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Income Tax Appellate Tribunal, “C”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI PAVAN SINGH, JM
O R D E R PER R.C.SHARMA (A.M.) : This is an appeal filed by the assessee against the order of CIT(A), dated 27-06-2013, for the Assessment Year 2009-10, in the matter of order passed under Section 143(3) of the I.T. Act. 2. The following grounds have been taken by the assessee: Ground No. I: Want of Natural Justice
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition made by the AO u/s. 68 despite the fact that the remand report of the AO confirmed that the appellant had satisfied all the three tests, viz: identity of P5 Asia Holding Investment (Mauritius) Ltd., (P5 Asia), financial capacity of P5 Asia and genuineness of the transaction of subscription to the share capital of the appellant, solely on the ground that the documents submitted to the Mauritian Government through the FT & TR-II, CBDT for further inquiry about P5 Asia are under verification.
2. The appellant prays that the order of the learned CIT(A) be quashed in as much as it completely disregards the remand report of the AO which confirmed that the appellant had fulfilled all the conditions for non-applicability of section 68 to the subscription amount received from P5 Asia. Without prejudice to Ground No. 1 Ground No. II. Addition of Rs. 20,98,25,00,000/- u/s. 68 of the Act being the amount received from P5 Asia towards subscription of Compulsorily Convertible Preference Shares (CCPS)
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 20,98,25,00,000/- made by the AO u/s. 68 even though the appellant had proved identity, and financial capacity of the investor and genuineness of the transaction.
2. The appellant prays that the addition of Rs. 20,98,25,00,000/- made by the AO u/s. 68 of the Act be deleted. The appellant craves leave to add, to alter and/or amend all or any of the above grounds of appeal at the time of hearing.
3. Rival contentions have been heard and record perused. The facts in brief are that the assessee is engaged in telecom business which operates telecom towers and owns a licence for Bihar for telecom business. In this company during the year under consideration the Provident Equity Partners (PEP) a global private investor credit through one of their Mauritius based investment namely P5 Asia Holding Investment (Mauritius) Ltd., (herein after referred to as „P5AHIML‟) invested Rs. 2098.25 Crores in Compulsory Convertible Preference Shares (CCPS) in December, 2008. This „P5AHIML‟ has registered itself as a Foreign Venture Capital Investor and also SEBI and subsequently obtained permission of FIPB to invest in this company. The terms of issue of CCPS are as under: Particulars Remarks No. of CCPS 19,25,000 Face Value of CCPS Rs. 10/- per CCPS Share Premium Rs. 10,890/- per CCPS Total proceeds received from Rs. 2,098.25 Crores CCPS Nature of Preference Shares Compulsorily Convertible Dividend 0.00001% p.a. per CCPS Terms of conversion At the end of ten year each CCPS shall be converted into 1 (one) equity share of the face and paid-up value of Rs. 10/- each Further to above in terms of clause 7 of the agreement, „P5AHIML‟ can exit from this investment and assessee company has to repay the above amount. The AO added a sum of Rs. 2098.25 Crores u/s. 68 of the Act received by the assessee towards subscription of its CCPS on the ground that transaction of issue and allotment of CCPS was not genuine and the assessee had failed to prove the financial capacity of the investor of the CCPS.
