Case Law Details
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.
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