Income Tax Appellate Tribunal - Mumbai
Aries Agro Ltd, Mumbai vs Dcit 14(1)(1), Mumbai on 28 November, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "K", MUMBAI
BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND
SHRI RAJESH KUMAR, ACCOUNTANT MEMBER
ITA No.1452/M/2017
Assessment Year: 2012-13
M/s. Aries Agro Ltd., Dy. Commissioner of
Plot No.24, Aries House, Income Tax 14(1)(1),
DEonar, 460, Aayakar Bhavan,
Vs.
Govandi, M.K. Road,
Mumbai - 400 043 Mumbai - 400020
Maharashtra.
PAN: AAACA5035G
(Appellant) (Respondent)
Present for:
Assessee by : Shri Firoze B. Andhyarwjina, A.R.
Revenue by : Shri Akhilendra Yadav, D.R.
Date of Hearing : 14.09.2018
Date of Pronouncement : 28.11.2018
ORDER
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order dated 20.12.2016 of the Disputes Resolution Panel [hereinafter referred to as the DRP] relevant to assessment year 2012-13.
2. The assessee has raised various grounds in the appeal. The first issue raised by the assessee is against the order of DRP confirming the action of Transfer Pricing Officer (TPO) in adding a sum of Rs.62,77,368/- on the ground that the interest charged by the assessee from AE on the loan advanced to it which is not at arm length price which was borrowed by the assessee from ICICI Bahrain.
2 ITA No.1452/M/2017M/s. Aries Agro Ltd.
3. The facts in brief are that the assessee is a listed company incorporated in Mumbai and is engaged in the business of, manufacturing, exporting and trading of multi-micronutrient fertilizers, other nutritional products and major fertilizers. It has five subsidiaries viz. Aries Agro Care Pvt. Ltd., Aries Agro Equipments Pvt. Ltd., Aries Agro Produce Pvt. Ltd., Golden Harvest Middle East FZC and Amarak Chemicals FZC. Since the assessee's transaction with these AEs exceeded Rs.15 crore, a reference to TPO was made and TPO made the some adjustments as mentioned hereinafter and therefore the draft assessment was framed vide order dated 28.03.2016 which was challenged before the DRP and DRP also confirmed the said additions/adjustments in the assessment. Finally assessment order was framed on 17.01.2017. Aggrieved by the said order the assessee has challenged it before the tribunal us.
4. The first issue agitated is against the confirmation of action of the TPO in making interest adjustments in the interest charged from the AE on the loan advanced by making external commercial borrowing to the tune of Rs.62,77,368/-. The assessee decided to set up a manufacturing facility at Fujairah. Accordingly for setting up the said facility, the funds were required by Golden Harvest an AE of the assessee. When it was not possible for the Golden Harvest to raise the funds from the banks on its own, the assessee, a holding company of Golden Harvest, borrowed the funds from ICICI Bank Bahrain with a specific objection of funding the setting of manufacturing facility by the Golden Harvest on the ground that majority of the production will be sold to the assessee by the said subsidiary 3 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
and it will realise the benefit of cost economy in the production. The loan arranged by the assessee was advanced to the Golden Harvest and interest was charged by the assessee to the subsidiary was same rate as has been charged by the ICICI Bank from the assessee i.e. LIBOR plus 250 basis points meaning thereby that assessee fully recovered the interest paid to ICICI Bank from the Golden Harvest and no cost was borne by it. However, according to the TPO, the said loan arranged by the assessee was a secured loan whereas the money advanced to the subsidiary was unsecured and without a security and therefore there was an attendant risk in advancing the said loan.
According to the TPO the assessee should have been compensated for the additional risk borne by the assessee reasoning that had the said loan been advanced to the third party, the transaction would have got marked up over and above the interest paid to ICICI Bank and therefore reached to a conclusion that interest charged from the subsidiary i.e. LIBOR plus 250 basis points is not an arm length price. Therefore, for the purpose of bench marking the loan transaction, a search was undertaken on the Bloomberg database to benchmark the loan transaction and on the basis of said search, interest rate was fixed at 5.82% and accordingly a shortfall of Rs.62,77,368/- in the interest charged from the AE was added to the income of the assessee to make the interest from AE at arm length. . The DRP affirmed the action of the TPO by observing and holding as under:
"2.16 We have considered the facts of the case and the submission of the assessee. The assessee has taken loan from ICICl Bahrain and given loan to its AE, Golden Harvest in order to fund working capital requirement of the AE. The assessee paid the interest due on the loan to the Bank and the same was recovered from AE, Golden Harvest at the same rate of interest. The assessee has 4 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
benchmarked this transaction by adopting CUP as the most appropriate method. The assessee has compared the interest paid to the bank with the interest charged from AE and stated that the transaction is at ALP. The assessee further refers to Para 1.65 of the OECD Guidelines (July 2010) and submitted that the analogy taken by the TPO is nothing but re-characterization of investment into loan.
