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2017 (11) TMI 1901
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....Inc., USA (LSVI), Ztec International (Mauritius Ltd. (Xtec) and Rishi Pharmaceuticals Inc.(RPI) in the previous year relevant to AY 2010-11. The case of the Revenue is that purchase of shares by the Assessee of its AEs was an international transaction and income from such international transaction has to be computed having regard to Arm's Length Price (ALP) as laid down in Sec.92 of the Act. According to the revenue the value at which the shares were purchased by the Assessee was enormous and therefore the price paid to the extent it was in excess of the value of the shares determined on the basis of Net Asset Value (NAV) Method had to be regarded as loan by the Assessee to its AE. On such deemed loan the Assessee ought to have charged interest which the Assessee did not charge. The revenue determined notional interest on such deemed loan and added the same to the total income of the Assessee as an Adjustment to the ALP u/s.92 of the Act. The relevant grounds of Appeal of the Assessee in ITA No.121/Kol/2016 are Grounds No.1 to 6 and in ITA No.647/Kol/2017 are Grounds 1, 1.1 to 1.12. 3. It is necessary to narrate about assessment for AY 2010-11 in Assessee's case because it has r....
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....of the transaction or class of transaction or class of associated person or functions performed by such persons or such other relevant factors as the Central Hoard of Direct Taxes (hereinafter referred to as "Board") may prescribe. 6. During the previous year relevant to AY 2010-11, the Assessee purchased 4,24,173 shares of RPI for a consideration of Rs. 5,38,12,000/-. The Assessee also purchased 1000 shares of LVSI from Xtec International (Mauritius) Ltd. for a consideration of Rs. 20,64,03,200/-. Besides the above, the Assessee also purchased 456.921 shares of LSVI for a consideration of Rs. 2,02,290 per share on 4.8.2009 and 300.365 shares at Rs. 5,83,466 per share on 7.1.2010. In all the Assessee paid a consideration of Rs. 26,76,83,395 for purchase of shares of 757 shares (456.921 + 300.365 = 757 ) of LSVI. The Assessee relied on a valuation report by an independent valuer to support the value at which the aforesaid transactions were carried out by the Assessee. The valuers in their report had adopted Discounted Cash Flow Method (DCFM) for arriving at the valuation of the shares that were purchased by the Assessee. 7. The AO referred to the Transfer Pricing Officer (TPO)....
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....ssee to its AE: Name of AE to whom payments made Amount of Loan Year in which advanced Xtec International (Mauritius) Limited USD 33,26,000 FY 2009-10 Lab Vantage Solutions Inc., USA USD 50,66,092 FY 2009-10 Rishi Pharmaceuticals Inc., USA USD 91,13,758 FY 2009-10 10. 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 a....
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....the AO for both the AY 2011-12 and 2012-13, before the Disputes Resolution Panel (DRP). Before the DRP, apart from the challenge to the merits of the addition made by the TPO, the Assessee raised an objection that since the subscription/purchase of shares being on capital account and therefore does not give raise to any "income" and hence the provisions of Sec.92 of the Act would not be applicable. The DRP did not agree with the submissions of the Assessee and it held that such transaction was also an international transaction and ALP of such transaction has to be computed in accordance with the provisions of Sec.92 of the Act. In AY 2011-12, the DRP upheld the quantum of addition and the rate of interest determined by the TPO. In AY 201213, the DRP gave partial relief to the Assessee by directing the TPO to adopt a lessor interest rate on the international transaction of deemed loan by the Assessee to its AE by directing the TPO to adopt rate of interest at LIBOR rate plus 350 bps. The following chart would show the interest rate determined by the TPO and the rate as directed by the DRP in AY 2010-11 to 2012-13: 13. The directions of the DRP were incorporated in the fair order ....
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....d the ITAT in ITA No.1053/Kol/2017 and ITA No.966/Kol/2017 for AY 2010-11 dated 22.9.2017 held that the transaction of purchase of shares of AE cannot be regarded as international transaction and cannot be subject matter of investigation u/s.92 of the Act. The following were the relevant observations of the Tribunal. "14....... We may mention here that if the preliminary objection that the transaction of investment in shares is on capital account and is therefore outside the purview of the provisions of Sec.92 of the Act is accepted then there would be no need to adjudicate Gr.No.3 raised by the Revenue and that ground would become infructuous. 15. We have heard the rival submissions. The preliminary issue that arises for our consideration is whether international transaction of investment in equity shares of an AE would not fall within the purview of Sec.92 of the Act, because no income arises out of such international transactions? As we have already seen the Hon'ble Bombay High Court in the case of Shell India Markets Ltd. (supra) and Vodafone (supra) has taken the view that amounts received on issue of share capital including premium is on capital account. Sha....
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....s of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2 (24) of the Act. The amount received on issue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2)(viib) of the Act. Thus such capital account cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in impugned order e) ..........The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when the income arises in case of an International transaction between AEs. It does not warrant re- computation of a consideration received/given on capital account." It is clear from a reading of para 'e' of the Cabinet Press release that, computation of ALP will arise income arises from an International transaction between AEs. It does not warrant determination or re-computation of a consider....
