JT.COMMISSIONER OF INCOME TAX (OSD) CIRCLE-8(1)(1), MUMBAI vs. RELIANCE LIFE SCIENCES P.LTD, NAVI MUMBAI

The captioned appeal was filed by the Revenue which was disposed–off by this Bench vide its order dated 8th September 2021. While going through this order, it came to be noticed that there is a typographical error crept while drafting the said order. Since the mistake found is apparent on the face of record, consequently, this Bench is of the opinion to proceed to suo–motu rectify the typographical error. The reproduction made below Para–14 at Page–16 of the order dated 8th September 2021, is hereby substituted and be read as under:– “14. Considered the rival submissions and perused the material on record in the light of the decisions relied upon. We find that the issue of identical issue has been decided by the Co–ordinate Bench of the Tribunal in assessee’s own case in M/s. Reliance Life Sciences Pvt. Ltd. v/s ACIT, ITA no.2301/Mum./ 2015, etc., for A.Y. 2009–10 & 2010–11, order dated 30th September 2019, 2 Reliance Life Sciences Pvt. Ltd. vide Para–29, 30, 31, 32, 42, 43, 44, 45 & 46 of the order, wherein for the reasons stated therein the issue has been decided in favour of the assessee and against the Revenue. For better appreciation of facts, the relevant portion of the findings of the Co–ordinate Bench given in assessee’s appeal cited supra, are reproduced below:– 29. We have heard the rival submissions and perused the orders of the authorities below. It is an undisputed fact that the assessee advanced optionally convertible loans to its AE i.e. RLSI. It is not in dispute that the OCL has been converted into Equity in subsequent years before the due date and before the prescribed date as agreed in the agreement. Assessee has charged no interest on OCL for the reason that RLSI was setup for developing global business opportunities in the field of pharmaceutical and bio-pharmaceutical, clinical research services and research and development activities. The assessee intended to fulfill its own objective of gaining majority control in such overseas acquisitions made through AE, for this reason assessee did not charged any interest on the investment made in its AE in the form of OCL. We also observe that as on 31.03.2011 RLSI has converted the entire loan amount outstanding in its books into paid in equity capital. We find that more or less on identical situation the Ahmadabad Bench in the case of DCIT v. Cadila Healthcare Limited (supra) held as under: - “7. We have heard the rival submissions and perused the material on record. CIT(A) while deleting the addition has noted that as per the agreement, the interest was payable only if the conversion option was not exercised on the expiry of 5 year period. If at any time during the 5 year period conversion option was exercised and the loan was converted into equity, no interest accrued or become payable. He further noted that the funds were provided by the Assessee as per RBI guidelines and in the immediately next year, the entire loan given to subsidiary was converted into equity shares of Zydus International Pvt. Ltd. He has further held that since the Assessee has converted the loan into equity in the immediate next year, there was no question of taxing notional interest. He has further held that Assessee had not granted interest free loan but invested in optionally convertible loan with a clause of interest in case, Conversion option was not exercised and further held the Assessee’s transaction with subsidiary was at arms length. Before us, the Revenue could not controvert the findings of CIT(A) by bringing any contrary material on record. In view of these facts, we find no reason to interfere with the order of CIT(A).