2.17. In this regard, we note that the loan obtained from ICICl Bahrain is secured in nature while the loan advanced to the AE is unsecured in nature. However, the assessee has charged same rate of interest from its AE as it has paid to ICICl Bahrain. Accordingly, it is inferred that since the assessee is risk bearing, it should compensated for the additional risk borne. The above contention of the assessee that the advancing of loan constitutes a shareholder activity is not justified because in case of uncontrolled transaction with any third party, it would have been remunerated for the additional risk borne. Considering a scenario that the assessee advances same Loan to a third party, it would have definitely charged some mark up for covering its administrative expenses and risk borne by it. Moreover, the assessee has also borne hedging Loss on its loan taken from ICICI Bahrain, which itself justifies the point that the loan is risk bearing and the assessee needs to be compensated for the same. Accordingly, in the present case also, the assessee should have received mark up over and above the interest paid to ICICI Bahrain. Accordingly, it is held in the facts and circumstances of the case, that the interest rate of LIBOR plus 2.5% is not at arm's Length. The interest working on the basis of arm's length interest rate of 5.82% is found to be in order. Hence, the action of the TPO is upheld. The objection filed by the assessee is dismissed."
5. The Ld. Counsel submitted before the bench that the DRP has grossly erred on fact and law in upholding the order of TPO in making an addition of Rs. Rs.62,77,368/- to benchmark the loan transaction which is against the decision of the jurisdictional High Court and various other decisions. The Ld. A.R. submitted that the assessee has obtained loan from ICICI Bank Bahrain in order to set up a production unit in Fujairah by subsidiary company namely Golden Harvest which was not able to raise the funds from the banks. The assessee fully recovered the interest from the subsidiary i.e. LIBOR plus 250 basis points and no cost was incurred by it. The ld AR submitted that the interest charged from AE was at arms length and in and in defense of his arguments the ld AR relied on the following decisions:
5 ITA No.1452/M/2017M/s. Aries Agro Ltd.
iii. CIT vs Tata Autocomp Systems Ltd - [2015] 56 taxmann.com 206 (Bom) iv. Marico Ltd v ACIT- (2016) 70 taxmann.com 214 (Mumbai) v. IL & FS Maritime Infrastructure Co Ltd v ACIT - (2015) 62 taxmann.com 233 (Mumbai) vi. Hinduja Global Solutions Ltd v ACIT - (2013) 145 ITD 0361 (Mumbai) vii. DCIT v Indian Hotels Co Ltd - [2014] 46 taxmann.com 261 (Mumbai) viii. Indegene Lifesystems P Ltd v ACIT- (2015) 60 taxmann.com 28 (Bangalore) ix. Tooltech Global Engineering P Ltd v DCIT-(2014) 51 taxmann.com 336 (Pune) x. Everest Kanto Cylinder Ltd. v. ACIT - (2014) 52 taxmann.com 395 (Mumbai) The Ld. A.R. submitted that in view of the ratio laid down by the various decisions the appeal of the assessee on this ground be allowed by directing the AO to delete the addition.
6. The Ld. D.R. heavily relied on the order of authorities below by submitting that the assessee has not recovered anything for the risk to which the assessee was exposed by way of raising loans from the ICICI Bank outside India and advancing the same to the foreign subsidiary without security. The Ld. A.R. submitted that had it been a loan to the third party the assessee would have definitely charged a mark up on the said interest paid to the bank and therefore prayed before the Bench that order of the DRP should be affirmed as the same at arms length.
7. We have heard the rival submissions of both the parties and perused the material on record including the decisions cited by the assessee. The assessee has advanced loan to its subsidiary Golden Harvest to set up a plant at Fujairah by borrowing the same from the ICICI Bank abroad . The assessee has charged the same rate from the AE at which the loan was borrowed from ICICI Bank i.e. LIBOR plus 250 basis points. In 6 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
our view the issue is squarely covered by the various decisions as referred to hereinabove wherein it has been held that loan transactions to the AR have to be benchmarked on the basis of LIBOR. In the present case the transaction is benchmarked by the assessee by following CUP method by charging LIBOR plus 250 basis points i.e. the same rate of interest which is charged by the ICICI Bank from the assessee and it is for this reason we are not in agreement with the direction of the DRP on this issue. The case of the assessee is squarely covered by the decision of co-ordinate bench of the Tribunal in the case of Everest Kanto Cylinder Ltd. v. ACIT (supra). The relevant observation of the Tribunal is reproduced as under:
"11. We had considered rival contentions and gone through the orders of lower authorities. As per our considered opinion, appropriate international rates should be used for the purpose of the comparability analysis. For this purpose, the London Inter Bank Offer Rate (LIBOR) is an internationally recognized rate for benchmarking loans denominated in foreign currency. For this purpose, reliance may be placed on the following decision of the coordinate bench :--
(i) Great Eastern Shipping Co. Ltd. [IT Appeal No 397 (M) of 2012, dated 10-1- 2014]
(ii) Mahindra & Mahindra Ltd. [IT Appeal No 7999/M/2011, dated 8-6-2012];
(iii) Hinduja Global Solutions Ltd. v. Addl CIT [2013] 145 ITD 361/35 taxmann.com 348 (Mum. - Trib.)
