2021 (10) TMI 506 - AT - Income Tax

Validity of assessment order on the reasoning that it is barred by time - HELD THAT - As assessee i.e. profit of Rubamin FZC be merged with the assessee s profit by treating Rubamin FZC as part or arm of assessee, then the assessment should be barred by time as in such scenario the provision of TP will not apply. Accordingly, the AO would not have the extended period of time for completing the assessment - It was held that the profit of Rubamin FZC shall not be included the profit of the assessee. Thus in view of assessee submission and decision held in raised by the assessee on merits, we dismiss this ground of appeal of the assessee. Addition by holding that the profit earned by its AE, M/s Rubamin FZC located at Sharjah UAE belongs to the assessee - AO concluded that the sole purpose of creating the RFZC was to shift the profit from India to the tax heaven i.e. RFZC - AO during the assessment proceedings also noted that there was no telephone/Internet connection up to November 2010 at the office of RFZC at UAE which evidences that the office was not functioning independently and properly - whether the company namely RFZC located in UAE was a paper company? - HELD THAT - Indeed the RFZC was incorporated after due compliance of RBI as well as the local laws of UAE - approval of RBI and the local laws of UAE do not decide the nature of transactions. The purpose of RBI is to approve the company within the provisions of relevant law which has no role to play with respect to the provisions of income tax Act. Accordingly, in view of the above facts and definitions, we hold that the company namely RFZC is a shell or paper company which is not doing any business activity in reality and only used as vehicle to books sales and profit and the employees cost which it has shown but actually, it is working for DRC companies. Thus, we also hold that the approval given by the RBI will not help to the assessee insofar holding the RFZC as a paper company. As pertinent to note that in earlier assessment years, there was not any search or survey carried out. Indeed in those assessment years, the assessment was completed based on the information furnished in the return and books of account submitted along with return of income. Now there was a search action u/s 132 of the Act carried out at the premises of the assessee and new facts emerged and in view of the new facts the Revenue changed its stand. Therefore we are of the view that the learned AR s contention to this extent is not maintainable. Whether it was necessary for the assessee to establish a company for carrying out its business activities in DRC? - A conjoint reading establishes the fact that the banking facility in DRC was poor. Thus to cope up with the uncertainty prevailing in DRC and safeguard its business and financial interest the assessee has to rout the transaction through third party or intermediary. At the same time liberalized exchange for third party payment were not available in India for the type of transaction it (RFZC) was carrying out i.e. exporting goods directly from DRC to ultimate customer in third country but routing the bill through RFZ to final customer - at that time it was not possible from India to export the goods directly from DRC to third country but issue bill from India and receive the remittance against such export from DRC in India. Whether the paper company as discussed above is engaged in any tax evasion? - As revenue has not invoked the provisions of section 6 of the Act. It was alleged by the revenue that RFZC has been used as the colourable device for diverting the profit - we find that there was no violation of any provisions of the law leading to draw the inference the assessee has acted in a manner which was prohibited under the provisions of law. Any transaction which is within the four corners of the law cannot be termed as colourable device merely on the reasoning that the assessee is able to save tax liability. Income Tax Act has been amended by incorporating the provisions of PoEM, GAAR for bringing such transactions under the net of tax. However, the provisions are not applicable to the year under consideration. Therefore, we are of the view that until and unless there is any violation of the provisions of law, it cannot be alleged that the assessee by adopting the colourable device has diverted the profit. Whether the profit shown by the RFZC belongs to the assessee? - As profit attributable to DRC for the reasons as discussed above cannot be clubbed with the assessee on the reasoning that the assessee has diverted the profit by using the colourable device. In either situation whether the profit belongs to RFZC or the DRC, the position of the assessee cannot be altered. In other words the assessee company can earn from either of subsidiary companies in the form of dividend only which is also a reality that the assessee has taken a dividend. In a situation of holding the profit of RFZC attributable to the DRC companies, the assessee would have taken the dividend which would have been subject to tax its hands in the same manner as the dividend from RFZC is taxable. Accordingly we hold that position of the assessee in either case cannot be detrimental to it. As we have decided the issue that profit attributable to RFZC belongs to DRC companies, then the question of the colourable device used by the assessee for diverting its profit does not arise. The profit attributable to RFZC with respect to the transactions carried out by it with the company based in China namely Trafigura Beheer BV belongs to DRC companies. Likewise, the profit attributable to RFZC with respect to the transactions carried out by it with the assessee company has already been subject to transfer pricing provisions. Therefore, no inference can be drawn that the profit of the