RELIANCE LIFE SCIENCES P.LTD,NAVI MUMBAI vs. DCIT RG 7(2), MUMBAI

In the alternative, Ld. Counsel for the assessee submits that investments on which no exempt income earned should not be considered for calculation of average value of investments. Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Pr.CIT v. M/s. Ballarpur Industries Limited in ITA.No. 51 of 2016 dated 13.10.2016 and ACIT v. Vireet Investments Private Limited [165 ITD 27]. He also further submitted that investments in Foreign Companies income from which is taxable should not be considered for average value of 5 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., investments. Reliance is placed on the decision of the Delhi Bench of Tribunal in the case of ACIT v. Indian Farmers Fertilizer Cooperative Ltd., [95 taxmann.com 114].

Ld. DR vehemently supported the orders of the authorities below.

We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the breakup of the dividend income earned by the assessee we notice that assessee has received dividend income of ₹.20,12,92,325/- from its group Company Reliance Industries Limited and dividend of ₹.12,86,468/- from Mutual funds. Therefore, the contention of the assessee that since 99% of the dividend was earned from its group company for which no expenditure has been incurred has considerable force. We also find that in the course of the assessment proceedings the assessee has furnished a detailed reply as to why there is no expenditure incurred for earning dividend income by the assessee as major expenditure has been incurred only for the purpose of life sciences business and no expenditure was incurred for earning any dividend income and therefore no disallowance should be made. However, the Assessing Officer has not recorded any satisfaction as to why there shall be any expenditure for earning dividend income more so when the assessee has received 99% of its dividend income only from its 6 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., group Company Reliance Industries Limited. Therefore, what could have been disallowed was only that part of expenditure attributable for earning the dividend income only out of administrative expenses. The direct expenses incurred for earning dividend income i.e. demat charges were already disallowed by the Assessing Officer. The Assessing Officer has not given any justification and satisfaction for invoking the provisions of Rule 8D but applied mechanically referring to the decision of the Hon’ble Bombay high court and the special Bench in the case of Daga Capital Management Pvt. Ltd., [117 ITD 169].

Assessee has clearly stated that for earning dividend income no expenditure has been incurred and all the expenditure which has been debited to P&L account is only with reference to the life sciences business activity. On a perusal of the expenditure debited to P&L account, we noticed that majority of the expenditure is on account of life sciences business activity except the administrative expenses i.e. on personnel which is at ₹.24.44 Crores. Even out of this expenditure only the expenditure incurred in the general administration department should be considered for disallowance and not entire personnel expenses of ₹.24.44 Crores can be attributable for earning the dividend income. At best only a part of expenditure can be attributable for earning dividend income where a decision making has happened for making investments and that 7 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., to all the investment are in group Company M/s. Reliance Industries Limited. Therefore, in our opinion the Assessing Officer shall find out the expenditure attributable for earning exempt income with reference to the submissions made by the assessee that it has not incurred any expenditure for earning dividend income. The assessee shall furnish the necessary details of expenditure incurred as the assessee itself admits that a very small quantum of expenditure can be attributable the general administrative expenditure and in the absence of any suomoto disallowance by the assessee. This issue is restored to the file of the assessing officer for re-quantification of disallowance only from out of general administrative expenditure where a decision making has happened for making investments.

We also direct the Assessing Officer to exclude investments on which no exempt income was earned following the decision of the Special Bench of Delhi, ITAT in the case of ACIT v. Vireet Investments Private Limited [165 ITD 27]. We also direct the Assessing Officer to exclude investment in Foreign Companies income from which is taxable and they should be excluded while calculating the average value of investments. This ground is partly allowed.

Without prejudice to the above, the Ld. Counsel for the assessee submits that the said expenditure is allowable as deduction u/s. 37(1) of the Act. Ld. Counsel for the assessee submits that for the A.Y. 2007-08 the Tribunal in ITA.No. 1575/MUM/2013 dated 19.10.2015 allowed the alternative claim of the assessee that the expenditure be allowed as deduction u/s. 37(1) of the Act. Copy of the order is placed on record.

We have heard the rival submissions and perused the orders of the authorities below. We observe from the Assessment Order that the assessee in the course of the assessment proceedings vide letter dated 17.01.2011 revised its claim u/s. 35(2AB) of the Act and assessee itself claimed expenditure on clinical trials of ₹.49,24,573/- u/s. 37(1) of the Act. However, before the Ld.CIT(A) assessee made a claim for deduction u/s. 35(2AB) of the Act in respect of clinical trials made outside the in-house facility of the assessee and in the alternative claim was made u/s. 37(1) of the Act. The Ld.CIT(A) rejected both the claims of the assessee i.e. u/s. 35(2AB) and 37(1) of the Act following his earlier order for the A.Y. 2007-08 observing that there is no change in facts. For the 10 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., A.Y. 2007-08 the Tribunal decided this issue in ITA.No. 1575/Mum/2013 dated 9.10.2015. On a perusal of the order of the Tribunal, we find that identical issue arouse for the A.Y. 2007-08 and the Tribunal allowed the alternative claim of the assessee that expenditure incurred on clinical trials outside the in-house facility of the assessee is allowable as deduction u/s. 37(1) of the Act observing as under: - “5.5. We have considered the submissions made by both the sides and gone through the orders passed by the lower authorities and material placed before us for our consideration. Since, main claim of assessee with respect to deduction u/s 35(2AB) was not seriously pressed before us, therefore, same is dismissed. With respect to alternate claim made by the assessee u/s 37(1) of the Act, it is noted that the invoice of M/s. Reliance Clinical Research Services Pvt. Ltd. dated 31.03.2007 is enclosed at page no. 3 of the paper book, showing that payment has been made to the said company under the head “Clinical Trial Fees” – for the month of March, 2007 for time spent on 1st March to 31st March, 2007 for conducting clinical trials, in support of to all ‘K projects’, for a sum of Rs.57,65,564/-. It is further noted that on the back side of the invoice, complete details have been given with respect to time spent by 22 employees of RCRS, also giving particulars of the studies done by these employees. Names of these employees have been given along with their rates per hour. It is further noted that ld. Assessing Officer has shown no doubts about the genuineness of these expenses. It was held by Ld. CIT(A) that since claim of assessee with respect to deduction u/s.35(2AB) has been denied, therefore, these expenses are capital in nature. It was further observed by ld. CIT(A) that Assessing Officer, as well as assessee, have treated these expenses as capital in nature. In our view, the observations of Ld. CIT(A) are misplaced and without any basis. We have gone through details of these expenses. In our considered view, these expenses are apparently revenue in nature. Ld DR also could not point out as to which expenses are capital in nature. Thus, in our view, these expenses are of revenue nature. 5.6. The other argument of Ld DR was that assessee did not claim these expenses u/s 37 and did not treat them as revenue in nature, and therefore assessee should be precluded from claiming benefit of these expenses, now at this stage, irrespective of this fact that these expenses may have been held as allowable, if the assessee would have made its claim correctly as per law, at the time of filing of return.

