TaxTMI 
TaxTMI 
TaxTMI 
2017 (2) TMI 1007
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..... CIT-DR as well Ld. Counsel for assessee agreed that the facts and circumstances of both the appeals of revenue are identical and hence they argued from the facts of ITA No.223/Mum/2016 in the case of Reliance Utilities P Ltd and stated that the same can be adopted for the other appeal. Hence, the grounds as raised in the appeal in the case of Reliance Utilities P Ltd reads as under:- "1. "Whether on the facts & circumstances of the case and in law, the learned Commissioner of Income Tax(A) is correct in deleting the addition of unexplained cash credits of 700,00,00,000/- made by assessing officer u/s 68 of Income Tax. Act 1961" 2. "Whether on the facts & circumstances of the case and in law, the learned Commissioner of Income Tax(A) is correct in deleting the addition made u/s. 68 of the Income Tax Act, 1961 holding that the power of the AO to lift the corporate veil is not in question without appreciating the fact that on lifting the corporate veil it is clear that Biometrix has been created as a mere camouflage or shell or sham company deliberately created by the persons exercising control over the same for the purpose of avoiding liability." 3. "Whether on the facts & cir....
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....S") against which the assessee had allotted seven crores CCPS of Rs. 10 each at a premium of Rs. 90 per share to Biometrix. This transaction was investigated by the Investigation Wing of the Income Tax Department, Mumbai upon receipt of commercial intelligence report dated 10.08.2012 from the High Commission of India, Singapore. The AO has summarized the observations in the said report that the source of funds of Biometrix, which invested Rs. 700 crores in the CCPS issued by the assessee and also in other group companies (in all aggregating to USD 1627.24 millions),needs further investigation considering that the said company incorporated under the laws of Singapore had a paid-up capital of Singapore Dollars 1,10,000 only and its shares were held by two corporate entities, of which one entity in Singapore held 91% of the shares. The ultimate owner of the two companies in Singapore i.e. Biometrix and its shareholder entity is an individual based in Mumbai holding 100% of the capital. The quantum of investment made by Biometrix which was the largest FDI from Singapore to India, given its small capital base and other facts such as a single room office in Singapore remaining clos....
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.... Mumbai vide letter dated 10.09.2013 requested that the assessment be kept in abeyance till further communication is issued to the AO. The Investigation Wing forwarded another report dated 05.02.2014 to the AO, which apart from the findings in its first report dated 10.07.2012, carried the details of the subsequent transactions of the purchase of CCPS from Biometrix by the group companies of the assessee and that the purchasers of CCPS have explained that the consideration was paid out of the proceeds from sale of units of mutual funds. The report stated that Biometrix had entered into separate Investment Agreement with the assessee and other group companies. It also stated that a Put & Call Option Agreement was entered into by Biometrix with a group company of the assessee, which gave Biometrix the right to sell the CCPS and that the loan from ICICI Bank was secured by assigning the rights in the Investment Agreement, the Put and Call Option Agreement and the charge was filed with the authority in Singapore. The report also stated how ICICI bank had sanctioned a loan of USD 1.2 billion on 28.06.2007 and a further sum USD 0.5 billion on 07.11.2007 and as per the documents filed by ....
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.... of CCPS were explained and the valuation report of S.R. Batliboi & Co was furnished. The assessee explained its understanding that Biometrix had obtained a loan from ICICI Bank, Singapore for making the investment in the CCPS and stated that it is not in possession of any correspondence in this regard. The bank statements of the assessee were furnished and credit entries for the receipt of Rs. 700 crores from Biometrix were identified in the bank statements. 6. The AO also made reference through FT & TR Division of the CBDT to Inland Revenue Authority in Singapore ("IRAS") on 13.03.2014. The reference was made as per requirement for exchange of information in relation to investments made by Biometrix in four reliance group companies including assessee. IRAS provided information pertaining to Biometrix, viz, the tax residency certificate, List of Directors and employees, Financial Statements and Income Tax Returns, Director's resolutions/KYC documents, ICICI bank statements with details of inward credits, disbursement related documents, loan principal and interest related documents, credit appraisal note and facility documents. On finding that complete information as sou....
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....s available for sale amounting to USD 1650,125,325. From the Facility Agreement entered into between Biometrix and ICICI Bank, the AO inferred that the loan has been advanced to Biometrix by ICICI Bank Limited through its overseas branches and ICICI Bank, Singapore Branch had also acted as an agent for facilitating the loan. In other words, ICICI Bank, Singapore Branch handled the disbursements, collection of interest and principal repayments. After examining various documents in relation to the loan, the AO found that ICICI Bank, Singapore Branch had not monitored the loan it granted to Biometrix strictly as per the terms of the contract. 7. Hence, the AO added the amount of Rs. 700 crores received by the assessee and invested by Biometrix in the CCPS issued by the assessee as income of the assessee as unexplained cash credit u/s. 68 of the Act. According to the AO the nature and genuineness of the transaction of investment in the CCPS of the assessee was not explained as required in Section 68 of the Act. The AO has stated that the assessee, the investor i.e. Biometrix, shareholders and directors of the investor, ICICI Bank, Singapore and other group companies of the assessee ha....
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....as per the DDIT report dated 10.07.2012, the source of this investment is from Biometrix which was not out of the equity capital but borrowed as a loan of USD 1700 million from ICICI Bank, Singapore. Two things are clear. The source is Biometrix and the source of source is the loan sanctioned by ICICI Bank, Singapore to Biometrix. Secondly, ICICI Bank has secured this loan with Option Agreements to sell the shares to M/s. Ekansha, a group company of M/s. Reliance Industries Limited. 5.7 The report further finds that Biometrix is said to be filing income tax returns, goods and service tax returns and other regulatory returns with the authorities in Singapore and copies of acknowledgement were filed as proof of the same. The report also confirms that Biometrix had repaid the loan to ICICI Bank, Singapore through the money raised by sale of CCPS to Reliance Gas Transportation Infrastructure Limited, Reliance Ports and Terminals Limited and Ekansha Enterprises Private Limited. The report also concludes that Reliance Gas Transportation Infrastructure Limited, Reliance Ports and Terminals Limited and Ekansha Enterprises Private Limited have filed details and explained the sources of mo....