4. AO observed that during the year, the assessee has issued 19,25,000 preference shares, each of face value Rs. 10/- to M/s. P5 Asia Holding Investments (Mauritius) Ltd., (hereinafter referred to as „P5AHIML‟) of Rs. 10,890/- per share. This comes to total nominal Rs. 1,92,50,000; total premium of Rs. 20,98,25,00,000. The dividend rate is 0.00001% per annum on face value of the preference shares, which implies that dividend per year on the amount of Rs. 20,98,25,00,000 would be Rs. 1925 per year i.e., a negligible amount of less than Rs. 2 per year. For all practical purposes, it can be said that an amount of Rs. 2098.25 Crores has been received by the assessee without any cost to service this amount through interest or dividend. This arrangement is stated to prevail for ten years. On the tenth anniversary of the effective date on which Preference Shares are issued to P5AHIML the Preference Shares will convert to Equity shares at a premium of Rs. 10,890/-. Per share i.e. Preference Shares costing Rs. 10,900/- (i.e., Rs. 10 face value + Rs. 10,890/- premium) will be converted into equity shares at 1:1 ratio. In comparison, the assessee‟s holding company, M/s. Idea Cellular Limited and its nominee own 1,00,00, 000 Equity Shares of Rs. 10/- each, at part, amounting to Rs. 10,00,00,000/-. It is obvious that assessee claims to have received share capital towards preference shares from P5AHIML at terms which so much adverse to P5AHIML that a prudent business entity may never agree to subscribe to preference shares. The assessee having received huge amount of funds amounting to Rs. 20,98,25,00,000/- from P5AHIML and having credited the amount in the books of accounts, S.68 of I.T. Act. The AO further observed that assessee has failed to prove the genuineness of transactions insofar as P5AHIML is a loss making company of meager turnover. For the year ended 31st December, 2007 and 31st December, 2008 and 31st December, 2009 the losses incurred were USD 55,111 and USD 23,947 and USD 33,808,799 respectively. Similarly, the turnover in these years were USD 432 and USD 1375 and Nil, respectively. This proves that P5AHIML does not have adequate financial capacity.
In view of the above discussion, the AO concluded that the transfer of funds from P5AHIML to assessee company, for what is claimed as subscription of Preference shares, is nothing but a colourable device and not genuine.
AO also stated that assessee has failed to prove the genuineness of transaction as far as the receipt of funds amounting to Rs. 2098.25 Crores from P5AHIML towards alleged investment in assessee‟s Preference Shares, is concerned. It is also obvious from the aforesaid that the assessee has failed to prove the financial capacity of P5AHIML. Under these circumstances, AO constrained to add the amount of Rs. 2098.25 Crores to asessee‟s income U/s.68 of the IT Act.
During the appellate proceedings, the assessee filed additional evidences which were sent by CIT(A) to the AO for his Remand Report. After long persuasion, the CIT(A) received Remand Report on 30-05-2013, thereafter, CIT(A) passed order on 27-06-2013 after observing as under: “4.20 After considering all facts and circumstances of the case, in the appellant company a foreign entity namely P5AHIML invested in convertible cumulative preference shares. AO added this U/s.68 of IT Act on the ground that appellant had not proved identity, genuineness and creditworthiness of investor. During appellate proceedings appellant had filed additional evidence. Additional evidence was forwarded to AO as per Rule 46A. Evidence is also admitted in view of Sec.46A(1)(c) as appellant was prevented from furnishing evidence before as it is in other country, considering it as sufficient cause, additional evidence is admitted. After the receipt of additional evidence along with other evidence AO through CIT-10, Mumbai forwarded to FT & TR-II CBDT, New Delhi for verification and investigation as per prescribed Rules. AO has empowered to investigate and verify in view of following cases i.e. CIT vs. Sophia Finance Ltd. (1994) 205 ITR 98 (Delhi), CIT vs. Oasis Hospitalities (P) Ltd (2011) 333 ITR 119 (Delhi), CIT vs. Divine Leasing & Finance Ltd. 299 ITR 268 (Del) (HC) and CIT vs. Stellar Investment Ltd. (2001) 251 ITR 263 (SC). As the documents furnished by appellant are under investigation and verification which was stated in remand report of AO. Under these circumstances, I uphold the order of AO. These grounds of appeal
are dismissed”.
