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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri J.Sudhakar Reddy, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : KOLKATA [Before Hon’ble Sri N.V.Vasudevan, JM & Shri J.Sudhakar Reddy, AM] I.T.A No. 1053/Kol/2017 Assessment Year : 2010-11 A.C.I.T., Circle-11(2) -vs.- M/s. TCG Lifesciences Ltd. Kolkata Kolkata [PAN : AABCC 0401 D] (Respondent) (Appellant) I.T.A No. 966/Kol/2017 Assessment Year : 2010-11 M/s. TCG Lifesciences Pvt.Ltd. -vs- C.I.T.(A)-22, (Formerly “TCG Lifesciences Ltd.) Kolkata Kolkata [PAN : AABCC 0401 D] (Respondent) (Appellant) For the Department : Shri G.Mallikarjuna, CIT(DR) For the Assessee : Shri S.P.Singh, IRS (Rtd.) & Shri Manoneet Dalal & Ms.Gunjan Khanna, CAs Date of Hearing : 14.09.2017. Date of Pronouncement : 22.09.2017.
ORDER Per N.V.Vasudevan, JM
ITA No.1053/Kol/2017 is an appeal by the Revenue while ITA No.966/Kol/2017 is an appeal by the Assessee. Both these appeals are directed against the order dated 27.02.2017 of C.I.T.(A)-22, Kolkata relating to A.Y.2010-11.
First we shall take up for consideration the appeal by the assessee. TCG LifeSciences Private Limited (formerly TCG Lifesciences Limited), (“hereinafter referred to as the Company”/’”Appellant”/ “Assessee:/“TCGLS”) is a company incorporated under the Companies Act, 1956. It carries on the business of providing
2 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 Contract Research & Development Service and Drug Discovery. It is a wholly owned subsidiary of TCG Lifesciences Mauritius Ltd. (“TCGM “). The ownership structure of the TCG group is as follows: Figure 1 : Relevant Ownership Structure of the Group Chatterjee Fund Management L.P.
TCG Lifesciences Rishi Pharmaceuticals Mauritius Ltd. Inc
Xtec International LabVantage Solutions, Inc (Mauritius ) Ltd.
Outside India
India TCG Lufesciences Ltd.
The Assessee entered into the following transactions with its Associated Enterprises (“AEs”) during the relevant years as mentioned below : Table 2 : Summary of TCGLS’s International Transactions for FY 2009-10 Sl.No. Transaction Relevant Quantity Amount of Associated Transaction Enterprise (Amount in INR) 1. Shares Purchase Rishi No.of 4,24,173 5,38,12,000 Pharmaceuticals shares Inc Xtec No.of 1,000 20,64,03,200 International shares (Mauritiius)Ltd 2. Shares Lab Vantage No.of 757 26,76,83,395 Subscription Solutions Inc. shares 3. Buy Back of Xtec No.of 32,13,000 15,43,45,300 shares by Xtec International shares International (Mauritius)Ltd. (Mauritius )Ltd. 4. Technical Rishi NA* 1,11,41,188
3 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 support service Pharmaceuticals received Inc 5. Guarantee Fees Lab Vantage NA* 35,98,000 Received Solutions Inc. 6. Reimbursement Lab Vantage NA* 1,17,79,814 of expense Solutions Inc. 7. Shares TCG No.of 37,15,926 3,71,59,260 Subscription by Lifesciences Shares TCG Mauritius Lifesciences Limited Mauritius Limited *Not Applicable
The Finance Act. 2001 had introduced a legislation with respect to transfer pricing. by substituting the erstwhile section 92 of the Act with a new and separate code or sections, namely sections 92 to 92F, with effect from 1st April. 2002. i.e. the assessment year 2002- 2003. The salient features of the legislation with respect to transfer pricing, to the extent material for the purpose of deciding the question referred to the special bench, are as follows: -
• Section 92(l) of the Act provides that any income arising from an "international transaction" shall be computed having regard to the arms length price. The Explanation to the said section provides that allowance for any expense or interest arising from an international transaction hall also be determined having regard to the arm' s length price.
• The term "international transaction' has been defined in section 92B(1) or the Act to mean a transaction between two or more "associated enterprises" either or both of whom are non-residents in the nature of inter alia purchase, sale or lease of intangible property or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.
• Section 92A of the Act defines the term "associated enterprise" in relation to another enterprise, in a manner where the enterprise directly or indirectly participates in the Management, control or capital of the other enterprise.
• The term "arm's length price" has been defined in clause (ii) of section 92F of the Act, to mean a price which is applied or proposed to be applied in a
4 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 transaction between persons other than associated enterprises in uncontrolled conditions. Section 92C( 1) of the Act provides that the arm's length price in relation to an international transaction shall be determined by any of the several methods, specified therein, having regard to the nature of the transaction or class of transaction or class of associated person or functions performed by such persons or such other relevant factors as the Central Hoard of Direct Taxes (hereinafter referred to as "Board") may prescribe.
