TMI Blog2019 (1) TMI 391X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of the Treaty. Therefore, for the said reason, we are unable to accept the plea of the assessee contained in the Additional Ground of appeal. Thus, on this aspect, assessee has to fail. Rate of tax applied by the income-tax authorities - Assessing Officer has taxed the dividend at 42.23% on gross basis. As per the assessee, it was to be taxed @ 5% in terms of Article 10 of India-Mauritius Tax Treaty - stand of AO is based on the decision of the DRP that ‘dividend income’ as per Sec. 2(22)(e) of the Act is not dividend as understood for the purposes of India-Mauritius Tax Treaty - Held that:- As in the earlier paras we have already held that it is wrong to say that ‘deemed dividend’ in question is not be understood as ‘dividend’ for the purposes of India-Mauritius Tax Treaty. Once it is held that the impugned deemed dividend is also of the nature of dividend for the purposes of India-Mauritius Tax Treaty, we find that the applicable rate of tax is 5% as correctly canvassed by assessee. Thus, in conclusion, we uphold the stand of assessee that the applicable tax rate on the dividend income is in terms of the India-Mauritius Tax Treaty. Thus, assessee succeeds on this aspect. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NOS. 1381/MUM/2017 And 564/MUM/2018 - - - Dated:- 6-11-2018 - SHRI G.S. PANNU, VICE PRESIDENT AND SHRI RAM LAL NEGI, JUDICIAL MEMBER For The Appellant : Shri Arvind Sonde/Shri Shabbir Motorwala For The Respondent : Shri Samuel Darse ORDER PER G.S. PANNU, VICE PRESIDENT : The captioned two appeals are by the same assessee for Assessment Years 2009-10 and 2010-11 and since they involve common issues, they have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. 2. Pertinently, the substantive dispute in both the appeals revolves around invoking of Sec. 2(22)(e) of the Act by the Assessing Officer to tax certain amount in the hands of the assessee as deemed dividend . We may first take-up the appeal of assessee for Assessment Year 2009-10, which is directed against the order dated 30.12.2016 passed by the Assessing Officer u/s 147 r.w.s. 143(3) of the Income Tax Act, 1961 (in short the Act ) giving effect to the directions of Dispute Resolution Panel-I, Mumbai (DRP) dated 23.12.2016. 3. Since assessee has raised multiple Grounds, we deem it fit and proper to reproduce the Grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as Loan and taxed as deemed dividend under Section 2(22)(e) of the Act (this ground without prejudice to Ground 1) 2.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming the taxation of ICDs of ₹ 13,00,00,000 placed by Portescap with Videojet as deemed dividend under Section 2(22)(e) of the Act. 2.2 The AO and the DRP further erred in re- characterising the ICDs of ₹ 13,00,00,000 as Loan and taxing it as deemed dividend under Section 2(22)(e) of the Act without appreciating the distinction between ICDs and Loans which cannot be ignored merely because it is related party transaction or due to accounting treatment or any other procedural aspects. 2.3 The Appellant prays that re-characterising the ICDs as Loan and taxing it is as deemed dividend under Section 2(22)(e) of the Act is erroneous, unwarranted and be deleted. Ground 3 - The alleged deemed dividend erroneously taxed at 42.23 percent on gross basis (this ground without prejudice to Ground 1 and 2) 3.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted and be deleted. 5. Before proceeding further, the background of the controversy before us can be summarised as follows. The appellant before us is a foreign company, which is incorporated in and tax resident of Mauritius. Its principal activity is to act as investment holding concern. Notably, assessee is a common shareholder in two concerns, namely, Portescap India Pvt. Ltd. (hereinafter referred to as Portescap ) and Videojet Technologies (I) Pvt. Ltd. (hereinafter referred to as Videojet ) inasmuch as it directly holds almost 99.99% of the shares of the former and 99.88% of the shares in the latter company. In the impugned assessment which has been initiated by taking recourse to Sections 147/148 of the Act, the Assessing Officer notes that Portescap had advanced monies totalling to ₹ 13 crores to Videojet during the previous year relevant to the assessment year under consideration. The Assessing Officer after noticing the common shareholding of the assessee in the aforesaid two concerns, examined the applicability of Sec. 2(22)(e) of the Act qua the amount of ₹ 13 crores advanced by Portescap to Videojet. As per the Assessing Officer, the