In view of our observations and also since facts being identical following the order of the Tribunal we allow the claim of the assessee that the said expenditure should be allowed u/s. 37 of the Act. Thus, the Assessing Officer is directed to allow this expenditure u/s. 37 (1) of the Act. This Ground is allowed.

The assessing officer made a reference u/s. 92CA(1) of the Act to the TPO for determining arm’s length price of the international transactions reported by the assessee. The TPO observed that assessee has advanced interest free Loans to RLSI and charged no interest in respect of said loan transactions. The assessee contented that since as per clause (3) of the loan agreement the said loan zero coupon was optionally convertible into share capital at any time not later than 31.03.2011 at a fair value to be determined by independent accountant at the time of conversion as per the terms of the loan agreement, no interest was charged by the assessee from RLSI. The contentions of the assessee have been rejected by the TPO observing as under: - (a) Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. The fact that the activities undertaken by the assessee were a part of the project under development and the capital structure of the company had been decided keeping in mind the project risk this company, does not justify non-charging of interest under the Indian transfer pricing regulations, as no 3rd party in the similar circumstances will grant the loan without charging interest at the market rate. (b) The fact that the conversion price would take care of non- charging of interest, which was not charged by the assessee from its AE, does not justify the same under the Indian transfer pricing regulations. The internal arrangement for issuance of shares in future by taking into consideration of accumulated interest, is not 14 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., quantified in this loan agreement. Therefore, this claim for compensating for not charging of interest against issuance of shares in future is not acceptable. (c) The assessee's argument that the said loan is to be treated as equity, since it was optionally convertible into share capital at any time not later than March 31, 2011 and it is a known fact that till date no share capital is issued against the loan and further at the option of the assessee/ lender of the loan, can be either returned the loan or issue the shares, thus assessee can get back its loan also. Further, the same is also not acceptable since, then the assessee should have made an equity contribution in the first instance instead of granting a loan. If the assessee had directly funded/ invested, from the said acquisitions, the assessee would be entitled to: > dividends as and when the same are declared and the same would be taxable in India and > It would also have been liable to capital gains tax on sale of share in future. In view of the above, the above argument of the assessee is not acceptable. Since no enterprise would advance interest-free loan to a third party in similar circumstances, therefore the interest-free loan given by the assessee do not comply with the arm's length principle. Moreover, the assessee's in its own case, while providing a loan to its AE 'M/s. RLS BV, has charged interest @ 6% p.a. and hence interest should have also been charged on the loan provided to M/s. RLS Inc. In view of the above discussions and in the facts and circumstances, the, benchmarking of interest free loan given by the assessee to this AE i.e. M/s. RLS Inc. is determined by applying interest rate of @ 6% p.a. charged by the assesses itself on the loan provided to its another AE M/s. RLS BV. The working of adjustment is as under:

Accordingly, the TPO charged interest at the rate of 6% per annum and made an adjustment of ₹.1,75,70,642/. Before the Ld. CIT(A), the assessee contented that the entire loan has been converted into equity capital in its books as on 31.03.2011 and hence no interest should be charged. However, the Ld.CIT(A) sustained the adjustment observing as under: - “7.3. I have considered the facts of the case, submission of the appellant as against the findings/ observations of the TPO/AO in orders u/s 92 CA (3) 143(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under: i. The appellant contended that the entire loan has been converted into equity capital in its book as on 31,03.2011 and hence no interest should be charged. In this regard, it is mentioned that even accepting these facts it is noted that from the date loan was advanced to AE till 31.03.2011 the funds were used by the AE without any cost against which assessee was paying interest. In third party situation no entity would part with its funds without charging any interest in such a condition. Accordingly, during the intervening period this amount continued to be in nature of loan only, on which interest was chargeable as per TP provisions. Other objections raised by the appellant have already been dealt with by TPO in his order. ii- It was stated that rate of interest charged @ 6% was quite high. In this regard it is noted that as mentioned on page 4 of his 16 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., order, the TPO has charged this interest on the basis of Axis Bank quotation which was treated CUP. Further 1% was advanced for risk and finally 6% rate was applied. Further in judgment dated 12.04.2013 Hon'ble IT AT in IT A No. 7872 Mum 201 1 in the case of Aurionpro Solutions Ltd. have held as "8.10 The Transfer Pricing Regulation are based on the deeming principle by taking into account a hypothetical situation that instead of having transaction with AE had the assesses transacted with unrelated party what would have been the financial/commercial result of that transaction. Thus, the effect of transaction on the income of the assessee is to be seen and considered and not effect on the cost or income of the AE. Therefore, the tested party is always the tax payer and not the AE. None of the factors under the Transfer Pricing Regulations require to consider whether the AEs would have incurred or earned more or less; but it is always considered whether the assessee had earned more or less by doing a similar transaction with an unrelated parties. 8.11 Even under Rule 10B of the IT Rules, the factors prescribed for inclusion or exclusion of comparables to determine the ALP are also based on the comparison of the assessee with the chosen entities and the AE has no role in the exercise of selecting the comparables. Thus, in our view, the interest that would have been earned by the assessee by advancing or placing the said amount with unrelated parties would be the Arm's Length interest in relation to the interest free loans/advances to the AE. The safest comparables, which can be taken as Arm 's Length interest rate in such a case would be the interest on FD with the bank for a term equivalent to the term for which the loans given to the AEs. 8.12 It is pertinent to note that in case of FD with the Bank, the investment is safe as it is free from risk of credit and interest. On the other hand, if the loan/advance is given to the unrelated party, then always there is some risk of credit and interest involved in such transaction. There is one more reason for taking the FD as an appropriate and good comparable because the lending rate by financial institutions/bank varies depending upon the credit rating of the borrower and further on the guarantee and security provided to secure the loans". In view of the above observations it may be noted that FD rate has been considered to be one of the methods for benchmarking international transactions relating to interest receivable. Further risk factor has to be considered looking to the fact that the fixed deposits 17 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., are very secure being with banks as compared to loan advanced to parties like AE of the appellant. Since there is risk associated with the unsecured loan, one has to take into account the risk while deciding ALP. Taking into consideration all the kinds of Risk associated with such transaction like Forex risk, Country risk, Entity risk, and circumstances further mark up may be added. Similar observations were made by Hon'ble ITAT Mumbai vide their order dt 16.11.2012 in the case of Wipro Ltd. vs. DOT 33 taxmann.com 263. Considering all these facts the rate of 6% for charging interest is held to be reasonable and consequently adjustment made by the TPO is upheld.”