3 Reliance Life Sciences Pvt. Ltd. “15. In the case before us now, there are two important factors pertaining to this interest free loan, and both of these aspect deserve to be examined in some detail. The first important aspect of this interest free advance is that the loan is said to be in the nature of quasi capital, and it was so given because out of EEFC (Exchange Earners Foreign Currency) account, while the assessee could have given loan upto US $ 50 million, it was not open to the assessee to subscribe to the equity capital without the permission of the Reserve Bank of India. There was thus, unlike the case of Perot Systems (supra) discussed above, indeed a technical problem in subscribing to the capital directly. It is also important to note that immediately upon obtaining the permission of the Reserve Bank of India, which assessee did obtain at later stages, the advances were converted into shares. Except for an amount of US $ 10,000, entire advances received by the step down subsidiary were converted into shares. It is also not in dispute that when RBI permission to convert loan into equity was sought it was sought effective from the date on which remittance was made. The second very important aspect of this interest free loan is this. In the present case, the entity receiving the interest free advances is not only a wholly owned subsidiary of the assessee company but is also playing a very significant role in its sale and distribution chain inasmuch as the assessee is sole vendor to the said concern so far as sales of raw material and semi finished goods is concerned, and it has a significant volume of transaction at almost 50% of entire sales and 90% of entire exports. Micro USA exists only to facilitate the marketing of assessee’s products in US markets. The relationship on account of lending of money cannot thus be considered in isolation with these crucial business considerations. In this regard, it is useful to refer to the following extracts from the annual financial statements of Micro USA: Assessment year 2002-03 In June 2000, the company entered into a loan agreement with HIRL and issued a note payable to HIRL. The note origina lly bore interest @ 9% and was due in five equal annual instalments, including interest accrued to the date of payment, beginning May 31, 2002 and ending May 31, 2006. In 2002, this note, with a balance of US $ 2,640,000 was forgiven by HIRL and converted to equity as a capital contribution. During the year ended March 31, 2002, the company borrowed an additional US$ 3,170,000 from HIRL. Purchase of raw materials from HIRL were approximately US$ 47.48 million for the year ended March 31, 2002. The company pays HIRL for these materials 165 days from the bill of lading date. These purchases formed the majority of company’s inventory expenditure for the year ended March 31, 2002........ Assessment year 2003-04 4 Reliance Life Sciences Pvt. Ltd. The company has an outstanding interest free loan payable to HIRL amounting to US$ 3,170,000 at March 2003. This loan is payable on demand and has therefore been classified as short term. The company purchased approximately US $ 40.12 million of materials from HIRL for the year ended March 31, 2003. The company pays HIRL for these materials 165 days from the bill of lading date. These purchases account for the majority of the company’s inventory expenditure for the year ended March 31, 2003. ....... Assessment year 2004-05 The company had an outstanding interest free loan payable to HIRL amounting to US$ 3,170,000 at March 31, 2003. The company also received an additional interest free loan of US $ 1,000,000 in September 2003. Pursuant to the unanimous written consent of the Board of Directors’ resolution dated February 27,2004, US $ 4,160,000 of the above loan was converted into Series A Preferred Stock and the remaining US $ 10,000 was repaid to the parent in March 2004. The company purchased approximately US $ 34.13 million and US$ 40.12 million of materials from HIRL for the year ended March 31, 2004 and 2003 respectively. The company pays HIRL for these materials 165 days from the bill of lading date. These purchases account for the majority of the company’s inventory expenditure for the year ended March 31, 2004 and 2003 respectively. .......

