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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Shri S.S. Godara & Shri Inturi Rama Rao
IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad (Through Video Conferencing) Before Shri S.S. Godara, Judicial Member AND Shri Inturi Rama Rao, Accountant Member
ITA No.1489/Hyd/2019 Assessment Year: 2013-14 The Deputy Commissioner Vs. M/s. Labzone Electronics of Income Tax, City Private Limited Circle 16(1), (Formerly known as M/s. Hyderabad. Alexandria Labspace Electronics City Private Limited), Hyderabad. PAN :AAJCA1470G. (Appellant) (Respondent) Assessee by: Shri P.V.S.S. Prasad. Revenue by: Shri YVST Sai. Date of hearing: 14.02.2022 Date of pronouncement: 23.02.2022 O R D E R Per S. S. Godara, J.M. This Revenue’s appeal for A.Y. 2013-14 arises from the Commissioner of Income Tax (Appeals) – 4, Hyderabad’s order dated 17.07.2019 in case No.10331/17-18/DCIT, Cir.1(1)/CIT(A)-4/Hyd/19-20, involving proceedings u/s 143(3) of the Income Tax Act, 1961 [in short, ‘the Act’]. Heard both the parties. Case file perused.
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The Revenue’s sole substantive grievance raised in the instant appeal challenges correctness of the CIT(A)’s action deleting section 94A(4) addition of Rs.18,86,00,000/- made in the course of assessment framed on 29.12.2016. The CIT(A)’s lower appellate detailed discussion to this effect reads as follows :-
“4. Ground nos. 1 & 8 are general in nature and do not require any specific adjudication. Ground nos. 2 to 6 are relate to addition of Rs.18,86,00,000/- u/s 94A(4) of the Act. The AO's observations in making the said addition are as under: The AO in the assessment order stated that during the year under consideration, the appellant company received Compulsorily Convertible Debentures (CCDs) from M/s. Alexandria Real Estate Cyprus No.1 Ltd. of 1,88,60,000 with face of Rs.101- for each CCD and the total amount received against for subscription of CCDs was Rs.18,86,00,000/-. The ARE Cyprus is an investment holding company registered in Cyprus and is wholly owned by Alexandria Real Estate Equities LP (ARE LP) which in tum is ultimately owned by Alexandria Real Estate Equity Inc. (ARE Inc.) incorporated in USA and is a listed company in USA. ARE Cyprus invested in CCDs of the appellant company out of the funds infused by its parent and ultimate parent i.e. ARE LP and ARE Inc., which are both resident of USA. The AO held that since the investing company was based at Cyprus and Cyprus was notified as a Notified Jurisdictional Area u/ s 94A of the Act vide CBDT Notification 8612013 dated 01.11.2013 published in Official Gazette through SO 4625 GI/13. Thus, as per Section 94A, the AO held that the transactions in respect of persons located in Notified Jurisdictional Area have to be considered as anti-avoidance nature. The implication part of notification was that if any assessee enters into a transaction with a person in Cyprus, then all the parties to the transactions shall be treated as Associated Enterprises and the transactions so entered shall be treated as International Transactions resulting in application of Transfer Pricing regulations. Accordingly, the AO made the addition of Rs.18,86,00,000/ - u/ s 94A of the Act treating that the area was already notified as a Notified Jurisdictional Area vide Notification 86/2013 dated 01.11.2013 vide SO 4625 GI/13. Further, the AO held that genuineness and identity was established but the creditworthiness of the investing company was not established in the above transaction. 4.1 During the course of appellate proceedings, the AR stated as under: (1) The ld. AO invoked provisions of section 94A of the Act treating Cyprus as Notified Jurisdictional Area (NJA) on the basis of CSDTs Notification 86/2013 dated 01.11.2013 published in Official Gazette through SO 4625 GI/13. As per section 94A(4) of the Act, the transactions with
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persons located in NJA i.e. Cyprus here will be treated as international transactions and such persons will be treated as associated enterprises and the transfer pricing regulations would be applicable. (2) The CSDT on 14.12.2016 issued a notification No. 114/2016 vide SO No.4033 (E) (read with Corrigendum Notification No.119/2016 dated 16.12.2016 vide SO No.4082 (E) retrospectively rescinding the earlier notification issued in 2013 and thereby declaring Cyprus as normal tax jurisdiction and not an NJA. In other words CSDT had withdrawn the original notification of 2013 retrospectively and thereby Cyprus was never deemed to have been an NJA at any point of time. (3) The ld. AO completed the assessment by holding that the sources of investments into CCDs by ARE Cyprus was not explained to his satisfaction and treated the entire amount of CCDs of Rs.18,86,00,000/- as the income of the appellant company holding the same as beneficial owner u/s 94A(4) of the Act. However, the fact remained that CCD amount of Rs.18,86,00,000/- from ARE Cyprus was received much before the release of CSDT Notification No.86j2013 dated 01.11.2013. Accordingly, invoking section 94A(4) of the Act is legally unsustainable and thereby entire proceedings of ld. AO are vitiated. It was submitted that the AO had no clue of CSDTs rescinding order issued on 14.12.2016 itself while completing the assessment u/s 143(3) on 29.12.2016. 