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.... pertaining to earlier period could not be provided as per Indo Singapore exchange of information protocol" (Para 35). "The crucia1.information in relation to this transaction that is the bank statement and other relevant documents is not on record" (Para 38). The Appellants had placed on record the swift messages dated 18.09.2007 issued by ICICI Bank, Singapore to OCBC Bank, Singapore and swift message dated 19.09.2007 issued by OCBC Bank, Singapore to HDFC Bank, Mumbai. It was also submitted that these swift messages were in fact forming part of the records in the files of the AO as obtained by the AO from IRAS, Singapore. Appellants had applied for the copies and the same had been duly furnished by the AO. These copies were again placed on record by the Appellants during the hearing. 5.13 Since, this evidence goes to the root of the matter, the same is dealt with first. The assessment order states that bank statements have not been furnished. However, the AO has secured the swift messages referred to above from IRAS, Singapore. A careful look at the swift messages shows that the three banks involved in the transaction viz., ICICI Bank, Singapore - the lender to Biometrix, OCBC....
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.... also show the inward remittances by ICICI Bank, Singapore and the outward remittances to the bank account of the Appellants with HDFC Bank, Mumbai. These are evidences secured by the AO from IRAS Singapore, the genuineness of which is not doubted in the assessment order. When the Appellants placed these evidences once again during the hearing, the same was forwarded to the AO seeking a remand report and the remand report does not dispute the facts and evidences on record. Consequently, the sole reason or basis in the assessment order and remand report is the non-receipt of bank account which was beyond the capacity of the Appellant and IRAS, Singapore cannot stand scrutiny, and therefore should fail in the light of the bank account references of this very transaction under question as is available through the swift messages issued by ICICI Bank, Singapore and OCBC Bank, Singapore respectively. The purpose of seeking the bank statement is to track the transaction and to find the link. The very purpose for which the bank statements were sought for had been achieved through the swift messages which are again documents issued by ICICI Bank, Singapore and OCBC Bank, Singapore respectiv....
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....er (in USD) 121433 1 067 440 4 221 643 422 675 Cost of Sales (in USD) -121433 -1 064 580 -4 213 555 - 421 531 Other income (in USD) 896 910 15 045 208 369 3 123 231 (3) its total annual expenditure on operations is less than S$200,000 in the immediately preceding period of 24 months No No No No Salary & Employee benefits (in USD) 102 950 Administrative expenses & other operating expenses (in USD) 5 995 772 38 937 226 29 760 302 110 377 287 Annual expenditure (in USD) 5 995 772 39 040 176 29 760 302 110 377 287 Negative tests: An entity is deemed no to be a shell/conduit company if: (4) it is listed on a recognised stock exchange of the Contracting State; or No No No No (5) its total annual expenditure on operations is equal to or more then S$200,000 in the immediately preceeding period of 24 months from the date the gains arise. Yes Yes Yes Yes Salary & Employee benefits (in USD) 102 950 Administrative expenses & other operating expenses (in USD) 5 995 772 38 937 226 29 543 845 110 377 287 Annual expenditure (in USD) 5 995 772 39 040 176 29 543 845 1....
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....s have submitted the following: "The credit committee of ICICI Bank giving an in-principle approval on 28.06.2007 for a loan of USD 1.2 billion. This In-principle approval has been given based on the list of investees, running projects, valuation of the equities in the -project and putting in place a Put/Call arrangement with a non-disposal undertaking permitting the borrower to enter into suitable hedging arrangements. Biometrix has passed a board resolution on 24.09.2007 to invest in CCPS of the Appellant. In line with the terms and conditions issued by ICICI Bank, Singapore a put and call option agreement was entered into between Ekansha Enterprise P Ltd and Biometrix on 31 .08.2007. The board of directors of Biometrix passed a resolution on 05.09.2007 to accept the facility from ICICI Bank for the borrowing of USD 1.2 billion in three tranches. On 07.09.2007, Biometrix and ICICI Bank entered into a Facility Agreement and on the same day, a deed of assignment of contract rights between Biometrix and ICICI Bank was entered into as a security for the company's liability to the bank. Utilisation requests raised by Biometrix from 15.09.2007 and the disbursal of....
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....resolution on 20.08.2007 and the same was filed with the Registrar of Companies on 14.09.2007 The FIRC dated 21.09.2007 issued by HDFC Bank vide serial numbers 420599 evidencing receipt of INR 700 crore. On 25.09.2007, the board of directors of the Appellant authorised allotment of CCPS and on 20.10.2007 Appellants filed Form 2 with ROC upon allotment of CCPS to Biometrix thus satisfying the conditions under section 75 of the Companies Act, 1956. In compliance with section 84 of the Companies Act, 1956, on 25.09.2007 Appellants issued six preference share certificates for the value of Rs. 700 crores. On 18.12.2007, the RBI acknowledged the filings made by the Appellants with RBI for allotment of CCPS to Biometrix". 5.26 The movement of funds from ICICI Bank through OCBC Bank into the bank account of the Appellant with HDFC Bank, Mumbal have already been dealt in detail earlier. None of the above have been disputed either in the assessment order or in the remand report. 5.27 Three important aspects needs attention and deliberation. The securement of the loan by Biometrix and its surrounding steps. Secondly, the movement of funds i.e. loan transforming into investment....
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....ct, a similar analysis has been done by the AO in the assessment order. Para 48 to 55 very cogently appreciates these evidences in a sequence and para 55 gives a finding that the loan so availed by Biometrix has been utilised for investment in CCPS of the four Reliance group companies". For the sake of convenience paras 48 to 55 are extracted below: 48. ICICI Bank Singapore has disbursed a loan of USD 1.7 billion to Biometrix. As per information received from FT&TR division, the IRAS has provided swift messages showing that loan proceeds have been remitted to the Overseas Chinese Banking Corporation, Singapore, SG Bank Account No. 662001767301 of Biometrix. The date wise details of the disbursal are as under: S.No Date Amount in USD 1 18.09.2007 38,35,00,000 2 03.10.2007 22,00,00,000 3 16.10.2007 57,66,25,325 4 12.12.2007 49,25,70,000 Total 167,26,95,325 49. The copies of Tax Residency Certificate and returns of income of Biometrix have been provided. The audited annual accounts of Biometrix for the following periods have also been provided. 50. As per the financial statements of Biometrix for the period ending September 2008 shows secured t....
