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TMI Blog2019 (10) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the assessee having regards to assessee s accounts and explanations and proceed further after recording speaking reasons for non-satisfaction. We note that, in this AY, learned AO has already rejected the assessee s working. With a view to enable revenue to take consistent stand in the matter, we restore the matter back to the file of learned AO on similar lines. The learned AO is directed to reappreciate the disallowance made by the assessee and invoke Rule 8D only if not satisfied with assessee s working of disallowance. It is made clear that if the disallowance is computed in terms of Rule 8D(2)(iii) then apart from the directions of CIT(A) to exclude certain investments, those investments which have not yielded any exempt income during the year under consideration would also be excluded as per the decision of Delhi Tribunal (Special Bench) rendered in ACIT Vs. Vireet Investment (P.) Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI] . Accordingly, Ground No.1 of assessee s appeal may be treated as partly allowed for statistical purposes. Capital gains u/s 50C - HELD THAT:- We find that CIT(A) has clinched the issue in correct perspective. Undisputedly, the property was not free from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reckoner value and furnished valuation report. Thirdly, it is observed that the transaction under consideration is mere development agreement and not a transaction of outright sale of land. Therefore, the provisions of Section 50C, in our opinion, were not applicable to such transactions since there was no transfer of capital assets rather it was a case of transfer of few rights out of bundle of rights available with the assessee. Therefore, concurring with the stand of Ld. first appellate authority, we dismiss Ground No.1 of revenue s appeal. The revenue s appeal stands dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany during the financial year 2008-09, for which allotment of shares was pending on 31st March, 2009 due to time consuming legal process involved in Kingdom of Saudi Arabia. Delay in allotment of Shares cannot be construed that the amount paid as Advance Share Application Money was deemed Loan on which, notional interest has been charged. Re-characterization of Advance Share application as Loan is unwarranted. The approval / clearance granted by the Saudi Arabian General Investment Authority (SAGIA) for increase in Share capital of Saudi Ensas and the fact that the Appellant Company received the required clearance from the Ministry of Commerce, which was published in the Local Official Gazette on 17.12.2015 is sufficient to prove that the advance paid was towards Share Application Money and not a Loan. The Appellant Company prays that the transfer pricing adjustment towards notional interest be deleted. 2. We have heard the rival submissions advanced by respective representatives, given thoughtful consideration to material on record and deliberated on judicial pronouncements cited before us. Our adjudication to the issues raised in cross-appeals is given in succeeding paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was computed @0.5% of average investments held by the assessee. After adjustment of suo-moto disallowance of ₹ 13.50 Lacs, the net disallowance thus worked out to be ₹ 117.90 Lacs. 3.3.2 Before Ld. first appellate authority, the assessee, inter-alia, pleaded that Ld. AO did not arrive at requisite satisfaction that the computation of disallowance by the assessee was incorrect before proceeding to apply Rule 8D and therefore, the additional disallowance was not justified. However, the said arguments could not find favor with Ld. CIT(A) and the same were rejected by observing as under: - With respect to the claim of the appellant that the AO has not arrived at a satisfaction that the computation of disallowance by the applicant company is incorrect. It is seen that the AO has discussed the issue in detail. He has observed that the expenses with reference to investment of such high magnitude did not involve time of only lower personnel but also the key management personnel. It is clear that the expenditure for MIS division has been allocated while the manhours of other persons has not been allocated. Accordingly, he has concluded that the computation of the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 667/Mum/2012 order dated 08/07/2016, wherein learned AO was directed to examine the sufficiency or correctness of suomoto disallowance made by the assessee having regards to assessee's accounts and explanations and proceed further after recording speaking reasons for non-satisfaction. We note that, in this AY, learned AO has already rejected the assessee's working. Nevertheless, with a view to enable revenue to take consistent stand in the matter, we restore the matter back to the file of learned AO on similar lines. The learned AO is directed to reappreciate the disallowance made by the assessee and invoke Rule 8D only if not satisfied with assessee's working of disallowance. It is made clear that if the disallowance is computed in terms of Rule 8D(2)(iii) then apart from the directions of Ld. CIT(A) to exclude certain investments, those investments which have not yielded any exempt income during the year under consideration would also be excluded as per the decision of Delhi Tribunal (Special Bench) rendered in ACIT Vs. Vireet Investment (P.) Ltd. [82 Taxmann.com 415]. Accordingly, Ground No.1 of assessee's appeal may be treated as partly allowed for statistical purposes. 