M/S. DLF HOTEL HOLDINGS LIMITED,NEW DELHI vs. DCIT, NEW DELHI

PER SMT. DIVA SINGH, JUDICIAL MEMBER

1. “That on the fact and the circumstances of the case the Ld. Transfer Pricing Officer and Dispute Resolution Panel and consequentially Ld. Assessing Officer has erred in holding the nature of interest free short term advance given to the subsidiary company as loan instead of quasi equity considered by the assessee.

2. That on the facts and the circumstances of the case, the Ld. Transfer Pricing Officer and Dispute Resolution Panel and consequentially Ld. Assessing Officer in holding that the Arms's Page 1 of 46

I.T.A .No.-6336/Del/2012 Length rate of interest chargeable on the interest free advance given to the subsidiary company is @ 17.26% as computed by the Transfer Pricing Officer, as against nil charged by the assessee.

3. That on the facts and the circumstances of the case, the Ld. Transfer Pricing Officer and Dispute Resolution Panel and consequentially Ld. Assessing Officer has erred in holding that only 20% of the advance is converted into equity and hence charging interest on the balance amount.

4. Without prejudice to the aforementioned ground, the Assessing Officer has erred in ignoring the alternative plea of the assessee that the rate of interest ought to have been at the LIBOR rate prevailing at the time of advancing the money.

5. That the Ld. Transfer Pricing Officer and Dispute Resolution Panel and consequentially Ld Assessing Officer grossly erred in law in not appreciating that the interest rates determined by CRISIL are determined for a different purpose and cannot be taken as comparable to international transactions of quasi equity to a 100% subsidiary.

6. That the determination of Arm's Length Price has not been done as per provisions of section 92C read with rule 10C of the Income Tax Act/Rule and the laws wants the "class of AE" to be one of the important criteria to determine the same.

7. That the Ld. TPO and DRP and consequentially Ld Assessing Officer failed to appreciate that the nature of transaction cannot reclassified from quasi-capital to loans as per law.

8. That on the facts and the circumstances of the case, the Ld. Assessing Officer has erred in making a disallowance u/s 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 at Rs.2,56,62,215.

9. That the order passed by the AO is bad in law. 10: That on the facts and the circumstances of the case, the Ld. Assessing Officer has erred in initiating the penalty proceedings u/s 271(1)(c) of the Income Tax Act 11. That the appellant craves leave to add to, alter, amend or vary any of the ground(s) of appeal at or before the time of hearing.”

2. Summing up the grounds raised in the present appeal the Ld. AR inviting attention to the grounds raised submitted that the assessee is before the ITAT primarily on two issues.

2.1. The first issue it was submitted is addressed vide Ground Nos.-1 and 3. In the eventuality the assessee does not succeed on the main issue, the assessee has I.T.A .No.-6336/Del/2012 raised Ground No.2 which is without prejudice to the main issue in Ground Nos. 1 & 3.

2.2. The next issue agitated by the assessee it was submitted is addressed in Ground No. 8.

2.3. The remaining Ground Nos. 4 to 7 it was submitted may be treated as arguments in support of the issues addressed in Ground Nos. 1 to 3. Ground No. 9, it was submitted is general in nature; Ground No. 10 is premature; and Ground No. 11 is a residuary ground, accordingly it was submitted that these grounds would not require any adjudication.

3. Inviting attention to the final assessment order, it was submitted that the assessee on 30.09.2008 in the year under consideration returned an income of Rs.2,15,39,383/-. Referring to para 4.2 of the said order it was submitted that certain admitted facts may be noticed first so as to appreciate the background of the case. Referring to the said para of the final assessment order, it was submitted that it is an admitted fact that the parent company was set up in 2006 with the aim to target the premium segment hotels, resorts, serviced apartments, and family recreational clubs. It was submitted that the vision of the parent company was to be India’s leading hospitality development and asset Ownership Company. It also aimed to become one amongst the largest such companies globally. For the said purposes it was submitted that the assessee had established a hospitality arm. Elaborating the strategy used for attaining its aims it was submitted that the company not only develops and acquires but also finances and actively manages a rapidly growing hospitality portfolio. Referring to I.T.A .No.-6336/Del/2012 the record and the accepted position it was submitted that approximately 6,000 rooms were under current development in most major cities and tourist destinations in India and the assessee at the relevant point of time was endeavoring to create a portfolio of 25,000 rooms in the next 5 years. This stated background of the assessee’s functioning aims it was may kindly be given due consideration while deciding the issues as it is these admitted aims/visions which have been the guidifying factors for each decision and action of the assessee.

3.1. Referring to the synopsis filed, it was submitted that the first tranche of money was advanced towards this aim in August 2007 and thereafter continuously till February 2008, the funds have been advanced towards the above stated aim. It was submitted that since various steps were required to be taken and fulfilled before the amounts initially shown as loan could be converted into Equity which was the ultimately intention. The waiting period it was submitted had to be shown as loan to maintain control over the funds advanced towards a specific purpose. The fact that in the case of the assessee these loans were converted into equity within a period of three months it was submitted would demonstrate that the intention of the assessee has been translated.

3.2. It was his submission that it is a matter of record that shares were allotted in accordance with the statutory guidelines. Accordingly relying upon the decision of the ITAT in Soma Textiles & Industries and judgement of the Hon’ble Bombay High Court in Vodafone India 369 ITR 511 (Bomb.) and CBDT circular dated 29.01.2015 it was submitted that addition by way of adjustment towards arm’s length price in the facts of the present case could not have been made. Copies of I.T.A .No.-6336/Del/2012 these decisions and relevant documents placed at Paper Book pages 7 to 17; Paper Book Page-115 and Paper Book Page-6 respectively were heavily relied upon. Accordingly it was his submission that no transfer pricing adjustment on these facts was warranted.

3.3. Inviting further attention to the DRP’s order in the case of the assessee pertaining to 2011-12 assessment year, it was submitted that relying upon the aforesaid circular of the CBDT and the decision of the Hon’ble Bombay High Court the issue was decided in favour of the assessee by the DRP. Placing further reliance upon the decision of the ITAT in the case of Bharti Airtel Ltd. (copy placed at Paper Book page 71 para 43), it was submitted referring to para 43 of the same that the said decision further supports the claim of the assessee as herein also funds were advanced to a wholly-owned subsidiary of the assessee for the purposes of share capital. Thus, relying on the facts and the precedent it was submitted the amounts cannot be treated as loan. Specific attention was invited to the fact that in the facts of Bharti Airtel Ltd. actual conversion took place after a delay of 1.5 years i.e. almost 17 months whereas in the case of the assessee the conversion has taken place within 3 months. Accordingly it was his submission that on facts the assessee’s case was on a better footing then the facts considered in the precedent cited.