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.... also mentioned that the original lender is a company organized and existing under the laws of India (ICICI Bank Ltd.). Therefore, it is clear that the loan has been advanced to the borrower by ICICI Bank Ltd., through its overseas branches and ICICI Bank Ltd., Singapore has acted as an "Agent" for facilitating the loan. 55. The loans so availed by Biometrix has been utilized for investment in the CCPS of four Reliance Group companies Monitoring of the loan transaction by ICICI Bank and valuation reports 5.29 Para 58 to 63 of the assessment order deals with this subject matter and to put it in a nut shell states that ICICI Bank had not monitored this loan transaction with due diligence and has not obtained proper valuation reports periodically so as to secure the loan. The Appellants in turn had contested this issue and had made elaborate submissions and in a nut shell meaning that there was no lack of diligence on the part of ICICI Bank as the covenants of debt cover and due payment of interest and repayment of principal were met. 5.30 At the very outset, this issue has no relevance in deciding the source of the investment. In fact, it concedes the fact that the loan was....
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.... dispute under question, especially when the entire loan has been repaid. Other reasons in the assessment order 5.32 The assessment order has provided few more reasons while confirming the addition. These are dealt with below: 1) The contention of the AO that Biometrix was yet to be formed when the loan was sanctioned by ICICI Bank is factually wrong. The submission of the Appellant that Biometrix was incorporated on 15-05-2007 whereas ICICI Bank sanctioned the loan only on 28-06-2007 is evidenced by the materials on record and is not disputed by the AO. 2) The observation of the AO that the money is only channelized through Singapore for unknown reasons and the investment is not Foreign Direct Investment since an Indian Bank through its overseas branch has financed Biometrix based on the security of the CCPS into which the loan proceeds was invested by Biometrix is neither here nor there. Simply put, the AO appears to question the rationale for borrowing the money in Biometrix, Singapore and investing the same in Indian companies rather than the Indian companies directly financing their requirements from banks in India. I find in paragraph 20 of the Assessment Order wher....
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....overned by the provisions of DTAA and the connected protocols. ICICI Bank Singapore is governed by banking secrecy norms and regulations as per Singapore laws. Non receipt of information based on DTAA and bank secrecy constraints cannot go against the Appellants. In fact, there is more than adequate evidence to prove source and genuineness of the investment. I have already referred to various paras in the assessment order wherein the AO in unequivocal terms have acknowledged the source and genuineness of the investment especially vide para 48 to 55. After stating so, it is not open to the AO to hold that the investment is not genuine since bank statement could not be obtained. At one breath the AO finds the investment to be genuine and in the same breath without disputing the evidence on record makes observations to the contrary. This approach is not correct and proper. 6) The AO has also stated that the facts have forced him to lift the corporate veil and cited judicial precedents to bring home the point that legal entities which are closely connected may be aggregated and viewed as one concern. The AO has stated that Biometrix is inextricably related to the MDA group of compan....
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....greeing that the outstanding Put Option obligation shall be backed by a Non Disposable Undertaking on equity shares of RIL such that the same gives a cover of at least 1.75 times of the outstanding Put Option obligation or face value of the outstanding CCPS/CCDs or the face value of the outstanding CCPS/CCDs, whichever is high." 5) Para 4A(ix) of the remand report states "Accordingly, on approval of the loan by the Credit Committee on 28.06.2007, Genemedix has set up a special Purpose Vehicle viz., Biometrix as subsidiary in Singapore for making investment in various infrastructure projects, whereby it invested 6530.35 crores by acquiring CCPS of four Reliance Group companies." 6) Para 4A(x) of the remand report states "Considering the fact that complete information of the transaction was not provided by either the shareholders and/ or Biometrix of the investee companies before the Investigation Wing, a reference was made to FT&TR Division, CBDT, New Delhi to obtain information from Singapore Tax Authorities." 7) A perusal of the above shows again that the source and genuineness of the investment stands proved i.e. Biometrix securing the loan from ICICI Bank, Singapore and in....
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....nation is not satisfactory. It is this conclusion that needs to be objectively examined in this appeal. 5.37 Section 68 of the Act obligates an assessee to show evidence both on the nature and source of any sum credited in the books of the said assessee. It needs no elaboration that through a catena of decisions the Courts have laid down the following three fundamental tests which have to be established to discharge the burden under section 68 of the Act: * Identity of the creditor * Creditworthiness of the creditor, and * Genuineness of the transaction. 5.38 Various courts have discussed the aspects of burden of proof that lies on assessee. Inference can be drawn about the nature of evidence offered, the circumstances explaining the credit and the actions of an assessee that would constitute reasonable discharge of that burden of proof. Some of those cases are mentioned hereunder. i. Supreme Court in case of CIT v. P. Mohanakala [2007] 291 ITR 278 / 161 Taxman 169 held that the expression "assessee offers no explanation" means where the assessee offers no proper, reasonable and acceptable explanation as regards the sum found credited in the books maintained by the ....
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....ctor Electrodes Ltd. [2010] 329 JTR 271 (Delhi), Dy. CIT v. Dolphine Marbles (P.) Ltd. [2011] 129 ITD 163/ 10 taxmann.com 75 (Jab.)(TM), Bharti Syntex Ltd. v. Dy. CIT 52 DTR 73 (Jp.): Assessee-company filed letters of the share applicant companies wrote to the ACIT confirming that they had applied for shares in the asses see-company, giving details of draft, copies of resolutions passed by BOO of applicant- companies besides their bank statement/copies of acknowledgement of returns, certificates of incorporations and balance sheets of the applicant-companies wherein investment made in the assessee-company was shown, PAN, ROC certificate, it had discharged the onus which lay upon it under section 68 by establishing the identity and creditworthiness of each shareholder and, therefore, no addition could be made under section 68. CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78/25 Taxman 80F (SC) In this case assessee gave the names and addresses of the creditors. It was in the knowledge of the Revenue that the creditors were income-tax assessees. The revenue apart from issuing notices under section 131 did not pursue the matter further. It did not examine the source of income of....
