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TMI Blog2023 (6) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... of the interest rate. We remit the issue back to the TPO with a direction to apply appropriate SBI PLR rate to determine the ALP of the interest on CCD. Set off of brought forward business loss and unabsorbed depreciation - We in this regard issue direction to the AO to consider the brought forward losses and unabsorbed depreciation and allow the set off in accordance with law. - IT (TP) A No. 48/Bang/2023 - - - Dated:- 17-3-2023 - SMT. BEENA PILLAI , JUDICIAL MEMBER AND Ms. PADMAVATHY S , ACCOUNTANT MEMBER For the Appellant : Shri Ketan Ved , CA For the Respondent : Shri D. K. Mishra , CIT ( DR ) ( ITAT ) , Bengaluru ORDER Per Padmavathy S. , Accountant Member This appeal is against the final order of assessment passed by the DCIT, Central Circle 2(2), Bangalore u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 5.12.2022 for the assessment year 2017-18. 2. The assessee company is a joint venture by Emirates Flight Training Devices (Mauritius) Ltd. The company is engaged in providing training services in the field of aircraft simulation for pilots and providing simulators on rental basis. The assessee filed the ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that identical issue on similar facts have been considered by the decision of the coordinate Bench in assessee s own case for earlier years i.e., AYs 2009-10 to 2013-14 (ITA Nos. 2006/Bang/2017, IT(TP)A No.63 84/Bang/2015, 599, 2060 2178/Bang/2016 CO No.83/Bang/2017 and 09/Bang/2019.). The ld. AR submitted that the impugned issue is covered by the said decisions of the coordinate Bench for the reason that the same CCD is continuing for the year under consideration also and that the lower authorities have not considered the view adopted by the Tribunal. 9. The ld. DR relied on the orders of the lower authorities. 10. We have heard the rival submissions and perused the material on record. We note that the coordinate Bench of the Tribunal in assessee s case (supra) has considered a similar issue and held that 21. Now we first decide the First and most important issue i.e. this that CCDs are Debts or equity and interest on it is allowable or not? On this issue, in the order of CIT (A) para 4 in the first year i.e. A. Y. 2009 - 10 is relevant and therefore, this Para is reproduced for ready reference hereinbelow. 4. Transfer pricing adjustment of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebenture issued by the appellant form CCD to equity. The Learned YPO during the course of the hearing had not contended on the nature f the intercompany funding and had queried only on the rate of interest charged. Accordingly, the Learned TPO failed to provide to the appellant adequate opportunity to argue on the proposed classification of CCD as equity. The Learned TPO went beyond the brief of arbitrating only on the arm's Length pricing related to the rate of interest, and proceeded to question the nature of the inter-company funding. 6. That the Learned AO/Learned TPO proceeded to apply the principle of thin capitalisation, as contained in the Legislation from UK and Australia, in contravention to confining the assessment based on the principles provided in the Indian Transfer pricing regulations (as provided in the Act and the Rules). 7. The Learned TPO as part of the TP order did not refer to nor had any dispute on the rate of interest charged, and thereby making the TP order erroneous. These are taken up together in determining whether the TP adjustment made by the TPO is correct. The relevant issues raised in the above grounds are as under: i) Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee on this basis that in the absence of specific Thin capitalization Rules in India, re - characterization of Debt Capital as equity Capital and disregarding of interest is not in order. We reproduce the relevant paras of this tribunal order i.e. para 18 to 30. 18. That takes us to objection of the Revenue authorities to the effect that the borrowings by the assessee, on which interest has been claimed as deduction, are in fact part of the capital of the assessee which is brought in the garb of borrowings purely on tax considerations. Our attention is pointed out to the fact the ratio of debt to the equity is 248 : 1 which is unusually high by any standard and that such a highly geared company only shows that equity is brought in the garb of debt, and it is contended that since what is termed as borrowing by the company is de facto minimum required capital to carry out the business in India, interest cannot be allowed as a deduction on the same. In other words, Revenue's objection is that the assessee company is so thinly capitalized that its debt capital is required to re-characterized as equity capital for the purpose of examining claim of deduction for interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be declared as an impermissible avoidance arrangement and the consequences, under this Code, of the arrangement may be determined by re-characterising any equity into debt or vice versa . That is the first step taken by the India's tax administration in the direction of having formal thin capitalization rules in India. However, it is not in dispute that as at the material point of time, India did not have any thin capitalization rules, nor does it have any thin capitalization rules even at present. 21. Interestingly, however, thin capitalization rules do exist in Belgium which perhaps explains, for the reasons we shall now set out, the peculiar capital structure may have been adopted by the assessee. As per the Country Survey Report on Belgium, as published by the International Bureau of Fiscal Documentation, Amsterdam (based on information as on 19th Dec., 1995) Belgium applies two sets of thin capitalization rules. Firstly, a 1:1 debt/equity ratio applies to loans granted by individual directors, shareholders and non-resident corporate directors to their company [art. 198(10) IR/WIB]. Interest relating to debt in excess of this ratio is re-characterized into a non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, prima facie the thin capitalization rules would have restricted the interest disallowance in excess of borrowings exceeding seven times the equity capital, whereas in the present case borrowings are two hundred forty-eight times the equity capital. As the capital is structured