M/S. EARNEST TOWERS PRIVATE LIMITED ,KOLKATA vs. ACIT, CIRCLE - 2(1), KOLKATA , KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, KOLKATA

Before Sri J. Sudhakar Reddy, Accountant Member & Sri S.S. Viswanethra Ravi, Judicial Member I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 M/s. Earnest Towers Private Limited……….………....………………...…………………….….Appellant [PAN : AABCE 8612 N] Vs. ACIT, Circle-2(1), Kolkata………............................................................…....….…………..…...Respondent Appearances by: Shri Ajit Kumar Jain & Siddhesh Chaugule, C.A appearing on behalf of the appellant. Shri P. K. Srihari, CIT- DR, appearing on behalf of the respondent.

Date of concluding the hearing : January 9th, 2019 Date of pronouncing the order : March 15th, 2019 O R D E R Per J. Sudhakar Reddy :- This appeal filed by the assessee directed against the final assessment order passed u/s 144C r.w.s. 143(3) of the Income Tax Act, 1961 (the ‘Act’), dated 25.10.2017. The facts of the case are brought out in the Dispute Resolution Panel’s (‘DRP’) order in Page no.1 & 2 which is extracted below for ready reference:

“Earnest Towers Private Limited is engaged in the business of real estate development and it is promoted by India Alternate Property Ltd. (IAPL), Hiranandani Properties Pvt. Ltd., Bengal Intelligent Parks Pvt. Ltd, TCG Urban Infrastructure Holdings Pvt. Ltd. Jaicorp Ltd and Sharanya Trading Pvt. Ltd. IAPL is primarily an investment holding company, domiciled in Mauritius. The assessee is engaged in real estate investment and acquired leasehold interest for 80 years in a 2 acre plot in Bandra Kurla Complex from Mumbai Metropolitan Region Development Authority. This acquisition of land was entirely fund through shareholders contributions in the form of equity and preference shares capital. The company intended to construct a 6.57 lakh Square Feet office building at this location on build-to-lease model for this property. The Company estimated a budget cost of Rs.1,828 crores. It also availed loan of Rs. 470 crores from Housing Development Finance Corporation Ltd so as to part finance the construction. The remaining cost of construction was funded by way of equity/internal accruals. In April 2012, out of the total area of 6.57 lakh sq. ft., the Assessee sold about 2.97 lakh sq feet space to CITI Group i.e. Citibank N.A. and Citigroup Global Markets India Private Limited for an aggregate consideration of Rs.985.59 crores, which was receivable in tranches. The remaining area of 3.59 lakh sq.ft was proposed to be leased on completion of the construction.

2 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 The Company decided to buy-back its shares from all its existing shareholders. The company recommended the maximum permissible buy back of 25% of the paid up capital and free reserves of the Company as on March 31, 2012. As such the Company offered to buy-back upto a maximum of 4,04,28,571 fully paid up equity shares of the Company of face value of Rs.10/- each share, at a price of Rs.70/- share, representing upto 17.89% of the existing paid up equity capital of the company. The Assessee’s Mauritius based holding company IAPL, therefore tendered 3,84,99,285 equity shares held in ETPL in response to the offer. The said international transaction of Buy back of shares was executed at a price of Rs.70/- per share, thus the Assessee paid a consideration amounting to Rs.2,69,49,49,950/-. AE of the assessee held 95.23% shares of the assessee others (domestic) held rest of the shares (4.77%). The TPO determined ALP of the shares @ Rs 50.09. This was arrived at by valuing shares at NAV. The assessee had adopted DCF method for valuing the shares. Excess amount paid to the AE 38499285* (Rs.70-Rs50) i.e Rs 769985700 was held to be loan given to AE. The TPO computed interest on loan so calculated as the T.P. adjustment.”