3.4. It was further pleaded that the tax authorities in 2009 – 10 and 2010 – 11 assessment year made no such addition. This fact it was submitted would be evident from the copies of the respective assessment orders placed at paper book pages 85-93 and 94-100 respectively. Accordingly it was his submission that I.T.A .No.-6336/Del/2012 there being no change in facts and circumstances the factual position accepted by the Revenue deserves to be followed and no addition by way of adjustment was possible.

4. Arguments on Ground No.2 were advanced stating that in the eventuality the assessee does not succeed in Ground Nos. 1 and 3 by allowing Ground No.2 LIBOR rate may be applied instead of the rate applied by the TPO as the loan was admittedly given in US dollars. The TPO’s search by resorting to obtain information by resorting to section 133(6) from Crisil for identifying the correct rate to be applied, it was submitted may be rejected as the application of Crisil BB rate on facts was not justified. The applicability of Libor rate it was submitted has judicial acceptance as would be evident from the decision of the Hon’ble Delhi High Court in the case of CIT vs. Cotton Naturals P. Ltd.(2015) 55 taxmann.com 523/231 Taxman 401 (Delhi) and decision of the ITAT, Delhi in the case of Bharti Airtel Ltd. (specific page 67 of the paper book para 61 of the said order). Referring to the facts it was submitted that the subsidiary company has obtained a loan from a third-party (Standard Chartered Bank) at an interest rate of 2.5% over the LIBOR and as such TP adjustment, if at all called for, should be restricted to LIBOR +2.5% being rate of an uncontrolled transaction.

5. The Ld. CIT DR relying upon the orders of the tax authorities submitted that both for holding it as an international transaction and for the applicability of correct rate reliance was being placed on the TPO’s order and the DRP’s order leading to the passing of the final assessment order. As an illustration, attention was invited to the assessment order and carrying us through para 4.2 of the I.T.A .No.-6336/Del/2012 same, it was submitted that the assessee itself had shown the loans as an interest-free loan as an international transaction wherein neither any method as the most appropriate method was selected not did the assessee make any effort whatsoever to select the most appropriate method or PLI.

5.1. Emphasis was laid on the fact that the assessee as per its own claim had advanced certain loans to its AE. DLF Global Hospitality Limited Cyprus (DGHL)/ DLF Cyprus. The loan was shown as an interest-free loan of US dollars 72580000 and has been reflected in Form No. 3CEB as an interest-free loan of Rs.2,91,99,60,465/-. Accordingly, these disclosures resulted in the issuance of a detailed show cause notice requiring the assessee to explain why arms length adjustment should not be made. It is only after considering the explanation of the assessee that the AO/TPO observed that no benchmarking has been carried out by the assessee in respect of these loans. In these facts it was his submission that since the decision regarding the treatment of this amount whether loan or debt was to be taken at the time of advancing and the purpose for which it was intended and the decision taken by the assessee clearly shows that it was a loan.

It was argued that no independent enterprise would extend an interest free loan to a third party without adequate remuneration. Thus the interest free loan given is obviously not in keeping with the arm's length principle, as enunciated in the transfer pricing guidelines as per the Income-Tax Act. The arm's length interest it was submitted, is determined by following the CUP method, wherein the interest rate is determined under the circumstances in which the tax payer and its subsidiaries are operating. Thus what is the interest that would have been earned

I.T.A .No.-6336/Del/2012 if such loans were given to unrelated parties in similar situation as that of subsidiaries is the measure which has to be applied. Since the tested party it was submitted is the tax payer in the circumstances the prevalent interest that could have been earned by the tax payer by advancing a loan to an unrelated party in India is to be considered. This has to be factored in with the situation of the tax payer's AE weak financial health as loan at what rate and condition would have been advanced. Thus this would be the relevant factor to be considered. In the circumstances, the assessee it was submitted has correctly chosen to argue on the rate of interest. The main issue it was submitted which needs to be considered is to decide the interest rate which the tax payer would have earned on advancing loan of above amounts to unrelated third parties with similar financial strength as that of the AE. It was submitted that it is also to be considered that there is no security provided by the AE's / subsidiaries against the loans advanced.

5.2. In these circumstances, it was submitted the TPO obtained necessary information under section 133(6) the rates as considered by CRISIL which is the leading credit rating Agency in India. While arriving at the rating the financial institutions are categoric by keeping in mind the four elements involved namely financial risk; credit risk; business risk and structural risk. The Corporate Bonds issued by companies in India it was submitted are also graded indicating the rate of interest that could be earned if the amount is lent to the companies. It was submitted that since the loan is advanced by the Indian holding company therefore the rate of interest on the amount if it had been advanced on loan to unrelated parties in India is the relevant rate of interest. Accordingly information

I.T.A .No.-6336/Del/2012 thus was sought and considering the financial health of the AE of the taxpayer it was submitted it was considered appropriate that the taxpayer would fall somewhere between BB and D ratings leading to the applicability of 17.26% as interest rate applicable. Accordingly it was his submission ht no variation in the order on facts and law was warranted.

S.No. Nature of Method used by Assessee Value of Transaction transaction (USD) Method PLI 1. Interest free NA NA 72,580,000 loan 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

I.T.A .No.-6336/Del/2012 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 to Loan (US $) DHHL-DGHL Amount in INR DGHL 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466 7.2. 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.” Page 10 of 46

I.T.A .No.-6336/Del/2012

(emphasis provided)

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 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.

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:-

AAA Instruments rated 'AAA' are judged to offer the highest (Triple A) degree of safety, with regard to timely payment of Highest Safety financial obligations. Any adverse changes in circumstances are most unlikely to affect the payments on the instrument. AA Instruments rated 'AA' are judged to offer a high degree of (Double A) High Safety safety, with regard to timely payment of financial obligations. They differ only marginally in safety from AAA ' issues. A Instruments rated 'A' are judged to offer an adequate Adequate Safety 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 Instruments rated 'BBB' are judged to offer moderate (Triple B) safety, with regard to timely payment of financial Moderate Safety 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. BB Instruments rated 'BB' are judged to carry inadequate (Double B) safety, with regard to timely payment of financial Inadequate Safe obligations; they are less likely to default in the immediate future than instruments in lower rating categories, but an adverse change in circumstances could lead to inadequate capacity to make payment on financial obligations. B Instruments rated 'B’ are judged to have high likelihood of High Risk default; while currently financial obligations are met,

I.T.A .No.-6336/Del/2012 adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. C Instruments rated 'C are judged to have factors present Substantial Risk that make them vulnerable to default; timely payment of financial obligations is possible only if favourable circumstances continue. D Instruments rated 'D' are in default or are expected to Default default on scheduled payment dates.

5. 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% 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:- Page 13 of 46

I.T.A .No.-6336/Del/2012

7.6. The assessee’s objection that the TPO cannot question the commercial expediency of its activities was not accepted by the TPO. The TPO was of the view that the OECD guidelines clearly held the view that “when independent enterprises transact with each other, the conditions of their commercial and financial relations (e.g. the price of goods transferred or services provided and the conditions of the transfer or provision) ordinarily are determined by market forces.