(iv) Aurionpro Solutions Ltd. v. Addl. CIT[2013] 33 taxmann.com 187 (Mum. - Trib.);
(v) Aurobindo Pharma Ltd, v. Asstt. CIT [2014] 42 taxmarm.com 556/62 SOT 214 (Hyd.)
(vi) Cotton Naturals (I) (P.) Ltd. v. Dy. CIT [2014] 146 ITD 662/32 taxmann.com 219 (Delhi)
(vii) Siva Industries and Holdings Ltd. v. Asstt. CIT [2014] 46 SOT 112 (URO)/11 taxmann.com 404 (Chennai)
(viii) Bharti Airtel Ltd. (supra)
(ix) Infotech Enterprises Ltd. v. Addl CIT [2014] 63 SOT 23/41 taxmann.com 364 (Hyd)
(x) Kohinoor Foods Ltd. [IT Appeal Nos. 3688-3691 & 3868-3869 (Delhi) of 2012 & dated 21-7-2014]; and
(xi) Four Soft Ltd. v. Dy. CIT [IT Appeal No. 1495 of2011] 7 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
12. In light of the above decisions, the rate to be used for undertaking an adjustment should be LIBOR and not the average yield rates considered by the learned TPO. The LIBOR rate for March 2008 was 2.6798%. However the assessee has charged 7% from its AE as per the internal CUP available. Thus, the assessee haS charged interest to EKC Dubai and EKC China at the rate higher than existing LIBOR rates. Accordingly, the said transaction of providing loan to EKC Dubai and EKC China is at arm's length. Additions made by the AO are accordingly set aside."
We ,therefore , respectfully following the ratio , set aside the DRP direction and direct the AO to delete the addition. The ground no. 1 is resultantly allowed.
8. The second issue raised by the assessee is against the action of DRP direction upholding the order of AO disallowing the hedging loss of Rs.61,63,000/- for hedging transaction with the AE. The AO after perusing the annual report of the assessee observed that a hedging loss of Rs.61,63,000/- was incurred by the assessee and accordingly details were sought from the assessee which was replied by the assessee vide letter dated 08.01.2016 submitting that it had incurred hedging loss in connection with the loan which was advanced to the foreign subsidiary Golden Harvest and it was also stated that the said loss was not recovered from the AE and borne by the assessee only . The TPO accordingly made an adjustment on account of international transaction to the tune of Rs.61,63,000/-. The Ld. DRP upheld the addition on account of hedging loss by observing and holding as under:
"2.20 We have considered the submission of the assessee. The assessee argued that the said transaction is not an international transaction as per section 92B of the Income Tax Act, 1961. In this regard, we have referred to Section 92B of the Income Tax Act, 1961. Section 92B states as under:
Meaning of international transaction.
92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, 8 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
sale or tease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, tosses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.
(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be [deemed to be a transaction] entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise [where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not].
[Explanation.-For the removal of doubts, it is hereby clarified that-(i) the expression "international transaction" shall include-
(a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;
(b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;
(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;
(d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;
(e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of /the transaction or at any future date;
2.21 Section 92B as stated above clearly explains the term "international transaction", which means a transaction between two or more associated enterprises, either or both of whom are non-residents............ in the nature of lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. In the instant case, the assessee has borne hedging Loss on loan availed from ICIC1 Bahrain. The said loan in-turn was diverted to AE for meeting its fund requirements. Hence, looking into the substance over form, hedging loss is directly attributable to the loan availed from ICICI Bahrain for the benefit of the AE. Therefore, we are of the considered opinion that the said transaction is an international transaction as per Section 92B 9 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
of the Income Tax Act, 1961. The assessee has also referred to Annexure 2, agreement on hedging contract, of his submission dated 02.05.2016. As per the agreement on hedging contract, the assessee has entered into contract with ICICI Bank Ltd for Payments: New York, Mumbai, Bahrain. In this regard, reference is made to the order of the TPO, wherein, TPO has stated that the assessee was asked to submit the details of the hedging loss {i.e. amount, nature of transaction on which loss is being incurred and hedging agreement). The assessee vide submission dated 8 January 2016 submitted that the assessee had incurred hedging loss amounting to INR 6,163,000 and the same was on account of interest on loan taken by the Assessee from ICICI bank, Dubai with an intent to provide loan to the AE in Dubai.
2.22 In view of the aforesaid reasons, we are of the considered opinion that the assessee should have recovered the hedging loss pertaining to the amount of ECB loan availed and diverted to AE in the form of loan. This, the assessee has failed to do. Therefore, the adjustment made by the TPO of Rs.61,63,0007- is held to be in order. The objection filed by the assessee is dismissed."
