Before

THE HONBLE HIGH COURT OF MADRAS

At Chennai
Under Section 260A of
the Income Tax Act, 1961

Deputy Commissioner Of Income Tax

......APPELLANT
v.

Vulcantech India Pvt. Ltd.

......RESPONDENT

WRITTEN SUBMISSIONS ON BEHALF OF THE

RESPONDENT

5TH K.R. RAMAMANI MEMORIAL TAXATION MOOT COURT

COMPETITION, 2015.

Memorandum on behalf of the Respondent

TABLE OF CONTENTS
LIST OF ABBREVIATIONS.................................................................................................iv
INDEX OF AUTHORITIES...................................................................................................v
STATEMENT OF JURISDICTION.....................................................................................vii
STATEMENT OF FACTS......................................................................................................ix
STATEMENT OF ISSUES.....................................................................................................xi
SUMMARY OF ARGUMENTS...........................................................................................xii
ARGUMENTS ADVANCED...................................................................................................1
I.

WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THAT

CORPORATE GUARANTEES ISSUED ON BEHALF OF SUBSIDIARY IS

AN INTERNATIONAL TRANSACTION U/S 92B?.............................1
A.

THAT

ISSUING CORPORATE GUARANTEE TO AN ASSOCIATED ENTERPRISE IS NOT AN

INTERNATIONAL TRANSACTION AS NO COSTS ARE INCURRED...............................................1

B.

THAT

CORPORATE GUARANTEE PROVIDED BY

ASSESSEE

IS IN THE NATURE OF

SHAREHOLDER ACTIVITY AND HENCE IT DOES NOT QUALIFY FOR TP ADJUSTMENT..........3

C.

THAT PROVIDING GUARANTEE WAS NOT WITHOUT CONSIDERATION...........................3

II. WHETHER THE TRIBUNAL WAS RIGHT IN UPHOLDING THE

NOTIONAL INTEREST ON THE LOAN PROVIDED BY ASSESSEE TO
ITS SUBSIDIARY ASSOCIATED ENTERPRISE?...............................4
A.

THAT

THE TRANSACTION IN QUESTION DOES NOT COME UNDER THE PURVIEW OF

TRANSFER PRICING PROVISIONS.............................................................................................5

B.
III.

THAT LIBOR RATE SHOULD BE APPLIED IF AT ALL ANY ADJUSTMENT IS WARRANTED.7

WHETHER THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING

THAT ASSESSEE IS NOT ENTITLED FOR BALANCE 50% OF

ADDITIONAL DEPRECIATION IN THE CURRENT ASSESSMENT YEAR
IN RESPECT OF ASSETS ACQUIRED IN PREVIOUS YEAR AND PUT
TO USE FOR LESS THAN 180 DAYS?...........................................7

Memorandum on behalf of the Respondent

A.

THAT

THE ADDITIONAL DEPRECIATION INCENTIVE IS A VESTED RIGHT AND

INTERPRETATION OF THE SAME SHOULD BE LIBERAL/PURPOSIVE..........................................8

B.

THAT

THE LEGISLATIVE INTENT AND THE CONFLICT BETWEEN PROVISIONS SHOULD

BE RECONCILED

.....................................................................................................................9

PRAYER.................................................................................................................................12

Memorandum on behalf of the Respondent

LIST OF ABBREVIATIONS
ACIT
AE
AIR
AO
CIT
CTR
CUP
DCIT
DRP
FCA
ITA
ITAT
ITD
ITO
ITR
JCIT
LIBOR
OECD

Assistant Commissioner of Income Tax

AE
All India Reporter
Assessing Officer
Commissioner of Income Tax
Current Tax Reporter
Comparable Uncontrolled Price
Deputy Commissioner of Income Tax
Dispute Resolution Panel
Federal Court of Appeal Canada
Income Tax Appeal
Income Tax Appellate Tribunal
Income-tax Tribunal Decisions
Income Tax Officer
Income Tax Reporter
Joint Commissioner of Income Tax
London Interbank Offered Rate
Organization for Economic Cooperation and
Development
Supreme Court
Supreme Court Cases
Show Cause Notice
Selected Orders of ITAT
Transfer Pricing Officer

