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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI C.N. PRASAD,
आदेश / O R D E R PER C.N. PRASAD, JM:
This appeal is filed by the assessee against the order of the Ld. CIT(A)-15, Mumbai dated 13.1.2014 pertaining to assessment year 2008-09.
The only issue in the appeal of the assessee is that the Ld. CIT(A) erred in upholding the adjustments made by the Assessing Officer on account of non-charging of interest on advance given towards supply of equipment by the assessee to its AE.
Brief facts are that the assessee-company was incorporated on 14th June, 2006 as a wholly owned subsidiary company of Essar Steel India Ltd which is an integrated steel manufacturing unit of flat rolled products in Hazira, District Surat at Gujarat. The assessee was in the process of setting up 8.0 MTPA integrated Iron Ore Pellet plant comprising of Beneficiation Plant at Joda in Orissa and a Slurry transportation system and pellet plant at Paradeep, Orissa. The return of income was filed on 30.9. 2008 declaring total income of Rs. 91,88,612/-. Since the value of international transactions exceeded Rs. 15 crores, the case was referred to TPO by the Assessing Officer and the TPO passed order u/s. 92CA(3) dated 11.10.2011 proposing adjustment of Rs. 1,24,30,054/- on account of Arm’s Length Pricing of the International Transactions. The Assessing Officer made addition of Rs. 1,24,30,054/- to the declared income of the assessee in conformity with the Arm’s Length Price determined by the TPO in the order passed u/s. 143(3) r.w. section 144C of the Act dated 15th December, 2011. The assessee by letter dated 2.1.2012 informed the Assessing Officer that it would not be filing objections before the Dispute Resolution Panel and requested for passing final order. The final order dated 24.1.2012 was passed u/s. 143(3) of the Act.
During the previous year ended 31.3.2008, the assessee made trade advance of 10% of the contract value in relation to an initial payment towards composite contract entered into with its Associated Enterprise i.e. Global Supplies (UAE) FZE. According to the assessee, this payment is only a trade advance for import of equipment by the assessee from AE therefore payment being in the nature of trade advance, no interest was charged by the assessee. However, the TPO was of the view that the assessee should charge interest on the advance payment made to AE and Arm’s length interest is to determined by following CUP method and Benchmarked the interest arising out of the advance transaction applying CUP method based on the information about the average yield on long term instrument during financial year 2007-08 which was collected u/s. 133(6) from CRISIL Ltd. and arrived at interest rate of 18.81% and calculated the adjustment at Rs. 1,24,30,054/-.
The assessee preferred an appeal before the Ld. CIT(A) and contended that advance was made only towards supply of goods, supply of machinery therefore, interest need not be charged and in the alternative if at all interest is to be charged, the rate of interest to be applied is at LIBOR and not at the prime lending rate as applied by the TPO. The contentions of the assessee were rejected by the Ld. CIT(A) and confirmed the order of the Assessing Officer.
The Ld. Counsel for the assessee Shri Vijay Mehta submits that during the previous year relevant to assessment year the assessee was in the process of setting up 8.0 MTPA Integrated Iron Ore Pellet Plant comprising of Beneficiation Plant and a slurry transportation system and pellet plant at Joda, Orissa. It has an Associated Enterprise (AE) in UAE namely Global Supplies (UAE) FZE. M/s Global Supplies (UAE) FZE and it is engaged in business of providing design, engineering and procurement services. The assessee has entered into an offshore supply contract dated 27.07.2007 (Pg 1 of paper book) with its AE in which it has been provided that; a) The assessee intends to set up 8.0 MTPA Integrated Iron Ore Pellet Plan comprising of Beneficiation Plant and a slurry transportation system and pellet plant at Joda, Orissa. The assessee requires design, engineering am procurement services and M/s Global Supplies (UAE) FZE had requisite experience, capacity and resources to perform the above services and agreed to provide the said services to assessee. b) The total value of the said contract is at USD $85.22 million c) The assessee will pay 10% of Contract price towards advance payment within 45 days of signing the contract through a letter of credit; i) on receipt of original invoice and ii) on receipt of bank guarantee from M/s Global Supplies (UAE) FZE for the advance amount to be paid by assessee The Ld. Counsel for the assessee submits that on the basis of the above agreement, the assesse received bank guarantee from M/s Global Supplies (UAE) FZE issued by Bank of India London branch dated 11.01.2008 for the amount of advance to be paid. The assessee made a payment of USD 8.52 million being 10% advance against supply of equipment on receipt of invoice dated 19.01.2008 (Pg 71 of P.B). The said payment was made on 31.01.2008 by acceptance of bill under letter of credit. The copy of correspondence addressed to Axis bank Ltd for accepting the bill (Pg 72-73 of P.B.). He submits that according to the TPO the assessee ought to have charged interest on the above amount paid towards advance for machinery. The TPO calculated notional interest amounting to Rs. 1,24,30,054/- by applying rate of 18.81% p.a. for 72 days. It is submitted that the TPO has erred in calculating interest for 72 days. The advance payment was made on 31.01.2008 so if at all interest was to be charged, it was to be charged for a period of 60 days and not 72 days as calculated by TPO.