When associated enterprises transact with each other, their commercial and financial relations may not be directly affected by external market forces in the same way, although associated enterprises often seek to replicate the dynamics of market forces in their transactions with each other. (OECD para 1.2).

7.6.1. The TPO was of the view that the OECD Guidelines say that the relationship among members of an MNE group may permit the group members to establish special conditions in their intra group relations that differ from those that would have been established had the group members been acting as I.T.A .No.-6336/Del/2012 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

I.T.A .No.-6336/Del/2012 possession and the power to gather material under the said provision was similar to the power vested with the AO in the proceedings under section 143(3) was correct as the wording is almost the same in both the sections i.e. 92CA(3) and 143(3). Further we find that the view that subsection (7) of section 92CA empowers the TPO to utilize the same under section 133 (6)/131 and any falsity in the information given under the provisions of the Income Tax Act, 1961 is liable for penal action. Accordingly, we find that the conclusion drawn by the TPO that he had the power to seek information u/s 133(6) in principle is the correct view in law and the conclusion so drawn by the TPO is upheld by us. Whether the same was necessitated or relevant on facts before us is an area which, if need be, shall arise later.

7.8. To revert back to the proceedings before the TPO the record shows that he concluded the issue in the following manner:-

“In view of the above discussion, while the assessee will be given benefit of conversion of the loan into equity during a reasonable time frame, the benefit will be limited to 20% of the loan. The rest will be treated as a loan on which an appropriate interest, as determined in the show cause notice, needs to be charged. The calculation of the same is as under:- Month Opening Funds Conversion into Closing Closing Revised End balance (Rs.) extended (Rs.) Equity (Rs.) balance (Rs.) balance after interest @ (after taking to (as per allowance for 17.26% account the assessee) 20% (as per revised closing TPO) balance) 7-Apr 7-May 7-June 7-July 2,069,582,691 2,069,582,692 29,767,498 7-Aug 2,069,582,692 2,069,582,692 29,767,498 7-Sep 2,069,582,692 20,306,910 2,089,889,602 30,059,579 7-Oct 2,089,889,602 2,069,582,692 20,306,910 1,675,973,064 24,106,079 7-Nov 1,675,973,064 629,918,780 650,225,690 2,305,891,844 33,166.411 7-Dec 2,305,891,844 200,152,084 850,377,774 2,506,043,928 36,045,265 8-Jan 2,506,043,928 850,377,774 2,506,968,373 33,599,012 8-Feb 2,506,043,928 850,377,774 Nil 2,335,968,373 33,599,012 8-Mar 2,335,968,373 2,335,968,373 2,335,968,373 33,599,012 Total 286,155,618

I.T.A .No.-6336/Del/2012 7.9. On a perusal of the objections posed by the assessee before the DRP, it is seen that findings of the TPO were assailed on various ground including the ground that the TPO has treated the loan as loan simplicitor and as a pure debt instrument and not as an instrument of hybrid funding having traits of equity.

The alleged modification misconstruing of facts by the TPO was assailed to be incorrect and misleading. Extracts from these Objection numbering 5.2.2 and 5.2.3 which has further being elaborated in Objection 5.2.9 before the DRP are extracted hereunder:-

5.2.9. Factual and legal arguments against the addition proposed by the Learned TPO ………………………………………… "A category of debt taken on by a company that has some traits of equity, such as having flexible repayment options or being unsecured. Examples of quasi-equity include mezzanine debt and subordinated debt." The definition/meaning of subordinated debt is provided as under: "Debt that is either unsecured or has a lower priority than that of another debt claim on the same asset or property, also called junior debt."

The assessee entered into a written arrangement in the form of agreement with its associated enterprise that the funds provided would be in the nature of quasi equity and not in the nature of debt. In assessee's case, it was clear that the funds would be converted into equity within the next 3 to 4 months which clearly reflects that it was actually meant to be a capital contribution. The support was also sought by the assessee from the guidelines issued by the Organisation for Economic Cooperation and Development on Transfer Pricing in 2010 ("OECD Guidelines"), an extract of which is appended below: "D.2 Recognition of the actual transactions undertaken 1.64. A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapter II. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute

I.T.A .No.-6336/Del/2012 other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.65. However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterisation of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterise the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. From the above, it can be clearly inferred that the funds provided by DHHL to DLF Cyprus can be considered to be quasi equity/capital requiring no interest payment in return. While there is no guidance available in the Indian Transfer Pricing Regulations, guidance issued by the ATO in Taxation Ruling TR 92/11 may also be referred to in this regard. It clearly states that contributions made or amounts extended by one company to the other may be considered as equity. The relevant extracts from the stated ruling is provided below: "60. In the context of applying Australia's transfer pricing rules, the principal factors that will be taken into account in determining whether a particular loan agreement should be treated as equivalent to a contribution to equity are detailed below.....”

7.10. The reproduction of the following extract of Objection No.5.3.9 further brings out the fact that the tax payer justified its action of advancing of loan as a shareholders activity guided by commercial expediency etc.:-

5.3.9. Factual and legal arguments against the addition proposed by the Learned TPO “During FY 2007-08, since DLF Cyprus was a newly formed company, it could not manage to obtain funds initially from third parties. Hence, in order to further the business objectives of DLF Cyprus, the assessee advanced loans in the form of quasi equity to I.T.A .No.-6336/Del/2012 retain control and have absolute ownership of profits subsequent to conversion. In addition to the above, assessee wishes to submit that after the conversion of the quasi-equity into equity, DLF Cyprus was able to secure additional funds from third party banks. This was critical for DLF Cyprus since the additional funds were required for completion of acquisitions, and the independent banks would not have provided any funds to DLF Cyprus without it having an acceptable debt/equity ratio. The third party banks which may have refrained from providing loans to DLF Cyprus at the time of set-up, advanced loans to DLF Cyprus only on the basis of restructured capital gearing of the company. The assessee wishes to submit that it was commercially expediency which necessitated DHHL to provide advances to DLF Cyprus. These advances were made as a part of capital for further investment by its associated enterprise and to obtain return in future. The assessee had full control over its associated enterprise which reduces the credit risk.” (emphasis provided)

7.10.1. Elaborating the argument that by way of this funding the assessee was engaged in stewardship activities, the following submissions have been advanced:-

“As explained above, stewardship activities do not require any payment since they directly benefit the shareholder, and in an independent scenario, a recipient of any corresponding benefit would not have been required to pay any charge for the same. In the instant case, since DHHL is the sole shareholder in DLF Cyprus, the provision of funding may be considered to be part of its shareholder activity, since it is providing support to its subsidiary as a shareholder. Additionally, any benefit accruing to DLF Cyprus from use of the funds is eventually transferred/ added to the value of DHHL as sole shareholder. Hence, it may be concluded that granting of funds by DHHL is for its own benefit, and hence, DLF Cyprus is not required to pay any interest on the same. The Hon'ble Panel would appreciate that the aforesaid assistance provided by the Assessee is necessary and expedient given the facts of the instant case.” (emphasis provided)