SC
SCC
SCN
SOT
TPO

Memorandum on behalf of the Respondent

INDEX OF AUTHORITIES
CASES
ACIT v. Kitex Garments, I.T.A. No. 75/Coch/2012.............................................................9, 10
ACIT v. W S Industries (India) Ltd, [2011] 128 ITD 98 (Chennai)...........................................4
Anushakti Chemicals and Drugs Ltd. v. ACIT, ITA Nos. 7495/Mum/2010 and
7126/Mum/2011...................................................................................................................8, 10
Bajaj Tempo Ltd. v. CIT, [1992] 196 ITR 188 (SC)...................................................................9
Bharti Airtel Limited v. ACIT, I.T.A. No.: 5816/Del/2012........................................................3
Birla Corp v. DCIT, I.T.A. Nos. 581 and 683/Kol/2011..........................................................10
Candila Healthcare Ltd v. DCIT, I.T.A. No. 2430/AHD/2012..................................................6
CIT v. National Taj Traders, AIR 1980 SC 485.........................................................................9
CIT v. Vegetable Products Ltd, 88 ITR 192 (SC).......................................................................8
Cosmo Flims Ltd. v. ACIT, [2012] 139 ITD 628 (Delhi..................................................8, 9, 10
CRI Pumps Pvt. Ltd. v. ACIT, [2013] 34 taxmann.com 123 (Chennai - Trib.)..........................8
CWT v. Jagdish Prasad Choudhary, 211 ITR 472 (Pat)............................................................9
DCIT v. Brakes India, I.T.A. Nos.1069/Mds/2010....................................................................8
Devi Polymers Pvt. Ltd. v. ACIT, 2014 SCC OnLine ITAT 986..........................................8, 10
Divis Lab v. DCIT, [2013] ITAT 3714;....................................................................................10
Glenmark Pharmaceuticals Ltd v. ACIT, (2014) 43 taxman 141...............................................4
Highway Constructions Company Pvt Ltd v CIT, (1993) 111 CTR (Gau) 143.........................6
Indian Writing Instruments Pvt. Ltd. v. DCIT, 2014 SCC OnLine ITAT 888..........................10
K P Varghese v. ITO, AIR 1981 SC 1922...................................................................................9
Kohinoor foods Limited v. ACIT, ITA No. 3869/del/2012.........................................................3
Micro Inks Limited v. ACIT, ITA No.1668/AHD/2006..........................................................4, 6
MITC Rolling Mills Pvt. Ltd v. ACIT, [2013] ITAT 2351........................................................10

Memorandum on behalf of the Respondent

Mylan Laboratories Ltd v. ACIT, ITA. No.66/Hyd/2013...........................................................7
Northgate Technologies Limited v DCIT, [2014] 148 ITD 433 (Hyd)......................................7
Prithvi Information Solutions Ltd v. ACIT, 2014 (34) ITR (Trib) 429 (Hyderabad).................6
Reddington India Limited v. The JCIT, ITA No.619/Mds/2014.................................................3
S.A.Builders Limited v. CIT, AIR 2007 SC 482.........................................................................4
Shiva Industries & Holdings Limited v. ACIT, I.T.A. No. 2148/Mds/2010...............................7
SIL Investment Ltd. V. ACIT, [2012] 54 SOT 5 4(Delhi).........................................................10
Tirath Singh v. Bachittar Singh, AIR 1955 SC 830...................................................................9
Tooltech Global Engineering Pvt Ltd v. DCIT, ITA No. 273/PN/2014.....................................6
VVF limited v. DCIT, ITA No.673/Mum/06...............................................................................5
STATUTES
Clause (iia) of Section 32(1), Income Tax Act, 1961...............................................................10
Notification No: FEMA 120/ RB-2004......................................................................................5
Rule 10B (1), Income Tax Rules, 1962......................................................................................6
Section 92B, Income Tax Act, 1961...........................................................................................1
ARTICLES & GUIDELINES
OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations,
2010................................................................................................................................1, 3, 4, 5

Memorandum on behalf of the Respondent

STATEMENT OF JURISDICTION
The Appellant has come before this court under Section 260A of the Income Tax Act, 1961
read with Section 106 of the Code of Civil Procedure, 1908.
Section 260A reads:
260A. (1) An appeal shall lie to the High Court from every order passed in appeal by the
Appellate Tribunal [before the date of establishment of the National Tax Tribunal], if the
High Court is satisfied that the case involves a substantial question of law.
(2) [The Chief Commissioner or the Commissioner or an Assessee aggrieved by any order
passed by the Appellate Tribunal may file an appeal to the High Court and such appeal
under this sub-Section shall be]
(a) filed within one hundred and twenty days from the date on which the order appealed
against is [received by the Assessee or the Chief Commissioner or Commissioner];
(c) in the form of a memorandum of appeal precisely stating therein the substantial question
of law involved.
(3) Where the High Court is satisfied that a substantial question of law is involved in any
case, it shall formulate that question.
(4) The appeal shall be heard only on the question so formulated, and the respondents shall,
at the hearing of the appeal, be allowed to argue that the case does not involve such
question.
Provided that nothing in this sub-Section shall be deemed to take away or abridge the power
of the court to hear, for reasons to be recorded, the appeal on any other substantial question
of law not formulated by it, if it is satisfied that the case involves such question.
(5) The High Court shall decide the question of law so formulated and deliver such judgment
thereon containing the grounds on which such decision is founded and may award such cost
as it deems fit.
(6) The High Court may determine any issue which
(a) has not been determined by the Appellate Tribunal; or
7

Memorandum on behalf of the Respondent

(b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such
question of law as is referred to in sub-Section (1).
(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure,
1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the
case of appeals under this Section.]
Section 107 of the Code of Civil Procedure, 1908 reads:
107. Powers of Appellate Court (1) Subject to such conditions and limitations as may be
prescribed, an
Appellate Court shall have power
(a) to determine a case finally;
(b) to remand a case;
(c) to frame issues and refer them for trial;

All of which is most humbly and respectfully submitted.