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....cts not under dispute or controversy are that a sum of Rs. 700 crores was received from Biometrix. As against this amount, the assessee has allotted 7.0 crores CCPS (Series A, B & C) of Rs. 100 each (face value of Rs. 10 each and premium of Rs. 90 each).Biometrix had borrowed the said amount on a loan basis from ICICI Bank, Singapore. Biometrix had utilized the proceeds of the loan from ICICI Bank, Singapore to purchase the compulsorily convertible preference shares issued by Reliance Gas Transportation Infrastructure Limited ('RGTIL"), Reliance Ports and Terminals Limited (RPTL"), and Reliance Utilities Private Limited ('RUL") ('the Assessee"). Now we will, for better cogency and appreciation of facts, place on record dates and events which on an apparent scrutiny would bring to light the correct facts. Admittedly, most of the records relied on by the AO were not available with the assessee and since the impugned order indicates that the same had been sourced from Inland Revenue Authority of Singapore ('IRAS') and ICICI Bank India, assessee had filed an application before the AO and had secured copies of all the documents which would find reference hereunder. This ....
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....CCPS/CCDs, thus identifying the end use restriction. It also mandated a Put & Call arrangement with one of the group entities and Biometrix and that the entity would provide a non-disposal undertaking of Reliance Industries Limited shares ("RIL shares") The proposed terms and conditions indicate the lender as ICICI Bank, Singapore, retaining their right to allocate the facility amongst its branches. It indicates the purpose towards subscription of CCPS& CCDs in existing infrastructure projects of Reliance MDA group and the loan arrangement was covered by a Put& Call arrangement. It puts a host of obligation on the borrower to ensure security of the loan and allow the borrower to enter into suitable hedging arrangement: 3 28.06.2007 Letter of Intent issued by ICICI Bank to Reliance Holdings BV for USD 1.2 billion term loan facility Letter of Intent is annexed as Exhibit 3 Assessing Officer - Vol 2. The summary of terms and conditions indicate the SPV borrower as an entity which should be a 100% subsidiary of Reliance Holding BV The promoter group is shown as Mukesh Dhirubhai Ambani (MDA') Group The lenders as ICICI Bank, Singapore retaining the right to ....
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....en entered into between the assessee and the investor Biometrix. Clause 2(a) identifies the investment as a subscription to CCPS of 7.0 crores at an aggregate subscription of Rs. 700 crores Clause 3 lays down the condition precedent for completion which includes company's warranties, promoter's warranties, investors warranties besides other terms and conditions Clause 4 deals with completion and post completion actions Clause 5 deals with obligations of the companies and promoters in execution and completion Clause 6 deals with representations, warranties and undertaking Clause 7 deals with valuation reports. It obligates the assessee to provide 2 valuation reports i.e. one as per the guidelines under Foreign Exchange Management Act and the other as per the Alternative Pricing Guidelines Methodology. 8 31.08.2007 Put & Call Option Agreement between Ekansha Enterprise Private Limited ("Ekansha") & Biometrix executed Put & Call Option Agreement is annexed as Exhibit 8 Assessing Officer Vol4 In terms of the Letter of Intent issues by ICICI Bank Singapore obligating a put and call option Agreement, between Biometrix and anyone of the Group Entities o....
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....ore and ICICI Bank Limited - Bahrain Branch (as Original Lenders) and with ICICI Bank Limited - Singapore (as Agent) for a single currency term facility of USD 1.2 billion. ICICI Bank has diversified the risk in this portfolio by sharing the facility between its Singapore Branch (USD 600 million) and Bahrain Branch (USD 600 million). As per Section 2 of the Facility Agreement, The facility was made available to the borrower in three tranches of USD 275 million, USD 400 million and USD 525 million for the specific purpose of investing in the CCPS of RGTIL, RPTL and RUL in the ratio of approximately 33:8.5:7 respectively subject to certain conditions precedent mentioned there. As per Section 3 of the Facility Agreement, the borrower may utilise the facility by delivery to the agent of a duly completed utilization request not later than the specified time. Section 4 of the Facility Agreement deals with repayment, pre-payment and cancellation. Section 5 of the Facility Agreement deals with costs of utilization i.e. calculation of interest, payment of interest, fees etc. Section 6 of the Facility Agreement deals with additional payment obligations like tax gross up, tax indemnity, m....
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....alue. A Value means the lower of the value determined by the statutory auditor and the valuation expert. B Value means the value of the CCPS as per FEMA pricing guidelines. Total debt cover means the proportion borne by the CCPS value to the debt due. As per Clause 19.2, the borrower shall ensure that at all times total debt cover does not fall below 110%. 11 07.09.2007 Deed Of Assignment Of Contract Rights As Security For The Company's Liabilities To ICICI Bank Singapore & the other Finance Parties was executed Deed of Assignment of Contract Rights is annexed as Exhibit 11 Assessing Officer - Vol 3, Page 465 Biometrix and ICICI Bank, Singapore entered into an Assignment of Contract Rights Agreement whereby the right to exercise any present or future rights of the borrower under the Option Agreement and each Investment Agreement was assigned by Biometrix in favour of ICICI Bank, Singapore (refer Clause 3). 12 14.09.2007 Special Resolution passed u/s 81(1A) of the Companies Act, 1956 filed with the Registrar of Companies ("ROC") Form 23 is annexed as Exhibit 12 Company Records As per section 192 of the Companies Act, 1956, all special res....
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....icing guidelines vide RBI/2004-051207 A.P.(DIR series) circular No, 16 dated 0410.2004 issued by Reserve Bank of India ("RBI") in exercise of the powers under regulation 10A(b) and l0B of the Foreign Exchange Management (transfer or issue of security by a person resident outside India) Regulations, 2000 read with master circulars issued by RBI from time to time requires the issue price should not be less than the fair valuation of shares done by Chartered Accountant as per the guidelines issued by the erstwhile Controller of Capital Issues in case of unlisted shares. Clause 5 of the guideline issued by Controller of Capital Issues vide File no. S.1l(21) CCI(1I0/90) dated 13.07.1990 provides that the fair value in case of unlisted shares will be arrived at by the Chartered Accountant on the basis of Net Asset Value ("NAV') and Profit Earning Capital Value ("PECV"). The assessee obtained certificate in accordance with the above requirements. 20 15.10.2007 From filed with RBI for allotment of 7,00,00,000 CCPS to Biometrix on 11.10.2007 FC - GPR is annexed as Exhibit 20 Company Records Foreign Investment in India is governed by Section 6(3) of FEMA 1999 read....
