AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (10) TMI 995
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....f Sec. 50C of the I.T. Act? 2. Whether on the facts and circumstances of the case the learned CIT(A) erred in directing the Assessing Officer to adopt the sales consideration at Rs. 330.00 lakhs as against the stamp duty valuation adopted by the Assessing Officer while computing capital gains? 3. Whether the Ld. CIT(A) is right in deciding the ALP rate for the advance to be 5.76% for A. Y. 2009-10 without considering the situs and the currency of the transaction, on the basis of unverified assumptions? 4. Whether the Ld. CIT(A) has not erred by not computing the ALP interest rate in a scientific approach using the appropriate commercial databases which give the ALP rate to be 7.61 % instead of the 5.76 % for AY 2009-10 which has been computed in a adhoc manner? The Ld. CIT(A)'s order is contrary to law and on facts and deserves to be set aside and A.O 's order may be restored. 1.3 The grounds raised by the assessee reads as under: - GROUND NO 1: DISALLOWANCE U/S 14A The learned Commissioner of Income-tax Officer (Appeals) [hereinafter referred to as the CIT(A)] and the Assessing Officer [hereinafter referred to as the AO] failed to appreciate that the Appellant....
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....] wherein the income of the assessee was determined at Rs. 361.21 Crores after certain additions / adjustments and disallowances as against returned income of Rs. 353.25 Crores filed by the assessee on 29/09/2009 which was revised at same figure on 29/03/2011 to claim credit for additional TDS. 3.2 As evident from grounds in cross-appeals, the following issues crop up from the orders of lower authorities: - No. Nature of Additions Amount (Rs.) A. Non-transfer Pricing Grounds 1. Disallowance u/s 14A Rs. 117.90 Lacs 2. Capital gains u/s. 50C of the Act Rs. 342.23 Lacs B. Transfer Pricing Grounds 3. TP adjustment on Share Application Money Rs. 160.09 Lacs The assessee is aggrieved on account of confirmation of disallowance u/s 14A and partial confirmation of Transfer Pricing adjustments whereas revenue is aggrieved by relief provided to the assessee by Ld. CIT(A) on account of Capital Gains and Transfer Pricing Adjustments. A. Non-Transfer Pricing Grounds 3.3.1 Disallowance u/s 14A During assessment proceedings, it transpired that the assessee earned exempt dividend income of Rs. 15.82 Crores including dividend income from Indian Companie....
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.... the assessee's plea for exclusion of investments in foreign companies whose dividend was taxable and companies under liquidation which were not going to give any income, found favor with Ld. first appellate authority, who directed for exclusion of aforesaid investments by observing as under: - The appellant has submitted that the investment amount taken by the AO includes investment in foreign companies whose dividend is taxable and companies under liquidation which are not going to give any income. It has claimed that these investments should be excluded while computing the average investment for the purpose of Rule 8D(2)(iii). The submission made by the appellant is found acceptable. The investment which generates taxable income and investment which is under write off should be excluded while adopting the average amount of investment which generates tax-exempt income. A similar view has been taken by CIT(A) in AY 2008-09 while deciding this very issue at para 2.6 of his order. The AO is directed to recompute the average investment value accordingly. Still aggrieved, the assessee is in further appeal before us. 3.3.3 Upon due consideration, we find that Ld. first appellate ....
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....sideration of Rs. 325 Lacs. This Land and Building formed part of fixed assets. Accordingly, the sales proceeds of Rs. 325 Lacs were apportioned in the following manner: - No. Head Amount (Rs.) 1. Land 280.75 Lacs 2. Building 43.91 Lacs 3. Electrical Fittings 0.34 Lacs Total Rs. 325 Lacs The said apportionment was done as per valuation done by independent Chartered Engineers & Govt. registered value namely M/s G.D. Rao & Associates vide valuation report dated 02/06/2007. The resultant gains of Rs. 271.38 Lacs on sale of land were offered to tax as Long-Term Capital Gains. However, Ld. AO noticing that stamp duty value of the property was more than agreement value, proceeded to apply the provisions of Section 50C to the stated transactions. 3.4.2 The assessee defended the same by submitting that the property under consideration was allotted to erstwhile Hyderabad Allwyn Ltd [HAL] in the year 1986 by the Government of Andhra Pradesh. HAL got amalgamated with the assessee with effect from 1.4.1993 and resultantly, the said property got vested with the assessee. As per the stipulations, the property could be used only for the purpose of manufacturing in....