9. The Ld. A.R. vehemently submitted before us that assessee has hedged the risk resulting from the fluctuation in foreign currency/exchange and thus covered the interest payment on ECB loan by way of derivative contract entered with the assessee and third party i.e. authorised dealer i.e. ICICI Bank India at Mumbai. The assessee has incurred loss of Rs.61,63,000/- which was debited to finance charges account in the P&L account and was fully borne by the assessee. The Ld. A.R. also referred to the para 5.5 of the loan agreement between assessee and the Golden Harvest copy of which is placed at page No.32 to
45. The Ld. A.R. also submitted that no such disallowance was made in the earlier assessment years. The Ld. A.R. primarily harped on the reasoning that hedging agreement was entered into between the assessee and the ICICI Bank , Mumbai and claimed that the profit on hedging, if any, would also have been offered to tax by the assessee and therefore submitted that the loss was rightly claimed by the assessee and should be allowed by reversing the order of DRP. The Ld. A.R. submitted that the 10 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
hedging loss is not an international transaction with the AE as the contract is between the assessee and the ICICI Bank, Mumbai and therefore transfer pricing provisions would not apply. The Ld. A.R. further referred to provisions of section 92B of the Act which defines the international transaction as transaction between the two or more AEs whereas the hedging contract was entered into between the assessee and ICICI Bank, Mumbai a independent third party not falling within the definition of AE. The Ld. A.R. also made a without prejudice submission that even if the loan was granted to an independent third party, the loss on account of hedging would not be recovered from such independent third party and therefore the question of recovering the same from its AE or making an adjustment in respect thereof would be incorrect.
10. The Ld. D.R., on the other hand, relied on the order of authorities below. The Ld. D.R. contended that since the assessee has hedged the payment of interest on the loan advanced to the AEs and therefore any expenses/loss incurred in connection therewith is liable for transfer pricing adjustment and therefore the arguments of the Ld. A.R. that it is not international transaction between the two or more AEs in terms of section 92B that carries no wait. Finally, the Ld. D.R. prayed before the Bench that since the hedging loss was incurred in connection with the hedging for foreign currency to protect the interest payments and therefore it was rightly added to the income of the assessee.
11. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are 11 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
that the assessee has borrowed money from ICICI Bank Bahrain for specific purpose of advancing the same to the AE of the assessee to set up a plant in Fujairah for the reason that majority of the production would be sold to the assessee. Now the issue before us whether the loss incurred by the assessee in connection with hedging of the foreign exchange for paymentof interest on loan provided to its AE by way of derivative contract entered into between the assessee and independent third party i.e. ICICI Bank, Mumbai is liable for transfer pricing adjustment or the assessee is not entitled to claim the said loss. The undisputed fact is that the contract is between the assessee and ICICI Bank, Mumbai and not with the AE , therefore we find merit in the contention of the assessee that the this is not an international within the meaning of section 92C of the Act. Having considered the facts of the case and rival submissions of the parties we are of the considered view that the loan was taken for the purpose of advancing it to the foreign subsidiary. Therefore, any expense or loss incurred in connection with that transaction would not be an international transaction between the assessee and the AE as the said loss or expense was incurred under a contract between the assessee and the third party. So under these circumstances, we are inclined to take a view that the DRP has taken a incorrect view of the matter in upholding the order of AO on this issue. We definitely feel that the expenses in not in connection with the business of the assessee or out of commercial and business expediency of the business but disallowance by making TP adjustments is not correct . The AO could made the disallowance u/s 37 of the Act as not wholly and exclusively for the purpose of business. In 12 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
view our observations , we not setting aside the order of DRP on this issue and direct the AO to delete the disallowance. The ground no 2 is accordingly allowed.
12. The third issue raised by the assessee is against the decision of the DRP upholding the addition on account of notional interest by TPO on share application money invested by the assessee in overseas subsidiary. The TPO observed that assessee has remitted share application money to its AE Golden Harvest in the previous F.Y. 2010-11 and in current F.Y. 2011- 12 and the same was disclosed by way of note in form 3CEB and assessee has not stated anything in the transfer pricing study report to that effect. The AO queried the assessee about the share application money remitted by the assessee till date and details of share allotted against the said share application money. The assessee replied that till date no shares were allotted and the shares are pending allotments before the AO vide written submission dated 22.01.2016 that Golden Harvest has set up a manufacturing facility in free trade zones at Sharjah which was governed by the free trade zone rules. As per the rules investments in any company setting up plant in free trade zones at Sharjah required the approval of free trade zone authorities. Since the assessee has not received the approval of free trade zone authorities, the AE Golden Harvest could not allot shares to the assessee. However, the explanation of the assessee did not find favour with the TPO who was of the opinion that the shares were not issued to the assessee within a reasonable period of time and any capital locked up due to non issuance of shares for a longer period of time has to be treated 13 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
in the nature of loan and accordingly treated the same as interest free loan extended to AEs. Finally the TPO applied interest @ 12.06% on the said share application money by making a upward adjustment of Rs.2,44,20,173/- in respect of share application money pending allotment of shares. The DRP dismissed the appeal of the assessee by observing and holding as under:
"3.8 we have considered the facts of the case and the submissions made by the assessee. The assessee has contended that the money was remitted as share application money and cannot be treated as loan. However, it is an undisputed fact that against the money so remitted, no shares have been allotted to the assessee even till date. Such inordinate delay has not been explained by the assessee. Other than stating that the shares could not be allotted as permission from the Sharjah authorities has not been obtained. It is pertinent to note that in an arm's length situation, no third party would ever agree to let its share application money to be retained without shares being allotted against such money for such a long period of time. It is clear from the factual information detailed in the assessment order that the assessee has not explained satisfactorily as to why when the payments were made so many months/years before, shares were still not issued. It has also not been explained as to under what circumstances the AEs solicited the share application money, why the shares were not allotted within a reasonable time. The assessee has also not furnished before us any evidence to substantiate its contentions that it was on account of delay in the Sharjah authorities giving approval that the shares have not been issued. No documents/evidence has been furnished by the assessee or any communication with the Sharjah authorities to show that any effort was being made by the assessee/its AEs to obtain the alleged approvals which would enable the AE to issue the shares to the assessee.