The Ld. Counsel for the assessee submits that the CIT(A) confirmed the view of Assessing Officer that assessee ought to have charged interest on advance given towards purchase of equipment and also upheld the rate of interest as calculated by the TPO.
The Ld. Counsel for the assessee submitted that the TPO has charged interest on advance paid against machinery as if it is a loan. It is submitted that TPO cannot re-characterise the transaction without bringing any material on record. In order to support the said contention reliance is placed on the following decisions: a) Aegis Ltd v. Addl. CIT being ITA No: 1213/Mum/2014 dated 27.07.2015 b) Bharti Airtel Limited v Addl. CIT being ITA No: 5816/De1/2012 dated 11/03/2014. c) DIT v. Besix Kier Dabhol SA [210 taxman 151 (Bom)] (Head note) d) M/s Pan India Network Infravest Pvt. Ltd v. Addl. CIT (ITA No: 7026/Mum/2013 dated 04.12.2015)
The Ld. Counsel for the assessee submitted that the assessee has demonstrated with the help of evidences that the money paid is towards advance against supply of equipment. Further, the TPO has not brought any evidence on record to prove that the said transaction is not an advance and the assessee has concealed the real position of the transaction. The agreement for supply of machinery is at Pg 1 of P.B. The agreement provided for detailed terms and condition for supply of machinery. It also provides for payment of advance @ 10% of total value. Further, the machineries worth USD 85.22 millions has been actually supplied under said agreement. It is further submitted that the said amount has been shown as 'Advance for EPC contracts' under the head capital work in progress in the balance sheet of the assessee (Pg. 67, 70 of P.B.). Thus, the agreement for supply and consequential advance payment thereunder could not have been doubted and rightly has not been doubted by A.O. or CIT(A). It is submitted that the facts of the present case are better than that of cases cited hereinabove in para 7 in as much as in present case, A.O. and CIT(A) have not even attempted to allege that advance against machinery is in reality a loan.
The Ld. Counsel therefore prayed that the transfer pricing adjustment upheld by CIT(A) on account of interest made may kindly be deleted.
Without prejudice to the above, the Ld. Counsel for the assessee submits that if at all interest is to be charged, the rate of interest to be applied on the said amount ought to be at LIBOR and not the prime lending rate as applied by the TPO. In order to support the said contention, reliance is placed on the following decisions: a) Cotton Naturals (I) Pvt. Ltd. v DCIT [276 CTR 445 (Del)] b) Hinduja Global Solutions Ltd v Addl.CIT [145 ITD 361 (Mum)] c) Siva Industries & Holding Ltd. vs. CIT [145 DJ 497 (Chen)] .
Without prejudice, it is further submitted that the amount was advanced by the assessee on 31.01.2008. Hence, if at all interest is to be computed, it has to be computed for 60 days and not 72 days as calculated by the TPO. The TPO has erred in calculating interest from the date of invoice instead of date of payment made which is erroneous. Without prejudice to the above, it is submitted that the TPO ought to have reduced the amount of interest on trade advance from capital work-in-progress of plant and machinery as it was related to acquisition of plant machinery. It is submitted that the TPO has erred in adding the amount of interest to the total income of the assessee instead of reducing the same capital work-in-progress.
The Ld. Departmental Representative vehemently supports the orders of the lower authorities.
