeeds on this point as well. - ITA Nos. 7523/Mum/2014, 5827/Mum/2015 and 484/Mum/2017 - - - Dated:- 30-8-2021 - P.P. Bhatt, J. (President) And Pramod Kumar, Vice President F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hence the transaction was akin to stewardship activity which does not require any benchmarking analysis. 5. erred in not appreciating the fact that the impugned loan transaction was entered into purely out of commercial expediency and hence the intent of giving loan to the AE should be taken into consideration. Funds to AE are quasi-equity 6. erred in not accepting the fact the funds provided by the Appellant to its AE a nature and hence the question of charging any interest on the same does not arise Funds provided to the AE out of funds received from holding company 7. erred in not considering the fact that the Appellant has remitted funds to its AE out of the funds received from its holding company. Arm's Length analysis not possible 8. erred in not appreciating the fact that the subject transaction of provision of funds by the Appellant to its AE cannot be compared to a simpliciter loan transaction between a financial Institution and its client and accordingly, arm's length analysis using CUP is not possible. No shifting of profits outside India 9. erred in concluding that there has been shifting of profits outside India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abroad, can not be compared with a loan simpliciter, and be, subjected to an arm's length price adjustment, on the basis of Comparable Uncontrolled Price (CUP) method accordingly. The issue in dispute is an ALP adjustment of ₹ 43.89 crores on account of notional interest on a loan stated to be of this nature by the assessee company to its fully owned foreign subsidiary, which is used as an SPV for overseas acquisitions. 4. Coming to the appeal for the assessment year 2011-12, which is directed against the order dated 26th November 2015 passed by the Assessing Officer in the assessment under section 143(3) r.w.s. 144C(13) of the Income Tax Act 1961 for the assessment year 2011-12, grievances raised in this appeal are as follows: Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax 1(3)(2) (learned AO), under Section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (Act') ('Assessment order'), in pursuance of the directions issued by Dispute Resolution Panel-II Hon'ble DRP), Mumbai, on the following grounds: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not arise. Funds provided to the AE out of funds received from holding company 8. erred in not considering the fact that the Appellant has remitted funds to its AE out of the interest free funds received from its holding company. Arm's Length analysis not possible 9. erred in not appreciating the fact that formation of Special Purpose Vehicles ('SPVs') always happens between related parties and therefore comparing the arrangements between the parent and its SPV vis- -vis a third party arrangements is not logical and accordingly, arm's length analysis using Comparable Uncontrolled Price ('CUP') Method is not possible. 10. erred in not appreciating the fact that the subject transaction cannot be compared to a simpliciter loan transaction between a financial institution and its client. No shifting of profits outside India 11. erred in concluding that there has been shitting of profits outside India. Incorrect reliance on Thin Capitalization rules 12. erred in law and in facts while applying the Thin Capitalization' concept to the Appellant's case Arm's length computation 13. erred by not apprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant. Transfer Pricing Adjustment on share application monies pending allotment and interest-free funds provided to TIML Global Limited (hereinafter referred to as the 'AE') 3. erred in not considering the fact that no income has been received or accrued from the alleged international transactions entered into by the Appellant and accordingly, transfer pricing regulations cannot be made applicable in the Appellant's case. Accordingly, the learned AO's reference of the Appellant's case to the Joint Commissioner of Income Tax - Transfer Pricing 4(2), Mumbai ('learned TPO') and the consequential transfer pricing adjustment ₹ 15,35,95,617 made to the total income of the Appellant for A.Y. 2012-13 is not in accordance with the transfer pricing regulations. Adjustment made with respect to the funds provided by way of preference/equity share capital and of outstanding funds into preference/equity share capital Re-characterization of a transaction is bad in law 4. erred in re-characterizing the transaction of preference/equity share capital as a deemed loan transaction for such period that shares were not allotted against prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that post acquisition of Virgin Radio, additional funds/deposits were provided to the AE to meet s Working capital needs, as bad economic conditions prevailed and the AE incurred losses. 12. erred in not appreciating the fact that the alleged loan transaction was entered into purely out of commercial expediency and hence the intent of giving loan to the AE should be taken into consideration. Funds to AE are quasi-equity 13. erred in not accepting the fact that the funds/deposits provided by the Appellant to its AE are quasi-equity in nature and hence, the question of charging any interest does not arise. Funds provided to the AE out of funds received from holding company 14. erred in not considering the fact that TIML India has remitted funds to its AE out of interest-free funds received from its holding company. No shifting of profits outside India 15. erred in not appreciating the fact that there was no intention of shifting of profits outside India. Analysis undertaken to arrive at the transfer pricing adjustment on share application monies pending allotment and interest-free funds provided to TIML Global Limited Arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e INR value of the funds provided for the purpose of calculation of interest without appreciating the fact that LIBOR rates are to be applied to the foreign currency denominated value of funds. In doing so the learned TPO has disregarded the transactions as appearing in the