TMI Blog2017 (11) TMI 1443X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Transaction of providing guarantee by the Assessee in respect of a loan taken by its AE - whether it can be said to be an international transaction? - Held 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 (N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Kol/2017 - - - Dated:- 22-9-2017 - Sri N.V.Vasudevan, JM And Shri J.Sudhakar Reddy, AM] For The Department : Shri G.Mallikarjuna, CIT(DR) For The Assessee : Shri S.P.Singh, IRS (Rtd.) Shri Manoneet Dalal Ms.Gunjan Khanna, CAs ORDER Per N . V . Vasudevan, JM ITA No.1053/Kol/2017 is an appeal by the Revenue while ITA No.966/Kol/2017 is an appeal by the Assessee. Both these appeals are directed against the order dated 27.02.2017 of C.I.T.(A)-22, Kolkata relating to A.Y.2010-11. 2. First we shall take up for consideration the appeal by the assessee. TCG LifeSciences Private Limited (formerly TCG Lifesciences Limited), ( hereinafter referred to as the Company / Appellant / Assessee:/ TCGLS ) is a company incorporated under the Companies Act, 1956. It carries on the business of providing Contract Research Development Service and Drug Discovery. It is a wholly owned subsidiary of TCG Lifesciences Mauritius Ltd. ( TCGM ). The ownership 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 ) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he extent material for the purpose of deciding the question referred to the special bench, are as follows: - Section 92 ( l ) of the Act provides that any income arising from an international transaction shall be computed having regard to the arms length price . The Explanation to the said section provides that allowance for any expense or interest arising from an international transaction hall also be determined having regard to the arm' s length price . The term international transaction' has been defined in section 92B ( 1 ) or the Act to mean a transaction between two or more associated enterprises either or both of whom are non - residents in the nature of inter alia purchase, sale or lease of intangible property or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises . Section 92A of the Act defines the term associated enterprise in relation to another enterprise, in a manner where the enterprise directly or indirectly participates in the Management, control or capital of the other enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of RPI for a consideration of ₹ 5,38,12,000/-. The Assessee also purchased 1000 shares of LVSI from Xtec International (Mauritius) Ltd. for a consideration of ₹ 20,64,03,200/-. Besides the above, the Assessee also purchased 456.921 shares of LSVI for a consideration of ₹ 2,02,290 per share on 4.8.2009 and 300.365 shares at ₹ 5,83,466 per share on 7.1.2010. In all the Assessee paid a consideration of ₹ 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. The AO referred to the Transfer Pricing Officer (TPO) for determination of ALP of the international transaction of purchase of shares. The TPO was of the view that DCFM was not the appropriate method of valuation and that the appropriate method would only be the Net Asset Valuation method (NAV). On the basis of such finding, the TPO determined the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given judicial recognition by the Indian Legislature in the context of valuation of shares . In fact the book value method was recognized by the Legislature much prior to the recognition of the discounted cash flow method . Thus, as an alternative, the book value or the net asset value method can be followed . It is noted that all the relevant information and details required for estimating the net asset value is available on record . Accordingly out of the two methods i . e . DCF NAV method, NAV method is the most reliable and appropriate to the facts of the present case . At this juncture it is pertinent to mention that even the assessee in the past years has been consistently following the NA V method to value to shares to be purchased / sold . Reference in this regard is made to the transfer pricing study report of the assessee for AY 2008 - 09 wherein the assessee itself had adopted the NAV method to value the shares of Xtec International Mauritius Ltd and Clinivent Research Pvt . Ltd . Accordingly the objections raised by the assessee in its letter dated' 23 . 01 . 2014 against the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . International Transaction of purchase of shares of RPI 23 . In view of the above, the valuation report submitted by the assessee based on the DCF method is rejected . In the scenario, making further assumptions and carrying out a separate DCF method based valuation on the basis of meagre and unreliable data would not be prudent . Accordingly, as was d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pward adjustment of rs . 11,78,64,440 /- is being made to the arm s length price of the loan . The total income of the assessee is to be upwardly adjusted by this amount . 