Memorandum on behalf of the Respondent

STATEMENT OF FACTS
I.

Vulcantech India Pvt. Ltd. hereinafter referred to as the Assessee is engaged primarily
in trading, reselling and distribution of Information Technology and office automation
products.

II.

The Assessee in the financial year 2007-08, had set up an AE, by the name of
Vulcantech Gulf FZE, hereinafter referred to as Vulcantech Gulf, which is a wholly
owned subsidiary of the Assessee.

III.

Thereinafter in the financial year 2008-09, the Assessee had set up another AE by the
name of Vulcantech Singapore Pte. Ltd., hereinafter referred to as the Vulcantech
Singapore, in which the Assessee had 51% shareholding.

IV.

In the FORM 3CEB the Assessee had disclosed a transaction entered into with
Vulcantech Singapore in the nature of an interest-free loan for an amount of Rs.
10,23,45,680/-. No interest was charged by the Assessee on the grounds of it being a
quasi-equity transaction.

V.

On 10th of December, 2011, the Assessee was served with a SCN requiring the
Assessee to disclose all transactions entered into with its AE. In reply to the SCN the
Assessee also submitted that it had provided a corporate guarantee to Vulcantech
Dubai to enable it to avail loans from Standard Chartered Bank Dubai. No
commission was charged by the Assessee on the grounds of it being a commercially
expedient transaction and that no cost had been incurred by the Assessee.

VI.

Subsequently, the matter was taken up by the TPO, who made adjustments for the said
transactions by computing a 1.5% commission for the corporate guarantee and a
notional interest @ 11% for the interest-free advance.

VII.

Thereafter, the Assessee appealed before the DRP, which upheld the adjustment made
by the TPO. Aggrieved by this the Assessee appealed to the ITAT, which provided
partial relief to the Assessee.

VIII.

In the assessment year 2008-09, the Assessee had acquired and installed new Assets
which were used for less than 180 days.
9

Memorandum on behalf of the Respondent

IX.

Thus, the Assessee was allowed to claim only 50% of the calculable rate of additional
depreciation as prescribed in Section 32(1)(iia) of the Income Tax Act, 1961.

X.

The Assessee seeks to claim the balance 50% of additional depreciation in the
subsequent year which is the current impugned assessment year, 2009-10. However,
the AO, disallowed the residual additional depreciation in the subsequent assessment
year which decision was upheld by the DRP. However, the Assessee got no relief
when the ITAT Chennai Bench also dismissed the Assessees appeal for allowance of
residual additional depreciation, re-affirming the DRPs decision.

XI.

The DCIT, filed an appeal before the Honourable Bench of the Madras High Court by
virtue of Section 260A of the Income-tax Act, 1961, against the order of the ITAT.

10

Memorandum on behalf of the Respondent

STATEMENT OF ISSUES
I.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT CORPORATE
GUARANTEE

ISSUED

ON

BEHALF

OF

SUBSIDIARY

IS

AN

INTERNATIONAL TRANSACTION U/S 92B?

II.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN UPHOLDING THE NOTIONAL
INTEREST ON THE LOAN PROVIDED BY ASSESSEE TO ITS SUBSIDIARY
ASSOCIATED ENTERPRISE?

III.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT ASSESSEE IS NOT
ENTITLED FOR BALANCE 50% ADDITIONAL DEPRECIATION IN THE
CURRENT ASSESSMENT YEAR IN RESPECT OF ASSETS ACQUIRED IN
PREVIOUS YEAR AND PUT TO USE FOR LESS THAN 180 DAYS?

11

Memorandum on behalf of the Respondent

SUMMARY OF ARGUMENTS
I.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT CORPORATE
GUARANTEE

ISSUED

ON

BEHALF

OF

SUBSIDIARY

IS

AN

INTERNATIONAL TRANSACTION U/S 92B?

It is submitted on behalf of the Assessee that corporate guarantee is not an international
transaction when it has no bearing on the profits and losses of the said enterprise. Moreover,
it is argued by the Assessee that the TPO erred on facts and in law by misrepresenting the
shareholders services as envisaged under the OECD Guidelines. Moreover, the TPO erred in
not considering that the Assesse had deep interest in the well being of its subsidiary. Lastly,
the TPO erred in applying external CUP, on wholly incomparable transactions.

II.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN UPHOLDING THE NOTIONAL
INTEREST ON THE LOAN PROVIDED BY ASSESSEE TO ITS SUBSIDIARY
ASSOCIATED ENTERPRISE?

The TPO erred in computing notional interest for the interest-free loan provided by the
Assessee in favour of Vulcantech Singapore. It disregarded the fact that the transaction was
quasi-equity in nature and under such circumstances it did not come under the purview of
Transfer Pricing provisions. Moreover, the TPO erred in disregarding the commercial
dependency of the Enterprises in question.

