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TMI Blog2017 (11) TMI 1901X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction in question is on capital account and determination of ALP in respect of such transactions is outside the purview of Chapter X of the Act. Consequently, the addition made by the AO in this regard is directed to be deleted. Whether transaction of providing guarantee by the Assessee in respect of a loan taken by its AE can be said to be an international transaction and if yes whether the determination of ALP in respect of the said international transaction as determined by the DRP is sustainable? - TPO rejected the claim of the Assessee that providing Guarantee to a subsidiary AE was in the nature of a shareholder activity and therefore such transactions are outside the purview of Sec.92 - HELD THAT:- As in Assessee s own case in AY 2010-11 and for AY 2010-11 [2017 (11) TMI 1443 - ITAT KOLKATA ] that the addition made by way of adjustment to ALP in respect of transaction of providing guarantee to AE cannot be sustained and the same is directed to the deleted. Disallowance u/s.14A r.w.r. 8D - HELD THAT:- Dividend from debts funds of mutual funds and dividend from foreign company are taxable. In such circumstances, we are of the view no disallowance u/s.14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Both these appeals were heard together as some common issues arise for consideration. We deem it convenient to pass a common order. 2. First we shall take up for consideration the common issue in ITA No.121/Kol/2016 for AY 2011-12 and 2012-13. The common issue relates to the purchase of shares by the Assessee of three of its Associated Enterprises (AE) M/S.Labvantage Solutions Inc., USA (LSVI), Ztec International (Mauritius Ltd. (Xtec) and Rishi Pharmaceuticals Inc.(RPI) in the previous year relevant to AY 2010-11. The case of the Revenue is that purchase of shares by the Assessee of its AEs was an international transaction and income from such international transaction has to be computed having regard to Arm s Length Price (ALP) as laid down in Sec.92 of the Act. According to the revenue the value at which the shares were purchased by the Assessee was enormous and therefore the price paid to the extent it was in excess of the value of the shares determined on the basis of Net Asset Value (NAV) Method had to be regarded as loan by the Assessee to its AE. On such deemed loan the Assessee ought to have charged interest which the Assessee did not charge. The revenue determined noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AEs within the meaning of Section 92A of the Act which defines the term associated enterprise as including, in relation to another enterprise, if one enterprise directly or indirectly participates in the Management, control or capital of the other enterprise. The term arm's length price has been defined in clause (ii) of section 92F of the Act, to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Section 92C( 1) of the Act provides that the arm's length price in relation to an international transaction shall be determined by any of the several methods, specified therein, having regard to the nature of the transaction or class of transaction or class of associated person or functions performed by such persons or such other relevant factors as the Central Hoard of Direct Taxes (hereinafter referred to as Board ) may prescribe. 6. During the previous year relevant to AY 2010-11, the Assessee purchased 4,24,173 shares of RPI for a consideration of ₹ 5,38,12,000/-. The Assessee also purchased 1000 shares of LVSI from Xtec International (Mauritius) Ltd. for a consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds to its foreign AEs without having to advance loan funds on which interest would have been assessed to tax India. Based on the above reasoning the TPO held that there was excess payments of US$ 83,92,092 by way of share purchase/subscription to its AEs was in substance a loan advanced to AE on which interest ought to have been charged by the assessee. 8. As far as purchase of share of RPI is concerned, the TPO determined the value of shares of TPI on the basis of NAV of face value of US$ 0.01. The TPO held that any excess payment over and above the face value is nothing but in substance a loan to the company. The TPO held that there was excess payment of USD 91,13,758 ($91,18,000 - $4242) for acquisition of shares of RPI and such excess payment to the AE was in substance a loan advanced on which interest ought to have been charged by the assessee. 