5 Reliance Life Sciences Pvt. Ltd. in operating activities for the year ended March 31, 2002 was US $ 39.49 million. Until the management is able to achieve its plan for profitable future operations, the company continues to be dep endent upon the availability of financial support from HIRL, including assistance in negotiating and guaranteeing debt arrangements with company’s banks. Such financial support may be subject to the approval of Reserve Bank of India. HIRL has pledged its financial support to the company through March 31, 2003. The company has a US $ 3,170,000 note payable to HIRL and HIRL either guaranteed or secured all of the company’s outstanding debts at March 31,2002. HIRL is company’s principal supplier of raw materials. .............. During the next twelve months, ending March 31, 2004, US $ 12.70 million of debt must be paid or refinanced, and US $ 29 million is payable to the parent. The company expects to meet these obligations with the continued support and guarantees of the parent ................ During the next twelve months, ending March 31, 2005, US $ 19.42 million of debt must be paid or refinanced, and US $ 12.48 million is payable to the parent. The company expects to meet these obligations with the continued support and guarantees of the parent 17. As is evident from the above discussions, the relationship between the assessee and its step down subsidiary Micro USA was simply that of a lender and a borrower. Not only the Micro USA was a significant part of the marketing apparatus of the assessee, and the assessee and the Micro USA had significant commercial relationship on that count, the assessee was a de facto and de jure promoter of the Micro USA. In the light of this undisputed position, and in the light of the admitted position that, even as per revenue authorities, the transaction is at best for advance of money by holding to step down subsidiary , let us examine the correctness of the arm’s length price adjustment in this case. In such a case, CUP method can be applied and the LIBOR or other bank rate linked rate is generally taken as a rate for comparable uncontrolled transaction. As has been held in a large number of cases, including in VVF (supra) and Perot Systems (supra), in the cases of arm’s length prices of loans and advances, costs of funds have no relevance and it is only the rate applicable for comparable uncontrolled transaction that is to be taken into account. However, even while applying CUP method, one has to bear in mind the fact that in terms

6 Reliance Life Sciences Pvt. Ltd. of Rule 10B (1) computation of ALP under the CUP method is a three step process which requires that (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm’s length price in respect of the property transferred or services provided in the international transaction; (Emphasis by underlining supplied by us) 18. Therefore, even when we take LIBOR plus rate as the base rate for an advance in step 1 of the above computation process, such base rate will have to adjusted inter alia for the differences……….. (a) between the international transaction and the comparable uncontrolled transaction, and (b) between the enterprises entering into such transactions, which could materially affect the price in the open market”. On both of these counts, adjustments will have to be necessarily made in the LIBOR plus rate. While the international transaction before us is that of advancing an interest free unsecured loan for helping a entity overcome its teething problems and pending the approval for capital subscription is received from the Reserve Bank of India, a typical LIBOR plus rate transaction is the transaction in which banks gives secure advances, for making profits out of so lending the money, to its customers. Strictly speaking, there is no parity between these two types of transactions. Secondly, we are dealing with a situation in which the two enterprises are mutually dependent for commercial reasons. While Micro USA is dependent on the assessee for its sheer existence, the assessee is dependent on Micro USA for its business. Let us assume for a while that Micro USA is unconnected with the assessee so far as its management, capital and control is concerned, but even then and without this management, capital and control relationship, the assessee, as an independent enterprises, will make sense in giving interest free advances to Micro USA so as to ensure its continued market access in USA and for other commercial reasons. This is quite unlike a typical transaction on LIBOR plus rate in which only motivation for 7 Reliance Life Sciences Pvt. Ltd. giving advance is earning interest. Clearly, thus, LIBOR plus rate cannot be adopted in this situation for two fundamental reasons – (i) first, that it is not a simplictor financing transaction between the assessee and Micro USA, as it is a transaction of investing in a step down subsidiary as quasi capital pending formal capital subscription with the approval of Reserve Bank of India; and (ii) second, that it is not a case of granting advance to a business concern without significant and decisive commercial considerations, as the monies are given for strengthening assessee’s marketing apparatus in US and to keep alive its biggest exports customer. There is a difference in the nature of transaction and there is also a difference in the nature of the enterprises, including their inter se commercial relationship, entering into this transaction. The differences are so fundamental that these differences, to use the phraseology employed in Rule 10B(1)(a)(ii), “could materially affect the price in the open market”. On account of these peculiar factors, the application of LIBOR plus rate or, for that purpose, any bank rate will be inappropriate to this case.

10 Reliance Life Sciences Pvt. Ltd. 7.4. The following extract brings out the reasoning of the TPO justifying the application of the rate which has been upheld by the DRP and heavily relied upon by the Ld.CIT. DR:- 3. “Financial institutions generally weigh four elements in determining whether or not to issue loans and, if so, at what conditions and fees: Financial Risk: In order to gauge the financial risk 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, three 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 in which the debtor operates its business is reflected in this risk; and Structural Risk: In gauging this risk, the qualifications of external rating agencies awarded to the debtor are weighed.

