ACIT, Circle-11(2), Kolkata, Kolkata V. M/s. TCG Lifesciences Limited., Kolkata

ITA 1053/KOL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1410 (ITAT-KOLKATA)
• Duration Of Justice: 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 15-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA
• Assessee Lawyers: S P SINGH IRS RTD
• Keywords: Transfer pricing; Maximum Marginal Rate; International transaction; Deemed to accrue or arise in india; Cost of acquisition; Wholly owned subsidiary; Fair market value; Valuation report; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 92F; 92A; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM & SHRI J.SU DHAKAR REDDY, AM] I.T.A NO. 1053/KOL/20 17 ASSESSMENT YEAR : 2010-1 1 A.C.I.T., CIRCLE-11(2) -VS.- M/S. TCG LIFE SCIENCES LTD. KOLKATA KOLKATA [PAN : AABCC 0401 D] (APPELLANT) (RESPONDENT) I.T.A NO. 966/KOL/201 7 ASSESSMENT YEAR : 2010-1 1 M/S. TCG LIFESCIENCES PVT.LTD. -VS- C.I.T.(A)-22, (FORMERLY TCG LIFESCIENCES LTD.) KOLKATA KOLKATA [PAN : AABCC 0401 D] (APPELLANT) (RESPONDENT) FOR THE DEPARTMENT : SHRI G.MALLIKARJUNA, CIT (DR) FOR THE ASSESSEE : SHRI S.P.SINGH, IRS (RTD.) & SHRI MANONEET DALAL & MS.GUNJAN KHANNA, CAS DATE OF HEARING : 14.09.2017. DATE OF PRONOUNCEMENT : 22.09.2017. ORDER PER N.V.VASUDEVAN, JM ITA NO.1053/KOL/2017 IS AN APPEAL BY THE REVENUE WH ILE ITA NO.966/KOL/2017 IS AN APPEAL BY THE ASSESSEE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 27.02.2017 OF C.I.T.(A)-22, KOLK ATA RELATING TO A.Y.2010-11. 2. FIRST WE SHALL TAKE UP FOR CONSIDERATION THE AP PEAL BY THE ASSESSEE. TCG LIFESCIENCES PRIVATE LIMITED (FORMERLY TCG LIFESCIE NCES LIMITED), (HEREINAFTER REFERRED TO AS THE COMPANY/APPELLANT/ ASSESSEE :/TCGLS) IS A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956. IT CAR RIES ON THE BUSINESS OF PROVIDING 2 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 CONTRACT RESEARCH & DEVELOPMENT SERVICE AND DRUG DI SCOVERY. IT IS A WHOLLY OWNED SUBSIDIARY OF TCG LIFESCIENCES MAURITIUS LTD. (TCG M ). THE OWNERSHIP STRUCTURE OF THE TCG GROUP IS AS FOLLOWS: FIGURE 1 : RELEVANT OWNERSHI P STRUCTURE OF THE GROUP OUTSIDE INDIA INDIA 3. THE ASSESSEE ENTERED INTO THE FOLLOWING TRANSAC TIONS WITH ITS ASSOCIATED ENTERPRISES (AES) DURING THE RELEVANT YEARS AS MENTIONED BELO W : TABLE 2 : SUMMARY OF TCGLSS INTERNATIONAL TRANSACT IONS FOR FY 2009-10 SL.NO. TRANSACTION RELEVANT ASSOCIATED ENTERPRISE QUANTITY AMOUNT OF TRANSACTION (AMOUNT IN INR) 1. SHARES PURCHASE RISHI PHARMACEUTICALS INC NO.OF SHARES 4,24,173 5,38,12,000 XTEC INTERNATIONAL (MAURITIIUS)LTD NO.OF SHARES 1,000 20,64,03,200 2. SHARES SUBSCRIPTION LAB VANTAGE SOLUTIONS INC. NO.OF SHARES 757 26,76,83,395 3. BUY BACK OF SHARES BY XTEC INTERNATIONAL (MAURITIUS )LTD. XTEC INTERNATIONAL (MAURITIUS)LTD. NO.OF SHARES 32,13,000 15,43,45,300 4. TECHNICAL RISHI NA* 1,11,41,18 8 CHATTERJEE FUND MANAGEMENT L.P. TCG LIFESCIENCES MAURITIUS LTD. RISHI PHARMACEUTICALS INC XTEC INTERNATIONAL (MAURITIUS ) LTD. LABVANTAGE SOLUTIONS, INC TCG LUFESCIENCES LTD. 3 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 SUPPORT SERVICE RECEIVED PHARMACEUTICALS INC 