III.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT ASSESSEE IS NOT
ENTITLED FOR BALANCE 50% ADDITIONAL DEPRECIATION IN THE
CURRENT ASSESSMENT YEAR IN RESPECT OF ASSETS ACQUIRED IN
PREVIOUS YEAR AND PUT TO USE FOR LESS THAN 180 DAYS?

It is submitted on behalf of the Assessee that AO grossly erred in law by disallowing the plea
to carry forward residual additional depreciation to the subsequent assessment year;
especially in light of there being a vested right of additional depreciation as recognised by
12

Memorandum on behalf of the Respondent

various judicial decisions across India. The AO erred in law by not recognising the legislative
intent and object behind the incentive provision to be construed liberally and purposively in
order to give practical effect to the incentive as envisaged in the legislation. Lastly, the AO
erred in law by not recognising various established judicial precedents delivered by the
Mumbai, Delhi, Cochin, Kolkata, Ahmedabad, Hyderabad and even the Chennai Benches of
the ITAT.

13

Memorandum on behalf of the Respondent

ARGUMENTS ADVANCED
I

WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THAT

CORPORATE

GUARANTEES

ISSUED

ON

BEHALF

OF

SUBSIDIARY IS AN INTERNATIONAL TRANSACTION U/S

92B?
The TPO erred on facts and in law by taking suo-moto cognizance and enhancing the income
of the Respondent by 17,01,990 on account of commission for corporate guarantee, issued by
the Respondent in favour of its subsidiary Vulcantech Gulf FZE by charging commission at
1.5% of 11,34,65,780.
That the AO/TPO erred on facts and in law in disregarding the fact:
(a) That corporate guarantee is not an international transaction when it has no bearing on the
profits and losses of the Assessee.
(b) That the TPO erred by misinterpreting the concept of shareholder services contained in
the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
released by the OECD Guidelines1.
(c) That the transaction was not without consideration as the Assessee had deep interest in
the well being of its subsidiary and it would receive benefits in the form of dividends from
the subsidiary.
(d) That the TPO erred in applying external CUP on wholly incomparable transactions and
disregarded the judicial precedent set by a plethora of judgments.
Moving on to the substantive issues involved:
A. THAT

ISSUING

CORPORATE

GUARANTEE

TO

AN

ASSOCIATED

ENTERPRISE IS NOT AN INTERNATIONAL TRANSACTION AS NO COSTS

ARE INCURRED.

An analysis of this definition of international transaction2 shows that it is:

a. in the nature of purchase, sale or lease of tangible or intangible property,
1 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010.
1

Memorandum on behalf of the Respondent

b. in the nature of provision of services,
c. in the nature of lending or borrowing money, or
d. in the nature of any other transaction having a bearing on the profits, income, losses or
assets of such enterprises.
Now, dealing with the Explanation, inserted with retrospective effect from 1st April 2002,
which was brought on the statute vide Finance Act, 2012. It is clear that this Explanation is to
be read in conjunction with the main provisions, and in harmony with the scheme of the
provisions, under Section 92B as it is stated that it is merely clarificatory in nature inasmuch
as it is for the removal of doubts, and therefore, one has to proceed on the basis that it does
not alter the basic character of definition of international transaction under Section 92B.
Under this Explanation, five categories of transactions have been clarified to have been
included in the definition of international transactions.
The first two categories of transactions, which are stated to be included in the scope of
expression international transactions by the virtue of clause (a) and (b) of Explanation to
Section 92 B, are transactions with regard to purchase, sale, transfer, lease or use of tangible
and intangible properties covered under the basic definition of international transaction.
Similarly, clause (d) deals with the provision of services also covered under the basic
definition. The remaining two items in the Explanation to Section 92 B not covered by any of
the three categories discussed above, i.e. clause (c) and (e) thereto, dealing with (a) capital
financing and (b) business restructuring or reorganization. These items can only be covered
in the residual clause of definition in international transactions, as in Section 92B(1), which
covers any other transaction having a bearing on profits, incomes, losses, or assets of such
enterprises. It is, therefore, essential that in order to be covered by clause (c) and (e) of
Explanation to Section 92 B, the transactions should be such as to have bearing on profits,
incomes, losses or assets of such enterprise. This aspect is further highlighted in clause (e) of
the Explanation dealing with restructuring and reorganization, wherein it is acknowledged
that such an impact on the profits and loss could be immediate or in future. The implication
of this statutory provision is that while impact on profit, income, losses or assets is sine
qua non, the mere fact that impact is not immediate, but on a future date, would not take the
transaction outside the ambit of international transaction. It is also important to bear in mind
2 Section 92B, Income Tax Act, 1961.
2

Memorandum on behalf of the Respondent

that, as it appears on a plain reading of the provision, this exclusion clause is not for
contingent impact on profit, income, losses or assets but on future impact on profit,
income, losses or assets of the enterprise. In this light now, let us refer to the provisions of
clause (c) of Explanation to Section 92B. In view of the discussions above, the scope of the
transactions under clause (c) is restricted to such capital financing transactions, including
inter alia any guarantee which has a bearing on the profits, income, losses or assets or such
enterprises3.
Hence, in the light of the arguments put forth, it was not necessary for the Assessee to report
the transaction of corporate guarantee in FORM 3CEB, as it is the case of the Assessee that it
has not incurred any cost in providing such guarantee and as such it has no impact on the
profit and loss of the Assessee, which was not rebutted by the TPO/AO during the course of
proceedings. This view has been upheld by the courts in various cases.4
B. THAT

CORPORATE GUARANTEE PROVIDED BY

NATURE OF

SHAREHOLDER

ASSESSEE

IS IN THE

ACTIVITY AND HENCE IT DOES NOT

QUALIFY FOR TP ADJUSTMENT.