BBB (Triple B) Instruments rated 'BBB' are judged to offer Moderate Safety moderate safety, with regard to timely payment of financial obligations for the present; however, 11 Reliance Life Sciences Pvt. Ltd. changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rating categories. BB (Double B) Instruments rated 'BB' are judged to carry Inadequate Safe inadequate 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 inadequate capacity to make payment on financial obligations. B High Risk Instruments rated 'B‟ are judged to have high likelihood of default; while currently financial obligations are met, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. C Substantial Instruments rated 'C are judged to have factors Risk present that make them vulnerable to default; timely payment of financial obligations is possible only if favourable circumstances continue. D Default Instruments rated 'D' are in default or are expected to default on scheduled payment dates

12 Reliance Life Sciences Pvt. Ltd. 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 following reply was given:- 5. Reply of the Assessee: The assessee has stated that this amount was in the form quasiequity since it was the intention of the assessee was to convert it into equity capital from the very beginning. It also states that to maintain flexibility, in case the funds were not used for the intended activity within the proposed period, it was initially granted as debt. It states that DHHL, being the parent company undertakes stewardship activities through the provision of funds and is not required to be compensated. It is stated that being a new entity, DGHL could not have accessed funds from any other source. This quasi equity was converted into equity and this became the basis to borrow from third party 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 authentic, it is not available in the public domain and it is like using secret comparables.” (emphasis provided) 7.6. The assessee‟s objection that the TPO cannot question the commercial expediency of its activities was not accepted by the TPO. The TPO was of the view that the OECD guidelines clearly held the view that “when independent enterprises transact with each other, the conditions of their commercial and financial relations (e.g. the price of goods transferred or services provided and the conditions of the transfer or provision) ordinarily are determined by market forces. When associated enterprises transact with each other, their commercial and financial relations may not be directly affected by external market forces in the same way, although associated enterprises often seek 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 the relationship among members of an MNE group may permit the group members to establish special conditions in their intra group relations that differ from those that would have been established had the group members been acting as independent enterprises operating in open market. Thus, 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 commercial one; whether in similar circumstances an independent person would have paid similar amount; whether the taxpayer really needed the services; whether the taxpayer really got some tangible or direct benefit; whether the amount paid was commensurate with the benefit (or the expected benefit) from such services, etc. We need not directly address the 13 Reliance Life Sciences Pvt. Ltd. entire sweep of issues referred to by the 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 though 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 does not have judicial acceptance. 7.7. The TPO concluded that the benefit of conversion into equity could be granted only to the extent of 20% of the loan. We find 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 the 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 with the TPO. We find that the TPO‟s conclusion that section 92C(3) authorized him to use the information in his possession and the power to gather material under the 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 the sections i.e. 92CA(3) and 143(3). Further we find that the view that subsection (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 Income Tax Act, 1961 is liable for penal action. Accordingly, we find that the conclusion 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 upheld 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 the record shows that he concluded the issue in the following manner:- “In view of the above discussion, while the assessee will be given benefit of conversion of the loan into equity during a reasonable time frame, the benefit will be limited to 20% of the loan. The rest will be treated as a loan on which an appropriate interest, as determined in the show cause notice, needs to be charged. The calculation of the same is as under:- Opening balance Closing (Rs.) (after Conversion Closing balance balance Revised month taking to Funds into Equity (Rs.) (as after allowance interest @ End account extended (Rs.) (Rs.) per assessee) for 20% (as 17.26% the revised per TPO) closing^ balance) 7 -Apr 7-May 7- June 7 -July 2,069,582,691 2,069,582,692 29,767,498 7-Auq 2,069,582,692 2,069,582,692 29,767,498 7-Sep 2,069,582,692 20,306,910 2,089,889,602 30,059,579 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 33,599,012 Total 286,155,618 14 