13.9 In India, the deposit of money towards share application of any company was governed by the Rules and regulations under the Companies Act, 1956 (applicable for the financial year in question) and Regulations of the SEBI. These rules and regulations are indicative of the Government intention to protect the interest of the investors and ensuring equity and fair play in allotment of shares. Sec.73 of the Companies Act, 1956 lays down the procedure for the allotment of shares. This section provides that in eventuality of money being refunded, it has to be refunded within 8 days, from the day the company becomes liable to pay it, failing which the company would be liable to pay interest upto @15% per annum.
3.10 Further, the SEBI Regulations (18), 2009 (issue of Capital and Disclosure Requirement) dated 26-08-2009 lays down that allotment of shares and refund of money has to be made within 15 days within the closure of the issue and if the shares are not allotted or application money are not refunded within 15 days then issuer shall pay interest at such rates and within such period as disclosed in the offer documents. Regulations 69 of SEBI (ICDR) lays down the general obligation of 14 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
the issuer and intermediaries with respect to public issue and right issue. It provides for ensuring payment of interest to applicants for delayed dispatch of allotment letters, refund orders as per disclosure made in the offer documents. Regulations 99 of SEBI (ICDR) lays down the minimum subscription requirements in the rights issue which prescribes, under certain circumstances, to refund the subscription amount to the subscriber at 15% per annum for the period of delay after 60 days. The TPO has also pointed out towards certain regulations relating to issue of preference shares by unlisted companies.
3.11 From the aforesaid provisions, it is clear that there is encumbrance on company issuing shares and that is in the shape of interest being payable after a certain period of time. Accordingly, it can be seen that on the one side, mere delay in allotment of shares cannot re-characterise the transaction of share application money as loans but delay in allotment of shares definitely entitles the applicant to receive the interest as per rates mentioned above. Hence, the assessee's contention on this point regarding re-c characterising the share application money as loan deserves to be rejected as there is not only delay but also no allotment of shares to the assessee against crores of money advanced to the AE, allegedly on account of share application money.
3.12 We are of the opinion that such provisions in the Indian Rules and Regulations of the Regulatory Authority referred to hereinabove are clear indicators of the fact that In third party situation and in arm's length dealing, interest would be chargeable against the share application money towards any delay attributable to the issuer company. Thus, the application of arm's Length principle clearly empowers the TPO to treat this transaction of share application money as loan for the limited purposes of the Transfer Pricing provisions. We, however, note that on close analysis of the transaction, what has been advanced to the AE is nothing but money in the nature of loan which has been only characterised by the assessee as share application money. Further, without prejudice to the above, even if for argument sake, it is considered that the money is remitted as share application money and remains share application money, even then, in an arm's length situation, assessee is entitled to interest on the delayed days for allotment of equity. The assessee has not furnished any document before us to show that in Sharjah, the money in the form of share application money can be retained by a company without issuing any share for months and years together.
3.13 In the case of M/s Perot Systems TSI, the Hon'ble Delhi ITAT has concluded that the cost of funds to the taxpayer and the commercial expediency is not an acceptable reason in international transactions between the assessee and the AE. The ITAT has further observed that one has to see whether the transaction is at Arm's Length under the Transfer Pricing provisions. Here the Hon'ble ITAT has also disregarded the argument that notional interest income is not assessable to tax. The Hon'ble ITAT referring to Sec.92(1) and 92B(1) has arrived at the conclusion that in considering the Arm's Length Price of loans, the rate of interest has to be considered and the income on account of interest can be attributed. These are the aspects of the decision of the Hon'ble ITAT that are squarely applicable to the facts of the case. Hence, the contention of the assessee regarding re-characterisation of the share application transaction as loan is rejected.
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3.14 In the case of Bharti Airtel Limited (ITA No.5816/Del/20l2) has observed as follows: -
"On facts of this case also, there is no finding about what is the reasonable and permissible time period for allotment of shares, and even if one was to assume that there was an unreasonable delay in allotment of shares, the capital contribution could have, at best, been treated as an interest free loan for such a period of 'inordinate delay' and not the entire period between the date of making the payment and date of allotment of shares. Even if ALP determination was to be done in respect of such deemed interest free loan on allotment of shares under the CUP method, as has been claimed to have been done in this case, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant if, despite having made the payment of share application money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is not in pan material with an interest free loan on commercial basis between the share applicant and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE, Since the TPO has not brought on record anything to show that an unrelated share applicant was to be paid any interest for the period between making the share application payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits."