9. The TPO thereafter proceeded to determine the ALP of the interest that the Assessee ought to have charged for the following loan by the Assessee to its AE: Name of AE to whom payments made Amount of Loan Year in which advanced Xtec Internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04/08/2009 15,19,982 19% 238 1,88,311 07/01/2009 35,46,110 19% 83 1,53,211 TOTAL 3,41,522 Average 1 USD to INR 45.004 Arm s Length Price 1,53,69,856 Loan considered in the hands of RPI Period beginning from Excess Investment (held to be loan) Interest rate No.of days Interest Amount 01/04/2009 91,13,758 20% 12 18,22,751 TOTAL 18,22,751 Average 1 USD to INR 45.004 Arm s Length Price 8,20,31,086 Thus, the computation of the arm s length price of the loan is ₹ 11,78,64,440/-. The arm s length price of the loan in the books of the assessee is NIL. The margin of +/-5% on thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fair order of assessment by the AO in AY 2011-12 and 2012-13. Against the addition made consequent to directions of the DRP by the AO in the fair order of assessment the Assessee has raised the various grounds of appeal which we have narrated in the earlier part of this order. 14. At the time of hearing of the appeal, it was brought to our notice by the learned counsel for the Assessee that identical issue as is sought to be raised in the present appeals for AY 2011-12 and 2012-13 had been considered and decided by the Tribunal in Assessee s case in AY 2010-11. It was submitted that the facts and circumstances and the basis of addition made in AY 2010-11 and AY 2011-12 and 2012-13 are one and the same. A copy of the order of the Tribunal in ITA No.1053/Kol/2017 and ITA No.966/Kol/2017 for AY 2010-11 dated 22.9.2017 was also filed before us. The learned DR however, while agreeing with the submission of the learned AR that identical issue was decided by the Tribunal in Assessee s own case, however reiterated submissions as were made in the case of the Assessee in AY 2010-11. He also made further submissions with regard to deemed loan transaction in a case where purchase of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, in the absence of express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. The said view has been reiterated by the Bombay High Court in the case of Shell India Markets Ltd. (supra). The ITAT Mumbai in the case of Topsgroup Electronic Systems (supra) has taken the view that the ratio laid down by the Hon ble Bombay High Court in the case of Vodafone (supra) will apply to a case where an Indian entity invests in shares of an AE also. The Tribunal held that what is made applicable for inbound share investment (investments in shares of Indian subsidiary by the holding company (Non-resident) would be equally applicable to outbound share investments also (Investment by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, going by the above, the transaction of investment in shares being payment on capital account falls outside the purview. 17. The learned DR submitted that the transaction of investment in shares of AE cannot be said to be not an international transaction. He further placed reliance on the decision of the Delhi ITAT in the case of First Blue Home Finance Ltd. Vs. DCIT (2015) 59 Taxmann.com 431 (Delhi-Trib.). In the aforesaid decision the ratio laid down is that in a case of issue of shares by Indian resident company to its AE Non-resident, there is no provision in Chapter X mandating addition on account of less share premium received also consequential interest on resultant deemed loan. The decision cited by the learned DR in fact supports the case of the Assessee. We however agree with the learned DR that the transaction of investment in shares of AE per se is an international transaction but the condition that income does not arise out of a capital account is the basis on which Courts have held that . To this submission is correct but the principle laid down is that the transaction of investment in shares being payment on capital account falls outside the purview of Chapte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee to Axis Bank, Singapore, on behalf of LVSI. The purpose of the guarantee was explicitly mentioned in the guarantee agreement wherein loan was extended for acquisition as well for the working capital facility for LVSI since it was unable to borrow funds it needed on a stand-alone basis and was not in a position to obtain a guarantee from an independent party to support the borrowings it needed. It was the plea of the Assessee that it provided such guarantee to protect its own investment and in anticipation of backward integration which would increase its business. This guarantee was for a loan of USD 16 million availed by LVSI. The Assessee charged guarantee fee @1% based on an analysis of US industrial Bond yield for the relevant period. 21. The TPO rejected the claim of the Assessee that providing Guarantee to a subsidiary AE was in the nature of a shareholder activity and therefore such transactions are outside the purview of Sec.92 of the Act. The Ld. TPO determined the guarantee fee rate @ 2.34%. The TPO assumed the credit rating of the Assessee to be around B-1 CCC+ on S P scale, as against the claim of the Assessee that its credit rating was BBB+ assigned by CRISIL. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rantee fee has been upheld mostly in the range of 0.25% to 0.60%. The learned DR relied on the order of the CIT(A). 