assessee company got diverted. Hence the ground of appeal of the assessee is allowed. Allowing the deduction of the loss for the reason that it was not crystallized in the year under consideration - HELD THAT - It is a fact on record that the income shown by Rubamin FZC has not been held to be taxable in India along with the profit of the assessee in the ground raised by the assessee bearing of this order. Once, the profit of Rubamin RZC is not taxable in India, the question of allowing the loss as claimed by the assessee in the ground of appeal against the profit of the assessee does not arise. Hence the ground of appeal of the assessee is dismissed. TP Adjustment - Transaction of corporate guarantee furnished by the assessee to its AE as international transaction and thereby making an addition being guarantee commission - TPO treated the transaction of furnishing the corporate guarantee by the assessee to the AE as international transaction - HELD THAT - We hold that the issue in the case of the assessee is no longer a covered issue. It is for the reason that, the ITAT on the earlier occasion in the own case of the assessee after making a reference to the order of the coordinate bench in the case of Micro Ink Ltd 2015 (12) TMI 143 - ITAT AHMEDABAD has held that the corporate guarantee was not the international transaction requiring to be benchmarked at the arm length price as the assessee has not charged any commission from the AE. However, the ruling in the own case of the assessee has been overruled by the Hon ble Madras High Court as discussed above. Accordingly we hold that the assessee cannot take the benefit of the order of the ITAT in its own case. Determination of the ALP of the impugned international transaction - TPO in the case on hand has adopted the basis of credit rating of the assessee and AE and accordingly calculated the average coupon rate difference based on such rating as per the data available for US bond - HELD THAT - Mumbai tribunal in the case of Greatship (India) Ltd. 2021 (4) TMI 254 - ITAT MUMBAI after considering the plethora of orders has reached to the conclusion that what the assessee would have paid the guarantee commission, had it obtained guarantee from the bank. That rate of commission should be applied to determine the ALP. The relevant extract of the order has already been reproduced in the submission of the learned AR for the assessee. In the order of the Mumbai ITAT in the case of Greatship (India) Ltd. supra, various judgements were referred therein and in all those judgements average rate of commission was ranging from 0.2 to 0.5 percent. Thus we are of the view that the justice will be served to the assessee and the revenue if the addition is restricted to 0.5% of the guarantee amount. We accordingly hold so. Hence the ground of appeal of the assessee is partly allowed. Characterization of receipts - sales tax subsidy as revenue receipt chargeable to tax - Alternatively, if it is treated as revenue receipt then the amount of deduction under section 80IB of the Act should be enhanced by the corresponding amount - HELD THAT - As decided in own case 2017 (2) TMI 1085 - ITAT AHMEDABAD we hold that the impugned receipt of sales tax subsidy is a revenue receipt which is chargeable to tax Deduction u/s 80IB - DRP has already given a direction to allow the deduction under section 80IB of the Act for the amount of sale tax subsidy but after verification. We find that the direction given by the learned DRP is clear and without any ambiguity. Therefore, we do not find any reason to interfere the direction of the learned DRP. Thus the alternate contention of the assessee is allowed. Hence the aground of appeal of the assessee, in terms of above, is allowed. Capital gain computation - applicability of section 50C - difference between the Jantri Value and the sale consideration under the provisions of section 50C - HELD THAT - As identical issue was raised by the assessee in its own case in the assessment year 2008-09 wherein as held CIT(A) justifies the Assessing Officer s action in not making any such reference. The same admittedly goes to the well settled law hereinabove that the impugned addition is not to be made without a necessary reference under the relevant statutory provision. We accordingly restore the instant issue back to the Assessing Officer for proceedings afresh as per law after affording adequate opportunity of hearing to the assessee. The assessee s instant ground is treated as accepted for statistical purposes. Consequently, the ground of appeal of the assessee of this year is set aside to the file of the AO for fresh adjudication as per the provisions of law and after giving the reasonable opportunity of hearing to the assessee. Hence the ground of appeal of the assessee is allowed for the statistical purposes. Not reducing the dividend income received from Rubamin FZC in the event profit of Rubamin FZC merged with assessee s income - HELD THAT - It is a fact on record that the income shown by Rubamin FZC has not been held to be taxable in India along with the profit of the assessee in the ground raised by the assessee bearing Nos. 4 to 7 vide paragraph No. 47 to 65 of this order. Once, the profit of Rubamin RZC is not taxable in India, the question of reducing the dividend income as claimed by the assessee in the ground of appeal against the profit of the assessee does not arise. Hence the ground of appeal of the assessee is dismissed. Consideration of income as per revised return of income - HELD THAT - At the outset we note that the return of income can be revised under the Act if it has been done within time limit as per the provision of the Act. Then it is the duty of Revenue authority to consider the income as per the revised return. Accordingly we direct the AO to consider the income as per revised return if the