AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (11) TMI 1901
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....ius 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 relevance to the issues that arise for consider....
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....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) for determination of ALP of the international transaction of purchase of shares as per the provisions of Se....
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....Y 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 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 16,663,00....
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....ns 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 of assessment by the AO in AY 2011-12 and 2012-13. Against the addition made consequent to directions of the DRP by the AO in the fair order of assessment the Assessee has raised the various grounds of appeal which we have narrated in the earlier part of this order. 14. At the time of hearing of the appeal, it was brought to our notice by the learned c....
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....he 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. 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 ....
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.... 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 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. DC....
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..... 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 business and the Assessee provided corporate guarantee to Axis Bank, Singapore, on behalf of LVSI. The purpose of the guarantee was explicitly mentioned in the guarantee agreement wherein loan was extended for acquisition as well for the working capital facility for LVSI since it was unable to borrow funds it needed on a stand-alone basis and was not in a position to obtain a guarantee from an independent party to support the bor....
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....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 various judicial precedents, wherein the arm's length guarantee fee has been upheld mostly in the range of 0.25% to 0.60%. The learned DR relied on the order of the CIT(A). 25. We have considered the rival submissions. In the following decisions, various benches of ITAT have taken the view that 0.25% to 0.60% Guarantee commission charged for providing Guarantee was at Arm's Length: Sl.No. Name of case laws Relevant para Reference Corporate ....
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...."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 addition made by the AO ought to have been deleted by the CIT(A) as the Guarantee Commission charged by the Assessee has to be regarded as at Arm's Length. We therefore direct the addition made in this regard be deleted. Further, it is worthwhile to mention that the recent Safe Harbour Rules notified by the Central Board of Direct Taxes (Notification No. 46/2017 dated 7 June 2017) the guarantee commission / fee declared in relation to the eligible international transaction is at the rate not less than 1% per annum on the amount guaranteed. The relevant extracts are reproduced below: 6. Providing corporate guarantee referred to in sub-item (a....
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.... 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 disallowance u/s.14A of the Act. The disallowance is directed to be deleted. 29. In AY 2011-12, the Assessee has filed an application for leave to file the following additional ground of appeal: "1. That on the facts and in the circumstances of the case, the petitioner be allowed foreign tax credit for the taxes paid in Japan on the doubly taxed income in accordance with the provisions of section 90 of the Act, read with the India- Japan tax treaty. 2. Without prejudice to the above, the petitioner be allowed foreign tax credit for the taxes paid in Japan on the doubly taxed income in accordance with the provisions of section 91 of the Act." 30. The facts and circumsta....
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....e 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 raised in the additional ground in accordance with law after due verification. The Assessee should be given an opportunity of being heard before any decision is taken on the issue. 33. In the result, ITA No. 121/Kol/2016 is partly allowed. 34. As far as ITA No. 647/Kol/2017 for AY 2012-13 is concerned, the only other issue which is not common with the appeal for AY 2011-12 is the issue with regard to disallowance of employees contribution to Provident Fund made by the AO by invoking the provisions of Sec.36(1)(va) of the Act. The Assessee as an employer withheld the provident fund contribution payable by its employees from their salaries payable, as their share of contribution to Provident Fund (P....