TaxTMI 
TaxTMI 
2017 (11) TMI 1443
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....ces Mauritius Ltd. ("TCGM "). The ownership structure of the TCG group is as follows: Figure 1 : Relevant Ownership Structure of the Group 3. The Assessee entered into the following transactions with its Associated Enterprises ("AEs") during the relevant years as mentioned below : Table 2 : Summary of TCGLS's International Transactions for FY 2009-10 Sl.No. Transaction Relevant Associated Enterprise Quantity Amount of Transaction (Amount in INR) 1. Shares Purchase Rishi Pharmaceuticals Inc No.of shares 4,24,173 5,38,12,000 Xtec International (Mauritiius)Ltd No.of shares 1,000 20,64,03,200 2. Shares Subscription Lab Vantage Solutions Inc. No.of shares 757 26,76,83,395 3. Buy Back of shares by Xtec International (Mauritius )Ltd. Xtec International (Mauritius)Ltd. No.of shares 32,13,000 15,43,45,300 4. Technical Rishi NA* 1,11,41,188 support service received Pharmaceuticals Inc 5. Guarantee Fees Received Lab Vantage Solutions Inc. NA* 35,98,000 6. Reimbursement of expense Lab Vantage Solu....
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....to as "Board") may prescribe. 5. The legislative intent in introducing the new transfer pricing legislation, as available in the Memorandum explaining the provisions in the Finance Bill, 2001, which later on was enacted as the Finance Act, 2001, was as follows. "The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational group by manipulating the prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax revenues. With a view to provide a statutory framework which can lead to computation or reasonable fair and equitable profits and tax in India, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act, " ... " [248 ITR st 181]. 6. In this appeal we are concerned with two of the International Transactions carried out by the Assessee during the previous year viz., (i) the transaction of pu....
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.... the particular facts of the present case. It is also being pointed out, based on what has been demonstrated above, that the DCF Method, in the facts of this particular case, would require making assumptions, some of them pertaining to the market conditions in the US, which would be unrealistic on the basis of facts available on record. 13. This means that another method of valuation will have to be chosen. It is seen that the assessee itself had utilized the 'Net Asset Value' Method for valuation of shares in connection with an international transaction undertaken in AY 2008-09. This method is also recognized world-over and is used frequently to value the shares of unlisted and unquoted companies. Reference in this regard can be made to Rule 11UA in the I.T. Rules, 1962. The IT (Fifteenth Amendment) Rules, 2012 dated 29.11.2012 has notified both "discounted cash flow method" and "book value method" to ascertain the value of shares. Accordingly under the Indian legislation, DCF and NAV methods have been given judicial recognition. As the DCF method also constructs a 'CUP', the NAV method similarly can be used to arrive at a constructed CUP. As it has been shown abo....
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....urposes. The company had therefore made excess investment and paid much higher shares of the US Company during the year. The statement showing the excess price paid for acquisition of shares is as follows: No.of shares Price as assessee per Price as computed above Excess paid price 1000 $4240 @914 33,26,000 457 $4240 $914 15,19,982 300.365 $12720 $914 35,46,110 TOTAL 83,92,092 16. The above excess price paid by the assessee is in substance a "loan" advanced to its AEs in the garb of equity/investment as it is on capital account. Instead of advancing loan on which interest would have been assessed to tax in Indiaat the maximum marginal rate, the company chose to invest in equity capital by paying higher price for the shares directly as well as through the Mauritius route. Had the assessee acquired the shares at the actual fair value it could not have remitted necessary funds required by its AEs cost-free. However by paying higher price for shares the assessee was effectively able to remit funds to its foreign AEs without havin....
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....itius) Limited USD 33,26,000 FY 2009-10 Lab Vantage Solutions Inc., USA USD 50,66,092 FY 2009-10 Rishi Pharmaceuitcals Inc., USA USD 91,13,758 FY 2009-10 9. The AO ultimately concluded that the Assessee ought to have charged interest of Rs. 11,78,64,440/- on the above transactions and since the Assessee did not charge any interest a sum of Rs. 11,78,64,440/- was to be added to the total income of the Assessee on account of adjustment to ALP of international transaction of providing loan to it's AE. The following were the conclusions of the TPO in this regard. "52. Based on the above, the arm's length interest rate of the loan advanced by the assessee to its AEs is computed as follows : AE to whom loan advanced Base Risk free fee rate Credit spread Rate of Interest XIML 10% 10% 20% LVSI 10% 9% 19% RPI 10% 10% 20% 53. Applying the aforesaid interest rate, the interest income which the assessee should have earned on its excess investment is as follows :- Loan considered in the hands of XIML Period beginning from Excess Investment (held to be loan) Interest rate No.of d....