“l. The Ld. TPO/AO erred in proposing an adjustment towards notional interest on a purported ‘deemed loan’ arising due to alleged excess amount paid for buy-back of equity shares, without appreciating that Transfer Pricing provisions would not be applicable to such a transaction. 1.1 The Ld. TPO/AO erred in proposing an adjustment of Rs.5,73,60,348/-towards notional interest on purported ‘deemed loan’ of Rs.76,99,85,700 arising due to alleged excess amount paid for buy-back of equity shares during the year under consideration. 1.2 The Ld. TPO/AO erred in not appreciating that Sections 92 to 92F of the Act are merely machinery sections and would not apply where the transaction entered by the Assessee is not liable to tax in India. 1.3 The Ld. TPO/AO erred in not appreciating that amounts paid by a company upon the investment / buyback of shares, is not included within the ambit of the definition of ‘income’ under section 2(24) of the Act. 1.4 The Ld. TPO/AO erred in not appreciating that the transaction relating to buy-back is in the nature of capital transaction which does not have any impact on the Assessee's taxable income/tax deductible expenditure and consequently has no impact on the arm's length price of the interactional transaction. 1.5 The Ld. TPO/AO erred in not appreciating that there could not be any shifting or avoidance of profit in the present arrangement by the Assessee and thus, the transfer pricing provisions would not get attracted in the absence of any tax liability in India out of the purported international transaction. 1.6 The ld. TPO/Assessing Officer erred in not appreciating that the assessee has been duly complaint with the FEMA guidelines and other applicable laws in respect of such transaction relating to buy-back.

3 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 1.7 The ld. TPO/Assessing Officer erred in not appreciating the business and commercial factors underlying such transaction. 1.8 The ld. TPO/Assessing Officer erred in not appreciating that shares were initially issued at a premium by the assessee. 1.9 The ld. TPO/Assessing Officer erred in not appreciating that the assessee per se was not concerned with the number of shares to be bought back.”

The assessee has also contended that the ‘share’ is not income as per the Income Tax Act. True but transactions in shares definitely give rise to income either business income or capital gains. Taxability of amount distributed while buying back its own shares by companies have been effectively dealt in under section 115QA. Section 115QA was inserted w.e.f. 1/6/2013 and is as such not applicable in the present assessment year. The assessee entered into an international transaction with its AE. As a result chapter X of the IT came into play. The Assessing Officer/TPO was right in determining the ALP of the transaction and proposing adjustments. The objection is therefore rejected. Thus it is clear that the valuation of shares by the assessee was based on imagination and unreal assumptions of the assessee, totally devoid of ground realities. DCF is one of the methods for valuation of shares, while doing so following points needs to be taken into consideration. DCF method proceeds on the assumption that "Cash is King". The DCF method values the business by discounting its free cash flows for the explicit forecast period and the perpetuity value thereafter. The free cash lows represent the cash available for distribution to both the owners and the creditors of the business. There are two broad approaches for valuation as per DCF Method. The Free Cash Flow to Equity (FCFE) approach and the second is the Free Cash Flow to Firm (FCFF) approach Free Cash Flow to Equity (FCFE) approach. Under this approach, the value for equity holders is obtained by discounting expected cash flows available for the equity holders. Cash flows to equity holders is arrived by reducing from gross operational cash flows, tax payments, amount required for incremental working capital, capital expenditure, interest payment, principal repayment for loans, etc. The net cash flows so arrived are discounted by the cost of equity. Free Cash Flow to Firm FCFF: Under this approach the value of the firm is obtained by discounting the expected cash flows to the firm or the enterprise. Cash flows to firm are arrived by reducing from gross operational cash flows, tax payments, amount required for incremental working capital, capital expenditure, noncash expenditure (depreciation), etc. In this approach, the free cash flow is discounted by Weighted Average Cost of Capital In practical scenario, FCFF is used more frequently and FCFE is used in cases where the cash flows are more predictable, for example, Road Projects with Annuity Payments. Estimation of c4sh lows As stated earlier, DCF valuation is arrived by taking the present value of expected future cash flows. Thus it is very important to consider the reasonable projections which the enterprise can achieve. It is a known fact that nobody can predict what the future will be. Thus while considering the projections instead of being optimistic or pessimistic one has to be realistic. Following are the factors that need to be considered while reviewing the projections:

4 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14  Appraisal by institutions and understanding of the business If the projections are appraised by any financial institution or a bank, the acceptability of the same is far higher as compared to unapprised projections.  Industry/Company Analysis While reviewing the projections, it becomes very important to understand the industry to which the Company belongs and the other players operating in the same industry. It is also very which required that regulatory aspects applicable to the industry are thoroughly reviewed  The projection need to be tested for sensitivity of critical assumptions such as Foreign Exchange rates, expected inflation, input output ratio, etc. Each activity of the company needs to be identified and the revenue assumptions need to be made for each stream of income. An appropriate Growth rate has to be applied to this considering the past trend of the enterprise, present and expected capacity utilization of the enterprise, expected trend in the industry, etc. Various cost and expenditure needs to be bifurcated into variable cost and fixed cost. The variable cost should be related to the revenue assumptions/activity of the company whereas fixed costs will be mainly time cost. These aspects have not been considered by the assessee while valuing the shares. In view of this it is held that the valuation of shares was highly inflated to give undue benefit to the AE of the assessee which held more than 95% of the assessee's shares. The TPO's stand of rejecting the valuation of shares by the assessee is upheld. Here it may be mentioned that the TPO has not rejected the valuation method applied by the expert. He has rejected the assumptions and projections given by the assessee to the valuer on the basis of which the valuer has done the valuation. The valuation of the shares by the TPO is also upheld in absence of alternative. The TPO has treated the excess amount paid on acquisition ie over and above the amount payable on the basis of FMV of shares determined by the TPO , as deemed loan to the AE and has benchmarked interest payable on such loan. The TPO's action in treating the inter company receivables as unsecured loan is upheld following the decision in the case of Cheil India (P) Ltd. Vs. DCIT, 2014 46 Taxmann.com 90 (Delhi Tribunal). On the Issue of chargeability of interest on deemed loan the Panel has carefully considered the facts of the case , the arguments of the assessee as well as the decision of the Hon'ble Delhi High Court in the case of Cotton Naturals. The transaction of allowing credit by an assessee to the subsidiary, as laid down by the Hon'ble Court should not be seen in isolation, but has to be considered under the transfer pricing rules which treat the domestic AE and the foreign AE as two separate entities and profit centers. The test applied is whether the compensation paid for the products and services is at arm's length, but at the same time it cannot be ignored that the two entities have a business and a commercial relationship. Transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair market price. This is done by computing the arm's length price. The purpose is to ascertain whether the transfer is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. Depending upon the receivables, in Indian currency or in US dollars, appropriate rate of interest should be applied. Thus, if loans are in US dollars, the rate applicable should be LIBOR PLUS,

5 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 as per the credit ratings of the AE and in case the loans are in India currency the rare applicable should be SBI Prime Lending rate (as on 30th June of the relevant financial year). Interest on loan will depend upon  the contractual terms of the transaction.  the risks, benefits and responsibilities. the conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and the size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition Taking all these issues into consideration since the amount paid was in Indian Rupees, the applicable rate for the case should be SBI PLR plus reasonable markup based on risk, market, terms of contract and geography. The TPO is directed to modify the benchmarking accordingly.” 4. Aggrieved, the assessee filed its appeal in following grounds:

“Based on the facts and circumstances of the case, Earnest Towers Private Limited (here-in-after referred to as 'ETPL'/'the Appellant/'the Company') respectfully craves leave to prefer an appeal against the order dated October 25, 2017, received by the Appellant on November 3, 2017, issued by Assistant Commissioner of Income-tax, Circle- 2 (l), Kolkata ('Ld. AO') in pursuance of the directions of the Dispute Resolution Panel ('DRP') dated August 22, 2017 on the following grounds: 1. General grounds 1.1. That the assessment order passed by the Ld. AO under section 143(3)/144C and read with the order passed by the Ld. Transfer Pricing Officer ('Ld. TPO'), under section 92CA(3) read with section 144C(5) of the Act, dated October 23, 2017, is bad in law and void ab-initio. 1.2 That the Ld. AO under the directions of the Hon'ble DRP erred in making a Transfer Pricing addition of Rs. 10,89,79,346/- to the income of the Appellant. 2. Ld. TPO, Ld. AO & the Hon'ble DRP have exceeded their jurisdiction 2.1 That the Ld. TPO, Ld. AO under the directions of the Hon'ble 'DRP have exceeded their jurisdiction by re-characterizing the transaction of buy-back of equity shares as a deemed loan, without appreciating that provisions of Chapter X of the Act does not confer any such power or jurisdiction upon the revenue department and to make such a secondary adjustment. 3. Buy-Back Of Assessee's Own Equity Shares Cannot Be Deemed To Give Rise To Income Under Chapter X Of The Act 3.1 The Hon'ble DRP and the Ld. TPO/ AO erred on facts and in law by not appreciating that the transaction pertaining to 'buy-back of equity shares from AE' is in the nature of capital transaction and thus cannot be subjected to tax as Income and thus determination of ALP in respect of such transactions is outside the purview of Chapter X of the Act. 4. Reference To Ld. TPO And The Rejection Of TP Documentation Bad In Law