Reliance Life Sciences Pvt. Ltd. 7.9. On a perusal of the objections posed by the assessee before the DRP, it is seen that findings of the TPO were assailed on various ground including the ground that the TPO has treated the loan as loan simplicitor and as a pure debt instrument and not as an instrument of hybrid funding having traits of equity. The alleged modification misconstruing of facts by the TPO was assailed to be incorrect and misleading. Extracts from these Objection numbering 5.2.2 and 5.2.3 which has further being elaborated in Objection 5.2.9 before the DRP are extracted hereunder:- 5.2.9. Factual and legal arguments against the addition 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 subordinated debt." The definition/meaning of subordinated debt is provided as under: "Debt that is either unsecured or has a lower priority than that of another debt claim on the same asset or property, also called junior debt." The assessee entered into a written arrangement in the form of agreement with its associated enterprise that the funds provided would be in the nature of quasi equity and not in the nature of debt. In assessee's case, it was clear that the funds 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 the guidelines issued by the Organisation for Economic Cooperation and Development on Transfer Pricing in 2010 ("OECD Guidelines"), an extract of which is appended below: "D.2 Recognition of the actual transactions undertaken 1.64. A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapter II. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where 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 circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterisation of the transaction and re- 15 Reliance Life Sciences Pvt. Ltd. characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterise the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. From the above, it can be clearly inferred that the funds provided by DHHL to DLF Cyprus can be considered to be quasi equity/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 other may be considered as equity. The relevant extracts from the stated ruling is provided below: "60. In the context of applying Australia's transfer pricing rules, the principal factors that will be taken into account in determining whether a particular loan agreement should be treated as equivalent to a contribution to equity are detailed below.....” 7.10. The reproduction of the following extract of Objection No.5.3.9 further brings out the fact that the tax payer justified its action of advancing of loan as a shareholders activity guided by commercial expediency etc.:- 5.3.9. Factual and legal arguments against the addition proposed by the Learned TPO “During FY 2007-08, since DLF Cyprus was a newly formed company, it could not manage to obtain funds initially from third parties. Hence, in order to further the business objectives of DLF Cyprus, the assessee advanced loans in the form of quasi equity to retain control and have absolute ownership of profits subsequent to conversion. In addition to the above, assessee wishes to submit that after the conversion of the quasi-equity into equity, DLF Cyprus was able to secure additional funds from third party banks. This was critical for DLF Cyprus since the additional funds were required for completion of acquisitions, and the independent banks would not have provided any 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 of the company. The assessee wishes to submit that it was commercially expediency which necessitated DHHL to provide advances to DLF Cyprus. These advances were made as a part of capital for further investment by its associated enterprise and to obtain return in future. The assessee 16 Reliance Life Sciences Pvt. Ltd. had full control over its associated enterprise which reduces the credit risk.” (emphasis provided) 7.10.1. Elaborating the argument that by way of this funding the assessee was engaged in stewardship activities, the following submissions 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 corresponding benefit would not have been required to pay any charge for the same. In the instant case, since DHHL is the sole shareholder in DLF Cyprus, the provision of funding may be considered to be part of its shareholder activity, since it is providing support to its subsidiary as a shareholder. Additionally, any benefit accruing to DLF Cyprus from use of the funds is eventually transferred/ 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, and hence, DLF Cyprus is not required to pay any interest on the same. The Hon'ble Panel would appreciate that the aforesaid assistance provided by the Assessee is necessary and expedient given the facts of the instant case.” (emphasis provided) 7.11. In the above facts, submissions and arguments advanced 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 portfolio in premium segment hotels, resorts, serviced apartments, family recreational clubs in major cities and tourist destination. The decisions so taken had been guided by a vision to make its mark globally in countries like Sri Lanka, Thailand, Moracco, Bhutan, France, USA, Indonesia etc. We find that this is an accepted position as brought out from the following extract from the TPO‟s order itself which forms a part of the final assessment order also :- 4.2. “DHHL was set up on 31 August 2006 as an integrated hospitality development and ownership company focused on premium segment hotels, resorts, serviced apartments, and family recreational clubs- DHHL has a vision to be. India's leading hospitality development and asset Ownership Company, and amongst 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 cities 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 500 awards since 1968, such as Conde Nast, "The Gold List", Gallivanter's Guide "Best Hotel Worldwide" etc. - owns and operates 18 boutique resorts across countries such as Indonesia, Thailand, Sri Lanka, India, Morocco, Bhutan, France and the USA.” (emphasis provided)