8. Against the above order of CIT(A), assessee is in further appeal before us.
9. Ld.AR vehemently argued that by filing various documentary evidence, the assessee has proved not only identity but also genuineness of transaction and creditworthiness of investor. He drawn our attention to the relevant pages of the agreement entered with P5AHIML to contend that after having all the safeguards, the investor have invested the funds in the assessee company. Our attention was also invited to the documentary evidences filed in support of the financial capacity of P5AHIML, copy of annual report, assessment order, financial statements of P5AHIML for this year as well as preceding two years. Our attention was also invited to the bank statement. It was contended that proper approval has been taken from the FIB. Copy of sanction/approval from relevant authorities/regulators were also placed on record. Our attention was also invited to the decision filed before the lower authorities for the premium charged on the preference years. In view of the various documentary evidences placed on record, Ld.AR vehemently contended that assessee has not only proved the source of funds but also source of the source. Accordingly, it was contended that all the conditions laid down U/s. 68 with regard to the identity, creditworthiness and genuineness of transactions was fully complied with. Therefore, in view of various judicial pronouncements which was placed on record, no addition was warranted u/s.68 of the I.T. Act.
10. Ld. AR relied on the Apex Court's decision in the case of CIT vs. Lovely Exports Pvt. Ltd. (2008) (216 CTR 195) in which it was held that once the assessee has given the names and identity of the shareholders, the onus upon it gets discharged and no addition can Department. Further reliance was placed on the following decisions rendered u/s. 68 of the Act. CIT vs. Creative World Telefilms Ltd. (2011) (333 ITR 100) (Born.); CIT vs. Oasis Hospitalities P. Ltd. (2011) (333 ITR 119) (Del); CIT vs. Divine Leasing and Finance Ltd. (2007) (299 ITR 268) (Del); CIT vs. Sophia Finance Ltd. (1993) (205 ITR 98) (Del) (FB); CIT vs. Stellar Investment Ltd. (2001) (251 ITR 263) (SC); CIT vs. Winstrall Petrochemicals P Ltd. (330 ITR 603) (Del).
On the other hand, it was contended by Ld. CIT-DR that the sum which has been credited in the books of the assessee has been routed by the ultimate fund provider namely Providence Equity Partners, USA through a series of companies based in tax haven countries. In this case, the assessee has not explained as to why the money had to travel from USA to Cayman Island, from Cayman Island to Mauritius and from Mauritius to India. The transaction in question becomes prima facie doubtful by this fact alone and especially so when there is no Indian, American or International Law which prohibits direct investment by an American Company into an Indian Company within the frame work of law. We see many examples mentioned in newspapers about investment made by private equity providers to Indian startup companies. The law says that the explanation about nature and source of the sum credited has to be to the satisfaction of the AO. The money trial and ownership trail can be looked into at page 5 to 6 of our submission.
The money trail of the investment and the ownership trail of the investment company makes the whole transaction prima facie doubtful and therefore the AO was right in not being satisfied by the explanation offered by the assessee regarding the nature of the sum credited.
He invited our attention to the fact that the value of preference shares subscribed to by the investor is Rs.1,92,50,000/- only for which the investor had to pay total of Rs. 2098.25 Crores. The investment is presumably for 10 years after which CCPS shall be converted into one equity share of the face and paid up value of Rs. 10/-. The investor was entitled to a dividend at the rate of 0.00001% per annum per CCPS. Thus the investor was to get a dividend of Rs. 1.92 per annum on an investment of Rs. 2098 Crores.
He further contended that the terms of investment seems to be fantastic unbelievable and against the principle of human probabilities. He further contended that the nature of investment becomes very much doubtful when we consider the following points: i. The investor is not getting any dividend against the investment of Rs. 2098.25 Crores; ii. There has been no appreciation in value of shares because the shares are not freely tradable commodity; iii. There is no ownership control and there cannot be in future also any ownership control by the investor company of the assessee company because investor company even after the conversion of its investment into equity shares wil be minority shareholder; iv. From the ownership trail, it is evident that ultimately the investment money has come from M/s. Providence Equity Partners, the private equity firm based in USA. However, it can be seen from page 30 to 36 of our submission made on 19th August, 2015 that it is not own money of M/s. Providence Equity Partners to use in this investment. This investment has been made by capital contribution from hundreds of contributors. What are these contributors getting in return from investment which has a lock of period of 10 years? Furthermore, if contributors are not getting any return, then why are they not asking their money back especially in view of the fact that the investor company has option to exit from this investment notwithstanding the status of the Indus IPO as per clause 11 of the agreement between the assessee and the investor company.