I.T.A .No.-6336/Del/2012 7.11. In the above facts, submissions and arguments advanced on behalf of the assessee, we find that the consistent claim of the assessee has been that it had aims and goals focused towards building its portfolio in premium segment hotels, resorts, serviced apartments, family recreational clubs in major cities and tourist destination. The decisions so taken had been guided by a vision to make its mark globally in countries like Sri Lanka, Thailand, Moracco, Bhutan, France, USA, Indonesia etc. We find that this is an accepted position as brought out from the following extract from the TPO’s order itself which forms a part of the final assessment order also :-

4.2. “DHHL was set up on 31 August 2006 as an integrated hospitality development and ownership company focused on premium segment hotels, resorts, serviced apartments, and family recreational clubs- DHHL has a vision to be. India's leading hospitality development and asset Ownership Company, and amongst the largest such companies globally. The company has been established as the hospitality arm of DLF Limited, which is its holding company. The company develops, acquires, finances and actively manages a rapidly growing hospitality portfolio. With approximately 6,000 rooms under current development in most major cities and tourist destinations in India, DHHL is on track to create a portfolio of 25,000 rooms in the next 5 years. DLF Hotels recently acquired controlling stake in Amanresorts, one of the pre-eminent and most innovative luxury hotel groups in the world. "Aman" - an outstanding brand and winner of over 500 awards since 1968, such as Conde Nast, "The Gold List", Gallivanter's Guide "Best Hotel Worldwide" etc. - owns and operates 18 boutique resorts across countries such as Indonesia, Thailand, Sri Lanka, India, Morocco, Bhutan, France and the USA.” (emphasis provided)

7.12. Guided by the above aims and vision, funds were advanced to its AE in Cyprus on the following dates:-

“It is seen from the Form No.3CEB and Transfer Pricing Study that the assessee company has advanced loans to its AE in Cyprus, DLF Global Hospitality Limited, as per the table below:-

I.T.A .No.-6336/Del/2012

Date of initial Loan to Loan (US $) DHHL-DGHL Amount in INR DGHL 30.07.2007 51,000,000 2,069,582,692 18.09.2007 500,000 20,306,910 20.11.2007 16,000,000 629,918,780 11.12.2007 5,080,000 200,152,084 2,919,960,466 7.13. Admittedly these loans were converted into equity within 3 months as per the following chart:-

Month End Opening (Rs.) Funds Conversion into Closing Extended (Rs.) equity (Rs.) Balance Apr-07 May-07 June-07 July-07 2,069,582,691 2,069,582,691 Aug-07 2,069,582,691 2,069,582,691 Sep-07 2,069,582,691 20,306,910 2,089,889,602 Oct-07 2,089,889,602 2,069,582,692 20,306,910 Nov-07 20,306,910 6,29,918,780 650,225,690 Dec-07 650,225,690 200,152,084 850,377,774 Jan-08 850,377,774 850,377,774 Feb-08 850,377,774 850,377,774 Nil Mar-08 Nil Nil 7.14. Though we find that the claim that these advances were converted into equity is not disputed by the Revenue, however, for the sake of completeness it is worth referring that this claim has been supported by following documents placed before the TPO/AO; the DRP and now before us in the Paper Book filed:-

S.No. Particulars Page No. 1. Documents relating to share capital in the wholly 1-47 owned subsidiary i.e. DLF Global Hospitality Ltd. (A) Initial Investment for equity shares: • Debt Authority to HSBC Bank alongwith ODI Form • Form A2-Application for remittance abroad • Chartered Accountants Certificate • Declaration cum undertaking under FEMA 1999 (B) Copies of resolution and other documents 48-49 relating to issue of equity shares; Page 21 of 46

I.T.A .No.-6336/Del/2012

• Written resolutions taken by the sole shareholder of DGHL 7.15. Apart from placing on record the copy of the audited balance sheet and profit and loss account of DLF Global Hospitality Limited for financial year 2007- 08 at pages 50 to 80 of their Paper book (available with the AO/TPO and the DRP)the assessee had also placed the following supporting documents:-

S.No. Particulars Page No. 3. Details of Original shareholders of DLF Global 81-84 Hospitality Ltd. • Copy of Instrument of Transfer • Copy of Certificate of Shareholding of Register of Companies • Notification dated 06.08.2007 for conversion of shares given to Registrar of companies • Certificates dated 25.08.2007 for change of name from Gunbarrel Investment Ltd. to DLF Global Hospitality Ltd. issued by ROC, Cyprus 7.16. We find that the documents filed by the assessee right from the stage of assessment before the AO/TPO till date have not been assailed by the Revenue.

We note that neither there is a rebuttal on facts nor is there any effort to assail their correctness. In the light of the above facts, we find that the assessee has successfully demonstrated that the explanations offered were supported by actual conduct. The loans were advanced as an activity of increasing its foothold in opportunities outside as part of capital to be converted into equity. The stated intent of realizing the aims and vision of the assessee company was to fund its AE so that the benefits of the efforts of the AE in increasing the foothold/portfolio would directly benefit the tax payer in India and the fact that the interest free loan

I.T.A .No.-6336/Del/2012 has been converted in equity after fulfilling the necessary legal requirements within three months is an evidence on record..

7.16.1. In the facts as they stand we are now called upon to decide whether in the peculiar facts and circumstances of the case it is an International Transaction or not. The Revenue claims that the fact of showing the interest free loan as an International Transaction to its subsidiary AE in Form 3CEB ipse dixit as considered in Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.) and also VVF Ltd. attracts the provisions of Chapter X of the Income Tax Act, 1961. The consistent objections posed by the tax payer though have been acknowledged by way of reproduction in the orders have not been considered necessary to address whether adjustment under Chapter X is warranted. The specious and facile reasoning that international transaction is acknowledged in Form 3CEB by the assessee itself cannot form the basis of the conclusion. At best it can form the starting point of the enquiry. In the light of the evidences on record and considering the arguments, we are inclined to hold that mere disclosure of the interest free loan as an international transaction by the tax payer in Form 3CEB would neither act as an estoppel nor fore close the tax payer from claiming the same as not being an international transaction. The transaction will become international transaction necessitating arm’s length adjustment if the ingredients of the transaction bring it within the purview of Chapter X. The disclosure made by way of abundant caution or due to ignorance of law on facts cannot be the basis of the decision of the tax authorities more so if the assessee raises objections questioning the same. The decision of the tax authorities has to be based on I.T.A .No.-6336/Del/2012 facts supporting the conclusion. The tax authorities cannot shy away from addressing the arguments that it was a shareholder activity necessitating immediate availability of funds in the hands of the AE in order to attain the aims and vision of the holding company. The law does not permit or contemplate an Appellate forum or an Authority any justification for ignoring the arguments of the tax payer based on facts made available to them. The consistent fact on record is that the tax payer was the sole shareholder in its newly created subsidiary AE whose success in the venture of increasing its portfolio directly impacted the business interests. The fact that incapability to generate resources and experience was clearly lacking is not in doubt. Though the commercial expediency by way of need or necessity of the same cannot be questioned by the Revenue however facts leading to and justifying the argument need to be addressed. It is well settled that the tax assessors cannot sit in the arm chair of the businessman. We hold considering the provisions that it is not within the domain of the tax authorities to insist that the aim of enhancing the global reach of the portfolio should be attained through a pure loan and not by way of shareholding activity. There is nothing on record to disbelieve the explanation that the AE did not have the demonstrated capability to fully utilize the funds for the intended purpose in a new area being a new territory. Thus the argument that in order to maintain control and command over the funds advanced fulfilling regulatory conditions at Cyprus etc. were required to be given due consideration.

