COX & KINGS LTD,MUMBAI vs. ADDL CIT RG 1(1), MUMBAI

अऩीराथी की ओय से / Appellant by : Shri R.R. Vora प्रत्मथी की ओय से/ Respondent by : Shri G.M. Doss, DR and Shri Mahesh Shah सुनवाई की तायीख / Date of Hearing : 13.10.2015 घोषणा की तायीख /Date of Pronouncement : 4.11.2015 आदेश / O R D E R PER D. KARUNAKARA RAO, AM: There are two appeals under consideration relating to AYs 2009-2010 and 2010-2011. Since, the issues raised in both the appeals are identical, therefore, for the sake of convenience, they are clubbed, heard combinedly and disposed of in this consolidated order. Appeal wise adjudication is given in the following paragraphs of this order.

on this issue are partly allowed.

8. The second issue relates to benchmarking of corporate guarantee related taxes. Brief facts in this regard are that the assessee has AE (CNK Australia) an SPV incorporated for acquiring the shares in Tempo Holidays Australia Pvt Ltd. CNK Australia was to raise funds for investing the Tempo from the Axis Bank, Hong Kong for which the assessee stood as guarantor. Assessee did not charge any commission from CNK Australia. Assessee justified its decision on various grounds ie subsidiary company, commercial expediency, non-international transaction cum quasi-equity etc. Assessee relied on various decisions in this regard.

“4.35. It is submitted that the interest rates provided by the CRISIL are based on the analysis of Indian market and cannot be applied to transactions effected in other geographical territories. The Ld TPO / DRP have not appreciated the fact that in case guarantee commission is to be imputed based on the interest rates, then the same should be interest rates charged by third party banks to CNK Australia and not the rates provided by the CRISIL. 4.36. Without prejudice to all the above, guarantee commission rates applied / confirmed by the Hon‟ble Bombay High Court and the Hon‟ble Mumbai Tribunal are as follows: Name of the case Guarantee commission rate Everest Kanto Cylinders Ltd (ITA No.1165 of 2013) 0.5% Manugraph India Ltd (ITA No.4761/M/2013 0.5% Asian Paints Ltd (149 ITD 511) (Mum Trib) 0.2% Aditya Birla Minacs Worldwide Ltd (7033/M/2012) (Mum. 0.5% Trib)

4.37. Without prejudice to the appellant‟s submissions that no adjustment should be made on account of guarantee commission, the appellant also submits that, if at all your honours upholds the adjustment on account of guarantee the same should be restricted in range of 0.2% to 0.5%, based on recent Tribunal judgments.” 13. Considering the above stated facts, we direct the AO to restrict the adjustments to 0.5% as upheld by the Hon‟ble High Court in the case of Everest Kanto Cylinders Ltd (supra). Accordingly, the relevant ground nos.6 to 9 are partly allowed.

