TMI Blog2019 (10) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... d AO has already rejected the assessee s working. With a view to enable revenue to take consistent stand in the matter, we restore the matter back to the file of learned AO on similar lines. The learned AO is directed to reappreciate the disallowance made by the assessee and invoke Rule 8D only if not satisfied with assessee s working of disallowance. It is made clear that if the disallowance is computed in terms of Rule 8D(2)(iii) then apart from the directions of CIT(A) to exclude certain investments, those investments which have not yielded any exempt income during the year under consideration would also be excluded as per the decision of Delhi Tribunal (Special Bench) rendered in ACIT Vs. Vireet Investment (P.) Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI] . Accordingly, Ground No.1 of assessee s appeal may be treated as partly allowed for statistical purposes. Capital gains u/s 50C - HELD THAT:- We find that CIT(A) has clinched the issue in correct perspective. Undisputedly, the property was not free from encumbrances. The original agreement was made in the year 2000 and there was inordinate delay on account of lack of approvals from concerned authorities and the proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not a transaction of outright sale of land. Therefore, the provisions of Section 50C, in our opinion, were not applicable to such transactions since there was no transfer of capital assets rather it was a case of transfer of few rights out of bundle of rights available with the assessee. Therefore, concurring with the stand of Ld. first appellate authority, we dismiss Ground No.1 of revenue s appeal. The revenue s appeal stands dismissed. - I.T.A. No.2822/Mum/2017 And I.T.A. No.2823/Mum/2017 And I.T.A. No.3356/Mum/2017 And I.T.A. No.3357/Mum/2017 - - - Dated:- 17-10-2019 - Shri Saktijit Dey, JM And Shri Manoj Kumar Aggarwal, AM For the Assessee : Shri Nitesh Joshi Ld. AR For the Revenue : Shri Pankaj Kumar- Ld.DR ORDER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) : - 1.1 Aforesaid cross-appeals for Assessment Years [AY] 2009-10 2010-11 contest separate orders of lower authorities on certain common grounds of appeal and hence, taken up together for the sake of convenience brevity. First, we take up cross-appeals for AY 2009-10 which is against the order of Ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ROUND NO 2: ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING. Advance of ₹ 11,41,62,123 was paid towards Share Application Money to Saudi Ensas Company for Engineering Services WLL (Saudi Ensas) in Kingdom of Saudi Arabia (a wholly owned subsidiary) by the Appellant Company during the financial year 2008-09, for which allotment of shares was pending on 31st March, 2009 due to time consuming legal process involved in Kingdom of Saudi Arabia. Delay in allotment of Shares cannot be construed that the amount paid as Advance Share Application Money was deemed Loan on which, notional interest has been charged. Re-characterization of Advance Share application as Loan is unwarranted. The approval / clearance granted by the Saudi Arabian General Investment Authority (SAGIA) for increase in Share capital of Saudi Ensas and the fact that the Appellant Company received the required clearance from the Ministry of Commerce, which was published in the Local Official Gazette on 17.12.2015 is sufficient to prove that the advance paid was towards Share Application Money and not a Loan. The Appellant Company prays that the transfer pricing adjustment towards notional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empt dividend income of ₹ 15.82 Crores including dividend income from Indian Companies and Mutual Fund amounting to ₹ 11.14 Crores. In its computation of income, the assessee offered suo-moto disallowance of ₹ 13.50 Lacs which mainly comprised-off of proportionate salary and administrative expenses. In defense, it was submitted that it did not incur any interest cost on borrowings for investment purposes. It was further submitted that investment portfolio was handled by its MIS department which primarily attend to the Accounts and Banking Operations and the assessee do not have any separate investment department. The attention was drawn to the fact that the staff cost and operating / administrative expenses of MIS department was apportioned at ₹ 13.50 Lacs and the same was already disallowed. However, rejecting the same, Ld. AO proceeded to invoke Rule 8D and worked out expense disallowance of ₹ 131.40 Lacs u/r 8D(2)(iii) which was computed @0.5% of average investments held by the assessee. After adjustment of suo-moto disallowance of ₹ 13.50 Lacs, the net disallowance thus worked out to be ₹ 117.90 Lacs. 3.3.2 Before Ld. f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed to recompute the average investment value accordingly. Still aggrieved, the assessee is in further appeal before us. 3.3.3 Upon due consideration, we find that Ld. first appellate authority has clinched the issue in the correct perspective. We are not convinced with the plea that Ld. AO has not recorded the requisite satisfaction before proceeding to apply Rule 8D(2)(iii). It is evident from the discussion made by Ld. AO in para 6.2 that the assessee did not furnish the basis of allocation of the expenses suo-moto disallowed by him. It was also observed that the part of salary and expenses attributed towards earning of dividend income bear no co-relation with the earning of the dividend income or the man-hours allotted to the activities resulting into the earning of dividend. Therefore, we are unable to concur with Ld. AR s argument, on this point. 