The stated intent of the tax payer that when the funds were fully utilized and exhausted by applying towards the intended purposes it was to be converted into

I.T.A .No.-6336/Del/2012 equity which has been done. Thus the arguments that the funds advanced till then as an interest free loan, if it has to be disbelieved, has to be shown as sham or bogus transaction. The facts are not so. In the face of the above consistent claim demonstrated by the assessee by way of facts and supporting evidences which stand unassailed by the Revenue on record, we therefore find no justification either in fact or law to uphold the Revenue’s stand that the tax payer must necessarily be bound by the disclosure made in Form No.3CEB Report.

There is nothing on record to support the conclusion that the interest free loan must necessarily be deemed to be an interest earning activity and not an activity to capitalize the opportunity cost for investing in new territories. We hold that for the tax authorities to consider re-characterizing the transaction the tax authorities must necessarily demonstrate that the transaction as claimed and documented is a sham or on the basis of facts and evidences is at a substantial variance with the stated form. In the absence of any such exercise the tax authorities are entering at their peril in the realm of arbitrariness. In the facts of the present case there is not even a whisper of a suggestion that it was a bogus transaction, as admittedly shares have been allotted. There is nothing in the provisions of the Act which empowers the tax authorities to insist that the interest free loan towards its AE for capitalization the opportunity of cost of entering in new territories must necessarily by modified and re-characterized into a loan simplicitor and considered to be an activity for earning interest. The tax authorities must bring on record facts and evidences impacting the veracity of the claim of the assessee and demonstrate the hollowness of the assessee’s claim. No such exercise has been I.T.A .No.-6336/Del/2012 done to counter the consistent claim of the assessee demonstrated by facts on record that the intention was to capitalize the opportunity cost and not to encash the opportunity to best utilize the available funds. In the facts as they stand, we find that the claim of the assessee has to be allowed.

7.16.2.The order of the Co-ordinate Bench dated 07.07.2015 in the case of Soma Textiles and Industries Ltd vs CIT in ITA 262/AHD/2012 supports the view taken as the assessee’s conduct in exploiting the opportunity for capital investment in the peculiar facts takes the issue out of the purview of Chapter X of the Income Tax Act, 1961. A brief reference to the said order at this place would be relevant as it is seen that the Co-ordinate Bench was also seized of facts where investment in share capital by the assessee holding company in India in its subsidiary in United Arab Emirates was held by the tax authorities to be covered within the scope of “international transactions” as defined in Section 92CA(3).

Therein also the commercial expediency for advancing of interest free loans by the assessee was not accepted by the tax authorities and as in the facts of the present case reliance therein was also placed on Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.) and also VVF Ltd. (cited supra) wherein more or less identical claim of the assessee was rejected by the TPO and the said finding had been upheld by the CIT(A). The Co-ordinate Bench considering the facts accepted the assessee’s argument that in the case of Perot Systems (cited supra) the argument that loan being quasi-capital was rejected on facts and the core legal issue was left open namely whether ALP adjustments will also be warranted in case of interest free loan extended as quasi-capital. The Co-ordinate Bench examined and I.T.A .No.-6336/Del/2012 considered the decisions rendered in Perot Systems TSI vs DCIT [2010] 130 TTJ 685 (Del.); Micro Inks Ltd vs ACIT [2013] 157 TTJ 289 (Ahd.); Four Soft Pvt. Ltd. vs DCIT [2014] 149 ITD 732 (Hyd); Prithvi Information Solutions Pvt. Ltd. vs ACIT [2014] 34 ITR (Tri) 429 (Hyd.) and thereafter came to the conclusion that none of these decisions had thrown any light on what constitutes “quasi capital” in the context of transfer pricing and its relevance in ascertainment of the arms length sales price of a transaction in the said context. The Co- ordinate Bench has quoted the decision of the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)] wherein their Lordships have begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that “A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas". The reference so made to the words of Justice Frankfurter was in the context of the concept of “super profits”. The Co-ordinate Bench observed that it is equally valid in the context of concept of “quasi capital” also observing that as in the case of the “super profits” there has been a "lazy repetition" (in the words of Felix Frankfurter J.) with regard to “quasi capital” as there appears to be no independent analysis of the provisions of the Act and the rules with regard to “quasi capital” also.

7.16.3. We find that the Co-ordinate Bench considering the term “quasi capital” has correctly understood “that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not I.T.A .No.-6336/Del/2012 interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations.” The decisions considering the expression were held to be inapplicable as “The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.” We find that quasi capital can be said to be a category of debt taken by a company which in the context of transfer pricing issues is not only an instrument of legitimate funding but is also a hybrid instrument pre-stipulated to be a loan for a transitory period, the economic purpose of which is a future capital investment in all its forms including contribution to equity or subscription of capital and cannot be justifiably be treated as a debt simplicitor. 7.17. Reliance has also been placed on the case of Bharti Airtel Ltd. vs ACIT in dated 11.03.2014 (Copy of which has been placed at book pages 38 to 94). Though reliance on the said decision has primarily been placed qua Ground No.2 in order to argue that without prejudice to the main issue if at all interest was to be charged on the interest free advances then the LIBOR rate would apply. The said proposition it has been argued is also supported by the decision of the Jurisdictional High Court in the case of Cotton Naturals India P.

Ltd.(cited supra). However, apart from the issue agitated in Ground No.2, Bharti Airtel Ltd. (cited supra) has also been relied in support of the primary issue for the proposition that the activity of interest free advances ultimately to be I.T.A .No.-6336/Del/2012 converted into equity by a holding company to a subsidiary company does not give rise to an international transaction.

