Facts- The Assessee Company being an investment company had received shares from its Promoters as a gift. The AO dismissed this claim stating that it was purchased by the assessee company at a discount from the said Promoters and that consideration was involved. Hence, AO disallowed the Long Term Capital Loss claimed by the assessee of Rs. 2 cr (approx). The Commissioner purports to treat the said transaction as a loan transaction and since the parties to the transaction are Associated Enterprise (AE), the interest rate should have been calculated at an Arm’s Length Price (ALP) for which the assistance of Learned Transfer Pricing Officer (TPO) was sought.
Conclusion- In the case of the assessee, the loan transaction is therefore, quasi-capital and substantive reward as interest thereon is opportunity to redeem its preferential shares capital and bring back the same into India.
Considering the facts and the decision of the Tribunal in assessee’s own case for the A.Y. 2008-09, 2010-11 and 201-12 and the fact that the same unsecured loan to Associated Enterprise is outstanding on which Arm’s Length Price for interest was computed by TPO in earlier years. We direct AO/ TPO to follow order of the Tribunal and re-compute the interest adjustment.
FULL TEXT OF THE ORDER OF ITAT SURAT
1. This appeal by assessee is directed against the orders of ld. Commissioner of Income Tax (Appeals), Valsad, under section 143(3) of the Income Tax Act, 1961 dated 29.01.2018 for the Assessment Year (AY) 2012-13. The assessee raised the following grounds of appeal:
“1. The order of assessment is contrary to the facts and prejudicial to the assessee.
2. On appreciation of the facts and circumstances of the case and law, the additions made by the Learned Assessing Officer and confirmed by the Learned Commissioner of Income Tax (Appeals) are contrary to law and based on erroneous understanding of the facts.
3. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in holding that the appellant has purchased the shares from its promoters at discounted price instead of holding that the shares were received as gift by the appellant company. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
4. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in holding that the transfer of shares was not without any consideration and hence do not constitute a gift. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserve; to be deleted.
5. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in not accepting the long term capital loss Rs 1,96,03,448/- as claimed by the appellant company during the course of assessment proceedings
6. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in treating an amount of Rs. 2,09,99,998/-represents the gain on sale of shares received as gift from Bilakhia family members as book profit U/s 115JB of the Act. The action of the Learned Commissioner of Income T; (Appeals) is contrary to the facts and law and prejudicial to the appellant and deserves to be deleted.
7. On appreciation of the facts and circumstances of the case and law, the Learn Commissioner of Income Tax (Appeals) has erred in confirming the action of t Learned Assessing Officer / Learned Transfer Pricing Officer in making upward adjustment @2.29 on account of interest on loan to the AE while determining the Arm’s Length Price of the International Transactions. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
8. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) ought to have deleted the action of the Learned Assessing Officer / Learned Transfer Pricing Officer in making upward adjustment of Rs.33,80,139/- on account of interest on loan to the AE while determining the Arm’s Length Price of the International Transactions. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
9. The Appellant craves to add, amend, modify or alter the above grounds of appeal at any stage of appellate proceedings.
10. The Appellant humbly prays that the appeal be allowed in toto.”
2. At the outset of hearing, the ld. Authorised Representative (AR) of the assessee submits that all grounds of appeal raised by the assessee are covered either against the assessee or in favour of the assessee. The ld.AR submits that Ground No.1 and 2 of the appeal are general in nature and needs no adjudication and may be dismissed as such. The ld.AR further submits that Ground No.2 to 6 are also covered against the assessee by the decisions of the Tribunal in earlier years and the same ay be dismissed by following the earlier years order. Considering the submission of the ld.AR of the assessee, the Ground No.2 to 6 are dismissed.
3. Ground No. 7 & 8 relates to upward adjustment @2.29% on account of interest on loan to Associated Enterprises (AE) while determining Arm’s Length Price of international transaction. The ld.AR of the assessee submits that these grounds of appeal are covered in favour of assessee by the decision of the Tribunal in A.Y. 2010-11 and 2011-12 in ITA no. 1416/AHD/2015 and 795/AHD/2016 respectively. The ld. AR for the assessee submits that the ld.CIT(A) passed the order by following order of his predecessor for the A.Y. 2010-11 and 2011-12. The ld.AR further submits that copy of decision of the Tribunal in assessee’s own case for the A.Y. 2008-09, A.Y. 2010-11 and 2011-12 is placed on record.