amount of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.07.2013. it was stated in the said letter that M/s. Portescape India Pvt. Ltd. has given loan to viz. M/s. Videojet Technologies (I) Pvt. Ltd. of ₹ 13 Crore. Since M/s. Kollmorgan India Investment Company is a registered shareholder having substantial interest in the M/s. Portescape India Pvt. Ltd. as well as M/s. Videojet Technologies (I) Pvt. Ltd. As per details available, the company holds 99.999% shareholding in M/s. Portescape India Pvt. Ltd. and 99.888% shareholding in M/s. Videojet Technologies (I) Pvt. Ltd. Clearly deemed dividend had arrived in the hands of the company under section 2(22)(e) of the Income Tax act, 1961, which the the company should have offered for taxation in India. From the information received in this office, it is seen that M/s. Portescape India Pvt. Ltd. has accumulated profit of ₹ 127.64 Crores during the year. As the Kollmorgan India Investment company has not filed return of income in India and had to offered deemed dividend as prescribed in section 2(22)(e) of the Act, for taxation in India, the income had escaped assessment for AY 2009-10 in the case. In this case, explanation 2(a) of section 147 is applicable. In view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borating the point, the learned representative referred to the assessment orders passed in the case of Portescap and Videojet u/s 143(3) of the Act for Assessment Year 2009-10 dated 21.12.2012 and 27.02.2014 respectively. Copies of such orders have been placed in the Paper Book at pages 59 to 75 and 51 to 58 respectively. Secondly, it is pointed out that the inference drawn by the Assessing Officer about the escapement of income in the hands of the assessee-company is expressly contrary to the circular of CBDT no. 495 dated 22.09.1987 in terms of which income by way of deemed dividend is assessable in the hands of the recipient concern, if it is other than a registered shareholder, and not in the hands of a registered shareholder, as is sought to be done by the Assessing Officer in the present case. According to the learned representative, it is an accepted proposition that the income-tax authorities cannot ignore the relevant circulars of CBDT as the same are binding on the departmental authorities, and, thus the belief of the Assessing Officer on escapement of income is untenable. 9. On the other hand, the ld. CIT-DR appearing for the Revenue justified the reasons recorded f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have escaped assessment so as to require the Assessing Officer to form a belief contemplated in Sec. 147 of the Act. 12. In this background, we may now examine the case set-up by the assessee before us. As our earlier discussion reveals, the sum and substance of the dispute is with regard to assessment of ₹ 13 crores in the hands of the assessee as deemed dividend by invoking Sec. 2(22)(e) of the Act. The relevant factual matrix has been noted by us elsewhere in this order, but to recapitulate, it would suffice to notice that Portescap advanced ₹ 13 crores to another concern, namely, Videojet. The assessee-company is a common shareholder holding substantial shareholding both in Portescap as well as Videojet. At this stage, we may refer to Sec. 2(22)(e) of the Act which creates a fiction whereby an amount which is otherwise paid as loan or advance is sought to be assessed as dividend , subject to fulfilment of other conditions prescribed in the section. Broadly speaking, any loan or advance made by a corporate entity to its shareholder or on behalf of a shareholder or for the individual benefit of a shareholder can be deemed to be a payment by way of dividend in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as deemed dividend in the hands of shareholder, considering abovementioned judgements u/s 163 of the Act by treating the assessee company as the Representative assessee u/s 163 of the Act . Ostensibly, the shareholder being referred to by the Assessing Officer in that case is the assessee-company before us. This assessment in the case of Portescap was finalised by the Assessing Officer on 21.12.2012. Thereafter, assessment in the case of Videojet was completed u/s 143(3) r.w.s. 144C(13) of the Act dated 27.02.2014 wherein also the applicability of Sec. 2(22)(e) of the Act to the sum of ₹ 13 crores received from Portescap has been addressed. In the said assessment, the Assessing Officer dealt with the defence of the assessee before him (i.e. Videojet) that if at all Sec. 2(22)(e) of the Act was attracted, the sum was liable to be taxed in the hands of the concerned shareholder and that Videojet was not a shareholder of Portescap. Inspite of the above, the Assessing Officer went ahead and assessed the amount of ₹ 13 crores as deemed dividend within the meaning of Sec. 2(22)(e) of the Act in the hands of Videojet on a substantive basis. 