PMP AUTO COMPONENTS P.LTD, MUMBAI V. DCIT RG 7(3)(2), MUMBAI

ITA 587/MUM/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5354 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 25-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANISH KUMAR SINGH
• Assessee Lawyers: RONAK G DOSHI
• Keywords: Depreciation; Transfer pricing; Double taxation relief; Opportunity of being heard; Principle of natural justice; International transaction; Rule of consistency; Earning of tax free income; Permanent establishment; Advance ruling; Question of law; Wholly owned subsidiary; Notional interest; Capital receipt; Commercial expediency; Rule 8D; Set aside
• Section: 43B; 143(3); 92B; 142(1); 234B; 14A; 115JB; 10B; 143(1); 201; 144C; 143(2); 192; 139(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA , AM AND SHRI AMARJIT SINGH, JM / I .T.A. (TP) NO. 587 /MUM/201 7 ( / ASSESSMENT YEAR: 2012 - 13 ) M/S. PMP AUTO COMPONENTS PVT. LTD. PENINSULA SPENTA, 2 ND FLOOR, MATHURAAS MILL COMPOUND, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI - 400013. / VS. DCIT, CIRLCE 7(3)(2) ROOM NO.12, GROUND FLOOR, AAYAKAR BHAVAN, MUMBAI - 400020. / I .T.A. NO. 229 /MUM/201 6 ( / ASSESSMENT YEAR : 2011 - 12 ) M/S. PMP AUTO COMPONENTS PVT. LTD. PENINSULA SPENTA, 2 ND FLOOR, MATHURAAS MILL COMPOUND, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI - 400013. / VS. DCIT, CIRLCE 7(3)(1) MUMBAI / I .T.A. NO. 209 /MUM/201 6 ( / ASSESSMENT YEAR : 2011 - 12 ) DCIT, CIRLCE 7(3)(1) MUMBAI / VS. M/S. PMP AUTO COMPONENTS PVT. LTD. PENINSULA SPENTA, 2 ND FLOOR, MATHURAAS MILL COMPOUND, SENAPAT I BAPAT MARG, LOWER PAREL, MUMBAI - 400013 ./ ./ PAN/GIR NO. : AAACP7200N ( / APPELLANT ) .. ( / RESPONDENT ) REVENUE BY: SHRI MANISH KUMAR SINGH (DR) ASSESSEE BY : SHRI RONAK G. DOSHI & HARDIK NIRMAL (AR) ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 2 / DATE OF HEARING : 04/ 0 4/ 201 9 / DATE OF PRONOUNCEMENT : 24 /05 /2019 / O R D E R PER AMARJIT SINGH, J M: THE ASSESSEE AS WELL AS THE REVENUE HAVE FILED THE AB OVE MENTIONED APPEALS AGAINST THE DIFFERENT ORDER PASSED BY THE DISPUTE RESOLUTION PANEL - 2 , MUMBAI [HEREINAFTE R REFERRED TO AS THE DRP ] RELEVANT TO THE A.Y S . 2011 - 12 & 2012 - 13 . ITA. NO.229/M/201 6 :- 2 . THE ASSESSEE HAS FILED THE PRESENT A PPEAL AGAINST THE ORDER OF DISPUTE RESOLUTION PANEL - 2, MUMBAI [HEREINAFTE R RE FERRED TO AS THE DRP ] RELEVANT TO THE A.Y. 2011 - 12 . 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - GROUND NO. I: ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF GUARANTEE COMMISSION A MOUNTING TO RS.1,79.190/ - : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN FOLLOWING THE ERRONEOUS DIRECTION OF THE DRP IN MAKING AN ADJUSTMENT OF RS1,79.190/ - ON ACCOUNT OF COMMISSION ON CORPORATE GUARANTEE PROVIDED ON BE HALF OF ITS ASSO CIATED ENTERPRISE ('AE'). THE 'T PO HAS CHARGED COMMISSION @ 1.75% NORMALLY CHARGED BY BANKS FOR GUARANTEES AND 1.25% CHARGED FOR RISK INVOLVED ON ACCOUNT OF EXCHANGE RATE RISK, COUNTRY SPECIFIC RISK AND AE RISK INVOLVED IN GIVING GUARANTEE ON LOANS. 2. THE AO FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT, THE TRANSACTION OF A CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSACTION. 3. THE APPELLANT THEREFORE HUMBLY PRAYS THAT THE ADDITION OF GUARANTEE COMMISSION BE DELETED OR BE APPROPRIA TELY REDUCED. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 3 GROUND NO. II: INCORRECT COMPUTATION OF TAX DEMAND, INTEREST U/S. 2348 234C OF TILE ACT AND NON - GRANT OF REFUND: THE AO ERRED IN COMPUTING THE TAX DEMAND, THEREBY WRONGLY COMPUTING INTEREST U/S. 234B & 234C OF THE ACT. 2. THE AO ALSO ERR ED IN STATING THAT THE REFUND HAS BEEN ISSUED TO THE APPELLANT, EVEN THOUGH NO REFUND WAS GRANTED TO THE APPELLANT. 3. THE APPELLANT THEREFORE HUMBLY PRAYS THAT THE AO BE DIRECTED TO RE - COMPUTE THE DEMAND AS PER LAW AND ISSUE REFUND DUE TO THE APPELLANT. 4 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY HAS FILED THE RETURN OF INCOME ON 30.11.2011 DECLARING TOTAL IN COME TO THE TUNE OF RS.12,45,38,811/ - WHICH WAS REVISED LATER ON DECLARING TOTAL INCOME TO THE TUNE OF RS.12,28,74,204/ - ON 26.03. 2013. THE RETURN WAS PROCESSED U/S 143(1) OF THE I.T. ACT, 1961. THEREFORE, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) & 142(1) OF THE I.T. ACT, 1961 WERE ISSUED AND SERVED UPON THE ASSESSEE. THE CASE OF THE ASSESSEE ALSO FELL UNDER TRANSFER PRICING SCRUT INY FOR CURRENT ASSESSMENT YEAR, T HEREFORE, THE REFERENCE WAS MADE U/S 92CA(1) OF THE I. T. ACT, 1961 TO THE ADDL. CIT, TRANSFER PRICING - II(2), MUMBAI VIDE LETTER DATED 06.12.2013. THE ORDER OF THE TPO U/S 92CA(1) OF THE I.T. ACT, 1961 DATED 19.01.2015 WAS RECEIVED AND THEREAFTER THE DRAFT ASSESSMENT ORDER U/S 143(3) R.W.S. 144C OF THE I.T. ACT, 1961 WAS SERVED UPON THE ASSESSEE ON 24.03.2015. THE ASSESSEE FILED THE OBJECTIONS BEFORE THE DRP - 2, MUMBAI VIDE OBJECTION NO. 144 WHICH WAS DISPOSED OF BY VIRTUE OF ORDER DATED 14.10.2015. THE ASSESSEE COMPANY IS ENGAGED IN THE MANUFACTURING AND MARKETING OF AUTO ELECTRICAL COMPONENTS FOR ORIGINAL EQUIPMENT MANUFACTURERS . THEREAFTER, THE TPO ADJUSTMENT WAS MADE U/S ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 4 92CA IN SUM OF RS.3,96,60,008/ - ON AC COUNT OF INTEREST ON LOAN AND DEEMED INTEREST . THE TPO ADJUSTMENT IN SUM OF RS.2,97,88,389/ - WAS MADE ON ACCOUNT OF NOTIONAL INTEREST ON SHARE INVESTMENT . THE TPO ADJUSTMENT WAS MADE IN SUM OF RS.1,79,190/ - ON GUARANTEE COMMISSION . THERE IS DISALLOWANCE U/ S 36(1)(VA) OF RS.1,97,802/ - . O N ACCOUNT OF RECONCILIATION OF 26AS IN SUM OF RS.6,03,950/ - WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE TOTAL INCOME OF THE ASSESSEE WAS ASSESSED TO THE TUNE OF RS.12,30,53,394/ - . FEELING AGGRIEVED, THE ASSESSEE HAS FI LED THE PRESENT APPEAL BEFORE US. ISSUE NO. 1 : - 5 . UNDER THIS ISSUE THE ASSESSEE HAS CHALLENGED THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF GUARANTEE COMMISSION AMOUNTING TO RS.1,79,190/ - . THE ASSESSEE HAS GIVEN THE CORPORATE GUARANTEE TO ONE OF ITS STEP DOWN SUBSIDIARY M/S. NORTHPOINT DCO2 S.R.O. CZECH REPUBLIC OF RS.59.73 LAKH TOWARDS GUARANTEE COMMISSION @ 1.75% TOWARDS GUARANTEE COMMISSION WHICH IS 1,79,190/ - . THE OBJECTION WAS RAISED BEFORE DRP WHO CONFIRMED THE FINDING OF THE TPO . THE LD. REPRESENTATIVE OF THE ASSESSEE HAS ARGUED THAT THE CORPORATE GUARANTEE IS NOT A INTERNATIONAL TRANSACTION, THEREFORE, NO GUARANTEE IS LIABLE TO BE ASSESSED. IT IS SPECIFICALLY ARGUED THAT THE AMENDMENT TO SECTION 92B(1) IS PROSPECTIVE IN NATURE, THEREFORE , THE SAID AMENDMENT IS APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE LD. REPRESENTATIVE OF THE ASSESSEE HAS ALSO ARGUED THAT THE WITHOUT PREJUDICE THE GUARANTEE COMMISSION BEING RESTRICTED TO THE EXTENT OF 0.5% OF THE GUARANTEE PAID IN VIEW OF THE JUDG MENT OF THE CIT VS. M/S. EVEREST KENTO CYLINDERS LTD. 232 TAXMAN 307)(BOM) AND CIT VS. ASIAN PAINTS ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 5 (INDIA) LTD. (243 TAXMAN 348) (BOM). HOWEVER, ON THE OTHER HAND, THE LD. REPRESENTATIVE OF THE DEPARTMENT HAS REFUTED THE SAID CONTENTION. THE FACTUAL POSIT ION IS NOT IN DISPUTE, THE ASSESSEE PROVIDED CORPORATE GUARANTEE TO ITS SUBSIDIARY M/S. NORTHPOINT DCO2 S.R.O. CZECH REPUBLIC OF RS.59.73 LAKH FOR THE PERIOD OF 34 DAYS. THE TPO RAISED THE ADDITION @ 3% OF GUARANTEE, THE TOTAL IN SUM OF RS.1,79,190/ - ON TH E BASIS OF THE INFORMATION RECEIVED FROM THE STATE BANK OF INDIA. THE FACTS OF THE PRESENT CASE ARE QUITE SIMILAR TO THE FACT OF THE CASE TITLED AS CIT VS. EVEREST KENTO CYLINDER LTD. (2015) 58 TAXMANN.COM 254 (BOM) IN WHICH THE HONBLE HIGH COURT HAS CONF IRMED THE GUARANTEE FEE @ 0.5% OF THE AMOUNT OF GUARANTEE. IN THE CASE OF THOMAS COOK (INDIA LTD. VS. ACIT 859/M/2014 HONBLE ITAT MUMBAI BENCH HAS ALSO UPHELD THE GUARANTEE FEE @ 0.5% OF THE GUARANTEE AMOUNT. THERE ARE NUMBER OF DECISION ON RECORD IN WHIC H THE GUARANTEE COMMISSION HAS BEEN RESTRICTED TO THE EXTENT OF 0.5% OF GUARANTEE AMOUNT . IN VIEW OF THE ABOVE MENTIONED LAW, WE ARE OF THE VIEW THAT IT WOULD BE THE REASONABLE TO DETERMINATION THE ARMS LENGTH PRICE (ALP) IN CONNECTION WITH THE GUARANTEE COMMISSION @ 0.5% OF THE GUARANTEE AMOUNT . A CCORDINGLY. W E SET ASIDE THE FI NDING OF THE DRP IN THIS REGARD AND RESTRICT THE GUARANTEE FEE @ 0.5% OF THE GUARANTEE AMOUNT. ACCORDINGLY W E DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ISSUE N O. 2 : - 6. ISSUE NO. 2 IS IN CONNECTION WITH THE INCORRECT COMPUTATION OF INTEREST U/S 234B & 234C OF THE ACT. NO DOUBT, THE CALCULATION OF ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 6 INTEREST IS NOT ON RECORD BUT THE ISSUE IS CONSEQUENTIAL IN NATURE WHICH IS BASED UPON THE DEMAND RAISED AGAINST THE ASSESSEE, THEREFORE, AO IS HEREBY DIRECTED TO CALCUL ATE THE INTEREST STRICTLY IN VIEW OF THE PROVISIONS U/S 234B & 234C OF THE ACT. ACCORDINGLY, THE ISSUE IS NOWHERE NEED TO DECIDE. ITA. NO.209/M/201 6 :- 7. THE REVENUE HAS FILED THE PRESENT APPEAL AGAINST T HE ORDER OF DISPUTE RESOLUTION PANEL - 2, MUMBAI [HEREINAFTE R REFERRED TO AS THE DRP] RELEVANT TO THE A.Y. 2011 - 12. 8. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: - (1) 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE I TAT WAS RIGHT IN ADOPTING 'LIBOR' (LONDON. INTER BANK OFFERED RATE) AS BENCHMARK FOR INTEREST ON LOAN GIVEN TO ASSOCIATE ENTERPRISES FROM INDIA WITHOUT APPRECIATING THE FACT THAT LOAN WAS GIVEN FROM INDIA AND IT OUGHT TO HAVE ADOPTED THE PREVAILING RATE OF INTERES T IN INDIA? (2) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE ITAT ERRED IN DIRECTING THE AO/TPO TO ADOPT THE LIBOR RATE PLUS 2% AS THE RATE OF INTEREST, FOR MAKING ADJUSTMENT TO ALP, WITHOUT HAVING REGARD TO THE FOLLOWING FACT ORS WHICH AFFECT THE RELEVANT? (I) THAT LIBOR CANNOT BE THE BENCHMARK WHERE THE CURRENCY OF THE ORIGIN COUNTRY OF LOAN IS NOT THE CURRENCY IN WHICH THE LOAN IS FINALLY EXTENDED. (II) THAT IN SUCH CASES, LIBOR WOULD HAVE TO BE ADJUSTED FOR COUNTRY RISK, CUR RENCY RISK, FORCE MARKET FLUCTUATIONS, ETC. (III) THAT THE ELEMENT OF COMMISSION FOR CONVERSION OF CURRENCY HAS TO BE CONSIDERED, AS THE LIBOR BASED RATES DO NOT CAPTURE THIS CLEMENT. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 7 (3) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BIE ITAT WAS JUSTIFIED IN DIRECTING THE AO/TPO TO ADOPT THE LIBOR RATE AS THE BENCHMARK WITHOUT FULLY APPRECIATING THE FACTUAL MATRIX OF THE CASE. THIS DIRECTION OF THE HON'BLE ITAT ISSUED WITHOUT FULLY APPRECIATING THE FACTUAL MATRIX TANTAMOUNT TO BEING A DIRECTI ON WHICH IS 'PERVERSE IN FACTS'. (4) 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP HAS ERRED IN GIVING RELIEF IN RESPECT OF INTEREST OF RS.2,97,88,389/ - HAVING CONFIRMED THE ADDITION WITH REGARD TO INVESTMENT OF CAPITAL IN AE.' (5) 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP HAS ERRED IN NOT CONSIDERING THAT THE ADDITION RS.2,97,88,389/ - WHICH IS AN ADJUSTMENT EMANATING FROM THE ADJUSTMENT BEING THE AMOUNT OF ADDITIONAL INVESTMENT OF CAPI TAL IN THE AE, OVER AND ABOVE THE ALP OF SHARES ISSUED, HAS BEEN UPHELD BY THE HON'BLE DRP.' (6) 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD DRP HAS ERRED IS HOLDING THAT THE CONCEPT OF ADJUSTMENT IS NOT EXPRESSLY PROVIDED IN THE CHAPTER X OF THE ACT AND CHARGING OF INTEREST ON THE AMOUNT OF ADJUSTMENT ARRIVED AT TOWARDS THE ALP OF THE ISSUE OF EQUITY SHARE, OVER AND ABOVE THE AMOUNT OF ADJUSTMENT IS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE LAW, WHICH THE ADJUSTMENT OF 'INTERE ST' IS NATURAL OF BENEFIT TO THE AE FLOWING FROM THE ADDITION RELATING TO THE ADDITIONAL INVESTMENT OF CAPITAL IN THE AE, OVER AND ABOVE THE ALP OF SHARES ISSUED, UPHELD BY THE HONBLE DRP.' 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, TH E HON'BLE DRP ERRED IN DELETING THE ADDITION ON ACCOUNT OF DISALLOWANCE U/S.2(24)(X) R.W.S. 36(1)(VA) OF THE ACT BY HOLDING THAT PROVISIONS OF SECTION 43B OF THE ACT ARE APPLICABLE WITHOUT APPRECIATING THE FACT THAT THE ISSUE WAS NOT GOVERNED BY THE PROVIS IONS OF SECTION 43B OF THE ACT IN VIEW OF THE CBDT'S CIRCULAR NO.22/2015 DATED 17.12.2015.' THE APPELLANT PRAYS THAT THE DIRECTIONS OF THE LD. DRP - 2, MUMBAI ON THE ABOVE GROUNDS BE SET ASIDE TO THE FILE OF THE A.O. OR CONFIRM THE ORDER OF THE AO. THE APPEL LANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 8 9. THE FACTS OF THE PRESENT CASE ARE QUITE SIMILAR TO THE FACTS OF THE C ASE AS DISCUSSED IN ITA. NO.229 /M/201 6 , THEREFORE, THERE IS NO NEED TO REPEAT THE SAME. ISSU E NO. 1 TO 3 : - 10. UNDER THESE ISSUES THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF NOTIONAL INTEREST ON ACCOUNT OF LOAN GIVEN TO ASSOCIATE ENTERPRISES. BEFORE GOING FURTHER, WE DEEM IT NECESSARY TO ADVERT THE FINDING OF THE DRP ON RECORD.: - 4.3 DISCUSSION AND DIRECTIONS OF DRP 4.3.1 WE HAVE GONE THROUGH THE ASSESSEE'S SUBMISSION, THE HON'BLE ITAT'S ORDER IN THE ASSESSEE,S OWN CASE AND VARIOUS OTHER DECISIONS OF HON'BLE ITAT AND THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF M/S. COTTON NATURAL (INDIA) PVT. LTD. THE HONBLE DELHI HIGH COURT AND HON'BLE ITAT HAVE DECIDED THE PRINCIPLE REGARDING INTERNATIONAL TRANSACTIONS OF INTEREST ON LOAN ADVANCED IN FOREIGN JURISDICTION ON THE BASIS OF LIBOR PLUS BASIS. THE MARKET / COUNTRY IN WHICH SUC H LOAN IS TO BE RAISED BY THE BORROWER SHOULD BE CONSIDERED AS THE PLACE WHERE TRANSACTIONS WAS CARRIED OUT AND THE COMPARABLE UNRELATED TRANSACTIONS IN THE SAME FOREIGN CURRENCY SHOULD BE USED TO FIND OUT THE INTERNAL / EXTERNAL CUP IN THIS REGARD. THE CU P METHOD HAS BEEN APPROVED BY VARIOUS ITATS MUMBAI ITAT IN THE CASE OF DCIT VS. TECH MAHINDRA 46 SOT 141(MUM) BEEN SO UPHELD IMPLIED BY THE HON'BLE DELHI HIGH COURT. THUS THE CUP METHOD THE MOST APPROPRIATE METHOD TO ASCERTAIN THE ALP OF SUCH INTERNATIONA L LOAN TRANSACTIONS AFTER TAKING INTO ACCOUNT BASIS AT WHICH SIMILAR TRANSACTIONS WITH OTHER (ELATED PARTIES HAVE BEEN ENTERED INTO. 11. ON APPRAISAL OF THE ABOVE MENTIONED FINDING, WE NOTICED THAT THE ISSUE HAS BEEN DECIDED ON THE BASIS OF DECISION OF HO NBLE ITAT IN THE ASSESSEES OWN CASE FOR A.Y. 2009 - 10 IN ITA. NO. 1484/M/2014 VIDE ORDER DATED 22.08.2014 AND ITA. NO.7724/M/2014 DATED ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 9 13.01.2016 FOR THE A.Y.2010.11. SINCE THE ASSESSEE HAS CHARGED @ 9.5% OF THE PER ANNUM, THEREFORE, THERE IS NO NEED FOR MAKING THE TPO ADJUSTMENT IN THIS REGARD. ACCORDINGLY, WE ARE OF THE VIEW THAT THE DRP HAS DECIDED THE MATTER OF CONTROVERSY JUDICIOUSLY AND CORRECTLY WHICH IS NOT LIABLE TO BE INTERFERE WITH AT THIS APPELLATE STAGE. ISSUE NOS. 4 TO 6: - 12. UNDER THESE ISS UES THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF NOTIONAL INTEREST ON INVESTMENT IN SUBSIDIARY AS DEEMED LOAN. BEFORE GOING FURTHER, WE DEEM IT NECESSARY TO ADVERT THE FINDING OF THE DRP ON RECORD.: - 5.1 ASSESSEE'S SUBMISSION IN THIS REGARD ARE AS FOLLOWS I. IN JUNE 2007. THE ASSESSEE ACQUIRED THE ENTIRE CAPITAL (KNOWN AS 'QUOTA') OF A COMPANY CALLED PMP BAKONYUNDER 'QUOTA SALE AND PURCHASE AGREEMENT' FROM A THIRD PARTY AT A COST OF 8 LACS EUROS EQUIVALENT TO INR 437.20 LACS; II. THE ASSESSEE INF USED ADDITIONAL CAPITAL OF RS. 1,415 LACS IN THE FINANCIAL YEAR 2008 - 09, I.E. A.Y. 2009 - 10 BY PURCHASING ADDITIONAL QUOTA OF PMP BAKONY AT PAR VALUE; III. THE ASSESSEE INFUSED ADDITIONAL CAPITAL OF RS. 267.14 LACS IN THE FINANCIAL YEAR 2009 - 10. I.E. A.Y. 2 010 - 11 BY PURCHASING ADDITIONAL QUOTA OF PIMP BAKONY AT PAR VALUE: IV. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS INFUSED ADDITIONAL CAPITAL OF RS. 198.35 LAKHS BY PURCHASING ADDITIONAL QUOTA OF PIMP BAKONY; V. THE ID. TPO AND THE ID. AO HAVE TR EATED THE DIFFERENCE BETWEEN THE PROPORTIONATE BOOK VALUE OF PMP BAKONYAND THE AMOUNT OF EQUITY INVESTMENT MADE BY THE ASSESSE COMPANY AS ON MARCH 31, 2009, MARCH 31, 2010 AND MARCH 31, 2011 AS 'LOAN'(SEE TABLE BELOW). THE ID. TPO ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 10 AND THE ID. AO HAS MADE A DDITION OF NOTIONAL INTEREST WITHOUT ASSIGNING ANY COGENT REASONS AS TO HOW AN ITEM OF INVESTMENT CAN EVER BE REGARDED AS 'LOAN' OF THE ASSESSEE. THE ABOVE VIEW IS INDEED DE HORS TO THE COMMERCIAL UNDERSTANDING. ACCORDING TO THE ID. TPO, SINCE THE BOOK VALUE OF SHARES IS LESS, THE ASSESSEE CANNOT INVEST FOR A VALUE IN EXCESS OF ITS BOOK VALUE. FURTHER, THE ID. TPO HELD THAT THE INVESTMENT IS EQUIVALENT TO INTEREST FREE LOAN AND IN AN UNCONTROLLED THIRD PARTY SCENARIO, INTEREST WOULD BE CHARGED ON SUCH AN AMOUNT. VI. IT IS MOST HUMBLY SUBMITTED THAT SUCH A VIEW IS INEXPLICABLE AND IT ONLY SHOWS THAT THE ADDITION IS MADE IN A PRE - CONCEIVED MANNER WITHOUT ANY BASE AND EVEN WITHOUT A WHISPER AS TO HOW AN INVESTMENT IN CAPITAL CAN BE RE - CHARACTERIZED AS LOAN' . VII. THE ASSESSEE HUMBLY SUBMITS THE SUBSCR IPTION OF SHARES CANNOT BE RE - CHARACTERIZED AS LOAN. CHARACTERIZED AS A LOAN TRANSACTION. IT IS HUMBLY SUBMITTED THA T THERE IS AN INHERENT DIFFERENCE BETWEEN A LOAN' AND CAPITAL CONTRIBUTION' BY WAY OF EQUITY. IN THIS REGARD, ATTENTION IS INVITED TO THE DECISION OF THE HON'BLE PUNJAB HIGH COURT IN PEPSU ROAD TRANSPORT CO VS. CIT (130 ITR 18) WHEREIN IT WAS HELD AS UNDER: WHEREIN IT WAS HELD AS UNDER: THOUGH AN ELEMENT OF REFUND OR REPAYMENT IS INHERENT IN THE C ONCEPT OF BORROWING. IN THE INSTANT CASE, THE RTCA NOT ONLY PROVIDED NOTHING FOR THE REPAYMENT OF THE IMPUGNED LOAN, BUT IT ALSO MADE DISTINCTION BETWEEN THE 'CAPITAL PROVIDED' AND THE 'CAPITAL BORROWED' AND THE ASSESSEE'S CASE FELL UNDER THE FORMER HEAD. THE WORD 'BORROW' HAS NOT BEEN DENNED IN THE STATUTE AND, THEREFORE, ITS DICTIONARY MEANING HAS TO BE LOOKED UP. THE MEANING OF THE WORD *BORROW' AS GIVEN IN THE SHORTER OXFORD DICTIONARY (3RD EDN.), IS 'TO TAKE (A THING) ON SECURITY GIVEN FOR ITS SAFE RET URN. TO TAKE A THING ON CREDIT ON THE UNDERSTANDING OF ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 11 RETURNING IT OR AN EQUIVALENT REFERENCE IN THIS RESPECT MAY ALSO BE MADE TO CEPT V. BHARTIA ELECTRIC STEEL CO. LTD. [1954)25 1 T 192 (CAL). IN THIS ALSO, THE QUESTION WAS WHETHER IT WAS 'MONEY HAD AND RECEIVED'; OR 'BORROWED MONEY'. IT WAS HELD THAT THERE HAS TO BE A POSITIVE ACT OF LENDING COUPLED WITH ACCEPTANCE BY THE OTHER SIDE OF THE MONEY, AS A LOAN. THUS, IT IS CLEAR THAT AN ELEMENT OF REFUND OR REPAYMENT IS INHERENT IN THE CONCEPT OF BORROWING.' APPLYING THE AFORESAID OBSERVATIONS, IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE ASSESSEE SUBSCRIBED TO THE SHARE CAPITAL OF ITS WHOLLY OWNED SUBSIDIARY. THERE IS NO OBLIGATION ON PART OF ITS SUBSIDIARY TO RETURN OR REPAY AFTER A SPECIFIED DURATION , WHICH IS INHERENT IN CONCEPT OF BORROWING. IN THE ABSENCE OF THIN CAPITALIZATION RULES AND SPECIFIC ANTI - ABUSE PROVISIONS, THERE IS N6IPE / JURISDICTION TO RECLASSIFY THE INVESTMENT A&. LOAN. IN THIS REGARD, RELIANCE IS PLACED ON THE DECISION OF THE JUR ISDICTIONAL HON'BLE MUMBAI TRIBUNAL IN THE CASE OF BESIX KIER DABHOL SA (134 TTJ 513) WHEREIN IT HAS BEEN HELD AS UNDER: 'IT IS THUS NOT EVEN NECESSARY TO EXAMINE WHETHER OR NOT THE FINANCE STRUCTURE IN QUESTION CONSTITUTED COLOURABLE DEVICE OR SORT OF SUB TERFUGE. AS LONG AS FINANCE STRUCTURE ADOPTED BY THE ASSESSEE WAS NOT SPECIFICALLY PROHIBITED BY THE APPLICABLE TAX TREATY PROVISIONS, AND AS LONG AS THERE WAS NO SPECIFIC ANTI ABUSE PROVISION TO DEAL WITH THE SAME IN THE TAX TREATY ITSELF, THE EFFECT OF T HE FINANCE STRUCTURE COULD NOT BE IGNORED.' FURTHER, THE ABOVE VIEW IS AFFIRMED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DIT V. BESIX KIER DABHOL SA(26 TAXMANN.COM 169). IX. HON'BLE JURISDICTIONAL TRIBUNAL IN A RECENT DECISION IN THE CASE OF AEGIS LIMITED V. ADDL. CIT (ITA NO. 1213/MUM/2014) VIDE ORDER DATED JULY 27, 2015 WHEREIN SIMILAR ISSUE WAS INVOLVED BY FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF BESIX (SUPRA) HAS HELD AS UNDER: 'THE TPO CANNOT QUESTION THE COMMERCIAL EX PEDIENCY OF THE TRANSACTION ENTERED INTO BY THE ASSESSEE UNLESS THERE ARE EVIDENCE AND CIRCUMSTANCES TO DOUBT. HERE IRIS A CASE OR INVESTME NT IN SNARES AND IF CANNOT B E GIVEN AINEREM COLOUR SO ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 12 AS TO EXPAND THE SCOPE OF TRANSFER PRICING ADJUSTMENTS BY RE - C HARACTERIZING IT AS INTEREST FREE LOAN. NOW, WHETHER IN A THIRD PARTY SCENARIO. IF AN INDEPENDENT ENTERPRISE SUBSCRIBES TO A SHARE, CAN IT BE CHARACTERIZE AS LOAN. IF NOT, THEN THIS TRANSACTION ALSO CANNOT BE INFERRED AS LOAN. THE CONTENTION OF THE LD. COU NSEL IS ALSO SUPPORTED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF DEXISKIER DHBOAL SA, ITA NO. 776 OF 2011 ORDER DATED 30TH AUGUST. 2012 AND BY VARIOUS OTHER DECISIONS. AS CITED BY HIM. THE CO - ORDINATE BENCHES OF THE TRIBUNAL HAVE BEEN CONSIST ENTLY HOLDING THAT SUBSCRIPTION OF SHARES CANNOT BE CHARACTERIZES AS LOAN AND THEREFORE NO INTEREST SHOULD BE IMPUTED BY TREATING IT AS A LOAN. ACCORDINGLY, ON THIS GROUND ALONE, WE DELETE THE ADJUSTMENT OF INTEREST MADE BY THE ASSESSING OFFICER. X. HON'BL E JURISDICTIONAL HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES PVT. LTD. V. ADDL. CIT (368 ITR 1) HAS HELD AS UNDER: THE TRANSACTION ON CAPITAL ACCOUNT OR ON ACCOUNT OF RESTRUCTURING WOULD BECOME TAXABLE TO THE EXTENT IT IMPACTS INCOME I.E. UNDER REPOR TING OF INTEREST OR OVER REPORTING OF INTEREST PAID OR CLAIMING OF DEPRECIATION ETC. IT IS THAT INCOME WHICH IS TO BE ADJUSTED TO THE ALP PRICE. IT IS NOT A TAX ON THE CAPITAL RECEIPTS. THIS ASPECT APPEARS TO HAVE BEEN COMPLETELY LOST SIGHT OF IN THE IMPUG NED ORDER.' FURTHER, CBDT VIDE PRESS RELEASE DATED JANUARY 28, 2015 HAS DECIDED TO ACCEPT THE ORDER OF JURISDICTIONAL HIGH COURT IN THE CASE OF VODAFONE (SUPRA) AND DECIDED NOT TO FILE SLP AGAINST IT BEFORE THE SUPREME COURT OF INDIA. HON'BLE DELHI TRIBUNA L IN THE CASE OF BHARTI AIRTEL LTD. V. ADDL. CIT (161 TTJ 428) HAS HELD AS UNDER : 49. IN ANY EVENT, IT IS NOT OPEN TO THE REVENUE AUTHORITIES TO CHARACTERIZE THE TRANSACTION UNLESS IT IS FOUND TO BE A SHAM OR BOGUS TRANSACTION. WHILE THERE ARE NO SPECIFIC POWERS VESTED IN THE TPO TO CHARACTERIZE THE TRANSACTION, EVEN UNDER THE JUDGE MADE LAW, SUCH CHARACTERIZE CAN BE DONE BY THE REVENUE AUTHORITIES WHEN THE TRANSACTIONS ARE FOUND TO BE SUBSTANTIALLY AT VARIANCE WITH THE STATED FORM. IN THE PRESENT CASE, THE RE CANNOT EVEN A SUGGESTION TO HOLD THAT THIS IS A BOGUS TRANSACTION BECAUSE ADMITTEDLY THE SUBSCRIBED SHARES CAPITAL HAS INDEED ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 13 BEEN ALLOTTED TO THE ASSESSEE. THE TRANSACTION IS THUS ACCEPTED TO BE GENUINE IN EFFECT' SIMILAR VIEW HAS BEEN TAKEN IN THE FOL LOWING DECISIONS: PANE BISCUITS PVT. LTD. V. DCIT (46 TAXMANN.COM 11) (T MUM); M/S. ALL CARGO GLOBAL LOGISTICS LTD. V. ACIT (150 ITD 651)(T MUM); M/S. HILL COUNTY PROPERTIES LTD. V. ACIT (ITA NO. 1404/HYD/2013) (THYD): XI. ALSO, AT PG. 16 OF THE TPO 'S ORDER, THE ID. TPO HAS PURPORTEDLY RELIED ON SOME DECISION OF THE HON'BLE DELHI HIGH COURT WITHOUT STATING THE NAME OR THE CITATION OF SUCH DECISION. THE ASSESSEE HUMBLY SUBMITS THAT IT CRAVES TO REPLY TO SUCH DECISION OF HON'BLE DELHI HIGH COURT IF THE SAME IS PROVIDED TO IT. BE THAT AS IT MAY, RELIANCE ON SUCH DECISION SHOULD NOT BE CONSIDERED AT THIS STAGE. XII. IF THE HON'BLE DRP STILL FEELS THAT THE ACTION OF THE ID. TPO/A0 IS CORRECT, THE ASSESSEE WOULD MOST HUMBLE REQUEST, IN THE INTEREST OF NATUR AL JUSTICE, TO PROVIDE SOME COGENT REASON AS TO HOW AN INVESTMENT IN CAPITAL CAN BE TREATED AS LOAN OF THE ASSESSEE SO AS TO ENABLE THE ASSESSEE TO PROVIDE A WELL - CONSIDERED REPLY IN THE MATTER. XIII. FURTHER. IN A.Y. 2009 - 10, HON'BLE TRIBUNAL IN THE ASSES SEE'S OWN CASE HAS DELETED SUCH ADJUSTMENT OF INTEREST. ALSO, HON'BLE DRP FOR AY. 2010 - 11, HAS DIRECTED THE ID. AO TO DELETE SUCH PROPOSED ADDITION. XIV. IN VIEW OF THE FOREGOING, THE ASSESSEE HUMBLY PRAYS THAT THE PROPOSED ADJUSTMENT OF NOTIONAL INTEREST OF RS.2,97,88,389/ - ON EQUITY INVESTMENT MADE IN OVERSEAS SUBSIDIARIES BE DELETED. XV. WITHOUT PREJUDICE, AS STATED ABOVE IN OBJECTION NO. 1, ADDITION OF NOTIONAL INTEREST CANNOT EXCEED AMOUNT CALCULATED BASED ON LIBOR RATE. 5.2 DISCUSSION AND DIRECTIONS OF THE DRP: FOLLOWING THE HON'BLE TRIBUNAL'S ORDER FOR A.Y.2009 - 10 IN THE ASSESSES OWN CASE AND ALSO RESPECTFULLY FOLLOWING THE HON'BLE DRP FOR A.Y. 2010 - 11, THE AO IS DIRECTED TO DELETE THE PROPOSED ADDITION. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 14 13. ON APPRAISAL OF THE ABOVE MENTIONED FIND ING, WE NOTICED THAT THE ISSUE HAS BEEN DECIDED ON THE BASIS OF DECISION OF HONBLE ITAT IN THE ASSESSEES OWN CASE FOR A.Y. 2009 - 10 IN ITA. NO.1484/M/2014 VIDE ORDER DATED 22.08.2014 AND ITA. NO.7724/M/2014 DATED 13.01.2016 FOR THE A.Y.2010.11. SINCE THE ASSESSEE HAS CHARGED @ 9.5% OF THE PER ANNUM, THEREFORE, THERE IS NO NEED FOR MAKING THE TPO ADJUSTMENT IN THIS REGARD. ACCORDINGLY, WE ARE OF THE VIEW THAT THE DRP HAS DECIDED THE MATTER OF CONTROVERSY JUDICIOUSLY AND CORRECTLY WHICH IS NOT LIABLE TO BE I NTERFERE WITH AT THIS APPELLATE STAGE. ACCORDINGLY, THESE ISSUES ARE DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ISSUE NO. 7: - 14. UNDER THIS ISSUE THE REVENUE HAS CHALLENGED DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE U/S 2(24)(X) R.W.S 36( 1)(VA) OF THE ACT. THE RELEVANT FINDING HAS BEEN GIVEN IN PARA NO.7.1 WHICH IS HEREBY REPRODUCED AS UNDER.: - 71 SUBMISSION OF THE ASSESSEE I. IT IS A SETTLED LAW THAT IN VIEW OF THE STATUTORY PROVISIONS OF SECTION 2(24)(X), SECTION 36(1)(VA) AND SECTION 4313(B) OF THE INCOME - TAX ACT, 1961 ('THE ACT'), CONTRIBUTIONS MADE BY THE ASSESSEE TOWARDS EMPLOYEES ESIC ARE ALLOWABLE DEDUCTIONS EVEN THOUGH MADE BEYOND STIPULATED PERIOD AS CONTEMPLATED UNDER THE MANDATORY PROVISIONS OF SECTION 36(1)(VA), READ WITH SEC TION 2(24)(X), PROVIDED SUCH CONTRIBUTIONS ARE PAID BY THE ASSESSEE ON OR BEFORE THE DUE DATE FOR FURNISHING THE RETURN OF INCOME AS PER SECTION 139(1) OF THE ACT: CIT V. GHATE PATIL TRANSPORTS LTD. (368 ITR 749) (BOM HC): ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 15 CIT V. HINDUSTAN CONSTRUCTION CO. LTD. (374 ITR 101) (BOM NC); CIT V VIJAY SHREE LTD. (224 TAXMAN 12) (CAL HC) CIT V. AIMIL LTD. (321 ITR 508) (DEL. HC) CIT V. ANZ INFORMATION TECHNOLOGY (0.) LTD. (318 HR 123) (KAR. HC) II. THUS, THE PAYMENT OF EMPLOYEES CONTRIBUTION TOWARDS ESI C OF RS. 1,97,802/ - THOUGH PAID AFTER THE STATUTORY DUE DATE BUT BEFORE THE DUE DATE OF FILING OF RETURN OF INCOME, THE SAID PAYMENT BE ALLOWED TO THE ASSESSEE. III. IN VIEW OF THE AFORESAID, THE ASSESSEE HUMBLY PRAYS THAT SUCH PROPOSED DISALLOWANCE SHOULD BE DELETED. 7.2 DISCUSSION AND DIRECTIONS OF DRP: THE A0 HAD DISALLOWED SUCH PAYMENT AS THE SAME HAD BEEN MADE BEYOND THE PERIOD ALLOWED UNDER THE ESIC RULES. HOWEVER, THE ASSESSEE HAS POINTED OUT THAT PAYMENTS MADE AFTER THE PERIOD STIPULATED UNDER THE E SIC ACT ARE PERMISSIBLE AS A DEDUCTION IF THE SAME HAD BEEN PAID ON OR BEFORE THE DUE DATE FOR FURNISHING OF THE RETURN OF INCOME, AS HAD BEEN DONE IN THE FACTS OF THIS CASE. THE ASSESSEE HAS SOUGHT RELIANCE IN THIS REGARD ON THE ABOVE DECISIONS. IN TERMS OF THE PROVISIONS OF SECTION 43B OF THE ACT AND THE DECISIONS RELIED UPON BY THE ASSESSEE COMPANY IN THIS BEHALF THE CONTENTION OF THE ASSESSEE IS FOUND TO BE CORRECT BY THE DRP AND THE AC IS HEREBY DIRECTED TO DELETE SUCH DISALLOWANCE. 15. ON APPRAISAL O F THE ABOVE MENTIONED FINDING, WE NOTICED THAT THE ASSESSEE DEPOSITED THE CONTRIBUTION TOWARDS EMPLOYEES ESIC EARLIER TO THE DUE DATE OF FILING THE RETURN OF INCOME, THEREFORE, NO DOUBT IN THE SAID CIRCUMSTANCES, THE SAME IS NOT LIABLE TO BE DISALLOWED. TH E DRP HAS ALSO RELIED UPON THE DECISION OF THE VARIOUS AUTHORITIES WHICH HAS BEEN MENTIONED IN THE ORDER. THE FACTS ARE NOT DISTINGUISHABLE AT THIS STAGE. THEREFORE, IN THE SAID CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE DRP HAS DECIDED THE MATTER OF CONTR OVERSY ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 16 JUDICIOUSLY AND CORRECTLY WHICH IS NOT LIABLE TO BE INTERFERE WITH AT THIS APPELLATE STAGE. ITA. NO. 587/ M/ 2017:- 16. THE ASSESSEE HAS FILED THE PRESENT APPEAL AGAINST THE ORDER DATED 09.09.2016 PASSED BY THE DISPUTE RESOLUTION PANEL - 2, MUMBAI [HEREI NAFTER REFERRED TO AS THE DRP] RELEVANT TO THE A.Y.2012 - 1 3 17 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - GROUND NO. I: VIOLATION OF PRINCIPLES OF NATURAL JUSTICE: ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE U. AO, FOLLOWING DIR ECTIONS OF THE 14. DISPUTE RESOLUTION PANEL ('DRP'), ERRED IN REJECTING THE OBJECTION RAISED BY THE APPELLANT IN RELATION TO THE PROPOSED TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF TREATING EQUITY INVESTMENTS IN OVERSEAS SUBSIDIARY AS A LOAN AND THEREBY PRO POSING ADDITION OF NOTIONAL INTEREST INCOME. 2. THE LD. AO, FOLLOWING THE DIRECTIONS OF THE LD. DRP, OUGHT TO HAVE HELD THAT: THE 14. DRP HAD REJECTED APPELLANTS OBJECTION IN THIS CONTEXT ONLY ON THE SOLE REASON THAT THE REVENUE HAS PREFERRED AN APPEAL A GAINST THE LD. DRP OBJECTIONS AND THE ISSUE BE KEPT ALIVE TO PROTECT INTEREST OF THE REVENUE. FURTHER, THE LD. DRP HAD FAILED TO ADHERE TO BINDING PRECEDENTS OF THE HON'BLE INCOME TAX APPELLATE TRIBUNAL'S (TRIBUNAL') IN APPELLANT'S OWN CASE FOR A.Y. 2009 - 10 AND 2010 - I1 WHICH WAS ON TILE SAME ISSUE. FAILURE TO FOLLOWING BINDING JUDICIAL PRECEDENT TANTAMOUNT TO VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. 3. THE APPELLANT PRAYS THE ENTIRE ASSESSMENT ORDER PASSED U/S. 143(3) R.W.S 144C OF ACT AS BAD - IN - LAW ON ACCOUNT OF GROSS VIOLATION OF PRINCIPLE OF NATURAL JUSTICE. GROUND NO. II: REFERENCE MADE TO THE LD. TRANSFER PRICING OFFICER ('LI). TPO') IS BAI) - IN - LAW: ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 17 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE IA. AO ERRED IN MAKING A REFERENCE T O THE IA. TPO U/S. 92CA(L) OF THE ACT INASMUCH NO OPPORTUNITY OF BEING HEARD WAS PROVIDED TO THE APPELLANT BEFORE MAKING SUCH REFERENCE. 2. THE LD. AO FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT FAILURE TO ADHERE TO PRINCIPLES OF NATURAL JUSTICE RENDE RS THE REFERENCE BAD IN LAW AND AS A CONSEQUENCE THE DRAFT ASSESSMENT ORDER PASSED U/S. 143(3) R.W.S. 144C OF THE ACT AS BAD - IN - LAW. THUS, THE APPELLANT PRAYS THAT MADE BY THE LD. AO TO THE LD. TPO U/S. 92CA(I) OF THE ACT TO BE DECLARED AS NULL VOID AND CO NSEQUENTLY THE DRAFT ASSESSMENT ORDER TO BE CONSIDERED AS BAD - IN - LAW. WITHOUT PREJUDICE TO GROUND NO. I & II: GROUND NO. III: ADDITION ON ACCOUNT OF TREATING EQUITY INVESTMENTS IN OVERSEAS SUBSIDAIRY AS A LOAN AND THEREBY MAKING AN ADDITION OF NOTIONAL IN TEREST INCOME AMOUNTING TO RS. 93,23,585/ - : ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN LAW, THE 14. AO, PURSUANT TO THE DIRECTIONS OF THE IA. DRP, ERRED IN TREATING EQUITY CAPITAL INVESTMENT MADE IN WHOLLY OWNED SUBSIDIARY IN THE PREVIOUS YEARS AS A N INTERNATIONAL TRANSACTION U/S 92B(1) AND RE - CHARACTERIZING THE SAME AS A LOAN AND CALCULATING NOTIONAL INTEREST ON SUCH LOAN AMOUNTING TO RS.93,23,585/ - . 2. THE LD. AO FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT: THE ASSESSEE HAD MADE INVESTMENT IN ITS SUBSIDIARY IN PREVIOUS YEARS IS ON CAPITAL ACCOUNT. NO FURTHER INFUSION WAS DONE IN THE YEAR UNDER CONSIDERATION. SUCH INVESTMENT CANNOT BE RE - CHARACTERIZED AS DEEMED LOAN AND THEREFORE, THE QUESTION OF CHARGING NOTIONAL INTEREST ON SUCH INVESTMEN T DO NOT ARISE. THE APPELLANT PRAYS THAT THE A FORESAID ADDITION MADE BY THE I D. AO. PURSUANT TO THE DIRECTIONS OF THE I HONBLE DRP, BE DELETED OR BE APPROPRIATELY REDUCED. WITHOUT PREJUDICE TO 3 ABOVE THE INTEREST RATE CHARGED SHOULD BE RESTRICTED TO LIBO R + 2%. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 18 WITHOUT PREJUDICE TO GROUND NO.! & II: GROUND NO. IV: ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF GUARANTEE COMMISSION AMOUNTING TO RS. 1.96 , 320/ - : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO, PURSUANT TO TH E DIRECTIONS OF LD. DRP, ERRE D IN MAKING AN ADJUSTMENT OF RS 1,96,320/ - ON ACCOUNT OF COMMISSION ON CORPORATE GUARANTEE PROVIDED ON BEHALF OF ITS ASSOCIATED ENTERPRISE ('AE'). 2. THE LD. AO FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT AS THERE IS NO IMP ACT ON THE PROFITS, INCOME, LOSSES OR ASSETS OF THE APPELLANT BY GIVING GUARANTEE ON BEHALF OF THE AE, THE SAID GUARANTEE TRANSACTION DOES NOT FALL WITHIN THE PURVIEW OF INTERNATIONAL TRANSACTION AS DEFINED UNDER SECTION 92B OF THE ACT. 3. WITHOUT PREJUDIC E TO ABOVE, EXPLANATION TO SECTION 9213 OF THE ACT IS PROSPECTIVE IN NATURE: 4. WITHOUT PREJUDICE TO 2 & 3, THE ID. AO BE DIRECTED TO RESTRICT THE ADDITION TO 0.5% OF THE GUARANTEE GIVEN. WITHOUT PREJUDICE TO GROUND NO. I & II: GROUND NO. V: DISALLOWANCE U/S 14A OF THE ACT: RS. 28.33,730/ - 1. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW THE ID. AO, PURSUANT TO THE DIRECTIONS OF THE LD. DRP. ERRED IN MAKING A DISALLOWANCE AMOUNTING TO RS.28,33,730/ - U/S 14A OF THE ACT R.W.R RULE 81) OF THE INCO ME TAX RULES, 1962 ( - THE RULES'). 2. THE APPELLANT PRAYS THAT THE LD. AO BE DIRECTED TO DELETE THE DISALLOWANCE U/S I4A OF THE ACT AMOUNTING TO RS.28,33,730/ - OR THE DISALLOWANCE SHALL BE APPROPRIATELY REDUCED. 3. WITHOUT PREJUDICE TO THE ABOVE, DISALLOWAN CE U/S. 14A OF THE ACT SHOULD BE RESTRICTED TO DIVIDEND INCOME EARNED DURING THE YEAR UNDER CONSIDERATION. 4. WITHOUT PREJUDICE TO ABOVE, WHERE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS EXCEEDING TAX FREE INVESTMENTS, IT IS PRESUMED THAT INVESTMENTS ARE MADE OUT OF SUCH INTEREST FREE FUNDS AND THEREFORE NO DISALLOWANCE OF INTEREST U/S. I4A IS CALLED FOR. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 19 5. WITHOUT PREJUDICE TO ABOVE, WHILE COMPUTING AVERAGE INVESTMENTS FOR THE PURPOSE OF RULE 8D OF THE RULES, INVESTMENTS WHICH ARE STRATEGIC IN NATURE ARE TO BE EXCLUDED. WITHOUT PREJUDICE TO GROUND NO. I & II: GROUND NO. VI: ADDITION OF DISALLOWANCE U/S 14A OF THE ACT OF RS. 29,22,272/ - TO THE COMPUTATION OF 1300K PROFIT U/S. 115.113 OF THE ACT: I. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. AO, PURSUANT TO THE DIRECTIONS OF THE ID. DRP, ERRED IN ADDING THE DISALLOWANCE MADE U/SI4A TO THE BOOK PROFITS ON THE ALLEGED GROUND THAT EXPENDITURE PERTAINS TO EARNING EXEMPT INCOME. 2. THE APPELLANT THEREFORE PRAYS THAT THE ADDITION OF RS.2 9,22,272/ - MADE TO THE BOOK PROFIT COMPUTED U/S 115JB BE DELETED. 18. THE FACTS OF THE PRESENT CASE ARE QUITE SIMILAR TO THE FACTS OF THE C ASE AS DISCUSSED IN ITA. NO.229 /M/201 6 , THEREFORE, THERE IS NO NEED TO REPEAT THE SAME. HOWEVER, THE FIGURE IS DIFFE RENT. ISSUE NO. 1: - 19. ISSUE NO. 1 IS IN CONNECTION WITH THE VIOLATION OF PRINCIPLES OF NATURAL JUSTICE WHICH IS NOT LIABLE TO BE DECIDED SEPARATELY BECAUSE IT WOULD BE DEALT WITH THE ISSUES RAISED IN THE OTHER GROUND, THEREFORE, THIS ISSUE IS NOT LIABLE TO BE ADJUDICATED IN THE SEPARATELY. ISSUE NO. 2: - 20. ISSUE NO. 2 HAS NOT BEEN PRESSED BY THE ASSESSEE , THEREFORE, THIS ISSUE IS DECIDED IN FAVOUR OF THE REVENUE AGAINST ASSESSEE BEING NOT PRESSED. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 20 ISSUE NO. 3: - 21. UNDER THIS ISSUE THE ASSESSEE HAS CHALL ENGED THE ADDITION ON ACCOUNT OF TREATING EQUITY INVESTMENT IN OVERSEAS SUBSIDIARY AS LOAN AND THEREBY MAKING AN ADDITION OF NOTIONAL INTEREST INCOME. AT THE VERY OUTSET, THE LD. REPRESENTATIVE OF THE ASSESSEE HAS ARGUED THAT THE ISSUE HAS DULY BEEN COVERE D BY THE DECISION OF HONBLE ITAT IN THE ASSESSEES OWN CASE FOR THE A.Y.2009.10 IN ITA. NO. 1484/M/2014, THEREFORE, IN THE SAID CIRCUMSTANCES, THE CLAIM OF THE ASSESSEE IS LIABLE TO BE ALLOWED. COPY OF ORDER DATED 22.08.2014 PASSED IN THE ASSESS EE S OWN CA SE BEARING ITA.NO.1484/M/2014 FOR THE A.Y.2009 - 10 IS ON THE FILE IN WHICH THE FOLLOWING FINDING HAS BEEN GIVEN AS UNDER .: - 8 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT MATERIAL ON RECORD. AS REGARDS THE ISSUE REGARDING THE PRIMARY LENDING RATE OR LIBOR RATE TO BE TAKEN AS ARMS LENGTH INTEREST IN RESPECT OF THE TRANSACTION 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 CONSIDERED BY THIS TRIBUNAL IN SERIES OF DECISI ONS AS RELIED UPON BY THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE. IN THE CASE OF AURIONPRO SOLUTIONS LTD. VS. ACIT (SUPRA), THE CO - ORDINATE BENCH OF TRIBUNAL IN WHICH ONE OF US JUDICIAL MEMBER IS A PARTY HAS CONSIDERED AND HELD IN PARA 8.7 TO 8.13 A S UNDER: - 8.7 UNDER THE TRANSFER PRICING REGULATIONS, AN INTERNATIONAL TRANSACTION HAS TO BE COMPARED WITH AN UNCONTROLLED TRANSACTIONS BETWEEN UNRELATED PARTIES WHICH MEANS THAT AN INTERNATIONAL TRANSACTION IS TESTED WITH THE TRANSACTION, IF THE ASSESSE E COULD HAVE ENTERED INTO A SIMILAR TRANSACTION WITH UNRELATED THIRD PARTY AND THEREBY THE INCOME OF THE ASSESSEE WOULD HAVE EARNED FROM A SIMILAR TRANSACTION WITH AN UNCONTROLLED PARTY. THUS, THE SAME INCOME IS EXPECTED OR DEEMED TO HAVE BEEN EARNED FROM THE ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 21 TRANSACTION WITH THE AES. THE UNDERLINING PRINCIPLE OF DETERMINING THE ALP IS BASED ON THE TRANSACTION BETWEEN THE UNRELATED PARTIES. THE INCOME OF THE ASSESSEE SHOULD NOT BE EFFECTED AS REDUCED AND THEREFORE, THE SAME IS COMPARED WITH THE INCOME OR EX PENDITURE AS THE CASE MAY BE EARNED OR INCURRED BY THE ASSESSEE, IF IT WOULD HAVE BEEN BETWEEN THE ASSESSEE AND THE UNRELATED PARTIES. THEREFORE, TESTED PARTY FOR THE PURPOSE OF DETERMINATION OF ALP IS THE ASSESSEE AND NOT THE AES. 8.8 IN THE CASE IN HAND , THE ASSESSEE HAS ADVANCED LOANS TO THE AES WITHOUT CHARGING ANY INTEREST; THEREFORE, THE TRANSACTION HAS 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 INCOM E, WHICH WOULD HAVE BEEN EARNED BY THE ASSESSEE IS EXPECTED TO HAVE BEEN EARNED FROM THE TRANSACTION OF ADVANCING LOANS TO THE AES. 8.9 THUS, ON PRINCIPLE, WE DO AGREE WITH THE DRP ON THE POINT OF THE TESTED PARTY FOR DETERMINING THE ARM'S LENGTH INTEREST RATE THAT WOULD HAVE BEEN EARNED BY THE ASSESSEE BY ADVANCING LOANS TO THE UNRELATED THIRD PARTY. 8.10 THE TRANSFER PRICING REGULATION ARE BASED ON THE DEEMING PRINCIPLE BY TAKING INTO ACCOUNT A HYPOTHECAL SITUATION THAT INSTEAD OF HAVING TRANSACTION WIT H AE HAD THE ASSESSEE TRANSACTED WITH UNRELATED PARTY WHAT WOULD HAVE BEEN THE FINANCIAL/COMMERCIAL RESULT OF THAT TRANSACTION. THUS, 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 ALWAYS THE TAXPAYER AND NOT THE AE. NONE OF THE FACTORS UNDER THE TRANSFER PRICING REGULATIONS 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 PRESCRIBED FOR INCLUSION OR EXCLUSION OF COMPARABLES TO DETERMINE THE ALP ARE ALSO BASED ON THE COMPARISON OF THE ASSESSEE WITH THE CHOSEN ENTITIES AND THE AE HAS NO RULE IN THE EXERCISE OF SELECTING THE COMPARABLES. THUS, IN OUR VIEW, THE INTEREST THAT WOULD HAVE BEEN EARNED BY THE ASSESSEE BY ADVANCING OR PLACING THE SAID AMOUNT WITH UNRELATED M/S PMP AUTO COMP ONENTS P. LTD, PARTIES WOULD ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 22 BE THE ARM'S LENGTH INTEREST IN RELATION TO THE INTEREST FREE LOANS/ADVANCES TO THE AE. THE SAFEST COMPARABLES, WHICH CAN BE TAKEN AS ARM'S LENGTH INTEREST RATE IN SUCH A CASE WOULD BE THE INTEREST ON FD WITH THE BANK FOR A TER M EQUIVALENT TO THE TERM FOR WHICH THE LOANS GIVEN TO THE AES. 8.12 IT IS PERTINENT TO NOTE THAT IN CASE OF FD WITH THE 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 UNR ELATED PARTY, THEN ALWAYS THERE IS SOME RISK OF CREDIT AND INTEREST INVOLVED IN SUCH TRANSACTION. THERE IS ONE MORE REASON 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 THE 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 