The legislative intent in introducing the new transfer pricing legislation, as available in the Memorandum explaining the provisions in the Finance Bill, 2001, which later on was enacted as the Finance Act, 2001, was as follows. "The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational group by manipulating the prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax revenues. With a view to provide a statutory framework which can lead to computation or reasonable fair and equitable profits and tax in India, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act, " ... " [248 ITR st 181].
In this appeal we are concerned with two of the International Transactions carried out by the Assessee during the previous year viz., (i) the transaction of purchase of shares of Rishi Parmaceuticals Inc.USA (hereinafter referred to as RPI) and LVSI by the Assessee; (ii) Transaction of providing guarantee by the Assessee to the lender for a loan taken by Lab Vantage Solutions Inc.USA (hereinafter referred to as LVSI).
We shall take up for consideration the international transaction of purchase of shares of RPI by the Assessee during the previous year. During the previous year the Assessee purchased 4,24,173 shares of RPI for a consideration of Rs.5,38,12,000/-. The Assessee also purchased 1000 shares of LVSI from Xtec International (Mauritius) Ltd. for a consideration of Rs.20,64,03,200/-. Besides the above, the Assessee also purchased 456.921 shares of LSVI for a consideration of Rs.2,02,290 per share on
5 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 4.8.2009 and 300.365 shares at Rs.5,83,466 per share on 7.1.2010. In all the Assessee paid a consideration of Rs.26,76,83,395 for purchase of shares of 757 shares (456.921 + 300.365 = 757 ) of LSVI. The Assessee relied on a valuation report by an independent valuer to support the value at which the aforesaid transactions were carried out by the Assessee. The valuers in their report had adopted Discounted Cash Flow Method (DCFM) for arriving at the valuation of the shares that were purchased by the Assessee. The AO referred to the Transfer Pricing Officer (TPO) for determination of ALP of the international transaction of purchase of shares. The TPO was of the view that DCFM was not the appropriate method of valuation and that the appropriate method would only be the Net Asset Valuation method (NAV). On the basis of such finding, the TPO determined the value of shares acquired by the Assessee as follows: International Transaction of purchase of shares of LSVI: “12. On the basis of the above, it is held that the discounted cash flow method adopted by the assessee to value the shares of LVSI was unreasonable and incorrect. Accordingly the valuation exercise carried out by the assessee to justify the arm's length price of the shares is found to be unreasonable and is hereby rejected. Further, the reports obtained from two valuers within a span of few months showed a difference of more than 300% in the value of the shares of LVSI. On the other hand, the actual performance reported in subsequent years was not even remotely close to the estimates. In the circumstances the DCF method did not fit in the particular facts of the present case. It is also being pointed out, based on what has been demonstrated above, that the DCF Method, in the facts of this particular case, would require making assumptions, some of them pertaining to the market conditions in the US, which would be unrealistic on the basis of facts available on record.
This means that another method of valuation will have to be chosen. It is seen that the assessee itself had utilized the 'Net Asset Value' Method for valuation of shares in connection with an international transaction undertaken in AY 2008-09. This method is also recognized world-over and is used frequently to value the shares of unlisted and unquoted companies. Reference in this regard can be made to Rule 11UA in the I.T. Rules, 1962. The IT (Fifteenth Amendment) Rules, 2012 dated 29.11.2012 has notified both "discounted cash flow method" and "book value method” to ascertain the value of shares. Accordingly under the Indian legislation, DCF and NAV methods have been given judicial recognition. As the DCF method also constructs a ‘CUP’, the NAV method similarly can be used to arrive at a constructed CUP. As it has been shown above that based on the
6 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 limitation posed by the paucity of information on the US markets and market studies, and the dangers in making projects based on incorrect assumptions in the present case, the DCF method cannot be applied to arrive at proper results. It therefore would not be incorrect to borrow the method which has been given judicial recognition by the Indian Legislature in the context of valuation of shares. In fact the "book value method" was recognized by the Legislature much prior to the recognition of the "discounted cash flow method". Thus, as an alternative, the "book value" or the "net asset value" method can be followed. It is noted that all the relevant information and details required for estimating the "net asset value" is available on record. Accordingly out of the two methods i.e. DCF & NAV method, NAV method is the most reliable and appropriate to the facts of the present case. At this juncture it is pertinent to mention that even the assessee in the past years has been consistently following the NA V method to value to shares to be purchased/sold. Reference in this regard is made to the transfer pricing study report of the assessee for AY 2008-09 wherein the assessee itself had adopted the NAV method to value the shares of Xtec International Mauritius Ltd and Clinivent Research Pvt. Ltd. Accordingly the objections raised by the assessee in its letter dated' 23.01.2014 against the application of NAV method is contradictory to the assessee's own conduct in the earlier years. Accordingly, the same is being applied here again.
