ITAT grants relief to ‘Times Group’; no ALP adjustment on interest free debt funding to overseas-SPV

Case details: Bennett Coleman & Co. Ltd. v. DCIT - [2021] 129 taxmann.com 397 (Mumbai - Trib.)

Judiciary and Counsel Details

• • P.P. Bhatt, President and Pramod Kumar, Vice-President.
  • J.D. Mistry, Sr. Adv. Hiten Chande and Pratima D’Souza for the Appellant.
  • Anand Mohan for the Respondent.

Facts of the Case

Assessee was a well-known Indian media group- commonly known as ‘Times Group’. A public listed company in the United Kingdom wanted to disinvest in its radio broadcasting business.cIt had put auction of its entire shareholding in Virgin Radio Holdings Limited. Assessee was one of the successful bidders in this auction.
As per the agreement, the purchasing company will be an SPV formed specifically to acquire Virgin Radio. Further, the transaction will be 100% equity-financed from internal resources of assessee and no further financing is required given. Thus, the assessee formed a SPV namely, TML Golden Square Ltd, UK.

The core issue before the Mumbai Tribunal was:

‘Whether an interest-free debt funding of an overseas company in the nature of a special purpose vehicle (SPV), with a corresponding obligation to use it for the purpose of acquisition of a target company abroad, can be compared with a loan simpliciter, and be, subjected to an arm’s length price adjustment?’

ITAT held

The Mumbai Tribunal held that its difficult to visualize an SPV in isolation with the owner of that structure, as these SPVs carry no financial and other risks, and such risks are assumed by the owner of that structure. There is a dichotomy in the SPV structure business model in the sense that while risks of SPV investments are assumed by the owner of the SPV, all the rewards, in whatever form, go to the SPV itself.

Rule 8(1) of the Nigerian Income Tax (Transfer Pricing) Regulations 2018 throws important light on this aspect. What this rule holds, is that an SPV, which does not control the financial risks associated with its funding activities, shall not be allocated the profits associated with those risks, and the profits or losses associated with such risks would be allocated to the owner(s) of the SPV.

Thus, interest-free debt funding of an overseas company in the nature of a SPV, with a corresponding obligation to use it for the acquisition of a target company abroad, can not be compared with a loan simpliciter. Thus same cannot be subject to arm’s length price adjustment on the basis of the Comparable Uncontrolled Price (CUP) method.