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....uation Report as on December 31, 2007 to April 15, 2011 are annexed as Exhibit 24 Assessing Officer - Vol 4 As required by the Investment Agreement entered into between the Investee companies and Biometrix, the assessee, RUL and RGTIL delivered valuation reports prepared by Ernst & Young (valuation expert) and the Statutory Auditors. Under the free Discounted Cash Flow (DCF') method and the valuation report was prepared by S. R. Batliboi and Co (Chartered Accountant) as per FEMA pricing guidelines. The valuation report prepared by the Valuation Expert and Statutory Auditor was the A Value and valuation report prepared by SR. Batliboi was the B Value respectively as per Clause 19.1 of the Facility Agreement between Biometrix &ICICI Bank, Singapore. Based on the above valuation report, considering the higher of the A Value and B Value, Biometrix submitted the CCPS Valuation report as per Clause 18.3 of the Facility Agreement entered into with ICICI Bank, Singapore duly reported on by its Statutory Auditor. The CCPS valuation report was submitted disclosing the total debt cover as given below: S.No Date of CCP Valuation Report Valuation as of Debt Cover Perce....
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....sketchy. On this basis the inferences drawn by the AO were justified and warranted that the respondent did not fulfill the requirements of section 68 of the Act. 12. He also submitted the facts and circumstances of each case, which are to be weighed and examined as to whether a particular ratio decided in a particular case could be applied. As noted above, the initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68 of the Act. These are: (i) Identity of investors; (ii) their creditworthiness/investments and (iii) genuineness of the transaction. Only when these three ingredients are established prima facie, only then the Department is required to undertake further exercise as discussed above. In the instant case, no such documents are filed and no steps taken by the assessee which could establish the aforesaid three ingredients. The respondent has not even furnished basic requirements of i.e. cheque number, date, amount(s), details of drawee bank etc. for the money received from Biometrix. The bank account of Biometrix was also not produced. Hence the respondents claim regarding investment by the Biometrix remained unverifiable. T....
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....68 of the Act has been amended by Finance Act 2012, w.e.f. 01-04-2013 whereby the onus is on the assessee to prove source of source in the case of receipt of share subscription to the satisfaction of the AO. Reliance is placed on the decision of ITAT, Kolkata Bench in the case of Subhlakshmi Vanijya(P.) Ltd. v. CII, [2015] 60 taxmann.com 60 (Kol. Trib) whereby amendment to section 68 of the Act by insertion of proviso by Finance Act, 2012 was held to clarificatory in the case of closely held companies in which public are not substantially interested and applicable with retrospective effect. The Hon'ble Delhi High Court in the case of Commissioner Of Income Tax v Focus Exports Pvt. Ltd. on 16 September, 2014 ITA No. 218/2012 Date of Decision 16th September, 2014 has noted that: "Referring to the term identity reference was made to the observations of the Assessing Officer in the remand report that the word identity meant the "condition or fact of a person or a thing being that specified unique person or thing". PAN number or card is relevant but cannot be blindly and without considering surrounding circumstances in all cases be sufficient to treat as a discharge of the onus. Id....
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.... transaction relationship between the parties, statutory postulates etc. However, when there is surrounding evidence and material manifesting and revealing involvement of the assessee in the 'transaction" and that it was not entirely an arms length transaction, resort or reliance to the said doctrine may be counter-productive and contrary to equity and justice. The doctrine is not an eldritch or a camouflage to circulate ill gotten and unrecorded money. Without being oblivious to the constraints of the assessee, an objective and fair approach/determination is required. Thus, no assessee should be harassed and harried but any dishonest façade and smokescreens which masquerade as pretence should be exposed and not accepted." It has also been held:- "What we perceive and regard as correct position of law is that the court or tribunal should be convinced about the identity, creditworthiness and genuineness of the transaction. The onus to prove the three factum is on the assessee as the facts are within the assessee's knowledge. Mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a privat....
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....at this section would apply only for such transactions which involve a resident assessee. It would not apply to a non-resident and neither the assessee nor the non-resident is under any obligation to disclose the nature and source of the sums found to be credited in the books of the assessee. He referred to the clarification issued by the CBDT dated 26.11.2001 to M/s. Chaturvedi and Shah, Chartered Accountants and copy marked to the CCIT, Mumbai wherein it was clarified that it is not possible to take any action under the Act unless there is linkage between remittance and any source of income in India thus clarifying there is no obligation on the assessee to show or prove the nature and source of the amounts credited in the Books in the case of non-resident. In other words even the amended section introducing the proviso to section 68 of the Act applies only to a resident investor and not a non-resident investor to explain the nature and source of the sums so credited. Hence, he argued that the proceedings attempting to enquire into the nature and source of funding by Biometrix, a non-resident and a tax resident of Singapore is completely without jurisdiction and therefore liable t....
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.... regulatory bodies such as RBI and ROC by the assessee also go to show that the linkage has been duly reported to the Regulators. It was further argued that the Revenue without furnishing any basis or evidence and without dislodging or discrediting, the unassailable evidence available in its record as gathered meticulously by it from IRJAS, Singapore and ICICI Bank has without reasons and basis had unilaterally concluded that the investments of Biometrix in the assessee company is not a genuine transaction of investment and therefore an unexplained cash credit in terms of section 68 of the Act. 17. Ld. Senior Counsel further argued that Biometrix is not a Shell or Conduit for the reason that the Government of Republic of Singapore and the Government of Republic of India had entered into double taxation avoidance agreement ("DTAA") on 20.04.1981 which is getting extended periodically. This DTAA had undergone a few amendments through various protocols. One such protocol was signed on 29.06.2005. Article 3 of the protocol introduced few tests to conclude whether an entity had come into existence lawfully or created as a shell or a conduit company only to derive undue benefits a....