The computation of the shares of LabVantage Solutions Inc, US based on the reported results for year ended 31st December 2008 is as follows:
Particulars Amount (in USD ‘000) Net Fixed Assets 719 Current Assets 11482 Other Assets 30 TOTAL ………………..(A) 12231 Current Liabilites 10647 Other Liabilities 670 TOTAL ……………..(B) 11317 Net Worth ………(A) – (B) 914 Number of shares 1000 Net Asset Value per share $914 per share
Accordingly, the fair value of the shares of LabVantage Solutions Inc, US should be $914 per share. It is pertinent to mention that the arm's length price of USD 914 per share which has been determined above should be considered the cost of acquisition of shares for all taxation purposes. The company had therefore made excess investment and paid much higher shares of the US Company during the
7 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 year. The statement showing the excess price paid for acquisition of shares is as follows: No.of shares Price as per Price as computed Excess price assessee above paid 1000 $4240 @914 33,26,000 457 $4240 $914 15,19,982 300.365 $12720 $914 35,46,110 TOTAL 83,92,092
The above excess price paid by the assessee is in substance a "loan" advanced to its AEs in the garb of equity/investment as it is on capital account. Instead of advancing loan on which interest would have been assessed to tax in Indiaat the maximum marginal rate, the company chose to invest in equity capital by paying higher price for the shares directly as well as through the Mauritius route. Had the assessee acquired the shares at the actual fair value it could not have remitted necessary funds required by its AEs cost-free. However by paying higher price for shares the assessee was effectively able to remit funds to its foreign AEs without having to advance loan funds on which interest would have been assessed to tax India.
Based on the above, it is held that the excess payments of USD 83,92,o92 by way of share purchase/subscription to its AEs was in substance a loan advanced to AE on which interest ought to have been charged by the assessee.”
International Transaction of purchase of shares of RPI “23. In view of the above, the valuation report submitted by the assessee based on the DCF method is rejected. In the scenario, making further assumptions and carrying out a separate DCF method based valuation on the basis of meagre and unreliable data would not be prudent. Accordingly, as was done in the case of LVSI, in this case also, a more reasonable method would be 'Net Asset Value' ('NAV') method. It is reiterated that even in the past years the assessee has applied the NAV method to value to shares to be purchased/sold in the context of international transactions under the Act. The same is followed in the present case also.
Since the net worth of the company is negative, the intrinsic value of the share is NIL. Based on the information on record, the fair value of the shares should be the face value Le. USD 0.01 per share. Any excess payment over and above the face value is nothing but in substance a loan to the company. Had the assessee acquired the shares at the actual fair value it could not have remitted necessary funds required by its AE cost-free. However by paying higher price for shares, the
8 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 assessee was effectively able to remit funds to its foreign AEs without having to advance loan funds on which interest would have been assessed to tax India.
Based on the above, it is held that the excess payment of USD 91,13,758 ($91,18,000 - $4242) to the AE was in substance a loan advanced on which interest ought to have been charged by the assessee.
It is pertinent to mention here that the arm's length price of USD 0.01 per share which has been determined above should be considered as the cost of acquisition of shares for all taxation purposes.”
