Income Tax Appellate Tribunal - Mumbai
Asst Cit 11(3)(2), Mumbai vs Vinca Developers P.Ltd, Mumbai on 30 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH "K", MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND
SHRI PAWAN SINGH, JUDICIAL MEMBER
ITA No.649/Mum/2016 (Assessment Year- 2010-11)
ACIT-11(3)(2), M/s Vinca Developers Pvt. Ltd.
Room No. 427, Aayakar 6th Floor, Akruti Trade Centre,
Bhavan, M.K. Road, Road No. 07, Marol MIDC,
Vs.
Mumbai-400020. Andheri (East),
Mumbai-400072
PAN:AACCV8042J
(Appellant) (Respondent)
Cross Objection No. 33/Mum/2016 (ITA No. 649/Mum/16 (A.Y- 2011-12)
M/s Vinca Developers Pvt. Ltd. ACIT-11(3)(2),
6th Floor, Akruti Trade Centre, Room No. 427, Aayakar
Road No. 07, Marol MIDC, Bhavan, M.K. Road,
Vs.
Andheri (East), Mumbai-400020.
Mumbai-400072
PAN:AACCV8042J
(Appellant) (Respondent)
ITA No. (TP)A 1854/Mum/2016 (Assessment Year- 2011-12)
M/s Vinca Developers Pvt. Ltd. ACIT-11(3)(2),
6th Floor, Akruti Trade Centre, Room No. 427, Aayakar
Road No. 07, Marol MIDC, Bhavan, M.K. Road,
Vs.
Andheri (East), Mumbai-400020.
Mumbai-400072
PAN:AACCV8042J
(Appellant) (Respondent)
Revenue by : Shri V. Jenardhanan (DR)
Assessee by : Shri Vijay Mehta (AR)
Date of hearing : 04.04.2018
Date of Pronouncement : 30.05.2018
Order Under Section 254(1) of Income Tax Act
PER PAWAN SINGH, JUDICIAL MEMBER:
ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
1. This set of two cross appeal and one cross objection by assessee are directed against the assessment order passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (the Act) dated 27.01.2016, in pursuance of directions of Dispute Resolution Penal (DRP) dated 22.12.2015, for Assessment Year 2010-11.
2. Brief facts of the case are that the assessee is an Indian Company, engaged in Real Estate Development, Slum Rehabilitation and other construction activities, filed its return of income for relevant Assessment Year on 30.09.2011, declaring loss of Rs. 54,67,261/-. Along with return of income, the assessee filed report under Rule 3CEB. In the report under Rule 3CEB, the assessee reported to have issued INR denominated Compulsorily Convertible Debentures (CCD) to a foreign entity namely "Netherlands Development Finance Company" called Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V. ("FMO"). The Assessing Officer on the basis of transaction shown by assessee with overseas company/ entity made a reference to Transfer Pricing Officer under section 92CA(1) for computation of Arm's Length Price (ALP) with regard to the said transaction/international transaction. The Transfer Pricing Officer (TPO) vide its order dated 29.01.2015 under section 92CA(3) suggested an adjustment of Rs. 4,57,26,287/- on account of payment of interest to a foreign entity/Associate Enterprises for payment of interest on Compulsorily Convertible Debentures ("CCDs"). 2
ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
Consequent upon receipt of order of TPO under section 92C(A)(3), the Assessing Officer passed draft assessment order under section 143(3) r.w.s. 144C(5) on 27.03.2015. The Assessing Officer also made the disallowance of interest of Rs. 1,62,70,200/- on account of advance given to M/s Ackruti City Limited (Akruti). On such the addition/disallowance and the adjustment suggested on account of ALP with regard to the said international transaction, the assessee filed objection before the DRP. The DRP vide its order dated 22.12.2015 rejected the objections, upholding the adjustment suggested by TPO and also upheld the bench marking on the basis of State Bank of India (SBI) Prime Lending Rate (PLR) of 11.75%. However, on the objection with regards to interest disallowance of Rs.1,62,70,000/- the DRP while relying upon the order of CIT(A) for earlier Assessment Year 2010-11 restricted the disallowance of interest to Rs. 12,80,166/-. Thus, in pursuance of the direction of DRP, the Assessing Officer passed the final assessment order under section 143(3) r.w.s 144C(13) of the Act on 27.01.2016. Therefore, aggrieved by the direction of DRP, the Revenue has filed the present appeal against the restricting the interest disallowance at Rs. 12,80,166/-. On service of notice of Revenue's appeal, the assessee has filed its cross objection. The assessee has also filed its appeal against the Transfer Pricing Adjustment and sustaining the disallowance of interest. The Revenue has raised the following grounds of appeal:
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1. Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in restricting the disallowance of interest made u/sec.
36(1)(iii) of the Income Tax Act, 1961 to Rs.12,80,166/- as against Rs.1,62,70,200/- disallowed in the assessment order thereby granting a relief of Rs.1,49,90,034/-.?"
2. "Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in restricting the disallowance of interest without appreciating the fact that the assessee did not have sufficient own funds to give interest free advances to the entity M/s Akruti City Ltd.?"