3.15 From the above, we note that the Hon'ble Tribunal has itself held that if it was to be assumed that there was an unreasonable delay in the allotment of shares, the capital contribution could have, at best, been treated as an "interest-free loan" for such a period of inordinate delay. It is pertinent to note that in such circumstances, the Hon'ble Tribunal is not averse to re-characterizing the transaction a "loan", albeit an interest free loan. We are, however, of the opinion that the moment it is re-characterized as a loan for the limited purpose of TP provisions, it would be covered by the Transfer Pricing provisions and all the provisions relating to the computation of ALP would apply.
3.16 Coming to the facts of the present case, the assessee has not brought any material on record to show that the AEs intended to issue equity shares to the assessee immediately at the time when the investments towards the shares by way of share application money was claimed to have been made by the assessee. It has not been explained as to why, if the money towards the shares were accepted by the AEs, they did not issue the shares to the assessee within a reasonable time, especially when shares were to be issued only to the holding company and no one else, and all matters would have been discussed and decided beforehand. Nothing has been brought on record to show as to the terms of the allotment of the shares. Mere entries in the books of accounts and records of the company cannot be accepted as reliable and conclusive evidence in the absence of the assessee substantiating the same with the documents relating to the terms of the issue and allotment of shares. As stated earlier, it has not been explained satisfactorily by the 16 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
assessee as to why substantial amounts were advanced to the AEs without the shares having been allotted for substantially long periods of time. It was for the assessee to show that as per the applicable laws, the company soliciting share application money could retain the funds without actually allotting the same for months/years together and without paying any compensation for such inordinate delay. The assessee failed to do so.
3.17 From the above, the only conclusion that can be drawn is that funds were provided by the assessee to the AEs interest-free for a long period of time with the intention to fund the activities of the AEs without corresponding compensation to itself under the garb of share application money. It is, therefore, clear that the transactions were substantially at variance with the stated form. Hence, the action of the TPO of characterizing the nature of the transactions as loan for Transfer Pricing purposes cannot be faulted with. The objections filed by the assessee are, therefore, dismissed.
3.18 The assessee has argued that the money it received for investing in the Sharjah company was on account of interest free funds received from IPO and out its own accruals. However, we have to appreciate that in the present proceedings and under the TP provisions, we are not concerned about the source of funds to the assessee. Rather, the mandate is to examine the transactions between two or more associated enterprises, either or both of whom are non-resident and to compute the ALP of the international transaction. Hence, as held earlier, Objection No. 3 is dismissed."
13. The Ld. A.R. submitted before the Bench that share application money was advanced for allotment of shares and to fulfill the requirement of funds by the AE for setting up a plant in free trade zone in Sharjah. The said AE Golden Harvest could not allot the share as the permission was not given by the free trade zone authorities to issue shares and therefore this was not in the hands of either the assessee or AE to get the share application money converted into shares as the same are subject to the local rules and regulations of the free trade zone. The assessee also contended that in the earlier years the assessment was framed in scrutiny proceedings and no such addition was made on account of interest on share application money. The Ld. A.R. stated that the only plea on the basis of which the said notional interest was added by the TPO was that no independent 17 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
entity would leave the money in the hands of the other entity without same being converted into equity within a reasonable period and it is only on that basis, the share application money was treated as interest free loan. The Ld. A.R. further stated that if there is no income arising from the international transactions, the transfer pricing provision could not apply. The Ld. A.R. relied on a series of decisions in defence of his arguments as under:
1. Vodafone India Services (P) Ltd. Vs. Add CIT - 368 ITR 001 (Bom)
2. Shell India Markets(P) Ltd Vs. Asst. CIT 369 ITR 516 (Bom)
3. Equinox Business Parks (P) Ltd. Vs. Union of India - 230 Taxman 191 (Bom)
4. SG Asia Holdings (lndia)(P)Ltd. Vs. DCIT - 229 Taxman 452 (Bom)
14. The Ld. A.R. further stated that the co-ordinate bench of the Tribunal has held in a couple of decisions that investment in share application money/capital of AE where no income accruing from the said investments; the said transactions are beyond the scope of Indian TP regulations. In defence of his argument the Ld. A.R. relied on the following decisions:
1. Hill County Properties Ltd. Vs. Add CIT 48 taxmann.com 94 (Hyd)
2. Vijai Electricals Vs. Add CIT - 60 SOT 77 (Hyd)
15. The assessee also submitted that the transactions of investment in share capital should not be treated as loan as the clear intention behind advancing the money was the allotment of shares. In defence of his argument the Ld. A.R. relied on the following decisions:
"1. DIT Vs. Besix Kier Dabhol SA TS-661-HC-2Q12 (Bom)
2. Aegis Limited v ACIT [TS-342-ITAT-2015 (Mum) -TP]
3. Parle Biscuits Pvt Ltd v DCIT [TS-127-ITAT-2014 (Mum) -TP]
4. Mylan Laboratories Ltd v ACIT [TS-399-ITAT-2015 (Hyd) - TP]
5. Allcargo Global Logistics v ACIT [150 ITD 651 (Mumbai)]
6. Tooltech Global Engineering Pvt Ltd v DCIT [51 taxmann.com 336 (Pune)]"18 ITA No.1452/M/2017
M/s. Aries Agro Ltd.