The TPO thereafter proceeded to determine the ALP of the interest that the Assessee ought to have charged for the following loan by the Assessee to its AE: Name of AE to whom Amount of Loan Year in which advanced payments made Xtec International USD 33,26,000 FY 2009-10 (Mauritius) Limited Lab Vantage Solutions USD 50,66,092 FY 2009-10 Inc., USA Rishi Pharmaceuitcals Inc., USD 91,13,758 FY 2009-10 USA
The AO ultimately concluded that the Assessee ought to have charged interest of Rs.11,78,64,440/- on the above transactions and since the Assessee did not charge any interest a sum of Rs.11,78,64,440/- was to be added to the total income of the Assessee on account of adjustment to ALP of international transaction of providing loan to it’s AE. The following were the conclusions of the TPO in this regard. “52. Based on the above, the arm’s length interest rate of the loan advanced by the assessee to its AEs is computed as follows :
AE to whom Base Risk free fee Credit spread Rate of Interest loan rate advanced XIML 10% 10% 20% LVSI 10% 9% 19% RPI 10% 10% 20%
9 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 53. Applying the aforesaid interest rate, the interest income which the assessee should have earned on its excess investment is as follows :-
Loan considered in the hands of XIML Period Excess Interest rate No.of days Interest beginning Investment Amount from (held to be loan) 16/07/2009 16,63,000 20% 257 2,34,186 30/-7/2009 16,663,000 20% 242 2,20,518 TOTAL $4,50,704 Average 1 USD to INR 45.004 Arm’s Length Price 2,04,63,498
Loan considered in the hands of LVSI Period Excess Interest rate No.of days Interest beginning Investment Amount from (held to be loan) 04/08/2009 15,19,982 19% 238 1,88,311 07/01/2009 35,46,110 19% 83 1,53,211 TOTAL 3,41,522 Average 1 USD to INR 45.004 Arm’s Length Price 1,53,69,856
Loan considered in the hands of RPI Period Excess Interest rate No.of days Interest beginning Investment Amount from (held to be loan) 01/04/2009 91,13,758 20% 12 18,22,751 TOTAL 18,22,751 Average 1 USD to INR 45.004 Arm’s Length Price 8,20,31,086 Thus, the computation of the arm’s length price of the loan is Rs.11,78,64,440/-. The arm’s length price of the loan in the books of the assessee is NIL. The margin of +/-5% on this amount if Rs.Nil. Thus, the arm’s length price of the loan computed under section 92CA(3) read with section 92C(3) is beyond this margin. Accordingly, an upward adjustment of rs.11,78,64,440/- is being made to the arm’s
10 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 length price of the loan. The total income of the assessee is to be upwardly adjusted by this amount. “
Before the CIT(A), apart from the challenge to the merits of the addition made by the TPO, the Assessee raised an objection that since the subscription/purchase of shares being on capital account and therefore does not give raise to any “income” and hence the provisions of Sec.92 of the Act would not be applicable. The Assessee placed reliance on the judgment of the Hon’ble Bombay High Court in the case of Vodafone India Services Pvt.Ltd. Vs. Union of India and 3 others in W.P. No. 871 of 2014 dated 10.10.2014 wherein it was held that for application of Chapter X of the Act income should arise from an international transaction and that is the condition precedent for application of chapter X of the Act. The facts in the case of Vodafone (supra) was that Vodafone India Services Pvt. Ltd., (petitioner) was a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited (the holding company). The Petitioner issued 2,89,224 equity shares of the face value of Rs.10/- each on a premium of Rs.8,509/- per share to its holding company. This resulted in the Petitioner receiving a total consideration of Rs.246.38 crores from its holding company on issue of shares between August and November 2008. The fair market value of the issue of equity shares at Rs.8,519/- per share was determined by the Petitioner in accordance with the methodology prescribed by the Government of India under the Capital Issues (Control) Act, 1947. The international transaction was reported in the prescribed Form 3CEB. The AO made a reference for determination of ALP of the international transaction to the TPO. Such reference to the TPO was challenged by the Assessee before the Hon’ble Bombay High Court. It was contended that the transaction of issue of shares cannot give raise to income, as income will not in its normal meaning include capital receipts unless it is so specified. It was submitted that u/s.92(1) of the Act any income arising out of international transaction has to be determined having regard to Arm’s Length Price. When there is no income, Sec.92(1) of the Act is not attracted at all. It was contended that the AO before making a
11 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 reference to the TPO has to give his finding as to whether there was income and why it is “necessary or expedient” to make a reference to the TPO. On such objection the Hon’ble Bombay High Court held that it would be for the Assessing Officer to first determine the issue of any income arising and/or being affected or potentially arising on determination of ALP before referring the transaction to the TPO, when specifically contended by the petitioner/Assessee. This is also indicated in Section 92CA(1) which requires an Assessing officer to refer an International Transaction for determination to the TPO only if he considers it "necessary or expedient" to refer the mater to the TPO. The exercise of finding out whether any income arises and/or is affected or potentially arises and/or is affected by the International Transaction would certainly be a factor to determine whether or not it is necessary or expedient to refer the matter to the TPO. In case no objection is raised by the assessee to the applicability of Chapter X then the prima facie view of the Assessing officer would be sufficient before referring the transaction to the TPO for determining the ALP. However where an objection is raised about the applicability of Chapter X by an assessee then the requirement for taking a decision after taking on board the objection becomes necessary. We may also add that subsequently in the decision of Vodofone India Services Pv.Ltd. IV 368 ITR 1 (Bom), the Hon’ble Bombay High Court reached the same conclusion that the word income for the purpose of the Act has a well understood meaning as defined in Section 2(24) of the Act. This even when the definition inSection 2(24) of the Act is an inclusive definition. It cannot be disputed that income will not in its normal meaning include capital receipts unless it is so specified, as in Section 2(24) (vi) of the Act. In such a case, Capital Gains chargeable to tax under Section 45 of the Act are, defined to be income. The amounts received on issue of share capital including the premium is undoubtedly 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.