Before us, Ld. Counsel for the assessee submits that during the F.Y.2008-09 assessee had advanced zero coupon i.e. optionally convertible loan [hereinafter in short “OCL”] pursuant to the loan agreement dated 28.01.2008 and no interest was charged by the assessee for the reason that RLSI was setup for developing global business opportunities in the field of pharmaceuticals, bio- pharmaceuticals, 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 him. Ld. Counsel for the assessee submits that as per clause (3) of the loan agreement, the loan was zero coupon and was optionally convertible into share capital at the option of the lender at a fair value to be determined at the time of conversion as per the terms of the loan agreement. Ld. Counsel for the assessee submits that as on 31.03.2011 RLSI has converted the entire loan amount outstanding in its books into paid in equity capital and this can be verified from the CPA certificate dated 18 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., 12.10.2011 which is placed at Page No. 220 of the paper book. Therefore, Ld. Counsel for the assessee submits that the TPO disregarding submissions of the assessee adopted interest rate of 6% per annum as arm’s length price rate of interest, which was charged by the assessee in respect of loan provided to its another AE i.e. M/s. Reliance Life Sciences BV [hereinafter in short “RLSBV”]. Ld. Counsel for the assessee further submits that no adjustment for interest should be made in respect of the said convertible loan provided to RLSI which has been entirely converted into paid in equity capital in subsequent year.

Ld. Counsel for the assessee further submits that erroneous benchmarking has been adopted by the TPO while determining arm’s length price. Ld. Counsel for the assessee submits that the TPO has failed to determine the arm’s length price of the optionally convertible loan on the basis of one of the methods prescribed u/s. 92C of the Act. It is submitted that the TPO adopted interest rate of 6% per annum charged by the assessee on the loan provided to another AE i.e. RLSBV which is a controlled transaction, as the arm’s length price, which is not on the basis of any of the prescribed methods. Ld. Counsel for the assessee submits that adhoc determination of arm’s length price by TPO dehors section 92C of the Act cannot be sustained. It is further submitted that arm’s length price cannot be determined on the basis of another controlled 19 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., transaction i.e. transaction with another AE. It is submitted that u/s. 92C of the Act arm’s length price can be determined only on the basis of independent and uncontrolled transactions. Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of CIT v. Lever India Exports Ltd., in ITA.No. 1306, 1307 and 1349 of 2014 dated 23.01.2017 and CIT v. Merck Ltd., in ITA.No. 272 of 2014 dated 08.08.2016.

Ld. Counsel for the assessee further submits that the approach of TPO in adopting controlled transaction to benchmark another controlled transaction is rejected by the Hon’ble Jurisdictional High Court in the case of ADIT v. Barclays Bank Plc. In ITA.No. 584/Mum/2012 dated 12.01.2018. It is further submitted by the Ld. Counsel for the assessee that when TPO failed to adopt one of the prescribed methods of the Act, the matter cannot be restored to the file of the assessing officer. Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of CIT v. Johnson & Johnson Limited in ITA.No. 1291 of 2014 dated 03.04.2017 and CIT v. Kodak India Pvt. Ltd., in ITA.No. 15 of 2014 dated 11.07.2016.

Without prejudice to the above, the Ld. Counsel for the assessee submits that interest free OCL is not a loan simplicitor and no interest 20 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., should be imputed. Ld. Counsel for the assessee submits that assessee intended to fulfill its own objective of gaining majority control in overseas acquisitions made through its AE, but intention was always to invest in equity and there was no intention to provide loan to earn any interest and as on 31.03.2011 the outstanding loan has been converted into paid in equity capital. It is further submitted that OCL is in the nature of quasi capital and not a routine loan simplicitor. It creates a valuable right in the hands of the lenders and the substantive reward is not interest but opportunity to own capital which in itself is a valuable right and which cannot be disregarded in determining the arm’s length price by comparing the transaction with other simplicitor loan transactions.

Ld. Counsel for the assessee submits that identical issue came up in the case of DCIT v. Cadila Healthcare Ltd., in ITA.No. 2430/AHD/2012 dated 11.10.2013 wherein the assessee has subscribed to OCL issued by AE and no interest was payable in case the loan was convertible into equity within a period of five years from the date of disbursement. The TPO held that this OCL to be in the nature of debt and made adjustment for interest. Hon’ble Tribunal affirmed the order of the Ld.CIT(A) wherein it was held that the assessee had not granted the loan but invested in OCL and held it to be at arm’s length.