“5. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited decision of the Tribunal in the case of MSC Crewing Services P Ltd (supra) and also the judgment of the jurisdictional High Court in the case of Vodafone India Services (P) Ltd (supra). After hearing Ld Representatives of both the parties and on perusal of the said decision of the Tribunal in the case of MSC Crewing Services P Ltd (supra), we find paras 2 and 3 of the Tribunal‟s are relevant in this regard. Considering the significance of the said paras 2 and 3 of the Tribunal‟s order (supra) and for the sake of completeness of this order, the said paras are extracted as under: “2.Effective ground of appeal is about transfer pricing adjustment of Rs 122.62 crores.During the assessment proceedings the AO found that 1,00,000 shares of the face value of Rs. 10 each were issued by the assessee to MSC Ship Management (Hong Kong) Ltd. of which the assessee was a wholly owned subsidiary, that the assessee had issued in three tranches totalling to 13,37, 553 shares and realised Rs.3,67,59,192/- (Rs.1,33,75,530/- as share capital and Rs.2,33,83,662/- as premium).The AO made a reference to the Transfer Pricing Officer(TPO) who held that a 3. MSC Crewing Services P. Ltd. premium of Rs.1187.0005 per share(aggregating Rs.1,58,76,76,118)ought to have been charged and proposed an addition of Rs.1,56,42,92,456/- being the difference between what should have been charged according to him as a premium. Premium actually charged by the assessee, amounting to Rs.2.33 Crores was treated as a receipt on capital account. The TPO also took the view that the premium allegedly under charged was a receivable arising out of the international transaction of issue of shares by the asséssee to its AE and proposed a further addition of Rs.17, 52,89,368/- being interest @ 15.55%.Against the proposed addition matter was referred to DRP by the assessee.It was held by the DRP that the correct amount which ought to have been charged as premium was Rs.876.75 per share.The DRP also held that the rate of interest should be arrived at by adding 3% to the return obtained by the assessee from a fixed deposit placed with the bank against bank guarantee obtained by it. As result, as against the total adjustment of Rs.1,73,95,81,824(1,56,42,92,456+17,52,89,368)initially proposed by the TPO, the AO finally sustained addition of Rs.1,22,62,39,100/-(Rs.114,93,15,931+7,69, 23,169/-),as per the directions of the DRP.

3.At the time of hearing before us, the Authorised Representative of the assessee stated that the issue of share premium has been decided by the Hon‟ble Bombay Court in the case of Vodafone India Services Private Limited(VISPL)in WP.871of 2014 on 23.07.2014.Department - al representative (DR)fairly conceded that the issue is decided in favour of the assessee by the said judgment of the Hon‟ble jurisdictional High Court. We have heard the rival submissions and perused the material before us. We find that identical issue had arisen in the case of VISPL(supra).Briefly stated in the case of VISPLit was found that it was a wholly owned subsidiary of a non-resident company, Vodafone TeleServices(India)Holdings Limited(VTIHL). It required funds for its telecommunication services project in India from it holding company i.e. from VTIHL during the AY.2009-10.On 21.08. 2008,the assessee issued 2,89,224 equity shares of the face value of Rs.10/- each on a premium of Rs.8,509/- per share to VTIHL.This resulted in the assessee receiving a total consideration of Rs.246.38 crores from the 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 it in accordance with the methodology prescribed by the Government of India. According to the AO and Transfer Pricing Officer (TPO), the assessee ought to have valued each equity share at Rs.53,775/- as against the aforesaid valuation done under the Capital Issues (Control) Act, 1947 at Rs. 8,519/- and on that basis shortfall in premium to the extent of Rs.45,256/- per share resulted into total shortfall of Rs. 1308.91 crores. Both the AO and the TPO on application of the Transfer Pricing provisions of the Act held that this amount of Rs.1308.91 crores was income. As a consequence of the above, said amount of Rs.1308.91 crores was required to be treated as deemed loan given by the assessee to VTIHL and periodical interest thereon was to be charged to tax as interest income of Rs.88.35 crores in the AY.2009-10.According to the assessee, the Act did not tax inflow of capital into the country nor did it create any legal fiction to treat such alleged shortfall in capital receipt on issue of equity shares by an Indian