3 "Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in restricting the disallowance of interest without appreciating the fact that the assessee could not substantiate with corroborative evidences the direct nexus between its own funds and he interest free advances given to its sister concern M/s. Akruti City Limited.?" 4 "Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in not following the ratio laid down by the Hon'ble High Court of Kerala in the case of Commissioner of Income-tax Vs V I Baby & Co. [254 ITR 248] wherein the Hon'ble High Court held that the assessee with liquidity cannot claim that it can give interest free advances to the partners & others and then borrow funds from the bank on interest for business purpose.?"
5 The appellant prays that the order of the Hon'ble DRP-II, Mumbai on the above ground be set aside and that of the A.O. be restored.
3. The assessee in its cross objection has raised the following grounds of cross objection:
Ground No. 1. DISALLOWANCE OF INTEREST OF RS. 12,80,166 The AO erred in stating that the assessee has not proved direct nexus between own funds and interest free amount given to Ackruti City Ltd. without appreciating the fact that the assessee has proved one to one nexus between share capital received and amount given to Ackruti City Ltd.
The AO erred in relying on the case law of Kerla High Court in the case of CIT v. V I Baby and Co. [254 ITR 248] as the facts of the case does not match with assessee's case.
The assessee therefore prays that the disallowance of interest of Rs.12,80,166 be deleted.4
ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
4. In Cross Appeal No. No. 1854/Mum/2016, the assessee has raised the following grounds of appeal:
Following grounds are without prejudice to each other:
Transfer Pricing Grounds
1. Ground No. 1: Relating to non-applicability of transfer pricing provisions:
1.1. The Hon'ble DRP erred on facts and in law by concurring with the learned AO / TPO's view that Appellant and Nederlandse Financierinngs-
Maatschappij Voor Ontwikkelingslandern N.V. ('FMO') are associated enterprises as per section 92 of the Act and therefore transfer pricing provisions are applicable to it. The appellant contends that FMO is not an associated enterprise as per the provisions of Act and DTAA between India and Netherlands and hence transfer pricing provisions are not applicable to it.
1.2. The Hon'ble DRP erred on facts and in law by concurring with the learned AO / TPO's view that the Compulsory Convertible Debentures (CCDs) are in the nature of loan and therefore covered under the deeming provision under Section 92A(2)(c).
1.3. The Hon'ble DRP erred on facts and in law by concurring with the learned AO / TPO's view that section 92A(2) overrides section 92A(1) ignoring the fact that section 92A(2) only supplements the primary definition of associated enterprises under sub-section (1). 1.4. The Hon'ble DRP erred on facts and in law by concurring with the learned AO / TPO's view that since the Appellant has complied with TP provisions in this year and earlier year, transfer pricing provisions are applicable without appreciating the fact that compliance was done on without prejudice basis.
2. Ground No. 2: Relating to bench marking analysis undertaken by Appellant:
2.1. The Hon'ble DRP erred on facts and in law by upholding rejection of the transfer pricing study report and the benchmarking analysis adopted by the Appellant while arriving at the arm's length interest rate at which interest is paid to FMO on the CCD's without any cogent reason.
2.2. The Hon'ble DRP erred on facts and in law in rejecting comparable debentures identified by the Appellant having similar parameter as that of CCD's issued by it to FMO without giving any cogent reasons.
2.3. The Hon'ble DRP further erred on facts and in law by disregarding the credit rating analysis done by the Appellant based on the scientific procedure laid down by the Securities and Exchange Board of India 5 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
('SEBI') and upholding the learned AO's /TPO's approach and not examining the detailed submissions made by the Appellant.
3. Ground No. 3: Relating to of use of SBI PLR as ALP:
3.1 The Hon'ble DRP erred on facts and in law by merely accepting the State Bank of India's ('SBI') Prime lending Rate ('PLR') as computed by the learned AO/TPO while determining the arm's length nature of interest paid by the Appellant on CCD's issued to FMO without carrying out detailed analysis or making any adjustment for the differences in terms and nature of CCD's and PLR rates.
3.2 The Hon'ble DRP erred by ignoring the fact that same interest rate on debentures that were issued in the previous year relevant to assessment year 2010-11 has been accepted at ALP by the TPO itself and thereby ignoring the principle of res judicata. ~ Corporate Tax Grounds
4. Ground No. 4: Disallowance of Interest of Rs. 12,80,166/-:
4.1 On the facts and circumstances of the case and in law, the Hon'ble DRP erred in sustaining the disallowance of interest to the extent of Rs. 12,80,166/-.
4.2 The Hon'ble DRP erred in ignoring the fact that the total project cost is Rs. 12,40,60,000/- and not Rs. 13,55,85,000/- and thus, entire project cost was sourced by share capital money i.e. owned funds.
4.3 The Hon'ble DRP erred in ignoring the fact that Consideration of Rs. 10,61,00,000/- given to Ackruti City Ltd. and payment of stamp duty and registration charges paid thereon of Rs 1,79,60,000/- for the business purpose and thus question of disallowance does not arise. 4.4 Without prejudice to the above, the Hon'ble DRP failed to appreciate that even if the interest is to be apportioned to advances given for acquisition of plot to Ackruti City Ltd., the same need to be capitalized to the cost of the plot and cannot be disallowed.