Appellant's books of account which is contrary to the provisions of the law. 26. without prejudice to grounds above, erred in not following the directions of the Hon'ble DRP, to rework the interest chargeable on the alleged loan after taking into consideration the effect of the foreign exchange gain/loss amounting to ₹ 70,59,75,503 as accounted by the Appellant in its books of accounts. Other Grounds 27. on the facts and in the circumstances of the case and in law, erred in not considering the submission of the Appellant claiming the amount of loan written off (of INR 5 crores), which was given to its wholly owned subsidiary, as business expenditure in computing the Appellant's total income for A.Y. 2012-13. Levy of interest under Sections 234A, 234B and 234D of the Act 28. erred in levying interest under Sections 234A, 234B and 234D of the Act. 6. While ground Nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestments through the assessee company. A public listed company in the United Kingdom, by the name of Scottish Media Group plc (SMG-UK, in short), wanted to disinvest in its radio broadcasting business, and that is the reason it put to auction its entire shareholding in Virgin Radio Holdings Limited, UK, (Virgin Radio, in short) which was held through SMG's wholly-owned subsidiary Ginger Media Group Ltd., UK. (Ginger-UK, in short). TIML-India was one of the successful bidders in this auction. The assessee was then invited to participate in the 'final proposal' phase of this disinvestment deal. A final proposal dated 19th March 2008 was submitted by the TIML-India. This offer, at point No. 5, specifically stated, under title 'Identity of the shareholders (with immediate and ultimate ownership)' that the purchasing company will be an SPV formed specifically for the purpose of acquiring Virgin Radio , which is 100% owned by TIML and that the immediate and ultimate shareholder of TIML is Bennett Coleman Co Ltd . In point No. 6, it was further stated that the transaction will be 100% equity-financed from internal resources of TIML/BCCL and that no further fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day itself, on behalf of TIML-Golden, for the acquisition of Virgin Radio shares, and the balance amount of TIML-Golden for other acquisition-related costs. The acquisition of shares in Virgin Radios by TIML-Golden was completed on 30th June 2008. A further payment of UK 3,75,000, as an interest-free loan, was made by TIML India to TIML Global for the working capital costs. It was in this backdrop that form 3CEB filed by the assessee company disclosed the following transaction with its AE: Amount remitted ₹ 477,10,41,750 . 4. When the aforesaid transaction came up for scrutiny before the Transfer Pricing Officer, as a result of the reference under section 92CA(1) having been made to him, the Transfer Pricing Officer was of the considered view that the amount has been as a loan by the assessee in its annual return, and, therefore, the benchmarking of this loan transaction is required to be done as an independent entity would have charged interest on such a transaction . The plea of the assessee that this activity was in the nature of the stewardship activity was rejected. The claim of the assessee that the loan was in the nature of quasi-equity and as it was for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into GBP the time of advancing a loan and the benchmarking is for the loan advanced and not for conversion of loan from Rupees to GBPs . As for the applicability of LIBOR rate, the stand of the TPO was that LIBOR does not apply to the transactions originating in currencies, such as INR, i.e. a currency which is not the LIBOR basket. The discussions about the rate at which benchmarking of interest is done, not being relevant for the present purposes, is not being referred to. Suffice to say that the Transfer Pricing Officer thus proceeded to benchmark this loan transaction as a transaction of unsecured loan, and taking the arm's length interest @ 13% on the remittance of ₹ 477.10 crores, and the TPO computed the arm's length interest at ₹ 47,20,68,074. When this disallowance was proposed by the Assessing Officer, the assessee raised the objections before the Dispute Resolution Panel, but without any success. Learned DRP confirmed the action of the authorities below in principle but reduced the quantum of ALP adjustment by altering the benchmarking rate to 12.25% and correcting the period for which the loan was given. While doing so, the DRP observed as follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat though the assessee's stated intention was to invest in the equity, the actual mode adopted by it is that of loan. Once it is accepted by the assessee that it has given loan to the AE, the only possible treatment for the transaction has to be to treat it as a loan to the AE. The Ld. TPO has also pointed out that the assessee itself has referred this transaction as loan in its annual report. In the opinion of the ld. TPO, any independent entity would have charged interest on such transactions. 3.4.4 Thus, it is seen that, both the assessee and the TPO have accepted the fund to be a loan. However, the assessee has contended that significantly the fund is equity in nature. In our considered opinion, there is no need to look beyond the proximate nature of funding and the purported nature of the same while doing the transfer pricing study. It is not material whether the assessee could have contributed to the AE in any farm other than the loan. It is stated position that the assessee advanced the loan to the AE for which it did not charge any interest. As long as the fund stood as loan in the AE's books and the assessee's books, the law not only permitted but require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prejudice that the notional interest should not be charged on the outstanding dues, that even if the interest is to be charged, it should be charged at the LIBOR rate. 3.5.4 As regards premium of 3% the assesses has submitted that between Group entities so there is no credit collection risk. It is stated that as for the year under consideration, there is foreign exchange gain amounting to INR 55,883,891 and in fact no loss, the risk on account of foreign exchange fluctuation is irrelevant. 