3.4.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd despite best efforts, the permission could not be obtained till March, 2007. Since considerable time had lapsed, SSSC was advised to revise sale consideration amount of ₹ 46 Lacs earlier offered by them in 2000 as the property prices in the area had increased. In response, SSSC gave fresh offer of ₹ 151 Lacs including notional interest of ₹ 17 Lacs on advance of ₹ 25 Lacs paid by them earlier. Although the revised offer was better than offer made by other parties, the management decided not to proceed with the transaction and refunded the advance of ₹ 25 Lacs along with interest thereon. However, rejecting the same, SSSC filed civil suit for specific performance of the contract. During the intervening period, the assessee made independent efforts to sell this property, however, the same did not fetch much fruits. Finally, in June 2007, the assessee got the property valued by M/s G.D. Rao & Associates, Chartered Engineer and Govt. Registered Valuer, who valued the land at ₹ 330 Lacs and structure thereon at ₹ 51.61 Lacs. However, taking a conservative view, the assessee estimated the realistic value of Land and Building at around ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant tenable that if the AO-did-not want to accept the sale consideration, since the appellant had disputed the stamp duty valuation before the AO, the AO should have referred the matter to the Valuation Officer under section 50C(2) of the Act. No such reference has been made by the AO. 5.5. The AO has acknowledged existence of special circumstances under which the property has been sold. He has reproduced the entire factual submission made by the appellant in this regard. The fact that the appellant had called off the transaction by returning the amount received from the buyer as advance and the efforts taken to sell the property through public tender is also known to the AO. However, the AO has merely held that the provisions of section 50C do not provide allowances for the circumstances under which the property was transacted. This does not appear to be a factually correct statement. In case of a dispute between the sale consideration and the value determined for stamp duty purposes, the AO is mandated to refer the transaction to Valuation Officer who is competent to go into such special circumstances and arrive at a fair value. The AO has not made such reference. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n further appeal before us. 3.4.5 After due consideration of factual matrix as enumerated by us in the preceding paragraphs, we find that Ld. CIT(A) has clinched the issue in correct perspective. Undisputedly, the property was not free from encumbrances. The original agreement was made in the year 2000 and there was inordinate delay on account of lack of approvals from concerned authorities and the property was subject matter of litigation. The property had negative covenants as to its use which would reduce its value. Further, the assessee had disputed the valuation before Ld. AO, but no reference was made to Valuation Officer u/s 50C(2). The factual submissions made by the assessee were not controverted by Ld. AO. Therefore, the action of Ld. AO in adopting the Stamp Duty Value could not be held to be justified. Therefore, finding no infirmity in the impugned order on this issue, we dismiss ground nos. 1 & 2 of revenue's appeal. B. Transfer Pricing Grounds 3.5.1 Transfer Pricing [TP] adjustment on account of Share Application Money Certain international transactions carried out by the assessee with its Associated Enterprises [AE] during the year were referred to Ld. Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s prudence and MCA notification was not applicable for Share Application Money pending with foreign companies. The attention was drawn to the fact that average cost of borrowings for overseas projects was only 2.7% per annum. However, the said submissions, in the opinion of Ld. TPO, would not impact the pricing since two uncontrolled parties would expect financial compensation in similar situation. Noticing that in case of assessee, the loan is unsecured, Ld. TPO, adopting Arm's Length Interest rate of 17.78%, proposed TP adjustment of ₹ 152.23 Lacs for 9 months. 