DECIDED BY THE T RIBUNAL IN VARIOUS CASES AS RELIED UPON BY THE ASSESSEE (SUPRA); THEREFORE, TO MAINTAIN THE RULE OF CONSISTENCY, WE FOLLOW THE DECISION OF THE COORDINATE BENCHES OF THIS TRIBUNAL, AND ACCEPT LIBOR FOR BENCHMARKING INTEREST ON INTEREST FREE LOANS TO AES. SI NCE THE LIBOR IS A RATE APPLICABLE IN THE TRANSACTIONS BETWEEN 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 ANY SECURITY OR GUARANTEE AS IN THE CASE OF THE ASSESSEE HAS TO BE BENCHMARK BY TAKING THE ARM'S LENGTH INTEREST RATE AS LIBOR PLUS. THOU M/S PMP AUTO COMPONENTS P. LTD CAN BE MADE UNDER ARMS LENGTH PRICE. IT IS PERTINENT TO NOTE THAT WHEN THE TRANSACTION BETWEEEN THE ASSESSEE AND ITS AE FALLS U NDER THE AMBIT OF INTERNATIONAL TRANSACTION AS PER THE PROVISIONS OF SECTION 92B, THEN THE ARMS LENGTH PRICE HAS TO BE DETERMINED BY CONSIDERING THE COMPARABLE UNCONTROLLED PRICE AND, THEREFORE, THE REASON FOR NON CHARGING THE INTEREST ON LOAN GIVEN TO TH E AE HAS NO BEARING SO FAR AS THE DETERMINATION OF ARMS LENGTH PRICE UNDER THE TRANSFER PRICING PROVISIONS AND REGULATIONS IS CONCERNED. THE TRIBUNAL IN 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 IS THAT THE ADVANCE WAS GIVEN TO THE AES TOWARDS WORKING ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 23 CAPITAL AND THE ASSESSEE IS GETTING GOOD BUSINESS FROM THE AES; THEREF ORE, HAVING COMMERCIAL CONSIDERATION, NO ADJUSTMENT OF TRANSFER PRICE IS JUSTIFIED. WE DO NOT AGREE WITH THE CONTENTION OF THE LD AR BECAUSE, THOUGH IT MAY BE AN OBJECTIVE BEHIND THE TRANSFER PRICING REGULATION THAT THE PROFITS TAXABLE IN INDIA ARE NOT SHI FTED OUT OF INDIA BY MANIPULATING THE PRICE CHARGED BETWEEN THE AES; HOWEVER, AS PER THE TRANSFER PRICING REGULATIONS, THERE IS NO SUCH CONDITION OF EXISTENCE OR NON - EXISTENCE OF COMMERCIAL CONSIDERATION BETWEEN THE ASSESSEE AND THE AES. 8.1 FURTHER, IN T HE CASE IN HAND, THE ADVANCE DOES NOT REPRESENT THE CREDIT PERIOD EXTENDED TO THE AES IN RESPECT OF THE BUSINESS TRANSACTION; BUT IT IS A TRANSACTION OF ADVANCING LOANS TO THE AES. THE TRANSACTION OF ADVANCING LOANS TO THE AES FALLS UNDER THE AMBIT OF INTE RNATIONAL TRANSACTIONS AS PER 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, INCO ME, LOSSES OR ASSETS OF SUCH ENTERPRISE. 8.2 THUS, THE TRANSACTION OF ADVANCING LOANS TO THE AES UNDOUBTEDLY FALLS WITHIN THE MEANING OF INTERNATIONAL TRANSACTION AS PER SECTION 92B. EVEN OTHERWISE, THE TRIBUNAL IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD(SU PRA) AS RELIED UPON BY THE ASSESSEE HELD IN PARAS 16 & 17 AS UNDER: 16. INTEREST FREE LOAN EXTENDED TO THE ASSOCIATED CONCERNS AS AT ARM'S LENGTH LENDING OR BORROWING MONEY BETWEEN TWO ASSOCIATED ENTERPRISES COMES WITHIN THE AMBIT OF INTERNATIONAL TRANSACT ION 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 - DETERMINATION 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 PERSPECTIVE 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) HAD CONSIDERED IDENTICAL ARGUMENT AND HELD AS FOLLOWS: M/S PMP AUTO COMPONENTS P. LTD, 10. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE CONTENDED THAT INCOME MEANS REAL INCOME AND NOT FICTITIOUS INCOME AND SINCE THE ASSESSEE HAS NOT EARNED ANY INCOME, THE SAME CANNOT BE TAXED. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 24 RELIANCE IN THIS 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 REPORTED IN 82 ITR 835 (SC) FOR THE PROPOSITION THAT LIABILITY TO TAX CAN ARISE 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 RULINGS DELIVERED IN THE CASE O F VENEBURG GROUP B.V. V. CIT 727 OF 2006 FOR THE PROPOSITION THAT IN THE ABSENCE OF ANY INCOME, TRANSFER PRICING PROVISIONS BEING MACHINERY PROVISION SHALL NOT APPLY. IT HAS FURTHER BEEN ARGUED THAT TRANSFER PRICING DOCUMENT MAINTAINED BY THE ASSESSEE CLEA RLY MENTIONED THAT THESE LOANS/ADVANCES ARE IN THE NATURE OF QUASI - EQUITY AND HENCE THE TRANSACTION OF GRANTING INTEREST FREE LOAN IS AT ARM'S LENGTH. THE LOAN AGREEMENTS MENTIONED 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 IS TO BE CONSIDERED. AUTHORITIES HAVE NO RIGHT TO RE - WRITE THE TRANSACTION UNLESS IT IS HELD THAT IT SHAM OR BOGUS OR ENTERED INTO BY THE PARTIES TO AVOID AND EVADE TAXES.' FURTHER REFERENCE HAS BEEN MADE TO PARA 1.37 OF 1995 OF OECD GUIDELINES FOR THE PROPOSITION THAT IT IS LEGITIMATE TO CONSIDER THAT ECONOMIC SUBSTANCE OF THE TRANSACTIONS. THE TRANSA CTIONS HAS BEEN SAID TO BE COMMERCIALLY EXPEDIENT AND LOAN GRANTED TO SUPPORT THE SUBSIDIARY AND OBTAIN RETURNS 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 RBI. THE INCOME TAX ACT, 1961 AND OECD GUIDELINES SUPPORT THE CONTENTION THAT THE EFFECT OF GOVERNMENT CONTROL/ INTERVENTION SHOULD BE CONSIDERED WHILE DETERMINING THE ARM'S LENGTH PRICE. UNDER THE THIN CAPITALIZATION RULES, NO DEDUCTION WAS ALLOWABLE TO THE HUNGARY ENTITY FOR PAYMENT OF INTEREST THEREFORE, THERE EXISTED IMPOSSIBILITY OF PERFORMANCE WITH REGARD TO PAYMENT OF HUNGARY ENTITY. ECONOMIC CIRCUMSTANCES OF THE SUBSIDIARIES DID NOT WARRANT THE CHARGING OF INTEREST FROM SUBSIDIARIES. THE LD. COUNSE L FOR THE ASSESSEE FURTHER RELIED UPON THE 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 RELIED UPON THE ORDERS OF THE LD. CIT(A), HE CLAIMED THAT THE L D. 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 AND ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 25 PERUSED THE RECORDS. THE PRIMARY CONTENTION BEFORE US, AS SUBMITTED BY THE LD. COUNSEL OF THE ASSESSEE IS THA T IT WAS COMMERCIALLY EXPEDIENT FOR ASSESSEE TO ADVANCE INTEREST FREE LOANS TO THE AES AND THAT SINCE NO INTEREST HAS ACTUALLY BEEN CHARGED, THERE IS NO REAL INCOME EXIGIBLE TO TAX. AS OBSERVED BY THE LD. CIT(A) THE AGREEMENTS SHOW THAT THESE ARE LOAN AMOU NT GIVEN BY THE ASSESSEE TO ASSOCIATED ENTERPRISES (AES). THIS IN FACT IS AN ADMITTED POSITION. THERE IS NO CASE THAT ANY SPECIAL FEATURE IN THE CONTRACT MAKE THE TRANSACTION AS CAPITAL IN NATURE. IT IS ALSO AN ADMITTED PROPOSITION THAT THE ASSESSEE HAS EX TENDED THE LOAN TO ITS AE'S WHO ARE 100% SUBSIDIARIES. THE ASSESSEE'S CASE IS THAT IT HAS ACTUALLY NOT EARNED ANY INTEREST AND IT WAS COMMERCIALLY EXPEDIENT TO EXTEND THESE INTEREST FREE LOANS. NOW IT IS NOTED THAT THIS IS NOT A CASE OF ORDINARY BUSINESS T RANSACTION. THE QUESTION M/S PMP AUTO COMPONENTS P. LTD, 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 INTERNATIONAL TRANSACTIONS, WHERE TWO ENTERPRISES WHICH ARE SUBJECT TO THE SAME CENTRE OR DIRECTION OR CONTROL (ASSOCIATED ENTERPRISE) MAINTAIN COMMERCIALLY OR FINANCIALLY RELATION WITH OTHER. IN SUCH A SITUATION, THE POSSIBILITY EXIST THAT BY WAY O F INTERVENTION FROM THE CENTRE OR OTHERWISE, BUSINESS CONDITIONS MUST BE ACCEPTED BY THE ACTING UNITS WHICH DIFFERS FROM THOSE WHICH IN THE SAME CIRCUMSTANCES WOULD HAVE AGREED UPON BETWEEN UNRELATED PARTIES. THE AIM IS TO EXAMINE WHETHER THERE IS ANOMALY IN THE TRANSACTION WHICH ARISE OUT OF SPECIAL RELATIONSHIP BETWEEN THE CREDITOR AND THE DEBTOR. HENCE THE CONTENTION OF HAVING ACTUALLY NOT EARNED ANY INCOME CANNOT COME TO THE RESCUE OF THE ASSESSEE IN THIS SCENARIO. THE CASE LAWS FROM THE APEX COURT CITE D BY THE LD. COUNSEL OF THE ASSESSEE ARE IN THE CONTEXT OF THE PROPOSITION THAT ONLY THE REAL INCOME 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 DEC ISIONS ARE NOT IN THE CONTEXT OF CHAPTER - X OF THE IT ACT WHICH RELATES TO SPECIAL PROVISION 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 ANSWER TO THE ARGUMENT OF THE ASSESSEE BEFORE US THAT THE IMPUGNED ADDITION ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 26 COULD NOT HAVE BEEN MADE BY THE AO AT ALL. RESP ECTFULLY FOLLOWING THE SAID DECISION, WE HOLD THAT THE AO WAS WELL WITHIN HIS POWERS IN MAKING THE IMPUGNED ADDITION. 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 ALP AS PER THE TRANSFER PRICING REGULATIONS. 