M/s. DLF Hotel Holdings Limited, New Delhi V. DCIT, New Delhi

ITA 6336/DEL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7104 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 21-04-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 21-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A M GOVIL
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Rule of consistency; Earning of tax free income; Wholly owned subsidiary; Corroborative evidences; Notional interest; Commercial expediency
• Section: 92C; 143(3); 92B; 14A; 133(6); 92

Judgement Text

PAGE 1 OF 46 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH.L.P.SAHU, ACCOUNTANT MEMBER I.T.A .NO.-6336/DE L/2012 (ASSESSMENT YEAR-2008- 09) DLF HOTEL HOLDINGS LTD., 9 TH FLOOR, DLF CENTRE, SANSAD MARG, NEW DELHI-110001. PAN-AACCD5033D (APPELLANT) VS DCIT, CIRCLE-10(1), NEW DELHI. (RESPONDENT) APPELLANT BY SHRI R .S.SINGHVI, CA RESPONDENT BY SHRI A.M. GOVIL, CIT(DR) DATE OF HEARING 2 1.04.2016 DATE OF PRONOUNCEMENT 30 .06 .2016 O R D E R PER SMT. DIVA SINGH, JUDICIAL MEMBER THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE. THE CORRECTNESS OF THE ORDER DATED NIL OF THE AO U/S 143(3) R.W.S 144C PAS SED IN PURSUANCE TO THE DIRECTIONS DATED 25/09/2012 OF THE DISPUTE RESOLUTI ON PANEL-1 (HEREINAFTER REFERRED TO AS DRP) IN 2008-09 ASSESSMENT YEAR HA S BEEN ASSAILED ON THE FOLLOWING GROUNDS:- 1. THAT ON THE FACT AND THE CIRCUMSTANCES OF THE C ASE THE LD. TRANSFER PRICING OFFICER AND DISPUTE RESOLUTION PAN EL AND CONSEQUENTIALLY LD. ASSESSING OFFICER HAS ERRED IN HOLDING THE NATURE OF INTEREST FREE SHORT TERM ADVANCE GIVEN TO THE SUBSIDIARY COMPANY AS LOAN INSTEAD OF QUASI EQUITY CONSIDERED BY THE ASSESSEE. 2. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE C ASE, THE LD. TRANSFER PRICING OFFICER AND DISPUTE RESOLUTION PAN EL AND CONSEQUENTIALLY LD. ASSESSING OFFICER IN HOLDING TH AT THE ARMS'S I.T.A .NO.-6336/DEL/2012 PAGE 2 OF 46 LENGTH RATE OF INTEREST CHARGEABLE ON THE INTEREST FREE ADVANCE GIVEN TO THE SUBSIDIARY COMPANY IS @ 17.26% AS COMP UTED BY THE TRANSFER PRICING OFFICER, AS AGAINST NIL CHARGED BY THE ASSESSEE. 3. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE, THE LD. TRANSFER PRICING OFFICER AND DISPUTE RESOLUTION PAN EL AND CONSEQUENTIALLY LD. ASSESSING OFFICER HAS ERRED IN HOLDING THAT ONLY 20% OF THE ADVANCE IS CONVERTED INTO EQUITY AN D HENCE CHARGING INTEREST ON THE BALANCE AMOUNT. 4. WITHOUT PREJUDICE TO THE AFOREMENTIONED GROUND, THE ASSESSING OFFICER HAS ERRED IN IGNORING THE ALTERNATIVE PLEA OF THE ASSESSEE THAT THE RATE OF INTEREST OUGHT TO HAVE BEEN AT THE LIBOR RATE PREVAILING AT THE TIME OF ADVANCING THE MONEY. 5. THAT THE LD. TRANSFER PRICING OFFICER AND DISPUT E RESOLUTION PANEL AND CONSEQUENTIALLY LD ASSESSING OFFICER GROSSLY ER RED IN LAW IN NOT APPRECIATING THAT THE INTEREST RATES DETERMINED BY CRISIL ARE DETERMINED FOR A DIFFERENT PURPOSE AND CANNOT BE TA KEN AS COMPARABLE TO INTERNATIONAL TRANSACTIONS OF QUASI E QUITY TO A 100% SUBSIDIARY. 6. THAT THE DETERMINATION OF ARM'S LENGTH PRIC E HAS NOT BEEN DONE AS PER PROVISIONS OF SECTION 92C READ WITH RULE 10C OF THE INCOME TAX ACT/RULE AND THE LAWS WANTS THE 'CLASS OF AE' TO BE ONE OF THE IMPORTANT CRITERIA TO DETERMINE THE SAME. 7. THAT THE LD. TPO AND DRP AND CONSEQUENTIAL LY LD ASSESSING OFFICER FAILED TO APPRECIATE THAT THE NATURE OF TRA NSACTION CANNOT RECLASSIFIED FROM QUASI-CAPITAL TO LOANS AS PER LAW . 8. THAT ON THE FACTS AND THE CIRCUMSTANCES OF TH E CASE, THE LD. ASSESSING OFFICER HAS ERRED IN MAKING A DISALLOWANC E U/S 14A OF THE INCOME TAX ACT, 1961 READ WITH RULE 8D OF THE I NCOME TAX RULES, 1962 AT RS.2,56,62,215. 9. THAT THE ORDER PASSED BY THE AO IS BAD IN LAW. 10: THAT ON THE FACTS AND THE CIRCUMSTANCES OF TH E CASE, THE LD. ASSESSING OFFICER HAS ERRED IN INITIATING THE PENAL TY PROCEEDINGS U/S 271(1)(C) OF THE INCOME TAX ACT 11. THAT THE APPELLANT CRAVES LEAVE TO ADD TO, ALT ER, AMEND OR VARY ANY OF THE GROUND(S) OF APPEAL AT OR BEFORE THE TIME OF HEARING. 2. SUMMING UP THE GROUNDS RAISED IN THE PRESENT APPEA L THE LD. AR INVITING ATTENTION TO THE GROUNDS RAISED SUBMITTED THAT THE ASSESSEE IS BEFORE THE ITAT PRIMARILY ON TWO ISSUES. 2.1. THE FIRST ISSUE IT WAS SUBMITTED IS ADDRESSED VIDE GROUND NOS.-1 AND 3. IN THE EVENTUALITY THE ASSESSEE DOES NOT SUCCEED ON TH E MAIN ISSUE, THE ASSESSEE HAS I.T.A .NO.-6336/DEL/2012 PAGE 3 OF 46 RAISED GROUND NO.2 WHICH IS WITHOUT PREJUDICE TO TH E MAIN ISSUE IN GROUND NOS. 1 & 3. 2.2. THE NEXT ISSUE AGITATED BY THE ASSESSEE IT WAS SUB MITTED IS ADDRESSED IN GROUND NO. 8. 2.3. THE REMAINING GROUND NOS. 4 TO 7 IT WAS SUBMITTED MAY BE TREATED AS ARGUMENTS IN SUPPORT OF THE ISSUES ADDRESSED IN GRO UND NOS. 1 TO 3. GROUND NO. 9, IT WAS SUBMITTED IS GENERAL IN NATURE; GROUND NO . 10 IS PREMATURE; AND GROUND NO. 11 IS A RESIDUARY GROUND, ACCORDINGLY IT WAS SU BMITTED THAT THESE GROUNDS WOULD NOT REQUIRE ANY ADJUDICATION. 3. INVITING ATTENTION TO THE FINAL ASSESSMENT ORDER, IT WAS SUBMITTED THAT THE ASSESSEE ON 30.09.2008 IN THE YEAR UNDER CONSIDERAT ION RETURNED AN INCOME OF RS.2,15,39,383/-. REFERRING TO PARA 4.2 OF THE SAI D ORDER IT WAS SUBMITTED THAT CERTAIN ADMITTED FACTS MAY BE NOTICED FIRST SO AS T O APPRECIATE THE BACKGROUND OF THE CASE. REFERRING TO THE SAID PARA OF THE FINAL ASSESSMENT ORDER, IT WAS SUBMITTED THAT IT IS AN ADMITTED FACT THAT THE PARE NT COMPANY WAS SET UP IN 2006 WITH THE AIM TO TARGET THE PREMIUM SEGMENT HOTELS, RESORTS, SERVICED APARTMENTS, AND FAMILY RECREATIONAL CLUBS. IT WAS SUBMITTED T HAT THE VISION OF THE PARENT COMPANY WAS TO BE INDIAS LEADING HOSPITALITY DEVEL OPMENT AND ASSET OWNERSHIP COMPANY. IT ALSO AIMED TO BECOME ONE AMONGST THE L ARGEST SUCH COMPANIES GLOBALLY. FOR THE SAID PURPOSES IT WAS SUBMITTED T HAT THE ASSESSEE HAD ESTABLISHED A HOSPITALITY ARM. ELABORATING THE STR ATEGY USED FOR ATTAINING ITS AIMS IT WAS SUBMITTED THAT THE COMPANY NOT ONLY DEVELOPS AND ACQUIRES BUT ALSO FINANCES AND ACTIVELY MANAGES A RAPIDLY GROWING HOS PITALITY PORTFOLIO. REFERRING TO I.T.A .NO.-6336/DEL/2012 PAGE 4 OF 46 THE RECORD AND THE ACCEPTED POSITION IT WAS SUBMITT ED THAT APPROXIMATELY 6,000 ROOMS WERE UNDER CURRENT DEVELOPMENT IN MOST MAJOR CITIES AND TOURIST DESTINATIONS IN INDIA AND THE ASSESSEE AT THE RELEV ANT POINT OF TIME WAS ENDEAVORING TO CREATE A PORTFOLIO OF 25,000 ROOMS I N THE NEXT 5 YEARS. THIS STATED BACKGROUND OF THE ASSESSEES FUNCTIONING AIMS IT WA S MAY KINDLY BE GIVEN DUE CONSIDERATION WHILE DECIDING THE ISSUES AS IT IS TH ESE ADMITTED AIMS/VISIONS WHICH HAVE BEEN THE GUIDIFYING FACTORS FOR EACH DECISION AND ACTION OF THE ASSESSEE. 3.1. REFERRING TO THE SYNOPSIS FILED, IT WAS SUBMITTED THAT THE FIRST TRANCHE OF MONEY WAS ADVANCED TOWARDS THIS AIM IN AUGUST 2007 AND THEREAFTER CONTINUOUSLY TILL FEBRUARY 2008, THE FUNDS HAVE BEE N ADVANCED TOWARDS THE ABOVE STATED AIM. IT WAS SUBMITTED THAT SINCE VARIOUS ST EPS WERE REQUIRED TO BE TAKEN AND FULFILLED BEFORE THE AMOUNTS INITIALLY SHOWN A S LOAN COULD BE CONVERTED INTO EQUITY WHICH WAS THE ULTIMATELY INTENTION. THE WAI TING PERIOD IT WAS SUBMITTED HAD TO BE SHOWN AS LOAN TO MAINTAIN CONTROL OVER TH E FUNDS ADVANCED TOWARDS A SPECIFIC PURPOSE. THE FACT THAT IN THE CASE OF THE ASSESSEE THESE LOANS WERE CONVERTED INTO EQUITY WITHIN A PERIOD OF THREE MONT HS IT WAS SUBMITTED WOULD DEMONSTRATE THAT THE INTENTION OF THE ASSESSEE HAS BEEN TRANSLATED. 3.2. IT WAS HIS SUBMISSION THAT IT IS A MATTER OF RECORD THAT SHARES WERE ALLOTTED IN ACCORDANCE WITH THE STATUTORY GUIDELINES. ACCORD INGLY RELYING UPON THE DECISION OF THE ITAT IN SOMA TEXTILES & INDUSTRIES AND JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN VODAFONE INDIA 369 ITR 511 (BOMB.) AND CBDT CIRCULAR DATED 29.01.2015 IT WAS SUBMITTED THAT ADDITION BY WAY OF ADJUSTMENT TOWARDS ARMS LENGTH PRICE IN THE FACTS OF THE PRESENT CASE COULD NOT HAVE BEEN MADE. COPIES OF I.T.A .NO.-6336/DEL/2012 PAGE 5 OF 46 THESE DECISIONS AND RELEVANT DOCUMENTS PLACED AT PA PER BOOK PAGES 7 TO 17; PAPER BOOK PAGE-115 AND PAPER BOOK PAGE-6 RESPECTIV ELY WERE HEAVILY RELIED UPON. ACCORDINGLY IT WAS HIS SUBMISSION THAT NO TRA NSFER PRICING ADJUSTMENT ON THESE FACTS WAS WARRANTED. 3.3. INVITING FURTHER ATTENTION TO THE DRPS ORDER IN T HE CASE OF THE ASSESSEE PERTAINING TO 2011-12 ASSESSMENT YEAR, IT WAS SUBMI TTED THAT RELYING UPON THE AFORESAID CIRCULAR OF THE CBDT AND THE DECISION OF THE HONBLE BOMBAY HIGH COURT THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DRP. PLACING FURTHER RELIANCE UPON THE DECISION OF THE ITAT IN THE CASE OF BHARTI AIRTEL LTD. (COPY PLACED AT PAPER BOOK PAGE 71 PARA 43), IT WAS SUBMI TTED REFERRING TO PARA 43 OF THE SAME THAT THE SAID DECISION FURTHER SUPPORTS TH E CLAIM OF THE ASSESSEE AS HEREIN ALSO FUNDS WERE ADVANCED TO A WHOLLY-OWNED SUBSIDIARY OF THE ASSESSEE FOR THE PURPOSES OF SHARE CAPITAL. THUS, RELYING ON TH E FACTS AND THE PRECEDENT IT WAS SUBMITTED THE AMOUNTS CANNOT BE TREATED AS LOAN. S PECIFIC ATTENTION WAS INVITED TO THE FACT THAT IN THE FACTS OF BHARTI AIRTEL LTD. ACTUAL CONVERSION TOOK PLACE AFTER A DELAY OF 1.5 YEARS I.E. ALMOST 17 MONTHS WH EREAS IN THE CASE OF THE ASSESSEE THE CONVERSION HAS TAKEN PLACE WITHIN 3 MO NTHS. ACCORDINGLY IT WAS HIS SUBMISSION THAT ON FACTS THE ASSESSEES CASE WAS ON A BETTER FOOTING THEN THE FACTS CONSIDERED IN THE PRECEDENT CITED. 3.4. IT WAS FURTHER PLEADED THAT THE TAX AUTHORITIES IN 2009 10 AND 2010 11 ASSESSMENT YEAR MADE NO SUCH ADDITION. THIS FACT I T WAS SUBMITTED WOULD BE EVIDENT FROM THE COPIES OF THE RESPECTIVE ASSESSMEN T ORDERS PLACED AT PAPER BOOK PAGES 85-93 AND 94-100 RESPECTIVELY. ACCORDINGLY I T WAS HIS SUBMISSION THAT I.T.A .NO.-6336/DEL/2012 PAGE 6 OF 46 THERE BEING NO CHANGE IN FACTS AND CIRCUMSTANCES TH E FACTUAL POSITION ACCEPTED BY THE REVENUE DESERVES TO BE FOLLOWED AND NO ADDITION BY WAY OF ADJUSTMENT WAS POSSIBLE. 4. ARGUMENTS ON GROUND NO.2 WERE ADVANCED STATING THA T IN THE EVENTUALITY THE ASSESSEE DOES NOT SUCCEED IN GROUND NOS. 1 AND 3 BY ALLOWING GROUND NO.2 LIBOR RATE MAY BE APPLIED INSTEAD OF THE RATE APPLI ED BY THE TPO AS THE LOAN WAS ADMITTEDLY GIVEN IN US DOLLARS. THE TPOS SEARCH B Y RESORTING TO OBTAIN INFORMATION BY RESORTING TO SECTION 133(6) FROM CRI SIL FOR IDENTIFYING THE CORRECT RATE TO BE APPLIED, IT WAS SUBMITTED MAY BE REJECTE D AS THE APPLICATION OF CRISIL BB RATE ON FACTS WAS NOT JUSTIFIED. THE APPLICABILITY OF LIBOR RATE IT WAS SUBMITTED HAS JUDICIAL ACCEPTANCE AS WOULD BE EVIDENT FROM THE DE CISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS P. LTD.(2015) 55 TAXMANN.COM 523/231 TAXMAN 401 (DELHI) AND DECISION OF THE ITAT, DELHI IN THE CASE OF BHARTI AIRTEL LTD. (SPECIFIC PAGE 67 OF THE PAPER BOOK PARA 61 OF TH E SAID ORDER). REFERRING TO THE FACTS IT WAS SUBMITTE D THAT THE SUBSIDIARY COMPANY HAS OBTAINED A LOAN FROM A THIRD-PARTY (STANDARD CH ARTERED BANK) AT AN INTEREST RATE OF 2.5% OVER THE LIBOR AND AS SUCH TP ADJUSTME NT, IF AT ALL CALLED FOR, SHOULD BE RESTRICTED TO LIBOR +2.5% BEING RATE OF AN UNCON TROLLED TRANSACTION. 5. THE LD. CIT DR RELYING UPON THE ORDERS OF THE TAX AUTHORITIES SUBMITTED THAT BOTH FOR HOLDING IT AS AN INTERNATIONAL TRANSACTION AND FOR THE APPLICABILITY OF CORRECT RATE RELIANCE WAS BEING PLACED ON THE TPOS ORDER AND THE DRPS ORDER LEADING TO THE PASSING OF THE FINAL ASSESSMENT ORDE R. AS AN ILLUSTRATION, ATTENTION WAS INVITED TO THE ASSESSMENT ORDER AND CARRYING US THROUGH PARA 4.2 OF THE I.T.A .NO.