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.... Lacs as determined by the Stamp Authorities. In the above background, the assessee submitted that based on the actual circumstances and various impediments including reservations/government permission involved and the fact that the initial agreement was entered in the year 2000, the proceeds received by the assessee from the sale of the aforesaid property must be considered and accepted. 3.4.3 However, disregarding the same and invoking the provisions of Sec. 50C, Ld. AO adopted Sale value to be Rs. 667.23 Lacs and worked out additional Long-Term Capital Gains of Rs. 342.23 Lacs and added the same to the income of the assessee. 3.4.4 The Ld. CIT(A), concurring with assessee's submission, deleted the additions by observing as under: - 5.3. The submission made by the appellant has been examined. It is seen that the appellant has disputed the Stamp Duty Valuation before the AO and has made an elaborate submission on this issue. It has brought out the fact that the original agreement was made in year 2000 and was inordinately delayed on account of lack of approvals from concerned authorities as well as initiation of litigation from the original bidders. The company has also submit....
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....competent authorities for altering land use even till the final transfer of, land. After a series of litigation, the land has been finally sold with the same encumbrances and an indemnification by the buyer with reference to liabilities of the appellant company. Further, the appellant has issued public tenders which have seen bids of Rs. 85 lakhs and Rs. 105 lakhs only. The Appellant Company in June 2007 got the property valued by M/s. G D Rao & Associate Engineers, Chartered Engineers and Government Registered Valuers who valued the land at Rs. 330 lakhs and structures thereon at Rs. 51.61 lakhs, thus making the total value of the property at Rs. 3 81.61 lakhs. It is clear that the appellant has been exploring various avenues of disposing off this property through contact with independent and unrelated parties but the price offered has been lower than the present price at which registration has been done. 5.7.The appellant has claimed that the valuation report has not taken into consideration any discount on the prevailing market rate on account of the fact that permission for alienation was to be obtained from the Andhra Pradesh Government. Some of the valuers had indicated tha....
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....hereas the balance 51% shareholding was held by the local partner in Saudi Arabia. During 2006-07, the local laws in KSA were relaxed and the foreign company was permitted 100% shareholding in local company. Since Saudi Ensas provided good business potential, it was decided that Saudi Ensas should continue to operate in KSA and would be provided with required financial assistance for rehabilitation. However, since the local partner was not keen to participate in the rehabilitation of the said entity, a decision was taken to purchase the entire shareholding of local partner. Consequently, Saudi Ensas became a wholly-owned subsidiary of the assessee company with effect from 28/01/2009. The assessee had Share Application Money of Rs. 11.81 Crores with the said entity as on 31/03/2009. 3.5.2 It was noted that although the money was advanced in the month of April, 2008 and the Share Allotment was not done till 31/03/2009, yet the assessee did not receive any interest on such share application money pending allotment. The Ld. TPO opined that under similar circumstances, independent parties would expect on interest if allotment is delayed beyond reasonable period of time. Reliance was pl....
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.... initiated by the assessee. Based on fresh search carried out to identify a good local law firm, the assessee had to go through entire process and documentation afresh with a new local lawyer. Finally, the regulatory / controlling authority namely Saudi Arabian General Investment Authority (SAGIA) granted approval / clearance for increase in Share Capital which ultimately became effective from 17/12/2015. In the said background, the assessee submitted that no notional interest could be attributed to Share Application money and the adjustment was not justified. To support the explanation qua delay in allotment of shares, various email correspondences were placed on record evidencing efforts on the part of various parties to ensure speedy execution of the task. Finally, it was submitted that shareholding activity was wrongly characterized as a loan amount and Transfer Pricing adjustment against the same was uncalled for. 3.5.5 Reliance was placed on the decision of Hon'ble Bombay High Court rendered in Vodafone India Services Pvt. Ltd. dated 10/10/2014 for the submissions that the transactions was on capital account and therefore, the Transfer Pricing provisions were not applicable....
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....ated as being on capital account during the intervening period. 7.6 However, in the present case, it is seen that the delay in such allotment has been inordinate. There is a delay of almost 6 years between infusion of money and allotment of shares. The AE required the funds immediately and hence, these funds were utilized immediately on their disbursal. They were not kept in any escrow account pending allotment. Hence while the AE benefited from the infusion immediately, the appellant has not been granted benefit of this amount as share capital eligible for a dividend. Nor has the amount been treated as loan and any interest has been paid to the appellant at arm's length. The sequence of events indicates that there was hardly any activity with reference to such allotment during the period 2011 to 2014. Hence, the entire period during which the amount remained unallotted cannot be treated as a genuine period during which the pendency can be attributed to regulatory requirements. 7.7 It is seen that the TPO himself has allowed a rebate of six months for which no interest has been computed by him. Although the claim of the appellant that the regulatory requirements in India ar....
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....39;s length interest rate by the TPO on the basis of average cost of borrowings is not found to be in accordance with various judicial decisions. The currency of all Middle East countries is tied to US$. Hence, a US$ based interest rate represents proper arm's length interest rate with respect to the loans in these jurisdictions. In such a scenario, it has been held by Delhi High Court in the case of Cotton Naturals(I) P. Ltd. v. DCIT [2013] 32 taxmann.com 219 (Del), that the bench mark rate has to be in the currency in which the loan is liable to be returned. It has also been judicially approved that the cost of funds to the lender is an immaterial consideration in benchmarking loans using CUP. What is important is determination of an interest rate between two independent parties and not cost of funds to the lender. To this extent, the action of the TPO is not found in accordance with the law and is liable to be quashed. 7.12 In a situation where the loans have been advanced in foreign currency, there has been substantive judicial approval of the use of Libor (or a benchmark rate in the currency of loan) as a benchmark rate along with reasonable spread in cases where loans h....