As per Ld.DR, the Providence Equity Partners have suffered major losses in money on its investment and it has lost more than F.Y. 2010 to 2015. This means that the investor group is in a cash crunch and therefore again the question arises as to why it has not exited from its investment in Aditya Birla Telecom Limited.
Reliance has placed by Ld.DR on the decision of the Delhi High Court in the case of Jansampark Advertising & Marketing (P) Ltd., [275 ITR 373], Navodaya Castles (P) Ltd., [367 ITR 306], Calcutta High Court in the case of Precision Finance Pvt. Ltd., [208 ITR 465] in support of the proposition that burden lies on the assessee to prove identity of the creditors and their creditworthiness and mere transaction through banking channel is not sufficient.
We have considered rival contentions, carefully gone through the orders of authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by Ld.AR and Ld.DR during the course of hearing before us in the context of factual matrix of the case. From the record we found that during the year under consideration, assessee was in receipt of Rs. 2098.25 Crores from P5 Asia Holding Investment (Mauritius) Ltd., (in short „P5AHIML‟) towards subscription of Compulsorily Convertible Preference shares. P5AHIML has invested in Compulsorily Convertible Preference shares issued by the assessee. P5AHIML is belonging to the Providence Equity Partners (PEP), a global private investment group specializing in media, entertainment, communication and information companies, managing funds of USD 22 billion and having investments in over 100 companies spread over 20 countries. P5AHIML has registered itself as a Foreign Venture Capital Investor (FVCI) like many such other foreign investment firms/bodies with SEBI. Subsequently approvals are taken from FIPB in the case of such investments as explained above, wherever applicable. The terms of issue of the CCPS are as under: I. No. of CCPS : 19,25,000 II. Face Value per CCP : Rs. 10/- each III. Share Premium per CCPS : Rs. 10,890/- IV. Total proceeds received : Rs. 20,98,25,00,000/- V. Nature : Compulsorily Convertible VI. Dividend : 0.00001% p.a. per CCPS VII. Terms of conversion : At the end of ten year each CCP shall be converted into 1 (one) equity share of the face and paid- up value of Rs. 10/- each.
In connection with the CCPS, the AO called for details such as identity proof of P5AHIML, proof of financial capacity i.e., copies of financial statements for year ended and two preceding years, copy of the regulatory approval for the share capital issued to P5AHIML, CCPS, shareholder‟s agreement, Statement of utilization of funds received from P5AHIML etc. The assessee submitted the foregoing details by August, 25, 2011, November 14, 2011, November 15, 2011, November 30, 2011 and December 7, 2011. Specifically, the assessee submitted the following: a. Certificate of Incorporation of P5AHIML; b. FIPB approval dated October 27, 2008 received by assessee for subscription made by P5AHIML; c. Copy of bank statement of the assessee‟s bank account with HSBC showing the inward remittance of Rs. 2,098.25 Crores towards the subscription amount of CCPS; d. Foreign Inward Remittance Certificate (FIRC) issued by HSBC setting out the purpose of remittance; e. Justification for premium charged; f. Shareholders‟ Agreement along with subscriber‟s agreement between assessee, ICL and P5AHIML; g. Reason for non-payment of dividend during the year; h. Return of allotment filed by the assessee for issue of CCPS; i. Statement of utilization of funds by the assessee on receipt of share subscription; j. Audited financial statements of P5AHIML for the year ended on December 31, 2008 and December 31, 2009; k. Order of Hon‟ble Bombay High Court approving the scheme of demerger between the assessee and ICL, u/s. 391 r.w.s. 394 of the Companies Act, 1956; l. Directors‟ report and Audited Financial Statements for the year ended 31st March, 2010 and 31st March, 2011.