Heard both sides, perused the orders of the authorities below. The assessee has made advance of 10% of the contract price to its AE for offshore supply contract. The TPO was of the view that interest should be charged on such advances to AE. The TPO charged interest on advance paid by the assessee against supply of machinery as if such advance is loan to its AE, therefore interest is to be charged on such advance. The TPO has not brought any material on record to suggest that this is only a loan and therefore interest is to be charged. The TPO re-characterized the whole transaction and this is not permissible without any materials or evidence suggesting that such advance is only a loan. In the case of Aegis Ltd Vs ACIT in dated 27.7.2015, the Co-ordinate Bench considered a situation where assessee subscribed for shares and this subscription was treated as advancing of loan by the TPO by re-characterizing the transaction and in such situation, the Co-ordinate bench held as under:
“We have heard the rival submissions and also perused the relevant findings in this regard in the impugned orders. The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. The TPO has redeemed some of these shares at par. The TPO has re-characterized the said transaction of subscription of shares into advancing of unsecured loan by terming it as an exceptional circumstance and has charged/imputed interest, on the reasoning that in an uncontrolled third party situation, interest would have been charged. We are unable to appreciate such an approach of TPO and under what circumstances, leave above any exceptional circumstances, a transaction of subscription of shares can be re-characterized as Loan transaction. The TPO /Assessing Officer cannot disregarded any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed. The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now, Aegis Limited 24 whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterize as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon’ble jurisdictional High Court in the case of Dexiskier Dhboal SA, ITA No. 776 of 2011 order dated 30th August, 2012 and by various other decisions, as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer. Thus, ground no. 14 is treated as allowed.
Next issue relates to adjustment of Rs. 16,70,226/-“ 8. In the case of Bharati Airtel Ltd., in ITA No. 5816 of 2012 dated 11.3.2014, the Co-ordinate Bench held as under:
Ïn any event, it is not open to the Revenue authorities to recharacterize the transaction unless it is found to be a sham or bogus transaction. While there are no specific powers vested in the TPO to recharacterize the transaction, even under the judge made law, such recharacterization can be done by the revenue authorities when the transactions are found to be substantially at variance with the stated form. In the present case, there cannot even a suggestion to hold that this is a bogus transaction because admittedly the subscribed shares capital has indeed been allotted to the assessee. The transaction is thus accepted to be genuine in effect.”
In the case of Pan India Network Infravest Pvt. Ltd Vs ACIT in & 7025/M/13 dated 4.12.2015, the Co-ordinate Bench held as under:
Now, we examine the applicability of the tribunal order rendered in the case of Bharti Airtel limited vs. Addl. CIT (Supra). In that case, the money was advanced to AE foreign subsidiaries as share application money as in the present case and shares were allotted after 13 to 16 months as against 42 months in the present case. In Para 47 of this tribunal order, the tribunal has considered this argument also that there is delay in allotment of shares. The tribunal stated that since the TPO has not brought on record anything to show that any unrelated share applicant was to be paid any interest for the period between making the share application money payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally 6 7025 & 7608 /Mum/2013 sustainable merits. In the present case also, the TPO has not brought on record anything to show that any unrelated share applicant was to be paid any interest for the period between making the share application money payment and allotment of shares. In fact, in the present case, the TPO has reproduced the submissions of the assessee in Para 4.2 of his order where the assessee submitted that the amounts were provided as equity/quasi equity and subsequently converted into equity shares. Thereafter in very next Para i.e. Para 4.3 of his order, the TPO starts with this observation that the concern of the assessee that conversion of loan into equity precludes the TPO to determine the arm’s length interest on the above interest free loan is covered in favour of the revenue by a tribunal order rendered in the case of Perot Systems TSI Ltd. vs. DCIT, (2010) TIOL – ITAT – Delhi. But there is no such mention in the written submissions of the learned AR of the assessee reproduced by the TPO in Para 4.2 of his order. Hence, the TPO has considered this transaction as a loan transaction by brushing aside the submissions of the learned AR of the assessee that this money was given as share application money and that too without giving any finding or indication any basis to say that this is a loan transaction. As in the case of Bharti Airtel limited vs. Addl. CIT (Supra), in the present case also, the TPO has not brought on record anything to show that any unrelated share applicant was to be paid any interest for the period between making the share application money payment and allotment of shares. Therefore even for this delay in allotment of shares also, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits. Hence, by respectfully following this tribunal order, we hold that the impugned ALP adjustment is devoid of merit and therefore deleted in both years because it was agreed by both sides that facts on this aspect are identical in both years”.
In the case on hand also the TPO has not brought any material suggesting that the transaction is sham or bogus or it is a loan so as to charge interest. What we find is only an advance for supply of machinery and therefore no interest is liable to be charged. Thus, we direct the Assessing Officer to delete the addition made towards interest on the advances made to its AE.
In the result, the appeal of the assessee is allowed.