3.5.4 Aggrieved, the assessee challenged the proposed adjustment before Ld. first appellate authority by way of elaborate written submissions which have already been extracted in para 7.3 of the impugned order. The assessee, reiterating the submission as made before Ld. TPO, pleaded that share application money was utilized by Saudi Ensas for repayment of outstanding dues of South Holland Bank and other statutory dues so that it could turn around and submit tenders for executing contracts in KSA and avail credit facilities for issuing bank guarantees to the clients. The clearances in the case of Saudi Ensas were del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney and allotment of shares, the assessee's AE stood benefitted from the infusion whereas no benefit accrued to the assessee. The cited decision of Vodafone India Services Pvt. Ltd. was found to be applicable only in case of Share Capital and not in the case of Share Application money, which was the fact in the present case. Therefore, the amount was to be treated as advance to the AE which has been utilized by the AE for its own use. Further, the amount was liable to be treated as loan for interim period till allotment of Shares. The relevant observations of first appellate authority, for ease of reference, could be extracted in the following manner: - 7.4 The submission made by the appellant has been examined and the reason for delay in allotment of shares has been perused. It is seen that the capital in the appellant company has been infused in tranches during the period April 2008 and March 2009 as Share Application Money towards additional capital after due approvals by relevant authorities. The final allotment of shares has occurred in financial year 2015-16, It is also seen that the AE was not in sound financial health at that time and the money so remitted was immediatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the decisions cited above will not be applicable to the period under review. 7.8 The reliance on the decision in the case of Vodafone is applicable only if the amount is treated as being in the nature of share capital and not otherwise. The same decision approves transaction on capital account in the nature of loan or machinery purchase etc. as being in the nature of international transaction as the revenue account is affected on account of interest and depreciation. In the present case, the issue relates to characterization of share application money and not an amount which represents share capital. 7.9 In light of the above discussion, for the period under review, the amount is treated as an advance to the AE which has been utilized by the AE for its own use. The amount is liable to be treated as loan for the interim period during which the appellant was liable to an arm's length interest on this amount. 7.10 The second issue relates to the arm's length rate of interest liable to be charged in this case. The TPO has computed average cost of borrowing in the case of the appellant at 14.78% and has added a 3% risk margin to arrive at an interest of 17.78%. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble risk spread. Hence, a interest rate of 5.76% is found to be at arm's length for the amount advanced as share application money to the AE. Similarly, since an interest rate of 5.76% has been found to be an arm's length interest rate in case of the appellant, the 6% rate charged by the appellant from the AE in respect of loans given to the AE is also found to be at arm's length and no further adjustment is required to be made. It is evident from the directions of Ld.CIT(A) that Ld. AO was finally directed to adopt a spread of 4% over LIBOR of 1.76%. In other words, the ALP of the transactions was directed to the computed by adopting a rate of 5.76% instead of 17.78% as proposed by Ld. TPO. The aforesaid adjudication has given rise to cross-appeals before us. The assessee is agitating the adjustment sustained by Ld. first appellate authority whereas the revenue is agitating the stand of Ld. CIT(A) in directing Ld. AO to apply LIBOR based rate of 5.76%. 3.5.7 Upon careful consideration of factual matrix as enumerated by us in the preceding paragraphs, the undisputed position that emerges is the fact that the assessee has advanced Share Application Money to one of its AE situated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, we draw strength from the observation of Hon'ble Bombay High Court in Pr. CIT V/s Aegis Limited (ITA No. 1248 of 2016 dated 28/01/2019) wherein Hon'ble court has observed that in the absence of finding that the transaction was sham, the TPO could not have treated such transaction as a loan and charge interest thereon on notional basis. 