The AO has observed in the order that P5AHIML has received capital contribution from its shareholder P6AHIML to subscribe to the CCPS. However, according to the AO, there is no information on the source and the exact route of funds into P6AHIML. According to him, a complex route of different entities has been used as a conduit to channelize the flow of funds into P5AHIML and then into the assessee and, hence, the transaction was not genuine. We found that the assessee had filed audited financial statements of P5AHIML at the instance of the AO which showed that the said investor had raised capital contribution from its shareholder, P6AHIML. Thus, the assessee had proved the source of funds of P5AHIML.
In December, 2008 for the assessment year in question, P5AHIML, made an investment of Rs. 2098.25 Crores by subscribing to CCPS issued by the assessee. This investment was made by P5AHIML after registering with SEBI. It is important to note P5AHIML after the assessee obtained necessary approval from the Ministry of Finance (FIPB). The registration certificate of P5AHIML with the SEBI as FVCI is enclosed. We found that the FIPB application contained full details about the investment, background of the transaction, the terms of CCPS, identity of the investor/investor group. We had also verified Shareholders Agreement dt. 22nd May, 2008 and Subscription Agreement dt. 22nd May, 2008 signed between the parties.
From the agreement so entered laid down the terms and conditions of the investment made by P5AHIML, an investment arm of PEP in the assessee, the Financial statements disclose the flow of funds into and from P5AHIML.
From the record we also found that while making such investment, assessee not only look for dividend or interest therein, but expects the return on his investment such as capital appreciation, value creation on listing of shares etc., when CCPS finally gets converted into equity of the assessee which held 16% stake in Indus towers Limited (ITL). The return expected by P5AHIML by way of value appreciation on conversion of CCPS into equity due to the assessee‟s investment in ITL which underlines their reason for the investment has been completely ignored by AO. Merely due to the existence of multiple entities within the investor P5AHIML by its shareholders just before investment is made, does not entitle the AO to draw any adverse inference on the financial capacity of P5AHIML. The fact that P5AHIML has raised share capital just before making investment shows that it has its own shareholders funds and it, in fact, proves the financial capability.
From the record we found that, in the course of assessment proceedings, the AO called for various details pertaining to P5AHIML in connection with the CCPS allotted to P5AHIML. These were: Identity proof of P5AHIML, proof of financial capacity i.e, copies of its financial statements for the year and for two preceding years, copy of the regulatory approval for the share capital issued to P5AHIML, evidence of funds received by the assessee, justification for a huge premium charged, terms of issue of CCPS, shareholder‟s agreement, Statement of utilization of funds received from P5AHIML etc. In compliance to the AO‟s requirement, assessee has filed all these documentary evidences. Without appreciating these documents, AO had made the addition u/s. 68 by treating the said receipt as an “un-explained credit”.
The assessee is a closely held public company having cellular license for Bihar and Jharkhand telecom circle. During the said year, assessee received Rs. 2098.25 Cr. from P5 Asia Holding Investment (Mauritius) Ltd., on account of issue of Rs. 19,25,000/- compulsorily convertible Preference shares. Each share had face value of Rs. 10/- and a premium of Rs. 10,890/-. The AO on grounds that the assessee has failed to substantiate the genuineness of the said investment treated Rs. 2098.25 Crores as un-explained cash credit u/s.68 of the Act. Vide letter dt. 24-12- 2013, further information was sought from the FTD with regard to genuineness of investment made by Providence Equity Partners VI International LP, Cayman Islands in P5 Asia Holding Investment (Mauritius) Ltd. From the information received it was observed that the fund for the said investment came from Providence Equity Partners LLC, entity registered in USA.
