Adani Power Ltd. Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid.
Facts- Assessee M/s Adani Power Ltd has contributed a sum of Rs. 1,35,42,00,000/- to M/s Adani Power Pte Ltd and a sum of Rs. 2,89,30,91,520/- to M/s Adani Shipping Pte Ltd, both being Associated Enterprises of the assessee.
Assessee was of the view that the sums advanced by the assessee company to its AEs were in the nature of quasi equity and the assessee company in its transfer pricing report also reported the aforesaid transactions as quasi equity.
TPO was of the view that the aforesaid amount advanced by the assessee company to its overseas AE’s were not in the nature of quasi capital but was in the nature of loan and the same was required to be benchmarked u/s. 92 of the Act. The TPO held that providing of loan by the assessee company to overseas AEs without charging any interest goes against the principal of arm’s-length price (ALP) since unrelated lenders do not provide interest free loans to independent unrelated Enterprises. TPO held that the nature of advances made by the assessee to the AE’s was in the nature of debt and had no character of equity funding. The AO accordingly held that the assessee should have charged interest at the rate of 5.3 8% which was the prime lending rate-PLR prevailing in Singapore.
Accordingly, adjustment of Rs. 23,11,66,577/- on account of interest charged on aforesaid impugned interest free loan for entire year was made.
CIT(A) reduced the addition from Rs. 23,11,66,577/- to Rs. 5,10,53,900/-. Revenue has preferred the present appeal in respect of substantial relief granted to the assessee.
Conclusion- Held that where advances were given by assessee to its AEs and no interest was charged on these advances contending that they were not loans but were quasi-capital in nature, since assessee was unable to substantiate same with evidence, advances were in nature of loans and transfer- pricing adjustment made by charging interest applying LIBOR was justified.
Held that arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These are two cross appeals filed by the Department and the assessee for assessment years 2010-11 and 2011-12 are arising out of the orders passed by Ld. CIT(Appeals) dated 20-10-2015 and 30-06-216 respectively. Since common issues are involved in the years under consideration, the same are being heard together. We shall first discuss assessment year 2010- 11 and our observations for this year shall apply to assessment year 2011-12 as well.
Assessment year 2010-11
2. The Department has taken the following grounds of appeal:
“Ground No. l: The Ld CIT(A) has erred in law and on facts in deleting the addition of Rs. 24,29,88,065/- made on adjustment in Arms length price of International Transaction contrary to the provisions stipulated in Section 92D and Rule 10.
Ground No.2: The Ld CIT(A) has erred in law and on facts in deleting the disallowance of Rs.13,46,45,288/- on depreciation claimed on leasehold rights over the land treating the same as intangible asset under sec. 32(l)(ii) of the Act.
Ground No.3: The Ld CIT(A) has erred in law and on facts in deleting the addition of interest of Rs.4,26,62,000/- (correct figure of addition of Rs.17,37,00,000/-) by treating it as ‘capital receipt.
Ground No. 4.: The Ld CIT(A) has erred in law and on facts in deleting the disallowance made u/s 14A r.w. Rule 8D of Rs.3,93,65,939/- and restricting it to Rs.46, 65,170/-.
Ground No.5: The Ld CIT(A) has erred in law and on facts in deleting the disallowance made on claim of excess depreciation ofRs.2,10,16,786/-.
Ground No.6: The Ld CIT(A) has erred in law and on facts in deleting the disallowance made on claim of travelling expenses to the extent of Rs. 63,02,960/- being 10% ofRs. 6,30,29,603/-.
On the fact and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above since the assessee has failed to disclose his true income/book profit.
The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored to the above extent. The appellant craves, to leave, to amend or alter any ground or add a new ground which may be necessary.”
2.1 The assessee has taken the following grounds of appeal:
“1(A) On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming addition to the extent of Rs,5,10;53,900 from out of total addition of Rs.23,11,66,577 made by the Assessing Officer by way of adjustment in the Arm’s Length Price of international transactions as per the order of the Transfer Pricing Officer.
(B) On the facts and in the circumstances of the case, the learned CIT(A) erred in rejecting the contentions of the appellant that the advances to Associate Enterprises were in the nature of quasi equity and, therefore, no interest is chargeable/leviable.
2.(A.) On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance to the extent of Rs.92,66,513 out of total disallowance of Rs.1,02,58,819 made by the Assessing Officer from out of deduction claimed by the appellant-company u/s.35D of the IT. Act.
(B) Consequential to the aforesaid ground No.2(A), the learned C.I.T. (Appeals) ought to have directed the Assessing Officer to allow deduction for additional amount of Rs.4,14,26,832 u/s.35D instead of deduction of only Rs.3,79,63,604 considered and allowed by the learned C.I.T. (Appeals) in addition to deduction claimed in the return of income having regard to the additional claim made by the appellant-company before the Assessing Officer during the course of the assessment proceedings.
3. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance to the extent of Rs.29,29,718 out of the total disallowance of Rs.3,76,30,487 made by the Assessing Officer u/s. 14A of the IT. Act read with Rule-80 of the IT. Rules.
4. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of Rs.1,212 made by the Assessing Officer on the assumption that the appellant-company claimed excess depreciation @ 15% on certain assets on which according to the Assessing Officer depreciation @ 10% only was allowable.
5. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.”
We shall first discuss the assessee’s grounds of appeal for assessment year 2010-11 and also the corresponding cross appeal of the Department with respect to that ground of appeal, wherever applicable:
3. Ground No. 1 of Assessee’s appeal: The learned CIT(A) erred in confirming addition to the extent of Rs,5,10;53,900 from out of total addition of Rs.23,1 1,66,577 made by the Assessing Officer by way of adjustment in the Arm’s Length Price of international transactions.
