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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Shri P.M. Jagtap, Vice-(KZ) & Shri S.S. Viswanethra Ravi
Per Shri P.M. Jagtap, Vice-President (KZ):- This appeal filed by the assessee is directed against the order of ld. Assessing Officer, i.e. Assistant Commissioner of Income Tax, Circle- 11(2), Kolkata dated 28.07.2017 passed under section 143(3) read with section 144C(5) of the Income Tax Act, 1961.
The assessee in the present case is a Company, which is engaged in the business of Analysis and Synthesis of Chemical Compounds and Data Processing. The return of income for the year under consideration was filed by the assessee on 30.11.2013 declaring total income of Rs.13,89,39,620/-. As noted by the Assessing Officer, the assesese-
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company during the year under consideration had entered into the following international transactions with its Associated Enterprises:- (i) Management Consultancy and Rs. 2,49,42,286/- Advisory Services (ii) Corporate Guarantee Fee Rs. 1,75,52,320/- received (iii) Sale of Long-term Investment Rs.71,88,98,240/- made in the shares of Associated Enterprises
In order to determine the Arm’s Length Price of the aforesaid international transactions entered into by the assessee-company with its AEs, a reference under section 92CA(2) of the Act was made by the Assessing Officer to the Transfer Pricing Officer. In the order passed under section 92CA(3) on 28th day of October, 2016, the Transfer Pricing Officer accepted the price charged by the assesese-company to its A.E. for providing Management Consultancy and Advisory Services as at Arm’s Length. He, however, did not accept the rate of Corporate Guarantee Fees charged by the assessee to its Associated Enterprises as at Arm’s Length and by following the view taken by him in A.Y. 2011-12 in assessee’s own case on a similar issue which was upheld by the Dispute Resolution Panel, he took the rate of Corporate Guarantee Fees at 2.32% as at Arm’s Length and worked out the Transfer Pricing Adjustment to be made on this issue at Rs.27,98,944/-. Similarly, following the view taken by him for A.Y. 2010-11 and 2011-12 in assessee’s own case which was upheld by the Dispute Resolution Panel, the Transfer Pricing Officer treated the investment made by the assessee-company in the share capital of its A.E. as deemed loan and worked out the Transfer Pricing Adjustment on account of interest on such loan at Rs.8,67,68,889/-. He accordingly worked out the total Transfer Pricing Adjustment to be made in the assessee’s case at Rs.8,95,57,833/-. In the Draft Assessment Order dated 26.12.2016 addition to that extent was made by the Assessing Officer to the total income of the assessee. The Assessing Officer also made further
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additions of Rs.5,38,000/- on account of disallowance under section 14A and Rs.6,025/- on account of disallowance of interest expenses.
Against the Draft Order of the Assessing Officer, objections were raised by the assessee before the Dispute Resolution Panel (DRP). The DRP vide its order dated 29.05.2017 passed under section 144C(5) of the Act confirmed the Transfer Pricing Adjustment worked out by the Transfer Pricing Officer (TPO) on account of interest by treating the investment made by the assessee in the share capital of its Associated Enterprise as a deemed loan. The DRP also confirmed the disallowance of Rs.5,38,000/- made by the Assessing Officer under section 14A. The DRP, however, allowed a part relief to the assessee in the Transfer Pricing Adjustment of Rs.27,98,944/- worked out by the TPO in respect of Corporate Guarantee Fees and restricted the said adjustment to Rs.14,84,912/-. In pursuance of the order passed by the DRP under section 144C(5), the total income of the assessee was determined by the Assessing Officer at Rs.22,77,37,443/- vide the final assessment order passed under section 143(3) read with section 144C(5) of the Act vide order dated 28.07.2017 after making, inter alia, the following additions:- (i) Transfer Pricing Adjustment Rs.8,82,53,801/- (ii) Disallowance u/s 14A Rs. 5,38,000/- (iii) Disallowance of interest Rs. 6,025/- expenses
Aggrieved by the order passed by the Assessing Officer under section 143(3)/144C(5) of the Act, the assessee has preferred this appeal before the Tribunal on the following grounds:- “1. Orders bad in law and on facts 1.1. That the order passed by the Ld. AO under section 143(3) read with section 144C(S) of the Income-Tax Act, 1961 (‘the Act') read with the order passed by the Ld. Transfer Pricing Officer ("TPO") under section 92CA(3) of the Act and the directions issued by the Hon'ble Dispute Resolution Panel CDRP') is bad in law and void ab-initio.