6 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 4.1 That the Hon'ble DRP erred in not holding that the order of Ld. TPO and the draft order of the Ld. 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. 5. Without Prejudice To Above, approach adopted by the Hon'ble DRP and Ld. TPO/AO is not correct 5.1 The Hon'ble DRP and the Ld. TPO/ AO erred on facts and in law by arbitrarily rejecting the valuation undertaken by an independent third party valuer and re-determining the share price without following any of the prescribed Transfer Pricing methods for determination of arm's length price. 6. Incorrect computation of tax payable, interest levied and Initiation of penalty proceedings 6.1 The Ld. AO has erred in computing the amount of minimum alternate taxes to be carried forward by the Appellant. 6.2 The Ld. AO has erred in granting credit of taxes deducted at source claimed by the Appellant. 6.3 The Ld. AO has erred in levying penal interest under section 234C while computing the tax payable by the Appellant. 6.4 The Appellant submits that based on the facts and the circumstances of the case, there was no basis for the Ld. 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. The Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing of the Appeal.”

7 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 issued was on account of capital transaction and does not give rise to income and hence, not liable to transfer pricing adjustment”. For the same proposition, he also relied on the judgment of Hon’ble Bombay High Court in the case of M/s Shell India Markets Pvt. Ltd. vs. ACIT; W.P No.1205 of 2013 dated 18th November 2014. 5.1 He further relied on the judgment of the ITAT Mumbai ‘K’ Bench in the case of M/s Topsgrup Electronic Systems vs. ITO; ITA No.2115/Mum/2015 dated 19.02.2016 for the proposition that the principles laid down in the case of Vodafone India Services Pvt. Ltd.(supra) which were for inbound transactions, were also applicable to out-bound investments. It was argued that the issue is covered in favour of the assessee by these decisions and hence the appeal of the assessee had to be allowed. 5.2 The ld. Counsel for the assessee also submitted that the DRP has not dealt with any of the case laws cited before it by the assessee. On a query from the Bench, it was submitted that Tranche-1 of the in-bound investment was made in the Financial Year 2008-09 and the issue of shares was of face value of Rs.10/-, at a premium of Rs.40/- per share. Tranche-2 of the investment was made in the Financial Year 2011-12 and was of a face value of Rs.10/- issued at a premium of Rs.60/-. It was submitted that these investments was made prior to the Amendment to the Income Tax Act 1961 by Finance Act 2012, wherein the definition of the term ‘international transaction’ was amended. It was also submitted that the valuation of shares in these inbound transactions were as per the following guidelines:  Tranche 1 in F.Y 2008-09 - as prescribed by the Ministry of Finance and Department of Economic Affairs; and  Tranche 2 in F.Y 2011-12 - as prescribed by Foreign Exchange Management Regulations 2010 (transfer or issue of security by a person resident outside India) (Amendment) as well

8 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 as notification No. FEMA205/2010-RB, issued by Reserve Bank of India on April 7 2010, which came into force with effect from April 21,2010. 5.3 It was further submitted that the buy-back of the shares which was an out- bound transactions were made of the face value of Rs.10/- at a premium of Rs.60/- which is same as the in-bound transaction done in the Financial Year 2011-12. Thus he submits that the Revenue was wrong on facts in coming to a conclusion that the valuation of shares in the buyback transaction is excessive. 5.4 To query from the Bench as to whether the Revenue has made an adjustment on account of interest in the subsequent assessment years, the ld. Counsel for the assessee submitted that no such adjustment was made in any of the subsequent assessment years. 6. On Ground No.6.1 and 6.2, the ld. Counsel for the assessee requested that the matters may be set aside to the file of the Assessing Officer with the direction to dispose off the same in accordance with the law as there was certain mistake apparent from record committed during the assessment proceedings. 6.1 The ld. Departmental Representative on the other hand, opposed the contention of the ld. Counsel for the assessee and submitted that Chapter X of the Act is applicable. He submitted that the assessee itself conducted a T.P study and reported the transaction as at arm’s length. He relied on the order of the DRP and the reasons given therein. He argued submitted that the transaction in shares definitely gives rise to income, which is either in the form of business income or capital gains. He relied on the reasoning given by the DRP at Pages 8 to 28 of its order and supported the valuation of equity shares made by the TPO. He also relied on the order in the case of Cheil India (P) Ltd. vs. DCIT, 2014 46 taxmann.com 90 (Delhi Tribunal) for the proposition that inter-company receivables are unsecured loans. He submitted that the excess amount paid by the