14. In this background, now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order, then it could not be said that same income had escaped assessment in the hands of another assessee. In our considered opinion, the meaning of expression escaped assessment appearing in Sec. 147 of the Act is quite clear and does not entail any ambiguity inasmuch as it cannot cover within its fold an income which has already been taxed. Quite clearly, in the instant case, not only the income taxed in other hand is same, but it has also been assessed in the other hand by invoking the very same section which is sought to be invoked in the present case, namely, Sec. 2(22)(e) of the Act. Therefore, considering the entirety of facts and circumstances, we are unable to uphold that there was any rational or intelligible nexus between the reasons and formation of belief by the Assessing Officer about the impugned escapement of income. Thus, on this aspect, we uphold the plea of the assessee that the initiation of proceedings under Sections 147/148 of the Act is untenable in the eyes of law and, consequently the assessment is liable to be quashed. We hold so. 15. Though in the earlier paras we have quashed the assessment, the rival parties have also made arguments on the meri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the existence of surplus funds with the depositor, i.e. Portescap is clearly noted in the Board Resolution dated 23.06.2008 and the same is also verifiable from the Audited Financial statements. In support of his proposition, reference has also been made to a copy of the ICD agreement, which is placed at pages 14 to 18 of the Paper Book, wherein clause (1) itself brings out that the transaction was initiated by Portescap, i.e. the depositor and not by Videojet. Secondly, clause (2) of the Deposit agreement has also been referred to, which defines the tenure of the deposit being two years from initial drawdown, which was extendable for one year, if agreed by both the parties. Thirdly, even clause (4) dealing with the Return brings out that interest is payable by Videojet @ 3 months MIBOR + 0.5% prevailing on first working day of the applicable quarter. In this case, the depositor has sought interest at a specified rate from the acceptor of deposit, which therefore showed that the depositor has given the deposit for its benefit in the form of earning of interest. Clause (6) of the agreement has also been brought-out to show that the purpose of Videojet, the acceptor, to use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised that the facts and circumstances of the case, as understood by the DRP, is to the effect that Videojet was in need of funds for its working capital requirements as specified in clause (6) of the Deposit agreement and since Portescap had surplus funds, the amount was loaned to Videojet and thus it could be said that this lending to Videojet was at the instance of the assessee, who was a common shareholder. According to the ld. DR, it can also be understood as a case of advancing money by Portescap to meet the requirement of Videojet, which would thus justify the conclusion of the Assessing Officer that it is a case of a loan received by Videojet from Portescap. The ld. DR emphasised that both Portescap and Videojet are controlled by the same entity, i.e. the instant assessee, and that in the absence of any conclusive evidence to show that the money was advanced at the instance of Portescap or it was given at the request of Videojet, the only conclusion that is liable to be drawn is that it is a case of a loan and, therefore, the Assessing Officer was justified in invoking Sec.2(22)(e) of the Act. 18. We have carefully considered the rival submissions. Ostensibly, Sec. 2(22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle. In fact, reference by the DRP to the judgment of the Hon'ble Madhya Pradesh High Court in the case of Sharda Talkies (Firm) vs Smt. Madhulata Vyas, AIR 1966 NMP 68 in para 4.8 of its order shows its concurrence with the concept of a distinction between a deposit and a loan. Thus, on the aspect of an ICD being distinct from a loan for the purpose of Sec. 2(22)(e) of the Act, we do not deal any further. So, however, the case made out by the Revenue before us is that having regard to the material on record, it does not justify the assertion of the assessee that the instant is a case of giving of ICD by Portescap to Videojet and not a loan. 19. In this context, we find that the DRP has referred to clause (6) of the Deposit agreement in order to say that it was the recipient, i.e. Videojet which was in need of funds and, therefore, it has to be understood as a loan transaction and not a deposit of money by Portescap for interest. 