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Income Tax Appellate Tribunal, “K” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM)
O R D E R Per Shamim Yahya (AM) :- These are appeals by the assessee against the respective orders of the Assessing Officer passed pursuant to the directions from Dispute Resolution Panel for A.Y. 2011-12, 2012-13 & 2013-14. Since the issues are common and connected and the appeals were heard together, these are consolidated to dispose of for the sake of convenience.
One issue raised in A.Y. 2011-12 is the disallowance of 5% travelling, conveyance, advertising and sales promotion, printing and stationary expenses resulting in disallowance of Rs. 15,37,086/-. The disallowance was made and confirmed on the ground that the assessee has not maintained bills and vouchers properly and some bills were misplaced.
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At the outset, learned Counsel of the assessee submitted that similar adhoc disallowance were decided in favour of the assessee by this Tribunal in in assessee’s own case for A.Y. 2009-10.
Upon careful consideration, we find that this issue is an adhoc disallowance based on surmise. Similar disallowance in assessee’s own case has earlier been deleted by the ITAT. Accordingly, we set aside the order of the authorities below and delete the disallowances.
5. Another issue raised in A.Y. 2011-12 relates to disallowance of proportionate expenses u/s. 36(1)(iii) of Rs. 97,360/- attributable to interest free advances given to the subsidiary.
6. At the outset, learned Counsel of the assessee stated that identical issue was decided by this Tribunal in assessee’s own case for A.Y. 2010-11. In this case vide order dated 9.12.2015, the ITAT has deleted the disallowance by placing reliance upon the decision of Hon'ble Apex Court in the case of S.A. Builders. It is not the case that the aforesaid order of ITAT has been set aside by the Hon'ble Jurisdictional High Court. Respectfully following the precedent, we set aside the orders of authorities below and deleted the addition.
7. Another issue raised for A.Y. 2011-12 is that DRP erred in enhancing sum of Rs. 9,94,84,001/- as notional interest as assessed by TPO.
Brief facts of the case on this issue are that the TPO noted that the assessee has entered into following international transactions with its AE-K Sera Sera Productions FZLLC as follows :- International Transactions : The international transaction entered by assessee with its AE-K Sera Sera Production FZLLC (hereinafter referred to as AE/FZLLC) are as under :-
Sr.No. Description of the transaction A.Y. 2011-12 Method
3 KSS Ltd. used 1 Opening balance : Interest Free Working capital 18,22,62,039/- …. advance given Advance against share capital 55,72,92,500/- …. 2 Advance against share capital 37,11,84,350/- …. 3 Advance Repaid 38,45,75,000/- ….
9. TPO proceeded to hold that the assessee company has given interest free advance to its subsidiary. He proceeded to calculate interest for these advances. TPO found it appropriate to apply net interest margin rate of 2.3% on the interest rate of 10.19% at which assessee took loan which worked out to 12.49%. The TPO thereafter worked out to transfer pricing adjustment of Rs. 1,37,84,006/-.
10. Upon assessee’s appeal learned DRP noted assessee’s contention that interest fee working capital advances reported by the TPO was said to have been covered by the ITAT in assessee’s own case where said amount was held to be not treated as advances. However despite noting so, DRP proceeded to distinguish the same. Upon further discussion, DRP found errors in TPO’s computation and proceeded to make enhancement by holding that interest was to be applied on the whole amount not taking into account adjustment. Against this order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. Learned counsel submitted that interest free working capital advances identified by the authorities below is actually advances given by the assessee to its AE for purchase of Hollywood films, which ultimately could be given effect and hence AE proceeded to repay the amount also. Learned counsel submitted that this issue for A.Y. 2009-10 has already travelled to the Tribunal and later on it was confirmed by the Hon'ble High Court in of 2016 vide order dated 26.11.2018. In this regard we may gainfully referred to the order of Hon'ble High Court on this issue :- 4. Briefly stated the case of the assessee is as under :
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4.1 The Respondent-assessee is a registered company and is engaged in the business of production and distribution of films. The assessee desired to acquire rights for distribution of three Hollywood films in India. For such purpose, the assessee contacted M/s. Citi Gate Trade FZE ("Citi Gate" for short). According to the assessee, Citi Gate would not deal with the assessee directly and required a foreign based entity. In order to formalize this arrangement of acquisition and distribution rights of the films, the assessee, therefore, used a UAE based company, its associated enterprise, as a conduit. The assessee first entered into an agreement with the said AE which envisaged the AE acquiring distribution rights for the assessee from Citi Gate. On the very next day, the AE entered into an agreement with Citi Gate. To operationalize said arrangement, the assessee advanced certain amounts to the AE. The AE, in turn, immediately paid up such amounts to Citi Gate. However, eventually, the arrangement did not work out. Citi Gate, thereupon, refunded the advance to the assessee through its AE. In the process, however, some time was consumed and the repayment was made over a period of time.