It is a normal practice for bankers to ask for corporate guarantee from group
companies/shareholders. Such requirement is also prescribed under various regulatory laws
governing banking. Reliance is placed on Para 7.9 of the OECD Guidelines 5 provides that
where an activity is performed by a group member solely because of its ownership interest in
other group member, such an activity would qualify as a shareholders activity, for which no
charge is required to be paid by the service recipient. 6Hence, when the Assessee was issuing
corporate guarantee in favour of its subsidiary it was fulfilling its obligations as a shareholder
and hence no charge was warranted.

3 Reddington India Limited v. The JCIT, ITA No.619/Mds/2014.

4 Bharti Airtel Limited v. ACIT, I.T.A. No.: 5816/Del/2012; Kohinoor foods Limited v. ACIT, ITA No.
3869/del/2012.

5 Supra Note 1.
6 Supra Note 4.
3

Memorandum on behalf of the Respondent

C. THAT

PROVIDING GUARANTEE WAS NOT WITHOUT CONSIDERATION.

The TPO has failed to appreciate the fact that Assessee has been able to explore overseas
market, enhance unutilized capacity and increased sales due to availability of financial
resources with AEs obtained with the help of corporate guarantee provided by the Assessee.
Thus, there is quid pro quo. In such a scenario, any support to the affiliates, is therefore in the
business interest of the Assessee and treated as part of its own core business 7. The Chennai
Tribunal8 has held that giving corporate guarantees for a subsidiary company is in the interest
and incidental to the business of the Assessee Company, and a commercially expedient
decision. The Honble Supreme Court has also reiterated similar views. 9 The test of Arms
Length Price requires parties to determine how independent parties would have transacted
under similar facts and circumstances. Here it was conceivable that given the business
interest in the other firm, unrelated parties could have provided corporate guarantees without
any charges. Similar views were put forth by the ITAT Hyderabad Bench 10 in the case of
interest free loans. It is pertinent to note here that the revenue cannot justifiably claim to put
itself in the arm-chair of the businessman or in the position of the board of directors and
assume the role to decide how much is reasonable expenditure having regard to the
circumstances of the case11. No businessman can be compelled to maximize its profit. The
income tax authorities must put themselves in the shoes of the Assessee and see how a
prudent businessman would act12. Lastly In Arguendo, if at all any charge has to be computed,
it has to be computed in accordance with the decision of the court in the case of Glenmark

7 Id..
8 ACIT v. W S Industries (India) Ltd, [2011] 128 ITD 98 (Chennai).
9 S.A.Builders Limited v. CIT, AIR 2007 SC 482.
10 Micro Inks Limited v. ACIT, ITA No.1668/AHD/2006.
11 Supra Note 1.
12 Supra Note 9.
4

Memorandum on behalf of the Respondent

Pharmaceuticals13 followed by a plethora of other judgments. Applying an external CUP on
wholly incomparable facts and circumstances is not tenable.
I.

WHETHER THE TRIBUNAL WAS RIGHT IN UPHOLDING THE

NOTIONAL

INTEREST

ON

THE

LOAN

PROVIDED

BY

ASSESSEE TO ITS SUBSIDIARY ASSOCIATED ENTERPRISE?

The TPO erred in computing notional interest for the interest-free loan @ 11%, provided by
the Assessee in favour of Vulcantech Singapore. The AO/TPO erred in holding:
a) That the transaction in question came under the purview of transfer pricing provisions.
b) That the financing relationship between holding company and subsidiary as a lender and
borrower simplicitor.
In Arguendo, it is argued by the Assessee that if at all any adjustment is to be made it should
be made in accordance with the LIBOR. The brief facts pertaining to the issue in question are
that the Assessee advanced loans to its AE without charging any interest on the grounds that
such a transaction was quasi-equity in nature.
Moving on the substantive issues involved.
A THAT

THE TRANSACTION IN QUESTION DOES NOT COME UNDER THE

PURVIEW OF TRANSFER PRICING PROVISIONS.