-6336/DEL/2012 PAGE 7 OF 46 SAME, IT WAS SUBMITTED THAT THE ASSESSEE ITSELF HAD SHOWN THE LOANS AS AN INTEREST-FREE LOAN AS AN INTERNATIONAL TRANSACTION WHEREIN NEITHER ANY METHOD AS THE MOST APPROPRIATE METHOD WAS SELECTED NOT DID TH E ASSESSEE MAKE ANY EFFORT WHATSOEVER TO SELECT THE MOST APPROPRIATE METHOD OR PLI. 5.1. EMPHASIS WAS LAID ON THE FACT THAT THE ASSESSEE AS PER ITS OWN CLAIM HAD ADVANCED CERTAIN LOANS TO ITS AE. DLF GLOBAL HOSPIT ALITY LIMITED CYPRUS (DGHL)/ DLF CYPRUS. THE LOAN WAS SHOWN AS AN INTEREST-FREE LOAN OF US DOLLARS 72580000 AND HAS BEEN REFLECTED IN FORM NO. 3CEB AS AN INTER EST-FREE LOAN OF RS.2,91,99,60,465/-. ACCORDINGLY, THESE DISCLOSURE S RESULTED IN THE ISSUANCE OF A DETAILED SHOW CAUSE NOTICE REQUIRING THE ASSESSEE T O EXPLAIN WHY ARMS LENGTH ADJUSTMENT SHOULD NOT BE MADE. IT IS ONLY AFTER CON SIDERING THE EXPLANATION OF THE ASSESSEE THAT THE AO/TPO OBSERVED THAT NO BENCHMARK ING HAS BEEN CARRIED OUT BY THE ASSESSEE IN RESPECT OF THESE LOANS. IN THES E FACTS IT WAS HIS SUBMISSION THAT SINCE THE DECISION REGARDING THE TREATMENT OF THIS AMOUNT WHETHER LOAN OR DEBT WAS TO BE TAKEN AT THE TIME OF ADVANCING AND T HE PURPOSE FOR WHICH IT WAS INTENDED AND THE DECISION TAKEN BY THE ASSESSEE CLE ARLY SHOWS THAT IT WAS A LOAN. IT WAS ARGUED THAT NO INDEPENDENT ENTERPRISE WOULD EXTEND AN INTEREST FREE LOAN TO A THIRD PARTY WITHOUT ADEQUATE REMUNERATION. THUS THE INTEREST FREE LOAN GIVEN IS OBVIOUSLY NOT IN KEEPING WITH THE ARM'S LENGTH PRIN CIPLE, AS ENUNCIATED IN THE TRANSFER PRICING GUIDELINES AS PER THE INCOME-TAX A CT. THE ARM'S LENGTH INTEREST IT WAS SUBMITTED, IS DETERMINED BY FOLLOWING THE CUP M ETHOD, WHEREIN THE INTEREST RATE IS DETERMINED UNDER THE CIRCUMSTANCES IN WHICH THE TAX PAYER AND ITS SUBSIDIARIES ARE OPERATING. THUS WHAT IS THE INTER EST THAT WOULD HAVE BEEN EARNED I.T.A .NO.-6336/DEL/2012 PAGE 8 OF 46 IF SUCH LOANS WERE GIVEN TO UNRELATED PARTIES IN SI MILAR SITUATION AS THAT OF SUBSIDIARIES IS THE MEASURE WHICH HAS TO BE APPLIED . SINCE THE TESTED PARTY IT WAS SUBMITTED IS THE TAX PAYER IN THE CIRCUMSTANCES THE PREVALENT INTEREST THAT COULD HAVE BEEN EARNED BY THE TAX PAYER BY ADVANCING A LO AN TO AN UNRELATED PARTY IN INDIA IS TO BE CONSIDERED. THIS HAS TO BE FACTORED IN WITH THE SITUATION OF THE TAX PAYER'S AE WEAK FINANCIAL HEALTH AS LOAN AT WHAT RA TE AND CONDITION WOULD HAVE BEEN ADVANCED. THUS THIS WOULD BE THE RELEVANT FAC TOR TO BE CONSIDERED. IN THE CIRCUMSTANCES, THE ASSESSEE IT WAS SUBMITTED HAS CO RRECTLY CHOSEN TO ARGUE ON THE RATE OF INTEREST. THE MAIN ISSUE IT WAS SUBMITTED W HICH NEEDS TO BE CONSIDERED IS TO DECIDE THE INTEREST RATE WHICH THE TAX PAYER WOU LD HAVE EARNED ON ADVANCING LOAN OF ABOVE AMOUNTS TO UNRELATED THIRD PARTIES WI TH SIMILAR FINANCIAL STRENGTH AS THAT OF THE AE. IT WAS SUBMITTED THAT IT IS ALSO TO BE CONSIDERED THAT THERE IS NO SECURITY PROVIDED BY THE AE'S / SUBSIDIARIES AGAINS T THE LOANS ADVANCED. 5.2. IN THESE CIRCUMSTANCES, IT WAS SUBMITTED THE TPO O BTAINED NECESSARY INFORMATION UNDER SECTION 133(6) THE RATES AS CONSI DERED BY CRISIL WHICH IS THE LEADING CREDIT RATING AGENCY IN INDIA. WHILE ARRI VING AT THE RATING THE FINANCIAL INSTITUTIONS ARE CATEGORIC BY KEEPING IN MIND THE FOUR ELEMENTS INVOLVED NAMELY FINANCIAL RISK; CREDIT RISK; BUSINESS RISK AND STRU CTURAL RISK. THE CORPORATE BONDS ISSUED BY COMPANIES IN INDIA IT WAS SUBMITTED ARE A LSO GRADED INDICATING THE RATE OF INTEREST THAT COULD BE EARNED IF THE AMOUNT IS L ENT TO THE COMPANIES. IT WAS SUBMITTED THAT SINCE THE LOAN IS ADVANCED BY THE IN DIAN HOLDING COMPANY THEREFORE THE RATE OF INTEREST ON THE AMOUNT IF I T HAD BEEN ADVANCED ON LOAN TO UNRELATED PARTIES IN INDIA IS THE RELEVANT RATE OF INTEREST. ACCORDINGLY INFORMATION I.T.A .NO.-6336/DEL/2012 PAGE 9 OF 46 THUS WAS SOUGHT AND CONSIDERING THE FINANCIAL HEALT H OF THE AE OF THE TAXPAYER IT WAS SUBMITTED IT WAS CONSIDERED APPROPRIATE THAT TH E TAXPAYER WOULD FALL SOMEWHERE BETWEEN BB AND D RATINGS LEADING TO THE A PPLICABILITY OF 17.26% AS INTEREST RATE APPLICABLE. ACCORDINGLY IT WAS HIS S UBMISSION HT NO VARIATION IN THE ORDER ON FACTS AND LAW WAS WARRANTED. 6. THE LD.AR ON THE OTHER HAND SUBMITTED THAT MERELY BECAUSE HE HAS ARGUED ON THE APPLICABILITY OF INTEREST RATE WITHOUT PREJU DICE TO THE MAIN ISSUE, IT SHOULD NOT BE UNDERSTOOD TO MEAN BY THE REVENUE THAT THE C ONNECTED GROUNDS WERE ARGUED FOR THE SAKE OF COMPLETENESS AS THE ASSESSEE WAS CONFIDENT ON THE MAIN ISSUE AS COVERED IN ITS FAVOUR BY THE JUDICIAL PREC EDENT CITED AND THE PRECEDENT AVAILABLE IN ASSESSEES OWN CASE THUS EVEN ON RULE OF CONSISTENCY THE ASSESSEE HAS A GOOD CASE HAD ABOVE THE JUDICIAL PRECEDENT C ITED. IT WAS HIS SUBMISSION THAT IN THE ARGUMENTS ADVANCED BY THE REVENUE THESE PRECEDENTS HAVE NOT BEEN UPSET EITHER BY CITING A CONTRARY VIEW OR ATTEMPTIN G TO DISTINGUISH ON FACTS. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. IT WOULD BE APPROPRIATE TO FIRST BRING OUT THE SALIENT FACTS FROM THE ORDERS AVAILABLE ON RECORD. IT IS SEEN THAT THE ASSESSEE MADE THE FOLLOWING DISCLOSURE IN ITS FORM NO. 3CEB:- S.NO. NATURE OF TRANSACTION METHOD USED BY ASSESSEE VALUE OF TRANSACTION (USD) METHOD PLI 1. INTEREST FREE LOAN NA NA 72,580,000 7.1. THE ADVANCING OF INTEREST FREE LOAN OF USD 7258000 0 TO ITS AE, DLF GLOBAL HOSPITALITY LTD., CYPRUS (DHHL/DLF) CYPRUS HAS BEEN REFLECTED AS AN INTEREST FREE I.T.A .NO.-6336/DEL/2012 PAGE 10 OF 46 LOAN OF RS.2,91,99,60,465. THE RELEVANT EXTRACT FR OM THE TPOS ORDER ADDRESSING THE SPECIFIC DATE AND AMOUNTS ON WHICH THE LOANS WE RE GIVEN IS REPRODUCED HEREUNDER:- IT IS SEEN FROM THE FORM NO.3CEB AND TRANSFER PRIC ING STUDY THAT THE ASSESSEE COMPANY HAS ADVANCED LOANS TO ITS AE IN CY PRUS, DLF GLOBAL HOSPITALITY LIMITED, AS PER THE TABLE BELOW:- DATE OF INITIAL LOAN TO DGHL LOAN (US $) DHHL-DGHL AMOUNT IN INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466 7.2. THE ASSESSEE IN SUPPORT OF ITS CLAIM HAS STATED BEF ORE THE TPO THAT THE LOAN WAS ADVANCED WITH THE INTENTION OF CONVERTING IT IN TO EQUITY AND HAS SHOWN THAT IT WAS CONVERTED INTO EQUITY WITHIN 3 MONTHS. THE ASS ESSEE AS PER RECORD HAS EXPLAINED THAT THE LOAN WAS SO STRUCTURED AS THE AS SESSEE WAS NOT SURE OF THE SUBSIDIARY COMPANYS CAPACITY TO UTILIZE THE FUNDS FOR THE INTENDED PURPOSES. IT HAS BEEN ARGUED THAT ON THE UTILIZATION OF THE FUND S IT WAS CAPITALIZED AS EQUITY HENCE IT HAS BEEN EXPLAINED THAT IT WAS NEVER A LOA N AND WAS ALWAYS A QUASI DEBT. FOR READY-REFERENCE THE RELEVANT EXTRACT FROM THE T POS ORDER INCORPORATING THE EXPLANATION OF THE ASSESSEE IS REPRODUCED HEREUNDER :- AS PER THE NOTES TO FORM 3CEB IT IS STATED THAT IN RESPECT OF INTEREST FREE LOAN TO THE ASSOCIATED ENTERPRISES, EVEN THOUGH THE COMPANY GRANTED A LOAN INITIALLY THE INTENTION WAS TO ALWAYS INVEST AND CONVERT THE FUNDS TO EQUITY WITHIN SHORT PERIOD OF TIME. THE DEBT FUNDS WERE CONVERTED TO EQUITY WITH IN SHO RT PERIOD OF THREE MONTHS. THE COMPANY OPTED FOR DEBT ONLY TO RETAIN SOME FLEXIBILITY TO GET ITS MONEY BACK IN CASE THE ASSOCIATE ENTERPR ISE IS NOT ABLE TO UTILIZE THE FUNDS FROM THE INTENDED PURPOSE. HOWEVER, ONCE THE ASSOCIATED ENTERPRISE UTILIZED THE FUNDS FOR INTEND ED PURPOSE, THE DEBT AMOUNT WAS CAPITALIZED BY ISSUING EQUITY SHARES TO THE COMPANY. HENCE, GIVEN THAT THE NATURE OF DEBT WAS QUASI-DEBT, THE TRANSACTION INVOLVING GRANTING INTEREST FREE LOAN CAN BE CONSID ERED TO BE AT ARMS LENGTH AS PROVIDED UNDER SECTION 92C OF THE ACT. I.T.A .NO.-6336/DEL/2012 PAGE 11 OF 46 (EMPHASIS PROVIDED) 7.3. IT IS SEEN FROM THE RECORD THAT THE SAID EXPLANATIO N WAS NOT ACCEPTED BY THE TPO WHO REJECTED IT HOLDING AS UNDER:- FROM THE ABOVE STATEMENT IT IS CLEAR THAT NO BENCH MARKING HAS BEEN CARRIED OUT IN RESPECT OF THESE LOANS. THE FA CT THAT THE DECISION REGARDING THE TREATMENT OF THIS AMOUNT AS LOAN OR D EBT WAS TO BE TAKEN WHEN IT WAS FELT THIS AMOUNT COULD BE UTILIZED FOR THE PURPOSE FOR WHICH IT WAS INTENDED, CLEARLY SHOWS THAT IT WAS A LOAN. AS NO INDEPENDENT ENTERPRISE WOULD EXTEND AN INTEREST FREE LOAN TO A THIRD PARTY THIS ACTION IS OBVIOUSLY NOT IN KEEPING WITH THE ARMS LENGTH PRIN CIPLE, AS ENUNCIATED IN THE TRANSFER PRICING GUIDELINES AS PER THE INCOME T AX ACT. THE ARMS LENGTH INTEREST IS DETERMINED BY FOLLOWIN G THE CUP METHOD, WHEREIN THE INTEREST RATE IS DETERMINED UNDER THE C IRCUMSTANCES IN WHICH THE TAX PAYER AND ITS SUBSIDIARIES ARE OPERATING I. E. WHAT IS THE INTEREST THAT WOULD HAVE BEEN EARNED IF SUCH LOANS WERE GIV EN TO UNRELATED PARTIES IN SIMILAR SITUATION AS THAT OF SUBSIDIARIE S. SINCE THE TESTED PARTY IS THE TAX PAYER, THE PREVALENT INTEREST THAT COULD HAVE BEEN EARNED BY THE TAX PAYER BY ADVANCING A LOAN TO AN UNRELATED PARTY IN INDIA, WITH THE SAME WEAK FINANCIAL HEALTH AS THAT OF THE TAX PAYER 'S AE, WILL BE CONSIDERED. 2. AS MENTIONED ABOVE, UNDER THE CUP METHOD, THE IN TEREST THAT IS CHARGED BETWEEN UNRELATED PARTIES UNDER SIMILAR CIR CUMSTANCES WOULD BE THE ARM'S LENGTH INTEREST. THE MAIN ISSUE IS TO DEC IDE THE INTEREST RATE AT WHICH THE TAX PAYER WOULD HAVE EARNED, IN ADVANCING LOAN OF ABOVE AMOUNTS TO UNRELATED THIRD PARTIES WITH SIMILAR FIN ANCIAL STRENGTH AS THAT OF THE AE. IT IS ALSO TO BE MENTIONED THAT THERE I S NO SECURITY PROVIDED BY THE AE'S /SUBSIDIARIES AGAINST THE LOANS ADVANCED. 7.4. THE FOLLOWING EXTRACT BRINGS OUT THE REASONING OF THE TPO JUSTIFYING THE APPLICATION OF THE RATE WHICH HAS BEEN UPHELD BY TH E DRP AND HEAVILY RELIED UPON BY THE LD.CIT. DR:- 3. FINANCIAL INSTITUTIONS GENERALLY WEIGH FOUR ELE MENTS IN DETERMINING WHETHER OR NOT TO ISSUE LOANS AND, IF SO, AT WHAT C ONDITIONS AND FEES: FINANCIAL RISK: IN ORDER TO GAUGE THE FINANCIAL RIS K INCURRED BY THE LENDER, THE DEBTOR'S FINANCIAL POSITION IS REVIEWED BASED ON ITS BALANCE SHEET AND INCOME STATEMENT; CREDIT RISK: IN ORDER TO GAUGE THE CREDIT RISK, THR EE ELEMENTS ARE WEIGHED, NAMELY THE AVAILABILITY OF GUARANTEES, THE PURPOSE OF THE LOAN AND THE LOAN'S TERM TO MATURITY; BUSINESS RISK: THE LENDER'S VIEWS ON THE INDUSTRY I N WHICH THE DEBTOR OPERATES ITS BUSINESS IS REFLECTED IN THIS R ISK; AND I.T.A .NO.-6336/DEL/2012 PAGE 12 OF 46 STRUCTURAL RISK: IN GAUGING THIS RISK, THE QUALIFIC ATIONS OF EXTERNAL RATING AGENCIES AWARDED TO THE DEBTOR ARE WEIGHED. 4. CORPORATE BONDS ISSUED BY COMPANIES IN INDIA ALS O GIVE AN INDICATION OF INTEREST THAT COULD BE EARNED IF THE AMOUNT IS L ENT TO THE COMPANIES. GOVERNMENT BONDS ARE SUBJECT ONLY TO INTEREST RATE RISK. HOWEVER, CORPORATE BONDS ARE SUBJECT TO CREDIT RISK IN ADDIT ION TO INTEREST RATE RISK. INTEREST RATE RISK REFERS TO THE RISK OF A BOND CHA NGING IN VALUE DUE TO CHANGES IN THE STRUCTURE OR LEVEL OF INTEREST RATES . THE CREDIT RISK OF A HIGH YIELD BOND REFERS TO THE PROBABILITY OF A DEFAULT ( I.E., DEBTOR UNABLE TO MEET INTEREST AND PRINCIPAL OBLIGATIONS) COMBINED WITH T HE PROBABILITY OF NOT RECEIVING PRINCIPAL AND INTEREST IN ARREARS AFTER A DEFAULT. A CREDIT RATING AGENCY ATTEMPTS TO DESCRIBE THE RISK WITH A CREDIT RATING SUCH AS AAA. IN INDIA, CRISIL IS THE LEADING CREDIT RATING AGENC Y. THE RATING SCALES VARY; THE MOST POPULAR SCALE USES (IN ORDER OF INCR EASING RISK) RATINGS OF AAA, AA, A, BBB, BB, B, C, WITH THE ADDITIONAL RATI NG D FOR DEBT ALREADY IN ARREARS. GOVERNMENT BONDS ARE OFTEN CONSIDERED T O BE IN A ZERO-RISK CATEGORY I.E. ABOVE AAA; AND CATEGORIES LIKE AA AND A MAY SOMETIMES BE SPLIT INTO FINER SUBDIVISIONS LIKE 'AA-'. BONDS RAT ED BBB AND HIGHER ARE CALLED INVESTMENT GRADE BONDS. THE SAFETY LEVEL OF THESE GRADING, AS ADOPTED BY CRISIL, ARE AS UNDER: AAA (TRIPLE A) HIGHEST SAFETY INSTRUMENTS RATED 'AAA' ARE JUDGED TO OFFER THE HIG HEST DEGREE OF SAFETY, WITH REGARD TO TIMELY PAYMENT OF FINANCIAL OBLIGATIONS. ANY ADVERSE CHANGES IN CIRCUMSTANCES ARE MOST UNLIKELY TO AFFECT THE PAYME NTS ON THE INSTRUMENT. AA (DOUBLE A) HIGH SAFETY INSTRUMENTS RATED 'AA' ARE JUDGED TO OFFER A HIGH D EGREE OF SAFETY, WITH REGARD TO TIMELY PAYMENT OF FINANCIAL OBLIGATIONS. THEY DIFFER ONLY MARGINALLY IN SAFETY FROM AAA ' ISSUES. A ADEQUATE SAFETY INSTRUMENTS RATED 'A' ARE JUDGED TO OFFER AN ADEQUA TE DEGREE OF SAFETY, WITH REGARD TO TIMELY PAYMENT OF FINANCIAL OBLIGATIONS. HOWEVER, CHANGES IN CIRCUMST ANCES CAN ADVERSELY AFFECT SUCH ISSUES MORE THAN THOSE IN THE HIGHER RATING CATEGORIES. BBB (TRIPLE B) MODERATE SAFETY INSTRUMENTS RATED 'BBB' ARE JUDGED TO OFFER MODERAT E SAFETY, WITH REGARD TO TIMELY PAYMENT OF FINANCIAL OBLIGATIONS FOR THE PRESENT; HOWEVER, CHANGING CIRCUMSTANCES ARE MORE LIKELY TO LEAD TO A WEAKENED CAPACITY TO PAY INTEREST AND REPAY PRINCIPAL THAN F OR INSTRUMENTS IN HIGHER RATING CATEGORIES. BB (DOUBLE B) INADEQUATE SAFE INSTRUMENTS RATED 'BB' ARE JUDGED TO CARRY INADEQUA TE SAFETY, WITH REGARD TO TIMELY PAYMENT OF FINANCIAL OBLIGATIONS; THEY ARE LESS LIKELY TO DEFAULT IN THE IMMEDIATE FUTURE THAN INSTRUMENTS IN LOWER RATING CATEGORIES, BUT AN ADVERSE CHANGE IN CIRCUMSTANCES COULD LEAD TO INADE QUATE CAPACITY TO MAKE PAYMENT ON FINANCIAL OBLIGATIONS. B HIGH RISK INSTRUMENTS RATED 'B ARE JUDGED TO HAVE HIGH LIKEL IHOOD OF DEFAULT; WHILE CURRENTLY FINANCIAL OBLIGATIONS ARE MET, I.T.A .NO.