PMP AUTO COMPONENTS P.LTD, MUMBAI V. DCIT 7(1), MUMBAI

ITA 1484/MUM/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8357 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2014
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 03-02-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 03-03-2014
• Court: TRIBUNAL
• Keywords: Transfer pricing; Double taxation relief; Principle of natural justice; International transaction; Rule of consistency; Permanent establishment; Valuation report; Notional interest; Commercial expediency
• Section: 143(3); 92B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI JH JH JH JH VKJ VKJVKJ VKJ- -- - LH LHLH LH- -- - 'KEKZ 'KEKZ 'KEKZ 'KEKZ YS[KK LNL; YS[KK LNL; YS[KK LNL; YS[KK LNL; ,OA ,OA,OA ,OA JH FOT; IKY JKO] U;KF;D LNL; JH FOT; IKY JKO] U;KF;D LNL; JH FOT; IKY JKO] U;KF;D LNL; JH FOT; IKY JKO] U;KF;D LNL; DS LE{K DS LE{K DS LE{K DS LE{K BEFORE SHRI R.C, SHARMA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER VK;DJ VIHY LA[;K VK;DJ VIHY LA[;K VK;DJ VIHY LA[;K VK;DJ VIHY LA[;K / ITA NO.1484/MUM/2014 FU/KKZJ.K O'KZ FU/KKZJ.K O'KZ FU/KKZJ.K O'KZ FU/KKZJ.K O'KZ @ @@ @ ASSESSMENT YEAR: - 2009-10 M/S PMP AUTO COMPONENTS P. LTD, PENINSULA SPENTA, 2 ND FLOOR, MATHURADAS MILL COMPOUND, SENAPATI BAGPAT MARG, LOWER PAREL, MUMBAI 400 013. VS. DCIT-7(1), ROOM NO. 622, AAYAKAR BHAVAN, M.K. ROAD, CHURCHGATE MUMBAI -400 020. PAN:- AAACP7200N APPELLANT RESPONDENT VK;DJ VIHY LA[;K VK;DJ VIHY LA[;K VK;DJ VIHY LA[;K VK;DJ VIHY LA[;K / ITA NO.1506/MUM/2014 FU/KKZJ.K O'KZ FU/KKZJ.K O'KZ FU/KKZJ.K O'KZ FU/KKZJ.K O'KZ @ @@ @ ASSESSMENT YEAR: - 2009-10 DCIT-7(1), ROOM NO. 622, AAYAKAR BHAVAN, M.K. ROAD, CHURCHGATE MUMBAI -400 020. VS. M/S PMP AUTO COMPONENTS P. LTD, PENINSULA SPENTA, 2 ND FLOOR, MATHURADAS MILL COMPOUND, SENAPATI BAGPAT MARG, LOWER PAREL, MUMBAI 400 013. PAN:- AAACP7200N APPELLANT RESPONDENT ORDER PER VIJAY PAL RAO, JM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ASSESS MENT ORDER DATED 20.01.2014 PASSED U/S 143(3) R.W.S 144C(13) OF INCO ME TAX ACT, PURSUANT TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED AS DRP) U/S 144C (5) OF ASSESSEE BY / FU/KKZFJRH DH VKSJ LS FU/KKZFJRH DH VKSJ LS FU/KKZFJRH DH VKSJ LS FU/KKZFJRH DH VKSJ LS SHRI YOGESH THAR REVENUE BY/ JKTLO DH VKSJ LS JKTLO DH VKSJ LS JKTLO DH VKSJ LS JKTLO DH VKSJ LS SHRI S.D. SRIVASTAVA DATE OF HEARING 12.08.2014 DATE OF PRONOUNCEMENT 22.08.2014 M/S PMP AUTO COMPONENTS P. LTD, 2 | P A G E THE INCOME TAX ACT FOR THE A.Y. 2009-10. THE ASSESS EE HAS RAISED FOLLOWING GROUNDS IN ITS APPEAL:- GROUND I: ADDITION OF NOTIONAL INTEREST ON ACCOUNT OF LOAN GIVEN TO ASSOCIATE ENTERPRISE ('AE') - RS. 1,14,01, 627/- 1. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. DISPUTE RESOLUTION PANEL ('DRP') AND THE LD. AO (FOLLOWING THE DIRECTIONS OF THE DRP) ERRED IN ADDING A SUM OF RS. 1,14,01,627/- ON ACCOU NT OF NOTIONAL INTEREST CHARGED ON LOANS ADVANCED TO ITS SUBSIDIARIES ON TH E ALLEGED GROUND THAT IT IS NOT AT ARM'S LENGTH PRICE AS PER THE PROVISIONS OF CHAPTER X OF THE ACT. 2. THE LD. DRP AND THE LD. AO (FOLLOWING THE DIRECT IONS OF THE DRP) FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT: (I) THE APPELLANT HAD CHARGED INTEREST ON THE LOANS ADVANCED TO ITS AE'S AT THE RATE THAT WAS SIGNIFICANTLY HIGHER THAN THE LONDON INTER BANK BORROWING RATE ('LIB OR') AND OTHER INTERNATIONAL BENCHMARKING RAT ES WHICH IS USED AS THE INTERNATIONAL STANDARD FOR LENDING AND BORROWING OF FUNDS AND CONSIDERING THE DIRECT COMMERCIAL INTEREST OF THE COMPANY NO ADDITI ON WAS JUSTIFIABLE ON LOAN GIVEN TO PMP BAKONY AND PMP MAURITIUS. (II) WITHOUT PREJUDICE TO THE ABOVE, UNDER ARTICLE 11 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT ('DTAA') SINCE NO INTEREST IS ' PAID', THE QUESTION OF MAKING ANY ADJUSTMENT DOES NOT ARISE. GROUND II: TREATING SHARE APPLICATION MONEY IN OVER SEAS SUBSIDIARY AS AN INTERNATIONAL TRANSACTION AND ADDI NG NOTIONAL INTEREST INCOME BY RE-CHRACTERIZING THE SH ARE APPLICATION MONEY AS A LOAN -RS.L,24,69,920/- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. DRP AND THE LD. AO (FOLLOWING THE DIRECTIONS OF THE DRP ) ERRED IN TREATING THE INVESTMENTS IN EQUITY SHARES OF THE FOREIGN SUBSIDI ARY AS AN INTERNATIONAL TRANSACTION U/S 92B(1) AND RE-CHARACTERIZING THE SH ARE APPLICATION MONEY AS A LOAN AND THEREBY COMPUTING INTEREST AND MAKING ADDI TION OF NOTIONAL INTEREST INCOME ON THE LOAN OFRS.L,24,69,9201-. GROUND III: TREATING EQUITY INVESTMENT IN OVERSEAS SUBSIDIARY AS AN INTERNATIONAL TRANSACTION AND ADDI NG TO THE TOTAL INCOME RS. 14,15,00,170/- M/S PMP AUTO COMPONENTS P. LTD, 3 | P A G E 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. DRP AND THE LD. AO (FOLLOWING THE DIRECTIONS OF THE DRP ) ERRED IN TREATING THE INCREMENTAL INVESTMENTS IN EQUITY SHARES OF THE FOR EIGN SUBSIDIARY AS AN 'INTERNATIONAL TRANSACTION' U/S. 92B(I) OF THE ACT AND ADDING THE ENTIRE INVESTMENT MADE IN PREVIOUS YEAR TO THE TOTAL INCOM E OF THE APPELLANT. 2. GROUND NO. 1 IS REGARDING ADDITION UNDER TRANSFE R PRICING ADJUSTMENT ON ACCOUNT OF INTEREST ON LOANS GIVEN TO THE SUBSIDIAR IES/ASSOCIATE ENTERPRISE. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G AND MARKETING AUTO COMPONENTS TO ORIGINAL EQUIPMENT MANUFACTURERS. THE ASSESSEE HAD GIVEN A LOAN OF EURO 15,650 EQUIVALENT TO RS. 10,05,151/- TO ITS WH OLLY OWNED SUBSIDIARY NAMELY PMP MAURITIUS WITHOUT CHARGING ANY INTEREST DURING THE YEAR. THE TPO NOTED THAT ON THE ANOTHER LOAN GIVEN TO ITS SUBSIDIARY NAMELY PMP BAKONY, HUNGARY, THE ASSESSEE HAD HAD CHARGED INTEREST AT THE RATE OF 8% PER ANNU M. THE ASSESSEE HAS SUBMITTED BEFORE THE TPO THAT IT HAD AGREED FOR A MORATORIUM OF ONE YEAR ON THE CHARGING OF INTEREST ON THIS LOAN. THE ASSESSEE CONTENDED THAT EVEN IN THE CASE OF ARMS LENGTH INTEREST, THE LIBOR BASED CUP IS AN APPROPRIATE MET HOD OF BENCH MARKING IN RESPECT OF LOAN GIVEN TO ITS SUBSIDIARY/AE. THE TP O DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT THE ASSESSEE IS THE TES TED PARTY WHO WAS BEARING THE LOSS OF OPPORTUNITY TO EARN INCOME ON THE AMOUNTS L ENT. HE HAS OBSERVED THAT THE GEOGRAPHICAL AND THE COMMERCIAL ENVIRONMENT OF THE LENDER ASSESSEE HAD TO BE TAKEN INTO CONSIDERATION FOR DETERMINATION OF ARMS LENGTH PRICE. AS PER THE TPO THE REASONABLE ARMS LENGTH PRICE IS THE BORROWING RATE BY THE ASSESSEE FROM ITS BANKERS AT 12% + MARKUP OF 3% TO FACTOR IN THE RELATIVE DIF FERENCE IN THE FINANCIALS OF THE ASSESSEE COMPARED TO ITS AES AS WELL AS THE RISKS UNDERTAKEN BY THE ASSESSEE THAT NO SECURITY HAD BEEN TAKEN AT THE TIME OF GRANTING SUCH LOANS. ACCORDINGLY THE TPO DETERMINED THE ARMS LENGTH INTEREST CHARGEABLE AT THE RATE OF 15% AND MADE ADJUSTMENT ON ACCOUNT OF INTEREST CHARGEABLE ON THE LOANS AND ADVANCES TO AE. SIMILARLY THE TPO HAS TAKEN THE ARMS LENGTH INTERE ST IN RESPECT OF THE LOAN OF EURO 8,23,875 EQUIVALENT TO RS. 5,26,95,045/- TO ITS WH OLLY OWNED SUBSIDIARY NAMELY PMP BAKONY, HUNGARY, ON WHICH THE ASSESSEE CHARGED INTE REST AT THE RATE OF 8% PER M/S PMP AUTO COMPONENTS P. LTD, 4 | P A G E ANNUM. BY APPLYING ARMS LENGTH RATE OF 15% ON BOTH LOANS GIVEN BY THE ASSESSEE TO ITS AES AT MAURITIUS AND HUNGARY THE TPO MADE THE A DJUSTMENT OF RS. 1,14,01,627/- 3. THE ASSESSEE CHALLENGED