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1.2. That the Hon'ble DRP erred in not holding that the order of TPO and the order of the AO (in so far it relates to transfer pricing proceedings) are void ab initio as the conditions of section 92C(3) of the Act have not been satisfied.
1.3. On the facts and in the circumstances of the case and in law, the Hon'ble DRP and the Ld. TPO/AO, erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act.
Erroneous transfer pricing adjustment on account of investment made in shares of the associated enterprise -
2.1. The Hon'ble DRP and the Ld. TPO/AO erred in not appreciating that the transaction pertaining to 'investment in equity shares of AE (comprising of share purchase/ share subscription)' is not an international transaction.
2.2. The Hon'ble DRP and the Ld. TPO/AO erred in considering the transactions of share subscription/purchase undertaken by the Appellant during the assessment years (‘AY') 2010-11 and AY 2011-12 as continuing, and thereby erred in making a transfer pricing adjustment, even though the Appellant had not entered into any such transaction during the AY 2013-14.
2.3. The Hon'ble DRP and the Ld. TPO/ AO erred in not appreciating that no income/potential income has arisen to the Appellant from such international transaction of investment in equity shares and thus would not fall within the purview of Indian Transfer Pricing regulations.
2.4. The Hon'ble DRP and the Ld. TPO/AO erred in re-characterizing the transaction of investment in equity shares as deemed loan, provided by the Appellant to its AE, by treating the difference in the value of equity shares invested in, i.e. difference between the alleged arm's length price as arrived by the Ld. TPO and actual invested price, which is bad in law and non-est in the eyes of law.
2.5. The Hon'ble DRP and the Ld. TPO/AO erred in making an adjustment for notional interest towards such share capital re- characterized as loan, which is not tenable and permissible under the law. The Hon'ble DRP and the Ld. TPO/ AO failed to appreciate the fact that provisions of Chapter X of the Act does not confer the power and jurisdiction upon the revenue department to make such an adjustment.
2.6. The Hon'ble DRP erroneously upheld the action/ approach of the Ld. TPO/AO by holding the investment in shares as an international transaction and benchmarking the same for arriving at the arm's
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length price of the interest receivable on the excess amount invested in shares of the AE, by placing reliance on their order of earlier years.
2.7. The Hon'ble DRP has grossly erred in not giving clear directions on the interest rate to be considered with respect to the transfer pricing adjustment for notional interest made by the Ld. TPO/AO on account of such investment made in shares of the AEs, even though the DRP in earlier year, i.e. AY 2012-13 had held such interest rate to be LIBOR + 350 bps.
2.8. On the facts and in the circumstances of the case the Hon'ble DRP and the Ld. TPO/AO erred in not considering that the Appellant, being the parent company, was concerned with only the total amount to be invested as share capital in the concerned year, and not the number of shares to be invested per se as such, if the value alleged by the learned TPO/AO was to be considered, the Appellant would have only invested in higher number of shares and the total investment in share capital of the AE would have remained unchanged.
2.9. The Hon'ble DRP and the Ld. TPO/AO ought to have appreciated that the Share subscription in AY 2010-11 and AY 2011-12 have been made out of reserves and surplus of the Appellant i.e. out of profits, which were already taxed under the relevant provisions of the Act, and as such adjustment on account of shares subscription/ share purchase, which is made out of taxed profits would lead to double taxation.
2.10. The Hon'ble DRP and Ld. TPO/AO erred in disregarding the fact that investment in shares of the AE was a legitimate business transaction for which the Appellant even paid the capital gains tax accruing on the account of income arising due to disposal of such shares of AE during the year.
Erroneous transfer pricing adjustment on account of the guarantee fees charged to the associated enterprise-
3.1. The Hon'ble DRP and the Ld. TPO/ AO erred in making a transfer pricing adjustment on account of the guarantee fees charged by the Appellant to its associated enterprise.
3.2. The corporate guarantee issued by the Appellant in favour of the AE is a shareholder's activity which does not require any charge and hence cannot be considered as an international transaction.