4. On the other hand, the ld. Sr .Departmental Representative (ld. Sr. DR) for the Revenue, after going through the grounds of appeal, order of ld.CIT(A) and order of the Tribunal in A.Y. 2008-09, 2010-11and 2011-12 submitted that she relied on the order of the ld.CIT(A).
5. We have considered the rival contention of parties and have gone through the order of the Lower Authorities. We find that the Co-ordinate Bench of the Tribunal in assessee’s own case for the A.Y.2008-09, the Transfer Pricing Officer (TPO) made similar adjustment on account of interest on loan to Associated Enterprises (AE) while determining Arm’s Length Price of international transaction. We find that on similar grounds of appeal the Co-ordinate Bench in assessee’s own case for A.Y. 2008-09 in ITA No. 507/AHD/2013 dated 04.02.2020 passed the following order:
“20. We have heard the rival submissions and perused the relevant material available on record. We find that the assessee is an investment company and was holding 46.2% shares in a Printing Ink Company known as Sterling + Hostag and for that purpose created a wholly owned subsidiary in Singapore as a Special Purpose Vehicle (SPV) known as M3 Holdings (Singapore) Pvt. Ltd (M3). The BHPL has invested in equity, preference shares and loan in the subsidiary AE, which in turn invested in Sterling + Hostage a printing ink manufacturing company in Europe. Once the investments are sold, it has to wind up and bring back entire proceeds to India and pay all applicable taxes as if any other resident company is required to do, if it has directly invested from India. As per the terms of the investment as applicable to the SPV under FEMA as well in the year 2012-13 (07.09.2012) the said Singapore AE has been winded up and all the capital remitted from India and investment/gains on disposal of investments has been completely brought back to India during year 201213 and 2013-14 and paid tax at the rate of 15% in India as per laws on the dividend received. During the year, the BHPL has redeemed preference shares and brought back of Rs.174.90 Cr. In order to redeem the aforementioned preference shares in the AE, and considering the fact that the AE do not have any income or extra funds in its hand, the redemption has been achieved by the assessee company i.e. BHPL and the AE by arranging a loan from Standard Chartered Bank Mauritius to the tune of 35 Million Euro through Standard Chartered Bank Mauritius. This is discernible from the letter dated 30.10.2007 of Standard Chartered Bank Mauritius addressed to M3 Holdings (Singapore) Pte Ltd. that the purpose of financing is that the company will redeem preference capital subscribed by Bilakhia Holding Pvt. Ltd., India. The Standard Chartered Bank, Ahmedabad gave guarantee to Standard Chartered Bank, Mauritius. BHPL has given Corporate Guarantee to Standard Chartered Bank Ahmedabad. BHPL has paid Guarantee charges of Rs.1,78,86,359/-. BHPL also extended a loan of Rs.28.125 Cr to the AE during the year towards day to day expenses and for achieving the above redemption. From the aforesaid foreign loan and quasi-equity contribution from BHPL, the AE redeemed the preference shares held by BHPL and also recovered a sum of Rs.3,22,19,944/- which is much more than the guarantee charges paid to the bank. In view of these facts, we are of the view that the AE has been created as SPV only to hold shares in company sterling + Hostage Europe and not authorized to carry any other activity. This view is further supported by the letter dated 02.11.2006 placed at Paper Book Page No.18, wherein the proposal submitted by the assessee vide letter dated 07.07.2006 (Placed at Paper Book Page No. 15 to 17] was approved wherein in it is clearly mentioned that M3 Holdings (Singapore) Pte Ltd. is a SPV formed to hold investment and do not propose to engage in any other activity being SPV. Once the above shares are sold as and when decided by BHPL, it has to wind up itself, and bring back the proceeds to India and BHPL has to pay taxes. The perusal of annual accounts for A.Y. 2012-13 [placed at Paper Book Page No. 54 to 82 and particularly Paper Book Page No. 78 note 35 appended therein would show that the assessee company has resolved to wind up of M3 Holdings (Singapore) Pte Ltd. as per applicable laws of Singapore and accordingly, received dividend of Rs.1,27,25,34,505 during A.Y.2012-13 and Rs.4,01,73,520/- in A.Y.2013-14 which has been duly reflected in annual accounts placed at Paper Book Page No. 55 (and Chart filed with written submissions filed by the counsel). Therefore, we are in agreement with the assessee that as per OECD guidelines, the substances over form has to be considered. The transaction in the case of assessee is therefore, be considered as a quasi-equity in substance, as against the transactions considered and characterized by the TPO as pure loan simplicitor as given by a financial institution. The finding recorded by the AO, that the AE of the assessee company was engaged in the financial services activities in Singapore