9 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 assessee for buy-back of shares is over and above the amount payable for these shares on the basis of FMV of shares determined by the TPO , is a deemed loan given by the assessee to the AE and has to be benchmarked for determining the ALP for the interest payable on such loan. He submitted that non-charging of interest on this loans in the subsequent years should not affect the decision in this year and the order for this year should be in accordance with law. He further submits that the valuation of inbound investments and the valuation of outbound investments cannot be on the same basis and at the same value and hence, the order of the DRP has to be upheld. On Ground No.6, he submitted that the Revenue has no objection if the Ground No.6.1 & 6.2 may be remanded back to the file of the Assessing Officer for fresh adjudication. 7. We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, we hold the assessee during the year, undertook to buy-back fully paid equity shares in the company from the existing shareholders of the company at a price of Rs.70 per share. The face value of the share is Rs.10/- per share and the premium was Rs.60/- per share. A maximum of Rs.4,04,28,571/- shares representing 17.89% of the existing paid up equity capital of the company was offered for buy-back. The fundamental question is whether such a transaction can be considered as such transaction would fall within the purview of Chapter X of the Act. 7.1 This issue is covered in favour of the assessee by the decision of the Mumbai Bench of the Tribunal in the case of M/s Topsgrup Electronic Systems vs. ITO; ITA No.2115/Mum/2015 wherein it is held as follows: “7. We have heard the rival contentions put forth by both the learned A.R. for the assessee and the learned D.R. for Revenue and perused and carefully considered the material on record; including the judicial pronouncements cited and relied on. Chapter X begins with section 92(i) of the Act which states that "Any income arising from and international transaction shall be computed having regard to the arms length price." Evidently, therefore, income arising from the international transaction is a condition precedent for computing the ALP and such income should

10 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 be chargeable to tax under the Act. In the absence of such income, benchmarking of an international transaction and computing ALP thereof would not be in order. Consequently, if an international transaction is on capital account and does not result in income as defined under section 2(24) of the Act, the provisions of Chapter X of the Act would not be applicable to such transaction. This proposition finds support in a number of judgements of the Hon'ble Bombay High Court viz. Vodafone India Services (2014) 368 ITR 001 (Bom), i.e. (Vodafone IV), Shell India Markets (P) Ltd. 269 ITR 516 (Bom), Equinox Business Parks (P) Ltd. vs. Union of India 320 Taxman 191 (Bom) and decisions of the ITAT, Hyderabad Bench in the case of Vijay Electrical Ltd (60 SOT 77) (Hyd) and Hill Country Properties Ltd. [48 taxmann.com 94 (Hyd)]. 7.1 Before us, the learned D.R. was not able to establish that any income arose out of the assessee's transaction, i.e. of investment in the shares of its wholly owned subsidiary, Tops BV, Netherlands. The learned D.R., however, contended that there is a scope for effect on potential income arising from subsequent sale of these shares and in this regard placed reliance on the decision of the Hon'ble Bombay High Court in the case of Vodafone India Services Ltd. (2014) 361 ITR 531 (Bom) ('Vodafone-III'). 7.1.1 The learned A.R. for the assessee pointed out that this averment made by the learned D.R. was a new contention and line of argument that does not emanate from the points considered by the TPO/AO/CIT(A) in their orders and therefore in the light of the decision of the Special Bench of the Mumbai ITAT in the case of Mahindra & Mahindra Ltd. [2009] 22 DTR (Mum) (SB) 361] this new argument/issue is not to be considered. We find force in the argument of the learned A.R. for the assessee for the assessee on this issue. 7.1.2 In any case the concept of potential income has been dealt with by the Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (368 ITR 1)(Vodafone IV) at para 31, 32 and 43 of its order as under:- "31. Similarly, the reliance by the revenue upon the definition of International Taxation in the sub-clause (c) and (e) of Explanation (i) to Section 92B of the Act to conclude that Income has to be given a broader meaning to include notional income, as otherwise Chapter X of the Act would be rendered otiose is far fetched. The issue of shares at a premium does not exhaust the universe of applicability of Chapter X of the Act. There are transactions which would otherwise qualify to be covered by the definition of International Transaction. The transaction on capital account or on account of restricting would become taxable to the extent it impacts income i.e. under reporting of interest over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to teh ALP. It is ......... tax on the capital receipts. This aspect appears to have been completely lost sight of in the impugned order." "32. The other basis in the impugned order is that as a consequence of under valuation of shares, there is an impact on potential income. The reasoning is that if the ALP were received, the Petitioner would be able to invest the same and earn income, proceeds on a mere surmise/assumption. This cannot be the basis of taxation. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax is being charged on the amount received as share premium. Chapter X is invoked to ensure that the transaction is charged to tax only on working out the income after arriving at the ALP of the transaction. This is only to ensure that there is no manipulation of prices/ consideration between AEs. The entire consideration received would not be a subject-matter of taxation. It appears for the above reason that the learned Solicitor General did not seek to defend the conclusion in the impugned order on the basis of the reasons found therein, but sought to support the conclusion with new reasons". "43. It was contended by the revenue that income becomes taxable no sooner it accrues or arises or when it is deemed to accrue or arise and not only when it was received. It is submitted that