company to its non- resident holding company, as income. It was also argued that there could be no question of treating the alleged shortfall as a deemed loan or taxing the alleged deemed interest on a deemed loan. It was contended that that provisions of chapter X had no application in cases where no income was arising from an International Transaction, that the issue of equity shares by the assessee to VTIHL did not give rise to any income from International Transaction, that arising of income on account of International Transaction was a condition precedent for application of Chapter X of the Act. Deciding the writ petition, the Hon‟ble Court held as follow: “24.A plain reading of Section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act. This has already been so held by the order dated 29 November 2013 of this Court in Vodafone-III. We 4 MSC Crewing Services P. Ltd. could have straight way held that the issue of examining the jurisdiction to apply Chapter X of the Act stands concluded by the order in Vodafone- III. 25.But we have examined the issue afresh.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 in Section 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. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. This is settled by the decision of this Court in Cadell Weaving Mill Co. vs. CIT 249 ITR 265 was upheld by the Apex Court in CIT vs. D.P. Sandu Bros. Chember (P) Ltd. 273 ITR 1. This Court has in Cadell Weaving Mills Co. (supra) inter alia, observed as under:- " It is well settled that all receipts are not taxable under the Income tax Act. Section 2(24) defines "income". It is no doubt an inclusive definition. However, a capital receipt is not income under section 2(24) unless it is chargable to tax as capital gains under Section 45. It is for this reason that under section 2(24)(vi) that the Legislature has expressly stated, inter alia, that income shall include any capital gains chargeable under section 45. Under Section 2(24)(vi), the Legislature has not included all capital gains as income. It is only capital gains chargeable under Section 45 which has been treated as income under Section 2(24). If the argument of the Department is accepted then all capital gains whether chargeable under section 45 of not, would come within the definition of the word "income" under section 2(24). Further, under section 2(24)(vi) the Legislature has not stated that "any capital gains" will be covered under the word income. On the contrary, the Legislature has advisedly stated that only capital gains which are chargeable under Section 45 of the Act could be treated as income. In other words, capital gains not chargeable to tax under section 45 fall outside the definition of the word "income" in section 2(24) of the Act. It is true that section 2(24) of the Act is an inclusive definition However, in this case, we are required to ascertain the scope of Section 2(24)(vi) and for that purpose we have to read the sub section strictly. We cannot widen the scope of sub section by saying that the definition as a whole is inclusive and not exhaustive. In the present case, the words "chargeable under section 45" are very important. They are not being read by the Department. These words cannot be omitted. In fact, the prior history shows that capital gains were not chargeable before 1946. They were not chargeable between 1948 and 1956. Therefore, whenever an amount which is otherwise a capital receipt is to be charged to tax, section 2(24) specifically so provides." In view of the above, we find considerable substance in the assessee's case that neither the capital receipts received by the assessee on issue of equity shares to its holding company, a non-resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act.(Emphasis by us.) We find that the facts of the case under consideration are similar to the fact of VIHPL. Hon‟ble Bombay High Court has held that the capital receipts received by the assessee on issue of equity shares to its holding company cannot be considered income. Respectfully, following the above judgment, we hold that adjustment made by the AO on account of ‘share premium’ and ‘interest charged on account of under charged premium amount cannot be endorsed. We also hold that TP provisions are not applicable to such transaction. Effective ground of appeal in favour of the assessee. 5 MSC Crewing Services P. Ltd. As the ground of appeal taken by the AO is consequential to the ground raised by the assessee and we have already decided the appeal of the assessee in its favour, so, the ground of appeal filed by the AO is decided against him.”

