TaxTMI 
TaxTMI 
2019 (10) TMI 995
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....p duty valuation in contravention of the provision of 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 t....
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....for the impugned AY on 22/03/2013 u/s 143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 by Ld. Addl. CIT- Range-7(3), Mumbai [AO] 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 14....
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....rvices Ltd [TS-643-HC-2016 (Del)], the Delhi High Court has ruled that it is not necessary for the AO to expressly record his satisfaction before invoking Rule 8D. However, 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 di....
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....perusal of details, it transpired that the assessee sold freehold land admeasuring 11 acres along with building to Sri Shiva Sai Constructions [SSSC] vide Sale Deed dated 18/07/2008 for aggregate consideration 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 Prades....
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....y the assessee and accordingly, the final deal was struck at Rs. 325 Lacs. The Sale Deed was executed on 18/07/2008 and at the time of registration, the Stamp Duty was adjudicated and paid by SSSC on market value of Rs. 667.23 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 ....
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....ant tenable. The first agreement with reference to the property has been entered into in year 2000. Admittedly, the use of land at that time was restricted to manufacturing activity. It is also admitted that appellant has not been able to obtain approval of 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 appel....
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....d to be advanced by assessee to one of its AE namely Saudi Ensas Company for Engineering Services WLL, Saudi Arabia [Saudi Ensas]. The said entity was a joint venture company and engaged in electromechanical business in the Kingdom of Saudi Arabia [KSA]. The assessee held 49% of its shareholding whereas 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 Allotmen....
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....of existing shareholding from Metrovol, a wholly owned subsidiary of Voltas to Voltas Netherlands BV, another wholly owned subsidiary of Voltas. Unfortunately, while the process was under review, main partner of Law firm Hassan Mahassni passed away which resulted into major setback to the entire process 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 adjust....
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....e various decisions quoted by the appellant with reference to characterization of share application money have also been examined. It is found that a delay in allotment of shares pursuant to introduction of share application money has been taken to be beyond the control of the appellant or AE and hence such amount has been treated 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 amo....
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....ppellant is 5.51%. He has also submitted that the appellant has availed credit facilities in the same financial zone i.e. in Bahrain, UAE and Qatar with average interest payment of 2.7% pa. He has also submitted that generally Libor is used as a benchmark rate in respect of such loans and the Libor during the period was 1.76% per annum. 7.11 The computation of arm'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 th....
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....ity has become wholly owned subsidiary of the assessee company during the month of January, 2009. The financial health of its AE was not good and the money was advanced with a view to infuse further capital in the AE and with a view to acquire controlling stake in its AE. The money has been utilized by its AE to pay-off business debts and to meet working capital requirements. Another undisputed 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 ....
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....tions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pricing legislation or on the facts of this case. We donot find so. We donot find any provision in law enabling such deeming fiction. What is before us 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 met....
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.... was no material on record to establish that the loans were in reality not loans but were quasi-capital and that there is also no reason why the loans were not contributed as capital if they were actually meant to be a capital contribution. It was observed that, "It is not the case that there was any technical problem that the loan could not have been contributed as capital originally, if it was meant to be a capital contribution". 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. Ho....
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.... adjustment as proposed by Ld. TPO. Ground No.2 of assessee's appeal stand allowed which makes Ground Nos. 3 & 4 of revenue's appeal infructuous and therefore, dismissed. 3.6 Finally, the assessee's appeal stand partly allowed whereas the revenue's appeal stand dismissed. Cross Appeals for AY 2010-11 4. Facts as well as issues are more or less pari-materia the same in this AY. The assessee has been assessed u/s 143(3) r.w.s.144C(3) on 30/03/2014 and saddled 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 as....
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....n the event of sale or transfer, whether outright or mortgage. The development agreement between the appellant and M/s Sheth Developers Private Limited dated 31st March, 2009 has also been examined. 5.6 The AO has acknowledged existence of special conditions associated with the land at the time of sale. He has reproduced the entire factual submission made by the appellant in this regard. While observing that the conditions to the allotment of land to the appellant do include 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 c....