The OECD Guidelines14 states that in certain circumstances it may be both appropriate and
legitimate for a tax administration to consider substance over form and all surrounding
circumstances. In such a case, the tax administration may disregard the form and recharacterize it in accordance with its substance.
In the case before us now, there are two important factors pertaining to this interest free loan,
and both of these aspects deserve to be examined in some detail. The first important aspect of
this interest free advance is that it was not open to the Assessee to subscribe to the equity
capital without the permission of the Reserve Bank of India 15. There was thus indeed a
technical problem in subscribing to the capital directly. It is also important to note that at later
13 Glenmark Pharmaceuticals Ltd v. ACIT, (2014) 43 taxman 141.
14 Supra Note 1
5

Memorandum on behalf of the Respondent

stages, the advances were converted into shares. The second very important aspect of this
interest free loan is that in the present case, the Entity receiving the interest free advances is
not only a subsidiary of the Assessee company but is also playing a very significant role in its
sale and distribution chain inasmuch as the Assessee being the sole vendor to the said concern
so far as sales in Singapore are concerned.
In the light of this undisputed position, let us examine the correctness of the Arms Length
Price adjustment in this case. In such a case, CUP method can be applied and the LIBOR or
other bank rate linked rate is generally taken as a rate for comparable uncontrolled
transaction. As has been held in a large number of cases 16, that in the cases of Arms Length
Prices of loans and advances, cost of funds has no relevance and it is only the rate applicable
for comparable uncontrolled transaction that is to be taken into account. However, even while
applying CUP method, one has to bear in mind the fact that in terms of Rule 10B (1),
computation of Arms Length Price under the CUP method is a three step process which
requires that even when we take LIBOR plus rate as the base rate for an advance in the first
step of the computation process, such base rate will have to be adjusted inter alia for the
differences (a) between the international transaction and the comparable uncontrolled
transaction, and (b) between the enterprises entering into such transactions, which could
materially affect the price in the open market 17. On both of these counts, adjustments will
have to be necessarily made in the LIBOR plus rate. While the international transaction
before us is that of advancing an interest free unsecured loan for helping an entity overcome
its teething problems and pending the approval for capital subscription from the Reserve
Bank of India; whereas a typical LIBOR plus rate transaction is the transaction in which
banks gives secure advances, for making profits out of so lending the money, to its customers.
Therefore, there is no parity between these two types of transactions. Secondly, we are
dealing with a situation in which the two enterprises are mutually dependent for commercial
reasons. This is quite unlike a typical transaction based on LIBOR plus rate in which only
motivation for giving advance is earning interest. Clearly, thus, LIBOR plus rate cannot be
adopted in this situation for two fundamental reasons:
15 Notification No: FEMA 120/ RB-2004.
16 VVF limited v. DCIT, ITA No.673/Mum/06.
17 Rule 10B (1), Income Tax Rules, 1962.
6

Memorandum on behalf of the Respondent

(i) That it is not a simplictor financing transaction between the Assessee and the AE.
(ii) That it is not a case of granting advance to a business concern without significant and
decisive commercial considerations, as the amount has been given for strengthening
Assessees marketing apparatus in Singapore.
There is a difference in the nature of transaction and there is also a difference in the nature of
the enterprises, including their inter se commercial relationship, entering into this transaction.
The differences are so fundamental that these differences, to use the phraseology employed in
Rule 10 B (1)(a)(ii), could materially affect the price in the open market. On account of
these peculiar factors, the application of LIBOR plus rate or, for that purpose, any bank rate
will be inappropriate to this case.
The ITAT of Hyderabad had expressed similar observations in a case whose facts were paripasu to the present case.18Various judgments19 have held that if the transaction appears to the
quasi-equity or equity in nature, it is beyond the scope of transfer pricing provisions.20 In light
of the above, it is submitted on behalf of the Assessee that the addition made by the TPO on
account of notional interest should be deleted.
D. THAT

LIBOR RATE SHOULD BE APPLIED IF AT ALL ANY ADJUSTMENT IS

WARRANTED.

In Arguendo, it is submitted on behalf of the Assessee that if any adjustment has to be made it
should be made in accordance with the LIBOR, as is the position of law. It is a settled law
that once the transaction between the Assessee and the AEs is in foreign currency and the
transaction is an international transaction, then the transaction would have to be looked upon
by applying the commercial principles in regard to international transaction. In such
circumstances the domestic lending rate would have no applicability and the appropriate

18 Supra Note 10.

19 Vijai Electricals v. ACIT, ITA No. 842/HYD/2012; Tooltech Global Engineering Pvt Ltd v. DCIT, ITA No.
273/PN/2014; Prithvi Information Solutions Ltd v. ACIT, 2014 (34) ITR (Trib) 429 (Hyderabad).

20 Highway Constructions Company Pvt Ltd v CIT, (1993) 111 CTR (Gau) 143; Candila Healthcare Ltd v.
DCIT, I.T.A. No. 2430/AHD/2012.

Memorandum on behalf of the Respondent

benchmark would be the LIBOR.21 This proposition has been laid down in a plethora of
judgments.22
II.