THE ACTION OF TPO/ASSESS ING OFFICER BEFORE THE DRP BY FILING OBJECTIONS AND CONTENDED THAT THE ASSESSE E CHARGED INTEREST TO ITS AE AT HUNGARY WHICH IS MORE THAN THE LIBOR RATE AND, THER EFORE, THE SAME IS AT ARMS LENGTH AND NO ADJUSTMENT WAS REQUIRED TO BE MADE IN RESPECT OF THE LOAN GIVEN TO ITS SUBSIDIARY. AS REGARDS THE LOAN GIVEN TO THE MAURIT IUS BASED AE, THE ASSESSEE CONTENDED THAT NO INTEREST HAS ACCRUED TO IT DURING THE PERIOD UNDER CONSIDERATION ON ACCOUNT OF MORATORIUM AGREED UPON WITH THE AE AN D FURTHER IN TERMS OF ARTICLE 11 OF DTAA WITH MAURITIUS, INTEREST PAID ALONE COULD BE SUBJECTED TO TAX. THE DRP DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT ARTICLE 11 IS RELEVANT FOR TAXATION OF AN IN COME AND HAS NO RELEVANCE FOR TRA NSFER PRICING PERSPECTIVE, WHICH FOLLOWS THE ARMS LENGTH PRINCIPLE. THE DRP HAS ACC EPTED THE REASONS GIVEN BY THE TPO FOR ADOPTING THE BANK LENDING RATE +3% MARKUP O N ACCOUNT OF RISK IN GIVING THE LOAN TO AE WITHOUT ANY SECURITY. FURTHER IT WAS OBS ERVED BY THE DRP THAT THE LIBOR RATE CAN BE CONSIDERED FOR THE FUNDS RAISED OVERSEA S AND NOT FOR THE AMOUNTS LENT BY THE ASSESSEE OUT OF ITS FUNDS IN INDIA. AS REGARDS THE MORATORIUM AGREED UPON BY THE ASSESSEE WITH ITS AE IN RESPECT OF PAYMENT OF INTE REST ON LOAN, THE DRP HAS HELD IT IS NOT RELEVANT FOR THE ISSUE OF ARMS LENGTH PRICE INSTEAD THE ISSUE IS WHETHER IN A COMPARABLE TRANSACTION WITH AN UNRELATED PARTY SIMI LAR CONCESSION WOULD HAVE BEEN GIVEN. THEREFORE, THE DRP OBSERVED THAT IN THE ABSE NCE OF ANY JUSTIFICATION OR COMPARABLE UNCONTROLLED TRANSACTION TO ESTABLISH TO HAVE FOREGONE THE INTEREST THAT WOULD HAVE BEEN DUE TO IT, THE MORATORIUM AGREED BE TWEEN TWO RELATED PARTIES IS NOT ACCEPTED. 4. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS CHALLENGED THE ORDERS OF AUTHORITIES BELOW ON TWO COUNTS VIZ. THE INTEREST RATE ADOPTED BY THE M/S PMP AUTO COMPONENTS P. LTD, 5 | P A G E TPO BY IGNORING LIBOR RATE AND SECONDLY THE TRANSFE R PRICING ADJUSTMENT MADE ON ACCOUNT OF NOTIONAL INTEREST ON THE LOAN GIVEN TO S UBSIDIARY. THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT A S REGARDS THE PRIMARY LENDING RATE OF INTEREST ADOPTED BY THE TPO, THE SAME IS NO T JUSTIFIED WHEN THE LOAN IS ADVANCED TO AE AND INSTEAD OF SUCH TRANSACTION WITH THE AE IF THE ASSESSEE WOULD HAVE GIVEN LOAN TO THE THIRD PARTY IN THE SIMILAR E CONOMIC AND GENOGRAPHICAL CONDITION, THEN THE EXPECTED INTEREST WOULD HAVE BE EN THE LIBOR + A REASONABLE MARKUP. THE LD. AUTHORIZED REPRESENTATIVE HAS FURTH ER CONTENDED THAT THE LIBOR HAS BEEN ACCEPTED AS A COMPARABLE UNCONTROLLED PRIC E IN CASE OF LOAN ADVANCED TO THE AE IN A SERIES OF DECISIONS OF ITAT. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE FOLLOWING ORDERS:- (I) AURIONPRO SOLUTIONS LTD. VS. ACIT (33 TAXMANN.C OM 187) (MUM) (II) HINDUJA GLOBAL SOLUTIONS LTD. VS. ACIT ( ITA N O. 254/MUM/2013) (MUM) (III) DCIT VS. TECH MAHINDRA LTD. ( 12 TAXMANN.COM 132 ) (MUM) (IV) TATA AUTOCOMP SYSTEMS LTD VS. ACIT (21 TAXMANN .COM 6) (MUM) (V) COTTON NATURALS (I) PVT. LTD. (ITA NO. 5855/DE L/2012) (DEL) (VI) SIVA INDUSTRIES LTD. & HOLDING LTD. VS. ACIT ( 11 TAXMANN.COM 404) (CHEN) (VII) AITHENT TECHNOLOGIES (P) LTD. VS. ITO (17 TAX MANN.COM 59) (DEL) (VIII) SIVA VENTURES LIMITED VS. ACIT (ITA NO. 2161 /MUM/2011) (CHEN) 5. HE HAS FURTHER CONTENDED THAT IN THESE DECISIONS THE TRIBUNAL HAS HELD THAT THE LIBOR RATE WITH AN APPROPRIATE MARKUP IS THE RIGHT PARAMETER TO BE APPLIED AS AGAINST THE RATE OF INTEREST PREVAILING IN INDIA. 6. ON THE ISSUE OF NON CHARGING OF INTEREST ON THE LOAN GIVEN TO THE MAURITIUS BASED AE, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT WHEN NO INTEREST WAS CHARGED BY THE ASSESSEE AS PER THE AGREEMENT ON MORATORIUM FOR ONE YEAR, THEN NO NOTIONAL INTEREST CAN BE ADDE D UNDER TRANSFER PRICING M/S PMP AUTO COMPONENTS P. LTD, 6 | P A G E ADJUSTMENT. ALTERNATIVELY, THE LD. AUTHORIZED REPRE SENTATIVE HAS SUBMITTED THAT AS PER THE DTAA BETWEEN INDIA AND MAURITIUS, UNPAID IN TEREST IS NOT TAXABLE IN TERMS OF ARTICLE 11 OF THE TREATY. HE HAS REFERRED ARTICLE 1 1 OF THE INDO MAURITIUS DTAA AND SUBMITTED THAT THE INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHE R STATE . THE INTEREST IN QUESTION WAS NOT PAID BY THE AE TO THE ASSESSEE, THEREFORE, THE SAME IS NOT TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 11 OF INDO-MAURITIUS DTAA . IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION OF THIS TRIBUNAL IN TH E CASE OF JOHNSON & JOHNSON VS. ASSISTANT DIRECTOR OF INCOME-TAX (INTERNATIONAL TAX ATION) (32 TAXMANN.COM 102) (THIRD MEMBER DECISION) WHEREIN, THE TRIBUNAL AFTER CONSIDERING THE DECISIO N OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DI RECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) VS. SIEMENS AKTIONGESELLSCHAFT DATED 22-1 0-2012 IN INCOME TAX APPEAL NO. 124/2010. 7. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT IN THE CASE OF AURIONPRO SOLUTIONS LTD. VS. ACIT (SUPRA), THE TRIBUNAL AFTER CONSIDERING THE OTHER DECISIONS OF TRIBUNAL ON THIS ISSUE HAS HELD THAT THE TRANSACTIO N OF ADVANCING LOAN TO AE FALLS UNDER THE AMBIT OF INTERNATIONAL TRANSACTIONS AS PE R THE TERMS OF SECTION 92B. FURTHER THE ASSESSEE IS A TESTED PARTY FOR THE PURPOSE OF D ETERMINATION OF ARMS LENGTH INTEREST AND, THEREFORE, THE INTEREST INCOME OF TH E ASSESSEE WHICH HAS BEEN FOREGONE BECAUSE OF THE TRANSACTION WITH THE AE HAS TO BE TAKEN AS AN ARMS LENGTH PRICE. THE LD. DR HAS RELIED UPON THE ORDERS OF AUT HORITIES BELOW AND SUBMITTED THAT FOR THE PURPOSE OF TRANSFER PRICING ADJUSTMENT, ART ICLE 11 OF TREATY IS NOT RELEVANT BECAUSE THE SAME IS FOR THE PURPOSE OF TAXING THE I NCOME AND NOT RELEVANT FOR THE PURPOSE OF COMPUTING THE INCOME. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RE LEVANT MATERIAL ON RECORD. AS REGARDS THE ISSUE REGARDING THE PRIMARY LENDING RAT E OR LIBOR RATE TO BE TAKEN AS ARMS LENGTH INTEREST IN RESPECT OF THE TRANSACTIO N OF GIVING LOAN BY THE ASSESSEE TO M/S PMP AUTO COMPONENTS P. LTD, 7 | P A G E ITS AE, WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CO NSIDERED BY THIS TRIBUNAL IN SERIES OF DECISIONS AS RELIED UPON BY THE LD. AUTHORIZED R EPRESENTATIVE OF THE ASSESSEE. IN THE CASE OF AURIONPRO SOLUTIONS LTD. VS. ACIT (SUPR A), THE CO-ORDINATE BENCH OF TRIBUNAL IN WHICH ONE OF US JUDICIAL MEMBER IS A PA RTY HAS CONSIDERED AND HELD IN PARA 8.7 TO 8.13 AS UNDER:- 8.7 UNDER THE TRANSFER PRICING REGULATIONS, AN INTERNA TIONAL TRANSACTION HAS TO BE COMPARED WITH AN UNCONTROLLED TRANSACTIONS BETWEEN UNRELATED PARTIES WHICH MEANS THAT AN INTERNATIONAL TRANSACTION IS TESTED WITH TH E TRANSACTION, IF THE ASSESSEE COULD HAVE ENTERED INTO A SIMILAR TRANSACTION WITH UNRELA TED THIRD PARTY AND THEREBY THE INCOME OF THE ASSESSEE WOULD HAVE EARNED FROM A SIM ILAR TRANSACTION WITH AN UNCONTROLLED PARTY. THUS, THE SAME INCOME IS EXPECT ED OR DEEMED TO HAVE BEEN EARNED FROM THE TRANSACTION WITH THE AES. THE UNDER LINING PRINCIPLE OF DETERMINING THE ALP IS BASED ON THE TRANSACTION BETWEEN THE UNR ELATED PARTIES. THE INCOME OF THE ASSESSEE SHOULD NOT BE EFFECTED AS REDUCED AND THEREFORE, THE SAME IS COMPARED WITH THE INCOME OR EXPENDITURE AS THE CASE MAY BE EARNED OR INCURRED BY THE ASSESSEE, IF IT WOULD HAVE BEEN BETWEEN THE ASS ESSEE AND THE UNRELATED PARTIES. THEREFORE, TESTED PARTY FOR THE PURPOSE OF DETERMIN ATION OF ALP IS THE ASSESSEE AND NOT THE AES. 8.8 IN THE CASE IN HAND, THE ASSESSEE HAS ADVANCED LOA NS TO THE AES WITHOUT CHARGING ANY INTEREST; THEREFORE, THE TRANSACTION H AS TO BE TESTED WITH A SITUATION, HAD THE ASSESSEE INVESTED OR ADVANCED OR DEPOSITED THE SAID AMOUNT WITH AN UNRELATED THIRD PARTY AND THEREBY THE INCOME, WHICH WOULD HAV E BEEN EARNED BY THE ASSESSEE IS EXPECTED TO HAVE BEEN EARNED FROM THE TRANSACTIO N OF ADVANCING LOANS TO THE AES. 8.9 THUS, ON PRINCIPLE, WE DO AGREE WITH THE DRP ON TH E POINT OF THE TESTED PARTY FOR DETERMINING THE ARM'S LENGTH INTEREST RATE THAT WOU LD HAVE BEEN EARNED BY THE ASSESSEE BY ADVANCING LOANS TO THE UNRELATED THIRD PARTY. 