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....-resident company, Vodafone Tele-Services (India) Holdings Limited (the holding company). The Petitioner issued 2,89,224 equity shares of the face value of Rs. 10/- each on a premium of Rs. 8,509/- per share to its holding company. This resulted in the Petitioner receiving a total consideration of Rs. 246.38 crores from its holding company on issue of shares between August and November 2008. The fair market value of the issue of equity shares at Rs. 8,519/- per share was determined by the Petitioner in accordance with the methodology prescribed by the Government of India under the Capital Issues (Control) Act, 1947. The international transaction was reported in the prescribed Form 3CEB. The AO made a reference for determination of ALP of the international transaction to the TPO. Such reference to the TPO was challenged by the Assessee before the Hon'ble Bombay High Court. It was contended that the transaction of issue of shares cannot give raise to income, as income will not in its normal meaning include capital receipts unless it is so specified. It was submitted that u/s.92(1) of the Act any income arising out of international transaction has to be determined having regard to Arm....
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....s bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, in the absence of express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. The Assessee placed reliance on the decision of the Hon'ble Bombay High Court in the case of Shell India Markets Pvt. Ltd Vs ACIT [2014] 51 taxmann.com 519 (Bombay)] wherein the decision rendered in the case of Vodofone (supra) was followed. The following were the relevant observations of the Court: "12. As held in Vodafone IV, the jurisdiction to apply Chapter X of the Act would occasion only when income arises out of International Transaction and such income is chargeable to tax under the Act. The issues raised in the present petition are identical to the issues which arose for consideration before this Court in Vodafone IV. Therefore, following the aforesaid decision we set aside the order dated 30 January 2013 of the TPO to the extent it holds that ....
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....ents disguised as equity Subscription which is overvalued. Also, the citation of judgments in Vodafone and Shell are also distinguishable on the facts and circumstances of the case. The issue in those matters was in respect of shares issued to the subsidiary whereas the situation is not the same for the case at hand. In my considered view of the matter, the basic assets creating value for the shares in the judgments referred were situated in India and accordingly the facts were different. The Appellant has contended that the need was to invest certain funds, and if valuation was the issue, more shares would have been subscribed. Such an argument and contention, in my view is well beyond the scope of the issues involved. Basically, the investment in certain number of shares is a business decision and subject to local laws the Ld. TPO would have no locus standi in the matter. 2. Thus, the approach of the Ld. TPO to consider the excess payment on account of share acquisition as loan is upheld and ground is dismissed." 13. The CIT(A) thereafter proceeded to determine the correctness of the quantum of addition made by the AO and finally gave partial relief to the Assessee by....
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....as taken the view that amounts received on issue of share capital including premium is on capital account. Share premium have been made taxable by a legal fiction under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, in the absence of express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. The said view has been reiterated by the Bombay High Court in the case of Shell India Markets Ltd. (supra). The ITAT Mumbai in the case of Topsgroup Electronic Systems (supra) has taken the view that the ratio laid down by the Hon'ble Bombay High Court in the case of Vodafone (supra) will apply to a case where an Indian entity invests in shares of an AE also. The Tribunal held that what is made applicable for inbound share investment (investments in shares of Indian subsidiary by t....
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....ransaction between AEs. It does not warrant determination or re-computation of a consideration received / given on capital account. Thus, going by the above, the transaction of investment in shares being payment on capital account falls outside the purview. 17. The learned DR submitted that the transaction of investment in shares of AE cannot be said to be not an international transaction. He further placed reliance on the decision of the Delhi ITAT in the case of First Blue Home Finance Ltd. Vs. DCIT (2015) 59 Taxmann.com 431 (Delhi-Trib.). In the aforesaid decision the ratio laid down is that in a case of issue of shares by Indian resident company to its AE Nonresident, there is no provision in Chapter X mandating addition on account of less share premium received also consequential interest on resultant deemed loan. The decision cited by the learned DR in fact supports the case of the Assessee. We however agree with the learned DR that the transaction of investment in shares of AE per se is an international transaction but the condition that income does not arise out of a capital account is the basis on which Courts have held that . To tHis submission is correct but the princ....