3.3. Without prejudice to the above, the DRP erred in considering 2.19% as guarantee fee receivable as against 2% actually received by the Appellant.
3.4. Without prejudice to the above, the directions of the DRP is erroneous in so far as confirming the action of the TPO in not following any of the prescribed methods for the purpose of determination of arm's length price of guarantee fee.
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3.5. Without prejudice to the above, the Hon'ble DRP and the Ld. TPO/AO erred in rejecting the methodical approach of the Appellant without any basis and assuming the credit rating of the associated enterprise purely based on gross assumptions.
3.6. Without prejudice to the above, the Hon'ble DRP and the Ld. TPO/AO followed an ad-hoc approach to determine the guarantee fee rate and disregarded the methodical benchmarking approach/ fresh benchmarking followed by the Appellant.
Erroneous disallowance of amount under section 14A of the Act
4.1. The Learned Assessing Officer erred in law and on facts in disallowing an amount of Rs. 5,38,000 under section 14A of the Act.
Erroneous disallowance of amount paid as interest on service tax
5.1. The Ld. AO erred in disallowing an amount of Rs. 3,924 paid as interest on service tax.
Interest under section 2348 of the Act
6.1. The Ld. AO erred in levying Rs.23,24,948 as interest under section 234B of the Act.
Interest under section 234C of the Act
7.1. The Ld. AO erred in levying Rs.39,46,000 as interest under section 234C of the Act.
Initiation of penalty proceedings
8.1. The Appellant submits that based on the facts and the circumstances of the case, there was no basis for the AO to propose to initiate penalty proceedings under section 271(1)(C) of the Act.
The Appellant submits that the above grounds are independent and without prejudice to one another”.
We have heard the arguments of both the sides and also perused the relevant material available on record. As submitted by the ld. Counsel for the assessee, Ground No. 1 raised in this appeal of the assessee is general in nature, which does not call for any specific adjudication.
As regards Ground No. 2, the ld. Representatives of both the sides have agreed that the issue involved therein relating to the Transfer
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Pricing Adjustment made on account of interest by treating the investment made by the assessee in the share capital of Associated Enterprises as deemed loans is squarely covered in favour of the assessee by the decision of the Tribunal rendered in assessee’s own case for A.Y. 2010-11 vide its order dated 22.09.2017 passed in ITA Nos. 966 & 1053/KOL/2017 vide paragraphs no. 15 & 16, which read as under:- “15. We have heard the rival submissions. The preliminary issue that arises for our consideration is whether international transaction of investment in equity shares of an AE would not fall within the purview of Sec.92 of the Act, because no income arises out of such international transactions? As we have already seen the Hon'ble Bombay High Court in the case of Shell India Markets Ltd. (supra) and Vodafone (supra) has taken the view that amounts received on issue of share capital including premium is on capital account. Share premium have been made taxable by a legal fiction under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24 )(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP, Therefore, in the absence of express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. The said view has been reiterated by the Bombay High Court in the case of Shell India Markets Ltd. (supra). The ITAT Mumbai in the case of Topsgroup Electronic Systems (supra) has taken the view that the ratio laid down by the Hon'ble Bombay High Court in the case of Vodafone (supra) will apply to a case where an Indian entity invests in shares of an AE also. The Tribunal held that what is made applicable for inbound share investment (investments in shares of Indian subsidiary by the holding company (Non-resident) would be equally applicable to outbound share investments also (Investment by a resident Indian company in the shares of the Non-resident AE). The parameters to be applied cannot be different for outbound investment and inbound investments. The transaction of purchase of shares being on capital account has now been settled with the Press note released by the Government of India dated 28.01.2015. The Union Cabinet accepted the order of Bombay High Court in the case of Vodafone India Services Private Limited (VISPL) dated 10.10.2014.
The Union Cabinet while accepting the Bombay High Court order, dated 10.10.2014, specifically noted the following observations:
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..... b) The crucial words "shall be chargeable to income tax" which are found in Section 42(2) of the 1922 Act are absent in Chapter X of the Act. .... Therefore it is clear that the deemed income which was charged to tax under Section 42(2) of 1922 Act was done away with under this Act. "
c) The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of Arm's Length Pricing to transactional value/ consideration itself does not arise."
d) If its income which is chargeable to tax, under the normal provisions of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2(24) of the Act. The amount received on issue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2)(viib) of the Act. Thus such capital account cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in impugned order.
e) ..........The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when the income arises in case of an International transaction between AEs. It does not warrant re- computation of a consideration received/given on capital account."