4.5 The Appellant therefore prays that the disallowance of interest of Rs. 12,80,166/- be deleted.
5. Ground No. 6: Penalty Proceedings:
5.1 The Hon'ble DRP / learned TPO / AO erred, in law and in initiating penalty proceedings under section 271(1)(C).
5. We have heard the Ld. Authorized Representative (AR) of the assessee and Ld. Departmental Representative (DR) for the Revenue and perused 6 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
the material available on record. At the outset of the hearing, the ld. AR for the assessee submits that he is not pressing his Cross Objection. Considering the submission of Ld. AR of the assessee, the Cross Objection filed by assessee is dismissed as not pressed.
6. The Ld. AR of the assessee in support of his grounds, in assessee's appeal, submits that Ground No. 1 to 3 relates to Transfer Pricing Adjustment of Rs. 4,57,26,287/- on account of interest paid on CCDs to FMO. The Ld. AR of the assessee submits that the assessee is engaged in business of real estate, Slum development and other development activities. During the previous year relevant to assessment year 2010-11, the assessee entered into agreement dated 20.09.2009 with FMO, a "Netherlands Development Finance Company". As per terms of agreement, the assessee agree to issue INR denominated Compulsory Convertible Debentures (CCD) to FMO, carrying an interest rate 14.75% p.a. to the Compulsory Convertible Debentures into Equity Share after 60 month. The assessee before the TPO has submitted that FMO is controlled by Dutch Government which holds 51% share in FMO. The said overseas entity/FMO is not Associate Enterprises in accordance with the provisions in Double Taxation Avoidance Agreement (DTAA) between India and Netherland. The CCD is not a loan and hence FMO does not fall within the definition of AE as provided in section 92A(2)(c) of the Act. Therefore, no reference for computation of ALP was required. 7
ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
The contention of the assessee was not accepted by the TPO and it was wrongly held that PMO is an AE of assessee and proceeded for bench marking the said transaction. The Ld. AR of the assessee further submits that assessee carried out details bench marking analysis in Transfer Pricing Study report wherein the assessee has compared the interest rate paid by real estate companies on similar type of debentures with interest rate paid by assessee. The assessee paid lower rate of interest on CCD paid by comparable companies on similar type of debentures. The TPO did not accept the contention and assessee proposed to apply SBI PLR of 11.75% for bench marking the interest rate of said transaction. It was submitted that if SBI's PLR is adopted for bench marking the transaction, than certain risk adjustment should be allowed. SBI's PLR is the rate which is granted to customer having good financial and security. It was further submitted that while granting loan to customers, the bank would take in to account several factors like security, industry risk and accordingly the interest rate would increase from Prime Lending Rate (PLR) depending on the customer. After looking on the balance sheet of the assessee as on 31.03.2009, no Bank would lend to the assessee at PLR rate as there is no final strength in the balance sheet of the assessee. In spite of the fact the assessee have been able to issue CCD at higher rate of interest. The Transfer Pricing Officer did not accept the contention of assessee and adopted the SBI PLR at 11.75% for bench 8 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
marking the transaction thereby made an adjustment of Rs. 4,75,26,287/- to ALP of the assessee. The assessee urged the similar contention before the DRP. The assessee also carried out the credit rating of comparable company using systematic rating of method and circular of SEBI to demonstrate that in spite of having better credit rating than the assessee, the rate of interest on debenture by comparable company is higher than that of assessee. The assessee also re-treated that subsequent amount was received was in earlier years and the terms and condition including the interest rate were decided for a period of five years. The said transaction has been accepted by TPO in immediately preceding years. The DRP not accepted the contention of assessee and still upheld the adjustment made by TPO. The Ld. AR of the assessee vehemently submits that when the FMO entered into transaction with assessee and agreed on the terms and condition as per agreement dated 20.09.2009. The FMO and assessee were not AE while making agreement. The FMO had no influence or control over the assessee and vice-versa and none of the parties was in a position to influence the decision of others. The transaction entered by virtue of agreement dated 20.11.2009 is a transaction between two independent enterprises and therefore, the provisions of Transfer Pricing are not applicable. Even otherwise the condition of receipt of amount as decided by agreement dated 20.11.2009 are at ALP. The agreed terms and condition were not influence by each other. Without prejudice to the 9 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
contention, the ld. AR submits that in order to conclude that two enterprises are AE, the condition prescribed under section 92A(1) as well as 92A(2) of the Act should be satisfied. Section 92A(2) of the Act illustrated as to when enterprises are deemed to be AE. However, there could be a case where one of the condition prescribed under 92A(2) is satisfied but condition mentioned under section 92A(1) of the Act is not met in such a situation in which enterprises does not participate in capital, management, or control of other enterprise, and thus, does not fulfil the basic rule under section 92A(1), even if the conditions of section 92A(2) are fulfilled, enterprise cannot be treated as 'Associate Enterprise'. In support of the submission, the Ld. AR of the assessee relied upon the decision of Tribunal in case of Orchid Pharma Ltd. v. Dy.CIT [176 taxmann.com 63 (Chennai)].