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....ber 2008 to October 2011 would show that the business carried out is neither negligible nor NIL and not discontinuous in nature. It is also evident that total annual expenditure on operation is more than S$ 200,000 during the period September 2008 to October 2011. Since the annual expenditure on operation is more than S$ 200000 the protocol allowed an inference that the entity is not deemed to be a shell or a conduit company. Considering the business operations and the annual expenditure on operations, it would go to prove that the affairs were not arranged with the primary purpose to take advantage of the benefits in Article 1 of the protocol. 18. Ld. Counsel further made argument without prejudice, that the protocol dated 29.06.2005 was introduced only for the purpose of determining taxability on capital gains. Article 1 of the protocol has deleted paragraph 4, 5 and 6 of Article 13 (Capital Gains) and the same had been replaced by substituted paragraph 4 which reads as under: 'Gains derived by a resident of a contracting state from the alienation of any property other than those mentioned in paragraphs 1,2 and 3 of this Article shall be taxable only in that state' Acc....
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.... explained that the total debt cover which is required to be 110% as per the Facility Agreement was at all times maintained by Biometrix. The total debt cover at different points in time prior and post the sale of RGTIL CCPS is tabulated below: S.No Date Event Debt Cover Percentage 1 31-12-2007 Valuation 421.23 2 29-12-2008 Sale of RGTIL CCPS 3 31-12-2008 Valuation 403.24 4 31-03-2009 Valuation 353.07 5 25-06-2009 Sale of RGTIL CCPS 6 24-12-2009 Sale of RGTIL CCPS 7 31-12-2009 Valuation 393.12 8 31-05-2010 Sale of RGTIL CCPS 9 30-06-2010 Valuation 413.17 Hence, it is clear from the above analysis, that the debt cover percentage was around400% both prior and post the sale of RGTIL COPS as against the required debt cover of 110% as per the Facility Agreement. The sale of RGTIL COPS based on valuation reports prepared as per FEMA Pricing Guidelines prescribed by RBI in no way was a no cause of concern for ICICI Bank as a lender of the loan. The Facility Agreement conceives the following valuation and the higher of the two valuations were considered for the purpose of debt cover purposes. A Value....
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....en the identity of the investor, the nature of the investment and the process steps carried out for investing the funds is self-evident and well known, the contemplated test of nature and source under section 68 of the Act gets fully satisfied. The transaction under question is a financial investment obtained as a loan and invested as CPPS. How does the size of the premises matter here? The transaction is not relating to a manufacturing plant requiring an elaborate factory and other arrangements nor provision of services using high capacity infrastructure tools. The only question that can come up for consideration is the genuineness of Biometrix. From the data provided by the AO in the form of financial statements, the assessee have already placed on record the threshold tests contemplated under Article 1 and 3 of the Protocol dated 29.06.2005 under the India Singapore DTAA have been completely satisfied and Biometrix is neither a shell or conduit in terms of the above test on the basis of application of data, as found in the balance sheet. Vide paragraphs 18 to 23 of the assessment order, the parties involved in the transaction had been identified, the nature and source of funds d....
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....) the loan account statements of ICICI, (ii) KYC documents of ICICI and (iii) OCBC bank statements showing the credit of the loan (all pertaining to Biometrix) as one of the reasons for not being satisfied about the genuineness of the transaction of the investment in the CCPS. There is such an overwhelming and concrete evidence for the loan of USD 1.7 billion and its investment of the loan in the CCPS of the assessee, non-receipt of these documents in no way diminishes the value of the evidence already available It is crystal clear from the foregoing discussions that it cannot be the case that only if these documents are available, it will prove the genuineness of the loan taken by Biometrix. These documents are only one more paper which will show that the loan has been provided by ICICI Bank to Biometrix. The non-receipt of these documents in no way can be construed as lack of evidence for availment of loan by Biometrix. The assumptions vide paragraph 43 to 46 that the transaction under question namely the investment of Biometrix in the assessee for issuance of CCPS would constitute international transaction stands negative by the decision of the Division Bench of the Hon'bl....
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....I Bank, India has advanced the loans. However, for the purpose of section 68 of the Act without prejudice to the fact that the findings are absolutely false, this finding itself vindicates the stand as to the nature and source for the purpose of section 68 of the Act. 24. Further, the test under section 68 of the Act is proving the nature and source and not whether something is a viable instrument or not. It is a figment of imagination to state that Indian entities have serviced the interest after conceding the fact vide paragraph 100 that the CCPS were sold and the collection proceeds were utilised for servicing the interest by Biometrix. This finding at paragraph 105(U) is grossly mischievous. The findings vide paragraph 105(iii) and (iv) as to whether the transaction is loan or investment, as long as the genuineness of the transaction is not under question, and when both loan and investment are recognised forms of transactions for the purpose of section 68 of the Act these findings can extend no assistance to the Revenue to presume or draw adverse inferences. As to whether a transaction is an investment or a loan is monitored by the regulator RBI under the provisions of FEMA. T....
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....e Loan Proposal, Letter of Intent, Investment Agreement, Put and Call Option Agreement, Facility Agreement, Assignment of Contract Rights Agreement, Security Trustee Agreement to show a seamless linkage demonstrating the fact that the Lender ICICI Bank has provided a loan of USD 1.20 Billion to borrower Biometrix, Singapore and this money has been invested into COPS with the Appellants and the other entities of the Reliance Mukesh Dhirubhai Amabani Group viz. Reliance Ports and Terminals Limited, Reliance Utilities Private Limited and Reliance Gas Transportation Infrastructure Limited. The Appellants also placed on record, the utilization request of Biometrix seeking availment of the loan, Disbursement letter issued by ICICI Bank, Singapore and the swift message of wire transfer issued by ICICI Bank, Singapore effecting the transfer or crediting the loan amount to the account of Biometrix and the corresponding Foreign Inward Remittance Certificates (FIRCs) issued by the bankers of the investee i.e. the Appellants banks confirming the amount loaned by ICICI Bank, Singapore into Biometrix has been invested with the Appellants against issuance of CCPS thus satisfying the sole intend....