11 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 even though the Petitioner did not receive the ALP value/ consideration for the issue of its shares to its holding company, the difference between the ALP and the contract price is an income, as it arises even if not received and the same must be subjected to tax. There can be no dispute with the proposition that income under the Act is taxable when it accrues or arises or is received or when it is deemed to accrue, arise or received. The charge-ability to tax is when right to receive an income becomes vested in the assessee. However, the issue under consideration is different viz. whether the amount said to accrue, arise or receive is at all income. The issue or shares to the holding company is a capital account transaction, therefore, has nothing to do with income. We thus do not find substance in the above submission." As is self evident from the above, potential income arising from a capital transaction may be considered under Transfer Pricing provisions if it arises from out of the impugned transaction. The situations in which a capital transaction may have an impact on potential income are provided in para 31 of the decision in the case of Vodafone India Services Pvt. Ltd. (368 ITR 1)(Bom) (extracted supra) by way of instances such as interest on loan given or received or depreciation, etc. 7.1.3 Further, a plain reading of section 92(1) of the Act which specifies that 'any income arising from an international transaction shall be computed having regard to the Arm's Length Price' implies that the potential income, if any, should arise from the impugned international transaction which is before the Transfer Pricing Officer for consideration and not out of a hypothetical international transaction which may or may not take place in future. Before us, except for making a claim in this regard the Ld. Departmental Representative was not able to establish that any income or potential income arose from the impugned transaction of the assessee's investment in acquiring the share capital of its wholly owned subsidiary, Tops BV, Netherlands. 7.1.4 In respect of the contention of the Ld. Departmental Representative that the decision of Vodafone India Services Pvt. Ltd. (368 ITR 1)(Bom) was not applicable to the assessee in the case on hand as it dealt with an inbound transaction and not an outbound transaction, the Ld. Representative for the assessee for the assessee submitted that the decision of the Hon'ble High Court in the case of Vodafone India Services P. Ltd.(368 ITR 1) had observed that it would be applicable to both inbound and outbound transaction at para 42 thereof which is extracted hereunder:- "42. It was contended by the Revenue that in any event the charge would be found in Section 56(1) of the Act. Section 56 of the Act does provide that income of every kind which is not excluded from the total income is chargeable under the head income from other sources. However, before Section 56 of the Act can be applied, there must be income which arises. As pointed out above, the issue of shares at a premium is on Capital Account and gives rise to no income. The submission on behalf of the revenue that the shortfall in the ALP as computed for the purpose of Chapter X of the Act given rise to income is misplaced. 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 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 permits re- computation of Income arising out of a Capital Account Transaction, such as interest paid/received on loans taken/given, depreciation taken on machinery etc. All the above would be cases of income being affected due to a transaction on capital account. This is not the revenue's case here. Therefore, although Section 56(1) of the Act would permit including within its head, all income not otherwise excluded, it does not provide for a charge to tax on Capital Account Transaction of issue of shares as is specifically provided for in Section 45 or Section 56(2) (viib) of the Act and included within the definition of income in Section 2(24) of the Act." 7.1.5 In these circumstances, we are of the view that the impugned transaction cannot be brought within the ambit of Indian Transfer Pricing provisions merely on the presumption that it may impact profits arising out of a subsequent transaction which may or may not be an