now, and the borrowings having been resorted by the Indian PE directly, it could possibly be said, or at least argued, that there is no debt capital in the assessee company--i.e. the Belgian entity, and this debt capital is confined to borrowings directly by the PE. Be that as it may, it cannot be open to us to apply these thin capitalization rules in the hands of the assessee company while computing its taxable income in India, because so far as taxability in India is concerned, the limitation to be placed on deduction of expenses has to be limitation under the laws of the State in which PE is situated i.e. India. It may be useful to recall that in terms of the provisions of art. 7(3)(b) of Indo-Belgian tax treaty, In the determination of the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the PE including executive and general adminis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate the anti-abuse provisions subsequently, it would not render the effort to take advantage of existing provisions of the treaty illegal. We are thus unable to accept the plea of the Revenue authorities, and we uphold the claim of deduction of interest in respect of capital borrowed from the shareholders or joint venture partners by the assessee. 26. Even otherwise, it is also important to bear in mind the fact that as the law stands now under s. 90 of the Indian IT Act, the provisions of a tax treaty override the provisions of the Indian IT Act--except to the extent the latter are beneficial to the assessee and this treaty override is unqualified, save and except for clarification that charge of tax in respect of a foreign company at a rate higher than the rate at which domestic company is chargeable, shall not be regarded as less favourable charge or levy in respect of such foreign company. Just in case there were any doubts on this fundamental legal position, the CBDT, vide Circular No. 333, dt. 2nd April, 1982 [(1982) 81 CTR (TLT) 18 : (1982) 137 ITR (St) 1], has set the same at rest. This circular deals with the question as to what the AOs will do when they find that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artmental Representative's passionate plea for invoking principles laid down by Hon'ble Supreme Court in McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), which, inter alia, holds that colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods and that it is the obligation of every citizen to pay the taxes honestly without resorting to subterfuge . It is thus not even necessary to examine whether or not the finance structure in question constituted colourable device or sort of subterfuge. As long as finance structure adopted by the assessee was not specifically prohibited by the applicable tax treaty provisions, and as long as there was no specific anti-abuse provision to deal with the same in the tax treaty itself, the effect of the finance structure could not be ignored. 28. It is interesting to take note of the paradigm shift with regard to the treaty override, as introduced in s. 129(9) of the Direct Taxes Code Bill 2010, which provides that notwithstanding the treaty override provisions in s. 129(8) [which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venture companies. The international consensus that the AO has referred to is for the need of thin capitalization rules, but then just because it is desirable to curb thin capitalization, the AO cannot disallow the interest paid on debt capital in the cases of thinly capitalized companies. The AO was clearly ahead of his times in disallowing the expenses based on his notions of thin capitalization rules, when such rules had not even reached the drawing board stage in India. Learned CIT(A) also did not follow the correct legal position by leaning upon restriction placed in Explanation to s. 37 of the Act, which is not applicable in respect of deduction on interest under s. 36(1)(iii) and in leaning upon restriction placed in art. 7(3)(b) on intra-organization notional payment of interest on capital, whereas the interest payment in the present case did not constitute an intra organization transaction at all. Even if these interest payments were to be treated as intra-organization transactions by treating the same as payments made to the GE, and not to the joint venture partners, these payments cannot be viewed as notional payments because in such a situation the GE will have corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can be paid on CCDs before its conversion? In our considered opinion, the reply to these questions is a BIG NO. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest u/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided. 24. After examining the applicability of the Tribunal order rendered in the case of Besix Kier Dabhol, SA vs. DDIT (supra), we now examine the applicability of the decision of Special Bench of the Tribunal rendered in the case of Ashima Syntex Ltd. Vs. ACIT as reported in 100 ITD 247 (Ahd.) (SB) on which reliance has been placed by ld. DR of revenue in the written submissions filed by him as reproduced above. From the facts noted by the Tribunal in this case, it is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om this decision of Special Bench of the Tribunal in that case. 25. Apart from relying on this decision of Special Bench of the Tribunal, the ld.DR of revenue in written submissions as reproduced above has mainly reiterated the same arguments which are adopted by the TPO in its order i.e. regarding RBI Master Circular on Foreign Investment in India dated 02.07.2007 and 01.07.2008. We would like to observe that such circular in the context of FDI policy of RBI is in a different context i.e. regarding future repayment obligations in convertible foreign currency and to have control over such future repayment obligations, the RBI is exercising strict and control so that such future repayment obligations does not go beyond a point and since in the case of fully convertible debentures, there is no future re-payment obligation, the same was considered as equity for the purpose of FDI policy. In our considered opinion, any definition of any term is to be considered keeping in mind the context in which such definition was given. This definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future re-payment obligations in convertible for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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