12 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 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 Assessee placed reliance on the decision of the Hon’ble Bombay High Court in the case of Shell India Markets Pvt. Ltd Vs ACIT [2014] 51 taxmann.com 519 (Bombay)] wherein the decision rendered in the case of Vodofone (supra) was followed. The following were the relevant observations of the Court: "12. As held in Vodafone IV, the jurisdiction to apply Chapter X of the Act would occasion only when income arises out of International Transaction and such income is chargeable to tax under the Act. The issues raised in the present petition are identical to the issues which arose for consideration before this Court in Vodafone IV. Therefore, following the aforesaid decision we set aside the order dated 30 January 2013 of the TPO to the extent it holds that ALP of issue of equity shares is RS.183.44 per share as against RS.10 per share as declared by the petitioner and consequent deemed interest brought to tax on the amount not received when bench marked to the ALP. "
Further reliance was placed on the decision of the ITAT Mumbai in the case of Topsgroup Electronic Systems [2016] 67 taxmann.com 310 (Mumbai - Trib.)] [ITA No. 2115/Mum /2015] wherein it was held that the ruling in the case of Vodofone (supra) would equally apply to shares subscription by an Indian entity in the share capital of its AE. The following were the relevant observations of the Tribunal: "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.”
The CIT(A) however did not agree with the submissions made by the Assessee. He held that the facts of the case cited by the Assessee are distinguishable. He did not
13 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 elaborate on what are the distinguishing features. The CIT(A) observed that the issue in the cases cited by the Assessee was investment in shares of the subsidiary whereas in the case of the Assessee the facts were different. The following were the relevant observations of the CIT(A) in this regard.
“1. I have considered the above submissions made by the Appellant with regard to the international transaction of purchase / subscription of share. On examination of the issue and the details as recorded by the Ld. TPO, I find myself in agreement with the approach of the Ld. TPO. The Ld. TPO has treated the transaction as International Transaction and the same is a valid position in view of the explanation clause I Cc) to section 92 B. The shares in question are marketable securities, hence subject to the provisions of Chapter X of the Income Tax Act 1961. The Appellant in the present case has made payments disguised as equity Subscription which is overvalued. Also, the citation of judgments in Vodafone and Shell are also distinguishable on the facts and circumstances of the case. The issue in those matters was in respect of shares issued to the subsidiary whereas the situation is not the same for the case at hand. In my considered view of the matter, the basic assets creating value for the shares in the judgments referred were situated in India and accordingly the facts were different. The Appellant has contended that the need was to invest certain funds, and if valuation was the issue, more shares would have been subscribed. Such an argument and contention, in my view is well beyond the scope of the issues involved. Basically, the investment in certain number of shares is a business decision and subject to local laws the Ld. TPO would have no locus standi in the matter.
Thus, the approach of the Ld. TPO to consider the excess payment on account of share acquisition as loan is upheld and ground is dismissed.”
The CIT(A) thereafter proceeded to determine the correctness of the quantum of addition made by the AO and finally gave partial relief to the Assessee by directing the AO to adopt a lesser interest rate on the international transaction of deemed loan by the Assessee to its AE. The following were the relevant observations of the CIT(A): “1. I have carefully considered the above recorded submissions made by the appellant on a without prejudice basis with regard to the interest rate to be applied on the deemed loan. It is worthwhile to mention that in relation to the DRP proceedings for AY 2012-13 in assessee’s own case, the Hon’ble panel has directed to compute interest at the rate of Libor plus 350 bps on the deemed loan. Based on the judicial precedents and arguments provided during this appeal, as
14 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 well as the findings of the Ld. DRP, I find myself in agreement with the Appellant that the approach of Ld. TPO is erroneous. While computing the rate of interest Libro should have been considered a the base rate by the Ld. TPO.
In the narrated circumstances, I direct the rate of interest to be considered at Libor plus 350 bps for the purpose of computing interest on deemed loan. Thus, the ground is allowed.”
Aggrieved by the order of the CIT(A) in upholding the order of the AO in so far as it relates to rejection of the claim of the Assessee that the transaction in question cannot be subject matter of proceedings u/s.92 of the Act and aggrieved by the determination of quantum of adjustment to the ALP as determined by the CIT(A), the Assessee is in appeal before the Tribunal and has raised grounds No. 2 to 2.11 before Tribunal. Aggrieved by the relief allowed to the Assessee as above in the computation of ALP, the Revenue has raised Gr.No.3 in its appeal. We may mention here that if the preliminary objection that the transaction of investment in shares is on capital account and is therefore outside the purview of the provisions of Sec.92 of the Act is accepted then there would be no need to adjudicate Gr.No.3 raised by the Revenue and that ground would become infructuous.
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.