25. We have considered the rival submissions. In the following decisions, various benches of ITAT have taken the view that 0.25% to 0.60% Guarantee commission charged for providing Guarantee was at Arm s Length: Sl.No. Name of case laws Relevant para Reference Corporate guarantee fee upheld mostly in the range of 0.25% to 0.60% 1. Thomas Cook(India) Limited Vs DCIT[2016]70 taxmann.com 322 (Mumbai Trib) 6 ..Considering the entirety of facts and circumstances of the case and on the basis of the material available on record, we, therefore proceed to uphold the rate of 0.50% for the purpose of determining the arm s length rate of the guarantee commission fee. Para-6 Pg no.10/11 2. Thomas Cook(India) Limited Vs ACIT[2016]69 taxmann.com 443 (Mumbai Trib) 6 ..Considering the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Mahindra Intertrade Ltd. Vs DCIT [ITA No.269/Mum/2014] 5 Considering the decision of coordinate bench on similar issue, we direct the AO to exceed the corporate guarantee fees @ .5% and made the adjustment accordingly. Para 5 Pg no. - 3 26. In the light of the aforesaid judicial pronouncements, we are of the view that the addition made by the AO ought to have been deleted by the CIT(A) as the Guarantee Commission charged by the Assessee has to be regarded as at Arm s Length. We therefore direct the addition made in this regard be deleted. Further, it is worthwhile to mention that the recent Safe Harbour Rules notified by the Central Board of Direct Taxes (Notification No. 46/2017 dated 7 June 2017) the guarantee commission / fee declared in relation to the eligible international transaction is at the rate not less than 1% per annum on the amount guaranteed. The relevant extracts are reproduced below: 6. Providing corporate guarantee referred to in sub-item (a) or sub-item (b) of item (v) of rule 10TC. The commission or fee dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from debts funds of mutual funds and dividend from foreign company are taxable. In such circumstances, we are of the view no disallowance u/s.14A of the Act could have been made. The Hon ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT 317 ITD 33 (Delhi) has held that there can be no disallowance of expenses u/s.14A of the Act, if there is no exempt income during the relevant previous year. In the light of the aforesaid decision, we are of the view that there cannot be any disallowance u/s.14A of the Act. The disallowance is directed to be deleted. 29. In AY 2011-12, the Assessee has filed an application for leave to file the following additional ground of appeal: 1. That on the facts and in the circumstances of the case, the petitioner be allowed foreign tax credit for the taxes paid in Japan on the doubly taxed income in accordance with the provisions of section 90 of the Act, read with the India- Japan tax treaty. 2. Without prejudice to the above, the petitioner be allowed foreign tax credit for the taxes paid in Japan on the doubly taxed income in accordance with the provisions of section 91 of the Act. 30. The facts and circumstances under which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt decision in the case of NTPC Vs. CIT 229 ITR 383 (SC), wherein it was held that legal questions on admitted facts can be permitted to be raised at any stage of the proceedings before Tribunal by way of additional grounds, the additional ground should be admitted for adjudication. 32. As far as the question of giving credit to taxes paid in Japan is concerned, it requires verification by the AO and therefore the AO is directed to consider the plea of the Assessee raised in the additional ground in accordance with law after due verification. The Assessee should be given an opportunity of being heard before any decision is taken on the issue. 33. In the result, ITA No. 121/Kol/2016 is partly allowed. 34. As far as ITA No. 647/Kol/2017 for AY 2012-13 is concerned, the only other issue which is not common with the appeal for AY 2011-12 is the issue with regard to disallowance of employees contribution to Provident Fund made by the AO by invoking the provisions of Sec.36(1)(va) of the Act. The Assessee as an employer withheld the provident fund contribution payable by its employees from their salaries payable, as their share of contribution to Provident Fund (PF) and Employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue has come up with the present appeal. After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the Income Tax Act, as introduced by Finance Act, 2003, was curative in nat.ure and is required to be applied retrospectively with effect from 1 st April, 1988. Such being the position, the deletion of the amount paid by the Employees' Contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act. We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appeal. 36. In view of the aforesaid decision of the Hon ble Calcutta High Court, we are of the view that the deduction claimed should be allowed as the employees contribution to the provident fund had admittedly been paid on or before the due date for filing return of income u/s.139(1) of the Act. We hold and direct accordingly. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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