16. The last without prejudice contention raised by the Ld. A.R. was that even if the share application money is stated as interest free loans, the arm length price rate of notional interest could not exceed the LIBOR. The Ld. A.R. relied on the following decisions:
i. CIT v Cotton Naturals India Pvt Ltd - [2015] 55 taxmann.com 523 (Delhi) A ii. Cotton Naturals India Pvt Ltd v DCIT - (2014) 146 ITD 0662 (Delhi) iii. CIT v Tata Autocomp Systems Ltd - [2015] 56 taxmann.com 206 (Bom) iv. Marico Ltd v ACIT - (2016) 70 taxmann.com 214 (Mumbai) v. IL&FS Maritime Infrastructure Co Ltd v ACIT- (2015) 62 taxmann.com 233 (Mumbai) vi Hinduja Global Solutions Ltd v ACIT - (2013) 145 ITD 0361 (Mumbai) vii. DCIT v Indian Hotels Co Ltd - [2014] 46 taxmann.com 261 (Mumbai) viii. Indegene Lifesystems P Ltd v ACIT- (2015) 60 taxmann.com 28 (Bangalore) ix. Tooltech Global Engineering P Ltd v DCIT - (2014) 51 taxmann.com 336 (Pune) x. Everest Kanto Cylinder Ltd v ACIT - (2014) 52 taxmann.com 395 (Mumbai) xi. Siva Industries & Holding Ltd v ACIT-[2011] 11 taxmann.com 404 (Chennai) xii. Siva Ventures Ltd v ACIT - (2013) 36 taxmann.com 498 (Chennai) xiii. Apollo Tyres Ltd v ACIT - (2014) 45 taxmann.com 337 (Cochin)
17. The Ld. D.R., on the other hand, heavily relied on the order of DRP by submitting that the assessee has advanced money to the foreign AE as share application money which remained unadjusted for a very long period of time due to non allotment of shares. The Ld. D.R. contended that the DRP has rightly upheld the order of TPO making adjustment on account of notional interest on the said share application money by treating the same as interest free loan and therefore clearly falls within the ambit of transfer pricing provisions. The Ld. D.R. also tried to distinguish various decisions relied upon by the assessee and submitted that all said decisions were rendered on different facts and circumstances and are not applicable to the present case. Finally, the Ld. D.R. prayed before the Bench that the order of DRP should be upheld.
19 ITA No.1452/M/2017M/s. Aries Agro Ltd.
18. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has advanced money as share application money to Golden Harvest a foreign AE to set up a plant in free trade zone in Sharjah. It is also undisputed that the AE could not convert the share application money into share capital by issuing shares to the assessee as the permission from the free trade zone authorities with whom the AE was registered was pending and this was the only sole reason for not issuing the shares in favour of the assessee. Now the issue before us is whether the share application money could be treated as loan and could be subjected to the transfer pricing provisions. After perusing the facts on record and going through the decision relied on by the Ld. A.R., we find that no income has accrued from the share application money to the assessee and therefore such transactions could not be subjected to transfer pricing provisions. The Hon'ble Jurisdictional Bombay High Court in the case of Shell India Markets Pvt. Ltd. vs. ACIT and others has also held that the provisions of chapter 10 of the Act would apply only when income arises from the international transactions. The relevant portion of the said order is reproduced as under:
"9. We shall now consider the above submissions on behalf of the Revenue. So far as the availability of alternative remedy is concerned, the petitioner has at the beginning of today's hearing itself undertaken to withdraw its objection on the issue of jurisdiction before the Dispute Resolution Panel. This was accepted by us before considering the issue on the merits. Moreover, this petition was filed on April 24, 2013, challenging the impugned orders dated January 30, 2013, of the Transfer Pricing Officer and the draft assessment order dated March 28, 2014, of the Assessing Officer, on the issue of jurisdiction. This issue has been decided in Vodafone IV and would be binding on all authorities within the State till the apex court takes a different view on it. Therefore, in view of the fact that the Revenue does not dispute that the issue on the merits stands covered by the decision of 20 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
Vodafone IV it would serve no useful purpose by directing the petitioner to prosecute its objections before the Dispute Resolution Panel and the Dispute Resolution Panel disposing of the same in accordance with Vodafone IV. Thus, in the present facts the distinction sought to be made on the ground of alternative remedy is not such as to warrant not entertaining the petition.
10. The second distinguishing feature from that of Vodafone IV, as canvassed by the Revenue, is that Form 3CEB in respect of the transaction of issue of shares to its associated enterprises, is not disclosed as an international transaction. This the petitioner was obliged to do as the transaction is an international transaction. This was in fact done by the petitioners in Vodafone IV. This stand by the Revenue is a little curious as in Vodafone IV the Revenue contended that as the petitioners therein had filed Form 3CEB in respect of issue of shares to its associated enterprise, they had submitted to the jurisdiction of Chapter X of the Act and cannot now contend that the proceeding to tax such shortfall on capital account is without jurisdiction. In this case, an exactly opposite stand is being taken by the State. The State is expected to be consistent and not change its stand from case to case. Be that as it may, the petitioner herein had not disclosed the transaction in Form 3CEB as, according to the petitioner, it was not an international transaction for the reason that it did not give no rise to any income. The fact that the petitioner chose not to declare issue of shares to its non-resident associated enterprises in Form 3CEB as in its understanding it fell outside the scope of Chapter X of the Act now stands vindicated by the decision of this court in Vodafone IV. If the petitioner did not file a particular transaction in Form 3CEB when so required to be filed, the consequences of the same as provided in the Act would follow. However, the mere not filing of Form 3CEB on the part of the petitioner would not give jurisdiction to the Revenue to tax an amount which it does not have jurisdiction to tax. Therefore, we do not find any substance in this objection also.