8.10 THE TRANSFER PRICING REGULATION ARE BASED ON THE D EEMING PRINCIPLE BY TAKING INTO ACCOUNT A HYPOTHECAL SITUATION THAT INSTEAD OF HAVING TRANSACTION WITH AE HAD THE ASSESSEE TRANSACTED WITH UNRELATED PARTY WHAT WOULD HAVE BEEN THE FINANCIAL/COMMERCIAL RESULT OF THAT TRANSACTION. TH US, THE EFFECT OF TRANSACTION ON THE INCOME OF THE ASSESSEE IS TO BE SEEN AND CONSIDERED AND NOT EFFECT ON THE COST OR INCOME OF THE AE. THEREFORE, THE TESTED PARTY IS AL WAYS THE TAXPAYER AND NOT THE AE. NONE OF THE FACTORS UNDER THE TRANSFER PRICING REGU LATIONS REQUIRE TO CONSIDER WHETHER THE AES WOULD HAVE INCURRED OR EARNED MORE OR LESS; BUT IT IS ALWAYS CONSIDERED WHETHER THE ASSESSEE HAD EARNED MORE OR LESS BY DOING A SIMILAR TRANSACTION WITH AN UNRELATED PARTIES. 8.11 EVEN UNDER RULE 10B OF THE IT RULES, THE FACTORS P RESCRIBED FOR INCLUSION OR EXCLUSION OF COMPARABLES TO DETERMINE THE ALP ARE A LSO BASED ON THE COMPARISON OF THE ASSESSEE WITH THE CHOSEN ENTITIES AND THE AE HA S NO RULE IN THE EXERCISE OF SELECTING THE COMPARABLES. THUS, IN OUR VIEW, THE I NTEREST THAT WOULD HAVE BEEN EARNED BY THE ASSESSEE BY ADVANCING OR PLACING THE SAID AMOUNT WITH UNRELATED M/S PMP AUTO COMPONENTS P. LTD, 8 | P A G E PARTIES WOULD BE THE ARM'S LENGTH INTEREST IN RELAT ION TO THE INTEREST FREE LOANS/ADVANCES TO THE AE. THE SAFEST COMPARABLES, W HICH CAN BE TAKEN AS ARM'S LENGTH INTEREST RATE IN SUCH A CASE WOULD BE THE IN TEREST ON FD WITH THE BANK FOR A TERM EQUIVALENT TO THE TERM FOR WHICH THE LOANS GIV EN TO THE AES. 8.12 IT IS PERTINENT TO NOTE THAT IN CASE OF FD WITH TH E BANK, THE INVESTMENT IS SAFE AS IT IS FREE FROM RISK OF CREDIT AND INTEREST. ON THE OTHER HAND, IF THE LOAN/ADVANCE IS GIVEN TO THE UNRELATED PARTY, THEN ALWAYS THERE IS SOME RISK OF CREDIT AND INTEREST INVOLVED IN SUCH TRANSACTION. THERE IS ONE MORE REA SON FOR TAKING THE FD AS AN APPROPRIATE AND GOOD COMPARABLE BECAUSE THE LENDING RATE BY FINANCIAL INSTITUTIONS/BANK VARIES DEPENDING UPON THE CREDIT RATING OF THE BORROWER AND FURTHER ON THE GUARANTEE AND SECURITY PROVIDED TO SECURE TH E LOANS. 8.13 THOUGH IN PRINCIPLE WE DO CONCUR WITH THE VIEW OF DRP ON THIS ISSUE, HOWEVER, SINCE THE ISSUE OF LIBOR HAS BEEN CONSIDERED AND DE CIDED BY THE TRIBUNAL IN VARIOUS CASES AS RELIED UPON BY THE ASSESSEE (SUPRA ); THEREFORE, TO MAINTAIN THE RULE OF CONSISTENCY, WE FOLLOW THE DECISION OF THE COORD INATE BENCHES OF THIS TRIBUNAL, AND ACCEPT LIBOR FOR BENCHMARKING INTEREST ON INTEREST FREE LOANS TO AES. SINCE THE LIBOR IS A RATE APPLICABLE IN THE TRANSACTIONS BETW EEN THE BANKS AND FURTHER THE LOANS ADVANCED BY THE BANK TO CLIENTS ARE SECURE BY SECURITY AND GUARANTEE; THEREFORE, A LOAN WHICH HAS BEEN ADVANCED WITHOUT A NY SECURITY OR GUARANTEE AS IN THE CASE OF THE ASSESSEE HAS TO BE BENCHMARK BY TAK ING THE ARM'S LENGTH INTEREST RATE AS LIBOR PLUS. THOUGH THE TPO TOOK ALP AS LIBO R + 3%; HOWEVER, IN OUR VIEW, THE APPROPRIATE RATE WOULD BE LIBOR PLUS 2%. WE ACCORDINGLY, DIRECT THE AO/TPO TO DETERMINE THE ARM'S LENGTH INTEREST BY CO NSIDERING THE LIBOR PLUS 2% ON THE MONTHLY CLOSING BALANCE OF ADVANCES DURING T HE FINANCIAL YEAR RELEVANT TO THE AY UNDER CONSIDERATION. 9. ON PRINCIPLE, WE DO CONCUR WITH THE VIEW OF THE CO-ORDINATE BENCH IN THE ABVOE SAID DECISION THAT THE ASSESSEE IS A TESTED PARTY A ND ECONOMIC/COMMERCIAL AS WELL AS GEOGRAPHICAL CONDITION IN WHICH THE ASSESSEE IS DOING BUSINESS ARE RELEVANT TO BE CONSIDERED FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE. HOWEVER, THE TRIBUNAL HAS FOLLOWED THE EARLIER DECISION OF THE C O-ORDINATE BENCH TO MAINTAIN THE RULE OF CONSISTENCY AND ACCORDINGLY DIRECTED THE TP O/ASSESSING OFFICER TO DETERMINED THE ARMS LENGTH PRICE BY CONSIDERING TH E LIBOR + 2% ON THE LOAN GIVEN TO THE AE. ACCORDINGLY, TO MAINTAIN THE CONSISTENCY ON THE POINT, WE DIRECT THE ASSESSING OFFICER/TPO TO DETERMINE THE ARMS LENGTH INTEREST BY CONSIDERING THE LIBOR + 2% ON THE TRANSACTION OF LOAN GIVEN TO THE AE. 9.1 AS REGARDS THE NON CHARGING OF INTEREST BY THE ASSESSEE FROM ITS MAURITIUS BASSED AE, WE DO NOT AGREE WITH THE CONTENTION OF T HE ASSESSEE THAT BECAUSE OF THE ASSESSEE AGREED FOR A MORATORIUM OF PAYMENT OF INTE REST, THE ASSESSEE DID NOT CHARGE THE INTEREST FOR THE YEAR UNDER CONSIDERATIO N AND, THEREFORE, NO ADJUSTMENT M/S PMP AUTO COMPONENTS P. LTD, 9 | P A G E CAN BE MADE UNDER ARMS LENGTH PRICE. IT IS PERTINE NT TO NOTE THAT WHEN THE TRANSACTION BETWEEEN THE ASSESSEE AND ITS AE FALLS UNDER THE AMBIT OF INTERNATIONAL TRANSACTION AS PER THE PROVISIONS OF SECTION 92B, T HEN THE ARMS LENGTH PRICE HAS TO BE DETERMINED BY CONSIDERING THE COMPARABLE UNCONTR OLLED PRICE AND, THEREFORE, THE REASON FOR NON CHARGING THE INTEREST ON LOAN GIVEN TO THE AE HAS NO BEARING SO FAR AS THE DETERMINATION OF ARMS LENGTH PRICE UNDER THE T RANSFER PRICING PROVISIONS AND REGULATIONS IS CONCERNED. THE TRIBUNAL IIN THE CASE OF AURIONPRO SOLUTIONS LTD. VS. ACIT (SUPRA) HAS OBSERVED IN PARA 8 TO 8.3 AS UNDER :- 8 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE FIRST CONTENTION OF THE LD AR OF THE ASSESSEE I S THAT THE ADVANCE WAS GIVEN TO THE AES TOWARDS WORKING CAPITAL AND THE ASSESSEE IS GET TING GOOD BUSINESS FROM THE AES; THEREFORE, HAVING COMMERCIAL CONSIDERATION, NO ADJUSTMENT OF TRANSFER PRICE IS JUSTIFIED. WE DO NOT AGREE WITH THE CONTENTION OF T HE LD AR BECAUSE, THOUGH IT MAY BE AN OBJECTIVE BEHIND THE TRANSFER PRICING REGULATION THAT THE PROFITS TAXABLE IN INDIA ARE NOT SHIFTED OUT OF INDIA BY MANIPULATING THE PR ICE CHARGED BETWEEN THE AES; HOWEVER, AS PER THE TRANSFER PRICING REGULATIONS, T HERE IS NO SUCH CONDITION OF EXISTENCE OR NON-EXISTENCE OF COMMERCIAL CONSIDERAT ION BETWEEN THE ASSESSEE AND THE AES. 8.1 FURTHER, IN THE CASE IN HAND, THE ADVANCE DOES NOT REPRESENT THE CREDIT PERIOD EXTENDED TO THE AES IN RESPECT OF THE BUSINESS TRAN SACTION; BUT IT IS A TRANSACTION OF ADVANCING LOANS TO THE AES. THE TRANSACTION OF ADVA NCING LOANS TO THE AES FALLS UNDER THE AMBIT OF INTERNATIONAL TRANSACTIONS AS PE R THE TERMS OF SEC 92B WHEREBY THE 'INTERNATIONAL TRANSACTION' MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, INTER ALIA LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES.. 8.2 THUS, THE TRANSACTION OF ADVANCING LOANS TO THE AE S UNDOUBTEDLY FALLS WITHIN THE MEANING OF INTERNATIONAL TRANSACTION AS PER SECTION 92B. EVEN OTHERWISE, THE TRIBUNAL IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD(S UPRA) AS RELIED UPON BY THE ASSESSEE HELD IN PARAS 16 & 17 AS UNDER: 16. INTEREST FREE LOAN EXTENDED TO THE ASSOCIATED C ONCERNS AS AT ARM'S LENGTH LENDING OR BORROWING MONEY BETWEEN TWO ASSOCIATED E NTERPRISES COMES WITHIN THE AMBIT OF INTERNATIONAL TRANSACTION AND WHETHER THE SAME IS AT ARMS LENGTH PRICE HAS TO BE CONSIDERED. THE QUESTION OF RATE OF INTEREST ON THE BORROWING LOAN IS AN INTEGRAL PART OF ARMS LENGTH PRICE RE-DE TERMINATION IN THIS CONTEXT. THE FACT THAT THE LOAN HAS THE RBI'S APPROVAL DOES NOT PUT A SEAL OF APPROVAL ON THE TRUE CHARACTER OF THE TRANSACTION FROM THE PERSPECT IVE OF TRANSFER PRICING REGULATION AS THE SUBSTANCE OF THE TRANSACTION HAS TO BE JUDGED AS TO WHETHER THE TRANSACTION IS AT ARMS LENGTH OR NOT. THE DELHI BENCH OF ITAT IN THE CASE OF PEROT SYSTEMS TSI (INDIA) LTD. V. DCIT (SUPRA) H AD CONSIDERED IDENTICAL ARGUMENT AND HELD AS FOLLOWS: M/S PMP AUTO COMPONENTS P. LTD, 10 | P A G E '9. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE CONT ENDED THAT INCOME MEANS REAL INCOME AND NOT FICTITIOUS INCOME AND SINCE THE ASSESSEE HAS NOT EARNED ANY INCOME, THE SAME CANNOT BE TAXED. RELIANCE IN T HIS REGARD HAS BEEN PLACED UPON IN THE CASE OF CIT V. KRMTT THIAGARAJA CHETTY & CO. REPORTED IN 24 ITR 525 (SC) & IN THE CASE OF MORVI INDUSTRIES LTD. V. CIT REPO RTED IN 82 ITR 835 (SC) FOR THE PROPOSITION THAT LIABILITY TO TAX CAN ARIS E ONLY WHEN THERE IS INCOME. NO TAX CAN BE CHARGED AS NOTIONAL INCOME ON ACCRUAL . FURTHER RELIANCE HAS BEEN PLACED UPON THE RULING OF AUTHORITY FOR ADVANCE RUL INGS DELIVERED IN THE CASE OF VENEBURG GROUP B.V. V. CIT 727 OF 2006 FOR THE P ROPOSITION THAT IN THE ABSENCE OF ANY INCOME, TRANSFER PRICING PROVISIONS BEING MACHINERY PROVISION SHALL NOT APPLY. IT HAS FURTHER BEEN ARGUED THAT TR ANSFER PRICING DOCUMENT MAINTAINED BY THE ASSESSEE CLEARLY MENTIONED THAT T HESE LOANS/ADVANCES ARE IN THE NATURE OF QUASI-EQUITY AND HENCE THE TRANSACTIO N OF GRANTING INTEREST FREE LOAN IS AT ARM'S LENGTH. THE LOAN AGREEMENTS MENTIO NED THAT THESE ARE INTEREST FREE LOANS. RELIANCE IN THIS REGARD IS PLACED UPON THE DECISION OF DELHI TRIBUNAL IN THE CASE OF SONY INDIA LTD. 114 ITD 448 PARA 100 THAT 'UNDER FISCAL LOANS ACTUAL TRANSACTION AS ENTERED BETWEEN THE PARTIES I S TO BE CONSIDERED. AUTHORITIES HAVE NO RIGHT TO RE-WRITE THE TRANSACTI ON UNLESS IT IS HELD THAT IT SHAM OR BOGUS OR ENTERED INTO BY THE PARTIES TO AVOID AN D EVADE TAXES.' FURTHER REFERENCE HAS BEEN MADE TO PARA 1.37 OF 1995 OF OEC D GUIDELINES FOR THE PROPOSITION THAT IT IS LEGITIMATE TO CONSIDER THAT ECONOMIC SUBSTANCE OF THE TRANSACTIONS. THE TRANSACTIONS HAS BEEN SAID TO BE COMMERCIALLY EXPEDIENT AND LOAN GRANTED TO SUPPORT THE SUBSIDIARY AND OBTAIN R ETURNS IN FUTURE. THE ASSESSEE HAD FULL CONTROL OVER ITS SUBSIDIARY WHICH REDUCE THE CREDIT RISK. THE LOAN HAD BEEN DULY GRANTED BY THE APPROVAL OF THE R BI. THE INCOME TAX ACT, 1961 AND OECD GUIDELINES SUPPORT THE CONTENTION THA T THE EFFECT OF GOVERNMENT CONTROL/ INTERVENTION SHOULD BE CONSIDERED WHILE DE TERMINING THE ARM'S LENGTH PRICE. UNDER THE THIN CAPITALIZATION RULES, NO DEDU CTION WAS ALLOWABLE TO THE HUNGARY ENTITY FOR PAYMENT OF INTEREST THEREFORE, T HERE EXISTED IMPOSSIBILITY OF PERFORMANCE WITH REGARD TO PAYMENT OF HUNGARY ENTIT Y. ECONOMIC CIRCUMSTANCES OF THE SUBSIDIARIES DID NOT WARRANT THE CHARGING OF INTEREST FROM SUBSIDIARIES. THE LD. COUNSEL FOR THE ASSESSEE FURTHER RELIED UPON TH E APEX COURT DECISION IN THE CASE OF M/S S.A. BUILDERS LTD. V. CIT(APPEALS) AND OTHERS 288 ITR 1 (SC) . 9.1 THE LD. DR FOR THE REVENUE ON THE OTHER HAND RE LIED UPON THE ORDERS OF THE LD. CIT(A), HE CLAIMED THAT THE LD. CIT(A)'S ORDER WAS A SPEAKING ORDER AND IT HAS REBUTTED ALL THE ARGUMENTS OF THE ASSESSEE. 10. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AN D PERUSED THE RECORDS. THE PRIMARY CONTENTION BEFORE US, AS SUBMITTED BY THE L D. COUNSEL OF THE ASSESSEE IS THAT IT WAS COMMERCIALLY EXPEDIENT FOR ASSESSEE TO ADVANCE INTEREST FREE LOANS TO THE AES AND THAT SINCE NO INTEREST HAS ACTUALLY BEE N CHARGED, THERE IS NO REAL INCOME EXIGIBLE TO TAX. AS OBSERVED BY THE LD. CIT( A) THE AGREEMENTS SHOW THAT THESE ARE LOAN AMOUNT GIVEN BY THE ASSESSEE TO ASSO CIATED ENTERPRISES (AES). THIS IN FACT IS AN ADMITTED POSITION. THERE IS NO C ASE THAT ANY SPECIAL FEATURE IN THE CONTRACT MAKE THE TRANSACTION AS CAPITAL IN NAT URE. IT IS ALSO AN ADMITTED PROPOSITION THAT THE ASSESSEE HAS EXTENDED THE LOAN TO ITS AE'S WHO ARE 100% SUBSIDIARIES. THE ASSESSEE'S CASE IS THAT IT HAS AC TUALLY NOT EARNED ANY INTEREST AND IT WAS COMMERCIALLY EXPEDIENT TO EXTEND THESE I NTEREST FREE LOANS. NOW IT IS NOTED THAT THIS IS NOT A CASE OF ORDINARY BUSINESS TRANSACTION. THE QUESTION M/S PMP AUTO COMPONENTS P. LTD, 11 | P A G E RELATES TO SCRUTINY OF INTERNATIONAL TRANSACTION TO DETERMINE WHETHER OR NOT THE SAME IT AS ARM'S LENGTH. THE PRINCIPLE OF TRANSFER PRICING AIMS AT DETERMINING THE PRICING IN THE SITUATIONS OF CROSS-BORDER INTERNATI ONAL TRANSACTIONS, WHERE TWO ENTERPRISES WHICH ARE SUBJECT TO THE SAME CENTRE OR DIRECTION OR CONTROL (ASSOCIATED ENTERPRISE) MAINTAIN COMMERCIALLY OR FI NANCIALLY RELATION WITH OTHER. IN SUCH A SITUATION, THE POSSIBILITY EXIST THAT BY WAY OF INTERVENTION FROM THE CENTRE OR OTHERWISE, BUSINESS CONDITIONS MUST BE AC CEPTED BY THE ACTING UNITS WHICH DIFFERS FROM THOSE WHICH IN THE SAME CIRCUMST ANCES WOULD HAVE AGREED UPON BETWEEN UNRELATED PARTIES. THE AIM IS TO EXAMI NE WHETHER THERE IS ANOMALY IN THE TRANSACTION WHICH ARISE OUT OF SPECI AL RELATIONSHIP BETWEEN THE CREDITOR AND THE DEBTOR. HENCE THE CONTENTION OF HA VING ACTUALLY NOT EARNED ANY INCOME CANNOT COME TO THE RESCUE OF THE ASSESSEE IN THIS SCENARIO. THE CASE LAWS FROM THE APEX COURT CITED BY THE LD. COUNSEL O F THE ASSESSEE ARE IN THE CONTEXT OF THE PROPOSITION THAT ONLY THE REAL INCOM E HAS TO BE TAXED AND INTEREST FREE ADVANCES CAN BE GIVEN BY COMPANIES (DOMESTIC) TO THEIR SUBSIDIARIES ON THE GROUND OF COMMERCIAL EXPEDIENCY. BUT THESE DECISION S ARE NOT IN THE CONTEXT OF CHAPTER-X OF THE IT ACT WHICH RELATES TO SPECIAL PR OVISION RELATING TO COMPUTATION OF INCOME FROM INTERNATIONAL HAVING REGARD TO ARM'S LENGTH PRICE. OTHER CASE LAWS CITED BY THE ASSESSEE ARE NOT GERMANE TO THE FACTS OF THIS CASE. HENCE IN OUR CONSIDERED OPINION THEY DO NOT HELP THE CASE OF THE ASSESSEE.' 17. THE AFORESAID DECISION OF THE TRIBUNAL IS AN AN SWER TO THE ARGUMENT OF THE ASSESSEE BEFORE US THAT THE IMPUGNED ADDITION COULD NOT HAVE BEEN MADE BY THE AO AT ALL. RESPECTFULLY FOLLOWING THE SAID DECI SION, WE HOLD THAT THE AO WAS WELL WITHIN HIS POWERS IN MAKING THE IMPUGNED ADDIT ION. THE JUSTIFICATION FOR THE QUANTUM OF NOTIONAL INCOME CONSIDERED AS TAXABLE IN THE HANDS OF THE ASSESSEE IS A MATTER WHICH WE WILL EXAMINE IN THE SUBSEQUENT PARAGRAPHS.' 8.3 ACCORDINGLY, WE DO NOT HAVE ANY DOUBT IN MIND THAT THE TRANSACTION IN QUESTION IS AN INTERNATIONAL TRANSACTION AND SUBJECTED TO THE A LP AS PER THE TRANSFER PRICING REGULATIONS. 