12 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 international transaction. In coming to this view, we draw support from the decisions of the ITAT, Hyderabad bench in the case of Vijay Electricals Ltd. [ 60 SOT 77(Hyd)] and Hill Country Properties Ltd. [48 taxmann.com 94(Hyd)]; which are cases of outbound investments, wherein prices at which the equity shares were acquired could have impacted the profits which may have arisen out of a subsequent transaction of the said shares. However, since no income arose from those transactions, it was held that the same would not fall within the ambit of Indian Transfer Pricing provisions. In the case of Vijay Electricals Ltd. (supra), the Tribunal in an appeal against order passed under section 263 of the Act held that Transfer Pricing provisions are not applicable to the transactions of investment in share capital since no income arises therefrom. Though in the case of Hill Country Properties Ltd., (supra), the transaction was of share application money, the Tribunal followed the decision rendered in the case of Vijay Electricals Ltd. (supra). (Emphasis ours) 7.1.6 The differentiation sought to be made by the Revenue between inbound investment in shares and outbound investment in shares for applicability of T.P provisions does not, in our considered view, find any support therein. It would also be appropriate in this regard to refer to Rules 10B and 10C of the Income Tax Rules, 1962 ( in short' the Rules'). Rule 10B(2) reads as under:- "(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely: (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." Equally important is sub-rule (3) to Rule 10B, which reads as under:- " (3) An uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." Similarly, Rule 10C(1) reads as under:- " 10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction [or specified domestic transaction], and which provides the most reliable measure of an arm's length price in relation to the international transaction [or the specified domestic

13 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 transaction, as the case may be]. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:-- (a) the nature and class of the international transaction [or the specified domestic transaction]; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction [or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method" 7.1.7 The aforesaid Rules indicate factors that ought to be taken into account for selection of the comparables, which necessarily include the contractual terms of the transaction and how the risks, benefits and responsibilities are to be decided. The conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and the size of the markets, the laws and the Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition are all material and relevant aspects. If we keep the aforesaid aspects in mind, it would be delusive to accept and agree that Transfer Pricing provisions/Rules can be different for inbound and outbound investment in shares. Such reasoning is not what Chapter X of the Act and Rules mandate or prescribe. The aforesaid provisions, in our view, do not make any such distinction. 7.1.8 Therefore, whether the transaction under comparability is inbound share investment or outbound share investment, the comparison has to be with comparables and not with what options or choices were available to the assessee for earning income or maximizing returns. Thus, what is made applicable for inbound share investment would be equally applicable to outbound share investments also. The parameters to be applied cannot be different for outbound investment and inbound investments. Therefore, in our view, the argument that different parameters would apply for inbound and outbound investments does not have any basis that emanate from the Transfer Pricing Rules.” (Emphasis ours). 7.2 No contrary decisions are brought to our notice by the ld. DR.

14 M/s. Earnest Towers Private Limited I.T.A. No. 2530/Kol/2017 Assessment Year: 2013-14 agreed by both parties. Ground No.6.3 is dismissed as consequential. Ground No.6.4 is dismissed as premature. 9. In the result, the appeal of the assessee is allowed in part.

Kolkata, the 15th March, 2019.

Sd/- Sd/- [S.S. Viswanethra Ravi] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated : 15.03.2019 (RS, Sr. PS)

Copy of the order forwarded to: 1. M/s. Earnest Towers Private Limited, Bengal Intelligent Park Limited, Building-Beta, Ground Floor, Block EP & GP, Sector-V, Salt Lake Electronics City, Kolkata – 91. 2. ACIT, Circle-2(1), Kolkata. 3. CIT(A)- 4. CIT- , 5. CIT(DR), Kolkata Benches, Kolkata.