11. The last objection taken by the Revenue was that in view of the variation in the shareholding pattern amongst different shareholders of the petitioner during the year clearly brought the issue of shares within clause (e) of the Explanation to section 92B of the Act. In terms of the above provision an international transaction would include a transaction of restructuring entered into by an enterprise with an associated enterprise. Mr. Pardiwala, learned counsel appearing for the petitioner, points out that there has been no restructuring of the organisation but there has been a mere change in the shareholding of different shareholders of the petitioner. However, in the present facts we need not examine this for the reason that even if it is assumed that it is an international transaction, the jurisdictional requirement for Chapter X of the Act to be applicable is that income must arise. In this case, admittedly following Vodafone IV no income has arisen. Thus, the jurisdictional requirement for application of Chapter X of the Act is not satisfied.
12. As held in Vodafone IV, the jurisdiction to apply Chapter X of the Act would occasion only when income arises out of international transaction and such income is chargeable to tax under the Act. The issues raised in the present petition are identical to the issues which arose for consideration before this court 21 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
in Vodafone IV. Therefore, following the aforesaid decision we set aside the order dated January 30, 2013, of the Transfer Pricing Officer to the extent it holds that the arm's length price of issue of equity shares is Rs. 183.44 per share as against Rs. 10 per share as declared by the petitioner and consequent deemed interest brought to tax on the amount not received when benchmarked to the arm's length price. Accordingly, we set aside the draft assessment order dated March 30, 2013, to the extent it seeks to bring to tax the arm's length price of the share issued by the petitioner to its non-resident associated enterprises and also deemed interest which is sought to be brought to tax on the ground of non- receipt of the consideration equivalent to the arm's length price by the petitioner on issue of equity shares. It is further clarified that the petitioner's objection before the Dispute Resolution Panel filed on April 25, 2013, on all issues save and except the issue covered by this order would be considered by the Dispute Resolution Panel on its own merits."
19. The Hon'ble Bombay High Court further in the case of Equinox Business Parks (P.) Ltd. vs. Union of India has held as under:
"This has been accepted by the Revenue and is evident from the order of DRP dated 30 October 2014 in Petitioner's case for A.Y. 2010-11. In the A.Y.2010-11 also the Petitioner had issued CCDs and equity-shares and the basis was identical to the present Petition. The Revenue sought to tax the Petitioner in terms of Chapter X of the Act. However, the Petitioner objected to the Draft Assessment order before DRP. On 30 October 2014, DRP issued directions under Section 144C(5) of the Act to the Assessing Officer for the A.Y. 2010-11 and on identical facts qua equity shares and CCDs holding as under:
"3.4 We find that the issue under consideration of applying Transfer Pricing Provisions on 'issue of shares' has been decided in favour of the assessee by the Hon'ble Bombay High Court in the case of M/s Vodafone India Services Private Limited in Writ Petition number 871 of 2014 dated 10th October 2014. The honourable High Court has held that the amounts received on issue of shares is a capital account transaction not separately brought within the definition of 'income' as per the provisions of section 2(24) as well as sections 4 & 5 of the Act. Therefore, such capital account transaction not falling within a statutory exception cannot be brought to tax. Even income arising from international Transaction between AE must satisfy the test of income under the Act and must find its home in one of the above heads i.e. charging provisions. There is no charging section in chapter X of the act. Only if there is income which is chargeable to tax under the normal provisions of the act, then alone Chapter X of the act could be invoked. Further, since there is no income arising from the transaction of issue of shares, the provisions of chapter X would not apply. The Hon'ble Bombay High Court in the said case has quashed and set aside as Being without jurisdiction, null and void, the reference made by the TPO, and the order of the TPO making a transfer pricing adjustment on issue of shares. Respectfully following the decision of the jurisdictional Bombay High Court, 22 ITA No.1452/M/2017 M/s. Aries Agro Ltd.
the adjustment proposed by the' TPO on account of issue of shares is deleted. Accordingly, ground of objection number 16 of the assessee is allowed."
20. We, therefore, respectfully following the ratio laid down by the Hon'ble Bombay High Court, reverse the direction of DRP and direct the AO to delete the addition on account of notional interest of Rs.2,44,20,173/-.
21. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 28.11.2018.
Sd/- Sd/-
(Mahavir Singh) (Rajesh Kumar)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: .11.2018.
* Kishore, Sr. P.S.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT (A) Concerned, Mumbai
The DR Concerned Bench
//True Copy// [
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.