7. It was also submitted that Section 92A(2) of the Act prescribes the phrase 'at any time during the previous year' whereas, there is no such mention u/s 92A(1) of the Act. Hence, while entering into a transaction, the two parties are not AE and they would not fall under definition of AE as defined u/s 92A(1) of the Act, unless the other conditions are satisfied. Therefore, the FMO and assessee are not A.E. The Ld. AR of the assessee without prejudice to the earlier contentions submits that TPO has held that since assessee had issued CCD's to FMO, assessee and FMO are AE as per definition of section 92A(2)c) of the Act. The Ld. AR of the 10 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
assessee explained that as per section 92A(2)c) of the Act, two enterprises are deemed to be AE, if a loan advanced by one enterprise to other enterprise constitutes not less than 51% of the total assets of the other enterprise. CCD's are not 'loan' since the same do not postulate any repayment of principal. The definition of 'loan' as provided u/s 269T of the Act; provide the definition of 'loan'. The loan is something which is repayable after notice or repayable after a certain period. CCD's issued by assessee are not repayable but are to be compulsorily converted to shares which are not loan in support of his submission, the Ld. AR of the assessee relied upon the decision of Hon'ble Supreme Court in case of Narendra Kumar Maheshwari v. Union of India and others (AIR 1989 SC 2138) and the decision of Tribunal in case of Adama India (P) Ltd. v. Dy.CIT [78 taxmann.com 75 (Hyd)]. Wherein the Tribunal held that CCD are not loan. The Ld. AR of the assessee submits that one of the objections of TPO is that the assessee in the TP study report has accepted that FMO is it's AE and benchmarked the said transaction. The Ld. AR explained that TP study was undertaken stating that the FMO is not AE and that benchmarking of said transaction was done without prejudice to the submission of assessee that assessee and FMO was not AE. There is no estoppel against the law and even if the same has been accepted by assessee, the same can be disputed at later stage, if it is contrary to the provision of law.
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8. On merit, the Ld. AR of the assessee submits that the rate of interest on CCD is at arm's length and no adjustment is required to be made on the same. The rate of interest on CCD was decided vide agreement dated 20.11.2009 which falls in last financial year related to the Assessment Year 2010-11. The certain amount was received from FMO in preceding Assessment Year for subscription of debenture. The assessee carried the TP study in preceding year and similar rate of interest @ 14.75% p.a. was accepted by department and no TP Adjustment was made by TPO. The revenue cannot re-visit the transaction made on the similar term and condition. On comparable companies, the Ld. AR of the assessee without prejudice to his earlier submission, submits that the assessee prepared a detailed TP study in order to justify the interest paid @ 14.75% p.a. on CCD is a Arm's Length. None, of the real estate companies, which were selected as comparable, have paid interest at the lower rate than that of assessee. The average rate to interest paid by comparable company is approximately 16% which is higher interest rate paid by the assessee. The average rate of State Bank of India(SBI) Prime Lending Rate (PLR) is 11.55%, the SBI PLR is the rate which is granted to the companies having extremely good financial strength and security. SBI would take into account several factors like security, industry risk, etc. However, as per the balance-sheet of the assessee as on 31.03.2009 no bank would lend money to the assessee at PLR rate, as there is no financial strength in 12 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
the balance sheet of the assessee and that none of the balance of the comparable company as weak as that of assessee, despite that the comparable company able to issue the debenture at higher interest rate. Thus, the adjustment required to be made at PLR rate, looking at the nature and business of financial strength of the assessee. The risk adjustment at least 3% to 5% should be considered, keeping in mind (i) industry in which assessee is engaged (ii) financial position of assessee
(iii) debenture is unsecured (iv) it is compulsorily convertible into equity, etc. After factoring the risk adjustment of even 3%, the rate would be 14.55% (11.55% + 3%) therefore; the interest rate paid by assessee would be at Arm's Length.
9. On the contrary, the Ld. DR for the Revenue supported the order of TPO/DRP. The Ld. DR for the Revenue further submits that the assessee is AE of foreign entity/FMO. The FMO is lender and therefore, Clause-c of sub-section (2) of section 92A, the FMO is AE of the assessee. The decision relied by Ld. DR in Orchid Pharma Ltd. (supra) is not applicable. The assessee is negotiating ever year. In the last Financial Year related to the Assessment Year 2010-11 only a part of the transaction of money was received by the assessee. All CCDs are listed now-a-days and interest rate is based on the credit base, the ld. DR further submits that this issue can be set-aside to the file of TPO/AO as the TPO 13 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
has not given any comment on the study. On corporate issue the ld DR for the revenue relied on the order of assessing officer.