10. Before the CIT(A), 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 Assessee placed reliance on the judgment of the Hon ble Bombay High Court in the case of Vodafone India Services Pvt.Ltd. Vs. Union of India and 3 others in W.P. No. 871 of 2014 dated 10.10.2014 wherein it was held that for application of Chapter X of the Act income should arise from an international transaction and that is the condition precedent for application of chapter X of the Act. The facts in the case of Vodafone (supra) was that Vodafone India Services Pvt. Ltd., (petitioner) was a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited (the holding company). The Petitioner issued 2,89,224 equity shares of the face value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed about the applicability of Chapter X by an assessee then the requirement for taking a decision after taking on board the objection becomes necessary. We may also add that subsequently in the decision of Vodofone India Services Pv.Ltd. IV 368 ITR 1 (Bom), the Hon ble Bombay High Court reached the same conclusion that the word income for the purpose of the Act has a well understood meaning as defined in Section 2(24) of the Act. This even when the definition inSection 2(24) of the Act is an inclusive definition. It cannot be disputed that income will not in its normal meaning include capital receipts unless it is so specified, as in Section 2(24) (vi) of the Act. In such a case, Capital Gains chargeable to tax under Section 45 of the Act are, defined to be income. The amounts received on issue of share capital including the premium is undoubtedly 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 wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts does not have any basis that emanate from the Transfer Pricing Rules . 12. The CIT(A) however did not agree with the submissions made by the Assessee. He held that the facts of the case cited by the Assessee are distinguishable. He did not elaborate on what are the distinguishing features. The CIT(A) observed that the issue in the cases cited by the Assessee was investment in shares of the subsidiary whereas in the case of the Assessee the facts were different. The following were the relevant observations of the CIT(A) in this regard. 1 . I have considered the above submissions made by the Appellant with regard to the international transaction of purchase / subscription of share . On examination of the issue and the details as recorded by the Ld . TPO, I find myself in agreement with the approach of the Ld . TPO . The Ld . TPO has treated the transaction as International Transaction and the same is a valid position in view of the explanation clause I Cc ) to section 92 B . The shares in question are marketable securities, hence subject to the provisions of Chapter X of the Income Tax Act 1961 . The Appellant in the present case has ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the order of the CIT(A) in upholding the order of the AO in so far as it relates to rejection of the claim of the Assessee that the transaction in question cannot be subject matter of proceedings u/s.92 of the Act and aggrieved by the determination of quantum of adjustment to the ALP as determined by the CIT(A), the Assessee is in appeal before the Tribunal and has raised grounds No. 2 to 2.11 before Tribunal. Aggrieved by the relief allowed to the Assessee as above in the computation of ALP, the Revenue has raised Gr.No.3 in its appeal. 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 Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsence of any income arising, the issue of applying the measure of Arm's Length Pricing to transactional value / consideration itself does not arise . d ) If its income which is chargeable to tax, under the normal provisions 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 consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the said international transaction as determined by the CIT(A) 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. 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 borrowings it needed. It was the plea of the Assessee that it provided such guarantee to protect its own investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor of Income-tax, International Taxation-I, Kolkata 160 ITD 1 (SB) (Kol). Following the principle laid down in the aforesaid decision, we are of the view that the plea of the Assessee in this regard cannot be sustained. The cases cited in support of the Assessee s contention also do not require any consideration as the decision of the special bench was rendered much after those decisions. 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 guarantee fee upheld mostly in the range of 0.25% to 0.60% 1. Thomas Cook(India) Limited Vs DCIT[2016]70 taxmann.com 322 (Mumbai Trib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co-ordinate 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 extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Draft Prospectus for the proposed IPO, which was postponed due to poor market conditions and later on abandoned in FY 2009 - 10 and charged to profit and loss account in FY 2009 - 10 would be capital in nature or in the nature of revenue expenditure are allowable as deduction during FY 2009 - 10 . 2 . In the instant ant case, the IPO was proposed by the Company with a view to obtaining funds for enhancement / expansion of its business operations, hence there is no doubting the business rationale of such IPO related expenses . 3 . Now, coming to the issue of the expenses being capital or revenue in nature, in this regard, relying on the decisions of the Apex Court in the case of Madras Auto Service ( P .) Ltd . ( 1998 ) ( 233 ITR 468 ) and the Jurisdictional Hon'ble High Court in the cases of Binani Cement Ltd . ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore 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 case in not considering the cost of funds of the lender - assessee and creditworthiness of borrower using data on public domain relied upon by the TPO, for determining the ALP of interest on loan advanced by assessee to its AE . 34. While deciding ground no.2 of the assessee we have already held that no income arises on a transaction of investments in shares in subsidiary company (AE). In view of the aforesaid conclusion the action of the AO in considering the excess value of consideration paid by the assessee for purchase of shares as loan transactions is not sustainable. Grounds no.3 and 4 raised by the revenue are on the computation of ALP on a presumed loan transactions by the assessee to its subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