15 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 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: ..... 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
16 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 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 learned DR submitted that the transaction of investment in shares of AE cannot be said to be not an international transaction. He further placed reliance on the decision of the Delhi ITAT in the case of First Blue Home Finance Ltd. Vs. DCIT (2015) 59 Taxmann.com 431 (Delhi-Trib.). In the aforesaid decision the ratio laid down is that in a case of issue of shares by Indian resident company to its AE Non- resident, there is no provision in Chapter X mandating addition on account of less share premium received also consequential interest on resultant deemed loan. The decision cited by the learned DR in fact supports the case of the Assessee. We however agree with the learned DR that the transaction of investment in shares of AE per se is an international transaction but the condition that income does not arise out of a capital account is the basis on which Courts have held that . To tHis submission is correct but the principle laid down is that the transaction of investment in shares being payment on capital account falls outside the purview of Chapter X of the Act. In that view of the matter, we hold that the determination of ALP in the present case cannot be sustained as the transaction in question is on capital account and determination of ALP in respect of such transactions is outside the purview of Chapter X of the Act. Consequently, the
17 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 addition made by the AO in this regard is directed to be deleted. Since the preliminary ground on the issue of jurisdiction is held in favour of the Assessee, the other grounds with regard to the quantification of ALP does not arise for consideration and are dismissed as infructuous.
The next issue that arises for consideration in the appeal by the Assessee is as to whether transaction of providing guarantee by the Assessee in respect of a loan taken by its AE can be said to be an international transaction and if yes whether the determination of ALP in respect of the said international transaction as determined by the CIT(A) is sustainable. 19. In the case of Guarantee extended by unrelated parties, they would charge a commission. The commission charged by one AE for providing Guarantee for a loan granted to another AE should be at Arm’s Length, i.e., similar quantum as unrelated party would charge for providing Guarantee. The quantum of commission would depend on several factors like the credit rating of the person availing the loan, the person providing the Guarantee etc.
During the financial year relevant to AY 2010-11, LVSI borrowed funds from Axis Bank for the purpose of growing its business and the Assessee provided corporate guarantee to Axis Bank, Singapore, on behalf of LVSI. The purpose of the guarantee was explicitly mentioned in the guarantee agreement wherein loan was extended for acquisition as well for the working capital facility for LVSI since it was unable to borrow funds it needed on a stand-alone basis and was not in a position to obtain a guarantee from an independent party to support the borrowings it needed. It was the plea of the Assessee that it provided such guarantee to protect its own investment and in anticipation of backward integration which would increase its business. This guarantee was for a loan of USD 16 million availed by LVSI. The Assessee charged guarantee fee @1% based on an analysis of US industrial Bond yield for the relevant period.
18 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11
The TPO rejected the claim of the Assessee that providing Guarantee to a subsidiary AE was in the nature of a shareholder activity and therefore such transactions are outside the purview of Sec.92 of the Act. The Ld. TPO determined the guarantee fee rate @ 2.34%. The TPO assumed the credit rating of the Assessee to be around B-1 CCC+ on S&P scale, as against the claim of the Assessee that its credit rating was BBB+ assigned by CRISIL. (Para 71, page 67 of the TPO Order). The TPO arrived at a credit rating of CC for LVSI, (Para 44, page 37 of his Order. The Ld. TPO proceeded on the basis that LVSI’s credit rating was CC and therefore they could get loan at Libor + 900 basis points. (page 68 of the TPO order). Since LVSI had borrowed loan from Axis Bank @ Libor +5.33%, the TPO determined cost of funds from Axis Bank @ LIBOR plus 1 % and arrived at a credit spread of 433 bps. Thereby, the TPO determined the benefit derived by LVSI by obtaining guarantee from its parent company was 467 bps (900-433 bps). ( Para 75 on page 68 of the TPO order). Based on above and applying the 50% split, the TPO determined an arm's length guarantee rate of 2.34%. ( Para 74 to 77 on page 68 to 69 of the TPO order).
The CIT(A) rejected the contention of the Assessee that provision of Guarantee was a shareholder activity and held that LVSI was benefitted in terms of interest saved on loan borrowed from Axis Bank and it is fair to assume a rating of B- for LVSI. Further, placing reliance on the DRP directions of AY 2012-13 in the Assessee's own case, the Ld. C!T(A) re-determined the guarantee fee at 2.19%. [ para 16.1/ 16.2 on page 63 and 64 of the CIT(A) order]
Before the Tribunal, the first and foremost submission of the learned counsel for the Assessee was that the transaction of giving guarantee on a loan availed by the AE cannot be regarded as an international transaction at all. At the time of hearing, the Bench expressed the view that this issue is no longer res integra and has been concluded by a decision of the Special Bench in the case of Instrumentarium Corporation Ltd.v.
19 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 Assistant Director of Income-tax, International Taxation-I, Kolkata 160 ITD 1 (SB) (Kol). Following the principle laid down in the aforesaid decision, we are of the view that the plea of the Assessee in this regard cannot be sustained. The cases cited in support of the Assessee’s contention also do not require any consideration as the decision of the special bench was rendered much after those decisions.