10.We have considered the rival submissions of the parties and have gone through the orders of the authorities below. The first foremost legal objection of the assessee is that the assessee is not AE's of FMO/foreign entity. And /or the assessee is no estopped under the law, once the assessee has furnished report under Rule 3CEB. It is not in dispute that the assessee in its TP study has categorically submitted that the FMO is not AE and that benchmarking of said transaction was done without prejudice to the submission of assessee that assessee and FMO was not AE. We find that this fact was asserted by assessee company before the ld. TPO, which has been referred in para 4 of his order. The TPO has not accepted the contention of the assessee. In our view there is no estoppels against the law, even the assessee has submitted the TP study it cannot be used against the assessee, as no tax can be levied without the authority of law. The ld TPO concluded that CCD's and loans are debts which is to be repaid and therefore would be covered in clause (c) of Section 92A(2).
11.A careful reading of section 92A makes it clear that basic rule for treating the enterprises as AE is set out in Section 92A(1). Section 92A(1) lays down the basic rule that in order to treat an entity as associated enterprise, one enterprise, in relation to another enterprise, participate, directly or indirectly, or through one or more intermediaries, "in the 14 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
management or control or capital of the other enterprise" or when "one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise". Further, careful reading of Section 92(A)(2) only prescribed the illustrations of the cases in which such an enterprise participates in management, capital or control of another enterprise. Which means that Section 92A (1) decides is the principle on the basis of which one has to examine whether or not two or more enterprise are associated enterprise or not. The principle is, as we have noted above, that one of the enterprise, in relation to other enterprise, participate, directly or indirectly, in the management or control or capital of the other enterprise and that persons who participate in such management, control or capital of both the enterprises are common. As long as an enterprise participates in any of the three aspects of the other enterprise, i.e. (a) management; (b) capital; or (c) control.
12.Hon'ble Supreme Court in Narendra Kumar Vs UOI (AIR 1989 SC 2138) while considering the meaning of Compulsory Convertible debenture('CCD') held that CCD does not postulates any repayment of principal. Therefore, it does not constitute a 'debenture' in its classical sense. The Hon'ble Apex Court also referred and relied the Guidelines for 15 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
the 'Protection of Debenture Holders' issued on 14th January 1987, which recognised the basic distinction between convertible and non convertible debenture. On the basis of said guideline it was held that instrument which is compulsorily convertible in to shares, is regarded as "equity" and not as a 'loan' or 'debt'. Therefore, we may conclude that the CCD is not a loan and hence FMO would not fall within the definition of AE as provided in section 92A(2)(c) of the Act.
13. The coordinate bench of Hyderabad Tribunal in Adama India (P) Ltd Vs CIT [78taxmann.com 75 (Hyd)] held that CCD are not loan with the following observation:
"8. We have considered the issue and examined the rival contentions. There is no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly, following the principles laid down by the Co-ordinate Benches and the Hon'ble High Court as relied on by the assessee in the submissions, we have to hold that TPO has wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corpn. Ltd. (supra) while assigning the jurisdiction to SEBI as an 'equity instrument'. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely against regulations laid by DIPB, RBI and FEMA."
14. The coordinate bench of Chennai Tribunal in Orchid Pharma Ltd. Vs DCIT while considering the definition of AE as prescribed under section 92A(1) held as under;
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"14. As evident from the limited narration of facts in the said decision, the assessee-company (i.e. Page Industries Ltd; PIL in short) was "a licensee of the brand- name 'Jockey' for exclusive manufacture and marketing of goods under license agreement" but "the assessee-company owns entire manufacturing facility, capital investment of Rs.100 crores and 15000 employees" and "there is no participation of JII (i.e. Jockey International Inc., USA) in the capital and management of the assessee-company". On these facts, the coordinate bench has held that JII and PIL are not associated enterprises as there is no participation by JII in "management or capital of PIL(emphasis supplied by us)". We have our reservation, whatever be it's worth, on the conclusions arrived at in this case but that does not dilute our highest respect for an important principles of law laid down by the coordinate bench. The reasons for this approach are as follows. The expression 'control' appearing in Section 92A(1) is very crucial and the manner in which control is exercised could go well beyond capital and management, but the coordinate bench had no occasion to deal with the "control" aspect at all. As held in the case of Diagco India (P.) Ltd. v. Dy. CIT [2011] 47 SOT 252/13 taxmann.com 62 (Mum.), even when an enterprise exercise control over the other enterprises by way of controlling the supply of raw material or use of trade marks, this also constitutes 'participation in control' leading to the status of associated enterprises under section 92A(1). It appears that this aspect of the matter has not been brought to the notice of, or pleaded before, the bench. While the conclusion arrived at by the bench clearly overlooks the specific mention of the word "control" in both limbs of the basic rule under section 92A(1) (i) as also under section 92A(1)(ii), and to that extent we are unable to concur that in the absence of participation in capital or management, two enterprises cannot be 'associated enterprises' under section 92A, what is important to us is that the coordinate bench has, inter alia, also held that, "....in order to constitute relationship of an AE, the parameters laid down in both sub-sections (1) and (2) should be fulfilled" and justified this approach by observing that "if we were to hold that there is a relationship of AE, once the requirements of sub-sec.(2) are fulfilled, then the provisions of sub-sec.(1) renders otiose or superfluous" and that "it is well settled canon interpretation of statutes that while interpreting the taxing statute, 17 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
construction shall not be adopted which renders particular provision otiose". The coordinate bench then further observed that "when interpreting a provision in a taxing statute, a construction, which would preserve the purpose of the provision, must be adopted". The legal position thus summed up by the coordinate bench is that in a situation in which the conditions, with respect to a set of enterprises, set out in section 92A(1) are clearly not fulfilled, even if the conditions under one of the clauses of section 92A(2) are fulfilled, such enterprises cannot be treated as associated enterprise under section 92A. To the limited extent of the principle so laid down by the coordinate bench, we are in considered agreement with the views of the coordinate bench, and it is this principle which is relevant for the purposes of our adjudication. It does directly affect the issue in appeal before us inasmuch as we are also dealing with a situation in which admittedly words of section 92A(2)(i) are clearly satisfied on the facts of this case, the scale of commercial relationship is so insignificant vis-à-vis total business operations of the assessee that there is admittedly no participation in control by one of the enterprise over the other enterprise so as to satisfy the mandate of Section 92A(1).