7.18. Considering the said decision, we find that the Co-ordinate Bench was called upon to decide whether Chapter X was attracted in facts where the assessee had advanced interest free loans to its AE for the stated purpose of share application. These material facts and issue would be evident from the very wordings of Ground No.15 and 15.1 raised by the assessee before the Co-ordinate Bench. These grounds when read alongwith other related grounds agitated before the Co-ordinate Bench are being reproduced so as to bring out the gamut of issues agitated and considered:-

I.T.A .No.-6336/Del/2012 environment and geographical conditions prevalent in India and overseas jurisdictions; (c) alleging that the financial health of the associated enterprises was weak and further in determining the credit rating of the associated enterprises as ranging between BB to D, being high risk category, without providing any cogent or germane reason for the same; (d) making additional arbitrary and adhoc adjustments to the rate of interest on account of security and single customer and transaction cost, thereby completely ignoring the on-ground reality of the inter--company transaction that there is no significant risk in advancing loans to 100% subsidiary companies and demonstrating an intention to arrive at a very high interest rate of 17.26% p.a. with the single-minded intention of making an addition to the returned income of the appellant. 15.3 That the assessing officer/TPO erred in relying upon the rate of interest charged by various domestic banks on advancement of foreign currency loans obtained by the TPO under section 133(6) of the Act, without affording opportunity to the appellant to rebut the same, in violation of principles of natural justice. 15.4 That the assessing officer/TPO erred in relying upon the information obtained under section 133(6) of the Act, without appreciating that such information was not available in the public domain and therefore, could not have been relied upon for the purpose of determining the arm's length price. 15.5. Without prejudice, that the assessing officer/TPO erred in computing the amount of interest at Rs.19,15,45,943, by applying rate of interest of 17.26% p.a. for the whole year on the consolidated amount of share application money, without considering the monthly balance of share application money. 15.6 That the assessing officer/TPO erred on facts and in law by disregarding established judicial pronouncements in India in making the Transfer Pricing adjustment.”

7.18.1. The facts and the legal precedent with which the Coordinate Bench was seized of are set out in Paras 44 to 45 of the said order and are reproduced hereunder for the purposes of bringing out the similarity on the material facts:-

I.T.A .No.-6336/Del/2012 Bharti Airtel (U.S.A.) Ltd. 40,45,14,1 09 29.11.2007 31.03.2009 Bharti Airtel (U.K.) Ltd. 3,17,72,666 31.01.2008 12.03.2009 Bharti Airtel (Singapore) 2,01,39,150 24,09.2007 1.04.2009 Ltd. Bharti Airtel (Hongkong) 1,81,48,200 24.09.2007 10.12.2008 Ltd. Bharti Airtel (Lanka) Ltd. 63,51,93,795 Various 31.07.2008 dates Total 110,97,67,920 45. These transactions were not benchmarked as, according to the assessee, these were in the nature of share application money payments. While the TPO did not question the character of payment, he noted that “from the information on record, it is seen that these amounts were extended by the AE which have not been converted into equity for quite a long time after the initial advancement”. It was also noted that time taken in actual allotment of shares has taken place as much as 13, 16 and 14 months in the cases of UK, US and Hong Kong based subsidiaries, and that the assessee has not earned any interest for this long period. The TPO was of the view that “any independent entity would not have left the amount in the hands of another entity without the same being converted into equity within a reasonable period or receiving interest on the same”. It was in this backdrop that the TPO proceeded to treat these amounts as interest free loans extended to the AEs. He then referred to the provisions of Section 92 B, in the light of which, according to the TPO, lending or borrowing of the money comes within the ambit of ‘international transactions’. He thus justified determination of arm’s length price of the transaction of, what he termed, as interest loans to the AEs. Reliance was placed on the decisions of the coordinate benches in the cases of VVF Ltd Vs DCIT (2010 TIOL 55 ITAT MUM TP) and Perot Systems TSI India Ltd Vs DCIT (2010 TII 3 ITAT TEL TP). The TPO then proceeded to determine ALP of the deemed interest free loans to the AE, but, for the reasons we will set out in a short while, it is not really necessary to deal with facts relating to ALP determination part. When assessee raised the objection before the DRP on this issue, it was rejected by observing that,” we agree with the TPO that capital locked up for want of transfer of shares for reasonably long period would partake the nature of loan”. It was in this backdrop that payments for share application money were treated as interest free loans given to the AEs and ALP adjustment was made for interest thereon. Aggrieved, assessee is in appeal before us.” (emphasis provided)

7.18.2. Considering the arguments on these facts and the legal precedent the Co- ordinate Bench came to the following conclusion:-

I.T.A .No.-6336/Del/2012

I.T.A .No.-6336/Del/2012 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 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.

7.18.3. When the facts as considered by the Co-ordinate Bench in the case of Bharti Airtel Ltd. are seen and the facts of the present case are considered, we find that there is a striking similarity on the material issues and the above conclusion and reasoning fully supports the view taken. In fact as argued on behalf of the assessee the facts of the assessee’s case in the present case are on a better footing as there is no perceived inordinate delay in converting the interest free loan into equity which exercise admittedly has been completed in 3 months as opposed to 13 to 14 months. Thus, the said decision fully supports the allowability of assessee’s claim.

7.18.4. Since the said decision has also been cited in support of Ground No.2 in the present proceedings and the occasion to consider the same in view of our finding may not arise. However for the sake of completeness, we note that in the facts of that case also the assessee had advanced the interest free loan in foreign currencies to its subsidiary which is identical to the facts of present case. Herein also the assessee who was the tested party had advanced loans to its foreign AE in I.T.A .No.-6336/Del/2012 foreign currencies. The Co-ordinate Bench after giving due consideration to the geographic; economic and financial realities of the tested party and the foreign AE also noted that the interest rate on foreign currency loans were qualitatively different and could not be compared to the interest rate on rupee loans as interest rates on strong currencies like USD etc. could not be held to be comparable. It has been held that what is relevant is what the assessee would have earned on foreign currency loans and not what the assessee could have earned on rupee denominated loans. The rationale for the said conclusion, we find has been set out in acknowledging the basic fact “that interest is nothing but time value of money and when inflation pressure on a currency is lower, as is the case with most strong currencies, the time value of money, i.e. interest, tends to be lower too.

Therefore, comparing interest rate on rupee loans cannot at all be compared with interest rates on strong currencies like GBP, USD and CAD.” The erudite discussions by the tax authorities about the Indian bond market and interest rate were held to be wholly irrelevant. The TPO’s reasoning that the tested party being the assessee i.e. the lender, the prevalent interest that could be earned by the taxpayer by advancing loan to an unrelated party in India was also considered and held to be inappropriate in view of the fact that since the interest rate on foreign currency loans necessarily being qualitatively different, thus it was held that even if the interest that the assessee would have earned was to be considered then such interest would be the interest that the assessee would have earned on foreign currency loans and not rupee denominated loans. In the facts of the present case the assessee has argued without prejudice to the main issue that if I.T.A .No.-6336/Del/2012 at all interest is to charged then judicial precedent sets out that it has to be the LIBOR rate + 2.5% interest as the rate charged by an independent Bank in the facts of the present case as the assessee’s own CUP being the best CUP on record cannot be ignored. As addressed earlier, we are not called upon to decide the issue in the facts of the present case.