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....is of US industrial Bond yield for the relevant period. 21. The TPO rejected the claim of the Assessee that providing Guarantee to a subsidiary AE was in the nature of a shareholder activity and therefore such transactions are outside the purview of Sec.92 of the Act. The Ld. TPO determined the guarantee fee rate @ 2.34%. The TPO assumed the credit rating of the Assessee to be around B-1 CCC+ on S&P scale, as against the claim of the Assessee that its credit rating was BBB+ assigned by CRISIL. (Para 71, page 67 of the TPO Order). The TPO arrived at a credit rating of CC for LVSI, (Para 44, page 37 of his Order. The Ld. TPO proceeded on the basis that LVSI's credit rating was CC and therefore they could get loan at Libor + 900 basis points. (page 68 of the TPO order). Since LVSI had borrowed loan from Axis Bank @ Libor +5.33%, the TPO determined cost of funds from Axis Bank @ LIBOR plus 1 % and arrived at a credit spread of 433 bps. Thereby, the TPO determined the benefit derived by LVSI by obtaining guarantee from its parent company was 467 bps (900-433 bps). ( Para 75 on page 68 of the TPO order). Based on above and applying the 50% split, the TPO determined an arm's length....
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....ara-6 Pg no.10/11 2. Thomas Cook(India) Limited Vs ACIT[2016]69 taxmann.com 443 (Mumbai - Trib) "6.....Considering the entirety of facts and circumstances of the case and on the basis of the material available no record, we, therefore proceed to uphold the rate of 0.50% for the purpose of determining the arm's length rate of the guarantee commission fee." Para-6 Pg no.5 3. Godrej Consumer Products Ltd. Vs ACIT [2016] 69 taxmann. Com 436 "46....Thus, on consideration of overall facts and circumstances in the light of judicial pronouncements referred to above, we are of the Para - 46 Pg no.- 16 (Mumbai-Tri.) considered opinion that the arm's length price of the corporate guarantee should be fixed at 0.5% 4. Everest Kanto Cylinder Ltd. Vs ACIT [ 2015] 56 taxmann.com 361 (Mumbai - Trin.) "15 Following the earlier order of this Tribunal and also considering the internal CUP being the guarantee commission paid by the assessee to the ICICI Bank for obtaining guarantee, we hold that the arm's length guarantee commission in respect of all three transactions of guarantee to its AE at Dubai, China and USA shall be taken at 0.5%. Accor....
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.... " 1. That on the fact and in the circumstances of the case CIT(A) erred in allowing expenses incurred during F.Y.-2007-08 & 2008-09. 2. That on the fact and in the circumstances of the case CIT(A) erred in allowing expenses made on account of preparation of offer document for IPO, which clearly was capital in nature." 29. The Assesee incurred certain expenditure in relation to business of restructuring. This expenditure was incurred in the financial year 2007-08 and 2008-09 relevant to A.Y.2008-09 and 2009-10. During the financial year 2009-10 the proposed business restructuring exercise was abandoned. The assessee therefore wrote off the said expenditure of Rs. 2.69 crores as 'Exceptional item' in its profit and loss account. The question before the AO was as to whether the aforesaid expenditure can be allowed as a deduction. The AO held that the expenses were capital in nature and cannot be allowed as a deduction. 30. On appeal by the assessee, the CIT(A) directed the AO to allow the deduction claimed by the assessee. The CIT(A) held that the expenses were in connection with issue of share capital, mostly professional fees for preparation and issuance of d....
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....ground no.1 and 2 before the Tribunal. 32. The ld. DR relied on the order of AO and the ld. Counsel for the assessee relied on the order of CIT(A). We are of the view that the expenditure in question was rightly directed to be allowed by CIT(A). It is not disputed that the expenditure was incurred as part of the restructuring exercise. The assessee wanted to raise moneys from the public through the issue of shares. The IPO was postponed due to poor market conditions. The IPO proposed to meet the capital cost of business restructuring. Because of the poor market conditions the IPO was abandoned so also the proposal for restructuring the business of the assessee was also abandoned. The expenditure incurred in this regard were in the nature of advertising expenses, legal expenses, crediting analysis research fees, payment to Company Secretaries and other professional organizations in connection with the proposed IPO. The restructuring exercise was abandoned and the expenses incurred were written off in the books of account during the previous year relevant to A.Y.2010-11. In the light of the decision of the Hon'ble Calcutta High Court in the case of Binani Cement Ltd.(supra) as wel....