In the course of hearing of the appeal, CIT(A) had called for a remand report from the AO on certain additional evidences filed by the assessee under rule 46A of the Income Tax Rules 1962. In the course of the remand proceedings, the AO sought further information on P5 Asia from the government of Mauritius through FT & TR, CBDT in terms of letter [DOF No.500/306/2009-FTD-I(PT)] dated March 21, 2013 by CBDT Chairperson. In the remand proceedings, the AO has concluded that "prima facie, these prove the genuineness and the financial capacity of the persons making investment in Preference Shares. The CIT(A) has admitted the 46A(l)(c) of the Rules on the ground that the assessee could not submit them before the AO since they were not received during the assessment proceedings.
From the record we also found that reference was made to FT & TR to verify the genuineness of investment made by in P5 Asia Holding Investment (Mauritius) Ltd., Providence Equity Partners VI International LP, Cayman Islands and Providence Equity Partners LLC. Vide letter dt. 25-06-2015, FT & TR has furnished the details of Providence Equity Partners LLC and Providence Equity Partners VI International LP, Cayman islands. Pages 8 – 51 pertain to information provided by the US tax Authorities about Providence Equity Partners LLC and pages 52 – 181 pertain to information provided by the tax authorities of Cayman Island about Providence Equity Partner VI International LP, Cayman Islands.
With regard to the information provided by the Cayman Island Tax authorities about Providence Equity Partners VI International LP, Cayman Islands, it is observed that the identity of the concern is furnished that the same is an entity incorporated in the Cayman Island. However, with respect to the source of fund, it was observed that funds in Providence Equity Partners VI International LP, Cayman Islands came from Providence Equity Partners LLC, USA.
We have also verified shareholder agreements, placed at page 3-52 placed of the paper book-1, subscribers agreement placed at page 53-90, return of allotment placed at page 91-94, FIPB Approval, at page 95-98, Foreign Inward Remittance Certificate placed at page 99, HSBC Bank Account of the assessee placed at page 100, certificate of incorporation of P5 Asia Holding Investments (Mauritius) Limited (“P5AHIML”) placed at page 102, audited financials statements of P5AHIML for the year ended December, 31, 2008 and December 31,2009, paced at page 103-155, statement of utilization of funds received from P5AHIML placed in the paper book- 1 respectively. We also verified certificate for net equity balance of providence equity partners VI International L.P., placed at page 1-2, net worth certificate of providence Equity GP VI international LP from Ernst & Young placed at page 3, assignment confirmation agreement placed at page 4-9, SEBI registration certificate for P5AHIML, paced at page 10-11, tax residency certificate of P5AHIML placed at page 13-15, clarification from the Auditor of P5AHIML for typographical error in Notes No.14”Holding and Ultimate Holding Companies” to the Financial Statement for the year ended December, 31,2009 at page 16 of paper book-II, respectively. We have also verified certified copy of statement of account of P5AHIML for account number 080-102056-020 with HSBC Bank (Mauritius) Ltd. for the month of December, 2008, paced at Anexure- 1 and certificate certifying the copy of assignment confirmation agreement dated December 23,2008 placed at Annexure-3. We have also verified director‟s report for the year ended March 31,2009, March 31,2010 and March, 31,2011 placed at page 157- 172 of the paper book, audited financials statements of the assessee for the year ended March, 31,2010 and March, 31,2011 placed at page 173-2012 of paper book and certificate from P5AHIML for no P.A.No. required under section 2(30) of the I.T.Act, 1961, placed at page 12 of the paper book.
After analyzing the above documents we can safely conclude that P5 Asia is a company belonging to the Providence Equity Partners ("PEP"), a global private investment group specializing in media, entertainment, communication and information companies, managing funds of USD 22 billion and having investments in over 100 companies spread over 20 countries. P5 Asia has registered itself as a Foreign Venture Capital Investor ("FVCI") with Securities and Exchange Board of India ("SEBI"). Approvals were also taken from the Foreign Investment Promotion Board ("FIPB"). The investment in CCPS of the assessee was made after PS Asia registered as a FVCI with SEBI and the assessee obtained the necessary approvals from the FIPB. In connection with the issue of