India vs Times Infotainment Media Ltd, August 2021, Income Tax Appellate Tribunal – Mumbai, TIA No 298/Mum/2014

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Times Infotainment Media Ltd (TIML India), is in the entertainment business, including running an FM Broadcasting channel in India. It successfully participated in the auction of the radio business of Virgin radio in March 2008 in the United Kingdom. To complete the acquisition, it acquired two SPV companies, namely TML Golden Square Limited and TIML Global Limited. TIML India wholly held TIML Global which in turn wholly held TIML Golden.

TIML India received funding from its parent Bennet Coleman & Co. Limited and remitted money primarily as an interest-free loan to TIML Global on 27 June 2008. TIML Global, on behalf of TIL Golden, paid UKP 53.51 million for the acquisition of Virgin Radio Shares. The acquisition of shares in Virgin Radios by TIML Golden was completed on 30 June 2008.

TIML India booked the transaction in its accounts as a loan to TIML Global Limited, but the arm’s length interest rate on the loan was claimed at zero percent.

The tax authorities computed the arm’s length interest rate of the loan transaction using the CUP method. A Dispute Resolution Panel later determined the arm’s length rate of interest on the intercompany loan based on the State Bank of India’s Prime Lending Rate.

Not satisfied TIML India brought the case to the Indian Tax Tribunal. Here they reiterated claims made before lower authorities that the loan was given to acquiring a controlling stake in the company outside India in the same business of the taxpayer. Hence, the transaction was akin to stewardship activity and did not require any benchmarking analysis. It was also argued that the loan was entered purely out of commercial expediency, and the intent of giving the loan should be considered. The funds provided were quasi-equity in nature.

Decision of the Income Tax Appellate Tribunal

The Tribunal decided in favor of TIML India and set aside the tax assessment.

The Tribunal noted that the transaction was remittance to a wholly-owned subsidiary for making further payment of the cost of acquisition of a target company. The SPV was formed primarily to acquire Virgin Radios and was entirely funded from the internal resources of the taxpayer and Indian parent company. The agreement to acquire the Virgin Radios was reached long before the subsidiaries came into existence. It is not a loan simpliciter to TIML Global but in the nature of an advance to TIML-Global with a corresponding obligation to use the funds advanced in the specified manner. The end-use of funds to acquire Virgin Radios was essentially an integral part of the entire transaction.

The Tribunal noted that the remittance of funds to TIML Global was for this limited and controlled purpose of acquiring the target companies, and the sequence of events and the material on record unambiguously confirm this factual situation. On that basis the remittance transaction to TIML Global cannot be considered on a standalone basis and can only be viewed in conjunction with the restricted use of these funds, for the strictly limited purpose, by TIML Global.

The Tribunal noted that the funding transaction in the case at hand differs from transactions between typical lenders and borrowers and as such is not comparable to a loan transaction.

The essence of the transaction is targeted acquisition and providing enabling funds for that purpose. Such a transaction cannot be a loan simpliciter on a commercial basis, which essentially implies that such a borrower can use the funds so received in such manner, even if subject to broad guidelines for purpose test, in furtherance of the borrower’s business interests.

The Tribunal observed that a transaction between an SPV and the entity creating such an SPV – as long as it is for a specific transaction structured by the owner entity –  is inherently incapable of taking place between independent enterprises.

When a strict condition about end-use, and that end-use is being decided by the owner of the SPV in advance that the SPV was not even in existence, is an inherent part of the transaction of funds being remitted is anything and could not be an uncontrolled condition.

The Tribunal held that requirement of arm’s length standards could never be met under the CUP Method, so far as the nature of the present transaction is concerned and observed that when the borrower has no discretion of using the funds gainfully, the commercial interest rates do not come into play at all.

The Tribunal ruled that the arm’s length price of the transaction by using the CUP method is NIL.


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