3.3.4 So far as the merits of the case are concerned, we find that this issue was restored by Tribunal to the file of learned AO in AY 2008-09 vide para 4.3.4 of ITA No. 1667/Mum/2012 order dated 08/07/2016, wherein learned AO was directed to examine the sufficiency or correc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue namely M/s G.D. Rao Associates vide valuation report dated 02/06/2007. The resultant gains of ₹ 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 Pradesh. HAL got amalgamated with the assessee with effect from 1.4.1993 and resultantly, the said property got vested with the assessee. As per the stipulations, the property could be used only for the purpose of manufacturing industrial sewing machines. However, in view of serious losses suffered by HAL, it discontinued this activity and the property remained idle since then. Subsequently, the assessee agreed to sell the property vide dated 06/07/2000 to a party M/s Sri Shiva Sai Constructions [SSSC] for sale consideration of ₹ 46 Lacs and accepted advance of ₹ 25 Lacs. The balance ₹ 21 Lacs wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ₹ 667.23 Lacs and worked out additional Long-Term Capital Gains of ₹ 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 the fact that the original agreement was made in year 2000 and was inordinately delayed on account of lack of approvals from concerned authorities as well as initiation of litigation from the original bidders. The company has also submitted that it had invited public bids for the property without any enthusiastic response. The appellant has got the land valued from an approved valuer and has negotiated the deal with the other party to the litigation resulting in final sale of the property. 5.4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith reference to liabilities of the appellant company. Further, the appellant has issued public tenders which have seen bids of ₹ 85 lakhs and ₹ 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 ₹ 330 lakhs and structures thereon at ₹ 51.61 lakhs, thus making the total value of the property at ₹ 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 appellant has claimed that the valuation report has not taken into consideration any discount on the prevailing market rate on account of the fact that permission for alienation was to be obtained from the Andhra Pradesh Government. Some of the valuers had indicated that this discount factor could be in the range of 10% - 20%. However, taking a conservative view of discounting the value by 5%, the value of the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas 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 ₹ 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 Allotment was not done till 31/03/2009, yet the assessee did not receive any interest on such share application money pending allotment. The Ld. TPO opined that under similar circumstances, independent parties would expect on interest if allotment is delayed beyond reasonable period of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 adjustment against the same was uncalled for. 3.5.5 Reliance was placed on the decision of Hon ble Bombay High Court rendered in Vodafone India Services Pvt. Ltd. dated 10/10/2014 for the submissions that the transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amount remained unallotted cannot be treated as a genuine period during which the pendency can be attributed to regulatory requirements. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the lender. To this extent, the action of the TPO is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allotmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of lending or borrowing, the transactions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. While doing so, the coordinate bench observed that there 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (ITA No.7033/Mum/2012 25/03/2015) wherein similar ratio has been laid down. 3.5.9 Keeping in the view the facts and circumstances, we delete the impugned TP 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.5 The submission made by the appellant has been examined. The deed of allotment of land by the Thane Collector to the appellant vide his letter dated 21st March, 1961 has been examined wherein it has been mandated at condition no. 4 that the Govt will be entitled to half the unearned increment in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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