same is filed within the framework of law. Hence the ground of assessee is allowed in terms of above for the statistical purposes. Not allowing the loss occurred due to fraud on reason that the same not crystallized in the current year - no documentary evidence furnished by the assessee with respect to the loss incurred on account of the fraud committed by the then CFO except the copy of the FIR - whether the impugned loss was crystallised in the year under consideration or in the subsequent year so as to allow the deduction to the assessee? - HELD THAT - The expression detection and discovery have different and distinct implications in law. The expression 'discovery' has to be interpreted so as to mean that loss must be deemed to have arisen only when the assessee comes to know about it and realizes that the amount embezzled cannot be recovered and not merely from the date of acquiring knowledge in which that embezzlement has taken place. In the present case, the ld. DRP has given finding that last amount was received in the financial year under consideration which implies that the balance amount is not recoverable. Accordingly it can be inferred that, such loss is eligible for deduction as it was discovered to the assessee that the amount of loss was not recoverable. Accordingly we set aside the finding of the learned DRP and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. TP Adjustment - upward adjustment made by TPO by using CUP on account of loan advanced to AE - assessee has advanced loan to its AE without charging any interest thereon - CIT (A) allowed the ground of appeal of the assessee in part after placing his reliance on the order of his predecessor in the case of the assessee for the assessment year 2007-08 and 2008-09 by directing the AO to adopt interest rate at LIBOR 0.75% - HELD THAT - This tribunal in the own case of the assessee for the assessment years 2008-09 - DR has not brought anything on record indicating that the above finding of the ITAT was either overruled or stayed. Thus we hold that the above finding of the ITAT is also applicable to the assessee for the year under consideration. Therefore we set aside the issue to the file of AO for fresh adjudication as per the provision of and in the light of above stated discussion. Hence the grounds of appeal of the assessee are allowed for statistical purposes. Loss on sale of shares - AO treated the entire transaction of sale purchase of the shares as a colourable device and reworked the amount of loss in accordance with the method adopted under rule 11UA - HELD THAT - As perused the details available in the form of sale or purchase agreement of share. All these details, evident that the necessary details to whom the shares were sold by the assessee were available before the learned CIT (A). Thus to this extent, we hold that the finding of the learned CIT (A) is contrary to the materials available on record. Additionally, we also note that there was nothing brought on record by the Revenue indicating/suggesting that the assessee has received any consideration in cash against the sale of shares. In view of the above and after considering the facts in totality we are not convinced with the finding of the authorities below that the assessee has adopted the colourable device for incurring the impugned losses. Whether the price (₹400 per share) at which the shares were sold was supported based on any documentary evidence? - We note that the section 48 deals with computation of income chargeable under the head 'capital gains'. Section 48 refers to the full value of consideration received or accruing as a result of transfer of a capital asset. It states that from the full value of consideration received or accruing, deduction would be allowed in respect of expenditure incurred wholly and exclusively in connection with the transfer and cost of acquisition of asset and cost of any improvement thereto. In other words, the provision does not provide that the fair market value of the property as on the date of transfer should be considered as the sale consideration provided under such 48. There is no provision under the Act prescribing the guidelines for pricing of the shares unlike the provisions contained under section 50C of the Act concerning immovable properties under the head capital gain. Thus in the absence of any specific provision to determine the sale price of the shares of unlisted company at prevailing point of time, we are inclined to hold that the price declared by the assessee is correct and within the provisions of law. We note that the law was amended to bring the transaction of unquoted sale and purchase of shares under the net of income tax concerning the sale price of the shares. As per the provisions of section 50CA of the Act, the sale price of shares other than quoted shares shall be the fair market rate which shall be determined as prescribed under the rule 11UA of the Income Tax Rule. As the purchase and sale of the shares by the assessee of the shares of company were duly supported with the relevant documentary evidences such share purchase agreement, copy of annual return and share sale agreement which are placed on pages 122 to 139, 100 to 113 and 266 to 268 of the paper book. It is also pertinent to note that the lower authorities did not doubt the details of the purchases and sales of the shares. In view of the above, we are not inclined to uphold the finding of authorities below. Accordingly, we set aside the order of learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of the Assessment Order
2. No Incriminating Material Found
3. Addition in respect of Rubamin Ltd.
4. Disallowance of Fraud Loss incurred by Rubamin Ltd.
5. Transfer Pricing Adjustment
6. Sales Tax Subsidy treated as Revenue in Nature
7. Addition u/s 50C
8. Other Grounds including Interest and Penalty

Detailed Analysis:

Validity of the Assessment Order:
The assessee argued that the assessment order was invalid as it was barred by time and not in accordance with the Dispute Resolution Panel (DRP) directions. The Tribunal noted that the issue was raised without prejudice to the grounds related to the profit of Rubamin FZC. Since the Tribunal decided in favor of the assessee regarding the profit of Rubamin FZC, the ground challenging the validity of the assessment order was dismissed.

No Incriminating Material Found:
The assessee claimed that no incriminating material was found during the search, making the assessment invalid under section 153A. However, the assessee chose not to press this ground, leading to its dismissal.

Addition in respect of Rubamin Ltd.:
The main issue was whether the profit of Rubamin FZC, a subsidiary in UAE, should be taxed in the hands of the assessee. The Revenue argued that Rubamin FZC was a shell entity used to divert profits out of India. The Tribunal examined various documents and emails found during the search, which indicated that the affairs of Rubamin FZC were controlled and managed from India. However, the Tribunal concluded that the profits of Rubamin FZC should not be included in the assessee's income, as there was no violation of the law. Thus, the addition of ?27,05,11,474 was deleted.

Disallowance of Fraud Loss incurred by Rubamin Ltd.:
The assessee claimed a deduction for a fraud loss of ?1,50,87,623. The Tribunal noted that since the profit of Rubamin FZC was not included in the assessee's income, the question of allowing the fraud loss did not arise. Hence, this ground was dismissed.

Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustments made by the AO. The Tribunal noted that the AO had not followed the DRP's directions regarding the purchase of cobalt and corporate guarantee commission. The Tribunal directed the AO to adhere to the DRP's directions and restricted the corporate guarantee commission adjustment to 0.5% of the guarantee amount, partly allowing the assessee's appeal.

Sales Tax Subsidy treated as Revenue in Nature:
The assessee argued that the sales tax subsidy should be treated as a capital receipt. The Tribunal, following its earlier decision, held that the subsidy was a revenue receipt but allowed the alternative claim for deduction under section 80IB.

Addition u/s 50C:
The AO made an addition of ?1,45,65,207 by invoking section 50C, which the assessee contested. The Tribunal noted that the AO had not referred the valuation to the valuation officer despite the assessee's objection. The Tribunal set aside the issue to the AO for fresh adjudication, directing that the valuation officer be consulted.

Other Grounds:
The Tribunal dismissed the grounds related to interest under sections 234B and 234C and the initiation of penalty proceedings under section 271(1)(c) as either consequential or premature.

Conclusion:
The appeals were partly allowed, with specific directions for fresh adjudication on certain issues, and the addition related to Rubamin FZC's profit was deleted. The Tribunal emphasized the need for adherence to procedural requirements, such as referring valuation disputes to the valuation officer and following DRP directions.