ALP computed by adopting lending rate of banks in India is not sustainable

Bombay Rayon Holdings Ltd. Vs ITO (ITAT Mumbai)

Another issue in this regard for A.Y.2010-11 onwards is that the loan has been converted into share application money. In this regard, the ld. Counsel of the assessee has placed reliance upon several case laws that share application money is shareholder fund and no interest should be attributable to the same. In the present case, we find that authorities below have given a clear finding that the plea that so called share application money which is said to be given for strategic purpose for acquiring control is not sustainable at all. Assessee has full control over the AE. It could not be said that giving further loans and considering it as share application advance can strengthen assessee’s control over the same. Hence, the plea that the loan was advanced as strategic shareholder function totally fails. Moreover it is not the issue of inordinate delay of conversion of share application money into share capital. The fact is that the issue of conversion into share capital was given a complete go by and subsequently the entire amount was written off as irrecoverable. Hence, the case laws relied by the assessee’s Counsel are in totally different context. Hence, this plea does not fortify the case of the assessee.

Now, we come to the issue of application on interest rate on the said sum advanced. In this regard we note that the DRP has distinguished the decision in the case of CIT vs. Tata Autocomp systems Ltd (supra) by observing that the said decision does not render any ratio. In our considered opinion, this observation of the Dispute Resolution Panel totally uncalled for. We are of the considered opinion that decision of the Jurisdictional High Court is fully binding upon all the Courts and Tribunal of subordinate jurisdiction. We note that in the said case the assessee advanced funds to its wholly owned subsidiary in Germany on interest-free terms. The TPO held that the transaction was an “international transaction” and held that the assessee ought to have received interest at 10.25% being the lending rate charged by the banks in India (Arms length price). The DRP enhanced the rate of interest to 12%. On appeal, the Tribunal followed its earlier view in WF Ltd. Vs. DCIT (ITA No.673/Mum/06) and DCIT Vs. Tech Mahindra Ltd (46 SOT 141) and held that as the amount was advanced to an AE in Germany, the ALP rate of the interest had to be determined by adopting the EURIBOR rate of interest i.e. rates prevailing in Europe. The Department challenged the said finding of the Tribunal in the High Court on the basis that the EURIBOR does not govern the monetary markets or interest rates in India, which is the residence country of assessee and EURIBOR rate is not applicable to the loans for which foreign currency has to be purchased by the Lender. HELD by the High Court dismissing the appeal:

“We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. Vs. DCIT I (supra) and DCIT Vs. Tech Mahindra Ltd.”46 SOT 141 to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr.Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in ‘ VVF Ltd. Vs. DCIT'(supra) and DCIT Vs. Tech Mahindra Ltd. “(supra) on the above issue. No record has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. Vs. DCIT (supra) and ” DCIT Vs. Tech Mahindra Ltd. “(supra). The Revenue not : having filed any appeal, has in fact accepted the decision of the Tribunal in “VVF Ltd. Vs. DCIT (supra) and ” DCIT Vs. Tech Mahindra Ltd.“(supra). In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order”.

We followed the above said case law and accordingly, hold that the arm‟s length price computed by adopting the lending rate of banks in India is not sustainable. In this regard, we agree with the alternative submission of the assessee that the interest should be charged at LIBOR+200 bps. Such charging of interest has been approved by Hon’ble Jurisdictional High Court in several other case laws. We direct accordingly. It may not be out of place to mention that revenue’s insistence on application of bank rates in India will throw open the issue of assessee not incurring any expenditure on the funds for advancing the loan. As we have already held this issue is not to be considered for the computation of arm’s length price for an international transaction here.

FULL TEXT OF THE ITAT JUDGEMENT

These are appeals by the assessee against respective orders of the assessing officer passed under section 143(3) / 147 r.w.s. 144C(1) of the Income Tax Act, 1961 pursuant to directions of the Dispute Resolution Panel. Since the issues are common and connected and the appeals were heard together these are being consolidated and disposed of together for the sake of convenience

2. The common grounds of appeal read as under:-

For the sake of reference we are referring to the grounds of A.Y.2009-10.

General

1. On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer (‘TPO’) / learned Assessing Officer (‘AO’) / Hon’ble Dispute Resolution Panel (‘DRP’) erred in making transfer pricing adjustment of INR 13,38,53,244 on account of interest on transaction of loan advanced by the appellant to its associated enterprise (‘AE’) in Italy, alleging the same to be not at arm’s length in terms of the provisions of section 92C(1) and 92C(2) of the Income Tax Act 1961 (‘the Act’), read with Rule 10D of the Income Tax Rules, 1962 (‘the Rules’).

Re-opening of assessment

2. On the facts and circumstances of the case and in law, the learned AO erred in issuing notice u/s 148 of the Act for re-opening the assessment without properly appreciating the facts of the case and in law.

3. On the facts and circumstances of the case and in law, the learned AO erred in re-opening the assessment on the basis of information received from DCIT, Central Circle – 6(3), Mumbai regarding survey action carried out u/s 133 A of the Act on M/s Bombay Rayon Fashions Ltd; the holding company of the appellant, during which statement of Shri Prashant Agarwal in the capacity of Managing Director of M/s Bombay Rayon Fashions Ltd. was recorded on oath u/s 131 of the Act

4. On the facts and circumstances of the case and in law, the learned AO further erred in not appreciating the decision of the Hon’ble Supreme Court in the case of CIT vs Kadar Khan Sons as reported in 352 ITR 480 which held that the learned AO has no power u/s 133 of the Act to administer oath and take a sworn statement.

Violation of Section 144CC13) of the Act

5. On the facts and circumstances of the case and in law, the learned AO/TPO erred in passing the final assessment order not in conformity with the directions of the Hon’ble DRP thus violating the mandatory provisions of section 144C(13) of the Act.

Loan transaction

Interest should not be charged on the loan transaction.