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....isputed fact is that ultimately the shares have been allotted to the assessee during December, 2015 after getting the desired regulatory approvals from concerned authority i.e. SAGIA. It is also undisputed fact that there was delay in the legal process which has been substantiated by the assessee, inter-alia, by furnishing email correspondences etc. The entirety of the facts and circumstances would demonstrate that the investment made by the assessee was for genuine business purpose and the stated transaction was not found to be a sham transaction, in any manner. Another fact is that whatever benefit would accrue to assessee's AE, they would indirectly accrue to the assessee since AE ultimately became wholly owned subsidiary of the assessee company. No doubt, there was inordinate delay in allotment of shares, nevertheless, the assessee was successful in explaining the delay in allotment of share and was able to demonstrate with evidences the circumstances which led to delay in allotment of shares. Therefore, re-characterization of this transaction as advance / loan by revenue authorities, in our considered opinion, was not correct approach and this transaction could not be equated ....
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.... is a transaction of capital subscription, its character as such is not in dispute and yet it has been treated as partly of the nature of interest free loan on the ground that there has been a delay in allotment of shares. On facts of this case also, there is no finding about what is the reasonable and permissible time period for allotment of shares, and even if one was to assume that there was an unreasonable delay in allotment of shares, the capital contribution could have, at best, been treated as an interest free loan for such a period of ' inordinate delay' and not the entire period between the date of making the payment and date of allotment of shares. Even if ALP determination was to be done in respect of such deemed interest free loan on allotment of shares under the CUP method, as has been claimed to have been done in this case, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant if, despite having made the payment of share application money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is not in pari materia with an interest free lo....
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....bution". The argument of loan being in the nature of quasi capital was thus rejected on facts. It was not even a case of quasi capital, and, therefore, this case has no bearing on the question before us i.e. whether ALP adjustments can be made in respect of payments towards share application money in a situation in which the shares have been issued several months after the payments for share application money have been made. Similarly, in VVF's case (supra), the transaction was admittedly in the nature of interest free loan between AEs and the commercial expediency in advancing interest free loans was on account of ownership and control of subsidiary being in the hands of the assessee, which was recognized as a significant factor for commercial expediency. However, as we have seen in the earlier discussions, such commercial expediency of granting interest free loans is wholly irrelevant because it is the impact of this interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital contribution was deemed to be partly an interest free loan (i.e. for the perio....
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....ddled with identical additions / adjustments. Therefore, our observation, conclusion as well as adjudication as for AY 2009-10 shall mutatis-mutandis apply to this year also. The issue of disallowance u/s 14A, which is subject matter of assessee's appeal, stand restored to Ld. AO on similar lines. Ground-2 challenges TP adjustment on account of Share Application money. This ground stands allowed. The assessee's appeal stand partly allowed. Ground Nos. 3 & 4 of revenue's appeal, being connected to Ground No.2 of assessee's appeal, stand dismissed. 5.1 In Ground No. 1, the revenue is agitating the relief granted by first appellate authority u/s 50C of the Act with respect to sale of Nala Land at Thane, Maharashtra. During assessment proceedings, it transpired that the assessee on 01/04/2009, entered into development agreement with respect to 3950 Sq. Mtr. Sanad land bearing Survey No. 526 of Village Pachapakhadi, Taluka and District at Thane, Maharashtra with M/s Sheth Developers Ltd. for consideration of Rs. 255.10 Lacs which was subsequently reduced to Rs. 238.17 Lacs due to delineation of land of 262.12 Sq. Mtrs. The said land was stated to be purchased in the year 1961 for Rs. 7....
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....ude a condition that 50% of the unearned revenue will go to the government, the AO has merely held that the provisions of section 50C do not provide allowances for the circumstances under which the property was transacted. This does not appear to be a factually correct statement. In case of a dispute between the sale consideration and the value determined for stamp duty purposes, the AO is mandated to refer the transaction to Valuation Officer who is competent to go into such special circumstances and arrive at a fair value. The AO has not made such reference. He has also not rejected the contention of the appellant with reference to the valuation report produced by the appellant. 5.7 I find the contention of the appellant tenable. The developer, as per the conditions of the development agreement, has to bear the burden of payment required to be made to the Collector towards unearned revenue from the land based on ready reckoner rates. If it is presumed that the sale price has to be the consideration arrived at by adopting ready reckoner rates, then such consideration comes to Rs. 4,61,14,372/-. The share which is liable to go to the Collector, Thane would be Rs. 2,30,57,186/- (b....