is not found to be correct as it is clearly borne out from the letter of disbursement of loan and purpose as setout the terms of loan as discussed herein above. The term of quasi-equity was explained by the Co-ordinate Bench of Ahmedabad in the decision of Cadila Healthcare Limited  80 taxmann.com 24 (Ahmedabad-Trib.), wherein, it was held that where assessee-company advanced loan to its AE within option to convert same into equity at par, since real consideration for granting loan was not interest simplicitor on amount advanced but opportunity to own capital on favourable terms, it was to be regarded as quasi capital transaction which could not be compared with simple loan transaction for purpose of determining ALP. The Co-ordinate Bench of Tribunal in Para 10 to 14 of the said decision observed as under:
“10. There is no dispute that the transactions in question are not of the transactions of lending money to the associated enterprises. The amount/advanced to the AEs are attached with the obligation of the AEs to sue share capital, in case the assessee exercise option for the same, on certain conditions, which are admittedly more favourable, and at an agreed price, which is admittedly much lower, vis-a-vis the conditions and prices which independent enterprise would normally agree to accept. The lending is thus in the nature of quasi capital in the sense that substantive reward, or true consideration, for such a loan transaction is not interest simplicitor on amount advanced but opportunity to own capital on certain favourable terms. Contrast this reward of owning the capital in the borrower entity with interest simplicitor, which is typically defined as “the reward of parting with liquidity for a specified period” (Prof Keynes) or as “a payment made by the borrower of capital by virtue of its productivity as a reward for his capitalist’s abstinences” (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason, that the transactions before us belong to a different genus than the act of simply giving the money to the ^borrower and fall in the category of ‘quasi capital’.
11. As for. the connotations of ‘quasi capital’, in the context of determination of arm’’s -length price under transfer pricing regulations, we may refer to the observations made by a coordinate bench of this Tribunal- speaking through one of us (i.e. the” Accountant Member), in the case of Soma Textile & Industries Ltd. v. Asst.ClT  154 ITD 745/59 taxmann.com 152 (Ahd.), as follows:
‘5 The question, however, arises as to what are the connotations of expression ‘quasi capital in the context of the transfer pricing legislation.
6. Hon’ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd. v. ACIT [(2015) 56 com 417 (Delhi)], has begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that “A phrase begins life as a literarily expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas”. The reference so made to the words of Justice Frankfurter was in the context of the concept of “super profits” but it is equally valid in the context of concept of “quasi capitals” also. As in the case of the super profits, to quote the words of Their Lordships, “many decisions of different benches of the ITAT indicate a rote repetition (in the words of Felix Frankfurter J, quoted in the beginning of this judgment a “lazy repetition”) of this reasoning, without an independent analysis of the provisions of the Act and the rules” the same seems to be the position with regard to “quasi capitals” There are several decisions of this Tribunal, including in the cases of Perot Systems TSI v. DCIT [(2010) 130 TTJ 685 (Del)]., Micro Inks Ltd. v. ACIT [(2013) 157 TTJ 289 (Ahd)], Four Soft Pvt. Ltd. v. DCIT [(2014)149 ITD 732 (Hyd.)], Prithvi Information Solutions Pvt. Ltd. v. ACIT [(2014) 34 ITR (Tri) 429 Hyd.] , which refer to the concept of ‘quasi capital’ but none of these decisions throws any light on what constitutes ‘quasi capital’ in the context of transfer pricing and its relevance in ascertainment of the arm’s length price of a transaction. Lest we may also end up contributing to, as Hon’ble Delhi High Court put it, “rote repetition of this reasoning without an independent analysis of the provisions of the Act and the Rules” let us take deal with the connotations of ‘quasi capital’, and its relevance, under the transfer pricing regulations.
7. The relevance of ‘quasi capital’, so far as ALP determination under the transfer pricing regulation is concerned, is from the point of view of comparability of a borrowing transaction between the associated enterprises.
8. It is only elementary that when it comes to comparing the borrowing transaction between the associated enterprises, under the Comparable Uncontrolled Price (i.e. CUP) method, what is to be compared is a materially similar transaction, and the adjustments are to be made for the significant variations between the actual transaction with the A E and the transaction it is being compared with. Under Rule 10B(l)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions.