15. While dealing with this, we may also refer to some observations made by Dr Ramon Dwarkasing, an Associate Professor in Transfer Pricing at Maastricht University, the Netherlands, in his book "Associated Enterprises- A Concept Essential for Application of the Arm's Length Principle" [ ISBN: 978-90-81724- 0-1, published by Wolf Legal Publishers, the Netherlands @ page 6], as follows:
'....in various countries, the concept of associated enterprises may even cover relationships between independent enterprises, for instance, where a foreign buyer has a strong negotiating power. For example, an Indian software company has a customer in Netherlands which is responsible for more than 90% of turnover of Indian software developer. The Dutch customer is able to dictate the prices to Indian software developer. The Indian software company is, therefore, able to charge a price with 1% margin/mark up, which is very low compared to his Indian counterparts (which apply, for instance, 6% mark up).18
ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
According to the Indian transfer pricing law, if the gods or articles manufactured or processed by one enterprises, are sold to other enterprise abroad or to person specified by such other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprises, the two enterprises shall be deemed to be associated enterprises [See section 92A(2)(i) of the Indian Income Tax Act, 1961] The Indian tax authorities consider the Indian software developer and its Dutch customer to be associated. They may adjust the prices and tax an unrealized profit, i.e. difference between real results and results based on prices derived from other software developers in India. The Netherlands does not consider the companies to be associated as it applies a narrow concept that does not include "de facto control" as a criterion for association. "Control" in the absence of company law based relationship or in the absence of any formal right to exercise control can be described as "de facto" control. Participation in capital and management can be characterized as "de jure" concepts; concepts covered by company law.' [Emphasis, by underlining, supplied by us]
16. While the above observations do seem to be at variance with the plain words of the statutory provision inasmuch as it refers to influence by way of "strong negotiating power" rather than an influence simplictor- as is the apparent scheme of the statutory provision, what is immediately discernible from the above extracts is that the 'de facto' control is the foundation of the wider approach to the concept of 'associated enterprises, and, of course, the impression that one of the ways in which use of expression 'influence', in concept of associated enterprises under the transfer pricing, can be rationalized is as dominant influence in the nature of de facto control. The definition of 'associated enterprise', as the above academic analysis shows, has two approaches- wider approach and narrow approach. A narrow approach to the concept of associated enterprises takes into account only "de jure" association i.e. though formal participation in the capital or participation in the management. A wider approach to the concept of 'associated enterprises' takes into account not only the de jure relationships but also de facto control, in the absence of participation in capital or participation in management, through other modes of control such as commercial relationships in which one has dominant influence over the other. This wider concept is clearly 19 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
discernible from the principles underlying approach to the definition of 'associated enterprises' in the tax treaties and has also been adopted by the transfer pricing legislation in India in an unambiguous manner. There is no other justification in the Indian transfer pricing legislation, except the participation in capital of an enterprise, management of an enterprise or control of an enterprise, which can lead to the relationship between enterprise being treated as 'associated enterprises'. What essentially follows is that clause (i) of Section 92A(2) has, at its conceptual foundation, de facto control by one of the enterprise over the other enterprise, on account of commercial relationship of its buying the products, either on his own or through any nominated entities, from such other enterprise and in a situation in which it can influence the prices and other related conditions. The wordings of clause (i), however, do not reflect this position in an unambiguous manner inasmuch as it does not set out a threshold of activity, giving de facto control to the other enterprise engaged in such commercial activity, in percentage terms or otherwise- as is set out in clause (g) and (h) or, for that purpose, in all other operative clauses of Section 92A(2). If the words of this clause are to be interpreted literally, as the authorities below have read, even if there is one isolated transaction with an enterprise in such an enterprise can influence the prices, such an enterprise is to be treated as an associated enterprise- whether or not this commercial relationship amounts to control on the other enterprise. That will clearly be an incongruous result. However, as Section 92A(2)(i) is to be read along with Section 92(A)(1), in such a situation in which an enterprise does not participate in (a) capital, (b) management, or (c) control of other enterprise, and thus does not fulfil the basic rule under section 92A(1), even if the conditions of Section 92A(2)(i) are fulfilled, these enterprise cannot be treated as 'associated enterprise'. In the case before us, it is not even the case of the revenue that the assessee has any participation in management or capital of the other enterprise, nor there is anything to even remotely indicate, much less establish, that one of the enterprise, by way of this commercial relationship, participates in control over the other enterprise. Viewed thus, Northstar, even if it is assumed that it can influence prices and other conditions relating to sale, cannot be treated as associated enterprise of the assessee before us. It is also important to bear in mind the fact that given the context in which the expression "prices and other conditions relating thereto are influenced by such other 20 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
enterprise" appears in Section 92A(2)(i), this influence has to be something more than influence in the ordinary course of business and in the process of negotiation, because, even in the course of ordinary every business and in the course of day to day negotiation, selling prices as also conditions of sale are invariably, in a way, influenced by the buyer. Therefore, even when a customer offers terms to someone with a 'take it or leave it' message, such an approach, by itself, cannot be termed as 'influence', for our purposes, unless the seller is in such a position and under such an influence that he has to simply accept the dictated terms. Any other view of the matter will result in all the enterprises dealing with each other as every party to a transaction has an influence over the price and conditions relating to the sale, and will lead to a situation in which all the enterprises dealing with each other on negotiated prices will have to be as associated enterprises. That again is a clearly absurd and unintended result, and it is only elementary that law is to be interpreted in such a manner as to make it workable rather than redundant. This principle is expressed in the latin maxim "ut res magis valeat quam pereat. Explaining this principle, Hon'ble Supreme Court has, in the case of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449/126 Taxman 321 (SC), has observed that "A construction which reduces the statute to a futility has to be avoided" and that "A statute or any enacting provision therein must be so construed as to make it effective and operative on the principle expressed in maxim utres magis valeat quam pereat i.e., a liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties. [See Broom's Legal Maxims (10th Edition), p. 361, Craies on Statutes (7th Edition) p. 95 and Maxwell on Statutes (11th Edition) p. 221.]" It is, therefore, important that the expression 'influence' is given a sensible meaning so as to make the provisions of Section 92A(2)(i) workable rather than adopting a literal meaning which will lead to wholly incongruous results.
17. Viewed in this perspective, we must adopt a sensible meaning of expression 'influence' which advances the scheme of the transfer pricing provisions rather than making these provisions unworkable. That meaning had to be a dominant influence which leads to de facto control over the other enterprise rather than an influence simplictor. If we are to adopt literal meaning of influence, as has been 21 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
adopted by the authorities below, all the transactions on negotiated prices will be hit by the provisions of Section 92A(2)(i). In the light of the discussions above, the expression 'influence', in the present context, must remain confined to dominant influence which amounts to de facto control. Acceptance of terms of the buyer on commercial considerations, as in this case, cannot be treated as influence of the buyer. It is a commercial decision whether to accept the terms of the buyer, with respect to the price or related conditions, or not. It becomes influence, for the purpose of Section 92A(2)(i), when the seller is placed in such a situation that he has no choice, because of buyer's dominant influence, but to accept it. It is thus clear that context in which a reference is made to the expression 'influence' in section 92A(2)(i) requires this expression to be read as a dominant influence in the sense of control by one enterprise over the other. Given the fact that the assessee's exports through the distribution part constitutes less than 5% of its entire exports, and less than 6% of its entire sales, Northstar is certainly not in a position to exercise any dominant influence, over the assessee. The assessee's decision to accept the terms set out by Northstar, even if that be so, may be justified on account of commercial expediencies or warranted by business exigencies or may simply be compulsion of this somewhat unique and complex business model, but it cannot, by any stretch of logic, be on account of dominant influence of Northstar as a customer. It may even be a sound business strategy to accept a rather passive and back seat role, if one can term it that way, in day to day decision making under this business model, but cannot be on account of dominant influence that Northstar exercises on buying of products from the assessee. The influence of Northstar, given the scale of business through Norrthstar as a distribution part, is too modest to make it a dominant influence in the nature of control. In this view of the matter, as also bearing in mind the earlier discussions on the issue, the assessee and Northstar can not be treated as 'associated enterprises' under section 92 A. We uphold the plea of the assessee.
15. Therefore, in view of above legal and factual discussion, we find force in the submissions of the ld AR for the assessee that the CCD not a loan and moreover, the Foreign entity namely "Netherlands Development Finance 22 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
Company" called Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V. ("FMO") would not fall within the definition of AE as provided in section 92A(2)(c) of the Act. And therefore, no reference for computation of ALP before the TPO was required.
16. The TPO has not brought on record any material on record to treat the FMO as AE of assessee. The TPO without discussing the legal issues raised by the assessee concluded that Article 9 of Netherlands India Double Taxatition Avoidance Agreement (DTAA) is unfounded and the transfer pricing provisions are to be governed by the domestic law of a country. In our view the conclusion arrived by ld. TPO is unfounded, when the FMO is not AE of the assessee.
