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TMI Blog2020 (1) TMI 1718X X X X Extracts X X X X X X X X Extracts X X X X ..... eopening illegal. As it is settled law that at the time of reopening, there has to be a reasonable belief that income has escaped assessment, the same need not be proved to the hilt. Hence, assessee's submission in this regard has no merit and they are liable to be dismissed. TP Adjustment on interest on loan to AEs - 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. It is amply clear that loan to the AE is international transaction and it needs to be benchmarked for ALP determination. As in the present case the entire amount has been written off as non-refundable. So the decision of KSS Ltd. does not help the case of the assessee. Rather it has been rightly relied upon by the ld. departmental representative in support of the proposition that interest free sums given to the AE dehors any cogent d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri. Anand Mohan ORDER PER: SHAMIM YAHYA These are appeals by the assessee against respective orders of the assessing officer passed under section 143(3) / 147 r.w.s. 144C(1) of the Income Tax Act, 1961 pursuant to directions of the Dispute Resolution Panel. Since the issues are common and connected and the appeals were heard together these are being consolidated and disposed of together for the sake of convenience 2. The common grounds of appeal read as under:- For the sake of reference we are referring to the grounds of A.Y.2009-10. General 1. On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') / learned Assessing Officer ('AO') / Hon'ble Dispute Resolution Panel ('DRP') erred in making transfer pricing adjustment of INR 13,38,53,244 on account of interest on transaction of loan advanced by the appellant to its associated enterprise ('AE') in Italy, alleging the same to be not at arm's length in terms of the provisions of section 92C(1) and 92C(2) of the Income Tax Act 1961 ('the Act'), read with Rule 10D of the Income Tax Rules, 1962 ('the Rules'). Re-opening ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uires the arm's length price to be determined keeping in mind the term 'having regard to' as used in section 92(1) of the Act. The learned TPO/ learned AO /Hon'ble DRP further erred in not appreciating that the income arising from an international transaction is required to be computed in relation to all relevant factors including those relevant to determine arm's length price. Without prejudice if interest is to be charged on the loan transaction, SBI PLR + 300bps cannot be applied. 9. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in not issuing a show cause notice to the appellant for charging interest at SBI PLR + 300 basis points thus denying the opportunity to the appellant for making its submissions against the interest rate and thus violating principles of natural justice. The Hon'ble DRP further erred in upholding the action of the learned AO / learned TPO. 10. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon'ble DRP erred in concluding that the loan was advanced by the appellant to its AE in Indian currency i.e. INR. and hence erred in applyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction using alternate is not reliable 19. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in arbitrarily selecting companies as comparables without considering the characteristics of the loan advanced by the appellant to its AE vis-a-vis the characteristics of the comparable loan transactions. The Hon'ble DRP erred in upholding the action of the learned TPO / learned AO. 20. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon'ble DRP erred in disregarding the fact that the learned TPO has not provided the information as to whether the data of comparable companies used is of controlled transaction or uncontrolled transaction thereby violating rule 10B(2) of the Rules. 21. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO / Hon'ble DRP erred in not undertaking a detailed comparability analysis of the comparable companies identified to compute the spread. Interest u/s 234B 22. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234B of the Act. Interest u/s 234C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, on the fact and circumstances of the case and in law, the learned TPO / learned AO erred by not bringing on record a comparable transaction of interest being charged on share application money pending allotment among unrelated parties. The Hon'ble DRP erred in upholding the action of the learned TPO / learned AO. Without prejudice, on the fact and circumstances of the case and in law, the learned TPO / learned AO erred in applying LIBOR rate on share application transaction. The learned AO / learned TPO further erred in applying spread in addition to LIBOR rate on share application transaction." 