Air Works India (Engineering) Pvt. Ltd. Vs ITO (ITAT Mumbai)
Summary: The Mumbai Bench of the Income Tax Appellate Tribunal considered two appeals filed by Air Works India (Engineering) Pvt. Ltd. challenging penalties imposed under Section 271(1)(c) of the Income Tax Act, 1961, for assessment years 2009-10 and 2010-11. The assessee, engaged in providing aviation engineering, asset management, safety and technology services, had advanced an interest-free working capital loan to its Mauritius-based associated enterprise, Mac Air Sales Ltd. The Transfer Pricing Officer treated the loan as an international transaction requiring an arm’s length interest adjustment. The controversy before the Tribunal was whether the resulting transfer pricing adjustment justified concealment or inaccurate-particulars penalties under Explanation 7 to Section 271(1)(c).
The assessee held 26% voting power in Mac Air Sales Ltd. and had advanced USD 25,39,270, equivalent to Rs.12,64,42,000, including a foreign-exchange restatement of Rs.1,21,35,738. Of this amount, USD 9,90,000 had been repaid. The assessee explained that the advance was funded entirely from its own resources and represented start-up business support in the nature of equity or quasi-equity investment. The funds were intended to develop the associated enterprise’s aviation consultancy operations and support international customers in the Asian region. On that basis, the assessee maintained that no interest was chargeable.
The Transfer Pricing Officer nevertheless made an upward adjustment using an interest rate of 11.96%. In the quantum proceedings, the arm’s length interest was subsequently determined by applying LIBOR plus 300 basis points. Consequently, the adjustment for assessment year 2009-10 was reduced from Rs.66,28,068 to Rs.22,11,203, with a similar reduction for assessment year 2010-11. The Assessing Officer thereafter invoked Explanation 7 to Section 271(1)(c) and levied penalties of Rs.6,63,361 and Rs.7,46,823 for the respective assessment years. The Commissioner of Income Tax (Appeals) confirmed both penalties.
Before the Tribunal, the assessee raised objections concerning the absence of proper satisfaction and the failure to specify the precise charge in the penalty notice. On merits, it emphasised that the transaction had been disclosed in its transfer pricing documentation and that the reasons for not charging interest had been explained before the tax authorities. The Revenue argued that the confirmed transfer pricing adjustment, even after reduction, justified the deeming provision under Explanation 7 because the assessee had not charged any interest on the associated enterprise loan.
The Tribunal observed that the loan transaction, the assessee’s funding explanation and the transfer pricing position had been disclosed. Merely because the Transfer Pricing Officer rejected the assessee’s explanation and made an arm’s length adjustment, it did not follow that inaccurate particulars of income had been furnished. Although the precise extent of the equity or quasi-equity component had not been elaborated, the assessee had explained its commercial reasons and the use of its own funds. The Tribunal therefore deleted the penalties for both assessment years and allowed both appeals on merits. The decision distinguishes a transfer pricing adjustment from the separate statutory requirements for imposing a penalty.
FULL TEXT OF THE ITAT MUMBAI ORDER
The aforesaid appeals have been filed by the assessee against order dated 16/08/2023 for A.Yrs. 2009-10 and 2010-11 passed by ld. CIT(A)-55, Mumbai in relation to penalty proceedings u/s.271(1)(c).
2. Since identical issues are involved in both the appeals, therefore, same were heard together and disposed of by way of this consolidated order.
3. The brief facts are that the assessee is engaged in the business of providing aviation services to scheduled airlines, business and people who own or operate air craft as well as to the country’s defense services. It provides engineering, asset management, safety and technology solutions to the commercial and solutions to the aviation industry. Here in this case reference to the ld. TPO was made to determine the international transaction with the AE. The ld. TPO on going through the Article in Form 3CEB notice that M/s. Mac Air Sales Ltd is an AE of the assessee group based in Mauritius, which is engaged in aviation consultancy. Assessee holds 26% of the voting power in Mac Air Sales Ltd. On going through the report, he noted that assessee advanced loan to its AE amounting to USD 25,39,270/- (Rs.12,64,42,000/-) and this includes restatement due to foreign exchange fluctuation of Rs.1,21,35,738/- for meeting its working capital requirement. Out of such loan, USD 9,90,000/- has been repaid by M/s. Mac Air Sales Ltd. He further noticed that interest free loan in Form 3CEB does not mention any such international transaction. In response to the show-cause notice, assessee had submitted as under:-
“the entire working capital loan was extended out of own funds of the assessee company The assessee company categorically submits that no loan funds were raised by the assessee company to extend the interest free working capital loans to the AE. Under section 92B of the Act, the international transaction means a transaction between 2 or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease 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, losses or assets of such enterprises and shall include a mutual agreement or arrangement between 2 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.