6. On the facts and circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in disregarding the fact that the appellant had received interest free loan from its holding company i.e. Bombay Rayon Fashion Ltd. and advanced the said loan to BRFL Italia SRL, its AE in Italy, interest free for promoting the ‘GURU’ brand.

7. On the facts and circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in disregarding the fact that the loan was advanced by the appellant to its AE for promoting the ‘GURU’ brand in Italy and hence disregarded the purpose of the loan advanced by the appellant to its AE and thus determined adjustment without considering the surrounding circumstances / commercial expediency of the loan advanced by the appellant to its AE.

8. On the facts and circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in not appreciating that the law requires the arm’s length price to be determined keeping in mind the term ‘having regard to’ as used in section 92(1) of the Act. The learned TPO/ learned AO /Hon’ble DRP further erred in not appreciating that the income arising from an international transaction is required to be computed in relation to all relevant factors including those relevant to determine arm’s length price.

Without prejudice if interest is to be charged on the loan transaction, SBI PLR + 300bps cannot be applied.

9. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in not issuing a show cause notice to the appellant for charging interest at SBI PLR + 300 basis points thus denying the opportunity to the appellant for making its submissions against the interest rate and thus violating principles of natural justice. The Hon’ble DRP further erred in upholding the action of the learned AO / learned TPO.

10. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in concluding that the loan was advanced by the appellant to its AE in Indian currency i.e. INR. and hence erred in applying SBI PLR + 300 basis points as rate of interest.

11. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in disregarding the fact that the appellant advanced loan to its AE in Euro and interest on loan has to be computed according to the currency of the country in which the loan is utilised.

12. On the facts and in the circumstances of the case and in law, learned TPO/ learned AO / Hon’ble DRP erred in following the rates prescribed under the Safe Harbor Rules which are not applicable to the appellant since the appellant is not an ‘eligible assessee’ within the meaning of Rule 10TB of the Rules.

13. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in concluding the credit rating of the AE i.e. the borrower as ‘below investment grade’ thus applying a higher spread rate of 300bps.

Without prejudice if interest is to be charged the rate of interest is to be restricted to LIBOR / LIBOR + 200 bps.

14. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO / Hon’ble DRP erred in not restricting the rate of interest on the loan transaction to LIBOR rates without any spread.

15. Without prejudice, learned TPO/ learned AO / Hon’ble DRP erred in applying spread on LIBOR rates. The learned TPO/ learned AO / Hon’ble DRP further erred in not restricting the spread to 200 bps.

16. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in not issuing a show cause notice to the appellant for applying swap calculator for calculating spread rate thus denying the opportunity to the appellant for making its submissions against the swap calculator and violating principles of natural justice. The Hon’ble DRP further erred in upholding the action of the learned AO / learned TPO.

17. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in not providing / explaining the basis for the swap calculator and the basis of search criteria adopted for computing spread.

18. On the facts and in the circumstances of the case and in law, the Hon’ble DRP erred in not adjudicating the objections with respect to swap calculator.

Data provided by the learned TPO for benchmarking the loan transaction  using alternate is not reliable

19. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO erred in arbitrarily selecting companies as comparables without considering the characteristics of the loan advanced by the appellant to its AE vis-a-vis the characteristics of the comparable loan transactions. The Hon’ble DRP erred in upholding the action of the learned TPO / learned AO.

20. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO /Hon’ble DRP erred in disregarding the fact that the learned TPO has not provided the information as to whether the data of comparable companies used is of controlled transaction or uncontrolled transaction thereby violating rule 10B(2) of the Rules.

21. On the facts and in the circumstances of the case and in law, the learned TPO/ learned AO / Hon’ble DRP erred in not undertaking a detailed comparability analysis of the comparable companies identified to compute the spread.

Interest u/s 234B

22. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234B of the Act.

Interest u/s 234C

23. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234C of the Act.

Penalty u/s 271(l)(c)

24. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 27I(I)(c) of the Act.

Penalty u/s 271BA

25. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 271BA of the Act.

Penalty u/s 271FA

26. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 271FA of the Act.

The Appellant prays that the additions made by the learned AO / TPO and upheld by the Hon’ble DRP be deleted and consequential relief be granted.

The Appellant craves leave to add, alter, amend and/or withdraw any of the above grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.,

2.1. Further Grounds relating to A.Y.2010-11 to 2014-15 only are as under:-

“On the facts and circumstance of the case and in law, the Hon’ble DRP erred in considering share application transaction and loan transaction as one single transaction without appreciating that the learned TPO himself has considered both the transactions as two different transaction in the transfer pricing order.

On the facts and circumstance of the case and in law, the Hon’ble DRP erred in directing the learned AO / learned TPO to apply SBI PLR + 300 basis points interest rate on share application transaction only on the ground that one consistent rate should be applied to entire transaction. However, not appreciating that they are two separate transactions.

On facts and circumstances of the case and in law, the learned TPO/learned AO/ Hon’ble DRP erred in proposing adjustment on conversion of loan to share application money since there is no income arising from the international transaction of share application, being an investment/ shareholder activity.

Without prejudice, on facts and circumstances of the case and in law, the learned TPO/learned AO/ Hon’ble DRP erred in proposing adjustment on conversion of loan to share application money since there is no income arising from the international transaction of share application, being an investment/ shareholder activity.

Without prejudice, on the fact and circumstances of the case and in law, the learned TPO / learned AO erred by not bringing on record a comparable transaction of interest being charged on share application money pending allotment among unrelated parties. The Hon’ble DRP erred in upholding the action of the learned TPO / learned AO.

Without prejudice, on the fact and circumstances of the case and in law, the learned TPO / learned AO erred in applying LIBOR rate on share application transaction. The learned AO / learned TPO further erred in applying spread in addition to LIBOR rate on share application transaction.”