5. GUARANTEE FEES RECEIVED LAB VANTAGE SOLUTIONS INC. NA* 35,98,000 6. REIMBURSEMENT OF EXPENSE LAB VANTAGE SOLUTIONS INC. NA* 1,17,79,814 7. SHARES SUBSCRIPTION BY TCG LIFESCIENCES MAURITIUS LIMITED TCG LIFESCIENCES MAURITIUS LIMITED NO.OF SHARES 37,15,926 3,71,59,260 * NOT APPLICABLE 4. THE FINANCE ACT. 2001 HAD INTRODUCED A LEGISLAT ION WITH RESPECT TO TRANSFER PRICING. BY SUBSTITUTING THE ERSTWHILE SECTION 92 OF THE ACT WITH A NEW AND SEPARATE CODE OR SECTIONS, NAMELY SECTIONS 92 TO 92F, WITH EFFECT FR OM 1 ST APRIL. 2002. I.E. THE ASSESSMENT YEAR 2002- 2003. THE SALIENT FEATURES OF THE LEGISL ATION WITH RESPECT TO TRANSFER PRICING, TO THE EXTENT MATERIAL FOR THE PURPOSE OF DECIDING THE QUESTION REFERRED TO THE SPECIAL BENCH, ARE AS FOLLOWS: - SECTION 92(L) OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN 'INTERNATIONAL TRANSACTION' SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE EXPLANATION TO THE SAID SECTION PROVIDES THAT ALLOW ANCE FOR ANY EXPENSE OR INTEREST ARISING FROM AN INTERNATIONAL TRANSACTION HALL ALSO BE DETERMINED HAVING REGARD TO THE ARM' S LENGTH PRICE. THE TERM 'INTERNATIONAL TRANSACTION' HAS BEEN DEF INED IN SECTION 92B(1) OR THE ACT TO MEAN A TRANSACTION BETWEEN TWO OR MORE 'ASSO CIATED ENTERPRISES' EITHER OR BOTH OF WHOM ARE NON-RESIDENTS IN THE NATURE OF INTER ALIA PURCHASE, SALE OR LEASE OF INTANGIBLE PROPERTY OR PROVISION OF SERVIC ES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES. SECTION 92A OF THE ACT DEFINES THE TERM 'ASSOCIAT ED ENTERPRISE' IN RELATION TO ANOTHER ENTERPRISE, IN A MANNER WHERE THE ENTERPRIS E 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 PROPOS ED TO BE APPLIED IN A 4 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED E NTERPRISES IN UNCONTROLLED CONDITIONS. SECTION 92C( 1) OF THE ACT PROVIDES THA T 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 NA TURE OF THE TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSON OR FUN CTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE CENTR AL HOARD OF DIRECT TAXES (HEREINAFTER REFERRED TO AS 'BOARD') MAY PRESCRIBE. 5. THE LEGISLATIVE INTENT IN INTRODUCING THE NEW T RANSFER PRICING LEGISLATION, AS AVAILABLE IN THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2001, WHICH LATER ON WAS ENACTED AS THE FINANCE ACT, 2001, WAS AS FOLLOW S. 'THE INCREASING PARTICIPATION OF MULTINATIONAL GROU PS IN ECONOMIC ACTIVITIES IN THE COUNTRY HAS GIVEN RISE TO NEW AND COMPLEX ISSUE S EMERGING FROM TRANSACTIONS ENTERED INTO BETWEEN TWO OR MORE ENTERPRISES BELONG ING TO THE SAME MULTINATIONAL GROUP. THE PROFITS DERIVED BY SUCH EN TERPRISES CARRYING ON BUSINESS IN INDIA CAN BE CONTROLLED BY THE MULTINATIONAL GRO UP BY MANIPULATING THE PRICES CHARGED AND PAID IN SUCH INTRA-GROUP TRANSACTIONS, THEREBY, LEADING TO EROSION OF TAX REVENUES. WITH A VIEW TO PROVIDE A STATUTORY FR AMEWORK WHICH CAN LEAD TO COMPUTATION OR REASONABLE FAIR AND EQUITABLE PROFIT S AND TAX IN INDIA, IN THE CASE OF SUCH MULTINATIONAL ENTERPRISES, NEW PROVISIONS A RE PROPOSED TO BE INTRODUCED IN THE INCOME-TAX ACT, ' ... ' [248 ITR ST 181]. 