4.2 The Revenue contends that by making interest free advances to the AE, the assessee has transferred its profit and therefore, the transfer price regime would apply.
Learned counsel for the Revenue vehemently contended that the Tribunal has committed serious error in holding that the present is not a case giving rise to transfer pricing mechanism. He submitted that the assessee had made interest free advances to AE. Such amount was retained by AE for long time. The advances were made by the assessee out of its borrowed funds on which the assessee was paying considerable interest. The assessing officer, therefore, correctly invoked the transfer pricing mechanism. In this context, learned counsel drew our attention to the explanation to Section 92B of the Act.
On the other hand, learned counsel Mr. Mody for the assessee opposed the appeal contending that the entire transaction has to be seen as a whole. The Revenue cannot bifurcate different events for isolated consideration. He submitted that the genuineness of the transaction has never been in doubt. The assessee had paid the money to the AE only for the purpose of acquiring distributorship rights. When such arrangement did not work out, the money was repaid to the assessee through the AE. At no point of time, the AE had retained such amounts for its own use or purpose.
The Tribunal, in the impugned order, has examined the entire transaction threadbare. Different clauses of the agreement have been 5 KSS Ltd.
taken into consideration. In the process, the Tribunal noted that the assesses had entered into an agreement with its AE specifically for the purpose of acquisition of distributorship rights of three films from Citi Gate. For such purpose, the AE was authorized to negotiate the price and other terms of the agreement with Citi Gate. Upon acquisition of such rights, the AE would transfer the same to the assessee at the price at which it had acquired i such rights from Citi Gate.
8. The Tribunal noted that the AE had entered into back to back contracts with the assessee and Citi Gate which envisaged inter alia that Citi Gate would grant, sale, assign and transfer to the AE as well as to the assessee all rights for sale, absolute and exclusive rights of distributorship. The Tribunal, therefore, was of the opinion that there was no ambiguity over the scope of such agreements. Under the arrangement, the AE of the assessee was under obligation to transfer the rights to the assessee. The assessee had, therefore, established that the transaction of giving advance to the AE was for no other purpose except for acquiring the rights in respect of the said Hollywood films.
The Tribunal also examined the bank statements of the assessee as well as its AE. From such statements, the Tribunal concluded that the amount in question never remained with the AE. The same was immediately transferred to Citi Gate. Similarly, whenever the amount was refunded by the Citi Gate, the same was also routed through the AE without any retention time by the AE.
On the basis of such findings, the Tribunal came to the conclusion that there was no diversion of income and therefore, the transfer pricing provisions would have no applicability. The Tribunal referred to and relied upon the Judgment of this Court in the case of Vodafone Services Pvt Ltd Vs. Union of India reported in 368 ITR 1 (Bom).
11. The Tribunal concluded that in order to attract the provisions of Chapter X of the Act, there must be transaction or arrangement between two or more associated enterprises which gives rise to the income or benefit in the hands of at least one of them. The Tribunal noted that in the present case, the advance was not given to the AE but to the third parties which was for the purpose of acquisition of rights of distributorship.
12. The findings of the facts of the Tribunal are not seriously in dispute before us. Even otherwise, in absence of any perversity being pointed out, the said findings are final at the stage of the Tribunal.
13. The relevant findings of the Tribunal, therefore, are that the assessee had released money in favour of the AE with a specific
6 KSS Ltd. purpose of acquisition of distributorship of the films from Citi Gate. Two back to back contracts entered into between the assessee and the AE and the AE and the Citi Gate duly establish this. Further, the AE never retained any amount either when the assessee released the same for payment to Citi Gate or when Citi Gate refunded the same to the assessee through AE.
14. Chapter X of the Act makes special provisions relating to avoidance of tax. Section 92 deals with computation of income from international transaction having regard to arm's length price. Section 92A pertains to meaning of associated enterprise. Section 92B pertains to meaning of international transaction.
15. Sub-section 1 of Section 92 provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sub-section 1 of Section 92B reads as under:-
" (1) For the purposes of this section and sections 92, 92C, 92D and 92E "international transaction" means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other, transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.