On the quantum of Guarantee Commission that has to be considered as at Arm’s length, the learned counsel for the Assessee placed reliance on various judicial precedents, wherein the arm's length guarantee fee has been upheld mostly in the range of 0.25% to 0.60%. The learned DR relied on the order of the CIT(A). 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 Arm’s Length: Sl.No. Name of case laws Relevant para Reference
Corporate guarantee fee upheld mostly in the range of 0.25% to 0.60% 1. Thomas Cook(India) “6…..Considering the entirety of facts Para-6 Limited and circumstances of the case and on Pg Vs DCIT[2016]70 the basis of the material available on no.10/11 taxmann.com 322 record, we, therefore proceed to (Mumbai – Trib) uphold the rate of 0.50% for the purpose of determining the arm’s length rate of the guarantee commission fee.” 2. Thomas Cook(India) “6…..Considering the entirety of facts Para-6 Limited and circumstances of the case and on Pg no.5 Vs ACIT[2016]69 the basis of the material available no taxmann.com 443 record, we, therefore proceed to (Mumbai – Trib) uphold the rate of 0.50% for the purpose of determining the arm’s length rate of the guarantee commission fee.” 3. Godrej Consumer “46….Thus, on consideration of Para – 46 Products Ltd. Vs overall facts and circumstances in the Pg no.- 16 ACIT [2016] 69 light of judicial pronouncements taxmann. Com 436 referred to above, we are of the
20 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 (Mumbai-Tri.) considered opinion that the arm’s length price of the corporate guarantee should be fixed at 0.5% 4. Everest Kanto “15 Following the earlier order of this Para-15 Cylinder Ltd. Vs Tribunal and also considering the Pg no.- 7 ACIT [ 2015] 56 internal CUP being the guarantee taxmann.com 361 commission paid by the assessee to the (Mumbai – Trin.) 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%. 5. Aditya Birla Minacs “2.6……Accordingly, following the Para 26 Worldwide Ltd.vs. earlier decisions of this Tribunal, we Pag no.-6 DCIT [2015] 56 direct the AO/TPO to adopt 0.5% as taxmann. Com 317 arm’s length guarantee commission (Mumbai – Trib.) charges in respect of the guarantee provided by the assessee for obtaining the loan by the AE.” 6. Mylan Laboratories “7.2…..Respectfully following the Para – 7.2 Ltd. Vs ACIT [2015] same, we direct the TPO to adopt Pg no. - 8 63 taxmann.com 179 0.53% as the guarantee commission (Hyderabad – Trib.) rate instead of 2% adopted by him” M/s. Mahindra “5………Considering the decision of “Para – 5 Intertrade Ltd. Vs co-ordinate bench on similar issue, we Pg no. - 3 DCIT [ITA direct the AO to exceed the corporate No.269/Mum/2014] guarantee fees @ .5% and made the adjustment accordingly. 26. 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
21 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 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 referred to The commission or fee declared in sub-item (a) or sub-item (b) of item (v) in relation to the eligible of rule 10TC. international transaction is at the rate not less than one per cent. 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 appeal by the Assessee is accordingly allowed.
ITA No.1053/Kol/2017 (Revenue’s appeal):
Grounds No.1 and 2 raised by the revenue read as follows :- “ 1. That on the fact and in the circumstances of the case CIT(A) erred in allowing expenses incurred during F.Y.-2007-08 & 2008-09.
That on the fact and in the circumstances of the case CIT(A) erred in allowing expenses made on account of preparation of offer document for IPO, which clearly was capital in nature.”
The Assesee incurred certain expenditure in relation to business of restructuring. This expenditure was incurred in the financial year 2007-08 and 2008-09 relevant to A.Y.2008-09 and 2009-10. During the financial year 2009-10 the proposed business restructuring exercise was abandoned. The assessee therefore wrote off the said expenditure of Rs.2.69 crores as ‘Exceptional item’ in its profit and loss account. The question before the AO was as to whether the aforesaid expenditure can be allowed as a
22 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 deduction. The AO held that the expenses were capital in nature and cannot be allowed as a deduction.
On appeal by the assessee, the CIT(A) directed the AO to allow the deduction claimed by the assessee. The CIT(A) held that the expenses were in connection with issue of share capital, mostly professional fees for preparation and issuance of draft prospectus. He was of the view that since the proposed IPO was shelved, it cannot be said that the expenditure in question was capital expenditure. He therefore held that expenses incurred in connection with respect to an abandoned project was revenue expenditure and in coming to the above conclusion, he placed reliance on the decision of the Hon’ble Calcutta High Court in the case of Binani Cements (infra). The following were the relevant observations of CIT(A) : “Upon going through the assessment order as well as the submissions of the appellant, it emerges that the moot issue in the present case is whether expenses incurred by the Company towards professional fees for preparation and issuance of the Draft Prospectus for the proposed IPO, which was postponed due to poor market conditions and later on abandoned in FY 2009-10 and charged to profit and loss account in FY 2009-10 would be capital in nature or in the nature of revenue expenditure are allowable as deduction during FY 2009-10.