20. Before we decide this aspect of the controversy, we deem it fit and proper to refer to certain clauses of the Deposit agreement which would bring out the salient features of the transaction as understood by both the parties, i.e. Porte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f money also terms it as a deposit by Portescap. The fact that Portescap had surplus funds has been consistently canvassed by the assessee before the lower authorities, which has not been contested. In fact, the same is also borne out of the Financial statements of Portescap, a copy of which has been placed in the Paper Book at pages 18 to 50. The amount has been depicted in the Balance-sheet of Portescap also as Inter-Corporate Deposit and so is the position in the Balance-sheet of the recipient, i.e. Videojet. Now, clause (6) of the Deposit agreement says that the funds borrowed in terms of the agreement are to be used by Videojet to finance its activities, in particular, for purchase of fixed assets, improving its commercial distribution network and for meeting its working capital requirements. This has been interpreted by the Revenue to say that Videojet was in need of funds and, therefore, the money was lent by Portescap, thus rendering it to be in the nature of a loan. In our considered opinion, the said approach of the Revenue is not justified because one of the clauses of the agreement cannot be read de hors the other clauses so as to infer the nature of the transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering the transaction to be one of an ICD. It is also a fact that the Deposit agreement has fructified inasmuch as the parties have acted upon it. Under these circumstances, and considering the features of the Deposit agreement, which we have discussed above, in our view, the cumulative effect of the evidence which bears on the character of the transaction demonstrates that it is in the form of a deposit and not as a loan . Therefore, in our considered opinion, the Revenue is wrong in asserting that it was a case of loan so as to fall within the purview of Sec. 2(22)(e) of the Act. Thus, we conclude by holding that the sum of ₹ 13,00,00,000/- given by Portescap to Videojet would not fall within the scope and ambit of Sec. 2(22)(e) of the Act and, therefore, the addition made is directed to be deleted. 23. The other aspect in the appeal is by way of Ground of appeal no. 3 wherein the rate of tax has been agitated. This aspect of the controversy is linked to the plea of the assessee raised in the Additional Ground of appeal, as our subsequent discussion would show. Therefore, we may first take up the Additional Ground of appeal preferred by the assessee. 24. By way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ims, participating in profits; and, thirdly, income from corporate rights which is subjected to same taxation treatment as income from shares by the laws of contracting state of which the company making the distribution is a resident. In the context of the controversy before us, i.e. deemed dividend under Section 2(22)(e) of the Act, obviously the same is not covered by the first two facets of the expression dividend in Article 10(4) of the Treaty. So, however, the third facet stated in Article 10(4) of the Treaty, in our view, clearly suggests that even deemed dividend as per Sec. 2(22)(e) of the Act is to be understood to be a dividend for the purpose of the Treaty. The presence of the expression same taxation treatment as income from shares in the country of distributor of dividend in Article 10(4) of the Treaty in the context of the third facet clearly leads to the inference that so long as the Indian tax laws consider deemed dividend also as dividend , then the same is also to be understood as dividend for the purpose of the Treaty. Therefore, for the said reason, we are unable to accept the plea of the assessee contained in the Additional Ground of appeal. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the CIT(A) failed to appreciate the distinction between ICDs and Loans. 