It is clear from a reading of para 'e' of the Cabinet Press release that, computation of ALP will arise income arises from an International transaction between AEs. It does not warrant determination or re-computation of a consideration received / given on capital account. Thus, going by the above, the transaction of investment in shares being payment on capital account falls outside the purview”.
The aforesaid decision rendered for A.Y. 2010-11 has subsequently been followed by the Tribunal in A.Y. 2011-12 & 2012-13 to decide the similar issue in favour of the assesese vide its order dated 17.11.2017 passed in ITA Nos. 121/KOL/2016 & 647/KOL/2017. Since the issue 8
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involved in the year under consideration as well as all the material facts relevant thereto are similar to that of A.Ys. 2010-11, 2011-12 and 2012- 13, we respectfully follow the orders of the Coordinate Bench of this Tribunal for A.Ys. 2010-11, 2011-12 & 2012-13 and delete the addition made on account of Transfer Pricing Adjustment in respect of interest by treating the investment made by the assessee-company in the share capital of its Associated Enterprises as deemed loans. Ground No. 2 of the assessee’s appeal is accordingly allowed.
As regards the Ground No. 3, the ld. Representatives of both the sides have agreed that the issue involved therein relating to the Transfer Pricing Adjustment made on account of Guarantee fees is also covered in favour of the assessee by the order of the Tribunal dated 22.09.2017 (supra) for A.Y. 2010-11, wherein a similar issue was decided vide paragraphs no. 25 & 26 as under:- “25. We have considered the rival submissions. In the following decisions, various benches of ITAT have taken the view that 0.25% to 0.60% Guarantee commission charged for providing Guarantee was at Ann's Length: Sl. Name of case laws Relevant para Reference No. Corporate guarantee fee upheld mostly in the range of 0.25% to 0.60% 1. Thomas Cook(lndia) "6..... Considering the entirety of Para-6 Pg, Limited –vs.- facts and circumstances of the no.10/11 DCIT[2016]70 case and on axmann.com 322 the basis of the material (Mumbai - Trib) available on record, we, therefore proceed to uphold the rate of 0.50% for the purpose of determining the arm's length rate of the guarantee commission fee."
Thomas Cook (lndia) "6 ..... Considering the entirety Para-6 pg. Limited Vs of facts and circumstances of No.5 ACIT[20l6]69 the case and on the basis of the taxmann.com 443 material available no record, (Mumbai - Trib) we, therefore proceed to uphold the rate of 0.50% for the 9
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purpose of determining the arm's length rate of the guarantee commission fee."
Godrej Consumer "46 .... Thus, on consideration of Para-46, Products Ltd. Vs ACIT overall facts and circumstances pg. No.16 [2016] 69 taxmann. in the light of judicial Corn 436 pronouncements referred to above, we are of the considered opinion that the arm's length price of the corporate guarantee should be fixed at 0.5%
Everest Kanto "15 Following the earlier order Para-15, Cylinder Ltd. Vs ACIT of this Tribunal and also Pg. No.7 [2015] 56 considering the internal CUP taxmann.com 361 being the guarantee commission (Mumbai - Trib.) paid by the assessee to the ICICI Bank for obtaining guarantee, we hold that the arm's length guarantee commission in respect of all three transactions of guarantee to its AE at Dubai, China and USA shall be taken at 0.5%. Accordingly, the Assessing Officer is directed to compute the adjustment on account of guarantee commission by taking the arm's length guarantee commission at 0.5%.
Aditya Birla Minacs "2.6 Accordingly, following the Para-15, Worldwide Ltd. vs. earlier decisions of this Pg.no.7 DCIT [2015] 56 Tribunal, we direct the AO/TPO taxmann. Corn 317 to adopt 0.5% as arm's length (Mumbai - Trib.) guarantee commission charges in respect of the guarantee provided by the assessee for obtaining the loan by the AE."