10. THEREFORE, IT IS CLEAR THAT THE TRANSACT ION OF LOAN GIVEN TO THE AE IS AN INTERNATIONAL TRANSACTION AND SUBJECTED TO ALP AS PER THE TRANSFER PRICING PROVISIONS OF INCOME TAX ACT. THE ASSESSEE HAS RAISED AN ALTERNATIVE PLEA THAT EVEN IN CASE THE TRANSFER PRICING PROVISIONS ARE APPLICABLE IN RESPE CT 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 APPLICABLE I N THE CASE OF INTEREST ARISING IN THE CONTRACTING STATE AND PAID TO THE RESIDENT OF ANOTHER CONTRACTING STATE. FOR THE SAKE OF READY REFERENCE, WE QUOTE ARTICLE 11 OF INDO - MAURITIUS DTAA AS UNDER: - M/S PMP AUTO COMPONENTS P. LTD, ARTICLE 11 INTEREST 1. IN TEREST 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 ST ATE IN WHICH IT ARISES AND ACCORDING TO THE LAWS OF THAT STATE. 3. INTEREST ARISING IN A CONTRACTING STATE SHALL BE EXEMPT FROM TAX IN THAT STATE PROVIDED IT IS DERIVED AND BENEFICIALLY OWNED BY: A. THE GOVERNMENT OR A LOCAL AUTHORITY OF THE OTHER CONTRACT ING STATE; B. ANY AGENCY OR ENTITY CREATED OR ORGANISED BY THE GOVERNMENT OF THE OTHER CONTRACTING STATE; OR C. ANY BANK CARRYING ON A BONAFIDE BANKING BUSINESS WHICH IS A RESIDENT OF THE OTHER CONTRACTING STATE. 4. INTEREST ARISING IN A CONTRACTING STATE SHALL BE EXEMPT FROM TAX IN THAT CONTRACTING STATE TO THE EXTENT APPROVED BY THE GOVERNMENT 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 CONTRACTING STAT E 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 ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 27 DEBTOR'S PROFITS, AND, IN PARTICULAR, INCOME FROM GOVERNMENT SECURITIES AND INCOME FROM BONDS OR DEBENTURES, INCLUDING PREMIUMS AND PRIZES ATTACHING TO SUCH SECURITIES, BONDS OR DEBENTURES. PENALTY CHARGES FOR LATE PAYMENT SHALL NOT HE REGARDED AS INTEREST FOR THE PURPOSE OF THIS ARTICLE. 6. THE PROVISIONS OF PARAGRAPHS 1, 2 3, AND 4 SHALL NOT 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, THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, OR PERFORMS IN THAT OTHER STATE INDEPENDENT PERSONAL SERVICES FROM A FIXED BASE SITUATED THEREIN, AND THE DEBT - CLAIM IN R ESPECT 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 S TATE 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 INTEREST, WHETHER BE IS A RESIDENT OF A CONTRACTING STATE OR NOT, HAS IN A CONTRACTING STAT E A PERMANENT ESTABLISHMENT IN CONNECTION WITH WHICH THE INDEBTEDNESS ON WHICH THE INTEREST IS PAID WAS INCURRED, AND SUCH INTEREST IS HOME BY THAT PERMANENT ESTABLISHMENT, THEN SUCH INTEREST SHALL BE DEEMED TO ARISE IN THE CONTRACTING STATE IN WHICH THE P ERMANENT ESTABLISHMENT IS SITUATED. M/S PMP AUTO COMPONENTS P. LTD, 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 - CLA IM FOR WHICH IT IS PAID, EXCEEDS THE AMOUNT WHICH WOULD HAVE BEEN AGREED UPON BY THE PAYER AND THE RECIPIENT IN THE ABSENCE OF SUCH RELATIONSHIP, THE PROVISIONS OF THIS ARTICLE SHALL 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 STATE, DUE REGARD BEING HAD TO THE OTHER PROVISIONS OF THIS CONVENTION. 11. IT IS CONTEMPLATED UNDER ARTICLE 11 OF DTAA THAT THE PAYMENT IS A CONDITION FOR TAXING THE INTEREST ON LY IN THE CIRCUMSTANCES WHEN THE INTEREST IS ARISING IN THE CONTRACTING STATE AND ACCRUED TO THE RESIDENT OF ANOTHER CONTRACTING STATE AND, THEREFORE, THE SAME IS SUBJECTED TO TAX IN THE OTHER STATE WHEN IT IS PAID. IN OTHER WORDS, THE PROVISIONS OF ARTICL E 11 DEFERS THE TAXABILITY OF THE INTEREST ARISING BUT NOT RECEIVED AND, THEREFORE, IT IS TAXED ONLY WHEN IT IS RECEIVED. ARTICLE 11 DOES NOT EXEMPT THE INTEREST ARISING IN A ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 28 CONTRACTING STATE AND ACCRUED TO A RESIDENT OF OTHER CONTRACTING STATE BUT IT MAK ES THE SAME TAXABLE ON THE EVENT OF PAYMENT. IN THE CASE IN HAND, WHEN THE ASSESSEE HAS NOT EVEN ADMITTED THE INTEREST ARISES 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. 22. IN VIEW OF THE DECISION OF THE HONBLE ITAT IN THE ASSESSEES OWN CASE IN ITA. NO. 1484/M/2014 FOR THE A.Y.2009 - 10 (SUPRA) , W E ARE OF THE VIEW THAT THE CASE OF THE ASSESSEE DULY BEEN COVERED. THE RELEVANT FINDING HAS BEEN GIVEN BELOW.;_ 17 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY DELHI BENCHES OF THIS TRIBUNAL IN THE CASE OF BHARTI AI RTEL 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 NOT DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAYMENTS FOR SHAR E 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, TREATED THESE TRANSACTIONS PARTLY AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN THE DATE S 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 TREATED 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 BUSINESS PROFITS OF THE ASSESSEE, BUT THE CORE ISSUE BEFORE US IS WHETHER SUCH A DEEMING FICTION I S ENVISAGED UNDER THE SCHEME OF THE TRANSFER PRICING LEGISLATION OR ON THE FACTS OF THIS CASE. WE DONOT FIND SO. WE DO NOT FIND ANY PROVISION IN LAW ENABLING 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 THE 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 AND PERMISSIBLE TIME PERIOD FOR ALLOTMENT OF SHARES, AND ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 29 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 CONTRIBUTION COULD HAVE, AT BEST, BEEN TREATED AS AN INTEREST FREE LOA N FOR SUCH A PERIOD OF 'INORDINATE DELAY' AND NOT THE ENTIRE PERIOD BETWEEN THE DATE OF MAKING THE PAYMENT AND DATE 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 T HE CUP METHOD, AS HAS BEEN CLAIMED TO HAVE BEEN DONE IN THIS CASE, IT WAS TO BE DONE ON THE BASIS 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 N OT ALLOTTED THE SHARES. THAT ASPECT OF THE MATTER IS DETERMINED BY THE RELEVANT STATUTE. THIS SITUATION IS NOT IN PARI MATERIA WITH AN INTEREST FREE LOAN ON COMMERCIAL BASIS BETWEEN THE SHARE APPLICANT AND THE COMPANY TO WHICH CAPITAL CONTRIBUTION IS BEING MADE. ON THESE FACTS, IT WAS UNREASONABLE AND INAPPROPRIATE TO TREAT THE TRANSACTION 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 PAID ANY INT EREST FOR THE PERIOD BETWEEN MAKING THE SHARE APPLICATION PAYMENT AND ALLOTMENT OF SHARES, THE VERY FOUNDATION OF IMPUGNED ALP ADJUSTMENT IS DEVOID OF LEGALLY SUSTAINABLE MERITS. 48. LET US ALSO DEAL WITH TWO JUDICIAL PRECEDENTS WHICH HAVE BEEN HEAVILY REL IED UPON BY THE TPO, AS ALSO BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, 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, F OR THE PERIOD TILL THE SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITAL CONTRIBUTION, AFTER THE SUBSCRIBED SHARES WERE ISSUED BY THE SUBSIDIARY IN WHICH CAPITAL CONTRIBUTION WAS MADE. IN THE CASE OF PEROT SYSTEMS TSI INDIA LTD VS. DCIT (SUPRA), A COORD INATE BENCH OF THIS TRIBUNAL HAD AN OCCASION TO DEAL WITH THE ARM'S LENGTH PRICE ADJUSTMENT WITH REGARD TO INTEREST FREE ADVANCES TO THE SUBSIDIARIES. THAT WAS A CASE IN WHICH THE ASSESSEE, AN INDIAN COMPANY, ADVANCED INTEREST - FREE LOANS TO ITS 100% FOREIG N SUBSIDIARIES. THE SUBSIDIARIES USED THOSE FUNDS TO MAKE INVESTMENTS IN OTHER STEP - DOWN SUBSIDIARIES. ON THE QUESTION WHETHER NOTIONAL INTEREST ON THE SAID LOANS COULD BE ASSESSED IN THE HANDS OF THE ASSESSEE UNDER THE TRANSFER PRICING PROVISIONS OF CHAP TER X, THE ASSESSEE ARGUED THAT THE SAID 'LOANS' WERE IN FACT 'QUASI - EQUITY' AND MADE OUT OF COMMERCIAL EXPEDIENCY. IT WAS ALSO ARGUED THAT NOTIONAL INCOME COULD NOT BE ASSESSED TO TAX. HOWEVER, BOTH OF THESE ARGUMENTS WERE REJECTED BY A COORDINATE BENCH OF THIS TRIBUNAL. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 30 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 THAT THERE IS ALSO NO REASON WHY THE LOANS WERE NOT CONTRIBUTED AS CAPITA L 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 CONTRIBUTED AS CAPITAL ORIGINALLY, IF IT WAS MEANT TO BE A CAPITAL CONTRIBUTION'. T HE ARGUMENT OF 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 A DJUSTMENTS CAN BE MADE IN RESPECT OF PAYMENTS TOWARDS 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 TRANSACTIO N WAS ADMITTEDLY IN THE NATURE OF INTEREST FREE LOAN BETWEEN AES AND THE COMMERCIAL EXPEDIENCY IN ADVANCING INTEREST 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 COMMERCIAL EXPEDIENCY. HOWEVER, AS WE HAVE SEEN IN THE EARLIER DISCUSSIONS, SUCH COMMERCIAL EXPEDIENCY OF GRANTING INTEREST FREE LOANS IS WHOLLY IRRELEVANT BECAUSE IT IS THE IMPACT OF THIS INTERRELATIONSHIP, ON ACCOUNT OF MANAGEMENT, CAPITAL AND CONTROL, WHICH IS SOUGHT TO BE NEUTRALIZED BY ARM'S LENGTH PRICE ADJUSTMENTS. THIS WAS ALSO NOT A CASE IN WHICH A CAPITAL CONTRIBUTION WAS DEEMED TO BE PARTLY AN INTEREST 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 AUTHORITIES TO RE - CHARACTERIZE THE TRANSACTION UNLESS IT IS FOUND TO BE A SHAM OR BOGUS TRANSACTION. WHILE THERE ARE NO SPECIFIC POWERS VESTED IN THE TPO TO RE - CHARACTERIZE THE TRANSACTION, EVEN UNDER THE JUDGE MADE LAW, SUCH RE - CHARACTERIZATION CAN BE DONE BY THE REVENUE AUTHORITIES W HEN 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 SHARES CAPITAL HAS INDEED BEEN ALLOTTED TO T HE ASSESSEE. THE TRANSACTION IS THUS ACCEPTED TO BE GENUINE IN EFFECT. 50. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW WERE IN ERROR IN TREATING THE PAYMENT OF SHARE A PPLICATION MONEY, AS ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 31 PARTLY IN THE 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 ACCORDINGLY. 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 BHARATI AIRTEL LTD WAS FOLLOWED. FURTHER THE RE - CATEGORIZATION OF SHARE APPLICATION MONEY AS INTEREST FREE LOAN IS NOT M/S PMP AUTO COM PONENTS P. LTD, 18 | P A G E PERMITTED UNDER THE PROVISIONS OF THE ACT AS HELD BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) VS. BESIX KIER DHABHOL SA (210 TAXMAN 151). IN THE CASE IN HAND, THE ASSE SSEE IS A 100% HOLDING OF THE SUBSIDIARY AND, THEREFORE, THE DECISION MAKING 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 ASSESSEE ITSELF HAD TO TAKE THE DECISION, CANNOT BE HELD AS REASONABLE OR BEYOND THE CONTROL OF THE ASSESSEE . THE TPO HAS RECORDED THAT FACT THAT THE ASSESSEE HAS FAILED TO BRING ON RECORD ANY EVIDENCE REGARDING THE TERMS AND CONDITIONS OF SUCH SHARE APPLICATION MONEY AN D 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 ABNORMAL DEL A Y IN ALLOTMENT OF SHARES, IT WAS TO BE DONE ON THE BASIS AS TO WHAT WOULD HAVE BEEN INTEREST PAYABLE TO AN UNRELATED SHARE APPLICANT. EVEN OTHERWISE WHEN THE ASSESSEE HAS NOT PRODUCED THE TERMS AND CONDITIONS OF APPLICATION MONEY, THEREFORE, WE REMIT THIS ISSUE TO THE RECORD OF ASSESSING OFFICE R/TPO TO RECONSIDER THE SAME TO DETERMINE 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 HAVE BEEN WITH AN UNRELATED PARTY. 23. BY HONORING THE DECI SION OF THE HONBLE ITAT IN THE ASSES SEES OWN CASE(SUPRA), WE REMIT THE ISSUE TO THE AO/TPO TO DETERMINE THE ISSUE ON THE SIMILAR GUIDELINE AS DISCUSSED ABOVE. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 32 ISSUE NO. 4: - 2 4 . ISSUE N O. 4 IS IN CONNECTION WITH THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF CORPORATE GUARANTEE COMMISSION. THIS ISSUE HAS BEEN ALREADY DISCUSSED AND DECIDED WHILE DECIDING THE ISSUE NO . 1 IN ITA. NO.229/M/2016 ABOVE . T HEREFORE, THE FINDING GIVEN IN THE SAID APPEAL SPECIFICALLY ON THE ISSUE RAISED THEREIN IS QUITE APPLICABLE AS MUTATIS MUTANDIS. THEREFORE, WE RESTRICT THE ADDITION TO THE EXTENT OF 0.5% OF THE AMOUNT OF GUARANTEE. ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ISSUE NO. 5: - 25 . ISSUE NO.5 IS IN CONNECTION WITH THE DISALLOWANCE OF U/S 14A OF THE ACT. THE ASSESSEE HAS EARNED THE DIVIDEND INCOME OF RS.1,11,636/ - AND SUO - MOTU DISALLOWED THE SUM OF R S.88,542/ - . AT THE VERY OUTSET, THE ASSESSEE AGREED TO RESTRICT THE DISALLOWANCE TO THE EXTENT OF DIVIDEND INCOME, THEREFORE, IN THE SAID CIRCUMSTANCES AND BY RELYING UPON THE LAW SETTLED IN PCIT VS. STATE BANK OF PATIALA (2018) 99 TAXMANN.COM 285 W E RESTRICT THE ADDITION TO THE EXTENT OF DIVIDEND INCOME TO T HE TUNE OF RS. 1,11,636/ - . ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ISSUE NO. 6: - 26 . UNDER THIS ISSUE THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE U/S 14A R.W. RULE 8D OF THE ACT AND COMPUTATION OF BOOK PROFIT U/S ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 33 1 15JB OF THE ACT. THIS MATTER HAS BEEN DISCUSSED AND DECIDED BY JURISDICTIONAL HIGH COURT IN ITA. NO. 337 OF 2013 DATED 10.02.2015 IN THE CASE OF CIT VS. M/S. BENGAL FINANCE & INVESTMENT PVT. LTD. THE RELEVANT FINDING HAS BEEN GIVEN IN PARA NO. 2,3 & 4 WHICH IS HEREBY REPRODUCED AS UNDER.: - 2. THE REVENUE PRESS THE FOLLOWING QUESTION OF LAW FOR OUR CONSIDERATION: (A) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE ITAT IS JUSTIFIED IN RESTORING THE ISSUE OF DISALLOWANCE U/S 14A TO THE FILE OF THE ASSESSING TO DECIDE AFRESH IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT N THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (328 ITR 81) WITHOUT APPRECIATING THE FACT THAT THE ISSUE OF DISALLOWANCE U/S 14A READ WITH RULE 8D, HAS NOT REA CHED ITS FINALITY AS THE DEPARTMENT HAS AGITATED THE MATTER BEFORE THE HONBLE SUPREME COURT, WHICH HAS AGITATED THE MATTER BEFORE THE HONBLE SUPREME COURT WHICH IS PENDING FOR INAL DECISION.? (B) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE ITAT IS JUSTIFIED IN DELETING THE ADDITION OF RS.78,84,387/UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB RELYING UPON THE DECISION IN THE CASE OF GOETZE (INDIA) LTD. V/S. CIT (2009) 32 SOT 101 (DEL.), WHICH HAS BEEN FOLLOWED BY ITAT, MUMBAI IN THE CASES REFERRED TO IN PARA 5 OF THE IMPUGNED ORDER WITHOUT APPRECIATING THAT THE ABOVE DECISION IN THE CASE OF GOETZE (INDIA) LTD. WAS RENDERED BY THE ITAT, DELHI BENCH ON COMPLETELY DISTINGUISHABLE SET OF FACTS, PECULIAR TO THE SAID CASE? 3. SO FAR AS QUESTION (A) IS CONCERNED, WE FIND THAT THE TRIBUNAL HAS MERELY FOLLOWED THE DECISION OF THIS COURT IN GODREJ & BOYCE MANUFACTURING CO. LTD./V/S. DCIT 328 ITR 81, DIRECTING THE AO TO WORK OUT THE DISALLOWANCE ON A REASONABLE BASIS AND NOT UNDER RULE 8D UNDER THE INCOME TAX RULES FOR THE A.Y. 2007 - 08. THE TRIBUNAL HAS MERELY FOLLOWED THE DECISION OF THE JURISDICTIONAL HIGH COURT AND NO FAULT CAN BE FOUND WITH THE SAME. ACCORDINGLY, ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 34 NO SUBSTANTIAL QUESTION OF LAW ARISES IN QUESTION (A). HENCE DISMI SSED. 4. SO FAR AS QUESTION (B) IS CONCERNED, THE IMPUGNED ORDER OF THE TRIBUNAL FOLLOWED ITS DECISION IN M/S. ESSAR TELEHOLDINGS LTD. V/S. DCIT IN ITA NO. 3850/MUM/2010 TO HELD THAT AN AMOUNT DISALLOWED UNDER SECTION 14A OF THE ACT CANNOT BE ADDED TO ARRI VE AT BOOK PROFIT FOR PURPOSES OF SECTION 115JB OF THE ACT. THE REVENUES APPEAL AGAINST THE ORDER OF THE TRIBUNAL IN M/S. ESSAR TELEHOLDINGS (SUPRA) WAS DISMISSED BY THIS COURT IN INCOME TAX APPEAL NO.438 OF 2012 RENDERED ON 7TH AUGUST, 2014. IN VIEW OF T HE ABOVE, QUESTION (B) DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. 27 . MOREOVER, THE MATTER OF CONTROVERSY HAS ALREADY BEEN DISCUSSED AND DECIDED IN THE CASE OF ACIT VS. VIREET INVESTMENT PVT. LTD. (DELHI TRIBUNAL). IN VIEW OF THE ABOVE MENTIONED DECI SION, WE ARE OF THE VIEW THAT THE PROVISIONS OF U/S 14A R.W. RULE 8D OF THE ACT IS NOT APPLICABLE UPON THE BOOKS PROFIT U/S 115JB OF THE ACT. ACCORDINGLY, WE DELETE THE SAID ADDITION RAISED AGAINST THE ASSESSMENT U/S 115JB OF THE ACT. ACCORDINGLY, WE DECID E THIS ISSUE IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. 2 8 . IN THE RESULT, APPEAL FILED BY THE REVENUE IS HEREBY DISMISSED AND THE APPEAL FILED BY THE ASSESSEE IS HEREBY ORDERED TO BE ALLOWED . ORDER PRONOUNCE D IN THE OPEN COURT ON 24 /05 /2019 . SD/ - SD / - ( SHAMIM YAHYA ) (AMARJIT SINGH) / ACCOUNTANT MEMBER /JUDICIAL MEMBER MUMBA I DATED : 24 /05 /2019 VIJAY ITA. NO. 587 /MUM/201 7 , 229 /MUM/201 6 & 209 /MUM/201 6 A.YS. 2011 - 12 & 2012 - 13 35 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDE NT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, //TRUE COPY// (SR. PRIVATE SECRETARY) , / ITAT, MUMBAI