The above mentioned transactions were in the nature of the investment in the form of equity/quasi equity. This investment is made in the AE as start-up investments so as to promote the business in the Asian region to enable the assessee company to support the international customers for aircraft sales and/or acquisition consultancy. It is to submit that a mere lending of interest free working capital loan itself cannot constitute an international transaction unless it has a bearing on the profits, income, losses or assets. In the present case the assessee company has extended the interest free working capital loan as a start-up support and according to the RBI approvals. The debt equity ratio of AE East 2:1 which is at accepted level. The assessee being a holding company has extended the loan us start-up support and also for its business gain. When no interest is charged and the lending is out of owned funds the loan transaction has no bearing on the profit of the assessee company. Therefore for the purposes of section 90B of the act, the loan transaction alone cannot be international transaction unless it has bearing on the profits of the enterprise. Further as the assessee has extended the working capital loan out of its own funds thus no expenses are incurred for it.”
4. Apart from that, assessee has also cited certain decisions wherein in such cases it was held that no interest should be charged. However, the ld. TPO made upward adjustment by taking rate of interest @11.96%, however, in the quantum proceedings, the matter has been settled by applying LIBOR +300 bps, accordingly, the addition has been reduced to Rs.22,11,203 as against Rs.66,28,068/- in the A.Y.2009-10 and similar reduction was made in the A.Y.2010-11.
5. Now on this, penalty u/s.271(1)(c) has been levied by invoking Explanation 7 to Section 271(1)(c) levying penalty both on inaccurate particulars of income leading concealment of income and penalty of Rs.6,63,361/- has been levied in A.Y.2009-10 and Rs.7,46,823/- in A.Y.2010-11. The penalty has also been confirmed by the ld. CIT(A).
6. Before us, ld. Counsel has raised various legal grounds and firstly, there is no proper satisfaction; and secondly, in the notice ld. AO has not specified the charge under which claim he has proposed to initiate the penalty proceedings. Even while levying the penalty he has levied on both the charges which cannot be sustained. On merits he submitted that, firstly in Form 3CEB assessee has categorically mentioned that entire loan was extended from own funds of the assessee and secondly, these were in the nature of investment in the form of equity / quasi-equity as part of investment so as to promote business in Asian region. Thus, under these circumstances, no interest was charged and there was no bearing on the profit of the assessee company.
7. On the other hand, ld. DR submitted that Explanation 7 is clear that if adjustment made by the ld. TPO then it is deemed to be the income in respect to which particulars have been concealed or inaccurate particulars have been furnished and here in this case, it is an admitted fact that assessee has not charged interest on such loan and therefore, till the stage of Tribunal, adjustment on account of interest has been confirmed which has been reduced by applying LIBOR + 300 bps. Thus, the order of the ld. CIT (A) should be upheld.
8. After considering the rival submissions and on perusal of the material placed on record, we find that it is not in dispute that assessee had advanced loan to its AE of USD 25,39,270/- (Rs.12,64,42,000/-) and out of which USD 9,90,000/- has been repaid to the assessee. When this was pointed out, assessee has explained that the entire working capital loan was extended out of own funds of the assessee company and these were in the nature of investment in the form of equity / quasi-equity as part of investment so as to promote business in Asian region to support international customers for aircraft sales. Apart from that, assessee has disclosed all the particulars of income including ALP of interest in the TP study report, by claiming that no interest is chargeable on this transaction. Though assessee has given explanation before the ld. TPO / ld. AO, however, the same has not been accepted. The assessee has explained all the reasons for not charging of interest due to various reasons and also one of the important explanations was that these investments were in the form of equity / quasi equity then in that case there could not have been any issue of imputing any interest even under TP provisions. However, what was the extent of the investment in equity / quasi equity has not been elaborated however, the contention of the assessee is that it has given partly that capital loan out of its own funds and has also justified the reasons for not imputing interest, then such explanation can be said to be not bonafide and does not lead to inference that assessee has furnished inaccurate particulars. Accordingly, penalty levied by the ld. AO in both the years are deleted.
9. In the result, both the appeals of the assessee are allowed on merits.
Order pronounced on 30th April, 2024.