WHETHER THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING

THAT ASSESSEE IS NOT ENTITLED FOR BALANCE 50% OF
ADDITIONAL DEPRECIATION IN THE CURRENT ASSESSMENT
YEAR IN RESPECT OF ASSETS ACQUIRED IN PREVIOUS
YEAR AND PUT TO USE FOR LESS THAN 180 DAYS?

a) The AO grossly erred in disallowing the additional depreciation claimed in the current
year to the extent it was not allowed in the preceding year in respect of assets
specified in Sec. 32(1)(iia) and that sec 32(1)(iia) does not stipulate that additional
depreciation is to be allowed only for the assets added during the year and does not
prescribe any year and usage for allowability of additional depreciation.
b) The AO ought to have appreciated that grant of additional depreciation is a vested
right as incentive for investments and Assessee cannot be deprived of such vested
rights as held by various judicial decisions across India.
c) The AO ought to have appreciated that the assets for which additional depreciation is
allowable, constitute a separate block by themselves and the rate of depreciation
applicable to such assets are governed by both Appendix I of Rule 5 of IT Rules and
depreciation rate as per clause(iia) of sec32(1) for additional depreciation.
The Assessees arguments can be broadly can be broadly characterized into two.
A THAT

THE ADDITIONAL DEPRECIATION INCENTIVE IS A VESTED RIGHT

AND INTERPRETATION OF THE SAME SHOULD BE LIBERAL/PURPOSIVE.

A bare reading of this Section 32(1)(iia) clearly says that in case a new machinery or plant
was acquired and installed after 31-03-2005 by an Assessee, who is engaged in the business
of manufacture or produce of article or thing, then, a sum equal to 20% of the actual cost of
the machinery and plant shall be allowed as a deduction. It is not in dispute that the Assessee
has acquired and installed the machinery after 31-03-2005. Therefore, the Assessee is eligible
21 Shiva Industries & Holdings Limited v. ACIT, I.T.A. No. 2148/Mds/2010.
22 Northgate Technologies Limited v DCIT, [2014] 148 ITD 433 (Hyd); Mylan Laboratories
Ltd v. ACIT, ITA. No.66/Hyd/2013

Memorandum on behalf of the Respondent

for additional depreciation which is equivalent to 20% of the actual cost of such machinery.
The dispute is the year in which the depreciation has to be allowed. It is true that Section 32
(1)(iia) does not contain any restriction or prohibition for claiming the balance additional
depreciation in the subsequent year. At the same time, it is also true that the said clause does
not expressly provide for such a claim, there neither is an enabling provision nor a disabling
provision. In such circumstances a view favourable to the Assessee is preferable, more so
when the proviso to the said Clause lists several exclusions, and none of them limit the right
of an Assessee to claim additional deprecation in full or deny the right of carry forward of the
balance amount, but for a few judgements23 in favour of the revenue authorities although a
recent judgment of the jurisdictional ITAT24 while allowing carry forward of the incentive
noted that a construction in favour of the Assessee has to be taken where two views are
available. The provision of additional depreciation admittedly has been directed towards
encouraging industrialisation by allowing additional benefit for acquisition and installation of
new plant and machinery. This one time incentive is aimed to boost new investments in
preferred direction until the Assessee exhausts his accrued vested right to claim the whole of
20% additional depreciation calculable on the actual cost of the newly acquired assets25.
The deductions of normal and additional depreciation are separately available to an Assessee.
Section 32(1)(iia) was introduced in the Act with a specific purpose/ object of providing relief
to assessees who make investment in the new plant and machinery and thus aid
incentivization. The Section therefore has to be interpreted keeping in view the intent and
purpose for which it was introduced. A construction which frustrates the basic purpose of the
provision should be avoided in preference of a pragmatic view. In the circumstances, it is in
the fitness of the scheme that the Revenue Department should rise to supplement the
intentions of the legislature, instead of frustrating the same. It is a settled position in law that
an incentive provision should be liberally construed. The applicability of this rule can be
challenged only where the result of liberal interpretation would be as good as re-legislation of
23DCIT v. Brakes India, I.T.A. Nos.1069/Mds/2010; CRI Pumps Pvt. Ltd. v. ACIT, [2013] 34 taxmann.com
123 (Chennai - Trib.)

24 Devi Polymers Pvt. Ltd. v. ACIT, 2014 SCC OnLine ITAT 986; CIT v. Vegetable Products Ltd, 88 ITR 192
(SC)

25 Cosmo Flims Ltd. v. ACIT, [2012] 139 ITD 628 (Delhi); Anushakti Chemicals and Drugs
Ltd. v. ACIT, ITA Nos. 7495/Mum/2010 and 7126/Mum/2011