9. The expression ‘quasi capital’, in our humble understanding, is relevant from the point of view of highlighting that a quasi capital loan or advance is not a routine loan transaction simplilcitor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. “As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the coordinate benches, wherein references have been made to the advances being in the nature of’quasi capital’, these cases referred to the situations in which (a) advances were made as capital could not subscribed to due to regulatory issues and the advancing of loans was only for the period till the same could be converted into equity, and (b) advances were made for subscribing to the capital but the issuance of shares was delayed, even if not inordinately. Clearly, the advances in such circumstances were materially different than the loan transactions simplicitor and that is what was decisive so far as determination of the arm’s length price of such transactions was concerned. The reward for time value of money in” these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.’
12. It is thus quite clear that the considerations for extending a loan simplictor are materially distinct and different from extending a loan which is given in consideration for, or mainly in consideration for, option to convert the same into capital on certain terms which are favourable vis-a-vis the terms available, or, to put it more realistically, hypothetically available, to an independent enterprise. On a conceptual note, the entire purpose of the exercise of determination of arm’s length price is to neutralize the impact of intra AE relationship in a transaction, the right comparable for such a transaction of quasi capital is a similar transaction of lending money on the same term i.e. with an option to convert the loan into capital on materially similar terms. However, what the authorities below have held, and wrongly held for that reason, is that a quasi capital transaction like one before us can be compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis.
13. Let us, at this stage, take note of the US Tax Court decision, relied upon by the TPO, in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09,13677-09; order dated 20th September 2012). It has been referred to by the TPO as decision of the US Supreme Court but in fact it is a decision of the US Tax Court, broadly at the same level of judicial hierarchy as this Tribunal. This decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were (1) whether advance agreements issued by Pepsi Co’s Netherlands subsidiaries to certain Pepsi Co domestic subsidiaries and PPR are more appropriately characterized as debt than as equity; and, (2) if the advance agreements are characterized as debt, whether, and to what extent payments on the advance agreements constitute original issue discount, relating to contingent payment debt instruments under section 1.1275-4(c), Income Tax Regulations. This provision is a deduction provision and not a provision relating to determination of arm’s length price. Nothing, therefore, turns on this decision. In any event, it is nobody’s case that the transaction before us is of the debt. The case of the assessee is that since in consideration of this transaction, the assessee is entitled to own the capital at certain admittedly favourable terms, the true reward of this debt is the availability of such an option, and, therefore, it cannot be compared with a debt simplictor for the purpose of determining arm’s length price. Nothing, therefore, turns on this decision, and whatever be its persuasive value, or lack thereof, the authorities below were in error even in relying upon this decision.
14. We have noted that, as noted by the TPO, it is wholly immaterial as to whether or not the assessee, by the virtue of this transaction, is entitled to subscribe to capital of the AE on certain concessional terms, because, in any case, the AE is a wholly owned subsidiary of the assessee and none else can subscribe to the AE’s capital. What has been overlooked, however, in this process of reasoning is that the very concept of arm’s length price is based on the assumption of hypothetical independence between AEs. Essentially, what is, therefore, required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm’s length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm’s length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such the impact of intra AE association cannot have any role to play in determination of arm’s length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval.
15. As regards the stand of the authorities below that Irish subsidiary has shown huge profits and high operational profits @ 93%, and this fact shows that the assessee should have charged interest on commercial rates, we are unable to even understand, much less approve, this line of reasoning. It is incomprehensible as to what role profits earned from the funds raised can have in determining arm’s length consideration of raising the funds, unless profit sharing is implicit in the consideration for raising the funds itself- which is neither the normal commercial practice nor the case before us. The cost of raising funds is determined much before the returns from funds so raised is even known. To hold that cost of funds raised should have been higher because the returns from funds employed by the enterprise is higher is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits made by the borrower from monies so raised. In any event, while determining arm’s length price of a transaction, it is immaterial as to what ‘benefit* an AE subsequently derives from such a transaction. What is to be determined is the consideration of a transaction in a hypothetical situation, in which AEs are independent of each other, and not the benefit that AEs derive from such transactions. It is not even the case of the authorities below that in the event of hypothetically dealing with an independent enterprise, no independent enterprise would not have given him an interest free loans even if there was an option, coupled with such a deal, to subscribe to the capital of the AE on the terms as offered by the AE to the assessee. Unless that happens, there is not even a prima facie case made out for an ALP adjustment.”
16. We have also noted that, in any event, whenever the assessee’s right to exercise the option of converting the loan into equity comes to an end, the assessee is entitled to interest on the commercial rates. It is not even the case of the authorities below that the interest so charged by the assessee, in a situation in which the right to exercise the option has come to an end, is not an arm’s length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arms length price adjustment of Rs. 5,00,35,270 in respect of interest which, according to the revenue authorities, should have charged on the optionally convertible loan granted to the AE’s.
21. Thus, applying the ratio of above decision, it would emerge that the consideration for extending the loan simplicitor is materially distinct and different from extending a loan which is given in consideration for or mainly in consideration for, option to convert the same into capital on certain terms which are favourable vis-à-vis the terms available or to put it more realistically, hypothetically available, to an independent enterprise. Therefore, quasi capital loan or advance are not routine transaction of loan simplicitor. The substantive reward for such a loan transaction is not loan but opportunity to own capital. In the case of the assessee, the loan transaction is therefore, quasi-capital and substantive reward as interest thereon is opportunity to redeem its preferential shares capital and bring back the same into India. We also note that the TPO has not considered Rule 10A(d) according to transaction which includes number of closely linked transactions. Hence, the nature of transaction as carried out by BHPL as per its objective effected a redemption of preference shares held by it to bring back its money to India which will increase its asset base and income into India. In order to redeem the preference shares, the AE do not have any funds and the BHPL has extended the loan of Rs.22.125 Crores and carried out all necessary activities to a facilitated redemption of preference shares. This is a closely linked integrated transaction under Rule 10A(d) i.e. functioning his shareholder’s function and as well as the loan extended for form shall be considered also a quasi-equity capital for the purpose of determining ALP.
22. The ld. counsel relied in the case of Bartronics India Ltd v. DCIT (2017) 86 taxmann.com 254 (Hyderabad – Trib.).
“15. As regards ground No. 3 regarding addition of Rs. 1,22,27,058/- in respect of corporate guarantee provided to AE, ld. AR submitted that the corporate guarantee given to AE does not fall within the scope of international transaction u/s 92B. He submitted that the corporate guarantee is provided to AE for commercial and business expediency and the assessee has not incurred any cost for providing such guarantee.
15.1 Without prejudice to the above, ld. AR submitted that the Corporate Guarantee was brought under section 92B under Finance Act, 2012 w.e.f. AY 2013-14. It is not applicable to the current AY. For this proposition, he relied on the following cases: 17 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. 1. Dr. Reddy’s Laboratories, ITA No. 294/Hyd/2014 & ITA No. 458/Hyd/2015. 2. Siro Clinpharm Pvt. Ltd. Vs. DCIT, ITA No. 2876/Mum/2014 3. Bharati Airtel Ltd. Vs. ACIT, ITA No. 5816/Del/2012 4. Asian Paints Ltd. Vs. ACIT, ITA No. 7801/Mum/2010 5. Lanco Infratech Ltd. Vs. DCIT, ITA No. 450/hyd/2016
16. Ld. DR, on the other hand, submitted that even though the amended section is introduced in Finance Act, 2012, but, it is introduced with retrospective effect from 01/04/2002. Accordingly, he supported the findings of revenue authorities.
17. Considered the rival submissions and perused the material facts on record as well as various case laws submitted by the assessee. Assessee has provided corporate guarantee to its AE in the current AY without charging any fees for the same. The term ‘guarantee’ was inserted in the definition of international transaction by inserting an explanation in the Finance Act, 2012 with retrospective effect from 01/04/2002. There is no dispute that the corporate guarantee is an international transaction and different assessees are adopting different methods of treatment. Some assessees charges nominal rate to the AEs, whereas other assessees are treating this as shareholder service. Here, the assessee has objected to include this transaction as international transaction for the reason that the Finance Act, 2012, which has inserted an explanation, which will be applicable prospectively from AY 2013-14 and the corporate guarantee transaction will not be applicable to the current AY. The same view was upheld by the coordinate bench in the case of Dr. Reddy Laboratories and other benches of Tribunal. The findings given by the coordinate bench in the case of Dr. Reddy Laboratories (supra) are extracted below: 29. We have carefully considered the rival submissions and perused the record. The ITAT, Delhi Bench in the case of 18 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. Bharati Airtel Ltd. (supra) has considered an identical issue which was re-affirmed in the case of Siro Clinpharma Pvt. Ltd., Vs. DCIT (order dated 31 st March, 2016). The bench observed that transfer pricing is a legislation seeking the tax-payers to organise their affairs in a manner compliant with the norms setout. In short, it is an anti abuse legislation which tells you as to what is the acceptable behaviour but it does not trigger levy of tax in a retrospective manner because no party can be asked to do an impossibility.. Analysing further the Bench observed that though Explanation to Section 92B is stated to be c1arificatory, it has to be necessarily treated as effective from the A.Y. 2013- 2014 and in this regard, relied upon the observations of the Hon’ble Delhi High Court in the case of Skies Satellite. We have also analysed the case law relied upon by the Ld. D.R. and also the provisions of the Act. In our considered opinion, the view taken by the Delhi Bench of ITAT in the case of Bharati Airtel Ltd., (supra) is one of the possible views on the matter and so long as there is no binding decision of any other Higher Forum taking a contrary view, the one which is favourable to the assessee has to be adopted even though other Benches have taken a different view. We, therefore, hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute “International Transaction” within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect.” Respectfully following the above decision, we reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on this aspect. Accordingly, the ground raised by assessee is allowed.
18. As regards addition of Rs. 48,10,26,558/- towards interest on advances given to AE, ld. AR submitted that the TPO erred in recharacterizing the nature of transactions from investment to loan which is not permissible u/s 145 of the Act. He submitted that if the amount is advanced as the share capital, the same would also be shown as share application money in the hands of subsidiary. He submitted that transaction of investment is not international transaction u/s 92B of the Act and hence no interest can be charged on such investment. He relied on the following cases: 19 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. 1. CIT Vs. EKL Appliances Ltd., ITA No. 1068/2011 2. M/s Vijay Electricals Ltd., Vs. Additional CIT, ITA No. 842/Hyd/2012, order dated 31/05/2013. 3. GSS Infotech Ltd. Vs. ACIT, Hyd. ITA No. 497/Hyd/2015 4. KAR Therapeutics & Estates Pvt. Ltd., Vs. DCIT, ITA No. 86/Hyd/2016. 5. Topsgrup Electronics Systems Ltd. Vs. ITO, 67 com 310 (Mum.) 6. Mylan Laboratories Ltd. Vs. ACIT,  63 Taxmann.com 179 (Hyd.)
19. Ld. DR, on the other hand, relied on the orders of revenue authorities and submitted that this transaction is recorded in the books of account as loan and not as investment. He referred to page 203 of paper book to submit that it is classified as loans & advances. He further submitted that the claim of the assessee is only an after thought.
Considered the rival submissions and perused the material facts on record. Assessee has transferred funds to its AE as investment and the same was classified in the balance sheet as’ loans and advances. However, it is only a classification of accounting entry in the books, but, what is relevant and important is whether such transfer of funds were duly treated as investment and accordingly shares were allotted in the subsequent AY. Assessee has submitted share allotment certificate as evidence. Since the transfer of funds were duly accounted by the AE and there is no restriction on the part of the AE to allot shares in the same AY of receipt of funds, as long as the shares allotted, it gives true nature of the transaction. In the given case, even there is no outstanding balance in the books of assessee as loans and advances, the same transaction was duly justified by receiving allotted shares in the subsequent AY. In our considered view, there is no element of profit in the above transaction. Moreover charging of interest is depending upon the contractual obligations between the parties. In the given case, 20 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. assessee has transferred funds with an intention to make investment, it cannot be treated as international transaction as held by various courts, particularly, in the case of KAR Therapeutics & Estates Pvt. Ltd. (supra) wherein the coordinate bench has held as under: “ 9. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. There is no dispute that the assessee had remitted $ 3387182 towards investment in share capital. The shares were allotted to the extent of $ 2654797 in the same AY. The subsidiary company has treated the balance remittance as interest free unsecured loan and repayable on demand in their financial statement. In the next AY, the subsidiary company has allotted the shares on 15/03/2012. Now, can these transactions be treated as international transaction, which qualifies for ALP adjustment. In our considered view, the amount $ 732.385 is towards investment in share capital of the subsidiary outside India and the transactions are not in the nature of international transaction referred to section 92-B of the IT Act and transfer pricing provisions are not applicable as there is no income as well as there is no mutual agreement between the companies for such payment of interest. Moreover, the subsidiary company also disclosed as ‘interest free. Moreover, in the similar situation with uncontrolled transaction, the allottee company in normal course of transaction will not be expected to receive any interest leave away the international transaction. Without any certainty or any agreement on receiving any interest but merely relying on the accounting method and disclosure of the subsidiary in their financial statement cannot lead to this transaction as international transaction which require ALP adjustment. Assessee had relied on the case of Prithvi Information Solutions Ltd. (supra) wherein on the similar set of facts and circumstances, the coordinate bench of this Tribunal has held as below: “10. We have considered the rival submissions, perused the record and have gone through the orders of the authorities below as well as decisions cited. In our opinion, the amount representing 2118.84 is towards investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pricing provisions are not applicable as there is no income. Accordingly, we set aside the order passed by the CIT u/s 263 and that of the AO is restored and the grounds raised by the assessee in this regard are allowed.” 21 ITA No. 259 /Hyd/2017 Bartronics India Ltd., Hyd.. As held in the above, we are inclined to treat the above transaction as not an international transaction and accordingly ground No. 1 of the assessee is allowed. Since we have adjudicated ground No. 1 as allowed, the ground Nos. 2 & 3 are only academic in nature and accordingly, dismissed.” Respectfully following the decision of the coordinate bench in the said case, we are inclined to treat the above transaction as not an international transaction and accordingly the ground raised on this issue is allowed.”
23. In the light of ratio of above decision, we find that the Tribunal has held that the advancing interest free loans must not necessarily be deemed to be interest earning activity and activity to capitalize opportunity cost for investing in new territories-The funds were raised for the purpose of investment in subsidiaries and on the fact that these funds were interest free and ultimately, shares were allotted, it shows that there is no adjustment need to be made, on the CUP method adopted by the AO/TPO, even if the transaction is considered as one that of international transaction. (AY. 2008-09 to 2011-12). We also note that it is only a classification of accounting entry in the books, but, what is relevant and important is whether such transfer of funds were duly treated as investment and accordingly shares were allotted in the subsequent AY. Assessee has submitted brought back the preferential shares Since the transfer of funds were duly accounted by the AE and there is no restriction on the part of the AE to allot shares in the same AY of receipt of funds, as long as the shares allotted, it gives true nature of the transaction. therefore, in our considered view, there is no element of profit in the above transaction. Moreover charging of interest is depending upon the contractual obligations between the parties. Further, we find the amount representing loan was towards investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pricing provisions are not applicable as there is no income. Therefore, considering the same, as the assessee has also given loan to obtain the benefits of full profits earned by the subsidiary and to ensure full control over the operations of the subsidiary. Therefore, this is not comparable to a bank financing a customer based on their individual financing needs. Further, in the case of BHPL could have very well given the money as a preference capital or as an equity capital but the interest free loan was given to enable the BHPL bring back such money back to India easily so as to increase the asset and tax base in India. In all countries share capital can be brought back only after complying with certain procedure and more so in the case of equity capital. Hence the contention of the assessee that it is a quasi-equity capital has not been right fully considered by the TPO as well as CIT(A).
24.The findings given in the case of Perot Systems TSI v. DCIT  37 SOT 358 (Delhi-Trib) are distinguishable as in that case profits were shifted out of India to Bermuda, a Tax Heaven. Where in the instant case, the AE subsidiary is formed with the intention and the structure of the transaction is to bring back the capital and profits to India after payment of due taxes. Further, in that case the result of the transaction was that the income of the assessee in India would reduce while that of the AE would increase. That was also a classic case of violation of transfer pricing norms where profits are shifted to tax heavens or low tax regimes to bring down the aggregate tax incidence of a multi-national group, whereas in the present case, the transaction have resulted into increase in cash inflow into India and possibility of increase of tax base in India. Further, there is no finding of fact that the transactions have been undertaken for shifting of profits to a low tax jurisdiction as against the finding given in Perot System (supra). Therefore, on an analysis of transaction as a whole and considering the observations and analysis by Hon’ble Tribunal Ahmedabad and Hyderabad in the decisions relied upon by the assessee, the transaction has to be considered as quasi-equity in nature. It was further contended that the TPO has not carried out any FAR analysis as in the case of assessee, the AE is just an extension of BHPL to hold investments and have not carried out any functions. The entire risks are borne by the assessee company only and the entire investments in Sterling + Hostag has been funded as equity capital, preference capital and loan only by BHPL as part of its shareholder function. The AE itself has not employed any assets. As per the contractual terms and law, the moment this investment is sold the entire proceeds of capital and profits are to be repatriated to India compulsorily and subject the same to taxation in India. Therefore, in this manner the entire risks are to be borne by and rewards accrue to BHPL only as a result of the investments made. As per Rule10B adjustment for contractual terms are to be considered while applying CUP method. In this case the AE is not authorised by law to undertake any functions or pursue any business. Once BHPL decides to sell investments held, the AE has to wind up and BHPL has to bring back the entire proceeds to India. Thus, the aforesaid