7.19. Reverting back to the main issue, we note that on behalf of the assessee, reliance has also been placed on the judicial precedent as considered by the Hon’ble Bombay High Court in the case of Vodafone India Services P.Ltd. v UOI [2014] 369 ITR 511 (Bom.). A perusal of the said decision shows that it further places reliance on Vodafone India Services P.Ltd. vs UOI 368 ITR 1 Bombay.

The said decision has been relied upon for the proposition that even if shares have been issued at a premium to the foreign holding company by an India subsidiary the amounts received from non-resident being capital in nature cannot be subjected to transfer pricing provisions. The Hon’ble High Court in categoric terms considering the issues on facts have held that the alleged shortfall between fair market of shares and the issue price of shares cannot be considered income on the basis of supposed intent of legislature. Form No.3CEB filed by the assessee by way of abundant caution, it has been held, would not be said to have granted Jurisdiction to the TPO. The applicability of Chapter X in categoric terms was ousted as the departmental case was found to have been based on surmises.

7.20. We find that no arguments have been advanced by the Revenue either disputing the factual position or the judicial precedent cited. It may also be appropriate to note that in the case of Soma Textiles & Industries the Co-

I.T.A .No.-6336/Del/2012 ordinate Bench, considering the precedents cited by the tax authorities, has made an erudite discussion on “quasi capital” as in the facts of the said decision the use of the said expression was one of the reasons for relying on precedent to oust the assessee’s claim. As observed the material facts were similar as, like in the present case, in the facts before the Co-ordinate Bench also interest free advances had been advanced by the assessee to its subsidiary AE for the intended purpose of exploiting the opportunity cost in the territories outside India. The financial transaction was claimed to be “quasi capital”, a term which was required to be defined as the judicial precedent relied upon by the Revenue in the context of the said expression did not have an occasion to consider the peculiarities on facts sought to be addressed by the use of the said expression by the assessee. Its meaning was considered to be not clear in the judicial precedent cited by the Revenue. Accordingly, considering the facts and the explanation it was held to be an instrument entered for exploiting the opportunity cost of investment as opposed to exploiting the activity of advancing funds for earning interest. As opposed to that we find that in the facts of the present case, the tax payer has made its case easily understandable and simpler by resorting to explain its activity of advancing interest free loan to its AE by the use of the expression “quasi equity” and “mezzanine financing” which terms are well understood in financial circles. For the sake of completeness, reference may be made to the definition as found available on “Investopedia” http://www.investopedia.com/term which defines “quasi equity” as “a category of debt taken on by a company that has some traits of equity, such as having flexible repayment options or being

I.T.A .No.-6336/Del/2012 unsecured Examples of quasi-equity include mezzanine debt and subordinated debt”. It further defines “Mezzanine financing” as a hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.” Thus considering the explanation of the assessee, we find that in form and substance the conduct of the assessee suggests no deviation with the stated form. In the face of the above factual position, we find that nothing has been brought on record by the Revenue to justify re-characterization of the financial arrangement explained as “quasi equity” and treat it as a loan simplicitor. The commercial expediency and business strategy of the assessee explained consistently on record found to be factually supported stands unassailed on record. The documentary evidence and arguments cannot be brushed aside or ignored as a meaningless rhetoric, merely to be reproduced in the orders but in reality discarded for all practical purposes without assigning any reason. We note with pain that such a mechanical disregard of the explanation offered and evidences relied upon will make the whole exercise of just and fair hearing, a meaningless exercise of justice dispensation.

Addressing the facts and evidences is imperative and the inherent strength of justice dispensation system lies in the unbiased and fair consideration of every case by the dispensers of justice. Faith in their wisdom and fairness should not be allowed to be eroded. A mechanical approach erring in favour of the Revenue is I.T.A .No.-6336/Del/2012 neither expected nor acceptable as it would erode the very bed rock of the trust reposed in the system and would lead to a breeding ground for skeptism and cynicism in the public towards the justice dispensers. This dangerous trend should be nipped in the bud. No doubt the justice dispenser is not expected to be careless in allowing relief but to deny where it ought to be given will only encourage the classical Biblical dislike of a “tax collector”. The effort on the contrary should be to promote an attitude best put in the words of Oliver Wendell Holmes Jr. who observes “I Like to pay taxes. With them, I buy civilization”. The policy makers through the policies of the country make frequent and valiant endeavours to shun this tag of a reviled tax collector and any carelessness in justice dispensation strikes a body blow to these small tentative steps. The acceptance or rejection of facts canvassed and argued should be a just, fair and transparent exercise. No doubt, the tax authorities are expected to address contradictions in facts pleaded and wherever evidences are found to be not relevant or reliable then they must be rebutted/disproved by evidences. No authority need be cited to hold that the explanation of the assessee is to be accepted or rejected by the tax authorities by addressing the facts and not avoiding to address the same. The tax authorities are not expected to reproduce the explanation as a mere meaningless rhetoric and arrive at a conclusion without addressing and meeting the explanation and evidences relied upon by the assessee. If the tax payer claims it is an interest free loan as a share holding activity, to be utilized by the AE for acquiring and increasing its portfolio and on utilization and fulfilling the internal and external requirements by way of I.T.A .No.-6336/Del/2012 permissions and procedures of the regulatory authority etc. it is to be converted into equity and that too at a premium then it is the correctness of this claim which is to be specifically addressed and decided. Merely because it is shown as an international transaction itself will not decide the claim. As observed earlier this principle stands settled by the Bombay High Court where the assessee in Vodafone India Services P.Ltd. (cited supra) had shown the issue of share capital in Form No.3CEB. Having shown it as such and objecting to jurisdiction of the tax authorities to apply Chapter X the Court accepted that Form 3CEB having been filed by way of abundant caution did not give jurisdiction to the department.

The decision is based on first principles that either an Authority has the jurisdiction or it does not have it, the acts of a person ex abundati cautela will not be the basis of jurisdiction of an Authority. The consistent objection posed by the assessee that the act of advancing interest free loan as “quasi equity” for the stated purpose was supported by documents and hence not an “international transaction”, cannot be ignored on the specious plea that disclosure was made by the tax payer in its Form 3CEB. We find that the assessee has successfully demonstrated its case relying upon the precedent of the aforesaid decision of the High Court followed in 369 ITR 511 (Bom.) where specifically the shares were transferred to its foreign holding company at a premium and also the decision of the ITAT in Bharti Airtel Ltd. (cited supra) where actual conversion took place after a delay over 1 year. We find that neither the facts have been rebutted nor the judicial precedent has been distinguished.