16. Explanation to Section 92B clarifies certain doubts. As per clause (c) of this explanation, capital financing including any type of long-term or short-term borrowings, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising in the course of business would be included within the expression "international transaction". Learned counsel for the Revenue had heavily relied on this explanation. However, having regard to the nature of entire arrangement and the different transactions, noted above, in our opinion, the said explanation would not cover the present situation. As noted, the present case is a simple one where the money was routed through the AE by the assessee for the purpose of acquisition of distributorship. This is not a case of either financing or landing or advancing of any moneys. The back to back agreements, the contents thereof and most significantly, the fact that neither at the point of payment nor at the point of refund of money, the AE retained the same for any significant period of time, in 7 KSS Ltd.
our opinion, would be crucial. This transaction did not result into diversion of income of the assessee to its AE. The Tribunal, therefore, committed no error. No question of law arises in this respect. Once we come to the conclusion that the transaction did not give rise to the international transaction, the rest of the issues would become academic.
The Hon'ble High Court next year also followed this order vide order dated 27.2.2019.
From the above, learned counsel stated that it is in connection with the same amount which Hon'ble High Court has held to be not in the nature of advances the authorities below have computed arm’s length interest for assuming the amount exigible to arm’s length adjustment. Learned counsel submitted that since Hon'ble High Court has categorically held that the said amount was not liable for arm’s length price adjustment, he claimed that the issue is covered in favour of the assessee as regards interest being computed on working capital advance is concerned.
Per contra, learned Departmental Representative could not dispute this proposition. However, he insisted that there is some error in computation of amount paid to AE and that returned. He further submitted that since there has been delay in return of the amount, earlier decision may not apply.
Upon carefully consideration, we are of the considered opinion that issue as regards determination of sums paid to AE for purchase of films being treated as working capital advance is already covered by the decision of Hon'ble High Court as above, hence no interest is liable to be computed for arm’s length price adjustment in this regard.
Another component of interest computation as arm’s length price is advance against share capital. In this regard learned counsel stated that advance against share capital cannot be treated as loans and advances as they are in the capital field. In this regard he referred to decision of Hon'ble Apex Court in the case of Vodafone International Holding (Civil Appeal No. 733 of 8 KSS Ltd.
2012). He further submitted that subsequently share to some extent were allotted. He referred to the decision of ITAT in Sterling Oil Resources Pvt. Ltd. (ITA No. 1791/Mum/2014 dt. 29.2.2016), that marginal delay in shares allotment cannot change the character of the sums being share capital application money to the nature of advances.
Per contra, learned Departmental Representative submitted that the Section 92B has duly been amended by the provisions of Explanation-C by the Finance Act 2012 with retrospective effect from 1.4.2002. He further submitted that Hon'ble Delhi High Court upheld the amendment to be retrospective. As consequences of the amendment such sum claimed to be capital advances has also been brought into the ambit of arm’s length price adjustment. He further submitted that Hon'ble High Court has held this amendment to be retrospective.
Per contra, learned counsel submitted that share capital advances cannot be treated as sums given for capital financing. In any case, he submitted that the TPO in subsequent assessment year has himself computed interest based upon a libor. He submitted that there are several case laws from ITAT & Hon'ble Jurisdictional High Court for the proposition that in transfer pricing adjustment in determination of arm’s length price interest libor should be taken as that guiding rate.
Upon careful consideration, we are of the considered opinion that so far share capital advance where share has been allotted, no interest adjustment is to be done in view of ITAT decision referred above. The Assessing Officer shall verify the actual amount of share allotted.
As regards the rest of the amount, which are claimed to be share capital advance but are lying unallotted, in our considered opinion the same will come under the purview of section 92B(c) which bring it into the ambit of international taxation. The said section reads as under :-
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“In section 92B of the Income-tax Act, after sub-section (2), the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2002, namely:— 'Explanation.—For the removal of doubts, it is hereby clarified that— (i) the expression "international transaction" shall include— (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;
In view of the amendment share capital advances which have not been allotted for quite some time cannot be kept out of ALP adjustment by merely claiming them to be share capital advance. In substance they have changed the character and are now under the ken of 92B sub-clause (i)(c) of the Act and hence the same is exigible to arm’s length price adjustment. We further hold that arm’s length price for interest in this regard should be adopted at libor plus Rs. 248.290 BPS resulting in rate of interest of 5.928% adopted by the TPO in subsequent assessment year 2013-14 itself. We direct accordingly.
The common issue for A.Y. 2012-13 & 2013-14 is in connection with transfer pricing adjustment for arm’s length price for interest income on advances given to AE. We direct that our aforesaid order shall apply mutatis mutandis in these years.
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In the result, appeals of the assessee stand allowed for statistical purposes.
Order has been pronounced in the Court on 17.6.2019.