-6336/DEL/2012 PAGE 13 OF 46 ADVERSE BUSINESS OR ECONOMIC CONDITIONS WOULD LEAD TO LACK OF ABILITY OR WILLINGNESS TO PAY INTEREST OR P RINCIPAL. C SUBSTANTIAL RISK INSTRUMENTS RATED 'C ARE JUDGED TO HAVE FACTORS PRE SENT THAT MAKE THEM VULNERABLE TO DEFAULT; TIMELY PAYMEN T OF FINANCIAL OBLIGATIONS IS POSSIBLE ONLY IF FAVOURABL E CIRCUMSTANCES CONTINUE. D DEFAULT INSTRUMENTS RATED 'D' ARE IN DEFAULT OR ARE EXPECTE D TO DEFAULT ON SCHEDULED PAYMENT DATES. 5. FROM THE ABOVE, IT IS SEEN THAT BONDS IN THE RA TING RANGE OF AAA TO BBB HAVE SOME KIND OF SAFETY, WITH A MINIMUM LEVEL OF 'MODERATE SAFETY (BBB). THEREFORE, IT IS CLEAR THAT 'UNSECURED LOAN' , LIKE THAT OF TAXPAYER, CANNOT FALL IN THE CREDIT RATING RANGE FROM AAA TO BBB, AS THE UNSECURED LOAN ADVANCED BY THE TAXPAYER IS NOT BACKED BY ANY GUARANTEE OR SECURITY. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND A LSO CONSIDERING THE FINANCIAL HEALTH OF THE AE OF THE TAXPAYER, IT WOUL D BE REASONABLE TO CONSIDER THAT THE LOAN ADVANCED BY THE TAXPAYER WOU LD FALL SOMEWHERE BETWEEN BB AND D RATINGS. INFORMATION ABOUT THE AVERAGE YIELD ON LONG TERM IN STRUMENT DURING FY 2007-08 WAS COLLECTED U/S 133(6) OF THE IT ACT FROM M/S CRISIL. 7.4.1. ACCORDINGLY, CONSIDERING THE INFORMATION RECEIVED F ROM CRISIL WHICH IS THE CREDIT RATING AGENCY IN INDIA WHERE THE RATINGS WER E RANGING FROM AAA; AA+; AA-; BB; BBB; BBB-; BBB; A+; A- TO A THE TPO WAS OF THE VIEW THAT THE ASSESSEES CASE WAS TO BE CONSIDERED RANGING BETWEEN THE RANGE OF B B TO D WHERE EITHER THERE IS NO SAFETY OR THE SAFETY IS INADEQUATE. IN THE SAID RANGE, BB RATE IT WAS NOTED DENOTES THE HIGHEST LEVEL OF SAFETY OR IN OTHER WOR DS MINIMUM LEVEL OF RISK. THE ANNUAL AVERAGE YIELD FOR BB RATED BONDS FOR 5 YEARS WAS CALCULATED AT 17.26% AND IT WAS HELD THAT 17.26% RATE OF INTEREST APPEARED T O BE MOST REASONABLE AND APPROPRIATE WHICH WAS PROPOSED TO BE APPLIED ON MON THLY CLOSING BALANCES FROM THE PERIOD 01.04.2007 TO 31.03.2008. 7.5. IT MAY BE PERTINENT TO CONSIDER THE PURPOSE OF THE INTEREST FREE LOAN TO THE AE AS PER THE REPLY OF THE ASSESSEE BEFORE THE TPO AND THE DRP. A PERUSAL OF THE RECORD SHOWS THAT ON BEHALF OF THE ASSESSEE THE FOL LOWING REPLY WAS GIVEN:- I.T.A .NO.-6336/DEL/2012 PAGE 14 OF 46 5. REPLY OF THE ASSESSEE: THE ASSESSEE HAS STATED THAT THIS AMOUNT WAS IN THE FORM QUASI- EQUITY SINCE IT WAS THE INTENTION OF THE ASSESSEE W AS TO CONVERT IT INTO EQUITY CAPITAL FROM THE VERY BEGINNING. IT ALSO STATES THAT TO MAINTAIN FLEXIBILITY, IN CASE THE FUNDS WERE NOT US ED FOR THE INTENDED ACTIVITY WITHIN THE PROPOSED PERIOD, IT WAS INITIAL LY GRANTED AS DEBT. IT STATES THAT DHHL, BEING THE PARENT COMPANY UNDER TAKES STEWARDSHIP ACTIVITIES THROUGH THE PROVISION OF FUN DS AND IS NOT REQUIRED TO BE COMPENSATED. IT IS STATED THAT BEING A NEW ENTITY, DGHL COULD NO T HAVE ACCESSED FUNDS FROM ANY OTHER SOURCE. THIS QUASI EQUITY WAS CONVERTED INTO EQUITY AND THIS BECAME THE BASIS TO BORROW FROM THIRD PART Y BANKS. THE ASSESSEE HAS STRESSED ON THE COMMERCIAL EXPEDIENCY OF THE TRANSACTION. THE ASSESSEE HAS OBJECTED TO THE USE OF S.133(6) TO GATHER INFORMATION STATING THAT IT MIGHT NOT BE AUTHENTI C, IT IS NOT AVAILABLE IN THE PUBLIC DOMAIN AND IT IS LIKE USING SEC RET COMPARABLES. (EMPHASIS PROVIDED) 7.6. THE ASSESSEES OBJECTION THAT THE TPO CANNOT QUEST ION THE COMMERCIAL EXPEDIENCY OF ITS ACTIVITIES WAS NOT ACCEPTED BY TH E TPO. THE TPO WAS OF THE VIEW THAT THE OECD GUIDELINES CLEARLY HELD THE VIEW THAT WHEN INDEPENDENT ENTERPRISES TRANSACT WITH EACH OTHER, THE CONDITION S OF THEIR COMMERCIAL AND FINANCIAL RELATIONS (E.G. THE PRICE OF GOODS TRANSF ERRED OR SERVICES PROVIDED AND THE CONDITIONS OF THE TRANSFER OR PROVISION) ORDINARILY ARE DETERMINED BY MARKET FORCES. WHEN ASSOCIATED ENTERPRISES TRANSACT WITH EACH OTHE R, THEIR COMMERCIAL AND FINANCIAL RELATIONS MAY NOT BE DIRECTLY AFFECTED BY EXTERNAL MARKET FORCES IN THE SAME WAY, ALTHOUGH ASSOCIATED ENTERPRISES OFTEN SEE K TO REPLICATE THE DYNAMICS OF MARKET FORCES IN THEIR TRANSACTIONS WITH EACH OTHER . (OECD PARA 1.2). 7.6.1. THE TPO WAS OF THE VIEW THAT THE OECD GUIDELINES SAY THAT T HE RELATIONSHIP AMONG MEMBERS OF AN MNE GROUP MAY PERM IT THE GROUP MEMBERS TO ESTABLISH SPECIAL CONDITIONS IN THEIR INTRA GROUP R ELATIONS THAT DIFFER FROM THOSE THAT WOULD HAVE BEEN ESTABLISHED HAD THE GROUP MEMB ERS BEEN ACTING AS I.T.A .NO.-6336/DEL/2012 PAGE 15 OF 46 INDEPENDENT ENTERPRISES OPERATING IN OPEN MARKET. T HUS, INTRA GROUP TRANSACTIONS HE NOTED NEEDED TO BE EXAMINED IN THE LIGHT OF THE SPECIAL PROVISIONS CONTAINED IN CHAPTER X OF THE ACT AND NOT MERELY IN THE CONTEXT OF SECTION 37(1). HE WAS FURTHER OF THE VIEW THAT THERE WERE SEVERAL HIGHLY RELEVANT ISSUES REQUIRING CONSIDERATION, NAMELY WHETHER THE TRANSACTION WAS REALLY A COMMERC IAL ONE; WHETHER IN SIMILAR CIRCUMSTANCES AN INDEPENDENT PERSON WOULD HAVE PAID SIMILAR AMOUNT; WHETHER THE TAXPAYER REALLY NEEDED THE SERVICES; WHETHER TH E TAXPAYER REALLY GOT SOME TANGIBLE OR DIRECT BENEFIT; WHETHER THE AMOUNT PAID WAS COMMENSURATE WITH THE BENEFIT (OR THE EXPECTED BENEFIT) FROM SUCH SERVICE S, ETC. WE NEED NOT DIRECTLY ADDRESS THE ENTIRE SWEEP OF ISSUES REFERRED TO BY T HE TPO AT THIS STAGE. SUFFICE IT TO SAY THAT THE SAID BROAD SWEEPING VIEW OF THE TAX AUTHORITIES HAS NOT BEEN APPROVED JUDICIALLY BY VARIOUS HIGH COURTS. THUS T HOUGH WE HAVE QUOTED THE VIEW EXPRESSED BY THE TPO. WE TAKE NOTE THAT IT IS NOT THE CORRECT VIEW AS ADMITTEDLY IN VARIOUS DECISIONS INCLUDING CIT VS CUSHMAN & WAKEFILED INDIA PVT.LTD. OF THE DELHI HIGH COURT, THE VIEW EXPRESSED BY THE TPO DO ES NOT HAVE JUDICIAL ACCEPTANCE. 7.7. THE TPO CONCLUDED THAT THE BENEFIT OF CONVERSION IN TO EQUITY COULD BE GRANTED ONLY TO THE EXTENT OF 20% OF THE LOAN. WE F IND NO RATIONALE HAS BEEN BROUGHT OUT IN THE ORDER FOR ARRIVING AT THIS MAGIC FIGURE OF 20%. IN ORDER TO DECIDE WHAT RATE OF INTEREST WAS TO BE CHARGED TO T HE REMAINING AMOUNT. INFORMATION U/S 133(6) WAS OBTAINED OVER RULING THE OBJECTIONS OF THE ASSESSEE WHO HAD PLEADED THAT NO SUCH POWERS WERE VESTED WIT H THE TPO. WE FIND THAT THE TPOS CONCLUSION THAT SECTION 92C(3) AUTHORIZED HIM TO USE THE INFORMATION IN HIS I.T.A .NO.-6336/DEL/2012 PAGE 16 OF 46 POSSESSION AND THE POWER TO GATHER MATERIAL UNDER T HE SAID PROVISION WAS SIMILAR TO THE POWER VESTED WITH THE AO IN THE PROCEEDINGS UNDER SECTION 143(3) WAS CORRECT AS THE WORDING IS ALMOST THE SAME IN BOTH T HE SECTIONS I.E. 92CA(3) AND 143(3). FURTHER WE FIND THAT THE VIEW THAT SUBSEC TION (7) OF SECTION 92CA EMPOWERS THE TPO TO UTILIZE THE SAME UNDER SECTION 133 (6)/131 AND ANY FALSITY IN THE INFORMATION GIVEN UNDER THE PROVISIONS OF THE I NCOME TAX ACT, 1961 IS LIABLE FOR PENAL ACTION. ACCORDINGLY, WE FIND THAT THE C ONCLUSION DRAWN BY THE TPO THAT HE HAD THE POWER TO SEEK INFORMATION U/S 133(6) IN PRINCIPLE IS THE CORRECT VIEW IN LAW AND THE CONCLUSION SO DRAWN BY THE TPO IS UPHEL D BY US. WHETHER THE SAME WAS NECESSITATED OR RELEVANT ON FACTS BEFORE US IS AN AREA WHICH, IF NEED BE, SHALL ARISE LATER. 7.8. TO REVERT BACK TO THE PROCEEDINGS BEFORE THE TPO T HE RECORD SHOWS THAT HE CONCLUDED THE ISSUE IN THE FOLLOWING MANNER:- IN VIEW OF THE ABOVE DISCUSSION, WHILE THE ASSESSE E WILL BE GIVEN BENEFIT OF CONVERSION OF THE LOAN INTO EQUITY DURING A REAS ONABLE TIME FRAME, THE BENEFIT WILL BE LIMITED TO 20% OF THE LOAN. THE RE ST WILL BE TREATED AS A LOAN ON WHICH AN APPROPRIATE INTEREST, AS DETERMINE D IN THE SHOW CAUSE NOTICE, NEEDS TO BE CHARGED. THE CALCULATION OF THE SAME IS AS UNDER:- MONTH END OPENING BALANCE (RS.) (AFTER TAKING TO ACCOUNT THE REVISED CLOSING BALANCE) FUNDS EXTENDED (RS.) CONVERSION INTO EQUITY (RS.) CLOSING BALANCE (RS.) (AS PER ASSESSEE) CLOSING BALANCE AFTER ALLOWANCE FOR 20% (AS PER TPO) REVISED INTEREST @ 17.26% 7-APR 7-MAY 7-JUNE 7-JULY 2,069,582,691 2,069,582,692 29,767,498 7-AUG 2,069,582,692 2,069,582,692 29,767,498 7-SEP 2,069,582,692 20,306,910 2,089,889,602 30,0 59,579 7-OCT 2,089,889,602 2,069,582,692 20,306,910 1,675 ,973,064 24,106,079 7-NOV 1,675,973,064 629,918,780 650,225,690 2,305, 891,844 33,166.411 7-DEC 2,305,891,844 200,152,084 850,377,774 2,506, 043,928 36,045,265 8-JAN 2,506,043,928 850,377,774 2,506,968,373 33, 599,012 8-FEB 2,506,043,928 850,377,774 NIL 2,335,968,373 33,599,012 8-MAR 2,335,968,373 2,335,968,373 2,335,968,373 3 3,599,012 TOTAL 286,155,618 I.T.A .NO.-6336/DEL/2012 PAGE 17 OF 46 7.9. ON A PERUSAL OF THE OBJECTIONS POSED BY THE ASSESS EE BEFORE THE DRP, IT IS SEEN THAT FINDINGS OF THE TPO WERE ASSAILED ON VAR IOUS GROUND INCLUDING THE GROUND THAT THE TPO HAS TREATED THE LOAN AS LOAN SI MPLICITOR AND AS A PURE DEBT INSTRUMENT AND NOT AS AN INSTRUMENT OF HYBRID FUNDI NG HAVING TRAITS OF EQUITY. THE ALLEGED MODIFICATION MISCONSTRUING OF FACTS BY THE TPO WAS ASSAILED TO BE INCORRECT AND MISLEADING. EXTRACTS FROM THESE OBJE CTION NUMBERING 5.2.2 AND 5.2.3 WHICH HAS FURTHER BEING ELABORATED IN OBJECTI ON 5.2.9 BEFORE THE DRP ARE EXTRACTED HEREUNDER:- 5.2.9. FACTUAL AND LEGAL ARGUMENTS AGAINST THE ADDI TION PROPOSED BY THE LEARNED TPO 'A CATEGORY OF DEBT TAKEN ON BY A COMPANY THAT HAS SOME TRAITS OF EQUITY, SUCH AS HAVING FLEXIBLE REPAYMENT OPTIONS OR BEING UNSECURED. EXAMPLES OF QUASI-EQUITY INCLUDE MEZZANINE DEBT AND SUBORDIN ATED DEBT.' THE DEFINITION/MEANING OF SUBORDINATED DEBT IS PROV IDED AS UNDER: 'DEBT THAT IS EITHER UNSECURED OR HAS A LOWER PRIOR ITY THAN THAT OF ANOTHER DEBT CLAIM ON THE SAME ASSET OR PROPERTY, ALSO CALL ED JUNIOR DEBT.' THE ASSESSEE ENTERED INTO A WRITTEN ARRANGEMENT IN THE FORM OF AGREEMENT WITH ITS ASSOCIATED ENTERPRISE THAT THE F UNDS PROVIDED WOULD BE IN THE NATURE OF QUASI EQUITY AND NOT IN T HE NATURE OF DEBT. IN ASSESSEE'S CASE, IT WAS CLEAR THAT THE FUN DS WOULD BE CONVERTED INTO EQUITY WITHIN THE NEXT 3 TO 4 MONTHS WHICH CLEARLY REFLECTS THAT IT WAS ACTUALLY MEANT TO BE A CAPITAL CONTRIBUTION. THE SUPPORT WAS ALSO SOUGHT BY THE ASSESSEE FROM TH E GUIDELINES ISSUED BY THE ORGANISATION FOR ECONOMIC COOPERATION AND DE VELOPMENT ON TRANSFER PRICING IN 2010 ('OECD GUIDELINES'), AN EX TRACT OF WHICH IS APPENDED BELOW: 'D.2 RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTA KEN 1.64. A TAX ADMINISTRATION'S EXAMINATION OF A CONTR OLLED TRANSACTION ORDINARILY SHOULD BE BASED ON THE TRANSACTION ACTUA LLY UNDERTAKEN BY THE ASSOCIATED ENTERPRISES AS IT HAS BEEN STRUCTURED BY THEM, USING THE METHODS APPLIED BY THE TAXPAYER INSOFAR AS THESE AR E CONSISTENT WITH THE METHODS DESCRIBED IN CHAPTER II. IN OTHER THAN EXCE PTIONAL CASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRAN SACTIONS OR SUBSTITUTE I.T.A .NO.