2.2. Assessee has also filed additional ground of appeal for all the years which reads as under:- "1. On the facts and circumstances of the case and in law, the learned AO / TPO have erred in determining the arm's length price of the international transaction of interest free loans on an adhoc basis and not in accordance with section 92C of the Income Tax Act, 1961 read with Rule 10B of the Income Tax Rules, 1962. The Hon'ble DRP has further erred in upholding the action of the learned AO/TPO." 2.3. Assessee prays that it is a legal ground and hence it should be admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary details. The assessee filed an Accountant's Report in Form No. 3CEB before the TPO during the course of the proceedings, as under: Assessment Year Name of AE Nature of transactions Amount Method used Currency 2009-10 BRFL Italia SRL Loan granted Not charged Other Method Euro 5. However, the TPO noted that the assessee did not furnish the complete financials of the AE for the years ending March 2010, March 2012, March 2013 and March 2014. The TPO also noted that certain reconciliations were not filed/given and that the AE/Assessee has not declared any forex gain/loss in any of the years. Since the assessee had not availed the opportunity to benchmark the transactions, the TPO invoked the provisions of section 92C(3) of the Act. The TPO noted that lending and borrowing is not the main business of the assessee. Further, the assessee had given loan to its AE without any arm's length compensation even when the loan is unsecured one and the subsidiary has not offered any security for the same. No written agreement concerning the loan has been filed before the TPO on the ground that no Agreement or MOU was entered into by the assessee with its AE (assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l expediency as well as the reliance on the decision of Hon'ble Supreme Court in the case of S.A. Builders. A reference may be made to para 10-12 of the decision. 3 Tata Autocomp Systems Ltd., (2012) 21 taxmann.com 6 (Mum.) 15-16 4 Aurionpro Solutions Ltd, [ 2013 J 33 taxmann.com 187 (Mumbai -Trib.) 8 5 Bharti Airtel 43 taxmann.com 150 48 6 Instrumentarium Corporation Ltd., 160 ITD Nl (Kolkata Tribunal.) (SB) 37-38 This case of Kolkata Tribunal has been decided by the Spl. Bench of ITAT. 8. Furthermore, the TPO objected that without prejudice to the argument that business/commercial expediency is not applicable in Transfer Pricing jurisprudence, assessee has also failed to demonstrate the business interest and existence of business or commercial expediency. That each of the AE is i.e. assessee company and the foreign AE in Italy are separate entities assessable to tax in separate jurisdictions on independent basis. In this regard the TPO referred to honourable Delhi High Court decision in the case of Sony Ericsson 374 ITR 118 wherein the honourable High Court in paragraph 51 - 56 has deliberated on the difference between section 37 (1) and chapter X of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the write off of the loan to subsidiary in Italy is not allowable as deduction under the provisions of income tax act. Thereafter, the TPO dealt with the without prejudice argument of the assessee that benchmarking of LIBOR +200 bps is not justified and only LIBOR rate should be used. The TPO observed that at the outset it is noted that assessee has not benchmarked the transaction of loan on its own. That assessee has also not submitted any Transfer Pricing study report. That form 3 CEB for all the years have been submitted after the reassessment proceedings were initiated by the assessing officer subsequent to the survey. He noted that in the course of survey proceedings the Managing Director had agreed to offer interest on loans to subsidiary at the rate of LIBOR +200 bps. In this regard the TPO further noted that courts/tribunals have held that the transaction of loan is to be benchmarked based on the prevailing interest rates and the currency in which loan is to be repaid. 9. The TPO noted that the assessee has claimed that it had not incurred any forex gain/loss as it had classified the said 'loans, investment and share application' as long term and had record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of all the years before him. For AY 2008-09 the primary adjustment has been calculated by the TPO to be Rs. 13,38,53,244/-. The computation of this interest has been provided by the TPO date-wise for each loan transaction with the AE entered into by the assessee during the previous year. The TPO has computed the number of days for which the amount was lent to the AE and the interest calculations on the same was also done. The entire calculation is given in the form of a Table in the order of the TPO. 11. In addition to the primary TP adjustment based on the SBI PLR, the TPO had, by way abundant caution, also computed an alternate adjustment after benchmarking the action on the basis of the foreign currency i.e. Euro. For this, the TPO utilised the Bloomberg Database taking the credit rating of the AE to