2.2. Assessee has also filed additional ground of appeal for all the years which reads as under:-

“1. On the facts and circumstances of the case and in law, the learned AO / TPO have erred in determining the arm’s length price of the international transaction of interest free loans on an adhoc basis and not in accordance with section 92C of the Income Tax Act, 1961 read with Rule 10B of the Income Tax Rules, 1962. The Hon’ble DRP has further erred in upholding the action of the learned AO/TPO.”

2.3. Assessee prays that it is a legal ground and hence it should be admitted.

2.4. Some facts are similar. We are referring to the facts and findings from A.Y.2009-10.

3. Brief facts of the case are that the assessee is a wholly owned subsidiary of Bombay Rayon Fashions Ltd (BRFL) which is a widely held public limited company. The assessee has two 100% subsidiaries namely BRFL Europe, B.V. and BRFL Italia SRL. The BRFL Italia SRL (‘BRFL Italy’ herein referred to as ‘AE’) was formed by the Group ostensibly to have a presence in the European region; to take over the other retail businesses of M/s Jam Session Holding SRL which owned a brand name ‘GURU1, (initially BRFL Italia SRL was incorporated as a 100% subsidiary of BRFL Europe BV on 05/08/2008 but w.e.f. 29/01/2009 the entire holding of BRFL Italia SRL was transferred to the assessee company). The assessee had filed its return of income for AY 2009­10 on 21/09/2009 declaring ‘nil’ income. The same had been accepted u/s 143(1) of the Act. A survey action under section 133(1) of the Act took place on the premises of the assessee on 16/12/2014 and it was found that the assessee had advanced loans to its AE. During the financial years 2008-09 to 2013-14 and that no interest has been charged on the loans so provided. It was also noted that the loans had been advanced out of the interest-bearing funds received from the holding company M/s Bombay Rayon Fashions Ltd. Subsequently in his statement recorded under section 131 of the Act, Shri Prashant Agarwal, the Managing Director of M/s Bombay Rayon Fashions Ltd, agreed that the assessee should have charged interest on the loans advanced to the AE @L1BOR +2% and on the basis of the prevailing rates the interest computed was also offered for taxation by him in the hands of the assessee for the respective financial years. Accordingly, the reassessment proceedings for AY 2009-10 was initiated by the AO and the notice under section 148 of the Act issued on 29/03/2016 but in the return of income filed by the assessee no disclosures were made and again a nil return was filed.

4. In this case, after obtaining the approval of the jurisdictional Pr. Commissioner, the AO referred the matter of the International Transactions to the TPO in order to determine the arm’s length price for all the financial year’s concerned. The TPO also took up all the cases from AY 2009-10 to 2014-15 together and called for the necessary details. The assessee filed an Accountant’s Report in Form No. 3CEB before the TPO during the course of the proceedings, as under:

5. However, the TPO noted that the assessee did not furnish the complete financials of the AE for the years ending March 2010, March 2012, March 2013 and March 2014. The TPO also noted that certain reconciliations were not filed/given and that the AE/Assessee has not declared any forex gain/loss in any of the years. Since the assessee had not availed the opportunity to benchmark the transactions, the TPO invoked the provisions of section 92C(3) of the Act. The TPO noted that lending and borrowing is not the main business of the assessee. Further, the assessee had given loan to its AE without any arm’s length compensation even when the loan is unsecured one and the subsidiary has not offered any security for the same. No written agreement concerning the loan has been filed before the TPO on the ground that no Agreement or MOU was entered into by the assessee with its AE (assessee’s letter to AO dated 18/1 1/2016). Thus, no agreement is there which could have detailed the terms and conditions of the loan.

6. The assessee made various objections before the Transfer Pricing officer.

(i) Interest not charged on loan provided to AE as well as not paid for the loan taken from the holding company.

(ii) There is no transfer of profits from the assessee to the AEs.

(iii) The AE‟s into losses and hence, no question of shifting profits.

(iv) Assessee has provided loans due to business expediency.

(v) Loans provided converted to share capital in subsequent years.

(vi) Loans provided written off in subsequent years. Without prejudice the assessee contended that benchmarking of LIBOR+200 bps is not justified as only LIBOR rates should be used. The Transfer Pricing officer exhaustively dealt with the issues raised.

7. The transfer pricing officer, for rejecting the contention that there was sufficient interest free funds available cannot be a reason to provide interest-

free loan to the AE, placed reliance upon the decisions of ITAT and honourable Bombay High Court decision. He also rejected the case laws relied upon by the assessee. The transfer pricing officer also rejected the assessee’s plea that there is no intention of shifting of profits. In this regard, he referred to the decision of ITAT Bangalore special bench in the case of Aztec software and technology 107 ITD 141. Honourable Punjab and Haryana High Court decision in the case of Coca-Cola India Inc 309 ITR 194 another case laws. The Transfer Pricing officer also held that the submission that the assessee is into loss also cannot be reason not charge interest on loans granted to it. In this regard also the Transfer Pricing officer referred to several case laws. The TPO further rejected the assessee’s contention that the loan was provided due to business/commercial expediency. In this regard he referred to several case laws as under:-

8. Furthermore, the TPO objected that without prejudice to the argument that business/commercial expediency is not applicable in Transfer Pricing jurisprudence, assessee has also failed to demonstrate the business interest and existence of business or commercial expediency. That each of the AE is i.e. assessee company and the foreign AE in Italy are separate entities assessable to tax in separate jurisdictions on independent basis. In this regard the TPO referred to honourable Delhi High Court decision in the case of Sony Ericsson 374 ITR 118 wherein the honourable High Court in paragraph 51 – 56 has deliberated on the difference between section 37 (1) and chapter X of the IT act the TPO noted that it was held by the honourable High Court that arm’s-length procedure described in chapter X as applicable has to be given full application. Therefore impact of chapter X cannot be controlled or curtailed by reference to allowability of expenditure under section 37 ( 1), the Transfer Pricing Officer also dealt with the assessee’s contention that loan provided were converted to share application money in subsequent years. He noted that the assessee’s claim is not tenable as the fact remains that even after a lapse of considerable period of time shares have not been allotted in the name of Indian entity. He noted that it is also a fact that the management and control of the subsidiary company in Italy is in the hands of the assessee company being a shareholder. No reasons have been given for delaying conversion of share application money into shares capital. He noted that on the other hand foreign subsidiary company continues to use the funds initially given and later shown as share application money. Hence he held that on these peculiar facts the impugned the amount qualifies as advances/loan and not share capital. He noted that there is a difference in the share application money converted subsequently and share application money not converted subsequently. Therefore he held that assessee’s reliance on the decision of Al cargo logistics and Bharti Airtel is misconceived and not applicable as in those cases share application money pending was converted in share capital. Furthermore he held that the decision of Bangalore tribunal in the case of logics microsystem dated February 2017 is squarely applicable wherein pending share application money was held to be treated as advanced to the subsidiary and subjected to ALP. Thereafter, Transfer Pricing officer also dealt with the assessee’s plea that loan provided was written of in subsequent years. In this regard he noted that assessee states that in financial year 2016 – 17 the loans to the subsidiary have been written off and therefore, Transfer Pricing provision and determination of arm’s-length price need not be carried out. In this regard the TPO noted that lending of money is not the business of the assessee. That each assessment year is separate and independent for the purposes of assessment. He further held that the assessee company is not into the business of financing and therefore, the write off of the loan to subsidiary in Italy is not allowable as deduction under the provisions of income tax act. Thereafter, the TPO dealt with the without prejudice argument of the assessee that benchmarking of LIBOR +200 bps is not justified and only LIBOR rate should be used. The TPO observed that at the outset it is noted that assessee has not benchmarked the transaction of loan on its own. That assessee has also not submitted any Transfer Pricing study report. That form 3 CEB for all the years have been submitted after the reassessment proceedings were initiated by the assessing officer subsequent to the survey. He noted that in the course of survey proceedings the Managing Director had agreed to offer interest on loans to subsidiary at the rate of LIBOR +200 bps. In this regard the TPO further noted that courts/tribunals have held that the transaction of loan is to be benchmarked based on the prevailing interest rates and the currency in which loan is to be repaid.

9. The TPO noted that the assessee has claimed that it had not incurred any forex gain/loss as it had classified the said ‘loans, investment and share application’ as long term and had recorded the respective assets at the exchange rates at the date of transaction. The TPO also noted that the loans had been claimed by the assessee to have been given for acquisition of the brand ‘Guru’ in Europe etc. and the TPO treated the loan as a long-term loan for the purposes of benchmarking taking that the tenure of loan to be five years. The assessee had submitted before the TPO that the loan provided to the subsidiary had been written off by it during FY 2016-17 as the brand ‘Guru’ was not successful in the European market. The TPO also noted from the financials of the AE for the 31/03/2009 that in the Balance Sheet of the AE a specific remark has been made on the loans mentioning that the “Payables to the Holding Company for shareholders financing totals Euro 18,861,544 and represent payables deriving from interest free loans: The sole partner BRHL India has granted financing denominated in Indian Rupees interest-free and due within the financial year”. The TPO concluded that the assessee has given the loan which is denominated in the Indian currency. He also noted that even in the assessee company’s ledger accounts the transaction is reported in Indian Rupees.

10. The TPO had given a notice to the assessee dated 18/08/2017 and at serial no. 5 (viii) the TPO had called for details of conversion of the loan from Indian Rupee to USD/any other foreign currency. In response the assessee in his letter dated 18.08.2017 mentioned that it had not converted the loans from Indian Rupees to US dollars. Since the loan was in INR the assessee could offer no documentation, explanation or computation regarding any possible forex gain/loss involved in the loan process also. For the same reason the assessee did not follow the provisions of Accounting Standard AS-11 in accounting for the foreign exchange gains/losses also. Further, the TPO had directed the assessee to provide the credit rating of the borrower and the manner in which the same has been determined vide his letter dated 18.08.2017 at serial no 5 (x) but the same was not provided to him by the assessee and in absence of any rating the TPO has treated the credit rating of the AE as ‘below investment grade’. Since the assessee did not benchmark the transaction of loan and did not benchmark the transaction, the TPO applied the rate of SBI PLR+300 bps and determined the TP adjustment in respect of all the years before him. For AY 2008-09 the primary adjustment has been calculated by the TPO to be Rs. 13,38,53,244/-. The computation of this interest has been provided by the TPO date-wise for each loan transaction with the AE entered into by the assessee during the previous year. The TPO has computed the number of days for which the amount was lent to the AE and the interest calculations on the same was also done. The entire calculation is given in the form of a Table in the order of the TPO.

11. In addition to the primary TP adjustment based on the SBI PLR, the TPO had, by way abundant caution, also computed an alternate adjustment after benchmarking the action on the basis of the foreign currency i.e. Euro. For this, the TPO utilised the Bloomberg Database taking the credit rating of the AE to be of ‘Non-Investment Grade’ the tenure of the loan being long-term; Euro LJBOR of 12 months; and, the TPO calculated a spread over and above the 12-month Euro LIBOR on the basis of certain factors like currency, country, issue date of the loan etc. For determining the spread, the TPO utilised the swap calculator (Currency-Fixed Flat Swap) considering the maturity periods and also the fluctuation in the INR and Euro. The TPO has given the details of the yearly UBOR + Spread for AY 2009-10 to 2014-15 in his order. The TPO has also held that since the AE has never made any payment of interest by the AE, the amount of interest worked out for the first year i.e. AY 2009-10 is to be added to the opening balance of the next year i.e. AY 2010-11 and so on and the TP adjustment was calculated accordingly. The TPO has also copied the screenshots of the Bloomberg Database search in his order and for the FY 2008-09 relevant to AY 2009-10 the Euro LIBOR and the spread was calculated at 160 bps + 652 bps = 812 bps. The TPO has worked out the alternate interest adjustment based on the Euro LIBOR + Spread in respect of each transaction during the previous year relevant to the AY 2009-10 in his order. For AY 2009-10 the alternate adjustment has been finally worked out by the TPO atRs.6,81,86,220/-.

For A.Y.2010-11 & onwards

12. The TPO has also computed the interest adjustment in respect of the amounts shown as set-apart by the assessee as ‘Advance for Share Application’ to the AE and the same have been sought to be benchmarked at a rate of Euro LIBOR rate + Spread, in respect of each of the year under consideration before the TPO.

13. The assessee objected against the above Transfer Pricing adjustment before the dispute resolution panel. The DRP rejected the assessee’s contention that subsidiary/AE was formed to create a global presence in the European market and to sell goods in the name and style of GU REO brand and that it was for this reason that assessee has advanced interest-free sums to the company. The DRP held that the Transfer Pricing adjustments are dependent on the purpose of the transaction. It also rejected the assessee’s contention that it was not paying any interest to its holding company and hence there was no need to charge an interest on sums advanced to the AE.

It noted that the loan given was an unsecured one and the subsidiary had also not provided any security. That lending and borrowing of money is not the main business of the assessee. That there is no loan agreement/memorandum of understanding and assessee has not been able to prove that there are any terms and conditions of the loan. That the existence of the agreement was categorically denied by the assessee. That two entities are situated in two separate jurisdictions and are assessable as independent and separate entities in the respective tax jurisdictions. The DRP noted that it is immaterial whether the assessee has complied with other rules and regulations which are different from the Transfer Pricing it also rejected the assessee’s contention of availability of having sufficient interest free funds. The DRP referred to ITAT special bench decision in the case of instrumental Corporation Ltd versus ACIT 160 ITD 1 Kolkatta Tribunal special bench. It also referred to the decision of ITAT in the case of PMP Auto Components private limited versus DCIT 50 Taxmann.com 272 and also the decision of ITAT in the case of Tata Autocomp systems Ltd versus ACIT 21 Taxmann.com 6. Referring to the ITAT decisions as referred above DRP held that these decisions also negate the arguments of the assessee that the interest was not charged since the AE could not get access to the funds from any other source in the international market, that the loans were given from interest free funds or that it was a shareholder function. On similar reasoning as that of the Transfer Pricing officer, it rejected the assessee’s contention that no transfer pricing adjustment should be made because the AE was incurring losses and there was no intention to shift profits by the assessee. Thereafter, the DRP referred to the assessee’s argument that interest on own transaction should be benchmarked in the currency of the country in which the loan is utilised. In this regard it noted that assessee has relied upon the Mumbai High Court decision in the case of CIT versus Autocomp systems Ltd 56 taxman.com 206. The DRP held that these arguments cannot be accepted. It noted that there is no contemporary evidence in terms of an agreement with the AE to suggest that the loans had been advanced in euros or that the loan were required to be repaid in any foreign currency. It noted that the assessee has not come with clean hands. On the other hand it noted that the financials of the AE for the period ended 31/3/2009 contained a special remark as under on the loans “payable to the holding company for shareholders financing totals euro 18, 861, 544 and represents payables deriving from interest free loans. The sole partner BR HL India has granted financing denominated in Indian rupees interest free and due within the financial year.”

14. It noted that assessee’s response to the TPO squarely that assessee had not converted the loans from Indian rupees to US dollar. It noted that it is found that even in assessee’s company Ledger accounts the transaction is reported in Indian rupees. That neither the assessee company Ledger accounts nor in the books of the AE there is any recording of foreign exchange gain or loss arising out of the loan transactions that keeping in view the volatility of the Indian rupee and also noting that there has to be at time between the taking of the decision to advance loan and the payment of actual loan there is bound to be some foreign exchange gain a loss but the assessee denies any such possibility. That this is possible only because the loan was in Indian rupees and for this reason that assessee could offer no documentation explanation or computation regarding any forex gain/loss involved in the loan process. The DRP noted that for the same reason the assessee had not followed the provisions of accounting standard AS 11 in accounting for the foreign exchange gain/loss. That the contention of the assessee that the loans were long-term is fit to be rejected because as mentioned in the financial statements of the AE the loans were due within the financial year. The DRP further noted that assessee’s reliance on the decision of honourable Bombay High Court in the case of auto comps systems Ltd supra in this context is not appropriate because honourable High Court had not given a decision on merits of the issue and had simply rejected the revenues appeal on the ground, that the revenue has not contested similar relief given by the ITAT in another case. DRP noted that honourable High Court in the case of CIT versus Cotton Naturals 55 Taxmann.com 523 has specifically adjudicated that the arm’s-length interest rate for loans advanced to foreign subsidiary by Indian company should be computed based on market determine interest rate applicable to the currency in which loan has to be repaid. Hence in this background and considering the absence of loan agreement and documentation and the fact that the AE had a specifically mentioned that the loan is rupees dominated and also considering that the assessee has also maintained its loan account in Indian rupees and keeping in view the Delhi High Court decision above it held that the DRP was correct to benchmark the loan transaction on the basis of SBI PLR only. The DRP also rejected the assessee’s contention regarding the claim of credit quality of the borrower to be evaluated. It held that assessee has not given any documentation and it has not discharged its onus. It held that the practice adopted by the TPO was standard practice as it was noted below investment grade. It also noted that subsequent writing off of the investment also proves that credit rating to the AE given by the TPO was fit and proper. That even in these proceedings the assessee has not made any effort to submit any other credit rating. It also considered the assessee’s contention of adding interest calculated on the outstanding loan for each assessment year to the opening outstanding loan for the next financial year and then computing the interest adjustments as akin to secondary adjustment. The DRP held that the mandate in chapter 10 of the act is to determine arms length price of international transaction undertaken by the taxpayer but since the assessment year under consideration the concept of interest on interest is not expressly provided in chapter X of the act hence no secondary adjustment needs to be done that this has been upheld by Mumbai ITAT in case of PMP auto components private Ltd supra hence the DRP directed not to add the interest computed for one year to the loans and advances due to the successive year. The DRP further rejected the assessee’s contention that TPO is recharact arising the nature of transaction. It noted that the TPO has merely gone by the substance of the matter and also noted the conduct of the two parties involved before forming his views. The DRP did not consider the other arguments of the assessee that the TPO was not adopted correct filters and identified comparables on the ground that these are academic as DRP has already held that TPO was correct in benchmarking the transaction on the basis of state bank of India PLR +300 bps. The DRP further noted that the onus was on the assessee to submit proper comparable set. That assessee has not submitted any such working and is also not attempted any such working. Therefore the arguments of the assessee were held to be academic and rejected.

15. For other assessment years, DRP also dealt with the issue of assessee’s plea that loan was converted into share capital advances. It noted that assessee’s submission is that loan amount which was transferred to share application money constitute a part of its shareholder activities and therefore, the provisions of Chapter X cannot be applied to share application money and were also claimed that loan was in the nature of quasi equity. It also noted that assessee’s reliance on ITAT decisions that once the loan has been converted into share application money, no interest can be charged thereon. It was also claimed that since only a part of the earlier interest free loan given to the AE had been converted into share application money, the transaction is a single transaction and the TPO has to apply only one consistent rate to the entire transaction.

16. Considering this, DRP also held that the concept of shareholder activities cannot be treated as omnibus vehicle to subsume all kind of commercial activities. It referred that a similar view has been taken by ITAT Delhi bench in the case of GE Money Financial Services (P) Ltd. vs. ACIT (2016) 69 Taxmann.com 420. DRP further observed that in the instant case the BRFL Italia SRL is a 100% subsidiary of the assessee and its entire capital is controlled by the assessee from before. The assessee has been infusing funds into its AE in the shape of loans and advances which stood at Rs. 205.07 crores as on 31.03.2009; Rs.291.29 crores as on 31.03.2010; Rs. 272.59 crores as on 31.03.2011; Rs. 296.43 crores as on 31.03.2012; Rs. 309.93 crores as on 31.03.2013; and, Rs. 314.05 crores as on 31.03.2014. These loans had been advanced to the AE without interest claiming that it is part of the shareholder activity. However, the assessee already held Euro 5010000 equity in the AE, giving it hundred percent control over the AE. It is obvious that the further ‘Share Application Money‟ declared as given to the AE is actually funding which is required by the AE but it serves no need of the assessee since its ownership for the purposes of maintaining and safeguarding its own interest is already secured. The interests of the assessee are otherwise also maintained and safeguarded by its hundred percent control over the AE. The additional funds given to the AE are on account of requirements of the AE and not towards shareholders’ mandate. Such funding goes towards benefiting the AE only as the AE need not approach markets for such funds. The DRP has already noted that the Share Application Money was not converted to equity shareholding and finally in FY 2015-16 the amounts have been written off. The DRP observed that the assessee has not given anything in writing to explain what has happened to the investment / quasi capital in this case. Thus, the DRP held that the payment of loans and advances or the Share Application Money, under the circumstances of the case, are not part of shareholder activities.

17. It also referred to the reliance placed by the assessee on the decision of ITAT Ahmadabad bench in the case of Soma Textiles & Industries Ltd. vs. Addl. CIT 59 Taxmann.com 152. It noted that in the said decision it was held that of quasi capital cannot be nil. It was also held that comparable uncontrolled price of a quasi capital loan, unless it is only for a transitory period and the defact reward for this value of money is the opportunity for capital investment or such other benefit, cannot be nil. Referring to the above decision, DRP held that it is apparent that in international transaction cases where the allotment of shares is delayed unnecessarily, the application money cannot be called a transaction on the capital account but it has to be treated as a category of loan and benchmarked accordingly. Further, the DRP referred to the ITAT Bengaluru decision in the case of Logix Microsystems Ltd. vs DCIT 80 taxmann.com 39. After relying on the above decisions and referring to other decisions and discussions, DRP held that the transaction of transferring amounts from loans and advances towards share application money with no allotment of shares till date constitutes an International Transaction as per Section 92B of the Act and such funds, although now renamed as „Share Application Money‟ are held to be still in the nature of loans / advances / financing.

18. The DRP further referred to the assessee‟s submission in computing interest based on PLR rate for loan transaction while computing interest based LIBOR rate for advances given on account of share application. It was claimed that since a part of the interest free loan given to the AE had been converted into share application money, the transaction is a single transaction and the TPO has to apply only one consistent rate to the entire transaction. The DRP however held that however it is noted that these amounts (now termed as Share Application Money) represent part and parcel of the total loans advanced to the AE and hence retain the same character as that of the other portion which has already been declared to be in the nature of loans and advances. Hence, the DRP directed the TPO to apply SBI PLR +300 rate on all the loans and advances including on the sums transferred in the books of the AE as the Share Application Money.

19. Against the above, assessee is in appeal before us.

20. We have heard both the Counsel and perused the records. Ld. Counsel of the assessee reiterated the submissions made before the authorities below. He submitted that assessee had not paid any interest for funds received from the holding company, which was advanced for the purpose of business and it has been clarified that sums were obtained from the holding company through internal accruals. That Assessee‟s function was only to pass on the funds received from the holding company. The ld. Counsel submitted that no proper method of benchmarking has been adopted. Ld. Counsel further submitted that no adjustment for interest on loan is to be done as the sums were advanced for business purpose. In this regard, the ld. Counsel placed reliance upon the following decisions of High Court / ITAT.

•  Pr. Commissioner of Income Tax vs. KSS Ltd. 101 Taxmanncom 357 (Bombay)
•  Logix Microsystems Ltd vs. DCIT IT (T.P.)A No.280/Bang/2014 dated 22/02/2017
•  Soma Textile & Industries Ltd. (2015) 59 Taxmann.com 152 (Ahmedabad-Trib)

21. These case laws were relied upon by the ld. Counsel of the assessee for the proposition that no interest is to be charged for non-allotment or inordinate delay in allotment of shares. Ld. Counsel also submitted that assessee is challenging issue of reopening. He submitted that necessary objection in this regard was raised before the authorities below.

22. Per contra, the ld. Departmental representative submitted that no objection challenging the reopening was filed before the Dispute Resolution Panel. He submitted that only a passing reference was made before the Transfer Pricing Officer. The ld. DR submitted that issue of reopening cannot be pressed before the Transfer Pricing Officer. The ld. DR further relied on various case laws for the proposition that the amounts given as interest free loans to the AE is an international transaction. He submitted that authorities below are quite correct in computing arm’s length price. In this regard, the ld. DR placed reliance upon several case laws as under:-

•  Tooltech Global Engineering (P.) Ltd. Vs ACIT (2018) 91 taxmann.com 357 (Bombay)
•  Instrumentarium Corporation Ltd. Vs ADIT (2016) 71 taxmann.com 193 (Kolkata – Trib.)
•  Perot Systems TSI (India) Ltd.(2010) 37 SOT 358 (Delhi) dated 30/10/2009
•  Tata AutocompSvstems Ltd. (2012) 21 taxmann.com 6 (Mum.)dated 30/04/2012 (Affirmed by Bombay HC in 56 taxmann.com 206)
•  Aurionoro Solutions Ltd. 2013 1 33 taxmann.com 187 (Mumbai -Trib.) dated 12/04/2 01 3 [Approved by Bombay High Court in Income Tax Appeal No. 1869 of 2004)
•  CIT vs. Cotton Naturals (I) (P) Ltd., 55 Taxmann.com 523 (Delhi)
•  IT(TP)A No.1984/Mum/2017 Laqshya Media Limited
•  Pr. CIT vs. KSS Ltd., 101 Taxmann.com 357

23. We have carefully considered the submissions. As regards with assessee’s challenge to reopening of the assessment, we find that no such objection has been raised before the Dispute Resolution Panel. Even the assessment order does not contain any mention of the issue of challenge to reopening by the assessee. Be as it may the only challenge to reopening is that the revenue has erred in relying upon the survey proceedings and statement obtained from the M.D during the survey proceedings. In this regard, reliance has been placed upon the decision of S.Kadar Khan (supra). We find that this reference to the said decision is wholly irrelevant here. In the said decision, the exposition was that statement obtained on survey is not conclusive proof of addition to be made. We fail to understand how this decision renders reliance by the revenue upon survey proceedings as basis for reopening illegal. As it is settled law that at the time of reopening, there has to be a reasonable belief that income has escaped assessment, the same need not be proved to the hilt. Hence, assessee’s submission in this regard has no merit and they are liable to be dismissed.

24. As regards the issue on merits, we note that assessee is a wholly owned subsidiary company of M/s. Bombay Rayon Fashions Ltd. The assessee has granted funds to its 100% subsidiary in Italy. The purpose was to take over the retail business of Jam Session Holding SRL which owned a brand name „GURU’. The assessee has given funds during the F.Y.2008-09 to 2013­14 to the said subsidiary company and no interest has been charged on the loans so provided. During the search action, M/s. Bombay Rayon Fashions Ltd., Managing Director Mr. Prashant Agarwal had agreed that assessee should have charged interest on loan advance to the AE @ LIBOR +2%. He had also offered for taxing the said sums in the hands of the assessee for respective financial years. In this context, the assessment was reopened. The assessee has not charged any interest on the loan advanced to the AE. The Transfer Pricing Officer has noted that lending and borrowing is not the main business of the assessee. It was also noted that assessee had given loans to its AE without any arm’s length compensation even when the loan is unsecured one and subsidiary has not offered any security for the same. No written agreement concerning the loan has been filed with any of the authorities. No other document is on record fortifying the claim of the assessee. Hence, assessee justification of granting interest free loan is simply ipse-dixit. Assessee’s plea is that interest was not charged on loan provided to AE as the sums were received from the holding company on which, no interest has been paid. This has rightly been rejected by the authorities below. The authorities below have also rejected the assessee’s contention that there is no transfer of profits from the assessee to the AEs that the AE is into losses and hence, there is no shifting of profits. That assessee had provided loans to business expediency, that loan provided was converted into share capital in the subsequent year that loan profit to written off in the subsequent years. In this regard, we note that interest free loans given to the AE have been categorically held to be international transaction calling for the adjustment of ALP in catena of case laws . The assessee’s plea that it was for business expediency and that it was out of own funds have been correctly rejected by the authorities below. In this regard, the decision of ITAT Delhi Bench in the case of Perot Systems TSI (India) Ltd. [2010] 37 SOT 358 (Delhi) is relevant. In that case, the ITAT did not accept the arguments of commercial expediency as well as the reliance on the Hon’ble Supreme Court in the case of SA Builders. Similar view has been taken in other decisions referred above including Tata Autocomp systems Ltd 21 taxmann.com 6 (Mum.) vide order dated 30/04/2012. This decision was affirmed by Bombay High Court in 56 Taxman.com 206.

25. In this regard we may also gainfully refer to the decision of ITAT Special Bench in the case of Instrumentarium Corporation Ltd. supra which reads as under:-

37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm’s length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm’s length price. The judicial precedents relied by the assessee, such as in the case of SA Builders Ltd. -(supra), in support of the proposition that interest free advance to the subsidiary, in which assessee has deep interest, are justified on the grounds of commercial expediency are in the context of the question whether such a use of borrowed funds can be said to be for the purposes of business, and, accordingly, whether interest on borrowings for funds so used can be allowed as a deduction in computation of business income of the assessee. That is not the issue here, and these judicial precedents on the commercial expediency, therefore, have no relevance in computation of arm’s length price of loan given to an associated enterprise. Similarly, learned counsel’s contention that a notional income cannot be taxed, and reliance on Shoorji Vallabhdas & Co. ‘s case (supra) in this regard, is wholly misplaced because that proposition is in the context of tax laws in general, whereas, transfer pricing provisions, being anti abuse provisions with the sanction of the statute, come into play in the specific situation of certain transactions with the associated enterprise. The general provisions of the law have to give way to these specific anti abuse provisions. While a notional interest income cannot indeed be brought to tax in general, the arm’s length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. When the legal provisions are not in pari materia, as the provision of normal computation of income and the provision of computation of income in the case of international transactions between the associated enterprises, what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions.

26. Keeping in mind the exposition in the above case, it is amply clear that loan to the AE is international transaction and it needs to be benchmarked for ALP determination. The decision of KSS Limited(supra) relied upon the ld. Counsel of the assessee is not applicable here as there is no agreement whatsoever between the parties i.e. between the assessee and the AE. In the said case there were back to back agreements and the explanation were found to be cogent. Moreover in the said case, when the arrangement did not work out the entire advance was refunded to the assessee through the AE over the period of time. However, in the present case the entire amount has been written off as non-refundable. So the decision of KSS Ltd. does not help the case of the assessee. Rather it has been rightly relied upon by the ld. departmental representative in support of the proposition that interest free sums given to the AE dehors any cogent documentation of purpose are liable for determination of arm’s length price as per provisions of Section 92B Explanation C.

27. Another issue in this regard for A.Y.2010-11 onwards is that the loan has been converted into share application money. In this regard, the ld. Counsel of the assessee has placed reliance upon several case laws that share application money is shareholder fund and no interest should be attributable to the same. In the present case, we find that authorities below have given a clear finding that the plea that so called share application money which is said to be given for strategic purpose for acquiring control is not sustainable at all. Assessee has full control over the AE. It could not be said that giving further loans and considering it as share application advance can strengthen assessee’s control over the same. Hence, the plea that the loan was advanced as strategic shareholder function totally fails. Moreover it is not the issue of inordinate delay of conversion of share application money into share capital. The fact is that the issue of conversion into share capital was given a complete go by and subsequently the entire amount was written off as irrecoverable. Hence, the case laws relied by the assessee’s Counsel are in totally different context. Hence, this plea does not fortify the case of the assessee.

28. Now, we come to the issue of application on interest rate on the said sum advanced. In this regard we note that the DRP has distinguished the decision in the case of CIT vs. Tata Autocomp systems Ltd (supra) by observing that the said decision does not render any ratio. In our considered opinion, this observation of the Dispute Resolution Panel totally uncalled for. We are of the considered opinion that decision of the Jurisdictional High Court is fully binding upon all the Courts and Tribunal of subordinate jurisdiction. We note that in the said case the assessee advanced funds to its wholly owned subsidiary in Germany on interest-free terms. The TPO held that the transaction was an “international transaction” and held that the assessee ought to have received interest at 10.25% being the lending rate charged by the banks in India (Arms length price). The DRP enhanced the rate of interest to 12%. On appeal, the Tribunal followed its earlier view in WF Ltd. Vs. DCIT (ITA No.673/Mum/06) and DCIT Vs. Tech Mahindra Ltd (46 SOT 141) and held that as the amount was advanced to an AE in Germany, the ALP rate of the interest had to be determined by adopting the EURIBOR rate of interest i.e. rates prevailing in Europe. The Department challenged the said finding of the Tribunal in the High Court on the basis that the EURIBOR does not govern the monetary markets or interest rates in India, which is the residence country of assessee and EURIBOR rate is not applicable to the loans for which foreign currency has to be purchased by the Lender. HELD by the High Court dismissing the appeal:

“We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. Vs. DCIT I (supra) and DCIT Vs. Tech Mahindra Ltd.“46 SOT 141 to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr.Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in ‘ VVF Ltd. Vs. DCIT'(supra) and DCIT Vs. Tech Mahindra Ltd. “(supra) on the above issue. No record has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. Vs. DCIT (supra) and ” DCIT Vs. Tech Mahindra Ltd. “(supra). The Revenue not : having filed any appeal, has in fact accepted the decision of the Tribunal in “VVF Ltd. Vs. DCIT (supra) and ” DCIT Vs. Tech Mahindra Ltd.“(supra). In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order”.

29. We followed the above said case law and accordingly, hold that the arm‟s length price computed by adopting the lending rate of banks in India is not sustainable. In this regard, we agree with the alternative submission of the assessee that the interest should be charged at LIBOR+200 bps. Such charging of interest has been approved by Hon’ble Jurisdictional High Court in several other case laws. We direct accordingly. It may not be out of place to mention that revenue’s insistence on application of bank rates in India will throw open the issue of assessee not incurring any expenditure on the funds for advancing the loan. As we have already held this issue is not to be considered for the computation of arm’s length price for an international transaction here.

30. In the additional ground, the assessee has raised the issue of arm’s length price of international transaction of interest free loans being computed on adhoc basis and not in accordance with Section 92C of the Income Tax Act. In this regard, we note that assessee has not provided any details whatsoever. Assessee has itself not done any benchmarking. Our decision as above has the mandate of Hon’ble Jurisdictional High Court in the case of Tata Autocomp systems Ltd (supra). Hence, this additional ground raised by the assessee is dismissed.

31. In the result, appeals of the assessee are partly allowed.

Order pronounced in the Open Court on 06.01.2020