Further reliance was also placed on the decision of the Ahmadabad Bench of the Tribunal in the case of Micro Inks Ltd v. ACIT in ITA.No. 1688/AHD/2006 dated 06.08.2013 reported in 92 DTR 186 wherein the Ahmadabad Bench while deciding arm’s length price of advance given by holding Company to its wholly owned subsidiary, held that, on pure commercial factors, CUP for interest on such transaction where subsidiary plays strategically commercial role in assessee’s business would be Nil. It is submitted that the Tribunal deleted the adjustment holding that the interest was not applicable in the said case. It is submitted that similar view is upheld in the case of Prithvi Information Solution Ltd v. ACIT in ITA.No. 1816/HYD/2012 dated 08.08.2014 by the ITAT Hyderabad Bench.

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 22 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., 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 23 ITA NO.2301/MUM/2015 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., bringing any contrary material on record. In view of these facts, we find no reason to interfere with the order of CIT(A).

Similarly, in the case of Micro Inks Ltd v. ACIT (supra) the Ahmadabad Bench of the Tribunal held as under: - “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 24 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., 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 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. .......

It is also important to bear in mind the fact that at the relevant point of time the assessee could not have invested in the shares of the step down subsidiary, without the permission of the Reserve Bank of India – as is uncontroverted stand of the assessee, and, therefore, the assessee could not also have, without the permission of the Reserve Bank of India, entered into loan agreements with a provision of conversion of such loans equity either. It is only 25 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., elementary legal position that what could not have been done directly could not have done indirectly also. There is thus not much of a merit in the stand of the revenue authorities that in the absence of a specific mention about conversion of loan into equity, it cannot be presumed that the interest free loans could not have been in the nature of quasi capital. As to the position that the relationship between the assessee and Micro USA was not of a lender and borrower simplicitor – a relationship which is essence of a loan transaction, it will be clear from the following observations in the annual financial statement of Micro USA : ....... As of March 31, 2002, the company had generated an accumulated deficit of US $ 27.48 million and had a net w orking capital surplus of US $ 3.31 million. Net cash used 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, 26 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., an d 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 cas e. 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 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 arms 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 27 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., 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 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 10 B (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.

The next logical question, therefore, is as to what would be the price at which such interest free advances coul d be given in comparable uncontrolled transactions. In other words, in case the assessee and the Micro USA were not associated enterprises in legal sense of that expression, at what rate the assessee would have granted advances pending approval for capital subscription in a company which is playing such a vital role in its business plans. It is so for the reason, as we begun by pointing out, the whole purpose of the arm’s length price adjustment is to nullify the impact of management, capital and control interrelationship between the associated parties. In our humble understanding, on the pure commercial factors and notwithstanding the management, capital and control relationship between the parties, such non interest bearing advances were equally justified even if the assessee and Micro USA were independent enterprises. Of course, we are alive to the fact that but for the management, capital and control interrelationship, Micro USA could not have played such a strategically significant role in assessee’s business but then right now we are concerned with a comparable uncontrolled transaction between independent enterprises, in which all other factors, except the commonality of management, control and capital, remain the same. The comparable uncontrolled price for interest on such a 28 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., transaction in which advances are made pending capital subscription in a company which plays strategically significant commercial role in assessee’s business , in our considered view, would be nil. The levy of interest would not come into play in such a case, except to the extent of refund of US $ 10,000 for which no shares were allotted. When it was so pointed out during the hearing, learned counsel for the assessee very fairly did not press his grievance to the extent of this amount. In the light of these discussions, the variations in the nature of transactions between the assessee and Micro USA and variations in the nature of relationship between the assessee and Micro USA are so fundamental that the entire LIBOR plus rate, which was the starting point of our computation of ALP of these interest free loans, is to be reduced to zero to take care of the differences in terms of Rule 10B(1)(a)(ii) of the Income Tax Rules. The impugned ALP adjustment, to this extent and in the terms i ndicated above, is unsustainable in law and we delete the same.”

In the case of DLF Hotel Holdings Ltd v. DCIT (supra) the Delhi Bench of the Tribunal held as under: - “7. We have heard the rival submissions and perused the 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:- Method used by Value of Assessee S.No. Nature of transaction Transaction (USD) Method PLI 1. Interest free loan NA NA 72,580,000 7.1. The advancing of interest free loan of USD 72580000 to its AE, DLF Global Hospitality Ltd., Cyprus (DHHL/DLF) Cyprus has been reflected as an interest free loan of Rs.2,91,99,60,465. The relevant extract from the TPO’s order addressing the specific date and amounts on which the loans were given is reproduced hereunder:- “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 (US $) Amount in Loan to DGHL DHHL-DGHL INR 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 29 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., Date of initial Loan (US $) Amount in Loan to DGHL DHHL-DGHL INR 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 before the TPO that the loan was advanced with the intention of converting it into equity and has shown that it was converted into equity within 3 months. The assessee as per record has explained that the loan was so structured as the assessee was not sure of the subsidiary company’s capacity to utilize the funds for the intended purposes. It has been argued that on the utilization of the funds it was capitalized as equity hence it has been explained that it was never a loan and was always a quasi debt. For ready-reference the relevant extract from the TPO’s 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 short period of three months. The Company opted for debt only to retain some flexibility to get its money back in case the associate enterprise is not able to utilize the funds from the intended purpose. However, once the associated enterprise utilized the funds for intended 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 considered to be at arm’s length as provided under Section 92C of the Act.” 7.3. It is seen from the record that the said explanation was not accepted by the TPO who rejected it holding as under:- “From the above statement it is clear that no benchmarking has been carried out in respect of these loans. The fact that the decision regarding the treatment of this amount as loan or debt 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 arm’s length principle, as enunciated in the transfer pricing guidelines as per the Income Tax Act. The arm’s length interest is determined by following 30 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., the CUP method, wherein the interest rate is determined under the circumstances 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 given to unrelated parties in similar situation as that of subsidiaries. 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.