I.T.A .No.-6336/Del/2012 7.21. We further find that the assessee, apart from justifying the arguments and demonstrating the correctness of its claim on judicial precedent cited, has also relied upon the CBDT instruction No. 2/2015 dated 29.01.2015. Relying on the same it has been argued that the tax authorities having communicated to the world at large their acceptance of the decision of the Court in the case of Vodafone India Services P.Ltd. now cannot resile from the position in the case of the assessee. Further the fact that in assessee’s own case for 2011-12 assessment year this position has been accepted by the DRP vide its order dated 28.12.2015 wherein the AO was directed to delete the addition on account of valuation of shares has been heavily relied upon by the assessee, which position too has not been disputed by the Revenue. We further find that nothing has been argued by the Revenue challenging the principles of consistency relied upon by the assessee. For ready-reference, the relevant extract is reproduced hereunder:-

“Ground of Objection l to 10 are adjudicated together as these are interrelated. The TPO has justified his modification of taxpayers economic analysis (page 9 onwards) and issued a detailed showcause notice dated 1-12-2014. Replies filed by the Taxpayer have been examined and the reasons due to which the TP study had to be modified under rule 92C(3)(c) rws 92CA(3) are comprehensively discussed. While share application money was advanced on 16-11-2010, shares were allotted on 15-05-2011. Even in AY 2008-09 the DRP had affirmed order of TPO that advancement of share application money to AE was an interest free loan. The share application money advanced to DLF Global Hospitality Ltd Cyprus treated as a deemed loan is approved by DRP, however in view of decision in the case of Cotton Naturals(I) P Ltd 2015-TII-09-HC-DEL-TP. The rate applicable as per the Hon'ble High Court's prescription would be based on the interest rate applicable to the currency in which the loan is repayable i.e since this is a foreign currency loan, in such cases DRP typically directs the TPO to benchmark case using LIBOR plus after marking it up for transaction costs, risk and credit rating but not below Libor plus 400 points. Since there is an internal CUP available in this case i.e 10.31 % on a loan advanced to a sister concern in the same jurisdiction it is presumed that it has taken into account transaction costs, risk and credit rating and is a preferred internal CUP and TPO is directed to adopt the same. The taxpayer has pointed out

I.T.A .No.-6336/Del/2012 some errors in computation of notional interest on deemed loan advanced to AE which may be taken into account by the AO. Similarly the interest on loan advanced to AE DLF Global Hospitality Ltd Cyprus should also be taken at the rate as per taxpayers agreement @10.31% which has been benchmarked by the taxpayer using CUP method. Since this is higher than the High Court's prescription in Cotton Naturals and thus is presumed at arms length without requiring further adjustment by TPO. TPO is directed to allow relief accordingly. Transaction of subscription of shares of AE now stands covered by CBDT Instruction vide. FNO 500/15/2014/APA-l Instruction No 2/2015 New Delhi, Dated 29th January 2015 whereby Bombay High Court decision in the case of Vodafone India Services Pvt Ltd has been accepted by the CBDT. The AO is directed to delete the addition on account of valuation of shares. The objections of the taxpayer are partly allowed.” (emphasis provided) 7.21.1. We find that the Rule of consistency relied upon by the assessee in the facts of the present case also needs due consideration and cannot be easily brushed aside by the Revenue and infact has not been rebutted by the Ld.CIT DR. Certainty in laws is the bed rock on which the foundation of a just and fair tax administration can be built. In the words of Benjamin Franklin “……..but in this world nothing can be said to be certain, except death and taxes”. The decision of the Hon’ble Bombay High Court in the aforesaid case of Vodafone India Services Pvt.Ltd. has been the basis for bringing out the CBDT Instruction vide. FNO 500/15/2014/APA-l Instruction No 2/2015 New Delhi, Dated 29th January 2015.

Not only the Instructions issued by the CBDT are binding on the Revenue in interpreting and executing the provisions of the Act, but even otherwise the tax authorities cannot act in derogation of such Instruction or whittle them down.

Certainty on issues and Consistency on identical facts and law is a sine quo non of a transparent just and fair governance on all issues including tax administration.

Thus, we find that this plank of the argument probably has consciously not been I.T.A .No.-6336/Del/2012 rebutted by the Revenue. We accordingly find no merit in the case of the Revenue.

7.22. Thus on a consideration of the above gamut of facts, circumstances, arguments, judicial precedent, we find that Ground No.1, 3 and 7 of the assessee are allowed. In the absence of any rebuttal on material facts and law, judicial precedent cited and considered, we find that no case has been made out by the Revenue to justify dismissal of the aforesaid grounds raised by the assessee.

7.23. We find that in view of the conclusion arrived at in Ground No.1, 3 & 7 we were not called upon to decide Ground No.2 of the assessee. However, since arguments of both the sides have been brought out and also while considering the facts in Bharti Airtel Ltd. for deciding the issues in Ground No.1, 3 & 7 the facts qua Ground No.2 being interlinked have been considered, we find ourselves in agreement with the view taken by the Co-ordinate Bench and therefore, Ground No.2 stands allowed. Ground No.4, 5 & 6 being arguments in support of Ground No.1 & 3 do not need any specific adjudication.

I.T.A .No.-6336/Del/2012 8.1. Inviting attention again to the profile of the assessee it was submitted that the assessee’s avowed aim of becoming a global player in the hospitality sector necessitated the investments made. It was submitted the business, commercial and economic strategy of the assessee and its visions and targets when considered would indicate that these were strategic investments in the domestic companies from which no exempt income has been earned. These facts it was submitted would be evident from the chart placed at Paper Book page 19. Accordingly it was his submission that these investment of Rs.4,42,80,11,360/- should be excluded from the computation of disallowance under Rule 8D. The said claim it was submitted was supported by the decision of the Hon’ble Delhi High Court in the case of ACB India 374 ITR 108 [Del.] (copy of the said decision is placed at pages 34 to 37 of the paper book filed). Relying upon the computation placed at Paper Book page 18, it was submitted that in case Rule 8D is applied on the remaining investment of Rs.1,57,64,632/- the disallowance would work out to Rs.91,021/-.

Inviting attention to the assessment order itself it was submitted that since the assessee itself has made disallowance of Rs.2,28,777/-, no further disallowance was called for.

Referring to the facts on record, it was submitted that the earning of exempt income cannot be said to be an activity of passive nature requiring no real time inputs. It was his argument that in fact in the present situation making of I.T.A .No.-6336/Del/2012 Investment, maintaining or continuing investment and timing the exit from investment are all well informed and well coordinated management decisions involving not only inputs from various source but also acumen of senior management functionaries. Relying upon the impugned order it was submitted that cost is inbuilt into even these so called "passive" Investment. It was his argument that necessarily there must be incidental expenditures of collection, telephone, follow up etc. Since in the present case, out of total funds available/ raised by the assessee, a substantial portion of it amounting to Rs. 484,88,54,275/- has been invested in Shares and Mutual Funds, therefore, it can be held that expenditure in relation to earning of exempt dividend income are embedded in indirect expenses.

9.1. It was further his submission that the decision of the Special Bench in the case of Cheminvest Ltd. vs ITO, Ward-3(3), New Delhi further supports the view taken.

Accordingly, we hold no further disallowance need be made subject to the verification of the calculation placed on record.

10.1. Accordingly, Ground No.8 filed by the assessee is allowed.

The order is pronounced in the open court on 30th of June, 2016.