DLF HOTEL HOLDINGS LTD.,NEW DELHI vs. DCIT, NEW DELHI

The first ground of appeal of the assessee is directed against the order of the AO/DRP treating advancement of share application money as an international transaction and thereby applying transfer pricing provisions.

At the time of hearing, the AR of the assessee submitted that the issue is covered in favour of the assessee by the Delhi Bench of the Tribunal in the case of the assessee itself for assessment year 2008-09 reported in 51 ITR(T) 499 (Del).

The ld. DR concurred with the above submissions of the AR of the assessee.

After considering the rival submissions and perusing the materials available on the record, we find that in the instant case, the assessee has advanced share application money of Rs.2,23,57,60,800/- to its associated enterprises. The AO/DRP/TPO applied internal CUP of 10.31% on the said amount for the purpose of computation of adjustment and added Rs.4,73,64,439/- to the income of the assessee.

Before us, the assessee contended that the issue is covered in favour of the assessee by the order of the Tribunal in the case of the assessee itself in assessment year 2008-09 and the DR has also agreed with the above submission of the AR of the assessee.

We find that the Tribunal has held as under: “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 capital investment in all its forms including contribution to equity or subscription of capital and cannot be justifiably be treated as a debt simplicitor. Reliance has also been placed on the case of Bharti Airtel Ltd. (supra) in (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 3 DLF Hotel Holdings Ltd. 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 (I) (P.) Ltd. (supra). However, apart from the issue agitated in Ground No. 2, Bharti Airtel Ltd.'s case (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.”

Further, we find that the Hon’ble Bombay High Court in the case of PCIT Vs PMP Auto Components Pvt. Ltd. in order dated 28.01.2019 where the assessee had entered into a transaction of purchase of share of shares of an AE, has held that The TPO could not have treated such transactions as a loan and charge interest thereon on notional basis. In view of the above, we set aside the order of the Assessing Officer and delete the addition of Rs.4,73,64,439/- and allow this ground of appeal of the assessee.

The facts of the case are that from the balance sheet of the assessee, the Assessing officer observed that the assessee has made investment in shares of group companies amounting to Rs.1240,62,57,500/- on which no income in the shape of dividend or any other income was earned. He observed that the company has taken secured and unsecured loans and paid

Before us, the AR of the assessee submitted that the issue is covered by the Hon’ble Delhi High Court in the case of the assessee itself for assessment year 2010-11 wherein on identical facts, disallowance of interest was deleted. He prayed that following the same, the disallowance of interest should be deleted.

The ld. DR agreed with the submissions of the AR of the assessee.

We find that the Hon’ble Delhi High Court has held as under: “6.The Tribunal vide order dated 9thApril, 2018 has affirmed findings of the Commissioner of Income Tax (Appeals) deleting addition of Rs.5,33,01,263/- made by the Assessing Officer as being contrary to law and in particular Section 36(1)(iii) of the Act. The Tribunal observed that investment in subsidiaries/ joint venture companies was one of the main objects of the respondent-assessee and hence expenditure in the nature of interest incurred for the purpose of making investments cannot be disallowed under Section 36(1)(iii) of the Act. 7. Apart from the incongruities in the reasoning and calculations made by the Assessing Officer referred to in the order of the Commissioner of Income Tax (Appeals), which have been accepted by the Tribunal, the issue raised is covered against the Revenue by the decision of the Supreme Court in S.A.

Thus in Atherton v. British Insulated & Helsby Cables Ltd.[(1925) 10 TC 155 : 1 KB 421 : 132 LT 288 (CA)] it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on of the business. The above test in Atherton case[(1925) 10 TC 155: 1 KB 421 : 132 LT 288 (CA)] has been approved by this Court in several decisions e.g. Eastern Investments Ltd. v. CIT[(1951) 20 ITR 1 : AIR 1951 SC 278], CIT v. Chandulal Keshavlal & Co.[(1960) 38 ITR 601 : AIR 1960 SC 738] , etc.

In our opinion, the High Court as well as the Tribunal and other Income Tax Authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest-free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of 6 DLF Hotel Holdings Ltd. commercial expediency, and if it was, it should have been allowed.

The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. XXX 37. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilise the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. The Assessing Officer had referred and followed some of the judgments in Commissioner of Income Tax versus Abhishek Industries Limited,(2006) 286 ITR 1(P&H) and others, which have been overruled by the Supreme Court in S.A. Builders Limited(supra).

In the result, the appeal of the assessee is allowed. (Order Pronounced in the Open Court on 28/02/2019)