Memorandum on behalf of the Respondent

a provision by addition, subtraction or alteration of words and violence would be done to the
spirit of the provision or where there is no ambiguity. The Honble Supreme Court held that
purposive interpretation is to be adopted where the literal meaning of the language used in the
provision leads to a result which would defeat the intent behind the provision 26. An
interpretation which thus achieves the purpose behind insertion of Section 32(1)(iia) needs to
be given effect. In the instant case, the object of Section 32(1)(iia) could be achieved only
when half of the additional depreciation remaining unavailable in view of second proviso to
Section 32(1) to the Assessee in the year of acquisition and installation is allowed in the
succeeding year. This interpretation also gets support from the fact that there is no specific
bar against such a claim under second proviso to Section 32(1). The second proviso to
Section 32(1) only creates a restriction with respect to the time over which additional
deprecation could be claimed. The second proviso to Section 32(1) does not affect the vested
right of the Assessee towards additional depreciation which it gets by making investment in
the new machinery or plant. It is our contention that the Assessee earns his entitlement
towards additional depreciation as soon as he incurs a cost on acquisition of plant or
machinery. The entitlement towards additional depreciation crystallizes in the event of
incurrence of cost on plant or machinery. The judgment27 interprets the expression shall be
allowed to mean a vested statutory right and such statutory right cannot get divested by the
restrictions on the incentive provision since it would be contrary to the very intention of
having the clause in the first place. Also, while construing a provision that creates a right, one
must take a construction which saves the right rather than the one which defeats it28.
E. THAT

THE

LEGISLATIVE

INTENT

PROVISIONS SHOULD BE RECONCILED

AND

THE

CONFLICT

BETWEEN

On categorical issues of interpretation, construction of the provision and legislative intent,

there can be four arguments. First, In Clause (iia) of Sec. 32(1) as introduced by Finance Act
2002 there was a mention of the previous year in which the additional depreciation u/s. 32(1)
(iia) was to be allowed but in the provisions which have been made effective from
26 Supra Note 25; Bajaj Tempo Ltd. v. CIT, [1992] 196 ITR 188 (SC); Tirath Singh v. Bachittar Singh, AIR
1955 SC 830; CIT v. National Taj Traders, AIR 1980 SC 485; K P Varghese v. ITO, AIR 1981 SC 1922

27 id; ACIT v. Kitex Garments, I.T.A. No. 75/Coch/2012

28 CWT v. Jagdish Prasad Choudhary, 211 ITR 472 (Pat).
10

Memorandum on behalf of the Respondent

01.04.2006, there is no mention about the previous year in which such additional depreciation
is to be allowed. Therefore, the legislative intent reflective from this amendment is the fact
that restrictions as to years of claim have been repealed. Second, in absence of a specific
provision for disallowing the claim of balance additional depreciation, an implied meaning to
the second proviso to Section 32(1) of restriction cannot be given since in the approach to
construe the incentive provisions liberally and purposively; harmonious effect must be given
to legislative intent to reconcile the contradiction, if any, to mean that the Assessee is eligible
for balance additional depreciation29. Third, if it is to be argued that the additional
depreciation under Section 32(1)(iia) as provided by the Finance (No. 2) Act, 2002 as being
a deduction of a further sum as depreciation, therefore what was proposed to be allowed is
depreciation simplicitor though it was called as additional depreciation. Therefore, if the
restrictions in 32(1) (ii) are to be applicable, then any balance of the amount of additional
sum of depreciation would have to be considered to be carried forward and set off in terms of
Sub-Section (2) of Section 32 of the Act. Fourth, if it is argued that normal depreciation and
additional depreciation are fundamentally different in concept, then similar restrictions cannot
be applied to both of them. The additional depreciation is investment based, while the regular
depreciation is period based and both are unrelated to each other. Normal depreciation and
additional depreciation are independent and two separate deductions available to an Assessee,
the expressions further sum and shall be allowed are indicative of this proposition30.
Additional depreciation is computed on the basis of actual cost of the eligible asset and is
in a sense independent from normal depreciation which is computed on the basis of written
down value of the block of asset, therefore, to subject these fundamentally different
deductions to similar restrictions would defeat the cardinal rule of interpretation of fulfilling
the object of the legislation.
The view that an Assessee is entitled to claim the deduction for the balance additional
depreciation in the succeeding year has been upheld by various Benches of the ITAT 31. It is
therefore clear that, but for the decisions of the Chennai bench which too have been lately
29 Birla Corp v. DCIT, I.T.A. Nos. 581 and 683/Kol/2011
30 Clause (iia) of Section 32(1), Income Tax Act, 1961
31 MITC Rolling Mills Pvt. Ltd v. ACIT, [2013] ITAT 2351; Supra Note 25; Indian Writing Instruments Pvt.
Ltd. v. DCIT, 2014 SCC OnLine ITAT 888; Supra Note 25; SIL Investment Ltd. V. ACIT, [2012] 54 SOT 5
4(Delhi), Supra Note 27; Divis Lab v. DCIT, [2013] ITAT 3714; Supra Note 24; Supra Note 29;

11

Memorandum on behalf of the Respondent

overruled, the overwhelming view is in favour of the allowance of the balance depreciation in
the subsequent years.

12

Memorandum on behalf of the Respondent

PRAYER
Wherefore, in the light of facts stated, issues raised, arguments advanced and
authorities cited, it is most humbly and respectfully prayed before this Honble Court
that it may be pleased to:

Delete the adjustment with respect to corporate guarantee as was done by the

TPO;
Delete the adjustment with respect to notional interest for the interest free loan

provided by the Assessee to Vulcantech Singapore;

Overrule the decision of the DRP/AO of disallowing the balance 50%
additional depreciation to the Assessee in the relevant assessment year 200910.

13