10. THEREFORE, IT IS CLEAR THAT THE TRANSACTION OF LOAN GIVEN TO THE AE IS AN INTERNATIONAL TRANSACTION AND SUBJECTED TO ALP AS P ER THE TRANSFER PRICING PROVISIONS OF INCOME TAX ACT. THE ASSESSEE HAS RAISED AN ALTER NATIVE PLEA THAT EVEN IN CASE THE TRANSFER PRICING PROVISIONS ARE APPLICABLE IN R ESPECT OF THE NON CHARGING OF INTEREST ON LOAN GIVEN TO AE, IT IS NOT TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 11 OF INDO-MAURITIUS DTAA BECAUSE THE SAID INTEREST WAS NOT PAID TO THE ASSESSEE. WE NOTE THAT THE PROVISIONS OF ARTICLE 11 ARE APPLI CABLE IN THE CASE OF INTEREST ARISING IN THE CONTRACTING STATE AND PAID TO THE RESIDENT O F ANOTHER CONTRACTING STATE. FOR THE SAKE OF READY REFERENCE, WE QUOTE ARTICLE 11 OF IND O-MAURITIUS DTAA AS UNDER:- M/S PMP AUTO COMPONENTS P. LTD, 12 | P A G E ARTICLE 11 INTEREST 1. INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER STATE. 2. HOWEVER, SUBJECT TO THE PROVISIONS OF PARAGRAPHS 3 AND 4 OF THIS ARTICLE, SUCH INTEREST MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH IT ARISES AND ACCORDING TO THE LAWS OF THAT STATE. 3. INTEREST ARISING IN A CONTRACTING STATE SHALL BE EX EMPT FROM TAX IN THAT STATE PROVIDED IT IS DERIVED AND BENEFICIALLY OWNED BY: A. THE GOVERNMENT OR A LOCAL AUTHORITY OF THE OTHER CO NTRACTING STATE; B. ANY AGENCY OR ENTITY CREATED OR ORGANISED BY THE GO VERNMENT OF THE OTHER CONTRACTING STATE; OR C. ANY BANK CARRYING ON A BONAFIDE BANKING BUSINESS WH ICH IS A RESIDENT OF THE OTHER CONTRACTING STATE. 4. INTEREST ARISING IN A CONTRACTING STATE SHALL BE EX EMPT FROM TAX IN THAT CONTRACTING STATE TO THE EXTENT APPROVED BY THE GOV ERNMENT OF THAT STATE IF IT IS DERIVED AND BENEFICIALLY OWNED BY ANY PERSON (OTHER THAN A PERSON REFERRED TO IN PARAGRAPH 3) WHO IS A RESIDENT OF THE OTHER CONTRAC TING STATE PROVIDED THAT THE TRANSACTION GIVING RISE TO THE DEBT-CLAIM HAS BEEN APPROVED IN THIS REGARD BY THE GOVERNMENT OF THE FIRST-MENTIONED CONTRACTING STATE . 5. THE TERM ' INTEREST ' AS USED IN THIS ARTICLE MEANS INCOME FROM DEBT-CLAIMS OF EVERY KIND, WHETHER OR NOT SECURED BY MORTGAGE, AND WHETHER OR NOT CARRYING A RIGHT TO PARTICIPATE IN THE DEBTOR'S PROFITS, AND, IN PARTICULAR, INCOME FROM GOVERNMENT SECURITIES AND INCOME FROM BONDS OR DEBE NTURES, INCLUDING PREMIUMS AND PRIZES ATTACHING TO SUCH SECURITIES, B ONDS OR DEBENTURES. PENALTY CHARGES FOR LATE PAYMENT SHALL NOT HE REGARDED AS I NTEREST FOR THE PURPOSE OF THIS ARTICLE. 6. THE PROVISIONS OF PARAGRAPHS 1, 2 3, AND 4 SHALL NO T APPLY IF THE RECIPIENT OF THE INTEREST, BEING A RESIDENT OF A CONTRACTING STATE, CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE IN WHICH THE INTEREST ARISES, THR OUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, OR PERFORMS IN THAT OTHER STATE I NDEPENDENT PERSONAL SERVICES FROM A FIXED BASE SITUATED THEREIN, AND THE DEBT-CL AIM IN RESPECT OF WHICH THE INTEREST IS PAID IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISHMENT OR FIXED BASE. IN SUCH CASE, THE PROVISIONS OF ARTICLE 7 OR ARTICLE 14, AS THE CASE MAY BE, SHALL APPLY. 7. INTEREST SHALL BE DEEMED TO ARISE IN A CONTRACTING STATE WHEN THE PAYER IS THAT CONTRACTING STATE ITSELF, A POLITICAL SUB-DIVISION, A LOCAL AUTHORITY OR A RESIDENT OF THAT STATE. WHERE, HOWEVER, THE PERSON PAYING THE I NTEREST, WHETHER BE IS A RESIDENT OF A CONTRACTING STATE OR NOT, HAS IN A CO NTRACTING STATE A PERMANENT ESTABLISHMENT IN CONNECTION WITH WHICH THE INDEBTED NESS ON WHICH THE INTEREST IS PAID WAS INCURRED, AND SUCH INTEREST IS HOME BY THA T PERMANENT ESTABLISHMENT, THEN SUCH INTEREST SHALL BE DEEMED TO ARISE IN THE CONTRACTING STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED. M/S PMP AUTO COMPONENTS P. LTD, 13 | P A G E 8. WHERE, BY REASON OF A SPECIAL RELATIONSHIP BETWEEN THE PAYER AND THE RECIPIENT OR BETWEEN BOTH OF THEM AND SOME OTHER PERSON, THE AMOUNT OF THE INTEREST PAID, HAVING REGARD TO THE DEBT-CLAIM FOR WHICH IT IS PAI D, EXCEEDS THE AMOUNT WHICH WOULD HAVE BEEN AGREED UPON BY THE PAYER AND THE RE CIPIENT IN THE ABSENCE OF SUCH RELATIONSHIP, THE PROVISIONS OF THIS ARTICLE S HALL APPLY ONLY TO THE LAST- MENTIONED AMOUNT. IN THAT CASE, THE EXCESS PART OF THE PAYMENTS SHALL REMAIN TAXABLE ACCORDING TO THE LAW OF EACH CONTRACTING ST ATE, DUE REGARD BEING HAD TO THE OTHER PROVISIONS OF THIS CONVENTION . 11. IT IS CONTEMPLATED UNDER ARTICLE 11 OF DTAA THA T THE PAYMENT IS A CONDITION FOR TAXING THE INTEREST ONLY IN THE CIRCUMSTANCES WHEN THE INTEREST IS ARISING IN THE CONTRACTING STATE AND ACCRUED TO THE RESIDENT OF AN OTHER CONTRACTING STATE AND, THEREFORE, THE SAME IS SUBJECTED TO TAX IN THE OTHE R STATE WHEN IT IS PAID. IN OTHER WORDS, THE PROVISIONS OF ARTICLE 11 DEFERS THE TAXA BILITY OF THE INTEREST ARISING BUT NOT RECEIVED AND, THEREFORE, IT IS TAXED ONLY WHEN IT I S RECEIVED. ARTICLE 11 DOES NOT EXEMPT THE INTEREST ARISING IN A CONTRACTING STATE AND ACCRUED TO A RESIDENT OF OTHER CONTRACTING STATE BUT IT MAKES THE SAME TAXABLE ON THE EVENT OF PAYMENT. IN THE CASE IN HAND, WHEN THE ASSESSEE HAS NOT EVEN ADMITTED TH E INTEREST ARISED AND ACCRUED TO THE ASSESSEE ON THE LOAN GIVEN TO THE AE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, THEREFORE, THE PROVISIONS OF ARTICLE 11 OF INDO-MAURITIUS TREATY CANNOT BE PRESSED INTO SERVICE. 12. GROUND NO. 2 IS REGARDING ADJUSTMENT ON ACCOUNT OF INTEREST ON THE SHARE APPLICATION MONEY IN OVERSEAS SUBSIDIARY. THE ASSES SEE REMITTED THE SHARE APPLICATION MONEY ON VARIOUS DATES TOTAL AMOUNTING TO RS. 16,20,24,380/- FOR THE EQUITY SHARES OF ITS SUBSIDIARY PMP MAURITIUS. SINC E THERE WAS A DELAY AND THE SHARES WERE ALLOTTED AFTER A PERIOD OF ALMOST ONE YEAR, THE TPO APPLIED THE RATE OF 15% TO COMPUTE THE INTEREST RECEIVABLE BY THE ASSES SEE FOR THE PERIOD UNDER CONSIDERATION ON SUCH ADVANCES AND ACCORDINGLY COMP UTED THE TRANSFER PRICING ADJUSTMENT AT RS. 1,24,69,920/-. 13. BEFORE THE DRP, THE ASSESSEE CONTENDED THAT AS PER THE RELEVANT MAURITIUS LAW NO TIME PERIOD IS PRESCRIBED FOR ALLOTMENT OF S HARES AGAINST THE SHARE APPLICATION M/S PMP AUTO COMPONENTS P. LTD, 14 | P A G E MONEY, THEREFORE, WHEN THE SHARES ARE ALLOTTED TO T HE ASSESSEE THE APPLICATION MONEY CANNOT BE TREATED AS ADVANCE GIVEN TO THE AE. FURTHER IT WAS SUBMITTED THAT AS PER THE EXPLANATION TO SECTION 92B ONLY PURCHASE OF SALE AND NOT ALLOTMENT OF SHARE COMES UNDER THE DEFINITION OF INTERNATIONAL T RANSACTION. THE DRP HAS HELD THAT CLAUSE (C) OF EXPLANATION TO SECTION 92B INCLUDES ANY TYPE OF ADVANCE PAYMENT OR DEFERRED PAYMENT OR RECEIVABLE OR ANY DEBT ARISING DURING THE COURSE OF BUSINESS WITHIN THE AMBIT OF INTERNATIONAL TRANSACTION. ACCORDINGLY, THE OBJECTION AND CONTENTION OF THE ASSESSEE WAS REJECTED. 14. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS REITERATED THE CONTENTIONS THAT THE TRANSACTION OF PAYMENT OF APPLICATION MONEY FOR ALLOTMENT OF SHARE DOES NOT FALL UNDER THE AMBIT OF INTERNATIONA L TRANSACTION AS PER THE EXPLANATION TO SECTION 92B. HE HAS SUBMITTED THAT THE TERM INTERNATIONAL TRANSACTION AS DEFINED IN SECTION 92B IS EXHAUSTIV E AND NOT INCLUSIVE. THE TPO HAS RE-CATEGORIZED THE SHARE APPLICATION MONEY TO LOAN WHICH IS NOT PERMISSIBLE UNDER THE LAW. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE FOLLOWING DECISIONS:- (I) M/S ALLCARGO GLOBAL LOGISTICS LTD. VS. ACIT (IT A NO. 4909/MUM/2012 AND 4910/MUM/2012) (II) PARLE BISCUITS PVT. LTD V. DCIT ( I.T.A NO. 9 010/MUM/2010) (III) BHARTI AIRTEL LIMITED VS. ADNL. CIT (I.T.A NO . 