-6336/DEL/2012 PAGE 18 OF 46 OTHER TRANSACTIONS FOR THEM. RESTRUCTURING OF LEGIT IMATE BUSINESS TRANSACTIONS WOULD BE A WHOLLY ARBITRARY EXERCISE T HE INEQUITY OF WHICH COULD BE COMPOUNDED BY DOUBLE TAXATION CREATED WHER E THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAME VIEWS AS TO HOW THE TRANSACTION SHOULD BE STRUCTURED. 1.65. HOWEVER, THERE ARE TWO PARTICULAR CIRCUMSTANC ES IN WHICH IT MAY, EXCEPTIONALLY, BE BOTH APPROPRIATE AND LEGITIMATE F OR A TAX ADMINISTRATION TO CONSIDER DISREGARDING THE STRUCTURE ADOPTED BY A TAXPAYER IN ENTERING INTO A CONTROLLED TRANSACTION. THE FIRST CIRCUMSTAN CE ARISES WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM IT S FORM. IN SUCH A CASE THE TAX ADMINISTRATION MAY DISREGARD THE PARTIES' C HARACTERISATION OF THE TRANSACTION AND RE-CHARACTERISE IT IN ACCORDANCE WI TH ITS SUBSTANCE. AN EXAMPLE OF THIS CIRCUMSTANCE WOULD BE AN INVESTMENT IN AN ASSOCIATED ENTERPRISE IN THE FORM OF INTEREST-BEARING DEBT WHE N, AT ARM'S LENGTH, HAVING REGARD TO THE ECONOMIC CIRCUMSTANCES OF THE BORROWING COMPANY, THE INVESTMENT WOULD NOT BE EXPECTED TO BE STRUCTUR ED IN THIS WAY. IN THIS CASE IT MIGHT BE APPROPRIATE FOR A TAX ADMINISTRATI ON TO CHARACTERISE THE INVESTMENT IN ACCORDANCE WITH ITS ECONOMIC SUBSTANC E WITH THE RESULT THAT THE LOAN MAY BE TREATED AS A SUBSCRIPTION OF CAPITA L. FROM THE ABOVE, IT CAN BE CLEARLY INFERRED THAT THE FUNDS PROVIDED BY DHHL TO DLF CYPRUS CAN BE CONSIDERED TO BE QUASI EQ UITY/CAPITAL REQUIRING NO INTEREST PAYMENT IN RETURN. WHILE THERE IS NO GUIDANCE AVAILABLE IN THE INDIAN TRANSFER PRICING REGULATIONS, GUIDANCE ISSUED BY THE ATO IN TAXATION RULING TR 92/11 MAY ALSO BE REFERRED TO IN THIS REGARD. IT CLEARLY STATES THAT CONTRIBUTIONS MADE OR AMOUNTS EXTENDED BY ONE COMPANY TO THE OTHE R MAY BE CONSIDERED AS EQUITY. THE RELEVANT EXTRACTS FROM TH E STATED RULING IS PROVIDED BELOW: '60. IN THE CONTEXT OF APPLYING AUSTRALIA'S TRANSFE R PRICING RULES, THE PRINCIPAL FACTORS THAT WILL BE TAKEN INTO ACCOUNT I N DETERMINING WHETHER A PARTICULAR LOAN AGREEMENT SHOULD BE TREAT ED AS EQUIVALENT TO A CONTRIBUTION TO EQUITY ARE DETAILED BELOW..... 7.10. THE REPRODUCTION OF THE FOLLOWING EXTRACT OF OBJEC TION NO.5.3.9 FURTHER BRINGS OUT THE FACT THAT THE TAX PAYER JUSTIFIED IT S ACTION OF ADVANCING OF LOAN AS A SHAREHOLDERS ACTIVITY GUIDED BY COMMERCIAL EXPEDIEN CY ETC.:- 5.3.9. FACTUAL AND LEGAL ARGUMENTS AGAINST THE ADDI TION PROPOSED BY THE LEARNED TPO DURING FY 2007-08, SINCE DLF CYPRUS WAS A NEWLY FO RMED COMPANY, IT COULD NOT MANAGE TO OBTAIN FUNDS INITIA LLY FROM THIRD PARTIES. HENCE, IN ORDER TO FURTHER THE BUSINESS OB JECTIVES OF DLF CYPRUS, THE ASSESSEE ADVANCED LOANS IN THE FORM OF QUASI EQUITY TO I.T.A .NO.-6336/DEL/2012 PAGE 19 OF 46 RETAIN CONTROL AND HAVE ABSOLUTE OWNERSHIP OF PROF ITS SUBSEQUENT TO CONVERSION. IN ADDITION TO THE ABOVE, ASSESSEE WISHES TO SUBMIT THAT AFTER THE CONVERSION OF THE QUASI-EQUITY INTO EQUITY, DLF CYP RUS WAS ABLE TO SECURE ADDITIONAL FUNDS FROM THIRD PARTY BANKS. THIS WAS C RITICAL FOR DLF CYPRUS SINCE THE ADDITIONAL FUNDS WERE REQUIRED FOR COMPLE TION OF ACQUISITIONS, AND THE INDEPENDENT BANKS WOULD NOT HAVE PROVIDED A NY FUNDS TO DLF CYPRUS WITHOUT IT HAVING AN ACCEPTABLE DEBT/EQUITY RATIO. THE THIRD PARTY BANKS WHICH MAY HAVE REFRAINED FROM PROVIDING LOANS TO DLF CYPRUS AT THE TIME OF SET-UP, ADVANCED LOANS TO DLF CYPRUS ONLY ON THE BASIS OF RESTRUCTURED CAPITAL GEARING O F THE COMPANY. THE ASSESSEE WISHES TO SUBMIT THAT IT WAS COMMERCIA LLY EXPEDIENCY WHICH NECESSITATED DHHL TO PROVIDE ADVAN CES TO DLF CYPRUS. THESE ADVANCES WERE MADE AS A PART OF CAPIT AL FOR FURTHER INVESTMENT BY ITS ASSOCIATED ENTERPRISE AND TO OBTA IN RETURN IN FUTURE. THE ASSESSEE HAD FULL CONTROL OVER ITS ASSO CIATED ENTERPRISE WHICH REDUCES THE CREDIT RISK. (EMPHASIS PROVIDED) 7.10.1. ELABORATING THE ARGUMENT THAT BY WAY OF THIS FUNDI NG THE ASSESSEE WAS ENGAGED IN STEWARDSHIP ACTIVITIES, THE FOLLOWING SU BMISSIONS HAVE BEEN ADVANCED:- AS EXPLAINED ABOVE, STEWARDSHIP ACTIVITIES DO NOT REQUIRE ANY PAYMENT SINCE THEY DIRECTLY BENEFIT THE SHAREHOLDER , AND IN AN INDEPENDENT SCENARIO, A RECIPIENT OF ANY CORRESPOND ING BENEFIT WOULD NOT HAVE BEEN REQUIRED TO PAY ANY CHARGE FOR THE SAME. IN THE INSTANT CASE, SINCE DHHL IS THE SOLE SHAREHO LDER IN DLF CYPRUS, THE PROVISION OF FUNDING MAY BE CONSIDERED TO BE PART OF ITS SHAREHOLDER ACTIVITY, SINCE IT IS PROVIDING SUP PORT TO ITS SUBSIDIARY AS A SHAREHOLDER. ADDITIONALLY, ANY BENEFIT ACCRUING TO DLF CYPRUS FROM USE OF THE FUNDS IS EVENTUALLY TRANSFER RED/ ADDED TO THE VALUE OF DHHL AS SOLE SHAREHOLDER. HENCE, IT MAY BE CONCLUDED THAT GRANTING OF FUNDS BY DHHL IS FOR ITS OWN BENEFIT, A ND HENCE, DLF CYPRUS IS NOT REQUIRED TO PAY ANY INTEREST ON THE SAME. THE HON'BLE PANEL WOULD APPRECIATE THAT THE AFORESA ID ASSISTANCE PROVIDED BY THE ASSESSEE IS NECESSARY AND EXPEDIENT GIVEN THE FACTS OF THE INSTANT CASE. (EMPHASIS PROVIDED) I.T.A .NO.-6336/DEL/2012 PAGE 20 OF 46 7.11. IN THE ABOVE FACTS, SUBMISSIONS AND ARGUMENTS ADVA NCED ON BEHALF OF THE ASSESSEE, WE FIND THAT THE CONSISTENT CLAIM OF THE ASSESSEE HAS BEEN THAT IT HAD AIMS AND GOALS FOCUSED TOWARDS BUILDING ITS PORTFOL IO IN PREMIUM SEGMENT HOTELS, RESORTS, SERVICED APARTMENTS, FAMILY RECREATIONAL C LUBS IN MAJOR CITIES AND TOURIST DESTINATION. THE DECISIONS SO TAKEN HAD BEEN GUIDE D BY A VISION TO MAKE ITS MARK GLOBALLY IN COUNTRIES LIKE SRI LANKA, THAILAND, MOR ACCO, BHUTAN, FRANCE, USA, INDONESIA ETC. WE FIND THAT THIS IS AN ACCEPTED PO SITION AS BROUGHT OUT FROM THE FOLLOWING EXTRACT FROM THE TPOS ORDER ITSELF WHIC H FORMS A PART OF THE FINAL ASSESSMENT ORDER ALSO :- 4.2. DHHL WAS SET UP ON 31 AUGUST 2006 AS AN INTEG RATED HOSPITALITY DEVELOPMENT AND OWNERSHIP COMPANY FOCUSED ON PREMIU M SEGMENT HOTELS, RESORTS, SERVICED APARTMENTS, AND FAMILY RE CREATIONAL CLUBS- DHHL HAS A VISION TO BE. INDIA'S LEADING HOSPITALITY DEVELOPMENT AND ASSET OWNERSHIP COMPANY, AND AMONGS T THE LARGEST SUCH COMPANIES GLOBALLY. THE COMPANY HAS BEEN ESTABLISHED AS THE HOSPITALITY ARM OF DLF LIMITED, WHICH IS ITS HOLDING COMPANY. THE COMPANY DEVELOPS, ACQUIRES, FINANCES AND ACTIVELY MANAGES A RAPIDLY GROWING HOSPITALITY PORTFOLIO. WITH APPROXIMATELY 6,000 ROOMS UNDER CURRENT DEVELOPMENT IN MOST MAJOR CITIE S AND TOURIST DESTINATIONS IN INDIA, DHHL IS ON TRACK TO CREATE A PORTFOLIO OF 25,000 ROOMS IN THE NEXT 5 YEARS. DLF HOTELS RECENTLY ACQUIRED CONTROLLING STAKE IN AMANRESORTS, ONE OF THE PRE-EMINENT AND MOST INNOVATIVE LUXURY HOTEL GROUPS IN THE WORLD. 'AMAN' - AN OUTSTANDING BRAND AND WINNER OF OVER 50 0 AWARDS SINCE 1968, SUCH AS CONDE NAST, 'THE GOLD LIST', GALLIVAN TER'S GUIDE 'BEST HOTEL WORLDWIDE' ETC. - OWNS AND OPERATES 18 BOUTIQUE RESORTS ACROSS COUNTRIES SUCH AS INDONESIA, THAILAND, SRI LANKA, I NDIA, MOROCCO, BHUTAN, FRANCE AND THE USA. (EMPHASIS PROVIDED) 7.12. GUIDED BY THE ABOVE AIMS AND VISION, FUNDS WERE AD VANCED TO ITS AE IN CYPRUS ON THE FOLLOWING DATES:- IT IS SEEN FROM THE FORM NO.3CEB AND TRANSFER PRIC ING STUDY THAT THE ASSESSEE COMPANY HAS ADVANCED LOANS TO ITS AE IN CY PRUS, DLF GLOBAL HOSPITALITY LIMITED, AS PER THE TABLE BELOW:- I.T.A .NO.-6336/DEL/2012 PAGE 21 OF 46 DATE OF INITIAL LOAN TO DGHL LOAN (US $) DHHL-DGHL AMOUNT IN INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466 7.13. ADMITTEDLY THESE LOANS WERE CONVERTED INTO EQUITY WITHIN 3 MONTHS AS PER THE FOLLOWING CHART:- MONTH END OPENING (RS.) FUNDS EXTENDED (RS.) CONVERSION INTO EQUITY (RS.) CLOSING BALANCE APR-07 MAY-07 JUNE-07 JULY-07 2,069,582,691 2,069,582,691 AUG-07 2,069,582,691 2,069,582,691 SEP-07 2,069,582,691 20,306,910 2,089,889,602 OCT-07 2,089,889,602 2,069,582,692 20,306,910 NOV-07 20,306,910 6,29,918,780 650,225,690 DEC-07 650,225,690 200,152,084 850,377,774 JAN-08 850,377,774 850,377,774 FEB-08 850,377,774 850,377,774 NIL MAR-08 NIL NIL 7.14. THOUGH WE FIND THAT THE CLAIM THAT THESE ADVANCES WERE CONVERTED INTO EQUITY IS NOT DISPUTED BY THE REVENUE, HOWEVER, FOR THE SAKE OF COMPLETENESS IT IS WORTH REFERRING THAT THIS CLAIM HAS BEEN SUPPORTED BY FOLLOWING DOCUMENTS PLACED BEFORE THE TPO/AO; THE DRP AND NOW BEFORE US IN THE PAPER BOOK FILED:- S.NO. PARTICULARS PAGE NO. 1. DOCUMENTS RELATING TO SHARE CAPITAL IN THE WHOLL Y OWNED SUBSIDIARY I.E. DLF GLOBAL HOSPITALITY LTD. (A) INITIAL INVESTMENT FOR EQUITY SHARES: DEBT AUTHORITY TO HSBC BANK ALONGWITH ODI FORM FORM A2-APPLICATION FOR REMITTANCE ABROAD CHARTERED ACCOUNTANTS CERTIFICATE DECLARATION CUM UNDERTAKING UNDER FEMA 1999 (B) COPIES OF RESOLUTION AND OTHER DOCUMENTS RELATING TO ISSUE OF EQUITY SHARES; 1-47 48-49 I.T.A .NO.-6336/DEL/2012 PAGE 22 OF 46 WRITTEN RESOLUTIONS TAKEN BY THE SOLE SHAREHOLDER OF DGHL 7.15. APART FROM PLACING ON RECORD THE COPY OF THE AUDIT ED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF DLF GLOBAL HOSPITALITY L IMITED FOR FINANCIAL YEAR 2007- 08 AT PAGES 50 TO 80 OF THEIR PAPER BOOK (AVAILABLE WITH THE AO/TPO AND THE DRP)THE ASSESSEE HAD ALSO PLACED THE FOLLOWING SUPP ORTING DOCUMENTS:- S.NO. PARTICULARS PAGE NO. 3. DETAILS OF ORIGINAL SHAREHOLDERS OF DLF GLOBAL HOSPITALITY LTD. COPY OF INSTRUMENT OF TRANSFER COPY OF CERTIFICATE OF SHAREHOLDING OF REGISTER OF COMPANIES NOTIFICATION DATED 06.08.2007 FOR CONVERSION OF SHARES GIVEN TO REGISTRAR OF COMPANIES CERTIFICATES DATED 25.08.2007 FOR CHANGE OF NAME FROM GUNBARREL INVESTMENT LTD. TO DLF GLOBAL HOSPITALITY LTD. ISSUED BY ROC, CYPRUS 81-84 7.16. WE FIND THAT THE DOCUMENTS FILED BY THE ASSESSEE RIGHT FROM THE STAGE OF ASSESSMENT BEFORE THE AO/TPO TILL DATE HAVE NOT BEE N ASSAILED BY THE REVENUE. WE NOTE THAT NEITHER THERE IS A REBUTTAL ON FACTS N OR IS THERE ANY EFFORT TO ASSAIL THEIR CORRECTNESS. IN THE LIGHT OF THE ABOVE FACTS , WE FIND THAT THE ASSESSEE HAS SUCCESSFULLY DEMONSTRATED THAT THE EXPLANATIONS OFF ERED WERE SUPPORTED BY ACTUAL CONDUCT. THE LOANS WERE ADVANCED AS AN ACTIVITY OF INCREASING ITS FOOTHOLD IN OPPORTUNITIES OUTSIDE AS PART OF CAPITAL TO BE CONV ERTED INTO EQUITY. THE STATED INTENT OF REALIZING THE AIMS AND VISION OF THE ASSE SSEE COMPANY WAS TO FUND ITS AE SO THAT THE BENEFITS OF THE EFFORTS OF THE AE IN IN CREASING THE FOOTHOLD/PORTFOLIO WOULD DIRECTLY BENEFIT THE TAX PAYER IN INDIA AND T HE FACT THAT THE INTEREST FREE LOAN I.T.A .NO.-6336/DEL/2012 PAGE 23 OF 46 HAS BEEN CONVERTED IN EQUITY AFTER FULFILLING THE NECESSARY LEGAL REQUIREMENTS WITHIN THREE MONTHS IS AN EVIDENCE ON RECORD.. 7.16.1. IN THE FACTS AS THEY STAND WE ARE NOW CALLED UPON TO DECIDE WHETHER IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE IT IS AN INTERNATIONAL TRANSACTION OR NOT. THE REVENUE CLAIMS THAT THE FACT OF SHOWIN G THE INTEREST FREE LOAN AS AN INTERNATIONAL TRANSACTION TO ITS SUBSIDIARY AE IN F ORM 3CEB IPSE DIXIT AS CONSIDERED IN PEROT SYSTEMS TSI VS DCIT [2010] 130 TTJ 685 (DEL.) AND ALSO VVF LTD. ATTRACTS THE PROVISIONS OF CHAPTER X OF THE INCOME TAX ACT, 1961. THE CONSISTENT OBJECTIONS POSED BY THE TAX PAYER THOUGH HAVE BEEN ACKNOWLEDGED BY WAY OF REPRODUCTION IN THE ORDERS HAVE NOT BEEN CON SIDERED NECESSARY TO ADDRESS WHETHER ADJUSTMENT UNDER CHAPTER X IS WARRANTED. T HE SPECIOUS AND FACILE REASONING THAT INTERNATIONAL TRANSACTION IS ACKNOWL EDGED IN FORM 3CEB BY THE ASSESSEE ITSELF CANNOT FORM THE BASIS OF THE CONCLU SION. AT BEST IT CAN FORM THE STARTING POINT OF THE ENQUIRY. IN THE LIGHT OF THE EVIDENCES ON RECORD AND CONSIDERING THE ARGUMENTS, WE ARE INCLINED TO HOLD THAT MERE DISCLOSURE OF THE INTEREST FREE LOAN AS AN INTERNATIONAL TRANSACTION BY THE TAX PAYER IN FORM 3CEB WOULD NEITHER ACT AS AN ESTOPPEL NOR FORE CLOSE TH E TAX PAYER FROM CLAIMING THE SAME AS NOT BEING AN INTERNATIONAL TRANSACTION. TH E TRANSACTION WILL BECOME INTERNATIONAL TRANSACTION NECESSITATING ARMS LENGT H ADJUSTMENT IF THE INGREDIENTS OF THE TRANSACTION BRING IT WITHIN THE PURVIEW OF C HAPTER X. THE DISCLOSURE MADE BY WAY OF ABUNDANT CAUTION OR DUE TO IGNORANCE OF L AW ON FACTS CANNOT BE THE BASIS OF THE DECISION OF THE TAX AUTHORITIES MORE S O IF THE ASSESSEE RAISES OBJECTIONS QUESTIONING THE SAME. THE DECISION OF THE TAX AUT HORITIES HAS TO BE BASED ON I.T.A .NO.