17.Therefore, in view of our detailed discussion as referred above, we are of the view that the foreign entity i.e. FMO is not AE of the assessee as there in no participation, directly or indirectly, in the management or control or in capital of the each other enterprise and in management, control or capital are common and hence, no reference for computation of ALP was warranted. Hence, the grounds No. 1 of the appeal of the assessee is allowed. As we have allowed ground No.1 of the appeal and held that FMO is not AE of assessee, therefore, discussion on merit raised in ground No. 2 and 3 related with the adjustment of ALP has become academic.
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ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
18.Ground No.4 relates to disallowance of interest of Rs. 12,80,166/-. The ld. AR of the assessee submitted that during the relevant financial year related to the assessment year 2010-11, the assessee had advanced certain money to Ackruti. The advance given to Ackruti consist of advance of Rs. 10,61,00,000 /-and Rs. 1,79,60,000/-on account of Stamp duty, therefore, a total sum of Rs. 12,40,60,000/- was advance given for business purpose and interest should be allowed as expenditure. The ld. AR further submits that assessee has own funds in the form of share capital to the extent of Rs. 12,51,00,000/- and the same should be reduced from working out the interest disallowance. The assessing officer did not agree with the contention of the assessee and relying upon his own order for assessment year 2010-11 proposed disallowance of Rs. 1,62,70,200/-. Before DRP, the assessee contended that the CIT(A) in assessment year 2010-11 restricted the interest disallowance Rs. 12,80,166/-, after granting credit of own funds to the assessee. Therefore, the DRP relying on the order of ld. CIT(A) for assessment year 2010-11 restricted with disallowance to Rs. 12,80,166/-. The ld AR further submits that in the appeal before Tribunal in appeal for assessment year 2010-11, it was held that disallowance would be restricted to the amount actually given by the assessee and should exclude stamp duty charges for registration of agreement. It is submitted that CIT (A) has already granted relief to the assessee to the extent of own funds however, inadvertently the Tribunal 24 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
in final direction has not mentioned that amount of own funds available with the assessee should also be reduced for computing the disallowance. On the contrary the ld. DR for the revenue supported the order of assessing officer. The ld DR further submits this the Tribunal has given categorical finding about the disallowance of interest for 3 months in appeal for A 2010-11 on actual amount of advance as the amount was advanced only on 31.12.2009.
19. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also gone through the order of coordinate bench in assessee's own case for assessment year 2010-11 in ITA No. 5145/M/2014 dated 2nd March 2016 (in assessee's appeal) and in ITA No. 6171/M/2014 dated 25th of May 2016 (in revenue's appeal). A careful perusal of the order passed by coordinate bench of the Tribunal reveals that while framing assessment order under section 143(3) for AY 2010-11, the assessing officer made the disallowance of proportionate interest of Rs. 1,62,70,200/- @ 12% attributable to the interest-free advances. On appeal before Commissioner (Appeals) the disallowance was restricted to Rs. 12,80,166/-. Aggrieved by the order of Commissioner (Appeals) both the party filed their cross appeal before this Tribunal. It appears that the ld. representative for assessee as well as Department representative has not brought the fact in the notice of the Tribunal that both the parties have filed their cross 25 ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
appeal against the impugned order dated 25 July 2014. Therefore, both the appeal were heard separately and decided by separate orders as referred above. In assessee's appeal ITA No. 5245/M/2014 the coordinate bench directed to compute the interest disallowance only for three-month as period involved in the assessment years 2010-11, was with effect from 31 December 2009. However, the appeal of revenue in ITA No. 6171/M/2014 in challenging of restricting the interest disallowance was dismissed. Therefore, virtually the order of ld. Commissioner (Appeals) for assessment year 2010-11 was partly confirmed. Therefore, respectfully following the decision of coordinate bench in assessee's appeal in AY 2010-11, we direct the assessing officer to compute the disallowance accordingly as directed in order dated 02.03.2016 in ITA No/M/2016. Hence ground No. 4 of the appeal is partly allowed. ITA No. 649/M/2016 by Revenue.
20. We have noted that the revenue has raised almost identical ground of appeal as raised in appeal for assessment year 2010-11 in ITA No. 6171/Mumbai/2014. As we have already noted that appeal of the revenue on identical ground of appeal was dismissed by Tribunal vide order dated 25th May 2016. Therefore, respectfully following the decision of coordinate bench the appeal filed by revenue is dismissed.
21. In the result both the appeals filed by the assessee is partly allowed and appeal by revenue is dismissed.
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ITA No. 649 & 1854 Mum 16, C.O. 33 Mum 16 M/s Vinca Developers Pvt. Ltd.
Order pronounced in the open court on 30th day of May 2018.
Sd/- Sd/-
(R.C. SHARMA) (PAWAN SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai; Dated 30/05/2018
S.K.PS
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. ािपत ितC
BY ORDER
(Asstt.Registrar)
ITAT, Mumbai
27