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....cts. Article 1.2.6 defines Option Agreement, Article 1.2.7 defines RPTL Investment Agreement and Article 1.2.9 defines RUL Investment Agreement (Page 251 and Page 253 of the Written Submissions filed by RUL and RPTL respectively) as under: Option Agreement means the put and call option agreement dated 30.08.2007 made between Ekansha Enterprise Private Limited (1) and the borrower (2) respecting the grant of certain put and call options in respect of certain CCPS RPTL Investment Agreement means the subscription agreement dated 30.08.2007 between the Borrower (1) and RPTL (2) respecting the subscription by the borrower of CCPS to be issued by Reliance Ports and Terminals Limited. RUL Investment Agreement means the subscription Agreement dated 30.08.2007 between the Borrower (1) and RUL (2) respecting the subscription by the borrower of CCPS to be issued by Reliance Utilities Limited. Appellants also drew attention to Article 3 - Assignment (Page 252 and Page 254 of the written submissions filed by RUL and RPTL respectively) wherein it is very clear that the assignment relates to borrower's (Biometrix) present and future rights, title and interest in under and to and the....
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.... Intelligence from the Indian High Commission, Singapore wherein the First secretary (Economic), High Commission of India, Singapore vide his letter dated 10.08.2012 reported the transaction of investment of USD 1627.24 million ( 6530.35 crores) by Biometrix Marketing Pte. Ltd., (Biometrix) in four Mukesh Ambani group Indian companies. In said report, it was informed that Biometrix has paid-up capital of Singapore Dollars 1,10,000 only and said entity is located in a single room, which was closed most of the time. Further, it has also been reported that said premises was subsequently occupied by another concern viz., Rikvin. The shareholders of said company were Mumbai based Shri Atul Shantikumar Dayal and Shalin Narain Tandon, wherein the first has 100% holding in Biometrix. It was reported that the investment was the largest FDI from Singapore to India and the investment made by Biometrix was beyond its proportion as it has a meager equity/share capital of Singapore Dollar 1,10,000 and this raised suspicion over the huge investment made by Biometrix in Indian companies and it was considered necessary that the ultimate source need to be ascertained. On receipt of said intimati....
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....eholding of the borrower company in a form and manner acceptable to ICICI Bank and (iii) assignment of Put Option with respect of sale/transfer of CCPS/CODs. An understanding was also entered with ICICI Bank, agreeing that the outstanding Put Option obligation shall be backed by a Non Disposable Undertaking on equity shares of RIL such that the same gives a cover of at least 1.75 times of the outstanding Put Option obligation or face value of the outstanding CCPS/CODs orthe face value of the outstanding CCPS/000s, whichever is high.' Accordingly, on approval of the loan by the Credit Committee on 28.06.2007, Genemedix has set up a Special Purpose Vehicle viz. Biometrix as subsidiary in Singapore for making investment in various infrastructure projects, whereby it invested 6530.35 crores by acquiring CCPS of four Reliance Group companies. Considering the fact that complete information of the transaction was not provided by either the shareholders and/or Biometrix of the investee companies before the Investigation Wing, a reference was made to FT&TR Division, CBDT, New Delhi to obtain information from Singapore Tax Authorities. In response, Inland Revenue Authority ....
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....ed Section 68 of the Income Tax Act, 1961 and considered the entire amount of Rs. 700,00,00,000 as unexplained cash credit in the hands of the assessee company and accordingly added the same to the total income of the assessee company and initiated penalty proceedings ujs.271(1)(c) of the Income Tax Act, 1961 for furnishing inaccurate and/ or concealment of particulars of income. It is to further submit that the assessee company and the ICICI Bank have expressed their inability to produce the Bank Account statement of Biometrix to which the loan was disbursed i.e., Overseas Chinese Banking Corporation, Singapore. Even before your goodself, the assessee has placed several other documents but has failed to produce the said crucial document. It is understood that the IRAS has expressed its inability to furnish said document/information owing to certain limitations on it as the information pertained prior to 1998,however, it is surprising that the assessee, being a Reliance group company, and at such a point of time, where the AO made an addition of Rs. 850 crores suspecting the transaction to be non-genuine in absence of certain important documentary evidences and the approach of th....
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....approving a loan of USD 1.2 Billion. The extract of the minutes evidently identifies the list of investees, the running projects, valuation of the equities in the project, the nature of the loan to be sanctioned in form of CCPS/CCD and putting in place a Put & Call arrangement with a non-disposal undertaking and permitting the borrower to enter into suitable hedging arrangements. That on the same day a letter of intent was issued by ICICI Bank to Reliance Holding BV for USD 1.2 Billion term loan facility on the terms and conditions referred to supra. That the shareholders of the assessee passed a special resolution at an Extraordinary general meeting under section 81 of the Companies Act, 1956 on 20.08.2007. This special resolution was followed by a Board Resolution of the assessee on 20.08.2007 authorizing to issue 7.0 crores of CCPS to Biometrix. On 24.08.2007 board resolution was passed by Biometrix to invest in CCPS of the investee companies viz. Reliance Gas Transportation Infrastructure Limited ('RGTIL"), Reliance Ports and Terminals Limited ('RPTL"), Reliance Utilities Limited (RUL"), (Assessee) up to an aggregate of Rs. 5000 crores. The Investment Agreement wa....
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....ted as security trustee for finance parties viz. Biometrix the borrower and ICICI Bank, Singapore, Bahrain and Hong Kong the lenders. On 15.03.2008, the CCPS were converted into dematerialized form in NSDL. Between 15.01.2008 and 15.04.2011, periodical valuation reports (COP Valuation Report as per clause 18.3 of the Agreement) prepared by Ernst and Young (Valuation Expert) and the Statutory Auditors were submitted by Biometrix to ICICI Bank. 26. We find that AO in his remand report admitted that after carrying out investigation in the matter and on the basis of material gathered by the investigation wing of the Income Tax Department, it has been ascertained that the investment in RUL was made by Biometrix out of the loan taken from ICICI Bank, Singapore. The word 'ascertain' means "find out as a definite fact". There is also an admission that Biometrix has subsequently repaid the loan to ICICI Bank, Singapore. Thus the AO clearly concedes that the source of source of the investment made by Biometrix in the CCPS issued by the assessee is the money taken as loan by Biometrix from ICICI Bank, Singapore. Para 4(A)(v) remand report is again an admission and confession both on the sour....