As mentioned above, under the CUP method, the interest that is charged between unrelated parties under similar circumstances would be the arm's length interest. The main issue is to decide the interest rate at which the tax payer would have earned, in advancing loan of above amounts to unrelated third parties with similar financial strength as that of the AE. It is also to be mentioned that there is 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 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.

Corporate bonds issued by companies in India also give an indication of interest that could be earned if the amount is 31 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., lent to the companies. Government bonds are subject only to interest rate risk. However, corporate bonds are subject to credit risk in addition to interest rate risk. Interest rate risk refers to the risk of a bond changing 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 the 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 agency. The rating scales vary; the most popular scale uses (in order of increasing risk) ratings of AAA, AA, A, BBB, BB, B, C, with the additional rating D for debt already in arrears. Government bonds are often considered to 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 rated BBB and higher are called investment grade bonds. The safety level of these grading, as adopted by CRISIL, are as under: AAA (Triple A) Instruments rated 'AAA' are judged to offer the highest degree of safety, with regard to timely Highest Safety payment of financial obligations. Any adverse changes in circumstances are most unlikely to affect the payments on the instrument. AA (Double A) Instruments rated 'AA' are judged to offer a High Safety high degree of safety, with regard to timely payment of financial obligations. They differ only marginally in safety from AAA ' issues. A Adequate Instruments rated 'A' are judged to offer an Safety adequate degree of safety, with regard to timely payment of financial obligations. However, changes in circumstances can adversely affect such issues more than those in the higher rating categories. 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, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rating categories.

From the above, it is seen that bonds in the rating 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 also considering the financial health of the AE of the taxpayer, it would be reasonable to consider that the loan advanced by the taxpayer would fall somewhere between BB and D ratings. Information about the average yield on long term instrument 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 from CRISIL which is the Credit Rating Agency in India where the ratings were ranging from AAA; AA+; AA-; BB; BBB; BBB-; BBB; A+; A- to A the TPO was of the view that the assessee’s case was to be considered ranging between the range of BB 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 words 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% 33 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., rate of interest appeared to be most reasonable and appropriate which was proposed to be applied on monthly 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 following reply was given:- 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 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 34 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., 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 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:-

Let us also deal with two judicial precedents which have been heavily relied upon by the TPO, as also by the learned Departmental Representative, on which their case rests. None of these decisions, however, deal with the core issue before us i.e. whether a capital contribution can be deemed to be partly an interest free loan, for the period till the shares were actually allotted, and partly as capital contribution, after the subscribed shares were issued by the subsidiary in which capital contribution was made. In the case of Perot Systems TSI India Ltd Vs. DCIT (supra), a coordinate bench of this Tribunal had an occasion to deal with the arm’s length price adjustment with regard to interest free advances to the subsidiaries. That was a case in which the assessee, an Indian company, advanced interest-free loans to its 100% foreign subsidiaries. The subsidiaries used those funds to make investments in other step- down subsidiaries. On the question whether notional interest on the said loans could be assessed in the hands of the assessee under the transfer pricing provisions of Chapter X, the assessee argued that the said "loans" were in fact "quasi - equity" and made out of commercial expediency. It was also argued that notional income could not be assessed to tax. However, both of these arguments were rejected by a coordinate bench of this Tribunal. While doing so, the coordinate bench observed that there was no material on record to establish that the loans were in reality not loans but were quasi -capital and that there is also no reason why the loans were not contributed as capital if they were actually meant to be a capital contribution. It was observed that, "It is not the case that there was any technical problem that the loan could not have been contributed as capital originally, if it was meant to be a capital contribution". The argument of loan being in the nature of quasi capital was thus rejected on facts. It was not even a case of quasi capital, and, therefore, this case has no bearing on the question before us i.e. whether ALP adjustments can be made in respect of payments towards share application 50 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., money in a situation in which the shares have been issued several months after the payments for share application money have been made. Similarly, in VVF's case (supra), the transaction was admittedly in the nature of interest free loan between AEs and the commercial expediency in advancing interest free loans was on account of ownership and control of subsidiary being in the hands of the assessee, which was recognized as a significant factor for commercial expediency. However, as we have seen in the earlier discussions, such commercial expediency of granting interest free loans is wholly irrelevant because it is the impact of this interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital contribution was deemed to be partly an interest free loan (i.e. for the period till the shares were actually allotted) and partly as capital contribution (i.e. when the subscribed shares were allotted by the subsidiary). Revenue, therefore, does not derive any advantage from these judicial precedents either.

In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the authorities below were in error in treating the payment of share application money, as partly in the nature of interest free loans to the AEs, and, accordingly, ALP adjustment based on that hypothesis was indeed devoid of legally sustainable merits. We delete the impugned adjustment of Rs.19,15,45,943. The assessee gets the relief accordingly. As we have decided this ground of appeal on the fundamental issue that the payment of share application money could not be partly treated as interest free loan to AE, we see no need to deal with other aspects of the matter.” (emphasis provided)

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. Merck Ltd. (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.

Ground No. 4 is in respect of interest charged on the amount paid towards subscription to share capital of AE’s. In the grounds of appeal

Ld. Counsel for the assessee submits that transfer pricing provisions are not applicable to amount paid towards capital of subsidiaries outside 55 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., India as there is no income arising from the transaction. Reliance in this regard is placed on following decisions: (i) Aries Agro Ltd v/s DCIT (ITA No. 1452/M/2017) (delay in allotment was more than 5 years) (ii) Hill County Properties Ltd (ITA No 1644/Hyd/2014) (Hyderabad ITAT)

Without prejudice to the above, even if it is treated as an international transaction, since the TPO has not brought any comparable on record to show that an unrelated share applicant was to be paid any interest for the period between making payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of any legally sustainable merits. It is submitted that this view is upheld by the Jurisdictional Tribunal in the case of Pan India Network Infravest Pvt Ltd., in ITA.No. 7026/Mum/2013 dated 04.12.2015 wherein the delay on allotment was 3 years 6 months.