3.5.8 Our view is further fortified by the decision of co-ordinate bench of Delhi Tribunal rendered in Bharti Airtel Limited V/s Addl. CIT (ITA No. 5816/Del/2012 dated 11/03/2014) wherein Hon'ble Bench has observed as under: - 47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions, however, deal with the core issue before us i.e. whether a capital contribution can be deemed to be partly an interest free loan, for the period till the shares were actually allotted, and partly as capital contribution, after the subscribed shares were issued by the subsidiary in which capital contribution was made. In the case of Perot Systems TSI India Ltd (supra), a coordinate bench of this Tribunal had an occasion to deal with the arm's length price adjustment with regard to interest free advances to the subsidiaries. That was a case in which the assessee, an Indian company, advanced interest-free loans to its 100% foreign subsidiaries. The subsidiaries used those funds to make investments in other step- down subsidiaries. On the question whether notional interest on the said loans could be assessed in the hands of the assessee under the transfer pricing provisions of Chapter X, the assessee argued that the said "loans" were in fact "quasi - equity" and made out of commercial expediency. It was also argued that notional income could not be assessed to tax. However, both of these arguments were rejected by a coordinate bench of this Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to hold that this is a bogus transaction because admittedly the subscribed shares capital has indeed been allotted to the assessee. The transaction is thus accepted to be genuine in effect. 50. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the authorities below were in error in treating the payment of share application money, as partly in the nature of interest free loans to the AEs, and, accordingly, ALP adjustment based on that hypothesis was indeed devoid of legally sustainable merits. We delete the impugned adjustment of ₹ 19,15,45,943. The assessee gets the relief accordingly. As we have decided this ground of appeal on the fundamental issue that the payment of share application money could not be partly treated as interest free loan to AE, we see no need to deal with other aspects of the matter. This decision has subsequently been followed by Mumbai Tribunal in Parle Biscuits Pvt. Ltd. V/s DCIT (ITA No.9010/Mum/2010 dated 11/04/2014) and also in Aditya Birla Minacs Worldwide Ltd. V/s DCIT (ITA No.7033/Mum/2012 25/03/2015) wherein similar ratio has been laid down. 3.5.9 Keeping in the view the facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.2 Before Ld. CIT(A), the assessee drew attention to the negative covenants attached with the land which would ultimately affect its market value. It was submitted that all the requisite permissions were to be obtained by the developer and the buyer was also liable to pay unearned revenue to the government which would work out to be ₹ 230.57 Lacs. If the same is added to consideration of ₹ 238.17 Lacs, the aggregate would work out to be ₹ 468.75 Lacs and the same would be more than reckoner value of ₹ 461.14 Lacs. In support, the valuation report from Cushman & Wakefield was also furnished. The attention was also drawn to the fact that the assessee had transferred only the development rights of the land and it was not a case of outright sale and therefore, the reckoner value could not be applied to stated transaction. 5.3 Convinced with assessee's submissions, Ld. CIT(A) deleted the impugned additions, by observing as under: - 5.5 The submission made by the appellant has been examined. The deed of allotment of land by the Thane Collector to the appellant vide his letter dated 21st March, 1961 has been examined wherein it has been mandated at condition no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refer the matter to the Valuation Officer who was competent person to factor all such aspects before arriving at a fair market value. In absence of such reference and a clear evidence of substantial encumbrance with respect to the land, the fair price determined by the valuer is found to be in order and liable to be accepted. 5.9 Keeping in view the above facts, it is directed that the AO should adopt the actual sales consideration as the sale consideration while computing capital gains. The ground raised by the appellant stands allowed. Aggrieved, the revenue is in further appeal before us. 5.4 After due consideration, we are of the opinion that Ld. CIT(A) has clinched the issue in the right perspective. The Ld. AO has ignored the fact that developer had to bear the burden of payment of unearned revenue to the Government. After adding the said burden to sale consideration received by the assessee, the aggregate would be more than reckoner value. Secondly, the matter was not referred to valuation officer since the assessee had contested the reckoner value and furnished valuation report. Thirdly, it is observed that the transaction under consideration is mere development agree ..... X X X X Extracts X X X X X X X X Extracts X X X X
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