6. IN THIS APPEAL WE ARE CONCERNED WITH TWO OF THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE DURING THE PREVIOUS YEAR VIZ., (I) THE TRANSACTION OF PURCHASE OF SHARES OF RISHI PARMACEUTICALS INC.USA (HEREINAFTER REFERRED TO AS RPI) AND LVSI BY THE ASSESSEE; (II) TRANSACTION OF PROVIDING GUARANT EE BY THE ASSESSEE TO THE LENDER FOR A LOAN TAKEN BY LAB VANTAGE SOLUTIONS INC.USA (HEREIN AFTER REFERRED TO AS LVSI). 7. WE SHALL TAKE UP FOR CONSIDERATION THE INTERNA TIONAL TRANSACTION OF PURCHASE OF SHARES OF RPI BY THE ASSESSEE DURING THE PREVIOUS Y EAR. DURING THE PREVIOUS YEAR THE ASSESSEE PURCHASED 4,24,173 SHARES OF RPI FOR A CON SIDERATION OF RS.5,38,12,000/-. THE ASSESSEE ALSO PURCHASED 1000 SHARES OF LVSI FRO M XTEC INTERNATIONAL (MAURITIUS) LTD. FOR A CONSIDERATION OF RS.20,64,03,200/-. BES IDES THE ABOVE, THE ASSESSEE ALSO PURCHASED 456.921 SHARES OF LSVI FOR A CONSIDERATI ON OF RS.2,02,290 PER SHARE ON 5 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 4.8.2009 AND 300.365 SHARES AT RS.5,83,466 PER SHAR E ON 7.1.2010. IN ALL THE ASSESSEE PAID A CONSIDERATION OF RS.26,76,83,395 FOR PURCHAS E OF SHARES OF 757 SHARES (456.921 + 300.365 = 757 ) OF LSVI. THE ASSESSEE RELIED ON A VALUATION REPORT BY AN INDEPENDENT VALUER TO SUPPORT THE VALUE AT WHICH TH E AFORESAID TRANSACTIONS WERE CARRIED OUT BY THE ASSESSEE. THE VALUERS IN THEIR REPORT H AD ADOPTED DISCOUNTED CASH FLOW METHOD (DCFM) FOR ARRIVING AT THE VALUATION OF THE SHARES THAT WERE PURCHASED BY THE ASSESSEE. THE AO REFERRED TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF SHARES. THE TPO WAS OF THE VIEW THAT DCFM WAS NOT THE APPROPRIATE METHOD OF VALUATI ON AND THAT THE APPROPRIATE METHOD WOULD ONLY BE THE NET ASSET VALUATION METHOD (NAV). ON THE BASIS OF SUCH FINDING, THE TPO DETERMINED THE VALUE OF SHARES ACQ UIRED BY THE ASSESSEE AS FOLLOWS: INTERNATIONAL TRANSACTION OF PURCHASE OF SHARES OF LSVI: 12. ON THE BASIS OF THE ABOVE, IT IS HELD THAT T HE DISCOUNTED CASH FLOW METHOD ADOPTED BY THE ASSESSEE TO VALUE THE SHARES OF LVSI WAS UNREASONABLE AND INCORRECT. ACCORDINGLY THE VALUATION EXERCISE CARRI ED OUT BY THE ASSESSEE TO JUSTIFY THE ARM'S LENGTH PRICE OF THE SHARES IS FOUND TO BE UNREASONABLE AND IS HEREBY REJECTED. FURTHER, THE REPORTS OBTAINED FROM TWO VA LUERS WITHIN A SPAN OF FEW MONTHS SHOWED A DIFFERENCE OF MORE THAN 300% IN THE VALUE OF THE SHARES OF LVSI. ON THE OTHER HAND, THE ACTUAL PERFORMANCE REPORTED IN SUBSEQUENT YEARS WAS NOT EVEN REMOTELY CLOSE TO THE ESTIMATES. IN THE CIRCUMSTANCES THE DCF METHOD DID NOT FIT IN THE PARTICULAR FACTS OF THE PRESENT CASE. IT IS ALSO BEING POINTED OUT, BASED O N WHAT HAS BEEN DEMONSTRATED ABOVE, THAT THE DCF METHOD, IN THE FACTS OF THIS PA RTICULAR CASE, WOULD REQUIRE MAKING ASSUMPTIONS, SOME OF THEM PERTAINING TO THE MARKET CONDITIONS IN THE US, WHICH WOULD BE UNREALISTIC ON THE BASIS OF FACTS AV AILABLE ON RECORD. 