3.5.5 The TPO has applied 10% p.a. rate which is also the rate of interest paid by the assessee on other loans plus Risk premium of 3% amounting to 13% for charging interest. However, it is seen that the SBI PLR rate for the relevant period is 12.25%. There cannot be a justification for the gross interest rate exceeding the SBI PLR rate. The assessee's argument is not acceptable as the LIBOR is the rate prevailing for lending or borrowings made by the banks where as when persons other than banks borrow, LIBOR has to be increased by a mark up. The mark up on LIBOR depends upon the credit rating and securities offered by the borrower. The assessee has not furnished any particulars rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke in company outside India, which was in the same business of the Assessee and hence the transaction was akin to stewardship activity which does not require any benchmarking analysis. 4. erred in not appreciating the impugned loan transaction was entered into purely out of commercial expediency and hence the intent of giving loan to the AE should be taken into consideration. Funds to AE are quasi-equity 5. erred in not accepting the fact the funds provided by the Assessee to its AE are quasi-equity in nature and hence the question of charging any interest on the same does not arise. Funds provided to the AE do not bear any cost 6. erred in not considering the fact that Assessee has remitted funds to its AE out of the funds received from its holding company, which have been provided to the Assessee free of cost for the purposes of acquisition. Arm's length interest rate 7. erred in law and in facts in considering the SBI Prime Lending Rate (PLR) of 12.25% p.a. as the arm's length interest rate for imputation of notional interest on the alleged loan transaction. 8. without prejudice to the above, erred in not appreciating the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be treated as an international transaction, it is required to be benchmarked anyway. On the question of application of CUP on the facts of this case, his plea has been that since the funding is admittedly in the nature of, and described in the books of accounts, as a loan, the interest imputation is inevitable. When learned Departmental Representative was confronted with, what appeared to us, infirmities in the application of CUP method, it was his submission that even if there are some shortcomings in the determination of the arm's length price, though he maintains that there are no such infirmities in substance, the matter may be remitted at the assessment stage for fresh adjudication on the determination of arm's length price. He fairly submits that if Indian PLR is not good enough as a benchmark for this loan, in all fairness, at least LIBOR is a good enough benchmarking tool for GBP denominated loan. Learned counsel reiterates his submissions, submits that this transaction is shown as a loan in the books of accounts as that is the only way in which it can shown, under the legal requirements, but then nothing really turns on how the transaction is treated for accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted under section 92C-which includes indirect methods as well. We will come back to this aspect a little later. 9. It is interesting to take note of the expression uncontrolled conditions in Section 92F(ii), and that is in addition to the transaction being between persons other than associated enterprises . One way of looking at the impact of expression controlled conditions could be that any conditions restricting the plain vanilla nature of that transaction are required to be ignored for the purpose of the ascertainment of the arm's length price. That would mean that not only that we have to assume that the arm's length price has to be a real, hypothetical and imaginary price of the same or similar transaction between independent enterprises but also the price of a transaction in which the 'controlled conditions do not exist. Of course, there could be another school of thought that the expression 'control conditions' essentially refers to a situation in which the parties to the transactions have no control on each other in the sense the parties are not the associated enterprises under section 92A, and that the fact of the parties to a transaction bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olled price method, by which,--(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) 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; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction 92. 11. The destination is thus arm's length price as defined in section 92F(ii), and the means to reach that destination are ser out in the methods of determining arm's length price under section 92C(1), and the path chosen by the Assessing Officer, which is in challenge before us, is CUP method which is defined under rule 10B(1)(a) of the Income Tax Rules, 1962. It is in this light we have to address the issue before us. To ascertain the arm's length price in this case, therefore, the starting point of this exercise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed as 'purchaser's guarantor in the agreement dated 30th May 2008, is so foundational and critical that the said agreement, in paragraph 22.1, states that In consideration of the seller entering into this agreement, ...(the TIML-India), as primary obligor and not merely as surety, unconditionally and irrevocably guarantees to the seller the proper and punctual performance of the purchaser's obligations under this agreement and the transaction documents, including, without limitation, due and punctual payment of any sum which the purchaser is liable to pay . The assessee company is into the radio broadcasting business, and, much before even the AE came into existence, the assessee company had bid for, and successfully bid for, the target company, which was eventually acquired by its wholly-owned step-down subsidiary. The acquisition of the target company was thus at the instance of, in furtherance of business interests of the assessee company, and structured by the assessee company. The remittance of funds to TIML-Global was for this limited and controlled purpose, and sequence events and the material on record unambiguously confirm this factual situation-and that is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty . 15. As a matter of fact, its difficult to visualize an SPV in isolation with the owner of that structure, as these SPVs carry no financial and other risks, and such risks are assumed by the owner of that structure. It is important to bear in mind the fact that there is a dichotomy in the SPV structure business model in the sense that while risks of a SPV investments are assumed by the owner of the SPV, all the rewards, in whatever form, go to the SPV itself. There is, as such, a clear gap between the entity assuming the risks and the entity getting the rewards of this risk. It is this gap or, to borrow Prof John Prebble QC's terminology-'ectopia', in tax laws that gives rise to the possibilities of profit shifting. As Prof Prebble puts it, in one of his published papers, Not surprisingly, the greatest opportunities for tax avoidance occur where the ectopia of tax law is most apparent . There has been an effort, consciously or subliminally, to address this ectopia in tax laws in several ways. 16. Of late, in certain jurisdictions and subject to certain conditions, the profits of the SPVs are taxed with the profits of the owner of that structure. Rule 8(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under the CUP method. Such a controlled end use of the monies is possible when the lender has functional control over the borrower, and that very control vitiates the arm's length situation. Section 92F(ii), as we have noted earlier, defines arm's length price as a real or hypothetical price in the same or materially similar transaction between persons other than associated enterprises, in uncontrolled conditions . In the first place, an enterprise and its SPV are inherently associated enterprises. The definition of 'associated enterprises' under section 92A(1) covers an enterprise which participates, directly or through one or more intermediaries, in the management or control or capital of the other enterprise . An SPV is entirely managed, entirely controlled and entirely owned by the enterprise which sets up the SPV. So far as section 92A(2) is concerned, SPVs are covered by more than one clause as the entire voting power (clause a) and entire share capital (clause b) of the SPV is held by the owner of that SPV, but loan advanced, if the remittance is to be treated as a loan to the SPV, by the owner of the SPV is clearly more than 50% of the book value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that there is no intra-AE relationship between the two entities (i.e. Indian entity and the overseas entity set up for a particular purpose or project), and these entities are independent of each other. In our humble understanding, when the overseas entity is, from a commercial perspective, a de facto non-entity and it has come into legal existence only for the furtherance of the interests of the company providing the wherewithal, all the gains that such an overseas entity belongs to the Indian company. The SPV in such a situation is no more than a conduit entity. In an arm's length situation, when an SPV is created for some specific project or purpose, therefore, the net gains of that project or purpose must go to the person(s) sponsoring the SPV. The next logical question then would be as to how does this principle translate into actionable reality. We find inputs from transfer pricing legislation in a developing economy in the African continent. Rule 8(1) of the Nigerian Income Tax (Transfer Pricing) Regulations 2018, which we have referred to and reproduced earlier in this order, throws important light on this aspect. What this rule holds, in plain words, is that an SPV, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TIML-Global, which takes into account the financial affairs of its step-down subsidiary TIML-Golden as well, reflect a loss figure. In other words, there is no economic gain to the SPV in the relevant financial period, and, therefore, even going by this theory, the arm's length price of providing funds to the SPV, under the CUP method, would be 'nil'. Except for this arm's length price imputation-if all it can be so imputed under the CUP method, no amount of commercial interest, as in a borrowing simpliciter-whether LIBOR based or PLR based, can be attributed to the funding to the SPVs. The action of the authorities below on this point, thus, is unsustainable in law. Ground Nos. 2 to 9 are thus allowed in the terms indicated above. 24. As we part with this aspect of the matter, we, however, make it clear that as we deal with the question as to whether the ALP adjustment for interest-free debt funding to the SPV abroad is concerned, we are only concerned about its application under the CUP method as in this case. That cannot be an authority for the proposition that ALP adjustment cannot be made, under any other permissible method under the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth price, under the CUP method and on the facts of this case, of funding of the SPVs by the assessee company, or providing them with the wherewithal to achieve objectives of the SPVs-which were determined by the commercial exigencies of the assessee company, is 'nil'. We, therefore, delete the impugned ALP adjustment of ₹ 44,26,61,264. The assessee gets the relief accordingly. 9. We see no reasons to take any other view of the matter than the view so taken by us in assessee's own case for immediately preceding assessment year. For the sake of completeness, however, we may add that a part of the ALP adjustment here is on account of interest imputation on exchange difference on account of conversion of GBP denominated interest-free funding remittance in INR, and notional adjustment of the subsequent conversions in equity, by converting from GBP to INR. When the base transactions are in GBP, balances reflected on account of exchange difference for such notional conversions cannot be treated as outstanding dues, and, for this reason also, the ALP adjustments on account of interest attributable to resultant exchange difference must stand deleted. In any event, as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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