17 Reliance Life Sciences Pvt. Ltd. 7.12. Guided by the above aims and vision, funds were advanced to its AE in Cyprus on the following dates:- “It is seen from the Form No.3CEB and Transfer Pricing Study that the assessee company has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:- Date of initial Loan Loan (US $) DHHL- Amount in INR to DGHL DGHL 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:- Conversion Funds Closing Month End Opening (Rs.) into equity Extended (Rs.) Balance (Rs.) Apr-07 May-07 June-07 July-07 2,069,582,691 2,069,582691 Aug-07 2,069,582,691 2,069,582691 Sep-07 2,069,582,691 20,306,910 2,089889602 Oct-07 2,089,889,602 2,069,582,69 20.306910 2 Nov-07 20,306,910 6,29,918,780 650.225690 Dec-07 650,225,690 200,152,084 850377774 Jan-08 850,377,774 850377774 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 wholly 1-47 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; • Written 48-49 resolutions taken by the sole shareholder of DGHL 7.15. Apart from placing on record the copy of the audited balance sheet and profit and loss account of DLF Global Hospitality Limited for financial year 2007- 08 at pages 50 to 80 of their Paper book (available with the 18 Reliance Life Sciences Pvt. Ltd. AO/TPO and the DRP) the assessee had also placed the following supporting documents:- S.No. Particulars. Page No 1 Details of Original shareholders of DLF Global 81-84 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 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 been assailed by the Revenue. We note that neither there is a rebuttal on facts nor 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 offered 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 converted into equity. The stated intent of realizing the aims and vision of the assessee company was to fund its AE so that the benefits of the efforts of the AE in increasing the foothold/portfolio would directly benefit the tax payer in India and the fact that the interest free loan 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 showing the interest free loan as an International Transaction to its subsidiary AE in Form 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 considered necessary to address whether adjustment under Chapter X is warranted. The specious and facile reasoning that international transaction is acknowledged in Form 3CEB by the assessee itself cannot form the basis of the conclusion. 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 the tax payer from claiming the same as not being an international transaction. The transaction will become international transaction necessitating arm‟s length adjustment if the ingredients of the transaction bring it within the purview of Chapter X. The disclosure made by way of abundant caution or due to ignorance of law on facts cannot be the basis of the decision of the tax authorities more so if the assessee raises objections questioning the same. The decision of the tax authorities has to be based on facts supporting the conclusion. The tax authorities 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 not permit or contemplate an Appellate forum or an Authority any justification for 19 Reliance Life Sciences Pvt. Ltd. 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 shareholder in its newly created subsidiary AE whose success in the venture of increasing its portfolio directly impacted the business interests. The fact that incapability 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 assessors cannot sit in the arm chair of the businessman. We hold considering the provisions that it is not within the domain of the tax authorities to insist that the aim 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 capability to fully utilize the funds for the intended purpose in a new area being a new territory. Thus the argument that in order to maintain control and command over the funds advanced fulfilling regulatory conditions at Cyprus etc. were required to be given due consideration. The stated intent of the tax payer that when the funds were fully utilized and exhausted by applying towards the intended purposes it was to be converted into equity which has been done. Thus the arguments that the funds advanced till then as an interest free loan, if it has to be disbelieved, 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 Revenue‟s 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 conclusion that the interest free loan must necessarily be deemed to be an interest earning 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 the transaction the tax authorities must necessarily demonstrate that the transaction as 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 the tax authorities are entering at their peril in the realm of arbitrariness. In the facts of the present case there is not even a whisper of a suggestion that it was a bogus 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 interest free loan towards its AE for capitalization the opportunity of cost of entering 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 of the claim of the assessee and demonstrate the hollowness of the assessee‟s claim. No such exercise has been done to counter the consistent claim of the assessee demonstrated by facts on record that the intention was to capitalize the opportunity 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 allowed. 