be of 'Non-Investment Grade' the tenure of the loan being long-term; Euro LJBOR of 12 months; and, the TPO calculated a spread over and above the 12-month Euro LIBOR on the basis of certain factors like currency, country, issue date of the loan etc. For determining the spread, the TPO utilised the swap calculator (Currency-Fixed Flat Swap) considering the maturit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n two separate jurisdictions and are assessable as independent and separate entities in the respective tax jurisdictions. The DRP noted that it is immaterial whether the assessee has complied with other rules and regulations which are different from the Transfer Pricing it also rejected the assessee's contention of availability of having sufficient interest free funds. The DRP referred to ITAT special bench decision in the case of instrumental Corporation Ltd versus ACIT 160 ITD 1 Kolkatta Tribunal special bench. It also referred to the decision of ITAT in the case of PMP Auto Components private limited versus DCIT 50 Taxmann.com 272 and also the decision of ITAT in the case of Tata Autocomp systems Ltd versus ACIT 21 Taxmann.com 6. Referring to the ITAT decisions as referred above DRP held that these decisions also negate the arguments of the assessee that the interest was not charged since the AE could not get access to the funds from any other source in the international market, that the loans were given from interest free funds or that it was a shareholder function. On similar reasoning as that of the Transfer Pricing officer, it rejected the assessee's contention that no trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statements of the AE the loans were due within the financial year. The DRP further noted that assessee's reliance on the decision of honourable Bombay High Court in the case of auto comps systems Ltd supra in this context is not appropriate because honourable High Court had not given a decision on merits of the issue and had simply rejected the revenues appeal on the ground, that the revenue has not contested similar relief given by the ITAT in another case. DRP noted that honourable High Court in the case of CIT versus Cotton Naturals 55 Taxmann.com 523 has specifically adjudicated that the arm's-length interest rate for loans advanced to foreign subsidiary by Indian company should be computed based on market determine interest rate applicable to the currency in which loan has to be repaid. Hence in this background and considering the absence of loan agreement and documentation and the fact that the AE had a specifically mentioned that the loan is rupees dominated and also considering that the assessee has also maintained its loan account in Indian rupees and keeping in view the Delhi High Court decision above it held that the DRP was correct to benchmark the loan transaction on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as transferred to share application money constitute a part of its shareholder activities and therefore, the provisions of Chapter X cannot be applied to share application money and were also claimed that loan was in the nature of quasi equity. It also noted that assessee's reliance on ITAT decisions that once the loan has been converted into share application money, no interest can be charged thereon. It was also claimed that since only a part of the earlier interest free loan given to the AE had been converted into share application money, the transaction is a single transaction and the TPO has to apply only one consistent rate to the entire transaction. 16. Considering this, DRP also held that the concept of shareholder activities cannot be treated as omnibus vehicle to subsume all kind of commercial activities. It referred that a similar view has been taken by ITAT Delhi bench in the case of GE Money Financial Services (P) Ltd. vs. ACIT (2016) 69 Taxmann.com 420. DRP further observed that in the instant case the BRFL Italia SRL is a 100% subsidiary of the assessee and its entire capital is controlled by the assessee from before. The assessee has been infusing funds into its AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly. Further, the DRP referred to the ITAT Bengaluru decision in the case of Logix Microsystems Ltd. vs DCIT 80 taxmann.com 39. After relying on the above decisions and referring to other decisions and discussions, DRP held that the transaction of transferring amounts from loans and advances towards share application money with no allotment of shares till date constitutes an International Transaction as per Section 92B of the Act and such funds, although now renamed as „Share Application Money' are held to be still in the nature of loans / advances / financing. 