6. Considering the above as well as the undisputed issue of the capital nature of the transaction in question, we are of the opinion that the adjustments made by the TPO are outside the scope of the TP provisions. We accordingly allow the issue raised by the assessee in its favour. Thus, the grounds raised by the assessee are allowed.”

15. From the above it is very clear that adjustment made on account of „share premium‟ and „interest‟ charged on account of „under charged premium amount‟ does not attract the TP provisions. Considering the same as well as respectfully following the above decision of the Tribunal, we allow this issue in favour of the assessee. Accordingly, relevant grounds raised by the assessee in this regard are allowed.

16. Fourth issue relates to disallowance of Rs. 65,64,655/- made u/s 14A read with Rule 8D of the IT Rules, 1962. In this regard, it is the case of the assessee that the assessee has not earned any dividend income or exempt income during the year and therefore, the said provisions of section 14A of the Act do not attract. If fact, the same was submitted before the AO but relying on the judgment of the Bombay High Court in the case of Godrej & Boyce Co Pvt Ltd (328 ITR 81) (Bom), AO applied the provisions of Rule 8D of the IT Rules, 1962 and made disallowance. On appeal, DRP confirmed the AO‟s decision. Aggrieved, assessee raised the issue before the Tribunal. Before us, Ld Counsel for the assessee reiterated the submissions made before the lower authorities and relied on various precedents viz., judgment of the Hon‟ble Punjab & Haryana High Court in the case of CIT vs. Lakhani Marketing (P&H) (272 CTR 265); decision of the Delhi High Court in the case of Cheminvest Limited (ITA No.749/2014); decision of the Tribunal in the case of ACIT vs. M. Bhaskaran (152 ITD 844) (Mds. Tribunal) and others, copies of which are placed in paper book placed before us, which are relevant for the proposition that “section 14A will not apply if no exempt income is received or receivable during the relevant previous year”. After hearing the Ld Representatives of both the parties and on perusal of the decisions cited by the Ld Counsel for the assessee, we agree with the ratio laid down by the said precedents. We, respectfully following the above cited decisions and the ratio laid down therein, direct the AO to examine and apply the same to the facts of the present and adjudicate the issue afresh after affording a reasonable opportunity of being heard to the assessee. Thus, the relevant grounds raised by the assessee are allowed.

17. The last issue relates to the disallowance in respect of the Annual Information Report (AIR) qua reconciliation. Relevant facts in this regard are that during the assessment proceedings, AO asked the assessee to reconcile the amount of tour sales as per the books of account and AIR statement. After considering the submissions of the assessee in this regard, AO rejected the same and made an addition of Rs. 1,73,44,191/- on account of tour sales being un-reconciled with the AIR statement in the draft assessment order. Aggrieved, assessee carried the matter in appeal before the DRP, wherein the DRP granted part relief to the extent of Rs. 1,23,59,044/- and confirmed the disallowance to the extent of Rs. 49,85,147/-. Accordingly, AO passed the final assessment order confirming the disallowance of Rs. 49,85,147/-. Aggrieved, with the said decision of the AO, assessee is in appeal before the Tribunal. Before us, Ld Counsel for the assessee reiterated the submissions made before the lower authorities and submitted that though the assessee offered to tax more tour sales than what they appeal in the AIR statement AO wanted reconciliation of the tour sales vis-a-vis reflected in the books of account. Considering the nature and size of the assessee‟s business, it is very difficult for the assessee to reconcile the tour sales merely on the basis of the extracts of the AIR statement. Further, he relied on the decisions of the Tribunal in the case of M/s. ANS Law Associates vs. ACIT (ITA No.5181/M/2012 and another decision in the case of Aegis Limited in which are relevant for the proposition that the additions made only on the basis of AIR information are not sustainable. In any case, the onus is on the AO to prove that the assessee had not reported any transaction and is in receipt of income from a particular source.

18. After hearing both the parties and on perusal of the factual matrix of the case as well as on perusal of the decisions cited by the Ld AR, we are of the opinion that the onus is on the Assessing Officer to inform the assessee giving all the details as to on, on what issue, the reconciliation is required, how that entry relates to the assessee etc. How any assessee can reconcile an entry or transaction which does ot pertains to him. Therefore, the onus is on the AO to inform the same. Considering the same and the finding of the Assessing Officer that no exhaustive exercise of reconciliation is undertaken by him during the assessment, we find need for remanding. Accordingly, we remand this ground to the file of the Assessing Officer for fresh adjudication of the issue after granting a reasonable opportunity of being heard to the assessee. Accordingly, relevant grounds raised

by the assessee in this regard are allowed for statistical purposes.

19. Since, the issues raised in appeal (AY 2010-2011) are identical to that of the ones adjudicated by us in the above paragraphs of this order while dealing with the assessee‟s appeal for the AY 2009-2010, therefore, our decision given therein squarely applies to the instant appeal too. Considering the same, the grounds raised by the assessee in its appeal for the AY 2010-2011 are partly allowed for statistical purposes.

20. In the result, both the appeals of the assessee are partly allowed for statistical purposes. Order pronounced in the open court on 4th November, 2015.