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 assessee‟s conduct in exploiting the opportunity for capital investment in the peculiar facts takes the issue out of the purview of Chapter 20 Reliance Life Sciences Pvt. Ltd. X of the Income Tax Act, 1961. A brief reference to the said order at this place would be relevant as it is seen that the Co-ordinate Bench 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 advancing of interest free loans by the assessee was not accepted by the tax authorities and 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 the said finding had been upheld by the CIT(A). The Co-ordinate Bench considering the facts accepted the assessee‟s 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 warranted in case of interest free loan extended as quasi-capital. The Co-ordinate Bench examined and considered the decisions rendered in Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.); Micro Inks Ltd vs ACIT [2013] 157 TTJ 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 on 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 Coordinate Bench has quoted the decision of the Hon‟ble 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 concept 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 Frankfurter J.) with regard to “quasi capital” as there appears to be no independent analysis 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 routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations.” The decisions considering the expression were held to be inapplicable as “The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.” We find that quasi capital can be said to be a category 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 hybrid instrument pre-stipulated to be a loan for a transitory period, the economic purpose of which is a future 21 Reliance Life Sciences Pvt. Ltd. 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 dated 11.03.2014 (Copy of which has been placed at book pages 38 to 94). Though reliance on the said decision has primarily been placed qua Ground No.2 in order to argue that without prejudice 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 argued is also supported by the decision of the Jurisdictional High Court in the case of Cotton Naturals India P. Ltd.(cited supra). However, apart from the issue agitated in Ground No.2, Bharti Airtel Ltd. (cited supra) has also been relied in support of the primary issue for the proposition that the activity of interest free advances ultimately to be converted into equity by a holding company to a subsidiary 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 attracted 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 assessee before the Co-ordinate Bench. These grounds when read alongwith other related 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 and 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 the 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 appellant in its associated enterprises in the form of share application money for allotment of shares as interest free loans and consequently, applying transfer pricing provisions to the said transaction(s) and while doing so making an improper comparison by: (a) Considering rate of interest suggested by rating agency and banks to general investor which are subject to various conditions like credit rating, loan, tenure, etc. and ignoring the fact that such rates can vary according to these variables; 22 Reliance Life Sciences Pvt. Ltd. (b) Undertaking a flawed analysis by applying the rate of interest used in relation to - Indian currency loan given in India to an intercompany transaction of advancement of money outside of India, thereby completely ignoring the difference in the, economic environment and geographical conditions prevalent in India and overseas jurisdictions; (c) alleging that the financial health of the associated enterprises was weak and further in determining the credit rating of the associated enterprises as ranging between BB to D, being high risk category, without providing any cogent or germane reason for the same; (d) making additional arbitrary and adhoc adjustments to the rate of interest on account of security and single customer and transaction cost, thereby completely ignoring the on-ground reality of the inter-- company transaction that there is no significant risk in advancing loans to 100% subsidiary companies and demonstrating an intention to arrive at a very high interest rate of 17.26% p.a. with the single- minded intention of making an addition to the returned income of the appellant. 