2.3 The Appellant prays that re-characterizing the ICDs as Loan and taxing it is as dividend under Section 2(22)(e) of the Act is erroneous, unwarranted and be deleted. Ground 3 - ICDs of ₹ 90,00,00,000 cannot be taxed as dividend under Section 2(22)(e) of the act as the Appellant was not a shareholder of Recipient Indian Company 3.1 On the facts and circumstances of the case and in law, the AO erred concluding and the CIT(A) in confirming the taxation of ICDs of ₹ 90.00,00,000 placed by Appellant's Wholly Owned Subsidiary in India with the Recipient Indian Company as dividend under Section 2(22)(e) of the Act as the Appellant was not the shareholder of the Recipient Indian Company when the deposits were placed. Ground 4 - Invoking third limb of Section 2(22)(e) of the Act/ enhancement of assessment invalid 4.1 The CIT(A) erred in enhancing the assessment without giving reasonable opportunity of showing cause against the assessment as required under Section 251(2) of the Act. 4.2 The CIT(A) further erred in invoking third limb of Section 2(22)(e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same has been assessed on a substantive basis in the hands of the assessee itself by invoking Sec. 2(22)(e) of the Act. 32. Insofar as the amount advanced to GVR is concerned, a pertinent plea of the assessee is that the same was advanced by Portescap in three tranches, i.e. ₹ 24 crores on 29.10.2009, ₹ 26 crores on 02.03.2010 and ₹ 40 crores on 03.03.2010. It has been pointed out that on the aforestated three dates, assessee-company was not holding any shares in GVR and that it is only for the first time on 17.03.2010, assessee acquired shareholding of GVR. It was, therefore, contended that even if the monies given by Portescap to GVR are treated as loans or advances for the purpose of Sec. 2(22)(e) of the Act, yet it could not be taxed as deemed dividend in the hands of the assessee as assessee was not a substantial shareholder of GVR on the relevant dates, i.e. 29.10.2009, 02.03.2010 and 03.03.2010 when the monies were given to GVR. We find that this aspect of the controversy was brought out by the assessee before the Assessing Officer as well as before the CIT(A). On this aspect, the Assessing Officer has not made any averment, so however, the CIT(A) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial shareholding in Portescap as well as GVR. The implication is that the Assessing Officer invoked the second limb of Sec. 2(22)(e) of the Act, namely that the payment by Portescap to GVR was on behalf of the common shareholder, i.e. the assessee. Quite clearly, the stand is not tenable because, factually speaking, on the dates when the monies have been given by Portescap to GVR, assessee was not holding any shares in GVR. Therefore, in such a situation, the judgment of the Hon'ble Allahabad High Court in the case of H.K. Mittal (supra) clearly militates against the Revenue because the relevant date to examine the shareholding pattern is the date on which the amount has been advanced. Insofar as the CIT(A) is concerned, he affirmed the approach adopted by the Assessing Officer by noticing that even prior to assessee becoming the shareholder of GVR, assessee was holding 100% shares of Videojet, who in turn was holding 100% shares of GVR and, therefore, at the relevant point of time when the impugned sums were given by Portescap to GVR, assessee was a beneficial shareholder in GVR. In our considered opinion, the conditions prescribed in Sec. 2(22)(e) of the Act in order to tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te evidence. 37. Now, the only other aspect left is with regard to a sum of ₹ 2,00,00,000/- given by Portescap to DHR. The said amount is liable to be treated as a loan or advance, as held by us in the earlier para and, therefore, the same has been rightly treated to be falling within the scope of Sec. 2(22)(e) of the Act by the income-tax authorities, which we hereby affirm. 38. Before parting, we may note that in this assessment year also, assessee had raised Ground challenging the initiation of proceedings by the Assessing Officer by issue of notice under Section 148 of the Act. On this aspect, the learned representative for the assessee had made submissions regarding the discrepancy in obtaining approval from the competent authority under Section 151 of the Act. Notably, in this context, the ld. DR had filed the relevant copies of the proposal of reopening initiated by the Assessing Officer as also the requisite approval by the competent authority in terms of Sec. 151 of the Act. We do not find any infirmity in the same and, therefore, the objection of the assessee on the initiation of proceedings under Sections 147/148 of the Act is liable to be dismissed. We hold ..... X X X X Extracts X X X X X X X X Extracts X X X X
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