Mylan Laboratories "7.2 ..... Respectfully following Para-7.2, Ltd. Vs ACIT [2015] the same, we direct the TPO to Pg no.8 63 taxmann.com 1 79 adopt (Hyderabad - Trib.) 0.53% as the guarantee commission rate instead of 2% adopted by him."
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M/s. Mahindra 5 Considering the decision of co- Para-5, Pg Intertrade Ltd. Vs ordinate bench on similar issue, no.3 DCIT [ITA we direct the AO to exceed the No.269IMuml2014] corporate guarantee fees @ .5% and made the adjustment accordingly.
In the light of the aforesaid judicial pronouncements, we are of the view that the addition made by the AO ought to have been deleted by the CIT(A) as the Guarantee Commission charged by the assessee has to be regarded as at Arm’s Length. We therefore direct the addition made in this regard be deleted. Further, it is worthwhile to mention that the recent Safe Harbour Rules notified by the Central Board of Direct Taxes (Notification No. 46/2017 dated 7 June 2017) the guarantee commission/fee declared in relation to the eligible international transaction is at the rate not less than 1% per annum on the amount guaranteed. The relevant extracts are reproduced below: 6. Providing corporate guarantee The commission or referred to in sub-item (a) or sub- fee declared in item (b) of item (v) of Rule 10TC. relation to the eligible international transaction is at the rate not less than one percent per annum on the amount guaranteed. Thus, based on the above, it is evident that the guarantee fees charged by the assessee is at arm’s length. We, therefore, direct that the adjustment proposed by the ld. TPO/AO be deleted”.
The above decision rendered for A.Y. 2010-11 has been followed by the Tribunal to decide the similar issue in favour of the assessee even in A.Y. 2011-12 and 2012-13 vide its common order dated 17.11.2017 passed in ITA No. 121/KOL/2016 & 647/KOL/2017. Since the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of A.Ys. 2010-11, 2011-12 and 2012-13, we respectfully follow the orders of the Coordinate Bench of this Tribunal for A.Ys. 2010-11, 2011-12 & 2012-13 and delete the addition relating to the Transfer Pricing Adjustment made on account of Guarantee fees charged to the Associated Enterprises. Ground No. 3 of the assessee’s appeal is accordingly allowed. 11
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As regards the Ground No. 4, it is observed that the issue involved therein relating to disallowance under section 14A is also covered by the order of the Tribunal dated 17.11.2017 for A.Ys. 2011-12 and 2012-13 (supra), wherein the disallowance made under section 14A was deleted by the Tribunal on the ground that there was no exempt income actually earned by the assessee during the relevant previous year. To arrive at this conclusion, the Tribunal relied on the decision of the Hon’ble Delhi High Court in the case of Cheminvest Limited –vs.- CIT [317 ITR 33]. As submitted by the ld. Counsel for the assessee, no exempt income was earned by the assessee even during the year under consideration and keeping in view this undisputed factual position, we delete the disallowance made by the Assessing Officer under section 14A by following the decision of the Tribunal in assessee’s own case for A.Y. 2011-12 as well as the decision of the Hon’ble Delhi High Court in the case of Cheminvest Limited (supra). Ground No. 4 is accordingly dismissed.
At the time of hearing before us, the ld. Counsel for the assessee has not pressed Grounds No. 5 to 8. The same are accordingly dismissed as not pressed.
As regards the issues raised in Grounds No. 6 & 7 relating to levy of interest under section 234B and 234C, it is observed that the same are consequential in nature. The Assessing Officer is accordingly directed to allow consequential relief to the assessee on these issues.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on March 15, 2019. Sd/- Sd/- (S.S. Viswanethra Ravi) (P.M. Jagtap) Judicial Member Vice-President (KZ) Kolkata, the 15th day of March, 2019
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Copies to : (1) M/s. TCG Lifesciences Pvt. Limited, (Formerly TCG Lifesciences Limited) Block-BN, Plot-7, Sector-V, Salt Lake Electronics Complex, Kolkata-700 091
(2) Assistant Commissioner of Income Tax, Circle-11(2), Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata-700 069
(3) Dispute Resolution Panel-2, New Delhi, (4) Commissioner of Income Tax , (5) The Departmental Representative (6) Guard File By order
Assistant Registrar, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.