-6336/DEL/2012 PAGE 24 OF 46 FACTS SUPPORTING THE CONCLUSION. THE TAX AUTHORITI ES CANNOT SHY AWAY FROM ADDRESSING THE ARGUMENTS THAT IT WAS A SHAREHOLDER ACTIVITY NECESSITATING IMMEDIATE AVAILABILITY OF FUNDS IN THE HANDS OF THE AE IN ORDER TO ATTAIN THE AIMS AND VISION OF THE HOLDING COMPANY. THE LAW DOES NO T PERMIT OR CONTEMPLATE AN APPELLATE FORUM OR AN AUTHORITY ANY JUSTIFICATION F OR IGNORING THE ARGUMENTS OF THE TAX PAYER BASED ON FACTS MADE AVAILABLE TO THEM . THE CONSISTENT FACT ON RECORD IS THAT THE TAX PAYER WAS THE SOLE SHAREHOL DER IN ITS NEWLY CREATED SUBSIDIARY AE WHOSE SUCCESS IN THE VENTURE OF INCR EASING ITS PORTFOLIO DIRECTLY IMPACTED THE BUSINESS INTERESTS. THE FACT THAT INC APABILITY TO GENERATE RESOURCES AND EXPERIENCE WAS CLEARLY LACKING IS NOT IN DOUBT. THOUGH THE COMMERCIAL EXPEDIENCY BY WAY OF NEED OR NECESSITY OF THE SAME CANNOT BE QUESTIONED BY THE REVENUE HOWEVER FACTS LEADING TO AND JUSTIFYING THE ARGUMENT NEED TO BE ADDRESSED. IT IS WELL SETTLED THAT THE TAX ASSESSO RS CANNOT SIT IN THE ARM CHAIR OF THE BUSINESSMAN. WE HOLD CONSIDERING THE PROVISIO NS THAT IT IS NOT WITHIN THE DOMAIN OF THE TAX AUTHORITIES TO INSIST THAT THE AI M OF ENHANCING THE GLOBAL REACH OF THE PORTFOLIO SHOULD BE ATTAINED THROUGH A PURE LOAN AND NOT BY WAY OF SHAREHOLDING ACTIVITY. THERE IS NOTHING ON RECORD TO DISBELIEVE THE EXPLANATION THAT THE AE DID NOT HAVE THE DEMONSTRATED CAPABILIT Y TO FULLY UTILIZE THE FUNDS FOR THE INTENDED PURPOSE IN A NEW AREA BEING A NEW TERR ITORY. THUS THE ARGUMENT THAT IN ORDER TO MAINTAIN CONTROL AND COMMAND OVER THE F UNDS ADVANCED FULFILLING REGULATORY CONDITIONS AT CYPRUS ETC. WERE REQUIRED TO BE GIVEN DUE CONSIDERATION. THE STATED INTENT OF THE TAX PAYER THAT WHEN THE FU NDS WERE FULLY UTILIZED AND EXHAUSTED BY APPLYING TOWARDS THE INTENDED PURPOSES IT WAS TO BE CONVERTED INTO I.T.A .NO.-6336/DEL/2012 PAGE 25 OF 46 EQUITY WHICH HAS BEEN DONE. THUS THE ARGUMENTS THA T THE FUNDS ADVANCED TILL THEN AS AN INTEREST FREE LOAN, IF IT HAS TO BE DISB ELIEVED, HAS TO BE SHOWN AS SHAM OR BOGUS TRANSACTION. THE FACTS ARE NOT SO. IN THE FACE OF THE ABOVE CONSISTENT CLAIM DEMONSTRATED BY THE ASSESSEE BY WAY OF FACTS AND SUPPORTING EVIDENCES WHICH STAND UNASSAILED BY THE REVENUE ON RECORD, WE THEREFORE FIND NO JUSTIFICATION EITHER IN FACT OR LAW TO UPHOLD THE R EVENUES STAND THAT THE TAX PAYER MUST NECESSARILY BE BOUND BY THE DISCLOSURE MADE IN FORM NO.3CEB REPORT. THERE IS NOTHING ON RECORD TO SUPPORT THE CONCLUSIO N THAT THE INTEREST FREE LOAN MUST NECESSARILY BE DEEMED TO BE AN INTEREST EARNIN G ACTIVITY AND NOT AN ACTIVITY TO CAPITALIZE THE OPPORTUNITY COST FOR INVESTING IN NEW TERRITORIES. WE HOLD THAT FOR THE TAX AUTHORITIES TO CONSIDER RE-CHARACTERIZING T HE TRANSACTION THE TAX AUTHORITIES MUST NECESSARILY DEMONSTRATE THAT THE TRANSACTION A S CLAIMED AND DOCUMENTED IS A SHAM OR ON THE BASIS OF FACTS AND EVIDENCES IS AT A SUBSTANTIAL VARIANCE WITH THE STATED FORM. IN THE ABSENCE OF ANY SUCH EXERCISE T HE TAX AUTHORITIES ARE ENTERING AT THEIR PERIL IN THE REALM OF ARBITRARINESS. IN T HE FACTS OF THE PRESENT CASE THERE IS NOT EVEN A WHISPER OF A SUGGESTION THAT IT WAS A BO GUS TRANSACTION, AS ADMITTEDLY SHARES HAVE BEEN ALLOTTED. THERE IS NOTHING IN THE PROVISIONS OF THE ACT WHICH EMPOWERS THE TAX AUTHORITIES TO INSIST THAT THE INT EREST FREE LOAN TOWARDS ITS AE FOR CAPITALIZATION THE OPPORTUNITY OF COST OF ENTER ING IN NEW TERRITORIES MUST NECESSARILY BY MODIFIED AND RE-CHARACTERIZED INTO A LOAN SIMPLICITOR AND CONSIDERED TO BE AN ACTIVITY FOR EARNING INTEREST. THE TAX AUTHORITIES MUST BRING ON RECORD FACTS AND EVIDENCES IMPACTING THE VERACITY O F THE CLAIM OF THE ASSESSEE AND DEMONSTRATE THE HOLLOWNESS OF THE ASSESSEES CLAIM. NO SUCH EXERCISE HAS BEEN I.T.A .NO.-6336/DEL/2012 PAGE 26 OF 46 DONE TO COUNTER THE CONSISTENT CLAIM OF THE ASSESSE E DEMONSTRATED BY FACTS ON RECORD THAT THE INTENTION WAS TO CAPITALIZE THE OP PORTUNITY COST AND NOT TO ENCASH THE OPPORTUNITY TO BEST UTILIZE THE AVAILABLE FUNDS . IN THE FACTS AS THEY STAND, WE FIND THAT THE CLAIM OF THE ASSESSEE HAS TO BE ALLOW ED. 7.16.2. THE ORDER OF THE CO-ORDINATE BENCH DATED 07.07.2015 IN THE CASE OF SOMA TEXTILES AND INDUSTRIES LTD VS CIT IN ITA 262/AHD/2012 SUPPORTS THE VIEW TAKEN AS THE ASSESSEES CONDUCT IN EXPLOITING THE O PPORTUNITY FOR CAPITAL INVESTMENT IN THE PECULIAR FACTS TAKES THE ISSUE OU T OF THE PURVIEW OF CHAPTER X OF THE INCOME TAX ACT, 1961. A BRIEF REFERENCE TO THE SAID ORDER AT THIS PLACE W OULD BE RELEVANT AS IT IS SEEN THAT THE CO-ORDINATE BENC H WAS ALSO SEIZED OF FACTS WHERE INVESTMENT IN SHARE CAPITAL BY THE ASSESSEE HOLDING COMPANY IN INDIA IN ITS SUBSIDIARY IN UNITED ARAB EMIRATES WAS HELD BY THE TAX AUTHORITIES TO BE COVERED WITHIN THE SCOPE OF INTERNATIONAL TRANSACTIONS AS DEFINED IN SECTION 92CA(3). THEREIN ALSO THE COMMERCIAL EXPEDIENCY FOR ADVANCIN G OF INTEREST FREE LOANS BY THE ASSESSEE WAS NOT ACCEPTED BY THE TAX AUTHORITIES AN D AS IN THE FACTS OF THE PRESENT CASE RELIANCE THEREIN WAS ALSO PLACED ON PEROT SYSTEMS TSI VS DCIT [2010] 130 TTJ 685 (DEL.) AND ALSO VVF LTD. (CITED SUPRA) WHEREIN MORE OR LESS IDENTICAL CLAIM OF THE ASSESSEE WAS REJECTED BY THE TPO AND T HE SAID FINDING HAD BEEN UPHELD BY THE CIT(A). THE CO-ORDINATE BENCH CONSID ERING THE FACTS ACCEPTED THE ASSESSEES ARGUMENT THAT IN THE CASE OF PEROT SYSTEMS (CITED SUPRA) THE ARGUMENT THAT LOAN BEING QUASI-CAPITAL WAS REJECTED ON FACTS AND THE CORE LEGAL ISSUE WAS LEFT OPEN NAMELY WHETHER ALP ADJUSTMENTS WILL ALSO BE WA RRANTED IN CASE OF INTEREST FREE LOAN EXTENDED AS QUASI-CAPITAL. THE CO-ORDINAT E BENCH EXAMINED AND I.T.A .NO.-6336/DEL/2012 PAGE 27 OF 46 CONSIDERED THE DECISIONS RENDERED IN PEROT SYSTEMS TSI VS DCIT [2010] 130 TTJ 685 (DEL.); MICRO INKS LTD VS ACIT [2013] 157 T TJ 289 (AHD.); FOUR SOFT PVT. LTD. VS DCIT [2014] 149 ITD 732 (HYD); PRITHVI INFORMATION SOLUTIONS PVT. LTD. VS ACIT [2014] 34 ITR (TRI) 429 (HYD.) AND THEREAFTER CAME TO THE CONCLUSION THAT NONE OF THESE DECISIONS HAD THROWN ANY LIGHT O N WHAT CONSTITUTES QUASI CAPITAL IN THE CONTEXT OF TRANSFER PRICING AND ITS RELEVANCE IN ASCERTAINMENT OF THE ARMS LENGTH SALES PRICE OF A TRANSACTION IN THE SAID CONTEXT. THE CO- ORDINATE BENCH HAS QUOTED THE DECISION OF THE HONB LE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS INDIA LTD VS ACIT [(2015) 56 TAXMANN.COM 417 (DELHI)] WHEREIN THEIR LORDSHIPS HAVE BEGUN BY QUOTING THE THOUGHT PROVOKING WORDS OF JUSTICE FELIX FRANKFURTER TO THE EFFECT THAT A PHRASE BEGINS LIFE AS A LITERARY EXPRESSION; ITS FELICITY LEADS TO ITS LAZY REPETITION; AND REPETITION SOON ESTABLISHES IT AS A LEGAL FORMULA, UNDISCRIMINATINGLY USED TO EXPRESS DIFFERENT AND SOMETIMES CONTRADICTORY IDEAS'. THE REFERENCE SO MADE TO THE WORDS OF JUSTICE FRANKFURTER WAS IN THE CONTEXT OF THE CO NCEPT OF SUPER PROFITS. THE CO-ORDINATE BENCH OBSERVED THAT IT IS EQUALLY VALID IN THE CONTEXT OF CONCEPT OF QUASI CAPITAL ALSO OBSERVING THAT AS IN THE CASE OF THE SUPER PROFITS THERE HAS BEEN A 'LAZY REPETITION' (IN THE WORDS OF FELIX FR ANKFURTER J.) WITH REGARD TO QUASI CAPITAL AS THERE APPEARS TO BE NO INDEPENDENT ANAL YSIS OF THE PROVISIONS OF THE ACT AND THE RULES WITH REGARD TO QUASI CAPITAL ALSO. 7.16.3. WE FIND THAT THE CO-ORDINATE BENCH CONSIDERING THE TERM QUASI CAPITAL HAS CORRECTLY UNDERSTOOD THAT A QUASI-CAPITAL LOAN OR ADVANCE IS NOT A ROUTI NE LOAN TRANSACTION SIMPLICTOR. THE SUBSTANTIVE REWARD FOR SUCH A LOAN TRANSACTION IS NOT I.T.A .NO.-6336/DEL/2012 PAGE 28 OF 46 INTEREST BUT OPPORTUNITY TO OWN CAPITAL. AS A COROL LARY TO THIS POSITION, IN THE CASES OF QUASI CAPITAL LOANS OR ADVANCES, THE COMPARISON OF THE QUASI CAPITAL LOANS IS NOT WITH THE COMMERCIAL BORROWINGS BUT WITH THE LOANS O R ADVANCES WHICH ARE GIVEN IN THE SAME OR SIMILAR SITUATIONS. THE DECISIONS CONSIDERING THE EXPRESSION WERE HELD TO BE INAPPLICABLE AS THE REWARD FOR TIME VALUE OF MONEY IN THESE CASES W AS OPPORTUNITY TO SUBSCRIBE TO THE CAPITAL, UNLIKE IN A NORMAL LOAN TRANSACTION WHERE REWARD IS INTEREST, WHICH IS MEASURED AS A PERCENTA GE OF THE MONEY LOANED OR ADVANCED. WE FIND THAT QUASI CAPITAL CAN BE SAID TO BE A CATE GORY OF DEBT TAKEN BY A COMPANY WHICH IN THE CONTEXT OF TRANSFER PRICING ISSUES IS NOT ONLY AN INSTRUMENT OF LEGITIMATE FUNDING BUT IS ALSO A HYBR ID INSTRUMENT PRE-STIPULATED TO BE A LOAN FOR A TRANSITORY PERIOD, THE ECONOMIC PUR POSE OF WHICH IS A FUTURE CAPITAL INVESTMENT IN ALL ITS FORMS INCLUDING CONTRIBUTION TO EQUITY OR SUBSCRIPTION OF CAPITAL AND CANNOT BE JUSTIFIABLY BE TREATED AS A DEBT SIMPLICITOR. 7.17. RELIANCE HAS ALSO BEEN PLACED ON THE CASE OF BHARTI AIRTEL LTD. VS ACIT IN ITA NO.5816/DEL/2012 DATED 11.03.2014 (COPY OF WHIC H HAS BEEN PLACED AT BOOK PAGES 38 TO 94). THOUGH RELIANCE ON THE SAID DECIS ION HAS PRIMARILY BEEN PLACED QUA GROUND NO.2 IN ORDER TO ARGUE THAT WITHOUT PREJ UDICE TO THE MAIN ISSUE IF AT ALL INTEREST WAS TO BE CHARGED ON THE INTEREST FREE ADVANCES THEN THE LIBOR RATE WOULD APPLY. THE SAID PROPOSITION IT HAS BEEN ARGU ED IS ALSO SUPPORTED BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF COTTON NATURALS INDIA P. LTD .(CITED SUPRA). HOWEVER, APART FROM THE ISSUE AGIT ATED IN GROUND NO.2, BHARTI AIRTEL LTD. (CITED SUPRA) HAS ALSO BEEN RELIED IN SUPPORT OF T HE PRIMARY ISSUE FOR THE PROPOSITION THAT THE ACTIVITY OF INTEREST FREE ADVANCES ULTIMATELY TO BE I.T.A .NO.-6336/DEL/2012 PAGE 29 OF 46 CONVERTED INTO EQUITY BY A HOLDING COMPANY TO A SUB SIDIARY COMPANY DOES NOT GIVE RISE TO AN INTERNATIONAL TRANSACTION. 7.18. CONSIDERING THE SAID DECISION, WE FIND THAT THE CO -ORDINATE BENCH WAS CALLED UPON TO DECIDE WHETHER CHAPTER X WAS ATTRACT ED IN FACTS WHERE THE ASSESSEE HAD ADVANCED INTEREST FREE LOANS TO ITS AE FOR THE STATED PURPOSE OF SHARE APPLICATION. THESE MATERIAL FACTS AND ISSUE WOULD BE EVIDENT FROM THE VERY WORDINGS OF GROUND NO.15 AND 15.1 RAISED BY THE ASS ESSEE BEFORE THE CO-ORDINATE BENCH. THESE GROUNDS WHEN READ ALONGWITH OTHER REL ATED GROUNDS AGITATED BEFORE THE CO-ORDINATE BENCH ARE BEING REPRODUCED SO AS TO BRING OUT THE GAMUT OF ISSUES AGITATED AND CONSIDERED:- 43. IN GROUND NO. 15, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: 15. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN MAKING ADDITION OF RS.19,15,45,943 ON ACCOUNT OF NOTIONAL INTEREST CALCULATED @ 17.26% P.A. ON THE AMOUNT OF SHARE APPLICATION MONEY ADVANCED BY THE APPELLANT TO ITS AES. 15.1. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE TRANSACTION OF ADVANCEMENT OF SHARE APPLICATION MONEY WAS NOT IN T HE NATURE OF 'INTERNATIONAL TRANSACTION' AS DEFINED IN SECTION 92B AND HENCE WAS OUTSIDE THE PURVIEW AND SCOPE OF CHAPTER X OF THE ACT. 15.2. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN TREATING THE AMOUNT OF INVESTMENTS MADE BY THE APPE LLANT IN ITS ASSOCIATED ENTERPRISES IN THE FORM OF SHARE APPLICA TION MONEY FOR ALLOTMENT OF SHARES AS INTEREST FREE LOANS AND CONS EQUENTLY, APPLYING TRANSFER PRICING PROVISIONS TO THE SAID TR ANSACTION(S) AND WHILE DOING SO MAKING AN IMPROPER COMPARISON BY: (A) CONSIDERING RATE OF INTEREST SUGGESTED BY RATIN G AGENCY AND BANKS TO GENERAL INVESTOR WHICH ARE SUBJECT TO VARI OUS CONDITIONS LIKE CREDIT RATING, LOAN, TENURE, ETC. AND IGNORING THE FACT THAT SUCH RATES CAN VARY ACCORDING TO THESE VARIABLES; (B) UNDERTAKING A FLAWED ANALYSIS BY APPLYING THE R ATE OF INTEREST USED IN RELATION TO - INDIAN CURRENCY LOAN GIVEN IN INDIA TO AN INTERCOMPANY TRANSACTION OF ADVANCEMENT OF MONEY OU TSIDE OF INDIA, THEREBY COMPLETELY IGNORING THE DIFFERENCE I N THE, ECONOMIC I.T.A .NO.