4.2 In course of appellate proceedings, the AR submitted the details of source of investment of ARE Cyprus, such as confirmation of ARE Cyprus of investment into appellant company, copy of incorporation document of ARE Cyprus, financial statements of ARE Cyprus and copies of Foreign Inward Remittance Certificate issued by the bank upon receipt of remittance from ARE Cyprus and copy of Form FC-GPR for the convertible debentures issued, Valuation Certificate by the CA and Certificate of Company Secretary towards allotment of shares. The above evidences were forwarded to the AO seeking a Remand Report vide this office letter 07.01.2019. The jurisdictional AO submitted Remand Report dated 19.02.2019, which was endorsed by the Addl.CIT, Range-16, Hyderabad dated 05.03.2019. The copy of the Remand Report received was furnished to the appellant for offering its comments, if any and the appellant has submitted its rejoinder on 14.03.2019, which is placed on record. After considering all the above, my observations are as under: 4.3 As could be seen from the entire gamut of facts, the only issue to be addressed is addition of Rs.18,86,00,000/-. The operative portion of the addition made in para-6 is reproduced as under: "6. Since the onus is on the assessee to prove satisfactorily the funds received in the form of CCDs totally amounting to Rs.18,86,00,000/- is out of sources of investing company which has to satisfy conditions of genuinity of transactions, identity and also credit worthiness otherwise the sum so received in the hands of beneficial owner in this case the assessee company shall be deemed to be income of the assessee 3
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company. The AR of the assessee has furnished details of identity of the assessee company to the extent of receipt in India but has failed to satisfy credit worthiness of the investing company for investing higher rate of interest bearing funds as CCDs having less margin of interest. As the assessee company received the funds it will be treated as a beneficial owner of the said funds. It was also objected by the AR that the funds in the form of CCDs have been routed through Cyprus prior to notification dated 01.11.2013. Hence, question of Notified Jurisdictional Area does not arises on the date of transfer of the funds, the objections of the AR is not acceptable as Cyprus being contracting stage have a legal obligation to exchange such information as is necessary for carrying out the provisions of agreement or of the domestic loss of the contracting stage, in particular for the prevention of fraud and evasion of the tax. Since the said country is not providing the information as requested by the Indian Authorities the action was taken on 01.11.2013 which is an accumulation effect on the non co-operation of Cyprus in providing the information. It is not clearly mentioned that the Notified Jurisdictional Area is applicable subsequently not prior to the period of the notification. The effort of the Cyprus to lift Notified Jurisdictional Area u/ s 94A of the Act is yet to be fruitful. In the above backdrop the request of the AR is not tenable. JJ 4.4 From the above, the following points emerge: a) The AO in the assessment order initially made a discussion throwing light on the three parameters i.e. identity of the transaction, genuineness of the transaction and creditworthiness of the transaction. Accordingly, he held that as creditworthiness of the investing company was not established, it was a sham transaction. Thereafter, he shifted his opinion to the provisions of section 94A(4) and invoked the same treating that the same was Notified as per CBDTs notification 86/2013 dated 01.11.2013 through SO 4625 GI/13 and made the addition of Rs.18,86,00,000/- u/s 94A(4) of the Act. b) In the remand report it was mentioned by the jurisdictional AO that removal of Cyprus from the list of Notified Jurisdictional Area u/ s 94A was rescinded with effect from the date of issue of the notification with retrospective effect from 01.11.2013 but since genuineness with regard to source of investment made by the investing company was not established by the appellant, the AO held that the addition may be sustained. 4.5 Hence, it becomes imperative to go through the provisions of Section 94A(4) of the Act, which reads as under: (4) Notwithstanding anything to the contrary contained in this Act, where, in any previous year, the assessee has received or credited any sum from any person located in a notified jurisdictional area and the assessee does not offer any explanation about the source of the said sum in the hands of such person or in the hands of the beneficial owner (if such person is not the beneficial owner of the said sum) or the explanation offered by the assessee, in the opinion of the Assessing Officer, is not satisfactory, then, 4
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such sum shall be deemed to be the income of the assessee for that previous year. 4.6 Thus, as could be seen from the above to make an addition u/s 94A(4) of the Act, the two conditions that has to be satisfied are: (1) The assessee should have received or credited any sum from any person located in a notified jurisdictional area and, (2) If the assessee do not offer any explanation about the source of the said sum either in the hands of such person or in the hands of the beneficial owner, to the satisfaction of the AO. 4.7 With regard to the first condition, the assessee has not received amounts from a person located in a Notified jurisdictional area as the CBDT Circular No.15 of 2017 in F.No.500/002/2015-FT&TR-III(1), dated 21.04.2017, Cyprus has also been accepted by the AO in the remand report dated 19.02.2019. Thus, the first condition was not attracted in appellant's case. 4.8 Coming to the second condition, if any sum is received from a person located in Cyprus, then the onus is on the assessee to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount shall be deemed to be the income of the assessee. The question of examining the source of income arises if such person is located in a Notified Jurisdictional Area. However, in the instant case the assessee received CCDs from ARE Cyprus and Cyprus was declared to be treated as normal tax jurisdiction and was not a Notified Jurisdictional Area vide CBDT Circular No.1S of 2017, dated 21.04.2017 retrospectively with effect from 01.11.2013. 4.9 Thus, the twin conditions for invoking the provisions of Section 92A(4) of the Act are failed in appellant's case. In view of the above discussion, the AO is directed to delete the addition of Rs.18,86,00,000/- u/s 94A(4) of the Act. As a result, the grounds raised in this regard are allowed.”
Learned CIT-DR vehemently contended during the course of hearing that there is hardly any dispute on admitted facts herein inter-alia indicating the assessee to have received CCDs (Compulsorily Convertible Debentures) totaling to Rs.18,86,00,000/- with face value of Rs.12/- each from M/s. Alexandria Real Estate Cyprus No.1 Ltd (“ARE Cyprus”). And that as per the Assessing Officer’s detailed discussion in Para 3
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onwards in the assessment order, it is clear that the said latter entity had infact had availed loans from shareholders and borrowals from M/s. Alexandria Finance LLC.
Mr. Sai took us to the Assessing Officer’s findings in paragraphs 4 to 6 that not only the assessee had failed to prove creditworthiness of the “cypriot” entity but also he noticed that the said tax jurisdiction was covered as a “notified jurisdictional area” under the provisions of section 94A of the Act vide notification dt.01.11.2013. Mr. Sai next admitted very fairly that “Cyprus” stands removed from the list of other notified tax jurisdictions as per Circular No.15 of 2017 dt.21.04.2017. He however quoted hon’ble apex court’s landmark decision in Hukumchand Mills Ltd. Vs. CIT (1967) 63 ITR 232 (SC) that even if the assessee has been absolved from application of section 94A of the Act, it deserves to be directed to prove creditworthiness of the overseas entity hereinabove so as to discharge its onus contemplated u/s 68 of the Act before the Assessing Officer afresh.
Learned authorized representative has drawn strong support from CIT(A)’s detailed discussion deleting the impugned addition made under section 94A of the Act.
We have given our thoughtful consideration to rival pleadings. The vexed question before us is of scope and ambit of section 94A of the Act inserted by the Finance Act 2011 w.e.f.
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01.06.2011. This relevant statutory provisions to this effect reads as under :
“94A. (1) The Central Government may, having regard to the lack of effective exchange of information with any country or territory outside India, specify by notification in the Official Gazette such country34a or territory as a notified jurisdictional area in relation to transactions entered into by any assessee. (2) Notwithstanding anything to the contrary contained in this Act, if an assessee enters into a transaction where one of the parties to the transaction is a person located in a notified jurisdictional area, then— (i) all the parties to the transaction shall be deemed to be associated enterprises within the meaning of section 92A; (ii) any transaction in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, income, losses or assets of the assessee including a mutual agreement or arrangement for allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided by or to the assessee shall be deemed to be an international transaction within the meaning of section 92B, and the provisions of sections 92, 92A, 92B, 92C [except the second proviso to sub-section (2)], 92CA, 92CB, 92D, 92E and 92F shall apply accordingly. (3) Notwithstanding anything to the contrary contained in this Act, no deduction,— (a) in respect of any payment made to any financial institution located in a notified jurisdictional area shall be allowed under this Act, unless the assessee furnishes an authorisation in the prescribed form authorising the Board or any other income-tax authority acting on its behalf to seek relevant information from the said financial institution on behalf of such assessee; and (b) in respect of any other expenditure or allowance (including depreciation) arising from the transaction with a person located in a notified jurisdictional area shall be allowed under any other provision of this Act, unless the assessee maintains such other documents and furnishes such information as may be prescribed34b, in this behalf. (4) Notwithstanding anything to the contrary contained in this Act, where, in any previous year, the assessee has received or credited any sum from any person located in a notified jurisdictional area and the assessee does not offer any explanation about the source of the said sum in the hands of such person or in the hands of the beneficial owner (if such person is not the beneficial owner of the said sum) or the explanation offered by the assessee, in the opinion of the Assessing
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Officer, is not satisfactory, then, such sum shall be deemed to be the income of the assessee for that previous year. (5) Notwithstanding anything contained in any other provisions of this Act, where any person located in a notified jurisdictional area is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII-B, the tax shall be deducted at the highest of the following rates, namely:— (a) at the rate or rates in force; (b) at the rate specified in the relevant provisions of this Act; (c) at the rate of thirty per cent. (6) In this section,— (i) “person located in a notified jurisdictional area” shall include,— (a) a person who is resident of the notified jurisdictional area; (b) a person, not being an individual, which is established in the notified jurisdictional area; or (c) a permanent establishment of a person not falling in sub-clause (a) or sub-clause (b), in the notified jurisdictional area; (ii) “permanent establishment” shall have the same meaning as defined in clause (iiia) of section 92F; (iii) “transaction” shall have the same meaning as defined in clause (v) of section 92F.]
A perusal thereof makes it clear that the legislature has incorporated non-obstante clause(s) in section 94A both sub- sections (2) and (4) thereof to be applicable in case(s) of the specified transactions in former and receipt or credit of any sum from any person; respectfully. Hon’ble apex court’s landmark decision in Central Board of India Vs. State of Kerala (2009) 4 SCC 94 (SC) holds that “a non-obstante clause is generally incorporated in a statute to give overriding effect to a particular section of the statute as a whole.” Meaning thereby that section 68 of the Act requiring an assessee to discharge its onus of identity, genuineness and creditworthiness, could no more be invoked when the specified transactions in question pertain to a person (defined in sub-section 6 (i)) located in the notified
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jurisdictional area. We wish to make it clear that Cyprus had been included in the notified list w.e.f. 01.11.2014 but removed on 21.04.2017 with retrospective effect from the former date which is nowhere an issue at all.
This leads us to the next equally important question as to whether the assessee’s compulsorily convertible debentures fall under non-obstante clauses in sub-sections (2) to (4) of section 94A of the Act. We notice with the able assistance of both the parties that such transactions are in the nature of “borrowals” only which have been duly covered under section 94A(2) wherein provisions of Chapter X are applicable than subs-section (4) exigible in case of receipt or credit of any sum from any person located in the notified jurisdictional area. We wish to observe here that even if the Revenue’s stand is accepted that the assessee had failed to prove creditworthiness, it could at best invoke Chapter X of the Act wherein such a transaction is treated to have been executed between associated enterprise within the meaning of section 92A only and not under sub-section (4) of 94A in foregoing terms. We thus uphold the learned CIT(A)’s directions deleting the impugned addition on account of removal of “Cyprus” as a notified jurisdictional area u/s 94A of the Act.
Now comes the equally important aspect in the Revenue’s arguments that we ought to direct the assessee to prove the creditworthiness of the “cypriot” entity qua the impugned compulsorily convertible debentures sums in tune with the assessment findings. We note with the able assistance of both the
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parties that the CIT(A) has nowhere dealt with the Assessing Officer’s detailed discussion holding the impugned “CCDs” to be a sham transaction whilst deleting the additions in issue made u/s 94A of the Act. The assessee’s plea before us is that this entire “sham transactions” issue has become redundant once the CIT(A) holds section 94A itself as not applicable. Be that as it may, we deem it appropriate that the CIT(A) needs to examine and adjudicate the above stated “sham transactions” issue in light of all the relevant facts on record on account of his foregoing failure in the impugned first round. Needful may be done in three effective opportunity of hearing. It is made clear that the assessee shall be very much at liberty to file additional evidence and raise all factual / legal plea(s) including exigibility of section 68, in consequential proceedings. Ordered accordingly.
No further ground has been pressed before us.
This Revenue’s appeal is partly allowed for statistical purposes in above terms.
Order pronounced in the Open Court on 23rd February, 2022.
Sd/- Sd/- (INTURI RAMA RAO) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated 23rd February, 2022. TYNM/sps
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Copy to: S.No Addresses 1 M/s. Labzone Electronics City Private Limited (Formerly known as M/s. Alexandria Labspace Electronics City Private Limited), Plot No.21, D.No.8-3-1024, 3rd Floor, Flat No.301, Jyothi Hermitage, Srinagar Colony, Hyderabad – 500073. 2 The Deputy Commissioner of Income Tax, Circle – 16(1), Hyderabad. 3 CIT(Appeals) – 4, Hyderabad. 4 Pr. CIT – 4, Hyderabad. 5 DR, ITAT Hyderabad Benches 6 Guard File By Order