15.3 That the assessing officer/TPO erred in relying upon the rate of interest charged by various domestic banks on advancement of foreign currency loans obtained by the TPO under section 133(6) of the Act, without affording opportunity to the appellant to rebut the same, in violation of principles of natural justice. 15.4 That the assessing officer/TPO erred in relying upon the information obtained under section 133(6) of the Act, without appreciating that such information was not available in the public domain and therefore, could not have been relied upon for the purpose of determining the arm's length price. 15.5. Without prejudice, that the assessing officer/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, without considering the monthly balance of share application 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 Coordinate 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 similarity on the material facts:- 44. So far as this grievance of the assessee is concerned, the relevant material facts, to the extent necessary for our adjudication, are as follows. It is not in dispute that during the relevant previous year the assessee has made following payments towards share application money in its foreign subsidiaries: Name of associated Amount of Date of share Date of issue of Enterprises advance (Rs.) application shares 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) 2,01,39,150 24,09.2007 1.04.2009 23 Reliance Life Sciences Pvt. Ltd. Name of associated Amount of Date of share Date of issue of Enterprises advance (Rs.) application shares Ltd. Bharti Airtel (Hongkong) 1,81,48,200 24.09.2007 10.12.2008. Ltd. Bharti Airtel (Lanka) Ltd 63,51,93,795 Various dates 31.07.2008 Total 110,97,67,920

32. We also observe that the TPO while charging interest at the rate of 6% compared another AE of the assessee namely RLSBV which is a controlled transaction with that of the RLSI for benchmarking the transaction. Following the decisions of the Hon‟ble Bombay High Court in the case of the CIT v. Lever India Exports Ltd (supra) and CIT v. MerckLtd. (supra), we hold that arm‟s length price cannot be determined on the basis of another controlled transaction as was done by the TPO. Therefore, respectfully following the above decisions, we hold that no interest ought to have charged on the OCL advanced to payee RLSI and thus we direct the Assessing Officer to delete the adjustment made towards interest.” …………..

27 Reliance Life Sciences Pvt. Ltd.

28 Reliance Life Sciences Pvt. Ltd. 7) However, the Tribunal allowed the respondent-assessee's appeal. During the course of the proceedings before the Tribunal the revenue contended that the borrowings on which the interest has been claimed as a deduction are in fact capital of the assessee and brought only under the nomenclature of loan for tax consideration. It was the case of the appellant-revenue before the Tribunal that debt capital is required to be re- characterized as equity capital. However, the Tribunal held that in India as the law stands there were no rules with regard to thin capitalization so as to consider debt as an equity. It is only in the proposed Direct Tax Code Bill of 2010 that as a part of the General Anti Avoidance Rules it is proposed to introduce a provision by which a arrangement may be declared as an impermissible avoidance arrangement and may be determined by recharactersing any equity into debt or vice versa. 8) We find no fault with the above observations of the Tribunal. There were at the relevant time and even today no thin capitalization rules in force. Consequently, the interest payment on debt capital cannot be disallowed. In view of the above, the question (i) raises no substantial question of law and is therefore, dismissed.”

45. In the case ofPCIT v. Aegis Limited (supra) the Hon'ble Jurisdictional High Court while answering the following question observed as under: - “Q1. Whether on the facts and circumstances of the case and in law, the Income Tax Appellate Tribunal erred in not considering the fact that the assessee had actually advanced/lent money to its AE in the garb of preference shares leading to attraction of provisions relating to Transfer Pricing in the ease of the assessee in view of Section 92B of the Act, without appreciating the fact that these preferential shares do not carry any dividend and are beyond scope of any capital appreciation? ….

2. The respondent-assessee is a Company registered under the Companies Act. For the Assessment Year 2009 10, the assessee was subjected to transfer pricing regime. Question no.1 arises out of the action of the Revenue to tax notional interest in the hands of the assessee through transfer pricing. The facts are that, during the period relevant to the assessment year in question, the assessee had subscribed to redeemable preferential shares of its Associated Enterprises ("AE" for short) and redeemed some of its shares at par. The Transfer Pricing Officer ("TPO" for short) held that the preference shares were equivalent to interest free loans advanced by the assessee and accordingly charged the interest on notional basis. The Tribunal by the impugned judgment, deleted the addition observing that the TPO had re-characterised the transaction of subscription of shares into advancing of unsecured loans. The Tribunal did not 29 Reliance Life Sciences Pvt. Ltd. accept such conclusion, inter-alia on the grounds that the TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction.