DCIT 7(2), MUMBAI vs. SOLVAY SPECIALITIES INDIA P. LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI LALIT KUMAR, JUDICIAL MEMBER I.T.A. No. 1702/M/2014 (AY:2009-2010) I.T.A. No. 630/M/2015 (AY:2010-2011) C.O.104/M/2015 (Arising out of I.T.A. No. 1702/M/2014 (AY:2009-2010) C.O. No.41/M/2015 (Arising out of I.T.A. No. 630/M/2015 (AY:2010-2011) फनाभ/ M/s. Solvay Specialities India DCIT-7(2), 6th Floor, Aayakar Bhavan, Private Limited, Vs. Plot No.3526/27, GIDC Estate, M.K. Road, Panoli-394116, Mumbai – 400 020. Distring, Bharuch (Gujarat). स्थामी रेखा सं./ PAN : AAJCS0613F (अऩीराथी /Appellant) .. (प्रत्मथी / Respondent) I.T.A. No. 1853/M/2014 (AY:2009-2010) I.T.A. No. 425/M/2015 (AY:2010-2011) ACIT-7(2), फनाभ/ M/s. Solvay Specialities India 6th Floor, Aayakar Bhavan, Private Limited, Vs. M.K. Road, Plot No.3526/27, GIDC Mumbai – 400 020. Estate, Panoli-394116, Distring, Bharuch (Gujarat). स्थामी रेखा सं./ PAN : AAJCS0613F (अऩीराथी /Appellant) (प्रत्मथी / Respondent) ..

अऩीराथी की ओय से / Assessee by : Shri M.P. Lohia & Shri Heman Chanduriya प्रत्मथी की ओय से/ Revenue by : Shri N.K. Chand – CIT, DR

सुनवाई की तायीख / Date of Hearing : 31.8.2015 घोषणा की तायीख /Date of Pronouncement : 4.11.2015 आदेश / O R D E R PER D. KARUNAKARA RAO, AM: There are six appeals under consideration involving the assessment years 2009-10 and 2010-2011. Out of these appeals, 2 appeals & 2 cross objections are filed by the assessee and the other 2 appeals are filed by the Revenue. Since, the issues raised in these appeals are either identical or inter-connected, therefore, for

the sake of convenience, they are clubbed, heard combinedly and disposed of in this consolidated order. I. Appeals for the AY 2009-2010 2. There are three appeals under consideration for this AY 2009-2010. Appeal ITA No.1853/M/2014 is filed by the assessee; appeal ITA No.1702/M/2014 is filed by the Revenue and C.O.No.104/M/2015 arose out of appeal ITA No.1853/M/2014. Appeal wise adjudication is given in the following paragraphs of this order. ITA No.1853/M/2014 (By assessee) 3. This appeal filed by the assessee on 18.3.2014 is against the order of the DRP-II, Mumbai read with order of the AO / TPO. In this appeal, assessee raised 14 grounds in toto. At the outset, Ld Counsel for the assessee brought our attention to the said grounds and mentioned that Ground nos. 1 and 2 are general in nature. On hearing both the parties in this regard, the said ground nos. 1 and 2 are dismissed as general. Further, bringing our attention to Ground nos. 4 to 6, Ld Counsel for the assessee submitted that the said grounds are not pressed. After hearing the Ld DR, the said grounds nos. 4, 5 and 6 are dismissed as not pressed. Further, Ld Counsel for the assessee also mentioned that Ground no.10 is required to be dismissed as infructuous in view of the amendment to the law. Accordingly, after hearing the Ld DR in this regard, the said ground no.10 is dismissed as infructuous. Bringing our attention to Ground nos. 12 to 14, Ld Counsel for the assessee mentioned that they are considering their consequential nature, they are required to be dismissed as consequential. We accept the argument of the Ld Counsel. Thus, what is left for adjudication relates to the issues raised in ground nos. 3, 7, 8, 9 and 11 and the same read as under: “3. The Ld AO / TPO / Ld DRP has erred in rejecting the segmental approach adopted by the assessee and adopting combined approach for the purpose of benchmarking the transaction of export of finished goods. 7. The Ld AO / TPO / Ld DRP has erred in rejecting the economic adjustment on account of higher depreciation cost claimed by the assessee in accordance with Rule 10B(1)(e)(iii) of the IT Rules, 1962. 8. The Ld AO / TPO / Ld DRP has erred in rejecting the plea of the assessee to compare the profitability of the assessee and comparables at EBDITA level.

deleted considering the judgment of the Bombay High Court in the case of Shell India Markets P. Ltd vs. ACIT [2014] 369 ITR 516 (Bom). 5. In response, Ld DR for the Revenue vehemently argued stating that the assessee failed to submit the segmental details at the first instance before the AO / TPO and the DRP. Further, he mentioned that if these documents are admitted by the Tribunal, they are required to be remanded to the file of the AO for fresh adjudication into the issue. Further also, Ld DR mentioned that while remanding, all the issues should be kept open. 6. We have heard both the parties on the preliminary issue relating to the admitting of additional evidence filed by the Ld Counsel for the assessee before us. It is an admitted fact that the audited segmental financial statements (P & L Account) are not available to the AO / TPO at the relevant point of time. We also find under the head “TPO comments”, the TPO heavily relied on the assessee‟s failure to furnish the said audited segmental Profit and Loss Accounts and also assessee‟s failure to discharge its onus in this regard. While rejecting the TP study reports of the assessee, TPO resorted to apply TNMM method for taking entity level profits. Considering the above deficiencies on part of the assessee during the assessment proceedings, we are of the opinion that the documents presently filed before us constitute additional evidence and they will go into the root of the matter relating to acceptability or otherwise TP study reports. Therefore, we find it very appropriate to admit the same. Considering the principles of natural justice, we are of the opinion that these evidence should be remanded to the file of the AO / TPO for admitting and considering the same during their de novo examination into the issues raised in the assessment. Accordingly, the AO is directed to consider all the assessee‟s arguments and other evidences, if any, to be furnished before them in accordance with law. Accordingly, the preliminary issue is decided in favour of the assessee. 7. Regarding the other issues raised in Ground nos.3, 4, 8, 9 and 11, we find that these issues cannot be adjudicated at this stage considering our finding / decision on the issue of additional evidences described in details in the above paras of this order. Accordingly, these issues are also remanded for fresh consideration and de novo decision. AO is directed to adjudicate these issues considering all the

decisions available on the subject after granting a reasonable opportunity of being heard to the assessee. 8. In the result, appeal of the assessee is allowed for statistical purposes.

ITA No.1702/M/2014 (By Revenue) 9. This appeal filed by the Revenue on 12.3.2014 is against the directions of the DRP-II, Mumbai dated 28.11.2013. In this appeal, Revenue raised the following grounds which read as under: “i) The Ld DRP has erred on facts and in law in deleting the transfer pricing adjustment of Rs. 163,96,23,293/- made on account of international transaction of issue of equity shares (Rs. 144,55,27,000/-) and Rs. 19,40,96,293/- on account of notional interest without properly appreciating the factual and legal matrix of the case as clearly brought out by the TPO and AO in the draft assessment order. ii) The Ld DRP has erred on facts and in law in justifying ebidta growth of 7% without any basis of assumption instead of 11.25% as computed by TPO on scientific basis for FY 2012-2013. iii) The Ld DRP has erred on facts and in law in justifying on relying upon “excerpts of economics survey filed by the assessee for AY 2008-2009” as the same were not presented before TPO. iv) The Ld DRP has erred on facts and in law in deleting the addition on account of notional interest by holding as the consequential effect of deleting the adjustment on share valuation. v) The direction of DRP-II, Mumbai is contrary in law and on facts and deserves to be set aside” 10. At the outset, Ld Representatives of both the parties mentioned that the issues raised in Ground no.(i) relates to the applicability of the principles of Arms Length to a transaction relating to the issuance of equity shares entered into by the assessee with its Associated Enterprises (AEs). Referring to the Ground Nos. (ii) to (v) of the instant appeal, both the Representatives mentioned that these issues relate to the valuation of such equity shares for the purpose of TP studies. Referring to the first issue relating to the applicability of the TP provisions to the international transactions involving with AEs equity shares, Ld Representatives of both the parties mentioned that this issue is now covered in favour of the assessee by various decisions in the case of Vodafone vs. Union of India (368 ITR 1), dated 10.10.2014. He also referred a Circular of CBDT, Instruction No.2 of 2013, copy of which is placed at page no.225 of the paper book, which contains the advice to the AO to accept the decision of the Hon‟ble Bombay High Court in the case of Vodafone (supra) without

further litigation in the matter. Further, on hearing both the parties, we find this issue now stands finalized in favour of the assessee and such transactions are now outside the scope of TP provisions as such transactions fall in „capital field‟. We have also referred to an order of the ITAT, Mumbai wherein one of us (A) is a party to the order in the case of M/s. Anglo-Eastern Ship Management (India) Private Limited in ITA No.1824/M/2014 (AY 2009-2010), dated 25.2.2015. On perusal of the said order, we find paras 5 and 6 of the said Tribunal‟s order (supra) are relevant in this regard and for the sake of completeness of this order the same are extracted as under: “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 totaling 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 ITA Nos.1666&1739/M/2014 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 a 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 VISPL it 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 ITA Nos.1666&1739/M/2014 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 ITA Nos.1666&1739/M/2014 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.” 11. Considering the above settled nature of the issue, we are of the opinion that the order of the DRP is acceptable for the above said reasons also. Accordingly, Ground no.(i) raised by the Revenue is dismissed. 12. Regarding the second issue raised on the valuation of shares, we find the adjudication of this issue becomes an academic exercise considering our decision on

Ground no.(i) of the Revenue. Accordingly, Ground nos. (ii) to (v) of the Revenue‟s appeal are dismissed as academic. 13. In the result, appeal of the Revenue is dismissed. C.O. No.104/M/2015 (By Assessee) (Arising out of ITA No.1702/M/2014) 14. This Cross Objection (CO) raised by the assessee on 16.7.2015 arose out of the Revenue‟s appeal ITA No.1702/M/2014 for the AY 2009-2010. 15. Before us, at the outset, Ld Representatives of both the parties fairly mentioned that the present C.O. is required to be dismissed as academic as the issue raised in this cross objection is only to strengthen the decision of the DRP on the issue relating to the scope of TP provisions qua the investment in the equity shares of the assessee in the AEs. As we have already approved the decision of the DRP and dismissed the Ground no.(i) raised by the Revenue while adjudicating its appeal ITA No.1702/M/2014 in the above paragraphs of this order, we are of the opinion that the C.O. raised by the assessee should also be dismissed as infructuous. Accordingly, the Cross Objection raised by the assessee is dismissed as infructuous. 16. In the result, assessee‟s Cross Objection is dismissed.

II. Appeals for the AY 2010-2011 17. There are three appeals under consideration for the AY 2010-2011. Appeal ITA No.630/M/2015 is filed by the assessee; appeal ITA No.425/M/2015 is filed by the Revenue and C.O.No.41/M/2015 arose out of appeal ITA No.425/M/2015. Appeal wise adjudication is given in the following paragraphs of this order. ITA No.630/M/2015 (By assessee) 18. This appeal filed by the assessee on 29.01.2015 is against the direction of the DRP-IV, Mumbai dated 10.11.2014. 19. At the outset, Ld Counsel for the assessee demonstrated that the issues raied in this appeal are identical to that of the ones raised by the assessee for the AY 2009-201 and the similar additional evidences containing segmental Profit & Loss Account / Financial Statements are filed for the first time before the DRP. However,

the said DRP did not entertain the same by giving reasoning that the same were not filed before the AO / TPO. However, referring to the TPO comments for rejection of the TP studies of the assessee, Ld Counsel for the assessee submitted that the stated reason is in the absence of audited segmental financial statements and the assessee‟s failure to discharge its onus and the same is a common reasoning given by the lower authorities for rejection of the TP studies of the assessee. Ld Counsel for the assessee also mentioned that, since, the issues raised in the present appeal are identical to that of the ones raised by the assessee in its appeal ITA No.1853/M/2014 for the AY 2009-2010, considering the commonality of the grounds, all the grounds raised in the present appeal should be remanded to the file of the AO with a direction to AO to admit the said audited segmental Profit & Loss Accounts and adjudicate the issue afresh. 20. After hearing the Ld DR, we are the considered opinion that the issues raised in this appeal should be remanded, with identical directions as given above in connection with the issue of additional evidences / admitting of additional evidences for the AY 2009-2010, to the file of the AO / TPO. We order accordingly. AO / TPO shall consider the said audited segmental accounts and taken a fresh decision on the issue in accordance with law. Accordingly, the relevant grounds raised by the assessee are allowed for statistical purposes. 21. In the result, appeal of the assessee is allowed for statistical purposes. ITA No.425/M/2015 (By Revenue) 22. This appeal filed by the Revenue on 16.1.2015 is against the directions of the DRP-IV, Mumbai dated 10.11.2014. In this appeal, Revenue raised the following grounds which read as under: “1) The Ld DRP has erred on facts and in law in deleting the transfer pricing adjustment of Rs. 16,98,49,423/- made on account of notional interest on deemed loan without properly appreciating the factual and legal matrix of the case as clearly brought out by the TPO and AO in the draft assessment order. 2) The direction of DRP-IV, Mumbai is order in contrary in law and on facts and deserves to be set aside.” 23. The above grounds raised by the Revenue are identical to that of the ones raised for the AY 2009-2010 in ITA No.1702/M/2014 and the same are dismissed. Considering the commonality of the issues raised in the appeal under consideration

as well as the Revenue‟s appeal for the AY 2009-2010, our decision given therein squarely applies to the instant appeal too. Considering the same, appeal of the Revenue is dismissed. 24. In the result, appeal of the Revenue is dismissed. C.O. No.41/M/2015 (By Assessee) (Arising out of ITA No.425/M/2015) 25. This Cross Objection (CO) raised by the assessee on 19.12.2015 arose out of the Revenue‟s appeal ITA No.425/M/2015 for the AY 2010-2011. 26. Before us, at the outset, Ld Representatives of both the parties fairly mentioned that the present C.O. is required to be dismissed as academic as the issue raised in this cross objection is only to strengthen the decision of the DRP on the issue relating to the scope of TP provisions qua the investment in the equity shares of the assessee in the AEs. As we have already approved the decision of the DRP and dismissed the Revenue‟s appeal ITA No.425/M/2015 in the above paragraphs of this order, we are of the opinion that the C.O. raised by the assessee should also be dismissed as infructuous. Accordingly, the Cross Objection raised by the assessee is dismissed as infructuous. 27. In the result, assessee‟s Cross Objection is dismissed. 28. Conclusively, two assessee’s appeals are allowed for statistical purposes. Two appeals of the Revenue as well as the two cross objections raised by the assessee are dismissed. Order pronounced in the open court on 4th November, 2015. Sd/- Sd/- (LALIT KUMAR) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक 4.11.2015 व.नन.स./ OKK , Sr. PS आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : 1. अऩीराथी / The Appellant प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A)- 3.

12 आमकय आमुक्त / CIT 4. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, 5. ITAT, Mumbai गार्ड पाईर / Guard file. 6. सत्मावऩत प्रनत //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीऱीय अधिकरण, भुंफई / ITAT, Mumbai