By Geeta Jani, Dhishat B. Mehta
fiogf49gjkf0d
New Page 1
Tribunal News
Part C — Tribunal & AAR International Tax Decisions
Geeta Jani
Dhishat B. Mehta
Chartered Accountants
20 Perot Systems vs DCIT
2010-TIOL-51-ITAT-DEL
Section 92,
Dated: 30.10.2009
Issues:
-
Interest-free loans advanced to overseas
wholly-owned subsidiaries cannot be regarded as quasi equity capital.
-
Notional arm’s length interest on a loan to
an AE can be taxed having regard to applicable transfer pricing provisions.
Facts:
-
The assessee, a company
incorporated in India, is engaged in the business of developing and designing
technology for business solutions and also providing business consultancy
services.
-
The assessee advanced
interest-free foreign currency loans to its two wholly-owned subsidiaries (WOS)
situated in Bermuda and Hungary. The funds were used by the WOS for making
long-term investments in step down operating subsidiaries.
-
During the course of the
assessment proceedings, the tax authorities held that the loan was an
international transaction and grant of interest-free loan was inconsistent
with the arm’s length principles of section 92 of the Income Tax Act.
-
The assessee resisted the
notional assessment by contending that:
(a) The overseas entities were 100% subsidiaries. The
assessee had neither any intention nor had earned any interest, and that it
was commercially expedient to extend such interest-free loans to WOS.
(b) Interest-free loans were in the form of quasi equity as
the subsidiaries had very small capital base. Further, unavailability of easy
borrowing means to the newly set up WOS was one of the main reasons for the
funding.
(c) Requisite approval of the RBI was obtained by the
assessee for such remittance. The Income Tax Act and the OECD Guidelines
support the contention that the effect of government control/intervention
should be considered while determining ALP
(d) Reliance was placed on Para 1.37 of 1995 OECD
Guidelines to support proposition that it is legitimate to consider the
economic substance of a transaction. The thin capitalisation rules of Hungary
were also referred to support the view that debt in excess of three times the
equity of the subsidiary is to be treated as equity.
(e) Relying on the Supreme Court’s Judgments in CTV. KRMTT
Thiagaraja Chetty & Co. 24 ITR 525 and Morvi Industries Ltd v CIT 82ITR835 it
was contended that the term income includes real income and not fictitious
income, and notional income assessment was not justified.
Held:
The ITAT upheld the contentions of the tax department and
held:
(a) The agreements between the parties indicate that the
assistance to the WOS was in the nature of loans and not in the nature of
capital.
(b) The concept of real income cannot be applied in respect
of international transactions covered by transfer pricing provisions.
(c) Reliance by the assessee on OECD guidelines and thin
capitalisation norms of the source country was not apt as they dealt with the
issue from the perspective of the borrower and the recipient country, and not
from the perspective of the lender. In any case, the thin capitalisation norms
of Hungary only regulated admissibility of interest expenditure in the hands
of the payer.
(d) Interest-free loans granted in Bermuda (situated in a
tax haven) would result in higher income in the hands of the AE and the
taxpayer’s income in India would reduce by the corresponding amount. This
would result in reduction of the overall tax incidence of the group, resulting
in a case of violation of the TP norms where profits are shifted to lower tax
regimes to bring down the aggregate tax incidence of multinational groups.
(e) The approval of the Reserve bank of India does not
validate or approve the true character of the transaction from a TP
perspective. RBI regulations could not be applied for the purpose of TP under
the Income Tax Act.
(f) Based on the above, the ITAT upheld the order of the
CIT(A) and held that the transaction to provide interest-free loans was an
international transaction subject to the TP guidelines, and income thereof,
arising from such transaction, should be determined under the provisions of
Income Tax Act.