18. The DRP further referred to the assessee's submission in computing interest based on PLR rate for loan transaction while computing interest based LIBOR rate for advances given on account of share application. It was claimed that since a part of the interest free loan given to the AE had been converted into share application money, the transaction is a single transaction and the TPO has to apply only one consistent rate to the entire transaction. The DRP however held that however it is noted that these amounts (now termed as Share Application Money) represent part and parcel of the total loans advanced to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance upon several case laws as under:- * Tooltech Global Engineering (P.) Ltd. Vs ACIT (2018) 91 taxmann.com 357 (Bombay) * Instrumentarium Corporation Ltd. Vs ADIT (2016) 71 taxmann.com 193 (Kolkata - Trib.) * Perot Systems TSI (India) Ltd.(2010) 37 SOT 358 (Delhi) dated 30/10/2009 * Tata AutocompSvstems Ltd. (2012) 21 taxmann.com 6 (Mum.)dated 30/04/2012 (Affirmed by Bombay HC in 56 taxmann.com 206) * Aurionoro Solutions Ltd. 2013 1 33 taxmann.com 187 (Mumbai -Trib.) dated 12/04/2 01 3 [Approved by Bombay High Court in Income Tax Appeal No. 1869 of 2004) * CIT vs. Cotton Naturals (I) (P) Ltd., 55 Taxmann.com 523 (Delhi) * IT(TP)A No.1984/Mum/2017 Laqshya Media Limited * Pr. CIT vs. KSS Ltd., 101 Taxmann.com 357 23. We have carefully considered the submissions. As regards with assessee's challenge to reopening of the assessment, we find that no such objection has been raised before the Dispute Resolution Panel. Even the assessment order does not contain any mention of the issue of challenge to reopening by the assessee. Be as it may the only challenge to reopening is that the revenue has erred in relying upon the survey proceedings and statement obtained from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that there is no transfer of profits from the assessee to the AEs that the AE is into losses and hence, there is no shifting of profits. That assessee had provided loans to business expediency, that loan provided was converted into share capital in the subsequent year that loan profit to written off in the subsequent years. In this regard, we note that interest free loans given to the AE have been categorically held to be international transaction calling for the adjustment of ALP in catena of case laws . The assessee's plea that it was for business expediency and that it was out of own funds have been correctly rejected by the authorities below. In this regard, the decision of ITAT Delhi Bench in the case of Perot Systems TSI (India) Ltd. [2010] 37 SOT 358 (Delhi) is relevant. In that case, the ITAT did not accept the arguments of commercial expediency as well as the reliance on the Hon'ble Supreme Court in the case of SA Builders. Similar view has been taken in other decisions referred above including Tata Autocomp systems Ltd 21 taxmann.com 6 (Mum.) vide order dated 30/04/2012. This decision was affirmed by Bombay High Court in 56 Taxman.com 206. 25. In this regard we may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l provisions has no application in the context of the other set of legal provisions. 26. Keeping in mind the exposition in the above case, it is amply clear that loan to the AE is international transaction and it needs to be benchmarked for ALP determination. The decision of KSS Limited(supra) relied upon the ld. Counsel of the assessee is not applicable here as there is no agreement whatsoever between the parties i.e. between the assessee and the AE. In the said case there were back to back agreements and the explanation were found to be cogent. Moreover in the said case, when the arrangement did not work out the entire advance was refunded to the assessee through the AE over the period of time. However, in the present case the entire amount has been written off as non-refundable. So the decision of KSS Ltd. does not help the case of the assessee. Rather it has been rightly relied upon by the ld. departmental representative in support of the proposition that interest free sums given to the AE dehors any cogent documentation of purpose are liable for determination of arm's length price as per provisions of Section 92B Explanation C. 27. Another issue in this regard for A.Y.2010-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revailing in Europe. The Department challenged the said finding of the Tribunal in the High Court on the basis that the EURIBOR does not govern the monetary markets or interest rates in India, which is the residence country of assessee and EURIBOR rate is not applicable to the loans for which foreign currency has to be purchased by the Lender. HELD by the High Court dismissing the appeal: "We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. Vs. DCIT I (supra) and DCIT Vs. Tech Mahindra Ltd."46 SOT 141 to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr.Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in ' VVF Ltd. Vs. DCIT'(supra) and DCIT Vs. Tech Mahindra Ltd. "(supra) on the above issue. No record has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. V ..... X X X X Extracts X X X X X X X X Extracts X X X X
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