-6336/DEL/2012 PAGE 30 OF 46 ENVIRONMENT AND GEOGRAPHICAL CONDITIONS PREVALENT I N INDIA AND OVERSEAS JURISDICTIONS; (C) ALLEGING THAT THE FINANCIAL HEALTH OF THE ASSOC IATED ENTERPRISES WAS WEAK AND FURTHER IN DETERMINING THE CREDIT RATING OF THE ASSOCIATED ENTERPRISES AS RANGING BET WEEN BB TO D, BEING HIGH RISK CATEGORY, WITHOUT PROVIDING A NY COGENT OR GERMANE REASON FOR THE SAME; (D) MAKING ADDITIONAL ARBITRARY AND ADHOC ADJUSTMEN TS TO THE RATE OF INTEREST ON ACCOUNT OF SECURITY AND SINGLE CUSTO MER AND TRANSACTION COST, THEREBY COMPLETELY IGNORING THE O N-GROUND REALITY OF THE INTER--COMPANY TRANSACTION THAT THERE IS NO SIGNIFICANT RISK IN ADVANCING LOANS TO 100% SUBSIDIARY COMPANIES AND DE MONSTRATING AN INTENTION TO ARRIVE AT A VERY HIGH INTEREST RATE OF 17.26% P.A. WITH THE SINGLE-MINDED INTENTION OF MAKING AN ADDIT ION TO THE RETURNED INCOME OF THE APPELLANT. 15.3 THAT THE ASSESSING OFFICER/TPO ERRED IN RELYIN G UPON THE RATE OF INTEREST CHARGED BY VARIOUS DOMESTIC BANKS ON AD VANCEMENT OF FOREIGN CURRENCY LOANS OBTAINED BY THE TPO UNDER SE CTION 133(6) OF THE ACT, WITHOUT AFFORDING OPPORTUNITY TO THE APPEL LANT TO REBUT THE SAME, IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE . 15.4 THAT THE ASSESSING OFFICER/TPO ERRED IN RELYIN G UPON THE INFORMATION OBTAINED UNDER SECTION 133(6) OF THE AC T, WITHOUT APPRECIATING THAT SUCH INFORMATION WAS NOT AVAILABL E IN THE PUBLIC DOMAIN AND THEREFORE, COULD NOT HAVE BEEN RELIED UP ON FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE. 15.5. WITHOUT PREJUDICE, THAT THE ASSESSING OFFICE R/TPO ERRED IN COMPUTING THE AMOUNT OF INTEREST AT RS.19,15,45,943 , BY APPLYING RATE OF INTEREST OF 17.26% P.A. FOR THE WHOLE YEAR ON THE CONSOLIDATED AMOUNT OF SHARE APPLICATION MONEY, WIT HOUT CONSIDERING THE MONTHLY BALANCE OF SHARE APPLICATIO N MONEY. 15.6 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW BY DISREGARDING ESTABLISHED JUDICIAL PRONOUNCEMENTS IN INDIA IN MAKING THE TRANSFER PRICING ADJUSTMENT. 7.18.1. THE FACTS AND THE LEGAL PRECEDENT WITH WHICH THE C OORDINATE BENCH WAS SEIZED OF ARE SET OUT IN PARAS 44 TO 45 OF THE SAID ORDER AND ARE REPRODUCED HEREUNDER FOR THE PURPOSES OF BRINGING OUT THE SIMI LARITY ON THE MATERIAL FACTS:- 44. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CON CERNED, THE RELEVANT MATERIAL FACTS, TO THE EXTENT NECESSARY FOR OUR ADJ UDICATION, ARE AS FOLLOWS. IT IS NOT IN DISPUTE THAT DURING THE RELEVANT PREVI OUS YEAR THE ASSESSEE HAS MADE FOLLOWING PAYMENTS TOWARDS SHARE APPLICATI ON MONEY IN ITS FOREIGN SUBSIDIARIES: NAME OF ASSOCIATED ENTERPRISES AMOUNT OF ADVANCE (RS.) DATE OF SHARE APPLICATION DATE OF ISSUE OF SHARES I.T.A .NO.-6336/DEL/2012 PAGE 31 OF 46 BHARTI AIRTEL (U.S.A.) LTD. 40,45,14,1 09 29.11.2007 31.03.2009 BHARTI AIRTEL (U.K.) LTD. 3,17,72,666 31.01.2008 12.03.2009 BHARTI AIRTEL (SINGAPORE) LTD. 2,01,39,150 24,09.2007 1.04.2009 BHARTI AIRTEL (HONGKONG) LTD. 1,81,48,200 24.09.2007 10.12.2008 BHARTI AIRTEL (LANKA) LTD. 63,51,93,795 VARIOUS DATES 31.07.2008 TOTAL 110,97,67,920 45. THESE TRANSACTIONS WERE NOT BENCHMARKED AS, ACCORDI NG TO THE ASSESSEE, THESE WERE IN THE NATURE OF SHARE APPLICA TION MONEY PAYMENTS. WHILE THE TPO DID NOT QUESTION THE CHARACTER OF PAY MENT, HE NOTED THAT FROM THE INFORMATION ON RECORD, IT IS SEEN THAT TH ESE AMOUNTS WERE EXTENDED BY THE AE WHICH HAVE NOT BEEN CONVERTED IN TO EQUITY FOR QUITE A LONG TIME AFTER THE INITIAL ADVANCEMENT. IT WAS ALSO NOTED THAT TIME TAKEN IN ACTUAL ALLOTMENT OF SHARES HAS TAKEN PLACE AS MUCH AS 13, 16 AND 14 MONTHS IN THE CASES OF UK, US AND HON G KONG BASED SUBSIDIARIES, AND THAT THE ASSESSEE HAS NOT EARNED ANY INTEREST FOR THIS LONG PERIOD. THE TPO WAS OF THE VIEW THAT ANY INDEPENDENT ENTITY WOULD NOT HAVE LEFT THE AMOUNT I N THE HANDS OF ANOTHER ENTITY WITHOUT THE SAME BEING CONVERTED INT O EQUITY WITHIN A REASONABLE PERIOD OR RECEIVING INTEREST ON THE SAME. IT WAS IN THIS BACKDROP THAT THE TPO PROCEEDED TO TREA T THESE AMOUNTS AS INTEREST FREE LOANS EXTENDED TO THE AES. HE THEN REFERRED TO THE PROVISIONS OF SECTION 92 B, IN THE LIGHT OF WHICH, ACCORDING TO THE TPO, LENDING OR BORROWING OF THE M ONEY COMES WITHIN THE AMBIT OF INTERNATIONAL TRANSACTIONS . HE THUS JUSTIFIED DETERMINATION OF ARMS LENGTH PRICE OF THE TRANSACT ION OF, WHAT HE TERMED, AS INTEREST LOANS TO THE AES. RELIANCE WAS PLACED O N THE DECISIONS OF THE COORDINATE BENCHES IN THE CASES OF VVF LTD VS DCIT (2010 TIOL 55 ITAT MUM TP) AND PEROT SYSTEMS TSI INDIA LTD VS DCI T (2010 TII 3 ITAT TEL TP). THE TPO THEN PROCEEDED TO DETERMINE ALP OF THE DEE MED INTEREST FREE LOANS TO THE AE, BUT, FOR THE REASONS WE WILL SET OUT IN A SHORT WHILE, IT IS NOT REALLY NECESSARY TO DEAL WITH FACT S RELATING TO ALP DETERMINATION PART. WHEN ASSESSEE RAISED THE OBJECT ION BEFORE THE DRP ON THIS ISSUE, IT WAS REJECTED BY OBSERVING THAT, WE AGREE WITH THE TPO THAT CAPITAL LOCKED UP FOR WANT OF TRANSFER OF SHARES FO R REASONABLY LONG PERIOD WOULD PARTAKE THE NATURE OF LOAN. IT WAS IN THIS B ACKDROP THAT PAYMENTS FOR SHARE APPLICATION MONEY WERE TREATED AS INTERES T FREE LOANS GIVEN TO THE AES AND ALP ADJUSTMENT WAS MADE FOR INTEREST TH EREON. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. (EMPHASIS PROVIDED) 7.18.2. CONSIDERING THE ARGUMENTS ON THESE FACTS AND THE LE GAL PRECEDENT THE CO- ORDINATE BENCH CAME TO THE FOLLOWING CONCLUSION:- I.T.A .NO.-6336/DEL/2012 PAGE 32 OF 46 46. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED T HE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE IN T HE LIGHT OF THE APPLICABLE LEGAL POSITION. 47. WE FIND THAT IN THE PRESENT CASE THE TPO HAS NO T DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAY MENTS FOR SHARE APPLICATION MONEY, AND THUS, OF CAPITAL CONTR IBUTIONS. THE TPO HAS NOT MADE ANY ADJUSTMENT WITH REGARD TO THE ALP OF THE CAPITAL CONTRIBUTION. HE HAS, HOWEVER, TREATED THES E TRANSACTIONS PARTLY AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN THE DATES OF PAYMENT TILL THE DATE ON WHICH SHARES WERE ACTUA LLY 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 CA N 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 LEGISLATIO N OR ON THE FACTS OF THIS CASE. WE DONOT FIND SO. WE DONOT FIND ANY PROVISION IN L AW 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 FR EE 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 REASONA BLE AND PERMISSIBLE TIME PERIOD FOR ALLOTMENT OF SHARES, AND EVEN IF ON E WAS TO ASSUME THAT THERE WAS AN UNREASONABLE DELAY IN ALLOTMENT OF SHA RES, THE CAPITAL CONTRIBUTION COULD HAVE, AT BEST, BEEN TREATED AS A N INTEREST FREE LOAN FOR SUCH A PERIOD OF INORDINATE DELAY AND NOT THE ENT IRE 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 DEE MED INTEREST FREE LOAN ON ALLOTMENT OF SHARES UNDER THE CUP METH OD, 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 PAYAB LE TO AN UNRELATED SHARE APPLICANT IF, DESPITE HAVING MADE T HE PAYMENT OF SHARE APPLICATION MONEY, THE APPLICANT IS NOT ALLOT TED THE SHARES. THAT ASPECT OF THE MATTER IS DETERMINED BY THE RELE VANT STATUTE. THIS SITUATION IS NOT IN PARI MATERIA WITH AN INTER EST FREE LOAN ON COMMERCIAL BASIS BETWEEN THE SHARE APPLICANT AND TH E 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. SINC E THE TPO HAS NOT BROUGHT ON RECORD ANYTHING TO SHOW THAT AN UNRELATE D SHARE APPLICANT WAS TO BE PAID ANY INTEREST FOR THE PERIO D BETWEEN MAKING THE SHARE APPLICATION PAYMENT AND ALLOTMENT OF SHARES, THE VERY FOUNDATION OF IMPUGNED ALP ADJUSTMENT IS D EVOID 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 DEPA RTMENTAL I.T.A .NO.-6336/DEL/2012 PAGE 33 OF 46 REPRESENTATIVE, ON WHICH THEIR CASE RESTS. NONE OF THESE DECISIONS, HOWEVER, DEAL WITH THE CORE ISSUE BEFORE US I.E. WH ETHER 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 ISSU ED BY THE SUBSIDIARY 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 ARMS LENGTH PRICE ADJ USTMENT WITH REGARD TO INTEREST FREE ADVANCES TO THE SUBSIDIARIES. THAT WA S A CASE IN WHICH THE ASSESSEE, AN INDIAN COMPANY, ADVANCED INTEREST-FREE LOANS TO ITS 100% FOREIGN SUBSIDIARIES. THE SUBSIDIARIES USED THOSE F UNDS TO MAKE INVESTMENTS IN OTHER STEP- DOWN SUBSIDIARIES. ON TH E QUESTION WHETHER NOTIONAL INTEREST ON THE SAID LOANS COULD BE ASSESS ED IN THE HANDS OF THE ASSESSEE UNDER THE TRANSFER PRICING PROVISIONS OF C HAPTER X, THE ASSESSEE ARGUED THAT THE SAID 'LOANS' WERE IN FACT 'QUASI - EQUITY' AND MADE OUT OF COMMERCIAL EXPEDIENCY. IT WAS ALSO ARGUED THAT NOTI ONAL INCOME COULD NOT BE ASSESSED TO TAX. HOWEVER, BOTH OF THESE ARGUMENT S WERE REJECTED BY A COORDINATE BENCH OF THIS TRIBUNAL. WHILE DOING SO, THE COORDINATE BENCH OBSERVED THAT THERE WAS NO MATERIAL ON RECORD TO ES TABLISH THAT THE LOANS WERE IN REALITY NOT LOANS BUT WERE QUASI -CAPITAL A ND 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'. THE ARGUMENT OF LOAN BEING IN THE NA TURE 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 ADJUSTMENTS CAN BE MADE IN RESPECT OF PAYMENTS TOWARDS SHARE APPLICATION MONEY IN A SITUATION IN WHICH THE SHARE S HAVE BEEN ISSUED SEVERAL MONTHS AFTER THE PAYMENTS FOR SHARE APPLICA TION MONEY HAVE BEEN MADE. SIMILARLY, IN VVF'S CASE (SUPRA), THE TRANSACTION WAS ADMITTEDLY IN THE NATURE OF INTEREST FREE LOAN BETW EEN AES AND THE COMMERCIAL EXPEDIENCY IN ADVANCING INTEREST FREE LO ANS WAS ON ACCOUNT OF OWNERSHIP AND CONTROL OF SUBSIDIARY BEING IN THE HA NDS OF THE ASSESSEE, WHICH WAS RECOGNIZED AS A SIGNIFICANT FACTOR FOR CO MMERCIAL EXPEDIENCY. HOWEVER, AS WE HAVE SEEN IN THE EARLIER DISCUSSIONS , SUCH COMMERCIAL EXPEDIENCY OF GRANTING INTEREST FREE LOANS IS WHOLL Y IRRELEVANT BECAUSE IT IS THE IMPACT OF THIS INTERRELATIONSHIP, ON ACCOUNT OF MANAGEMENT, CAPITAL AND CONTROL, WHICH IS SOUGHT TO BE NEUTRALIZED BY A RM'S LENGTH PRICE ADJUSTMENTS. THIS WAS ALSO NOT A CASE IN WHICH A CA PITAL 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 CONTR IBUTION (I.E. WHEN THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIARY). REVENUE, THEREFORE, DOES NOT DERIVE ANY ADVANTAGE FROM THESE JUDICIAL P RECEDENTS EITHER. 49. IN ANY EVENT, IT IS NOT OPEN TO THE REVENUE AUT HORITIES TO RECHARACTERIZE THE TRANSACTION UNLESS IT IS FOUND TO BE A SHAM OR BOGUS TRANSACTION. WHILE THERE ARE NO SPECIFIC POWERS VESTED IN THE TP O TO RECHARACTERIZE THE TRANSACTION, EVEN UNDER THE JUDGE MADE LAW, SUCH RE CHRACTERIZATION CAN BE DONE BY THE REVENUE AUTHORITIES WHEN THE TRANSAC TIONS ARE FOUND TO BE I.T.A .NO.-6336/DEL/2012 PAGE 34 OF 46 SUBSTANTIALLY AT VARIANCE WITH THE STATED FORM. IN THE PRESENT CASE, THERE CANNOT EVEN A SUGGESTION TO HOLD THAT THIS IS A BOG US TRANSACTION BECAUSE ADMITTEDLY THE SUBSCRIBED SHARES CAPITAL HAS INDEED BEEN ALLOTTED TO THE ASSESSEE. THE TRANSACTION IS THUS ACCEPTED TO BE GE NUINE 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 AUTHOR ITIES BELOW WERE IN ERROR IN TREATING THE PAYMENT OF SHARE APPLICATION MONEY, AS PARTLY IN THE NATURE OF INTEREST FREE LOANS TO THE AES, AND, ACCO RDINGLY, ALP ADJUSTMENT BASED ON THAT HYPOTHESIS WAS INDEED DEVOID OF LEGAL LY SUSTAINABLE MERITS. WE DELETE THE IMPUGNED ADJUSTMENT OF RS.19, 15,45,943. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. AS WE HAVE DE CIDED 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. (EMPHASIS PROVIDED) 7.18.3. WHEN THE FACTS AS CONSIDERED BY THE CO-ORDINATE BEN CH IN THE CASE OF BHARTI AIRTEL LTD. ARE SEEN AND THE FACTS OF THE PRESENT CASE ARE CON SIDERED, WE FIND THAT THERE IS A STRIKING SIMILARITY ON THE MAT ERIAL ISSUES AND THE ABOVE CONCLUSION AND REASONING FULLY SUPPORTS THE VIEW TA KEN. IN FACT AS ARGUED ON BEHALF OF THE ASSESSEE THE FACTS OF THE ASSESSEES CASE IN THE PRESENT CASE ARE ON A BETTER FOOTING AS THERE IS NO PERCEIVED INORDINATE DELAY IN CONVERTING THE INTEREST FREE LOAN INTO EQUITY WHICH EXERCISE ADMITTEDLY HAS BEEN COMPLETED IN 3 MONTHS AS OPPOSED TO 13 TO 14 MONTHS. THUS, THE SAID DECISIO N FULLY SUPPORTS THE ALLOWABILITY OF ASSESSEES CLAIM. 7.18.4. SINCE THE SAID DECISION HAS ALSO BEEN CITED IN SUP PORT OF GROUND NO.2 IN THE PRESENT PROCEEDINGS AND THE OCCASION TO CONSIDE R THE SAME IN VIEW OF OUR FINDING MAY NOT ARISE. HOWEVER FOR THE SAKE OF COM PLETENESS, WE NOTE THAT IN THE FACTS OF THAT CASE ALSO THE ASSESSEE HAD ADVANCED T HE INTEREST FREE LOAN IN FOREIGN CURRENCIES TO ITS SUBSIDIARY WHICH IS IDENTICAL TO THE FACTS OF PRESENT CASE. HEREIN ALSO THE ASSESSEE WHO WAS THE TESTED PARTY HAD ADVA NCED LOANS TO ITS FOREIGN AE IN I.T.A .NO.-6336/DEL/2012 PAGE 35 OF 46 FOREIGN CURRENCIES. THE CO-ORDINATE BENCH AFTER GI VING DUE CONSIDERATION TO THE GEOGRAPHIC; ECONOMIC AND FINANCIAL REALITIES OF THE TESTED PARTY AND THE FOREIGN AE ALSO NOTED THAT THE INTEREST RATE ON FOREIGN CURREN CY LOANS WERE QUALITATIVELY DIFFERENT AND COULD NOT BE COMPARED TO THE INTEREST RATE ON RUPEE LOANS AS INTEREST RATES ON STRONG CURRENCIES LIKE USD ETC. COULD NOT BE HELD TO BE COMPARABLE. IT HAS BEEN HELD THAT WHAT IS RELEVANT IS WHAT THE ASS ESSEE WOULD HAVE EARNED ON FOREIGN CURRENCY LOANS AND NOT WHAT THE ASSESSEE C OULD HAVE EARNED ON RUPEE DENOMINATED LOANS. THE RATIONALE FOR THE SAID CONC LUSION, WE FIND HAS BEEN SET OUT IN ACKNOWLEDGING THE BASIC FACT THAT INTEREST IS NOTHING BUT TIME VALUE OF MONEY AND WHEN INFLATION PRESSURE ON A CURRENCY IS LOWER, AS IS THE CASE WITH MOST STRONG CURRENCIES, THE TIME VALUE OF MONEY, I.E. IN TEREST, TENDS TO BE LOWER TOO. THEREFORE, COMPARING INTEREST RATE ON RUPEE LOANS C ANNOT AT ALL BE COMPARED WITH INTEREST RATES ON STRONG CURRENCIES LIKE GBP, USD A ND CAD. THE ERUDITE DISCUSSIONS BY THE TAX AUTHORITIES ABOUT THE INDIAN BOND MARKET AND INTEREST RATE WERE HELD TO BE WHOLLY IRRELEVANT. THE TPOS REASON ING THAT THE TESTED PARTY BEING THE ASSESSEE I.E. THE LENDER, THE PREVALENT INTERES T THAT COULD BE EARNED BY THE TAXPAYER BY ADVANCING LOAN TO AN UNRELATED PARTY IN INDIA WAS ALSO CONSIDERED AND HELD TO BE INAPPROPRIATE IN VIEW OF THE FACT THAT S INCE THE INTEREST RATE ON FOREIGN CURRENCY LOANS NECESSARILY BEING QUALITATIVELY DIFF ERENT, THUS IT WAS HELD THAT EVEN IF THE INTEREST THAT THE ASSESSEE WOULD HAVE EARNED WAS TO BE CONSIDERED THEN SUCH INTEREST WOULD BE THE INTEREST THAT THE ASSESS EE WOULD HAVE EARNED ON FOREIGN CURRENCY LOANS AND NOT RUPEE DENOMINATED LO ANS. IN THE FACTS OF THE PRESENT CASE THE ASSESSEE HAS ARGUED WITHOUT PREJUD ICE TO THE MAIN ISSUE THAT IF I.T.A .NO.-6336/DEL/2012 PAGE 36 OF 46 AT ALL INTEREST IS TO CHARGED THEN JUDICIAL PRECEDE NT SETS OUT THAT IT HAS TO BE THE LIBOR RATE + 2.5% INTEREST AS THE RATE CHARGED BY A N INDEPENDENT BANK IN THE FACTS OF THE PRESENT CASE AS THE ASSESSEES OWN CUP BEING THE BEST CUP ON RECORD CANNOT BE IGNORED. AS ADDRESSED EARLIER, WE ARE NOT CALLED UPON TO DECIDE THE ISSUE IN THE FACTS OF THE PRESENT CASE. 7.19. REVERTING BACK TO THE MAIN ISSUE, WE NOTE THAT ON BEHALF OF THE ASSESSEE, RELIANCE HAS ALSO BEEN PLACED ON THE JUDICIAL PRECE DENT AS CONSIDERED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES P.LTD. V UOI [2014] 369 ITR 511 (BOM.). A PERUSAL OF THE SAID DECISION SHOWS THAT IT FURTHE R PLACES RELIANCE ON VODAFONE INDIA SERVICES P.LTD. VS UOI 368 ITR 1 BOMBAY. THE SAID DECISION HAS BEEN RELIED UPON FOR THE PROPOSITION T HAT EVEN IF SHARES HAVE BEEN ISSUED AT A PREMIUM TO THE FOREIGN HOLDING C OMPANY BY AN INDIA SUBSIDIARY THE AMOUNTS RECEIVED FROM NON-RESIDENT BEING CAPITA L IN NATURE CANNOT BE SUBJECTED TO TRANSFER PRICING PROVISIONS. THE HON BLE HIGH COURT IN CATEGORIC TERMS CONSIDERING THE ISSUES ON FACTS HAVE HELD THA T THE ALLEGED SHORTFALL BETWEEN FAIR MARKET OF SHARES AND THE ISSUE PRICE OF SHARES CANNOT BE CONSIDERED INCOME ON THE BASIS OF SUPPOSED INTENT OF LEGISLATURE. FO RM NO.3CEB FILED BY THE ASSESSEE BY WAY OF ABUNDANT CAUTION, IT HAS BEEN HE LD, WOULD NOT BE SAID TO HAVE GRANTED JURISDICTION TO THE TPO. THE APPLICABILITY OF CHAPTER X IN CATEGORIC TERMS WAS OUSTED AS THE DEPARTMENTAL CASE WAS FOUND TO HA VE BEEN BASED ON SURMISES. 7.20. WE FIND THAT NO ARGUMENTS HAVE BEEN ADVANCED BY THE REVENUE EITHER DISPUTING THE FACTUAL POSITION OR THE JUDICIAL PREC EDENT CITED. IT MAY ALSO BE APPROPRIATE TO NOTE THAT IN THE CASE OF SOMA TEXTILES & INDUSTRIES THE CO- I.T.A .NO.-6336/DEL/2012 PAGE 37 OF 46 ORDINATE BENCH, CONSIDERING THE PRECEDENTS CITED BY THE TAX AUTHORITIES, HAS MADE AN ERUDITE DISCUSSION ON QUASI CAPITAL AS IN THE FACTS OF THE SAID DECISION THE USE OF THE SAID EXPRESSION WAS ONE OF THE REASONS FOR R ELYING ON PRECEDENT TO OUST THE ASSESSEES CLAIM. AS OBSERVED THE MATERIAL FACTS W ERE SIMILAR AS, LIKE IN THE PRESENT CASE, IN THE FACTS BEFORE THE CO-ORDINATE B ENCH ALSO INTEREST FREE ADVANCES HAD BEEN ADVANCED BY THE ASSESSEE TO ITS S UBSIDIARY AE FOR THE INTENDED PURPOSE OF EXPLOITING THE OPPORTUNITY COST IN THE T ERRITORIES OUTSIDE INDIA. THE FINANCIAL TRANSACTION WAS CLAIMED TO BE QUASI CAP ITAL, A TERM WHICH WAS REQUIRED TO BE DEFINED AS THE JUDICIAL PRECEDENT RE LIED UPON BY THE REVENUE IN THE CONTEXT OF THE SAID EXPRESSION DID NOT HAVE AN OCCA SION TO CONSIDER THE PECULIARITIES ON FACTS SOUGHT TO BE ADDRESSED BY TH E USE OF THE SAID EXPRESSION BY THE ASSESSEE. ITS MEANING WAS CONSIDERED TO BE NOT CLEAR IN THE JUDICIAL PRECEDENT CITED BY THE REVENUE. ACCORDINGLY, CONSIDERING THE FACTS AND THE EXPLANATION IT WAS HELD TO BE AN INSTRUMENT ENTERED FOR EXPLOITING THE OPPORTUNITY COST OF INVESTMENT AS OPPOSED TO EXPLOITING THE ACTIVITY OF ADVANCING FUNDS FOR EARNING INTEREST. AS OPPOSED TO THAT WE FIND THAT IN THE F ACTS OF THE PRESENT CASE, THE TAX PAYER HAS MADE ITS CASE EASILY UNDERSTANDABLE AND S IMPLER BY RESORTING TO EXPLAIN ITS ACTIVITY OF ADVANCING INTEREST FREE LOAN TO ITS AE BY THE USE OF THE EXPRESSION QUASI EQUITY AND MEZZANINE FINANCING WHICH TERM S ARE WELL UNDERSTOOD IN FINANCIAL CIRCLES. FOR THE SAKE OF COMPLETENESS, R EFERENCE MAY BE MADE TO THE DEFINITION AS FOUND AVAILABLE ON INVESTOPEDIA HTTP://WWW.INVESTOPEDIA.COM/TERM WHICH DEFINES QUASI EQUITY AS A CATEGORY OF DEBT TAKEN ON BY A COMPANY THAT HAS SOME TRAITS OF EQUITY, SUCH AS HAVING FLEXIBLE REPAYMENT OPTIONS OR BEING I.T.A .NO.-6336/DEL/2012 PAGE 38 OF 46 UNSECURED EXAMPLES OF QUASI-EQUITY INCLUDE MEZZANIN E DEBT AND SUBORDINATED DEBT . IT FURTHER DEFINES MEZZANINE FINANCING AS A HYBRID OF DEBT AND EQUITY FINANCING THAT IS TYPICALLY USED TO FINANCE THE EXP ANSION OF EXISTING COMPANIES. MEZZANINE FINANCING IS BASICALLY DEBT CAPITAL THAT GIVES THE LENDER THE RIGHTS TO CONVERT TO AN OWNERSHIP OR EQUITY INTEREST IN THE C OMPANY IF THE LOAN IS NOT PAID BACK IN TIME AND IN FULL. IT IS GENERALLY SUBORDIN ATED TO DEBT PROVIDED BY SENIOR LENDERS SUCH AS BANKS AND VENTURE CAPITAL COMPANIES . THUS CONSIDERING THE EXPLANATION OF THE ASSESSEE, WE FIND THAT IN FORM A ND SUBSTANCE THE CONDUCT OF THE ASSESSEE SUGGESTS NO DEVIATION WITH THE STATED FORM . IN THE FACE OF THE ABOVE FACTUAL POSITION, WE FIND THAT NOTHING HAS BEEN BRO UGHT ON RECORD BY THE REVENUE TO JUSTIFY RE-CHARACTERIZATION OF THE FINANCIAL ARR ANGEMENT EXPLAINED AS QUASI EQUITY AND TREAT IT AS A LOAN SIMPLICITOR. THE CO MMERCIAL EXPEDIENCY AND BUSINESS STRATEGY OF THE ASSESSEE EXPLAINED CONSIST ENTLY ON RECORD FOUND TO BE FACTUALLY SUPPORTED STANDS UNASSAILED ON RECORD. T HE DOCUMENTARY EVIDENCE AND ARGUMENTS CANNOT BE BRUSHED ASIDE OR IGNORED AS A M EANINGLESS RHETORIC, MERELY TO BE REPRODUCED IN THE ORDERS BUT IN REALITY DISC ARDED FOR ALL PRACTICAL PURPOSES WITHOUT ASSIGNING ANY REASON. WE NOTE WITH PAIN TH AT SUCH A MECHANICAL DISREGARD OF THE EXPLANATION OFFERED AND EVIDENCES RELIED UPON WILL MAKE THE WHOLE EXERCISE OF JUST AND FAIR HEARING, A MEANINGLESS EX ERCISE OF JUSTICE DISPENSATION. ADDRESSING THE FACTS AND EVIDENCES IS IMPERATIVE A ND THE INHERENT STRENGTH OF JUSTICE DISPENSATION SYSTEM LIES IN THE UNBIASED AN D FAIR CONSIDERATION OF EVERY CASE BY THE DISPENSERS OF JUSTICE. FAITH IN THEIR W ISDOM AND FAIRNESS SHOULD NOT BE ALLOWED TO BE ERODED. A MECHANICAL APPROACH ERRING IN FAVOUR OF THE REVENUE IS I.T.A .NO.-6336/DEL/2012 PAGE 39 OF 46 NEITHER EXPECTED NOR ACCEPTABLE AS IT WOULD ERODE T HE VERY BED ROCK OF THE TRUST REPOSED IN THE SYSTEM AND WOULD LEAD TO A BREEDING GROUND FOR SKEPTISM AND CYNICISM IN THE PUBLIC TOWARDS THE JUSTICE DISPENSE RS. THIS DANGEROUS TREND SHOULD BE NIPPED IN THE BUD. NO DOUBT THE JUSTICE DISPENSER IS NOT EXPECTED TO BE CARELESS IN ALLOWING RELIEF BUT TO DENY WHERE IT OU GHT TO BE GIVEN WILL ONLY ENCOURAGE THE CLASSICAL BIBLICAL DISLIKE OF A TAX COLLECTOR. THE EFFORT ON THE CONTRARY SHOULD BE TO PROMOTE AN ATTITUDE BEST PUT IN THE WORDS OF OLIVER WENDELL HOLMES JR. WHO OBSERVES I LIKE TO PAY TAXES. WITH THEM, I BUY CIVILIZATION. THE POLICY MAKERS THROUGH THE POLICIES OF THE COUNTRY M AKE FREQUENT AND VALIANT ENDEAVOURS TO SHUN THIS TAG OF A REVILED TAX COLLEC TOR AND ANY CARELESSNESS IN JUSTICE DISPENSATION STRIKES A BODY BLOW TO THESE S MALL TENTATIVE STEPS. THE ACCEPTANCE OR REJECTION OF FACTS CANVASSED AND ARGU ED SHOULD BE A JUST, FAIR AND TRANSPARENT EXERCISE. NO DOUBT, THE TAX AUTHORITIE S ARE EXPECTED TO ADDRESS CONTRADICTIONS IN FACTS PLEADED AND WHEREVER EVIDEN CES ARE FOUND TO BE NOT RELEVANT OR RELIABLE THEN THEY MUST BE REBUTTED/DIS PROVED BY EVIDENCES. NO AUTHORITY NEED BE CITED TO HOLD THAT THE EXPLANATIO N OF THE ASSESSEE IS TO BE ACCEPTED OR REJECTED BY THE TAX AUTHORITIES BY ADDR ESSING THE FACTS AND NOT AVOIDING TO ADDRESS THE SAME. THE TAX AUTHORITIES ARE NOT EXPECTED TO REPRODUCE THE EXPLANATION AS A MERE MEANINGLESS RHETORIC AND ARRIVE AT A CONCLUSION WITHOUT ADDRESSING AND MEETING THE EXPLANATION AND EVIDENC ES RELIED UPON BY THE ASSESSEE. IF THE TAX PAYER CLAIMS IT IS AN INTERES T FREE LOAN AS A SHARE HOLDING ACTIVITY, TO BE UTILIZED BY THE AE FOR ACQUIRING AN D INCREASING ITS PORTFOLIO AND ON UTILIZATION AND FULFILLING THE INTERNAL AND EXTERNA L REQUIREMENTS BY WAY OF I.T.A .NO.-6336/DEL/2012 PAGE 40 OF 46 PERMISSIONS AND PROCEDURES OF THE REGULATORY AUTHOR ITY ETC. IT IS TO BE CONVERTED INTO EQUITY AND THAT TOO AT A PREMIUM THEN IT IS TH E CORRECTNESS OF THIS CLAIM WHICH IS TO BE SPECIFICALLY ADDRESSED AND DECIDED. MERELY BECAUSE IT IS SHOWN AS AN INTERNATIONAL TRANSACTION ITSELF WILL NOT DECIDE THE CLAIM. AS OBSERVED EARLIER THIS PRINCIPLE STANDS SETTLED BY THE BOMBAY HIGH CO URT WHERE THE ASSESSEE IN VODAFONE INDIA SERVICES P.LTD. (CITED SUPRA) HAD SHOWN THE ISSUE OF SHARE CAPITAL IN FORM NO.3CEB. HAVING SHOWN IT AS SUCH A ND OBJECTING TO JURISDICTION OF THE TAX AUTHORITIES TO APPLY CHAPTER X THE COURT AC CEPTED THAT FORM 3CEB HAVING BEEN FILED BY WAY OF ABUNDANT CAUTION DID NOT GIVE JURISDICTION TO THE DEPARTMENT. THE DECISION IS BASED ON FIRST PRINCIPLES THAT EITH ER AN AUTHORITY HAS THE JURISDICTION OR IT DOES NOT HAVE IT, THE ACTS OF A PERSON EX ABUNDATI CAUTELA WILL NOT BE THE BASIS OF JURISDICTION OF AN AUTHORITY. THE CONSISTENT OBJECTION POSED BY THE ASSESSEE THAT THE ACT OF ADVANCING INTEREST FREE LO AN AS QUASI EQUITY FOR THE STATED PURPOSE WAS SUPPORTED BY DOCUMENTS AND HENCE NOT AN INTERNATIONAL TRANSACTION, CANNOT BE IGNORED ON THE SPECIOUS PLE A THAT DISCLOSURE WAS MADE BY THE TAX PAYER IN ITS FORM 3CEB. WE FIND THAT THE ASSESSEE HAS SUCCESSFULLY DEMONSTRATED ITS CASE RELYING UPON THE PRECEDENT OF THE AFORESAID DECISION OF THE HIGH COURT FOLLOWED IN 369 ITR 511 (BOM.) WHERE SPECIFICALLY THE SHARES WERE TRANSFERRED TO ITS FOREIGN HOLDING COMPANY AT A PRE MIUM AND ALSO THE DECISION OF THE ITAT IN BHARTI AIRTEL LTD. (CITED SUPRA) WHERE ACTUAL CONVERSION TOOK PLACE AFTER A DELAY OVER 1 YEAR. WE FIND THAT NEITHER TH E FACTS HAVE BEEN REBUTTED NOR THE JUDICIAL PRECEDENT HAS BEEN DISTINGUISHED. I.T.A .NO.