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TMI Blog2020 (1) TMI 858X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned CIT(A) has erred in confirming the disallowance rejecting the contention of the assessee that no expenditure on earning tax free income has been incurred by the assessee. 3. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the shares having been held by the assessee as stock-in-trade for regular business of the assessee, the dividend income on such shares being incidental, the disallowance under Section 14A is not called for. 5. Without prejudice to the above and in the alternative, the learned CIT(A) has erred in rejecting the contention of the assessee that the investments being strategic in nature the dividend is only incidental, therefore disallowance under Section 14A is not called for. 5. Without prejudice to the above and in the alternative, the assessee having sufficient owned funds, investments having not been made out of borrowed funds, no disallowance of interest under Section 14A can be made. 6. (i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming disallowance of an amount of Rs. 24,15,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding equity does not have any impact on profits or assets of the assessee, the same is not an international transaction. (iii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the AO has erred in recharacterizing the transaction of providing equity into a loan transaction. 12. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO in treating the amount of Rs. 10,51,54,723/- standing in the name of the assessee in the last year as a loan given to the subsidiary during the current year also. 13. Without prejudice to the above and in the alternative, the learned CIT(A) has erred in rejecting the contention of the assessee that the transaction being in foreign currency the LIBOR rate is the appropriate rate of interest, not the rate as applied by the AO." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Jaypee Capital Services Ltd., the assessee company is into the business of trading of equity, commodity and derivatives of equity and forex market. Assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Undisputedly, during the year under assessment, assessee company has earned dividend income of Rs. 1,36,19,200/- and claimed the same as exempt u/s 10(34) of the Act. Ld. AR for the assessee challenging the impugned order contended that the entire investment in the shares have been made by the assessee company out of its own funds and drew our attention towards balance sheet, available at page 16 of the paper book. Perusal of the balance sheet qua the year under assessment shows that the assessee company is having paid up share capital of Rs. 7,64,75,500/- with reserve and surplus of Rs. 3,17,17,14,177/- (total Rs. 3,24,81,89,677/-). These facts go to prove that as against the total investment of Rs. 2,97,33,89,709/-, assessee company was having its own share capital and surplus & reserves to the tune of Rs. 3,24,81,89,677/-. It is settled principle of law that in case the assessee company is having sufficient own interest free funds, it is to be presumed that the investment is not made out of borrowed funds but out of its own interest free funds. Reliance in this regard is placed on the decision rendered by Hon'ble Supreme Court in case of CIT vs. Reliance Industries Ltd. in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds no.5, 6, 7 & 8 are determined in favour of the assessee. GROUND NO.9 13. AO made disallowance of Rs. 4,48,911/- on account of foreign tour and travel expenses incurred by Shri Saurav Arora which are pertaining to his travel to Australia and New Zealand on the ground that Shri Saurav Arora is neither Director nor employee of the assessee company and assessee company has not conducted any transactions with Australia and New Zealand Stock Exchanges and ld. CIT (A) also confirmed the disallowance. 14. Challenging the impugned order, ld. AR for the assessee contended that disallowance has been made and confirmed by AO/ CIT (A) by recording incorrect facts and drew our attention towards page 16 of the paper book which is balance sheet of the assessee company showing that Shri Saurav Arora is one of the Directors of the assessee company. 15. However, from the perusal of the reply filed by the assessee company before the ld. CIT (A), extracted in para 7.2 of the impugned order, assessee company has failed to prove the purpose for which foreign tours have been carried out by Shri Saurav Arora. Emails brought on record by the assessee company also failed to explain the purpose of for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court of Delhi in case of CIT vs. EKL Appliances Ltd. 345 ITR 241 held as under :- "17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Office will not borrow or lend from/to any person in India without specific permission of the Reserve bank of India. The Assessing officer further observed that in view of India Belgium Double Taxation Avoidance Agreement interest on monies paid by the Head Office to the branches was not allowable as a deduction. 6) In appeal, the Commissioner of Income Tax (Appeals) by an order dated 29/3/2007 upheld the order of the Assessing officer and disallowed the deduction on account of interest of Rs. 5.73 crores paid to Joint Venture Partners. The Commissioner of Income Tax (Appeals) held that Article 7(3)(b) of the Double Taxation Avoidance Agreement forbids allowance of any interest paid to the head office by permanent establishment in India as a deduction. Further, the payment of interest also directly violates the conditions imposed by RBI in its letter dated 3/11/1998. Therefore, the order of the Assessing Officer was upheld. 7) However, the Tribunal allowed the respondent-assessee's appeal. During the course of the proceedings before the Tribunal the revenue contended that the borrowings on which the interest has been claimed as a deduction are in fact capital of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced 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 allotment of shares, nevertheless, the assessee was successful in explaining the delay in allotment of share and was able to demonstrate with evidences the circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company in equity shares of subsidiaries as a loan; secondly, OECD Guidelines also discourage restricting of legitimate business transaction; thirdly, when the AO has not come up with specific finding that the transaction in question is a sham transaction, he cannot treat the transaction of "capital infusion" by the assessee company as a loan and to charge the interest thereon on notional basis; and fourthly, in the absence of any specific finding by the AO that any income has arisen from international transaction, TP provisions contained in Chapter-X of the Act do not apply. Section 92(1) of the act says that income arisen from international transaction is a condition precedent for application of Chapter-X of the Act. Consequently, we are of the considered view that addition made by the AO and confirmed by the ld. CIT(A) on account of arm's length price of value of interest receivable on loans outstanding of Rs. 1,04,24,675/- in the name of Jaypee Singapore Pte Ltd. is not sustainable, hence ordered to be deleted. So, grounds no.10 to 13 are determined in favour of the assessee. 26. Resultantly, the appeal filed by the assessee is partly allowed. Order pronounced in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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