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..... As regards para 4(B)(ii) of the remand report records the finding that both ICICI Bank and IRAS had expressed inability to furnish the bank account statements of Biometrix with OCBC Bank, Singapore. The Paragraph records the fact that Singapore IRAS expressed limitation in furnishing prior to 2006. To clarify this is due to the terms agreed between Republic of Singapore and not furnishing of one of the documents due to restriction in an international treaty cannot be a ground for adding the amount of investment by Biometrix as an unexplained credit. It is surprising as to how ICICI Bank can be expected to provide the bank statement of Biometrix with OCBC Bank, Singapore. Anyhow, when this is not possible for them, the assessee cannot be mandated to comply with the impossible. Further, what is sought for is evidence confirming the disbursal of loan to the said account. The swift messages evidencing the fact that amounts have been disbursed by ICICI Bank, Singapore to the bank account of Biometrix with OCBC Bank, Singapore and further that OCBC Bank has disbursed the said money to the bank account of HDFC Bank of the assessee is already on record. This is additional information ove....
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....cuments were part of the AO's files, copies of which were applied by the assessee and again furnished. The essence of the matter is that ICICI Bank, Singapore had sanctioned a loan of USD 1.7 Billong to Biometrix for it to invest inter-alia into the assessee in the form of CCPS. We find that the AO conceded that "Investigation conducted by the Investigation Wing", as follows: "So, as per the report of DDIT(lnv), Unit 11(1), Mumbai M/s Biometrix Marketing Pte. Ltd. (Biometrix) based in Singapore had made investments to the tune of Rs. 6530 crores in the form of Compulsorily Convertible Preference Shares (CCPS) in the following four Reliance Group Companies. (page 703 of the paper book) (emphasis supplied) S.No Name of the Company No. Of CCPS Amount of CCPS 1. MIs Reliance Ports & Terminals Ltd 8,50,00,000 850,00,00,000 2. MIs Reliance Utilities Ltd 7,00,00,000 700,00,00,000 3. M/s Reliance Gas Transportation Infrastructure Pvt Ltd. 31,28,44,149 31,28,44,14,900 4. MIs Relogistics Infrastructure Ltd 18,51,91,300 18,51,91,30,000 29. We also find that the DDIT(lnv)-Unit 11(1), Mumbai conducted enquiries in this case and vide his report dated 10.07.2012 he h....
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....book) (emphasis supplied) We find that Complete financial flow commencing from ICICI Bank finding its way ultimately to the assessee as CCPS investment and this is proved by the swift messages issued by ICICI Bank, Singapore to the bankers of Biometrix and the swift messages issued by the bankers of Biometrix to the bankers of the assessee are already forming part of the AO's record, copies of which were duly obtained. The assessee even during the hearing placed on record a financial chart to demonstrate the sequence commencing from the date of utilization request by Biometrix till its ultimate credit into the assessee's bank account. The very same chart is being reproduced as under:- The swift messages covering the entire transaction have been placed on record. It is made clear that all the swift messages are forming part of the this Appellate order& the details of which can found in pages 76 to 81.- 30. To sum up the whole issue in the present appeal by Revenue, is about the source, nature and genuineness of the transaction to determine whether the addition made by the AO under section 68 of the Act is sustainable. Admittedly, in this case, there is no dispute that the....
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....as liquidated in 2011 and therefore Biometrix is a shell entity. The ld. Counsel for the assessee argued that Biometrix was a tax resident of Singapore and to ascertain whether an entity is a shell/ conduit company in Singapore, the various tests laid down in India Singapore DTAA is the only relevant factor and that all the positive and negative tests laid down therein is fulfilled by Biometrix during every year of its existence. The Revenue has not contested this position. The CIT (A) has upheld that Biometrix is not a shell/ conduit company. We concur with the finding of the CIT(A) though we are of the considered view, that that this issue is not at all relevant for the purpose of section 68 of the Act in the facts and circumstances of the case, since it is abundantly clear from the materials on record that Biometrix was to be an SPV. Next, we will deal with the fifth and sixth ground of appeal by the Revenue. It concerns as to how Biometrix sold the CCPS at lower than the market value disclosed by them to ICICI Bank. The CIT(A) has dealt with these and observed that the debt-cover ratio at all times was more than that prescribed in the Facility Agreement based on the higher of t....
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....e. In our considered view, the bank statement of the assessee and the foreign inward remittance certificate issued by HDFC Bank, Mumbai showing the receipt of money from Biometrix is on record. What is not on record is the bank statement of Biometrix. However, the other materials on record viz., the swift messages and audited financial statements of Biometrix clearly prove that Biometrix borrowed from ICICI Bank and invested the same money in the CCPS issued by the assessee. We are convinced from the materials available on record that Biometrix borrowed from ICICI Bank and invested the same in the CCPS invested by the assessee. Regarding the first ground of appeal questioning the deletion of the addition made under section 68 of the Act, we hold that on review of the materials available on record, we are satisfied that the requirements of section 68 of the Act viz., nature, source and genuineness of the transaction including the identity and the creditworthiness of the investor, are fulfilled. Few questions of law raised by the Revenue are not dealt with for the reasons stated below: a) The initial onus is upon the assessee to establish three things to obviate the mischief o....
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.... to have proved that the creditor had the credibility to advance the loan. Thereafter the burden shifted to AO to the contrary. The failure on the part of the creditor to show that their sub-creditor had credit worthiness to advance the said loan amount to the assessee, could not, under the law be treated as income from undisclosed sources particularly, when there was neither direct or circumstantial evidence on record that the said loan amount actually belong to, or were owned by, the assessee. 34. Further, Hon'ble Supreme Court in the case Sreelekha Banerjee (supra) has also held that if the explanation given by the assessee shows that the receipt was not of an income nature, the department cannot act unreasonably and reject the explanation to hold that it was income. If, however, the explanation is unconvincing one which deserved to be rejected, the revenue can reject it and draw inference that the amount represents income either from sources already disclosed by assessee or from some undisclosed sources. But in the present case before us the assessee has directly established the nexus of loan taken by Biometrix from ICICI Bank, Singapore and this was invested in the CCPS issue....