-6336/DEL/2012 PAGE 41 OF 46 7.21. WE FURTHER FIND THAT THE ASSESSEE, APART FROM JUST IFYING THE ARGUMENTS AND DEMONSTRATING THE CORRECTNESS OF ITS CLAIM ON JUDIC IAL PRECEDENT CITED, HAS ALSO RELIED UPON THE CBDT INSTRUCTION NO. 2/2015 DATED 29.01.2015. RELYING ON THE SAME IT HAS BEEN ARGUED THAT THE TAX AUTHORITIE S HAVING COMMUNICATED TO THE WORLD AT LARGE THEIR ACCEPTANCE OF THE DECISION OF THE COURT IN THE CASE OF VODAFONE INDIA SERVICES P.LTD. NOW CANNOT RESILE FROM THE POSITION IN THE CASE OF THE ASSESSEE. FURTHER THE FACT THAT IN ASSESSEES OWN CASE FOR 2011-12 ASSESSMENT YEAR THIS POSITION HAS BEEN ACCEPTED BY THE DRP VIDE ITS ORDER DATED 28.12.2015 WHEREIN THE AO WAS DIRECTED TO DELETE TH E ADDITION ON ACCOUNT OF VALUATION OF SHARES HAS BEEN HEAVILY RELIED UPON BY THE ASSESSEE, WHICH POSITION TOO HAS NOT BEEN DISPUTED BY THE REVENUE. WE FURTH ER FIND THAT NOTHING HAS BEEN ARGUED BY THE REVENUE CHALLENGING THE PRINCIPLES OF CONSISTENCY RELIED UPON BY THE ASSESSEE. FOR READY-REFERENCE, THE RELEVANT EXT RACT IS REPRODUCED HEREUNDER:- GROUND OF OBJECTION L TO 10 ARE ADJUDICATED TOGETH ER AS THESE ARE INTERRELATED. THE TPO HAS JUSTIFIED HIS MODIFICATIO N OF TAXPAYERS ECONOMIC ANALYSIS (PAGE 9 ONWARDS) AND ISSUED A DETAILED SHO WCAUSE NOTICE DATED 1-12-2014. REPLIES FILED BY THE TAXPAYER HAVE BEEN EXAMINED AND THE REASONS DUE TO WHICH THE TP STUDY HAD TO BE MODIFIE D UNDER RULE 92C(3)(C) RWS 92CA(3) ARE COMPREHENSIVELY DISCUSSED. WHILE SHARE APPLICATION MONEY WAS ADVANCED ON 16-11 -2010, SHARES WERE ALLOTTED ON 15-05-2011. EVEN IN AY 2008 -09 THE DRP HAD AFFIRMED ORDER OF TPO THAT ADVANCEMENT OF SHARE APP LICATION MONEY TO AE WAS AN INTEREST FREE LOAN. THE SHARE APPLICATION MO NEY ADVANCED TO DLF GLOBAL HOSPITALITY LTD CYPRUS TREATED AS A DEEMED L OAN IS APPROVED BY DRP, HOWEVER IN VIEW OF DECISION IN THE CASE OF COT TON NATURALS(I) P LTD 2015-TII-09-HC-DEL-TP. THE RATE APPLICABLE AS PER T HE HON'BLE HIGH COURT'S PRESCRIPTION WOULD BE BASED ON THE INTEREST RATE APPLICABLE TO THE CURRENCY IN WHICH THE LOAN IS REPAYABLE I.E SINCE T HIS IS A FOREIGN CURRENCY LOAN, IN SUCH CASES DRP TYPICALLY DIRECTS THE TPO T O BENCHMARK CASE USING LIBOR PLUS AFTER MARKING IT UP FOR TRANSACTIO N COSTS, RISK AND CREDIT RATING BUT NOT BELOW LIBOR PLUS 400 POINTS. SINCE T HERE IS AN INTERNAL CUP AVAILABLE IN THIS CASE I.E 10.31 % ON A LOAN ADVANC ED TO A SISTER CONCERN IN THE SAME JURISDICTION IT IS PRESUMED THAT IT HAS TAKEN INTO ACCOUNT TRANSACTION COSTS, RISK AND CREDIT RATING AND IS A PREFERRED INTERNAL CUP AND TPO IS DIRECTED TO ADOPT THE SAME. THE TAXPAYER HAS POINTED OUT I.T.A .NO.-6336/DEL/2012 PAGE 42 OF 46 SOME ERRORS IN COMPUTATION OF NOTIONAL INTEREST ON DEEMED LOAN ADVANCED TO AE WHICH MAY BE TAKEN INTO ACCOUNT BY THE AO. SIMILARLY THE INTEREST ON LOAN ADVANCED TO AE DLF G LOBAL HOSPITALITY LTD CYPRUS SHOULD ALSO BE TAKEN AT THE RATE AS PER TAXPAYERS AGREEMENT @10.31% WHICH HAS BEEN BENCHMARKED BY THE TAXPAYER USING CUP METHOD. SINCE THIS IS HIGHER THAN THE HIGH COUR T'S PRESCRIPTION IN COTTON NATURALS AND THUS IS PRESUMED AT ARMS LENGTH WITHOUT REQUIRING FURTHER ADJUSTMENT BY TPO. TPO IS DIRECTED TO ALLOW RELIEF ACCORDINGLY. TRANSACTION OF SUBSCRIPTION OF SHARES OF AE NOW ST ANDS COVERED BY CBDT INSTRUCTION VIDE. FNO 500/15/2014/A PA-L INSTRUCTION NO 2/2015 NEW DELHI, DATED 29TH JANUARY 2015 WHEREBY BOMBAY HIGH COURT DECISION IN THE CASE OF V ODAFONE INDIA SERVICES PVT LTD HAS BEEN ACCEPTED BY THE CBDT. THE AO IS DIRECTED TO DELETE THE ADDITION ON ACCOUNT OF VALUA TION OF SHARES. THE OBJECTIONS OF THE TAXPAYER ARE PARTLY ALLOWED. (EMPHASIS PROVIDED) 7.21.1. WE FIND THAT THE RULE OF CONSISTENCY RELIED UPON B Y THE ASSESSEE IN THE FACTS OF THE PRESENT CASE ALSO NEEDS DUE CONSIDERAT ION AND CANNOT BE EASILY BRUSHED ASIDE BY THE REVENUE AND INFACT HAS NOT BEE N REBUTTED BY THE LD.CIT DR. CERTAINTY IN LAWS IS THE BED ROCK ON WHICH THE FOUN DATION OF A JUST AND FAIR TAX ADMINISTRATION CAN BE BUILT. IN THE WORDS OF BENJAM IN FRANKLIN ..BUT IN THIS WORLD NOTHING CAN BE SAID TO BE CERTAIN, EXCEPT DEA TH AND TAXES. THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE AFORESAID CASE OF VODAFONE INDIA SERVICES PVT.LTD. HAS BEEN THE BASIS FOR BRINGING OUT THE CB DT INSTRUCTION VIDE. FNO 500/15/2014/APA-L INSTRUCTION NO 2/2015 NEW DELHI, DATED 29TH JANUARY 2015. NOT ONLY THE INSTRUCTIONS ISSUED BY THE CBDT ARE BI NDING ON THE REVENUE IN INTERPRETING AND EXECUTING THE PROVISIONS OF THE AC T, BUT EVEN OTHERWISE THE TAX AUTHORITIES CANNOT ACT IN DEROGATION OF SUCH INSTR UCTION OR WHITTLE THEM DOWN. CERTAINTY ON ISSUES AND CONSISTENCY ON IDENTICAL FA CTS AND LAW IS A SINE QUO NON OF A TRANSPARENT JUST AND FAIR GOVERNANCE ON ALL ISSUE S INCLUDING TAX ADMINISTRATION. THUS, WE FIND THAT THIS PLANK OF THE ARGUMENT PROBA BLY HAS CONSCIOUSLY NOT BEEN I.T.A .NO.-6336/DEL/2012 PAGE 43 OF 46 REBUTTED BY THE REVENUE. WE ACCORDINGLY FIND NO M ERIT IN THE CASE OF THE REVENUE. 7.22. THUS ON A CONSIDERATION OF THE ABOVE GAMUT OF FACTS , CIRCUMSTANCES, ARGUMENTS, JUDICIAL PRECEDENT, WE FIND THAT GROUND NO.1, 3 AND 7 OF THE ASSESSEE ARE ALLOWED. IN THE ABSENCE OF ANY REBUTTAL ON MAT ERIAL FACTS AND LAW, JUDICIAL PRECEDENT CITED AND CONSIDERED, WE FIND THAT NO CAS E HAS BEEN MADE OUT BY THE REVENUE TO JUSTIFY DISMISSAL OF THE AFORESAID GROU NDS RAISED BY THE ASSESSEE. 7.23. WE FIND THAT IN VIEW OF THE CONCLUSION ARRIVED AT I N GROUND NO.1, 3 & 7 WE WERE NOT CALLED UPON TO DECIDE GROUND NO.2 OF THE A SSESSEE. HOWEVER, SINCE ARGUMENTS OF BOTH THE SIDES HAVE BEEN BROUGHT OUT A ND ALSO WHILE CONSIDERING THE FACTS IN BHARTI AIRTEL LTD. FOR DECIDING THE ISSUES IN GROUND NO.1, 3 & 7 THE FACTS QUA GROUND NO.2 BEING INTERLINKED HAVE BEEN CONSIDE RED, WE FIND OURSELVES IN AGREEMENT WITH THE VIEW TAKEN BY THE CO-ORDINATE BE NCH AND THEREFORE, GROUND NO.2 STANDS ALLOWED. GROUND NO.4, 5 & 6 BEING ARGU MENTS IN SUPPORT OF GROUND NO.1 & 3 DO NOT NEED ANY SPECIFIC ADJUDICATION. 8. THE NEXT ISSUE WHICH WE ARE CALLED UPON TO DECIDE IS ADDRESSED IN GROUND NO.8 WHICH HAS BEEN EXTRACTED IN THE EARLIER PART O F THIS ORDER. IN SUPPORT OF THE SAID GROUND, IT WAS SUBMITTED BY THE LD.AR THAT THE AO HAS MADE AN ADDITION U/S 14 READ WITH RULE 8D OF THE ITAT RULES. ADDRESSING THE SAME IT WAS SUBMITTED THAT THE AO WHILE MAKING THE ADDITION AND THE DRP W HILE UPHOLDING THE SAME HAVE IGNORED CERTAIN MATERIAL FACTS WHICH MAY FIRST BE REQUIRED TO BE HIGHLIGHTED SO AS TO BRING OUT THE ISSUE BEFORE THE TRIBUNAL. I.T.A .NO.-6336/DEL/2012 PAGE 44 OF 46 8.1. INVITING ATTENTION AGAIN TO THE PROFILE OF THE ASS ESSEE IT WAS SUBMITTED THAT THE ASSESSEES AVOWED AIM OF BECOMING A GLOBAL PLAY ER IN THE HOSPITALITY SECTOR NECESSITATED THE INVESTMENTS MADE. IT WAS SUBMITTED THE BUSINESS, COMMERCIAL AND ECONOMIC STRATEGY OF THE ASSESSEE AND ITS VISIO NS AND TARGETS WHEN CONSIDERED WOULD INDICATE THAT THESE WERE STRATEGIC INVESTMENT S IN THE DOMESTIC COMPANIES FROM WHICH NO EXEMPT INCOME HAS BEEN EARNED. THESE FACTS IT WAS SUBMITTED WOULD BE EVIDENT FROM THE CHART PLACED AT PAPER BOO K PAGE 19. ACCORDINGLY IT WAS HIS SUBMISSION THAT THESE INVESTMENT OF RS.4,42,80, 11,360/- SHOULD BE EXCLUDED FROM THE COMPUTATION OF DISALLOWANCE UNDER RULE 8D. THE SAID CLAIM IT WAS SUBMITTED WAS SUPPORTED BY THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF ACB INDIA 374 ITR 108 [DEL.] (COPY OF THE SAID DECISION IS PLACED AT PAGES 34 TO 37 OF THE PAPER BOOK FILED). RELYING UPON TH E COMPUTATION PLACED AT PAPER BOOK PAGE 18, IT WAS SUBMITTED THAT IN CASE RULE 8D IS APPLIED ON THE REMAINING INVESTMENT OF RS.1,57,64,632/- THE DISALLOWANCE WOU LD WORK OUT TO RS.91,021/-. INVITING ATTENTION TO THE ASSESSMENT ORDER ITSELF I T WAS SUBMITTED THAT SINCE THE ASSESSEE ITSELF HAS MADE DISALLOWANCE OF RS.2,28,77 7/-, NO FURTHER DISALLOWANCE WAS CALLED FOR. 9. THE LD.CIT DR HEAVILY RELYING UPON THE ORDERS OF TH E TAX AUTHORITIES SUBMITTED THAT THE AO HAS PLACED RELIANCE UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. UNITED GENERAL TRUST LTD 200 ITR 455 (SC). REFERRING TO THE FACTS ON RECORD, IT WAS SUBMITTED THAT THE EARNING OF EXEMPT INCOME CANNOT BE SAID TO BE AN ACTIVITY OF PASSIVE NATURE REQUIRING NO REAL TIME INPUTS. IT WAS HIS ARGUMENT THAT IN FACT IN THE PR ESENT SITUATION MAKING OF I.T.A .NO.-6336/DEL/2012 PAGE 45 OF 46 INVESTMENT, MAINTAINING OR CONTINUING INVESTMENT AN D TIMING THE EXIT FROM INVESTMENT ARE ALL WELL INFORMED AND WELL COORDINAT ED MANAGEMENT DECISIONS INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCE BUT A LSO ACUMEN OF SENIOR MANAGEMENT FUNCTIONARIES. RELYING UPON THE IMPUGNED ORDER IT WAS SUBMITTED THAT COST IS INBUILT INTO EVEN THESE SO CALLED 'PAS SIVE' INVESTMENT. IT WAS HIS ARGUMENT THAT NECESSARILY THERE MUST BE INCIDENTAL EXPENDITURES OF COLLECTION, TELEPHONE, FOLLOW UP ETC. SINCE IN THE PRESENT CASE , OUT OF TOTAL FUNDS AVAILABLE/ RAISED BY THE ASSESSEE, A SUBSTANTIAL PORTION OF IT AMOUNTING TO RS. 484,88,54,275/- HAS BEEN INVESTED IN SHARES AND MUT UAL FUNDS, THEREFORE, IT CAN BE HELD THAT EXPENDITURE IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME ARE EMBEDDED IN INDIRECT EXPENSES. 9.1. IT WAS FURTHER HIS SUBMISSION THAT THE DECISION OF THE SPECIAL BENCH IN THE CASE OF CHEMINVEST LTD. VS ITO, WARD-3(3), NEW DELHI FURTHER SUPPORTS THE VIEW TAKEN. 10. ON A CONSIDERATION OF THE RIVAL SUBMISSION AND THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE AFORESAID DECISION OF THE SPECIAL BENCH IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN CHEMIN VEST LTD. (CITED SUPRA) FOLLOWING CIT VS HOLCIM IS NO LONGER GOOD LAW. REV ERTING TO FACTS, WE FIND THAT THE LD.AR FOR EXCLUSION OF RS.4,428,011,360/- FROM THE COMPUTATION OF DISALLOWANCE UNDER RULE 8D OF THE INCOME TAX RULES HAS INVITED O UR ATTENTION TO PAPER BOOK PAGE 19 SO AS TO CANVASS THAT BEING STRATEGIC INVES TMENTS THEY CANNOT FORM PART OF THE CALCULATION. JURISDICTIONAL HIGH COURTS DECIS ION IN ACB INDIA PVT. LTD. (CITED SUPRA) IS RELIED UPON WHICH HAS NOT BEEN REBUTTED BY THE REVENUE BY I.T.A .NO.-6336/DEL/2012 PAGE 46 OF 46 REFERRING TO ANY CONTRARY DECISION. WE ALSO FIND T HAT THE CHART REPRODUCED HAS BEEN PLACED BEFORE THE DRP IN ITS OBJECTION. CONS IDERING THE JUDICIAL PRECEDENT CITED AND IN THE ABSENCE OF ANY REBUTTAL ON THE MAT ERIAL FACTS THAT THESE CONSTITUTED STRATEGIC INVESTMENTS FOR THE ASSESSEE, WE DIRECT THE AO TO EXAMINE THE CORRECTNESS OF THE COMPUTATION PLACED ON RECORD BY THE ASSESSEE WHICH AS PER THE CALCULATION SHEET AT PAGE 19 IS SHOWN TO BE WOR KING OUT TO RS.91,021/-, WHEN IT IS COMPARED WITH THE SUO MOTO DISALLOWANCE OF RS.2,28,777/- MADE BY THE ASSESSEE WE FIND NO FURTHER DISALLOWANCE ON FACTS I S WARRANTED. THE FACT OF SUO MOTO DISALLOWANCE IS EVIDENT FROM THE SECOND LAST PAGE OF THE AO ITSELF. ACCORDINGLY, WE HOLD NO FURTHER DISALLOWANCE NEED B E MADE SUBJECT TO THE VERIFICATION OF THE CALCULATION PLACED ON RECORD. 10.1. ACCORDINGLY, GROUND NO.8 FILED BY THE ASSESSEE IS A LLOWED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30 TH OF JUNE, 2016. SD/- SD/- (L.P.SAHU) (DIVA SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR, ITAT NEW DELHI