Without prejudice to the above, it is submitted that even if capital financing is to be held as an international transaction, even then the provision cannot be applied retrospectively. The provisions of the Act which were on the Statute as on 1.04.2012 only will apply for the FY 2012-13 (ie AY 2013-14) and onwards. Without prejudice to the above, it is submitted that the argument of the assessee in respect of 56 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., erroneous benchmarking adopted by the TPO in Ground No 3 above also applies to the transaction of share application money.

Ld. DR vehemently supported the orders of the authorities below. Ld. DR further submits that the share application money was not recharectersed as loan but it was essentially a loan. Ld. DR submits that the preference shares carry coupon of 5% therefore, it is in the nature of loan and the arm’s length price of interest determined by the TPO is justified.

In reply referring to page Nos. 329 to 358 of the Paper Book the Ld. Counsel for the assessee submits that the amount remitted as share application money is evidenced from the RBI filings. Referring to page Nos. 9 and 17 of the Paper Book Ld. Counsel for the assessee submits that the finances of RVSBV and RLSI also reported the amounts under shareholders paid in equity. He further submits that the TPO in the order itself has given a finding that he is recharactersing the transaction to one of loans. Ld. Counsel for the assessee further submits that preference share form part of share capital and not debt of the Company. Therefore, even though they may carry the preferential coupon rate the same cannot be regarded as loan. Referring to Page No. 25 of the Ld.CIT(A) order Ld. Counsel for the assessee submits that as per the terms of the issues 57 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., of preference shares there shall carry coupon of 5% in case of distribution of profits. It is submitted that this cannot be equated with interest coupon. It is submitted that the dividend is payable only on the availably of sufficient profits itself proves that the investment is in the nature of share capital and not debt.

We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the order of the Ld. TPO, we find that assessee subscribed to equity shares of RLSI and RLSBV as a part of its capital investment in its 100% subsidiary. The assessee submitted before the TPO that since the basic objective of the above investment in the form of share application was to fund its AE’s for developing global business opportunities for further expanding the assessee’s business operations outside India, the specification to the shares of AE’s at fair value has been shown at arm’s length price. Assessee also contended that since subscription to equity shares does not have a bearing on the determination of income of the assessee the provisions of section 92(1) of the Act are not applicable to the international transaction of such nature as defined in section 92B(1) of the Act. However, the TPO held that since no shares have been allotted by AE’s to the assessee in respect of the amount paid towards share application the same would be characterized as being in the nature of interest free loan provided to AE’s. TPO also 58 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., observed the fact that AE’s were setup for developing global business opportunities for further expanding the assessee’s business operations outside the India is not a valid ground for non-allotment of shares by AE’s to the assessee. Therefore, in the absence of allotment of shares the share application money is treated as loan given by the assessee to its AE’s and applied interest rate at 6% per annum and accordingly made adjustment. The Ld.CIT(A) upheld the adjustment.

Before us, Ld. Counsel for the assessee placing reliance on the decision of the Hon’ble Bombay High Court in the case of Director of Income-tax v. Besix Kier Dabhol Stay Application in ITA.No. 776 of 2011 dated 30.08.2012 and PCIT v. Aegis Limited in ITA.No. 1248 of 2016 dated 27.01.2019 contends that recharecterisation of transaction is not permitted in the absence of specific provisions under the Act.

We have gone through the judgment of the Hon’ble Bombay High Court referred to above in the case of DIT v. Besix Ker Dabhol SA (supra). The Hon’ble Bombay High Court while answering the following question observed as under: - “Q.1. Whether on the facts and circumstances of the case and in law the Tribunal was right in holding that in the absence of any specific thin capitalization rules in India, the Assessing officer cannot disallow the interest payment on debt capital after having observed the abnormal thin capitalization ratio of 248:1? …..

In the case of PCIT 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 accept such conclusion, inter-alia on the grounds 61 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., 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. 3. We are broadly in agreement with the view of the Tribunal. The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon on notional basis. No question of law arises.”

Similar view has been taken by the Hon'ble Bombay High Court in a recent Judgement in the case of Pr.CIT v. Concentrix Services India Pvt. Ltd., in ITA.No. 778 of 2017 and 867 of 2017 dated 04.09.2019. Further, the Ld. DR has not brought any contrary decisions to our notice. The ratio of the above decisions squarely applicable to the facts of the assessee’s case. The TPO has recharectersied the transaction of investment of preference shares into loan which is not permissible in view of the judgments of the Hon’ble Bombay High Court. Thus, respectfully following the above decisions, we direct the Assessing Officer to delete the adjustment made towards interest on subscription to share capital of AE’s.

Ground No.1 of grounds of appeal

In the case of ACIT v. M/s. Ballarpur Industries Ltd., in ITA.No. 346 to 379/NAG/2014 dated 04.12.2015 the Nagpur Bench of the Tribunal following the decision of the Hon'ble Delhi High Court in the case of Cheminvest v. CIT (supra) held as under: - “6. We have heard both the sides at some length and carefully perused the orders of the authorities below in the light of the precedence 63 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., cited. As far as the exemption for the years under consideration were concerned, it was an admitted factual position that the AO has not mentioned any such amount. Meaning thereby, there was no exempt income earned by the assessee for the years under consideration. In reply to one of our questions, the learned AR, Mr. K. P. Dewani has also made a statement at Bar that no dividend was declared, hence, there was no earning of exempted dividend income. He has also clarified that for the purpose of invocation of the provisions of section 14A of the IT Act, the AO has applied the formula only in respect of disallowance of proportionate interest expenditure. There was no allegation of the AO that the exempt income was earned by the assessee. In the light of the undisputed finding on facts, we have perused the decision of the Hon’ble Courts. We may like to mention that a view has been expressed consistently that if there is no exempted profit then there is no question of invocation of the provisions of section 14A of the IT Act but, we have also carefully perused that very decision of the Tribunal namely Cheminvest Ltd. (supra) was reversed by the Hon’ble Delhi High Court, copy placed in the compilation. The Hon’ble Delhi High Court in ITA No.749/2014 vide order dated 02-09-2015 titled as “Cheminvest Ltd. Vs CIT” has decided the substantial question of law that whether disallowance u/s 14A of the Act can be made in a year in which no exempt income has been earned or received by the assessee. The Final verdict was as under: - “23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

The next ground of appeal is in respect of disallowance u/s. 35(2AB) of the Act.