5816/DEL/2012) (IV) BESIX KIER DHABHOL SA (ITA NO. 776 OF 2012) (B OM HC) (V) BESIX KIER DHABHOL SA ( 134 TTJ 513) (TMUM) 15. THUS THE LD. AUTHORIZED REPRESENTATIVE HAS SUB MITTED THAT THE PURCHASE AND SALE AS PROVIDED UNDER THE DEFINITION OF INTERNATIO NAL TRANSACTION IS DIFFERENT FROM THE SUBSCRIPTION OF SHARES OF THE AE. M/S PMP AUTO COMPONENTS P. LTD, 15 | P A G E 16. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON T HE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THERE IS AN ABNORMAL DELAY IN TH E ALLOTMENT OF SHARES AND DURING THE SAID PERIOD THE AMOUNT PAID BY THE ASSESSEE TO THE AE HAS TO BE CONSIDERED AS LOAN GIVEN WITHOUT CHARGING INTEREST. THE LD. DR HA S SUBMITTED THAT IN THE NORMAL COURSE THE APPLICATION MONEY IS KEPT IN ESCROW ACCO UNT AND, THEREFORE, THE SAME CANNOT BE USED BY THE RECIPIENT COMPANY BEFORE THE ALLOTMENT OF SHARES. THUS FOR THE PERIOD THE MONEY REMAINED WITH THE AE, THE ASSE SSEE HAS FOREGONE THE INTEREST ON THE SAID AMOUNT WHICH WOULD HAVE BEEN EARNED IN THE SIMILAR TRANSACTION WITH A THIRD PARTY. 17 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND REL EVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE HAS BEE N CONSIDERED BY DELHI BENCHES OF THIS TRIBUNAL IN THE CASE OF BHARTI AIRTEL LIMITED VS. ADDL. CIT IN ITA NO. 5816/DEL/2012, AND HELD VIDE ITS DECISION DATED 11. 3.2014 IN PARA 47 TO 50 AS UNDER:- 47. WE FIND THAT IN THE PRESENT CASE THE TPO HAS NO T DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAYMENTS FOR SHA RE APPLICATION MONEY, AND THUS, OF CAPITAL CONTRIBUTIONS. THE TPO HAS NOT MADE ANY ADJUSTMENT WITH REGARD TO THE ALP OF THE CAPITAL CONTRIBUTION. HE HAS, HOWEVER, T REATED THESE TRANSACTIONS PARTLY AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN TH E DATES OF PAYMENT TILL THE DATE ON WHICH SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITAL CONTRIBUTION, I.E. AFTER THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIARIES IN WHICH CAPITAL CONTRIBUTIONS WERE MADE. NO DOUBT, IF THESE TRANSACTIONS ARE TREA TED AS IN THE NATURE OF LENDING OR BORROWING, THE TRANSACTIONS CAN BE SUBJECTED TO ALP ADJUSTMENTS, AND THE ALP SO COMPUTED CAN BE THE BASIS OF COMPUTING TAXABLE BUSI NESS PROFITS OF THE ASSESSEE, BUT THE CORE ISSUE BEFORE US IS WHETHER SUCH A DEEM ING FICTION IS ENVISAGED UNDER THE SCHEME OF THE TRANSFER PRICING LEGISLATION OR O N THE FACTS OF THIS CASE. WE DONOT FIND SO. WE DO NOT FIND ANY PROVISION IN LAW ENABLI NG SUCH DEEMING FICTION. WHAT IS BEFORE US IS A TRANSACTION OF CAPITAL SUBSCRIPTION, ITS CHARACTER AS SUCH IS NOT IN DISPUTE AND YET IT HAS BEEN TREATED AS PARTLY OF TH E NATURE OF INTEREST FREE LOAN ON THE GROUND THAT THERE HAS BEEN A DELAY IN ALLOTMENT OF SHARES. ON FACTS OF THIS CASE ALSO, THERE IS NO FINDING ABOUT WHAT IS THE REASONABLE AN D PERMISSIBLE TIME PERIOD FOR ALLOTMENT OF SHARES, AND EVEN IF ONE WAS TO ASSUME THAT THERE WAS AN UNREASONABLE M/S PMP AUTO COMPONENTS P. LTD, 16 | P A G E DELAY IN ALLOTMENT OF SHARES, THE CAPITAL CONTRIBUT ION COULD HAVE, AT BEST, BEEN TREATED AS AN INTEREST FREE LOAN FOR SUCH A PERIOD OF 'INOR DINATE DELAY' AND NOT THE ENTIRE PERIOD BETWEEN THE DATE OF MAKING THE PAYMENT AND D ATE OF ALLOTMENT OF SHARES. EVEN IF ALP DETERMINATION WAS TO BE DONE IN RESPECT OF SUCH DEEMED INTEREST FREE LOAN ON ALLOTMENT OF SHARES UNDER THE CUP METHOD, A S HAS BEEN CLAIMED TO HAVE BEEN DONE IN THIS CASE, IT WAS TO BE DONE ON THE BA SIS AS TO WHAT WOULD HAVE BEEN INTEREST PAYABLE TO AN UNRELATED SHARE APPLICANT IF , DESPITE HAVING MADE THE PAYMENT OF SHARE APPLICATION MONEY, THE APPLICANT IS NOT AL LOTTED THE SHARES. THAT ASPECT OF THE MATTER IS DETERMINED BY THE RELEVANT STATUTE. T HIS SITUATION IS NOT IN PARI MATERIA WITH AN INTEREST FREE LOAN ON COMMERCIAL BASIS BETW EEN THE SHARE APPLICANT AND THE COMPANY TO WHICH CAPITAL CONTRIBUTION IS BEING MADE . ON THESE FACTS, IT WAS UNREASONABLE AND INAPPROPRIATE TO TREAT THE TRANSAC TION AS PARTLY IN THE NATURE OF INTEREST FREE LOAN TO THE AE. SINCE THE TPO HAS NOT BROUGHT ON RECORD ANYTHING TO SHOW THAT AN UNRELATED SHARE APPLICANT WAS TO BE PA ID ANY INTEREST FOR THE PERIOD BETWEEN MAKING THE SHARE APPLICATION PAYMENT AND AL LOTMENT OF SHARES, THE VERY FOUNDATION OF IMPUGNED ALP ADJUSTMENT IS DEVOID OF LEGALLY SUSTAINABLE MERITS. 48. LET US ALSO DEAL WITH TWO JUDICIAL PRECEDENTS W HICH HAVE BEEN HEAVILY RELIED UPON BY THE TPO, AS ALSO BY THE LEARNED DEPARTMENTAL REP RESENTATIVE, ON WHICH THEIR CASE RESTS. NONE OF THESE DECISIONS, HOWEVER, DEAL WITH THE CORE ISSUE BEFORE US I.E. WHETHER A CAPITAL CONTRIBUTION CAN BE DEEMED TO BE PARTLY AN INTEREST FREE LOAN, FOR THE PERIOD TILL THE SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITAL CONTRIBUTION, AFTER THE SUBSCRIBED SHARES WERE ISSUED BY THE SUBS IDIARY IN WHICH CAPITAL CONTRIBUTION WAS MADE. IN THE CASE OF PEROT SYSTEMS TSI INDIA LTD VS. DCIT (SUPRA), A COORDINATE BENCH OF THIS TRIBUNAL HAD AN OCCASION TO DEAL WITH THE ARM'S LENGTH PRICE ADJUSTMENT WITH REGARD TO INTEREST FREE ADVAN CES TO THE SUBSIDIARIES. THAT WAS A CASE IN WHICH THE ASSESSEE, AN INDIAN COMPANY, ADVA NCED INTEREST-FREE LOANS TO ITS 100% FOREIGN SUBSIDIARIES. THE SUBSIDIARIES USED TH OSE FUNDS TO MAKE INVESTMENTS IN OTHER STEP- DOWN SUBSIDIARIES. ON THE QUESTION W HETHER NOTIONAL INTEREST ON THE SAID LOANS COULD BE ASSESSED IN THE HANDS OF THE AS SESSEE UNDER THE TRANSFER PRICING PROVISIONS OF CHAPTER X, THE ASSESSEE ARGUED THAT T HE SAID 'LOANS' WERE IN FACT 'QUASI - EQUITY' AND MADE OUT OF COMMERCIAL EXPEDIE NCY. IT WAS ALSO ARGUED THAT NOTIONAL INCOME COULD NOT BE ASSESSED TO TAX. HOWEV ER, BOTH OF THESE ARGUMENTS WERE REJECTED BY A COORDINATE BENCH OF THIS TRIBUNA L. WHILE DOING SO, THE COORDINATE BENCH OBSERVED THAT THERE WAS NO MATERIAL ON RECORD TO ESTABLISH THAT THE LOANS WERE IN REALITY NOT LOANS BUT WERE QUASI-CAPITAL AND THA T THERE IS ALSO NO REASON WHY THE LOANS WERE NOT CONTRIBUTED AS CAPITAL IF THEY WERE ACTUALLY MEANT TO BE A CAPITAL CONTRIBUTION. IT WAS OBSERVED THAT, 'IT IS NOT THE CASE THAT THERE WAS ANY TECHNICAL PROBLEM THAT THE LOAN COULD NOT HAVE BEEN CONTRIBUT ED AS CAPITAL ORIGINALLY, IF IT WAS MEANT TO BE A CAPITAL CONTRIBUTION'. THE ARGUMENT O F LOAN BEING IN THE NATURE OF QUASI CAPITAL WAS THUS REJECTED ON FACTS. IT WAS NOT EVEN A CASE OF QUASI CAPITAL, AND, THEREFORE, THIS CASE HAS NO BEARING ON THE QUESTION BEFORE US I.E. WHETHER ALP M/S PMP AUTO COMPONENTS P. LTD, 17 | P A G E ADJUSTMENTS CAN BE MADE IN RESPECT OF PAYMENTS TOWA RDS SHARE APPLICATION MONEY IN A SITUATION IN WHICH THE SHARES HAVE BEEN ISSUED SEVERAL MONTHS AFTER THE PAYMENTS FOR SHARE APPLICATION MONEY HAVE BEEN MADE . SIMILARLY, IN VVF'S CASE (SUPRA), THE TRANSACTION WAS ADMITTEDLY IN THE NATU RE OF INTEREST FREE LOAN BETWEEN AES AND THE COMMERCIAL EXPEDIENCY IN ADVANCING INTE REST FREE LOANS WAS ON ACCOUNT OF OWNERSHIP AND CONTROL OF SUBSIDIARY BEING IN THE HANDS OF THE ASSESSEE, WHICH WAS RECOGNIZED AS A SIGNIFICANT FACTOR FOR COMMERCI AL EXPEDIENCY. HOWEVER, AS WE HAVE SEEN IN THE EARLIER DISCUSSIONS, SUCH COMMERCI AL EXPEDIENCY OF GRANTING INTEREST FREE LOANS IS WHOLLY IRRELEVANT BECAUSE IT IS THE IMPACT OF THIS INTERRELATIONSHIP, ON ACCOUNT OF MANAGEMENT, CAPITA L AND CONTROL, WHICH IS SOUGHT TO BE NEUTRALIZED BY ARM'S LENGTH PRICE ADJUSTMENTS. T HIS WAS ALSO NOT A CASE IN WHICH A CAPITAL CONTRIBUTION WAS DEEMED TO BE PARTLY AN I NTEREST FREE LOAN [I.E. FOR THE PERIOD TILL THE SHARES WERE ACTUALLY ALLOTTED) AND PARTLY AS CAPITAL CONTRIBUTION [I.E. WHEN THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIARY). REVENUE, THEREFORE, DOES NOT DERIVE ANY ADVANTAGE FROM THESE JUDICIAL PRECEDENTS EITHER. 49. IN ANY EVENT, IT IS NOT OPEN TO THE REVENUE AUT HORITIES TO RE-CHARACTERIZE THE TRANSACTION UNLESS IT IS FOUND TO BE A SHAM OR BOGU S TRANSACTION. WHILE THERE ARE NO SPECIFIC POWERS VESTED IN THE TPO TO RE-CHARACTERIZ E THE TRANSACTION, EVEN UNDER THE JUDGE MADE LAW, SUCH RE-CHARACTERIZATION CAN BE DON E BY THE REVENUE AUTHORITIES WHEN THE TRANSACTIONS ARE FOUND TO BE SUBSTANTIALLY AT VARIANCE WITH THE STATED FORM. IN THE PRESENT CASE, THERE CANNOT EVEN A SUGGESTION TO HOLD THAT THIS IS A BOGUS TRANSACTION BECAUSE ADMITTEDLY THE SUBSCRIBED SHARE S CAPITAL HAS INDEED BEEN ALLOTTED TO THE ASSESSEE. THE TRANSACTION IS THUS A CCEPTED TO BE GENUINE IN EFFECT. 50. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING I N MIND ENTIRETY OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW W ERE IN ERROR IN TREATING THE PAYMENT OF SHARE APPLICATION MONEY, AS PARTLY IN TH E NATURE OF INTEREST FREE LOANS TO THE AES, AND, ACCORDINGLY, ALP ADJUSTMENT BASED ON THAT HYPOTHESIS WAS INDEED DEVOID OF LEGALLY SUSTAINABLE MERITS. WE DELETE THE IMPUGNED ADJUSTMENT OF RS.19,15,45,943. THE ASSESSEE GETS THE RELIEF ACCOR DINGLY. AS WE HAVE DECIDED THIS GROUND OF APPEAL ON THE FUNDAMENTAL ISSUE THAT THE PAYMENT OF SHARE APPLICATION MONEY COULD NOT BE PARTLY TREATED AS INTEREST FREE LOAN TO AE, WE SEE NO NEED TO DEAL WITH OTHER ASPECTS OF THE MATTER. 18. THE OTHER DECISIONS OF THE TRIBUNAL RELIED UPON BY THE ASSESSEE ARE ALSO ON THE SIMILAR LINES AS THE DECISION IN THE CASE OF BH ARATI AIRTEL LTD WAS FOLLOWED. FURTHER THE RE-CATEGORIZATION OF SHARE APPLICATION MONEY AS INTEREST FREE LOAN IS NOT M/S PMP AUTO COMPONENTS P. LTD, 18 | P A G E PERMITTED UNDER THE PROVISIONS OF THE ACT AS HELD B Y THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DIRECTOR OF INCOME TAX (INTERN ATIONAL TAXATION) VS. BESIX KIER DHABHOL SA (210 TAXMAN 151). IN THE CASE IN HAND, T HE ASSESSEE IS A 100% HOLDING OF THE SUBSIDIARY AND, THEREFORE, THE DECISION MAKI NG BODY IS THE ASSESSEE ITSELF BEING THE SOLE SHARE HOLDER OF THE AE. ACCORDINGLY THE ABNORMAL DELAY IN ALLOTMENT OF SHARES IN THE CIRCUMSTANCES OF THE CASE WHEN THE AS SESSEE ITSELF HAD TO TAKE THE DECISION, CANNOT BE HELD AS REASONABLE OR BEYOND TH E CONTROL OF THE ASSESSEE . THE TPO HAS RECORDED THAT FACT THAT THE ASSESSEE HAS FA ILED TO BRING ON RECORD ANY EVIDENCE REGARDING THE TERMS AND CONDITIONS OF SUCH SHARE APPLICATION MONEY AND ALLOTMENT OF SHARES. IN VIEW OF THE DECISION OF CO- ORDINATE BENCH ON THE ISSUE EVEN IF ARMS LENGTH PRICE DETERMINATION WAS TO BE DONE IN RESPECT OF SUCH TRANSACTION OF PAYMENT OF APPLICATION MONEY AND ABONORMAL DELY IN ALLOTMENT OF SHARES, IT WAS TO BE DONE ON THE BASIS AS TO WHAT WOULD HAVE BEEN INT EREST PAYABLE TO AN UNRELATED SHARE APPLICANT. EVEN OTHERWISE WHEN THE ASSESSEE H AS NOT PRODUCED THE TERMS AND CONDITIONS OF APPLICATION MONEY, THEREFORE, WE REMI T THIS ISSUE TO THE RECORD OF ASSESSING OFFICER/TPO TO RECONSIDER THE SAME TO DET ERMINE THE ACTUAL PERIOD OF DELAY IN ALLOTMENT AND ARMS LENGTH INTEREST TO BE RECEIVED BY THE ASSESSEE IN CASE THE TRANSACTION OF SHARE APPLICATION MONEY WOULD H AVE BEEN WITH AN UNRELATED PARTY. 19. GROUND NO. 3 IS REGARDING EQUITY INVESTMENT IN OVERSEAS SUBSIDIARY TREATED AS INTERNATIONAL TRANSACTION AND FULL AMOUNT HAS BEEN ADDED TO THE INCOME OF THE ASSESSEE. IN THE YEAR 2007, THE ASSESSEE ACQUIRED T HE ENTIRE CAPITAL OF THE COMPANY PMP BAKONY FROM A THIRD PARTY IN HUNGARY. THE VALUE OF THE CAPITAL CONTRIBUTION WAS BASED ON THE VALUATION REPORT AND ACCEPTED TO BE AT ARMS LENGTH PRICE. SUBSEQUENTLY, THE ASSESSEE INFUSED FURTHER CAPITAL OF RS. 14,15,00,170/- IN THIS SUBSIDIARY DURING THE YEAR UNDER CONSIDERATION. THI S ADDITIONAL INVESTMENT WAS MADE AT PAR AND ON THAT ACCOUNT CLAIMED TO BE AT ARMS L ENGTH. THE TPO NOTED THAT BOOK VALUE OF THE SHARES AS ON 31.03.2008, THE DATE NEAR EST TO THE DATE OF TRANSACTION, WAS NEGATIVE AND YET THE ASSESSEE HAS PAID PAR VALU E TO ACQUIRE ADDITIONAL CAPITAL. M/S PMP AUTO COMPONENTS P. LTD, 19 | P A G E THE TPO TOOK THE ARMS LENGTH PRICE OF THE SHARES A T NIL AND ACCORDINGLY RECOMMENDED THE TP ADJUSTMENT OF THE ENTIRE AMOUNT OF RS. 14,15,00,170/- 20. BEFORE DRP, THE ASSESSEE CONTENDED THAT THIS TR ANSACTION WOULD NOT COME WITHIN THE AMBIT OF THE DEFINITION OF THE TERM INT ERNATIONAL TRANSACTION AND HAD BEEN REPORTED ONLY BY WAY OF ABUNDANT DISCLOSURE. THE AS SESSEE HAD INVESTED AT PAR VALUE EVEN THOUGH THE DISCOUNTED CASH FLOW VALUATIO N AS PER THE KPMG REPORT HAD RECOMMENDED A MUCH HIGHER VALUE. THE DRP DID NOT AC CEPT THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ADJUSTMENT MADE BY TPO/A SSESSING OFFICER IN THIS RESPECT. 21. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT WHEN THE ASSESSEE HAS MADE INVESTMENT BY INFUS ING THE CAPITAL IN THE SUBSIDIARY THEN THE ENTIRE AMOUNT OF INVESTMENT CAN NOT BE TREATED AS INCOME OF THE ASSESSEE BY APPLYING THE TRANSFER PRICING PROVISION S. THE TPO APPLIED THE NET WORTH METHOD FOR DETERMINATION OF ARMS LENGTH PRICE WHER EAS THE ASSESSEE IS THE ONLY SHARE HOLDER OF THE SUBSIDIARY AND THE INFUSION OF FURTHER CAPITAL WILL HAVE NO EFFECT ON THE VALUE OF THE SHARES HELD BY THE ASSESSEE RAT HER, THIS INFUSION OF CAPITAL WILL INCREASE THE VALUE OF THE SHARES ALREADY HELD BY TH E ASSESSEE. THUS THE LD. AUTHORIZED REPRESENTATIVE HAS SUBMITTED THAT SUBSCR IBING IN SHARES AT PREMIUM OR AT DISCOUNT IS IMMATERIAL AS THE LOSS IS OFFSET BY THE GAIN AND VICE-VERSA. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE FOLLOWING DEC ISIONS:- (I) MISS DHUN DADABHOY KAPADIA ( 163 ITR 651)(SC) (II) CIT VS. GOLD MOHORE INVESTMENT CO. LTD ( 74 IT R 62) (1969) (SC) (III) CIT VS. DALMIA INVESTMENT CO. LTD (52 ITR 567 ) (1964) M/S PMP AUTO COMPONENTS P. LTD, 20 | P A G E 22. THE LD. AUTHORIZED REPRESENTATIVE THUS SUBMITTE D THAT POST ADDITIONAL INFUSION OF CAPITAL IN THE SUBSIDIARY, THE NET WORTH OF THE SUBSIDIARY TURN TO THE POSITIVE AS PER THE BALANCE-SHEET AS ON 31.03.2009. THE VALUATION A S PER THE DISCOUNTED CASH FLOW AS PER THE REPORT OF KPMG IS MUCH HIGHER THAN THE P AR VALUE OF THE CAPITAL, THEREFORE, THE INVESTMENT MADE BY THE ASSESSEE AT P AR IS REASONABLE HAVING REGARD TO THE BENCH MARKING OF DCFM VALUATION. 23. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THA T THE ASSESSEE HAS FAILED TO PRODUCE ANY VALUATION OR OTHER MATERIAL IN SUPPORT OF ITS CLAIM THAT THE CAPITAL INFUSED AT PAR IS AT ARMS LENGTH. IN THE ABSENCE OF ANY MA TERIAL IN SUPPORT OF THE CLAIM, THE TPO HAS RIGHTLY ADOPTED THE NET WORTH METHOD FOR DE TERMINING THE ARMS LENGTH PRICE OF THE TRANSACTIONS. HE HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RE LEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THE ASSESSEE HAS NOT PRODU CED ANY VALUATION OR OTHER MATERIAL TO SHOW THAT THE INVESTMENT MADE IN THE SU BSIDIARY AT PAR IS AT ARMS LENGTH. THE ASSESSEE HAS PLACED RELIANCE ON THE VALUATION R EPORT OF KPMG BASED OF DCF METHOD. WE FIND THAT IN CASE OF INVESTMENT IN THE 1 00% SUBSIDIARY OF THE ASSESSEE, THE VALUATION HAS TO BE FUTURE PROSECTIVE EARNING O N THE CAPITAL AND SHOULD NOT BE BASED ON THE PRESENT NET WORTH OF THE SUBSIDIARY. S INCE THE INVESTMENT IS FOR LONG TERM AND NOT FOR EARNING THE CAPITAL GAIN, THEREFO RE, WE FIND MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE VALUATION SHOULD HAVE BEEN BA SED ON THE DISCOUNTED CASH FLOW METHOD (DCF). SINCE NO SUCH REPORT WAS PRODUCE D BY THE ASSESSEE BEFORE THE TPO/ASSESSING OFFICER, THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE INTEREST OF JUSTICE, WE REMIT THIS ISSUE TO THE RECORD OF ASSESSING OFFICER/TPO TO RECONSIDER AND DECIDE THE ISSUE AFRESH AFTER TAKING INTO ACCOUNT THE VALUATION REPORT BASED ON DCF METHOD. 25. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUND S AS UNDER:- M/S PMP AUTO COMPONENTS P. LTD, 21 | P A G E 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED ASSESSING OFFICER ERRED IN VIOLATING THE PRINCIPLE OF NATURAL JUSTICE INASMUCH AS NO OPPORTUNITY OF HEARING WAS GIVEN TO THE APPELLAN T BEFORE MAKING A REFERENCE TO THE TRANSFER PRICING OFFICER U/S. 92CA (1) OF THE INCOME TAX ACT, 1961 ('THE ACT'). 2. THE APPELLANT PRAYS THAT THE ORDER OF THE TRANSF ER PRICING OFFICER ('THE TPO') PASSED U/S. 92CA OF THE ACT BE TREATED AS NUL L AND VOID AND CONSEQUENTLY ALL ADDITIONS/ ADJUSTMENTS MADE IN THE SAID ORDER IN VIOLATION OF PRINCIPLE OF NATURAL JUSTICE BE STRUCK DOWN AS BAD IN LAW AND DELETED. 26. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS RAISED THE OBJ ECTION IN THE ADDITIONAL GROUND THAT THE ASSESSING OFFICER HAS NOT GIVEN THE OPPORT UNITY OF HEARING BEFORE REFERRING THE ISSUE OF INTERNATIONAL TRANSACTION TO THE TRANS FER PRICING OFFICER FOR DETERMINATION OF ARMS LENGTH PRICE. AS PER THE PROVISIONS OF SEC TION 92 CA, IT IS NOT MANDATED THAT BEFORE REFERRING THE INTERNATIONAL TRANSACTION ENTE RED INTO BY THE ASSESSEE TO THE TPO FOR DETERMINATION OF ARMS LENGTH PRICE, THE AS SESSING OFFICER IS DUTY BOUND TO CALL FOR OBJECTIONS FROM THE ASSESSEE OR GRANT AN O PPORTUNITY OF HEARING TO THE ASSESSEE ON THE ISSUE OF REFERENCE. IF THE ASSESSEE HAS ANY OBJECTION IN RESPECT OF ANY TRANSACTION TO BE TREATED AS INTERNATIONAL TRAN SACTION, THE SAME CAN BE RAISED BEFORE THE TPO. THEREFORE, THE PROVISIONS OF SECTIO N 92CA CONTEMPLATE THAT IN CASE THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EX PEDIENT SO TO DO, HE MAY WITH PRIOR APPROVAL OF COMMISSIONER, REFER THE COMPUTATI ON OF ARMS LENGTH PRICE TO THE TPO. AT THE STAGE OF REFERENCE WHAT IS REQUIRED IS ONLY THE SATISFACTION AND OPINION OF THE ASSESSING OFFICER IS THE CONDITION AND NOT T HE ADJUDICATION OF THE ISSUE OF REFERENCE ITSELF AFTER CONSIDERING THE ASSESSEES O BJECTIONS. THE ASSESSEE ITSELF HAS REPORTED THIS TRANSACTION AS INTERNATIONAL TRANSACT ION, THEREFORE, THERE IS NO SCOPE OF ANY OPPORTUNITY OF HEARING OR CONSIDERING ANY OBJEC TION OF ASSESSEE ON THE POINT OF REFERENCE TO THE TPO FOR DETERMIANTION OF ALP. ACCO RDINGLY, WE DO NOT FIND ANY SUBSTANCE OR MERIT IN THE ADDITIONAL GROUND RAISED BY THE ASSESSEE AND THE SAME IS DISMISSED. M/S PMP AUTO COMPONENTS P. LTD, 22 | P A G E 27. THE REVENUE IN ITA NO. 1506/MUM/2014 HAS RAISED THE FOLLOWING GROUNDS:- (I) THE LEARNED DRP HAS ERRED ON FACTS AND IN LAW I N DELETING THE TRANSFER PRICING ADJUSTMENT WITHOUT PROPERLY APPRECIATING TH E FACTUAL AND LEGAL MATRIX OF THE CASE AS CLEARLY BROUGHT OUT BY THE ASSESSING OF FICER IN THE DRAFT ASSESSMENT ORDER. (II)THE LEARNED DRP HAS ERRED ON FACTS AND IN LAW I N DELETING THE TRANSFER PRICING ADJUSTMENT WITHOUT PROPERLY APPRECIATING TH E FACT THAT THE TPO HAD MADE THE ADDITION ON ACCOUNT OF INTEREST CHARGEABLE ON LOAN TRANSACTION WITH PMP BAKONY OFRS.57,71,641/- AS THE ASSESSEE HAD NOT REALIZED ANY AMOUNT OF INTEREST FROM ADDITIONAL CAPITAL INVESTMENT MADE TO ITS AE WHEREAS ASSESSEE HAD PASSED TANGIBLE BENEFIT ON TO THE AE B Y INFUSION OF AN EXCESS AMOUNT. (I I I) THE LEARNED DRP HAS ERRED ON FACTS AND IN L AW IN DELETING THE TRANSFER PRICING ADJUSTMENT BY HOLDING THAT THE TRANSFER PRI CING PROVISION IN THE ACT DOES NOT ENVISAGE THE CONCEPT OF 'SECONDARY TRANSFER PRI CING ADJUSTMENT' AND A CONCEPT OF'SECONDARY ADJUSTMENT' IS ALIEN TO THE IN DIAN TRANSFER PRICING LAW. 28. THE ONLY ISSUE ARISES IN THE REVENUES APPEAL I S REGARDING SECONDARY TRANSFER PRICING ADJUSTMENT IN RESPECT OF THE CAPITAL INFUSE D BY THE ASSESSEE IN ITS SUBSIDIARY. 29. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. DR HAS RELIED UPON THE ORDER OF THE TPO AND SUBMITTED THAT THIS ADJUSTMENT IS ONLY ALTERNATIVE TO THE ADJ USTMENT OF AMOUNT OF CAPITAL INFUSED IN THE SUBSIDIARY. 30. ON THE OTHER HAND, THE LD. AUTHORIZED REPRESENT ATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE TPO HAS MADE THE DOUBLE ADJUSTME NT IN RESPECT OF THE SAME TRANSACTION. THE TPO AFTER MAKING ADJUSTMENT OF ENT IRE CAPITAL INFUSED IN THE SUBSIDIARY HAS ALSO MADE A FURTHER ADJUSTMENT OF I NTEREST CHARGEABLE ON THE SAID AMOUNT. M/S PMP AUTO COMPONENTS P. LTD, 23 | P A G E 31. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND CAR EFUL PERUSAL OF THE RECORD, WE NOTE THAT THE ADJUSTMENT ON ACCOUNT OF NOTIONAL INT EREST ON THE ADDITIONAL CAPITAL INFUSED BY THE ASSESSEE IN THE SUBSIDIARY IS OVER A ND ABOVE, THE ADJUSTMENT OF THE ENTIRE CAPITAL INVESTMENT AMOUNT. THEREFORE, IT IS NOT AN ALTERNATIVE BUT IT IS AN ADJUSTMENT OF OVER AND ABOVE OF THE ENTIRE AMOUNT O F CAPITAL INVESTMENT. THE DRP HAS CONSIDERED THIS ISSUE IN PARA 5 AS UNDER:- 5 OBJECTION 4 IS AGAINST THE TP ADJUSTMENT MADE BY THE TPO ON ACCOUNT OF NOTIONAL INTEREST CHARGED AMOUNTING TO RS. 87,71,6 41/-MADE BY THE ASSESSEE IN ITS AE. THE TPO IN THE FACTS OF THIS ISSUE WAS O F THE VIEW THAT AS A TANGIBLE BENEFIT HAD BEEN PASSED ON TO THE AE BY INFUSION OF AN EXCESS AMOUNT BY THE ASSESSEE WHILE MAKING THE ADDITIONAL CAPITAL CONTRI BUTION. THE SAME WAS TREATED BY THE TPO AS AN INTEREST FREE LOAN AND CON SEQUENTLY INTEREST AT THE RATE OF 15% WAS COMPUTED AND RECOMMENDED AS A FURTH ER TRANSFER PRICING ADJUSTMENT. ON THESE FACTS THE DRP IS OF THE VIEW T HAT THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF THE ADDITIONAL CAPITAL INF USION HAS ALREADY BEEN MADE AND APPROVED. THE TRANSFER PRICING PROVISIONS IN THE ACT DOES NOT ENVISAGE THE CONCEPT OF I SECONDARY TRANSFER PRICIN G ADJUSTMENT' AND AS A CONCEPT' SECONDARY ADJUSTMENT' IS ALIEN TO THE INDI AN TRANSFER PRICING LAW. THE TPO/AO ARE ACCORDINGLY DIRECTED TO DELETE THIS TRAN SFER PRICING ADJUSTMENT. 32. SINCE THIS IS A SECONDARY ADJUSTMENT IN RESPECT OF THE SAME TRANSACTION WHICH IS NOT PERMISSIBLE IN THE TRANSFER PRICING PROVISIO NS OF THE INCOME TAX ACT, THEREFORE, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF DRP QUA THIS ISSUE. 33. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED WHEREAS THAT BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT TODAY I.E 22- 8-2014 SD/- SD/- (R.C. SHARMA) (VIJAY PAL RAO) (ACCOUNTANT MEMBER/ YS[KK LNL; YS[KK LNL; YS[KK LNL; YS[KK LNL; ) (JUDICIAL MEMBER/ U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; ) MUMBAI DATED 22-8 -2014 SKS SR. P.S,