AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (11) TMI 1443
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....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 Solutions Inc. NA* 1,17,79,814 7. Shares Subscription by TCG Lifesciences Mauritius Limited....
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....laining 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 purchase of shares of Rishi Parmaceuticals Inc.USA (hereinafter referred to as RPI) and LVSI by the Assessee; (ii) Transaction of providing guarantee by the ....
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....ular 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 above that based on the limitation posed by the paucity of information on the US markets and market studies, and the dangers in making projects based on incorrect assumptions....
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....es 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 having to advance loan funds on which interest would have been assessed to tax India. 17. Based on the above, it is held that the excess payments of USD 83,92,o92 by way of share purchase/subscription to its AEs was in substance a loan advanced to AE on which interest ought to have been charged by the assessee." Interna....
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..../- 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 days Interest Amount 16/07/2009 16,63,000 20% 257 2,34,186 30/-7/2009 16,663,000 20% 242 2,20,518 TOTAL $4,50,704 Average 1 USD to INR 45.004 Arm's Length Price 2,04,63,498 Loan considered in the hands of LVSI Period beginning from Excess Investment (held to be loan) Interest rate No.of days Interest Amount 04/08/2009 15,19,982 19....
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....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's Length Price. When there is no income, Sec.92(1) of the Act is not attracted at all. It was contended that the AO before making a reference to the TPO has to give his finding as to whether there was income and why it is "necessary or expedient" to make a reference to the TPO. On such objection the Hon'ble Bombay High Court held that it would be for the Assessing Officer to first determine the issue of any income arising and/or being affected or potentially arising on determination of ALP before referring the tr....
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....f 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 ALP of issue of equity shares is RS.183.44 per share as against RS.10 per share as declared by the petitioner and consequent deemed interest brought to tax on the amount not received when bench marked to the ALP. " 11. Further reliance was placed on the decision of the ITAT Mumbai in the case of Topsgroup Electronic Systems [2016] 67 taxmann.com 310 (Mumbai - Trib.)] [ITA No. 2115/Mum /2015] wherein it was held that the ruling in the case of Vodofone (supra) would equally apply to shares subscription by an Indian entity....
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....nvest 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 directing the AO to adopt a lesser interest rate on the international transaction of deemed loan by the Assessee to its AE. The following were the relevant observations of the CIT(A): "1. I have carefully considered the above recorded submissions made by the appellant on a without prejudice basis with regard to the interest rate to be applied on the deemed loan. It is worthwhile to mention that in relation to the DRP proceedings for AY 2012-13 in assessee's own case, the Hon'ble panel has directed to compute interest at the rate of Libor plus 3....
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....n 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 the holding company (Non-resident) would be equally applicable to outbound share investments also (Investment by a resident Indian company in the shares of the Non-resident AE). The parameters to be applied cannot be different for outbound investment and inbound investments. The transaction of purchase of shares being on capital account has now been settled with the Press note released by the Government of India dated 28.01.2015. The Union Cabinet accepted the order of Bombay High Court in the case of Vodafone India Services Private Limited (VISPL) dated 10.10.2014.....
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....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 principle laid down is that the transaction of investment in shares being payment on capital account falls outside the purview of Chapter X of the Act. In that view of the matter, we hold that the determination of ALP in the present case cannot be sustained as the transaction in question is on capital account and determination of ALP in respect of such transactions is outside the purview of Chapter X of the Act. Consequently, the addition made by the AO in this regard is directed to be deleted. Since the preliminary ground on the issue of jurisdiction is held in favour of the Assessee, the other....
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....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 guarantee rate of 2.34%. ( Para 74 to 77 on page 68 to 69 of the TPO order). 22. The CIT(A) rejected the contention of the Assessee that provision of Guarantee was a shareholder activity and held that LVSI was benefitted in terms of interest saved on loan borrowed from Axis Bank and it is fair to assume a rating of B- for LVSI. Further, placing reliance on the DRP directions of AY 2012-13 in the Assessee's own case, the Ld. C!T(A) re-determined the guarantee fee at 2.19%. [ para 16.1/ 16.2 on page 63 and 64 of the CIT(A) order] 23. Before the Tribunal, the first and foremost submission of th....
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....i-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%. Accordingly, the Assessing Officer is directed to compute the adjustment on account of guarantee commission by taking the arm's length guarantee commission at 0.5%. Para-15 Pg no.- 7 5. Aditya Birla Minacs Worldwide Ltd.vs. DCIT [2015] 56 taxmann. Com 317 (Mumbai - Trib.) "2.6......Accordingly, following the earlier decisions of this Tribunal, we direct the AO/TPO to adopt 0.5% as arm's length guarantee commission charges in respect of the guarantee provided by the assessee for obtaining the loan by the AE." Para 26 Pag no.-6 6. Mylan Laboratories Ltd. Vs ACIT [2015] 63 taxmann.com 179 (Hyderabad - Trib.) "7.2.....Respectfully following the s....
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.... 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 draft prospectus. He was of the view that since the proposed IPO was shelved, it cannot be said that the expenditure in question was capital expenditure. He therefore held that expenses incurred in connection with respect to an abandoned project was revenue expenditure and in coming to the above conclusion, he placed reliance on the decision of the Hon'ble Calcutta High Court in the case of Binani Cements (infra). The following were the relevant observations of CIT(A) : "Upon going through the assessment order as well as the submissions of the appellant, it emerges that the moot issue in the present case is whether expenses incurred by the Company towards professional fees for preparation and issuance of the Dr....
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.... 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 well as Graphite India ltd.(supra), we are of the view that the expenditure incurred on the abandoned project development should be treated as a revenue expenditure and allowed as a deduction. The CIT(A) has taken note of the aforesaid decisions and has rightly deleted the addition made by the AO. Order of CIT(A) is therefore upheld and grounds No.1 and 2 raised by the revenue are dismissed. 33. Grounds No.3 and 4 raised by the revenue read as follows :- "3. That the Ld . CIT(A) has erred in law and on the facts and circumstances of the case in restricting the interest in loan advanced to AE @ LlBOR+350 bps arbitrarily and not supported by any data analysis. 4. That the Ld. CIT(A) has erred in law and on the facts and circumstances of the ca....