Before us, Ld. Counsel for the assessee submits that Ld.CIT(A) has erred in confirming the action of the Assessing Officer in disallowing the claim for deduction u/s. 35(2AB) of the Act. Referring to the decision of the Hon’ble Gujarat High Court in the case of CIT v. Cadila Healthcare Ltd., [31 taxmann.com 300], Ld. Counsel for the assessee submits that even clinical trials conducted outside the approved laboratory facility is eligible for deduction u/s. 35(2AB) of the Act.

Ld. DR vehemently supported the orders of the authorities below.

We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the order of the Tribunal, we find that identical issue arouse for the A.Y. 2007-08 and the tribunal allowed the alternative claim of the assessee that expenditure incurred on clinical trials outside the in-house facility is eligible for deduction u/s. 37(1) of the Act observing as under: - “5.5. We have considered the submissions made by both the sides and gone through the orders passed by the lower authorities and material placed before us for our consideration. Since, main claim of assessee with respect to deduction u/s 35(2AB) was not seriously pressed before us, therefore, same is dismissed. With respect to alternate claim made by the assessee u/s 37(1) of the Act, it is noted that the invoice of M/s. Reliance Clinical Research Services Pvt. Ltd. dated 31.03.2007 is enclosed at page no. 3 of the paper book, showing that payment has been made to the said company under the head “Clinical Trial Fees” – for the month of March, 2007 for time spent on 1st March to 31st March, 2007 for conducting clinical trials, in support of to all ‘K projects’, for a sum of Rs.57,65,564/-. It is further noted that on the back side of the invoice, complete details have been given with respect to time spent by 22 employees of RCRS, also giving particulars of the studies done by these employees. Names of these employees have been given along with 67 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., their rates per hour. It is further noted that ld. Assessing Officer has shown no doubts about the genuineness of these expenses. It was held by Ld. CIT(A) that since claim of assessee with respect to deduction u/s.35(2AB) has been denied, therefore, these expenses are capital in nature. It was further observed by ld. CIT(A) that Assessing Officer, as well as assessee, have treated these expenses as capital in nature. In our view, the observations of Ld. CIT(A) are misplaced and without any basis. We have gone through details of these expenses. In our considered view, these expenses are apparently revenue in nature. Ld DR also could not point out as to which expenses are capital in nature. Thus, in our view, these expenses are of revenue nature. 5.6. The other argument of Ld DR was that assessee did not claim these expenses u/s 37 and did not treat them as revenue in nature, and therefore assessee should be precluded from claiming benefit of these expenses, now at this stage, irrespective of this fact that these expenses may have been held as allowable, if the assessee would have made its claim correctly as per law, at the time of filing of return. We have carefully considered this argument, but find that it is not sustainable in the eyes of law, in the given facts and circumstances of the case, and in view of well settled position of law. In our view, there are no estoppels against law. Even if, assessee agrees or consents for something contrary to law, the A.O. is obliged under the law, to discharge his duty of making fair assessment of income and to compute amount of tax payable as per law. As per Article 265 of the Constitution of India, “No tax can be collected except by authority of law”. Hon’ble Supreme Court in the case of Ramlal vs Rewa Coalfield Ltd (AIR 1962 SC 361), held that the state authorities should not raise technical pleas if the citizens have a lawful right, which is being denied to them merely on technical grounds. The state authorities cannot adopt the attitude which private litigants might adopt. Further, we place our reliance on the judgment of Hon’ble Delhi High Court in the case of CIT vs Bharat General Reinsurance Co Ltd 81 ITR 303 (Del.) Relevant portion is reproduced below: “It was true that the assessee itself had included that dividend income in its return for the year in question, but there was no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it was incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it could not confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. Therefore the income 68 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., from dividend was not assessable during the assessment year 1958-59, but it was assessable in the assessment year 1953-54. It could not, therefore, be taxed in the assessment year 1958-59.” Further reliance is placed by us on another judgment of Hon’ble Gujarat High Court, in the case of, S.R. Koshti 276 ITR 165 (Guj) in which relief was granted to assessee with following observations: “The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.” In the case of Snehlata 192 CTR 50, Hon’ble J&K High Court held that “when the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities. It is settled proposition of law that no tax can be levied or recovered without authority of law. Article 265 of the Constitution of India and section 114 of the State (J&K) Constitution imposes an embargo on imposition and collection of tax if the same is without authority of law.” Lastly, we find it useful to refer to judgment of Hon’ble Bombay High Court in the case of Central Provinces Manganese Ore 112 ITR 734, holding that, the mere fact that a deduction was not claimed before the Income-tax Officer, was not of much importance, since if the liability arises then a claim can be made in a bonafide manner at any stage before the higher authority, who is competent to grant relief. Thus, in view of aforesaid discussion, coupled with facts and circumstances of this case and clear position of law, as discussed above, in our opinion there was no reason to deny the claim assessee u/s 37 of the Act. Therefore, the AO is directed to allow these expenses u/s 37 of the Act. Accordingly, ground no.2 of the assessee’s appeal is partly allowed.”