FAR analysis as required under Rule 10B has not been carried out by the TPO/CIT(A) while rejecting the contention of BHPL that even though in form the transaction is structured as a loan, in substance this is a quasi-equity capital. Thus, the aforesaid material differences and considerations for extending the loan to AE as compared to a loan simplicitor has not been considered by the TPO/CIT(A) as required by Rule 10B, which is more particularly analyzed by the Hon’ble Ahmedabad Tribunal in the case of Cadila Healthcare Limited in Para 11 & 12 of the judgement as reproduced above. The ld. counsel further without prejudice as an alternative argument that for the event in the transaction is not considered as quasi-equity in nature then there is no loss of Revenue to the Government of India hence Chapter X being anti-avoidance provisions are not applicable to the facts of the case. Had interest been paid on the amount brought back to India profits would have been lesser to that extent and taxes would have been paid to Government of India proportionately lesser to that extent. Hence, there is no loss of Revenue to the Government of India. Further, alternatively if transaction as quasi-equity is not accepted it shall be considered that there is no risk for BHPL in extending the interest free loan as observed by the CIT(A) in Para 9.3 at Page 19 of the Appeal Order. The CIT (A) observed that the transaction is as a loan simplicitor to an un-related party. Since the loan is consumed in a foreign country interest rate prevalent in that country shall be considered as ALP. In this case as per Rule 10B entire functions are carried out by BHPL and the risks and rewards are also to be borne and enjoyed by BHPL, hence there should not be any risk premium chargeable to the loan as an adjustment.
Therefore, reliance placed by the Learned Counsel ld. counsel has placed reliance on the following decision of Vibhav Gems Limited (2017) 88 taxmann.com 12 (Raj.)- SLP dismissed (2018) 99 taxmann.com 2 (SC) also supports his case. We have noted that, as noted by the TPO, it is wholly immaterial as to whether or not the assessee, by the virtue of this transaction, is entitled to subscribe to capital of the AE on certain concessional terms, because, in any case, the AE is a wholly owned subsidiary of the assessee and none else can subscribe to the AE’s capital. What has been overlooked, however, in this process of reasoning is that the very concept of arm’s length price is based on the assumption of hypothetical independence between AEs. Essentially, what is, therefore, required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm’s length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm’s length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such the impact of intra AE association cannot have any role to play in determination of arm’s length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. We have also noted that the assessee has given loan of Rs.30,84,40,000/- and brought back Rs.32,56,53,750/- as repayments. Similarly, investment in preferential shares were at Rs.1,71,68,40,000/- as against which the assessee has brought back by way of redemption of preference shares for an amount of Rs.1,74,90,59,944/-. Therefore, the transactions under consideration is in the nature of quasi capital. Hence, there was no requirement charge an arm’s length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arms length price adjustment of Rs.1,80,56,250 in respect of interest on loan to AE, which, according to the revenue authorities, should have charged on the loan granted to the AE’s to bring back preferential shares capital in India. Thus, Ground No. 4 of the appeal of the assessee is allowed.”
6. We further find that on similar ground of appeal in assessee’s own case for the A.Y.2009-10. 2010-11 and 2011-12 in ITA No.1415, 1416/AHD/2015 & 795/AHD/2016, the Tribunal followed the order for A.Y. 2008-09. We further noted that the ld. CIT(A) while granting partial relief to the assessee noted that same unsecured loan is outstanding in the current year. Considering the facts and the decision of the Tribunal in assessee’s own case for the A.Y. 2008-09, 2010-11 and 201-12 and the fact that the same unsecured loan to Associated Enterprise is outstanding on which Arm’s Length Price for interest was computed by TPO in earlier years. Therefore, respectfully following the order of Co-ordinate Bench, we direct the AO/TPO to follow the order of the Tribunal in A.Y. 2008-09, 2010-11 and 2011-12 and re-compute the interest adjustment. In the result the ground no. 7 & 8 of the appeal are allowed.
7. In the result, appeal of the Assessee partly allowed.
Order announced on 11 October, 2021 at the time of hearing in virtual court hearing.