In the instant ant case, the IPO was proposed by the Company with a view to obtaining funds for enhancement/ expansion of its business operations, hence there is no doubting the business rationale of such IPO related expenses.
Now, coming to the issue of the expenses being capital or revenue in nature, in this regard, relying on the decisions of the Apex Court in the case of Madras Auto Service (P.) Ltd. (1998) (233 ITR 468) and the Jurisdictional Hon'ble High Court in the cases of Binani Cement Ltd. (ITA No. 265 of 2009) and Graphite India (221 ITR 420) (1996), it emerges that an expenditure of capital nature ought to bring into existence any item of capital nature. In the instant case, the expenses for preparation of the offer documents for proposed issue of shares but abandoned did not bring into existence any item of capital nature for the company.
Thus considering the facts of the case in light of the principles laid down vide the aforesaid Apex Court ruling and the Jurisdictional High Court rulings, I am of the view that the expenses incurred by the Company on professional fees in connection to the abandoned IPO issues be allowed as revenue expenditure under
23 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 section 37 of the Act being incurred for the purpose of business. Thus, this ground is allowed.
Aggrieved by the order of CIT(A) the revenue has raised ground no.1 and 2 before the Tribunal. 32. The ld. DR relied on the order of AO and the ld. Counsel for the assessee relied on the order of CIT(A). We are of the view that the expenditure in question was rightly directed to be allowed by CIT(A). It is not disputed that the expenditure was incurred as part of the restructuring exercise. The assessee wanted to raise moneys from the public through the issue of shares. The IPO was postponed due to poor market conditions. The IPO proposed to meet the capital cost of business restructuring. Because of the poor market conditions the IPO was abandoned so also the proposal for restructuring the business of the assessee was also abandoned. The expenditure incurred in this regard were in the nature of advertising expenses, legal expenses, crediting analysis research fees, payment to Company Secretaries and other professional organizations in connection with the proposed IPO. The restructuring exercise was abandoned and the expenses incurred were written off in the books of account during the previous year relevant to A.Y.2010-11. In the light of the decision of the Hon’ble Calcutta High Court in the case of Binani Cement Ltd.(supra) as well as Graphite India ltd.(supra), we are of the view that the expenditure incurred on the abandoned project development should be treated as a revenue expenditure and allowed as a deduction. The CIT(A) has taken note of the aforesaid decisions and has rightly deleted the addition made by the AO. Order of CIT(A) is therefore upheld and grounds No.1 and 2 raised by the revenue are dismissed. 33. Grounds No.3 and 4 raised by the revenue read as follows :- “3. That the Ld . CIT(A) has erred in law and on the facts and circumstances of the case in restricting the interest in loan advanced to AE @ LlBOR+350 bps arbitrarily and not supported by any data analysis.
That the Ld. CIT(A) has erred in law and on the facts and circumstances of the case in not considering the cost of funds of the lender-assessee and
24 ITA No.1053/Kol/2017 & 966/Kol/2017 M/s. TCG LIfesciences Ltd. A.Yr.2010-11 creditworthiness of borrower using data on public domain relied upon by the TPO, for determining the ALP of interest on loan advanced by assessee to its AE. “
While deciding ground no.2 of the assessee we have already held that no income arises on a transaction of investments in shares in subsidiary company (AE). In view of the aforesaid conclusion the action of the AO in considering the excess value of consideration paid by the assessee for purchase of shares as loan transactions is not sustainable. Grounds no.3 and 4 raised by the revenue are on the computation of ALP on a presumed loan transactions by the assessee to its subsidiaries. Since it has already been held that there was no loan transaction at all, the question of computation of ALP interest on such loan transactions does not arise for consideration. Therefore grounds no.3 and 4 raised by the revenue are infructuous and are accordingly dismissed. 35. In the result, appeal by the Revenue is dismissed. 36. In the result the appeal by the assessee is allowed and the appeal by the revenue is dismissed. Order pronounced in the Court on 22.09.2017.
Sd/- Sd/- [J.Sudhakar Reddy] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 22.09.2017. [RG PS]
Copy of the order forwarded to: 1. M/s. TCG LIfesciences Limited, Block-BN, Plot-7, Sector-V, Kolkata-700091. 2. A. C.I.T., Circle-11(2), Kolkata. 3. C.I.T.(A)-22, Kolkata 4. C.I.T.-4 Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.