Facts being identical following the order of the Tribunal we allow the claim of the assessee that the said expenditure should be allowed u/s. 37 of the Act. Thus, the Assessing Officer is directed to allow this expenditure u/s. 37 (1) of the Act. This Ground is allowed.

Ground No. 4 is in respect of Interest-free loans provided to AE, M/s. Reliance Life Science Inc., USA ('M/s. RLSI). In the grounds of appeal

Ground Nos. 5 & 6 are in respect of subscription to share application money paid to RLSI & RLSBV treated as deemed loan and interest was charged thereon. In the grounds of appeal assessee contends as under: (i) The learned CIT(A) erred in determining the arm's length price (ALP) of interest chargeable in respect of subscription to equity share capital of M/s. RLS Inc at INR 50,11,071/-.

Ground Nos. 5 & 6 are identical to Ground No. 4 for the A.Y. 2009-10. Facts’ being identical to the case of assessee for the A.Y. 2009-10, the decision rendered therein applies mutatis mutandis to the appeal for the Assessment year under consideration i.e. A.Y. 2010-11. We order accordingly.

Coming to the last Ground of appeal

Ld. DR vehemently supported the orders of the authorities below. Ld. DR further submits that the geography in which the AE and the Non AE operate are different and therefore the assessee not charging interest to the non AE under similar circumstances cannot be taken as CUP. In reply Ld. Counsel for the assessee submitted that different geography filter shall be a factor of consideration while determining the arm's length rate of interest to be charged for the amount advanced/outstanding to/from the AE and non AE. When the consistent policy of the assessee is not to charge interest from AE as well as non-AE and there is outrightly, no charge of interest on outstanding balances from the AE as well as non AEs, geography filter does not come into picture. In light of the aforesaid submissions, the assessee prays, that no interest ought to have been charged on amounts due from the AE, RGMX and consequently, the adjustment to the income be deleted.

We have heard both the parties perused the orders of lower authorities and the case law relied on. We find that in the case of 75 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., CIT v. Indo American Jewellery Ltd. in ITA.No. 1053 of 2012 dated 08.01.2013 the Hon’ble Bombay High Court held as under: “3 As regards the second question is concerned, the Transfer Pricing Officer while determining the Arms Length Price of the international transactions, noticed that the outstanding balance from Associated Enterprises was amounting to Rs.8.76 crores. As that amount was outstanding for more than year, taking the rate of interest at 10%, the Transfer Pricing Officer determined the interest receivable at Rs.87.66 lacs and added the same to the international transaction cost. 4 On appeal, the CIT(A) held that the total outstanding amount was Rs.8.73 Crores and out of which the amount outstanding from the Associated Enterprises was to the extent of Rs.5.11 Crores and the balance amount of Rs.3.62 Crores was outstanding from non Associated Enterprises. Relying on the Board Circular no. 12 of 2001, the CIT(A) further held that in the present case, the profit of one Associated Enterprise is negligible and the other Associated Enterprise has incurred losses and therefore it cannot be said that the assessee had transfered any profit to the Associated Enterprises outside India by not charging interest on the outstanding payment which has been realised after the due date and accordingly deleted the interest charged on late realisation of the export proceeds. 5. On appeal filed by the Revenue, the ITAT upheld the order of CIT (A). While, upholding the order of CIT (A), the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and Non Associated Enterprises- debtors and the delay in realization of the export proceeds in both the cases is same. In these circumstances, the decision of the Tribunal in deleting the notional interest on outstanding amount of export proceeds realized belatedly cannot be faulted."

Similarly, in the case of CIT v. M/s. Lingingstones in ITA.No. 887 of 2014 dated 28.11.2016 the Hon'ble Jurisdictional High Court held as under: - 76 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., “3. The grievance of the revenue is that the respondent-assessee granted longer period of credit to its Associated Enterprises on sale of goods as compared to the period of credit granted to Non Associated Enterprises. Consequently the notional interest on delayed collection of consideration on sale of goods to Associated Enterprises needs to be added to the declared consideration to arrive at an arms length price 4. The Tribunal by the impugned order rendered a finding of fact that the respondent-assessee has not charged any interest from third parties i.e. Non Associated Enterprises on delayed payments exceeding more than 300 to 400 days from the sale of goods. Consequently, it holds that once such delayed payment in respect of sale of goods made to third parties carries no interest, then adding of notional interest to delayed payments made by the Associated Enterprises is not called for 5. Further, the impugned order places reliance upon the order of this Court in Income Tax Appeal (L) No. 1053 of 2012 (Commissioner of Income Tax-9 vs. M/s.Indo Amercian Jewellery Ltd.) rendered on 8th January, 2013. In the above case a similar question was not entertained by this Court on the ground that there is complete uniformity in the act of the assessee therein in not charging interest from Associated Enterprises and Non Associated Enterprises for delay in recovery of its sale proceeds. 6. In the present case also the Tribunal has rendered a finding of fact that the interest is not being charged in case of sales made to Non-Associated Enterprises for delayed payment just as in the case of Associated Enterprises. These finding of fact rendered by the Tribunal is not shown to be perverse in any manner.”

In the case before us also as a consistent policy, assessee has not charged any interest on its receivables from non-AE's i.e. third party business transactions. Assessee has not paid any interest on payables to non-AE's. Further, we observe during the year under consideration assessee has neither charged interest on its receivable nor has paid any interest on its payables to its AE RGMX. Therefore, we observe that there is complete uniformity in the act of the assessee in not charging interest 77 (A.Y: 2009-10) ITA.No. 3883/Mum/2016 (A.Y: 2010-11) M/s. Reliance Life Sciences Pvt. Ltd., from both AE's and non-AE'S for the outstanding receivables. In such circumstances the ratios of the above decisions relied on by the assessee are squarely applicable to the facts of assessee. Thus, respectfully following the said decisions we hold that no interest can be charged on amounts due from AE RGMX and consequently the adjustment made by the TPO is directed to be deleted. This ground of appeal is allowed.

In the result, appeal of the assessee is partly allowed as indicated above.