3.1 Ground No. 1 of Revenue’s appeal: The Ld CIT(A) has erred in law and on facts in deleting the addition of Rs. 24,29,88,065/- made on adjustment in Arms length price of International Transaction contrary to the provisions stipulated in Section 92D and Rule 10.
4. The brief facts in relation to this ground of appeal are that during the relevant assessment year, the assessee M/s Adani Power Ltd has contributed a sum of ~ 1,35,42,00,000/- to M/s Adani Power Pte Ltd and a sum of ~ 2,89,30,91,520/- to M/s Adani Shipping Pte Ltd, both being Associated Enterprises of the assessee. The assessee was of the view that the sums advanced by the assessee company to its AEs were in the nature of quasi equity and the assessee company in its transfer pricing report also reported the aforesaid transactions as quasi equity. During the course of assessment, the TPO was of the view that the aforesaid amount advanced by the assessee company to its overseas AE’s were not in the nature of quasi capital but was in the nature of loan and the same was required to be benchmarked under section 92 of the Act. The TPO held that providing of loan by the assessee company to overseas AEs without charging any interest goes against the principal of arm’s-length price (A LP) since unrelated lenders do not provide interest free loans to independent unrelated Enterprises. Before the TPO, the assessee submitted that the AE’s mentioned above were incorporated with the capital that the assessee company advanced sums towards its equity obligations. M/s Adani Power Pte Ltd was incorporated with the object of investing in coal mines and also carry on the business of an investment holding company while M/s Adani Shipping Pte Ltd was incorporated with the object of carrying on business of chartering and owning of ships. Accordingly, by advancing the above amount, the assessee company would also be benefiting from such transaction. However, the TPO held that the nature of advances made by the assessee to the AE’s was in the nature of debt and had no character of equity funding. The AO accordingly held that the assessee should have charged interest at the rate of 5.3 8% which was the prime lending rate-PLR prevailing in Singapore. Accordingly, adjustment of ~ 23,11,66,577/- on account of interest charged on aforesaid impugned interest free loan for entire year was made.
5. In appeal before CIT, the assessee challenged the interest rate adjustment of ~ 5.38% and also the fact that this adjustment was made for the entire year under consideration and not the period for which the aforesaid sums were advanced. The Ld. CIT(Appeals) agreed with the assessee’s contention that there was business rationale of owning ships so as to ensure timely supply of coal for running the power plant. However, Ld. CIT(Appeals) concurred with the TPO’s finding that the above advances were in the nature of loan considering the fact that the assessee has itself characterised the same as loans in its audited financial statements. It is only when the question came to the benchmarking of the aforesaid advances, the assessee came out with the proposition that the loan may be treated as quasi capital in nature. Accordingly, Ld. CIT(Appeals) was of the view that aforesaid transaction had to be benchmarked in accordance with TP provisions. However, during the course of hearing, CIT required the assessee to modify the search process so as to make the search results more accurate. Further, Ld. CIT(Appeals) revised the benchmarking of interest at 2.48% per annum for M/s Adani Shipping Pte Ltd and 2.62% for M/s Adani Power Pte Ltd. This was on the basis that interest rate should be benchmarked to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency that are legal tender of the place or country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the central bank. However, interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent i.e. the rate of interest. In the instant case, since the loans have been made in USD and are also receivable in USD, in view of the Delhi High Court ruling in the case of CIT vs Cotton Naturals 55 taxmann.com 523, which has held that arm’s-length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which donor has to be repaid, which in the instant case is USD. Further, Ld. CIT(Appeals) also restricted the period of interest to the specific period for which loan was advanced by the assessee to the aforesaid AE’s and not for the entire year. Accordingly, Ld. CIT(Appeals) reduced the addition from ~ 23,11,66,577/- to ~ 5,10,53,900/-.
6. The Department is in appeal before us in respect of the above substantial relief granted by the Ld. CIT(Appeals) whereas the assessee is in appeal before us against the disallowance to the extent of ~ 5,10,53,900/- confirmed by Ld. CIT(Appeals).
7. Before us, the learned counsel for the assessee primarily reiterated the submissions made before Ld. CIT(Appeals) and the learned DR placed reliance on the observations made by the AO in the assessment order. We have heard the rival contentions and perused the material on record. In our considered view, we find no infirmity in the order of Ld. CIT(Appeals) so as to interfere with his findings. Firstly, the issue whether the said advance could be treated as quasi capital, we are of the considered view that Ld. CIT(Appeals) has observed correctly that in the instant set of facts, it is only when the assessee was confronted to benchmark the interest on the aforesaid advances made by the assessee towards AE’s, it came up with the alternate contention that the said amount could be treated as quasi capital. In the instant facts, as correctly noted by Ld. CIT(Appeals), there is nothing on record which could support the fact that the said advances by the assessee towards AEs were in the nature of quasi-capital. Both the TPO and Ld. CIT(Appeals) have made detailed observations on this aspect and we concur with the same. In the case of Kalpataru Power Transmission Ltd. [2022] 142 taxmann.com 428 (Ahmedabad – Trib.), the Ahmedabad ITAT has held that where advances were given by assessee to its AEs and no interest was charged on these advances contending that they were not loans but were quasi-capital in nature, since assessee was unable to substantiate same with evidence, advances were in nature of loans and transfer- pricing adjustment made by charging interest applying LIBOR was justified. In the case of Soma Textile & Industries Ltd. [2015] 59 taxmann.com 152 (Ahmedabad – Trib.), the Ahmedabad ITAT held that comparable uncontrolled price of quasi-capital loan, cannot be nil, unless it is only for a transitory period and de facto reward for said value of money is opportunity for capital investment or such other benefit. The ITAT made the following note-worthy observations:
