VOLTAS LTD,MUMBAI vs. ADDL CIT RG 7(3), MUMBAI

Manoj Kumar Aggarwal (Accountant Member): -

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11

GROUND NO 1: DISALLOWANCE U/S 14A The learned Commissioner of Income-tax Officer (Appeals) [hereinafter referred to as the CIT(A)] and the Assessing Officer [hereinafter referred to as the AO] failed to appreciate that the Appellant Company had on its own, offered Rs.13.50 lakhs as disallowance u/s.14A, being Operating & Administrative Expenses and Establishment / General Expenses, which could be considered as attributable towards earning exempt dividend income. The CIT(A) has disallowed 0.5% of average investments (excluding foreign investments, investment in Govt. Securities and FMP's which are subject to tax), which is unwarranted. The Appellant Company therefore prays that the additional disallowance made by the CIT(A), over and above the disallowance of Rs.13.50 lakhs voluntarily offered by the Appellant Company be deleted.

GROUND NO 2: ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING. Advance of Rs. 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 interest be deleted.

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 was determined at Rs.361.21 Crores after certain additions / adjustments and disallowances as against returned income of Rs.353.25 Crores filed by the assessee on 29/09/2009 which was revised at same figure on 29/03/2011 to claim credit for additional TDS.

The assessee is aggrieved on account of confirmation of disallowance u/s 14A and partial confirmation of Transfer Pricing adjustments whereas revenue is aggrieved by relief provided to the assessee by Ld. CIT(A) on account of Capital Gains and Transfer Pricing Adjustments.

A. Non-Transfer Pricing Grounds 3.3.1 Disallowance u/s 14A During assessment proceedings, it transpired that the assessee earned exempt dividend income of Rs.15.82 Crores including dividend income from Indian Companies and Mutual Fund amounting to Rs.11.14 Crores. In its computation of income, the assessee offered suo-moto disallowance of Rs.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

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 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 Rs.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 Rs.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 Rs.13.50 Lacs, the net disallowance thus worked out to be Rs.117.90 Lacs. 3.3.2 Before Ld. first appellate authority, the assessee, inter-alia, pleaded that Ld. AO did not arrive at requisite satisfaction that the computation of disallowance by the assessee was incorrect before proceeding to apply Rule 8D and therefore, the additional disallowance was not justified. However, the said arguments could not find favor with Ld. CIT(A) and the same were rejected by observing as under: - With respect to the claim of the appellant that the AO has not arrived at a satisfaction that the computation of disallowance by the applicant company is incorrect. It is seen that the AO has discussed the issue in detail. He has observed that the expenses with reference to investment of such high magnitude did not involve time of only lower personnel but also the key management personnel. It is clear that the expenditure for MIS division has been allocated while the manhours of other persons has not been allocated. Accordingly, he has concluded that the computation of the appellant is not correct. There is no formal documentation which the AO is required to generate for rejecting the computation of the appellant. In the case of Indiabulls financial services Ltd [TS-643-HC-2016 (Del)], the Delhi High Court has ruled that it is not necessary for the AO to expressly record his satisfaction before invoking Rule 8D.

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 However, the assessee’s plea for exclusion of investments in foreign companies whose dividend was taxable and companies under liquidation which were not going to give any income, found favor with Ld. first appellate authority, who directed for exclusion of aforesaid investments by observing as under: - The appellant has submitted that the investment amount taken by the AO includes investment in foreign companies whose dividend is taxable and companies under liquidation which are not going to give any income. It has claimed that these investments should be excluded while computing the average investment for the purpose of Rule 8D(2)(iii). The submission made by the appellant is found acceptable. The investment which generates taxable income and investment which is under write off should be excluded while adopting the average amount of investment which generates tax-exempt income. A similar view has been taken by CIT(A) in AY 2008-09 while deciding this very issue at para 2.6 of his order. The AO 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.

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 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 correctness of suo- moto disallowance made by the assessee having regards to assessee’s accounts and explanations and proceed further after recording speaking reasons for non-satisfaction. We note that, in this AY, learned AO has already rejected the assessee’s working. Nevertheless, 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 Ld. 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 [82 Taxmann.com 415]. Accordingly, Ground No.1 of assessee’s appeal may be treated as partly allowed for statistical purposes. 3.4.1 Capital gains u/s 50C of the Act The assessee reflected capital gains from sale of certain Land & Building situated at Sangareddy, Hyderabad. Upon perusal of details, it transpired that the assessee sold freehold land admeasuring 11 acres along with building to Sri Shiva Sai Constructions [SSSC] vide Sale Deed dated

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 18/07/2008 for aggregate consideration of Rs.325 Lacs. This Land and Building formed part of fixed assets. Accordingly, the sales proceeds of Rs.325 Lacs were apportioned in the following manner: - No. Head Amount (Rs.)

The said apportionment was done as per valuation done by independent Chartered Engineers & Govt. registered value namely M/s G.D. Rao & Associates vide valuation report dated 02/06/2007. The resultant gains of Rs.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

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 consideration of Rs.46 Lacs and accepted advance of Rs.25 Lacs. The balance Rs.21 Lacs was to be paid upon receipt of permission from Andhra Pradesh Government for alienation of the said property and upon execution of deed of conveyance. As per the terms, the responsibility to obtain the permission was with the assessee, however, despite vigorous follow-up, the assessee could not succeed in obtaining the permission. As SSSC was keen to purchases the property, they agreed to take up the responsibility of obtaining the said permission and despite best efforts, the permission could not be obtained till March, 2007. Since considerable time had lapsed, SSSC was advised to revise sale consideration amount of Rs.46 Lacs earlier offered by them in 2000 as the property prices in the area had increased. In response, SSSC gave fresh offer of Rs.151 Lacs including notional interest of Rs.17 Lacs on advance of Rs.25 Lacs paid by them earlier. Although the revised offer was better than offer made by other parties, the management decided not to proceed with the transaction and refunded the advance of Rs.25 Lacs along with interest thereon. However, rejecting the same, SSSC filed civil suit for specific performance of the contract. During the intervening period, the assessee made independent efforts to sell this property, however, the same did not fetch much fruits. Finally, in June 2007, the assessee got the property valued by M/s G.D. Rao & Associates, Chartered Engineer and Govt. Registered Valuer, who valued the land at Rs.330 Lacs and structure thereon at Rs.51.61 Lacs. However, taking a conservative view, the assessee estimated the realistic value of Land and Building at around Rs.321.25 Lacs. Thereafter, SSSC expressed willingness to revise

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 the offer and offered to purchase the property for Rs.325 Lacs on ‘as-is- where-is’ basis, which was accepted by the assessee and accordingly, the final deal was struck at Rs.325 Lacs. The Sale Deed was executed on 18/07/2008 and at the time of registration, the Stamp Duty was adjudicated and paid by SSSC on market value of Rs.667.23 Lacs as determined by the Stamp Authorities. In the above background, the assessee submitted that based on the actual circumstances and various impediments including reservations/government permission involved and the fact that the initial agreement was entered in the year 2000, the proceeds received by the assessee from the sale of the 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 Rs.667.23 Lacs and worked out additional Long-Term Capital Gains of Rs.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: -

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11

Aggrieved, the revenue is in further appeal before us. 3.4.5 After due consideration of factual matrix as enumerated by us in the preceding paragraphs, we find that Ld. 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 property was subject matter of litigation. The property had negative covenants as to its use which would reduce its value. Further, the assessee had disputed the valuation before Ld. AO, but no reference was made to Valuation Officer u/s 50C(2). The factual submissions made by the assessee were not controverted by Ld. AO. Therefore, the action of Ld. AO in adopting the Stamp Duty Value could not be held to be justified. Therefore, finding no infirmity in the impugned order on this issue, we dismiss ground nos. 1 & 2 of revenue’s appeal. B. Transfer Pricing Grounds 3.5.1 Transfer Pricing [TP] adjustment on account of Share Application Money Certain international transactions carried out by the assessee with its Associated Enterprises [AE] during the year were referred to Ld. Transfer Pricing Officer [TPO] u/s 92CA (1) for determination of Arm’s Length Price [ALP]. One such transaction was Share Application money of Rs.11.41 Crores stated to be advanced by assessee to one of its AE namely Saudi Ensas Company for Engineering Services WLL, Saudi Arabia [Saudi

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 Ensas]. The said entity was a joint venture company and engaged in electromechanical business in the Kingdom of Saudi Arabia [KSA]. The assessee held 49% of its shareholding whereas 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 Rs.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 time. Reliance was placed on Ministry of Corporate Affairs (MCA) notification dated 14/12/2011 which stipulated that all allotment of securities was to be completed within a period of 60 days from the date of receipt of share application money and if the allotment was not made in that period, the money was to be refunded within

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 15 days, failing which entity shall be required to pay interest of 12% per annum. No independent party would wait beyond reasonable time period and therefore, allowing for time period of 60 days, the assessee, in the opinion of Ld. TPO, should have received interest on Share Application Money from July, 2008 to March, 2009. 3.5.3 Upon show-cause notice, the assessee argued that share application money was given as a business prudence and MCA notification was not applicable for Share Application Money pending with foreign companies. The attention was drawn to the fact that average cost of borrowings for overseas projects was only 2.7% per annum. However, the said submissions, in the opinion of Ld. TPO, would not impact the pricing since two uncontrolled parties would expect financial compensation in similar situation. Noticing that in case of assessee, the loan is unsecured, Ld. TPO, adopting Arm’s Length Interest rate of 17.78%, proposed TP adjustment of Rs.152.23 Lacs for 9 months. 3.5.4 Aggrieved, the assessee challenged the proposed adjustment before Ld. first appellate authority by way of elaborate written submissions which have already been extracted in para 7.3 of the impugned order. The assessee, reiterating the submission as made before Ld. TPO, pleaded that share application money was utilized by Saudi Ensas for repayment of outstanding dues of South Holland Bank and other statutory dues so that it could turn around and submit tenders for executing contracts in KSA and avail credit facilities for issuing bank guarantees to the clients. The clearances in the case of Saudi Ensas were delayed, initially to give effect

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 to transfer of 51% shareholding of the local partner and subsequently due to certain complications arising on account of assignment of existing shareholding from Metrovol, a wholly owned subsidiary of Voltas to Voltas Netherlands BV, another wholly owned subsidiary of Voltas. Unfortunately, while the process was under review, main partner of Law firm Hassan Mahassni passed away 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 was on capital account and therefore, the Transfer Pricing provisions were not applicable to these transactions. Reliance was also placed on various judicial pronouncements to support

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 the submissions, which have already been tabulated in para 7.3.10 of the impugned order. 3.5.6 The Ld. CIT(A), after due consideration, inter-alia, took note of the fact that the capital was infused in tranches as Share Application money towards additional capital after due approvals by relevant authorities and the share allotment finally took place in financial Year 2015-16. Further, assessee’s AE was not in sound financial health and the money so remitted was utilized in payment of business debts and to meet working capital requirements. However, noticing that there was inordinate delay of almost 6 years between infusion of money and allotment of shares, the assessee’s AE stood benefitted from the infusion whereas no benefit accrued to the assessee. The cited decision of Vodafone India Services Pvt. Ltd. was found to be applicable only in case of Share Capital and not in the case of Share Application money, which was the fact in the present case. Therefore, the amount was to be treated as advance to the AE which has been utilized by the AE for its own use. Further, the amount was liable to be treated as loan for interim period till allotment of Shares. The relevant observations of first appellate authority, for ease of reference, could be extracted in the following manner: -

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 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.

It is evident from the directions of Ld.CIT(A) that Ld. AO was finally directed to adopt a spread of 4% over LIBOR of 1.76%. In other words, the ALP of the transactions was directed to the computed by adopting a rate of 5.76% instead of 17.78% as proposed by Ld. TPO. The aforesaid adjudication has given rise to cross-appeals before us. The assessee is agitating the adjustment sustained by Ld. first appellate

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 authority whereas the revenue is agitating the stand of Ld. CIT(A) in directing Ld. AO to apply LIBOR based rate of 5.76%. 3.5.7 Upon careful consideration of factual matrix as enumerated by us in the preceding paragraphs, the undisputed position that emerges is the fact that the assessee has advanced Share Application Money to one of its AE situated in Saudi Arabia with a view to acquire further stake in that entity. The entity 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 allotment of shares, nevertheless, the assessee was successful in explaining the delay

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 in allotment of share and was able to demonstrate with evidences the circumstances which led to delay in allotment of shares. Therefore, re- characterization of this transaction as advance / loan by revenue authorities, in our considered opinion, was not correct approach and this transaction could not be equated with loan transactions. The Ld. DR has contended that the transactions have not been re-characterized as loan but the same has been benchmarked since certain benefits have accrued to AE by infusion of fund which must be shared with the assessee. However, we find that ALP of the transaction has been computed in similar manner as it would be computed for a loan transaction. Further as already noted, assessee’s AE ultimately became wholly owned subsidiary of the assessee and therefore, whatever benefit would accrue to AE, the same would indirectly accrue to the assessee. Therefore, not convinced with the approach of lower authorities, we hold that no addition would be warranted on this account. To arrive at aforesaid conclusion, we draw strength from the observation of Hon’ble Bombay High Court in Pr. CIT V/s Aegis Limited (ITA No. 1248 of 2016 dated 28/01/2019) wherein Hon’ble court has observed that in the absence of finding that the transaction was sham, the TPO could not have treated such transaction as a loan and charge interest thereon on notional basis. 3.5.8 Our view is further fortified by the decision of co-ordinate bench of Delhi Tribunal rendered in Bharti Airtel Limited V/s Addl. CIT (ITA No. 5816/Del/2012 dated 11/03/2014) wherein Hon’ble Bench has observed as under: -

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 treated as interest free loan to AE, we see no need to deal with other aspects of the matter. This decision has subsequently been followed by Mumbai Tribunal in Parle Biscuits Pvt. Ltd. V/s DCIT (ITA No.9010/Mum/2010 dated 11/04/2014) and also in Aditya Birla Minacs Worldwide Ltd. V/s DCIT (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.

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 at Thane, Maharashtra. During assessment proceedings, it transpired that the assessee on 01/04/2009, entered into development agreement with respect to 3950 Sq. Mtr. Sanad land bearing Survey No. 526 of Village Pachapakhadi, Taluka and District at Thane, Maharashtra with M/s Sheth Developers Ltd. for consideration of Rs.255.10 Lacs which was subsequently reduced to Rs.238.17 Lacs due to delineation of land of 262.12 Sq. Mtrs. The said land was stated to be purchased in the year 1961 for Rs.7.37 Lacs and the indexed cost of the same was worked out to Rs.46.61 Lacs. The assessee offered Long Term Capital Gain of Rs.191.56 Lacs from this transaction. Since the reckoner value of land worked out to be Rs.461.14 Lacs, Ld. AO proceeded to apply the provisions of Section 50C disregarding assessee’s contention that there were negative covenants with the property as half the unearned revenue was liable to be shared by the buyer of the property with the Government and therefore, the sale consideration was bound to be below the reckoner value. However, disregarding the same, Ld. AO, invoking provisions of Section 50C, enhanced the gains by Rs.222.96 Lacs.

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11 value of Rs.461.14 Lacs. In support, the valuation report from Cushman & Wakefield was also furnished. The attention was also drawn to the fact that the assessee had transferred only the development rights of the land and it was not a case of outright sale and therefore, the reckoner value could not be applied to stated transaction.

Aggrieved, the revenue is in further appeal before us.

VOLTAS LIMITED Assessment Years 2009-10 & 2010-11

Conclusion

उप/सहायकपंजीकार (Dy./Asstt.