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....r consideration and are dismissed as infructuous. 18. The next common issue that arises for consideration in the appeal by the Assessee is as to whether transaction of providing guarantee by the Assessee in respect of a loan taken by its AE can be said to be an international transaction and if yes whether the determination of ALP in respect of the said international transaction as determined by the DRP is sustainable. 19. In the case of Guarantee extended by unrelated parties, they would charge a commission. The commission charged by one AE for providing Guarantee for a loan granted to another AE should be at Arm's Length, i.e., similar quantum as unrelated party would charge for providing Guarantee. The quantum of commission would depend on several factors like the credit rating of the person availing the loan, the person providing the Guarantee etc. This issue is also an issue flowing from the assessment made on same guarantee provided by the Assessee to its AE in AY 2010-11 and therefore we will first set out the facts as it transpired in AY 2010-11. 20. During the financial year relevant to AY 2010-11, LVSI borrowed funds from Axis Bank for the purpose of growing its b....
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....e fee from AE. Based on the earlier Assessment year i.e., AY 2010-11, the learned TPO in AY 2011-12 and 2012-13 determined Arm's Length guarantee fee at 2.34%. The order of the TPO was incorporated by the AO in the draft order of assessment. Against such draft order of assessment, the Assessee preferred objections before the DRP. In AY 2012-13, the DRP held that LVSI benefitted in terms of interest saved on loan borrowed from Axis Bank and it was fair to assume a rate of B- for LSVI. Further, based on a 50% split, redetermined the guarantee fee at 2.19%. In AY 2011-12, the addition of 2.34% made by the TPO was upheld by the DRP. 24. At the time of hearing it was agreed by the parties that the decision of the Tribunal in AY 2010-11 holding that the guarantee fee charged by the Assessee is at ALP would apply to the present AY 2011-12 and 2012-13 also. In AY 2010-11 identical issue was considered by this Tribunal and the Tribunal in ITA No.1053/Kol/2017 and ITA No.966/Kol/2017 for AY 201011 dated 22.9.2017 held as follows: "24. On the quantum of Guarantee Commission that has to be considered as at Arm's length, the learned counsel for the Assessee placed reliance on variou....
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....ntee 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 earlie r 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 same, we direct the TPO to adopt 0.53% as the guarantee commission rate instead of 2% adopted by him" Para - 7.2 Pg no. - 8 M/s. Mahindra Intertrade Ltd. Vs DCIT [ITA No.269/Mum/2014] "5.........Considering the decision of coordinate bench on similar issue, we direct the AO to exceed the corporate guarantee fees @ .5% and made the adjustment accordingly. "Para - 5 Pg no. - 3 26. In the light of the aforesaid judicial pronouncements, we are of the view that the addit....
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.... from debt fund scheme of mutual fund is not exempt from tax and so also dividend from investments in shares of foreign subsidiary company and therefore no disallowance u/s.14A of the Act could be made. The DRP directed the AO to verify the claim of the Assessee and exclude only investments which do not yield tax free income. The AO pursuant to the directions of the DRP did not allow the claim of the Assessee that no disallowance u/s.14A of the Act could be made by holding that the foreign company in which investments in the form of shares were made by the Assessee was not its subsidiary and therefore the claim of the Assessee cannot be accepted. 28. We have considered the rival submissions. Dividend from debts funds of mutual funds and dividend from foreign company are taxable. In such circumstances, we are of the view no disallowance u/s.14A of the Act could have been made. The Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT 317 ITD 33 (Delhi) has held that there can be no disallowance of expenses u/s.14A of the Act, if there is no exempt income during the relevant previous year. In the light of the aforesaid decision, we are of the view that there cannot be any....
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....India. It has been submitted that at the time of filing of income-tax return in India for the A.Y. 2011-12 assessee had not claimed foreign tax credit on account of taxes paid in Japan as no tax was paid in Japan at that time and also the tax return was not filed in Japan. Hence, the assessee now after payment of taxes in Japan and since the time for filing of revised return in India has expired is now seeking to raise the aforesaid Additional ground. 31. We have considered the plea of the Assessee and the objection of the learned DR who submitted that the issue sought to be raised in the Additional Ground does not arise out of the order of the DRP. In our view keeping in mind the ratio of the Hon'ble supreme Court decision in the case of NTPC Vs. CIT 229 ITR 383 (SC), wherein it was held that legal questions on admitted facts can be permitted to be raised at any stage of the proceedings before Tribunal by way of additional grounds, the additional ground should be admitted for adjudication. 32. As far as the question of giving credit to taxes paid in Japan is concerned, it requires verification by the AO and therefore the AO is directed to consider the plea of the Assessee ra....
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....d., of the Hon'ble Calcutta High Court in GA No.2607 of 2011 order dated 06.09.2011 was filed before us. In the order in the case of Vijayshree Ltd., (supra), the Hon'ble Calcutta High Court held as follows : "The only issue involved in this appeal is as to whether the deletion of the addition by the Assessing Officer on account of Employees'Contribution to ESI and PF by invoking the provision of Section 36(1)(va) read with Section 2(24)(x) of the Act was correct or not. It appears that the Tribunal below, in View of the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., reported in 2009 Vol.390 ITR 306, held that the deletion was justified. Being dissatisfied, the Revenue has come up with the present appeal. After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the Income Tax Act, as introduced by Finance Act, 2003, was curative in nat.ure....