13. THIS MEANS THAT ANOTHER METHOD OF VALUATION WIL L HAVE TO BE CHOSEN. IT IS SEEN THAT THE ASSESSEE ITSELF HAD UTILIZED THE 'NET ASSE T VALUE' METHOD FOR VALUATION OF SHARES IN CONNECTION WITH AN INTERNATIONAL TRANSACT ION UNDERTAKEN IN AY 2008-09. THIS METHOD IS ALSO RECOGNIZED WORLD-OVER AND IS US ED FREQUENTLY TO VALUE THE SHARES OF UNLISTED AND UNQUOTED COMPANIES. REFERENC E IN THIS REGARD CAN BE MADE TO RULE 11UA IN THE I.T. RULES, 1962. THE IT (FIFTE ENTH AMENDMENT) RULES, 2012 DATED 29.11.2012 HAS NOTIFIED BOTH 'DISCOUNTED CAS H FLOW METHOD' AND 'BOOK VALUE METHOD TO ASCERTAIN THE VALUE OF SHARES. ACC ORDINGLY UNDER THE INDIAN LEGISLATION, DCF AND NAV METHODS HAVE BEEN GIVEN J UDICIAL RECOGNITION. AS THE DCF METHOD ALSO CONSTRUCTS A CUP, THE NAV METHOD SIMILARLY CAN BE USED TO ARRIVE AT A CONSTRUCTED CUP. AS IT HAS BEEN SHOWN A BOVE THAT BASED ON THE 6 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 LIMITATION POSED BY THE PAUCITY OF INFORMATION ON T HE US MARKETS AND MARKET STUDIES, AND THE DANGERS IN MAKING PROJECTS BASED O N INCORRECT ASSUMPTIONS IN THE PRESENT CASE, THE DCF METHOD CANNOT BE APPLIED TO A RRIVE AT PROPER RESULTS. IT THEREFORE WOULD NOT BE INCORRECT TO BORROW THE METH OD WHICH HAS BEEN GIVEN JUDICIAL RECOGNITION BY THE INDIAN LEGISLATURE IN T HE CONTEXT OF VALUATION OF SHARES. IN FACT THE 'BOOK VALUE METHOD' WAS RECOGNIZED BY T HE LEGISLATURE MUCH PRIOR TO THE RECOGNITION OF THE 'DISCOUNTED CASH FLOW METHOD '. THUS, AS AN ALTERNATIVE, THE 'BOOK VALUE' OR THE 'NET ASSET VALUE' METHOD CAN BE FOLLOWED. IT IS NOTED THAT ALL THE RELEVANT INFORMATION AND DETAILS REQUIRED FOR E STIMATING THE 'NET ASSET VALUE' IS AVAILABLE ON RECORD. ACCORDINGLY OUT OF THE TWO MET HODS I.E. DCF & NAV METHOD, NAV METHOD IS THE MOST RELIABLE AND APPROPRIATE TO THE FACTS OF THE PRESENT CASE. AT THIS JUNCTURE IT IS PERTINENT TO MENTION THAT EV EN THE ASSESSEE IN THE PAST YEARS HAS BEEN CONSISTENTLY FOLLOWING THE NA V METHOD TO VALUE TO SHARES TO BE PURCHASED/SOLD. REFERENCE IN THIS REGARD IS MADE TO THE TRANSFER PRICING STUDY REPORT OF THE ASSESSEE FOR AY 2008-09 WHEREIN THE ASSESSEE ITSELF HAD ADOPTED THE NAV METHOD TO VALUE THE SHARES OF XTEC INTERNATIONAL MA URITIUS LTD AND CLINIVENT RESEARCH PVT. LTD. ACCORDINGLY THE OBJECTIONS RAISE D BY THE ASSESSEE IN ITS LETTER DATED' 23.01.2014 AGAINST THE APPLICATION OF NAV ME THOD IS CONTRADICTORY TO THE ASSESSEE'S OWN CONDUCT IN THE EARLIER YEARS. ACCORD INGLY, THE SAME IS BEING APPLIED HERE AGAIN. 14. THE COMPUTATION OF THE SHARES OF LABVANTAGE SOL UTIONS INC, US BASED ON THE REPORTED RESULTS FOR YEAR ENDED 31ST DECEMBER 2008 IS AS FOLLOWS: PARTICULARS AMOUNT (IN USD 000) NET FIXED ASSETS 719 CURRENT ASSETS 11482 OTHER ASSETS 30 TOTAL ..(A) 12231 CURRENT LIABILITES 10647 OTHER LIABILITIES 670 TOTAL ..(B) 11317 NET WORTH (A) (B) 914 NUMBER OF SHARES 1000 NET ASSET VALUE PE R SHARE $914 PER SHARE 15. ACCORDINGLY, THE FAIR VALUE OF THE SHARES OF LA BVANTAGE SOLUTIONS INC, US SHOULD BE $914 PER SHARE. IT IS PERTINENT TO MENTIO N THAT THE ARM'S LENGTH PRICE OF USD 914 PER SHARE WHICH HAS BEEN DETERMINED ABOVE S HOULD BE CONSIDERED THE COST OF ACQUISITION OF SHARES FOR ALL TAXATION PURPOSES. THE COMPANY HAD THEREFORE MADE EXCESS INVESTMENT AND PAID MUCH HIGHER SHARES OF T HE US COMPANY DURING THE 7 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 YEAR. THE STATEMENT SHOWING THE EXCESS PRICE PAID F OR ACQUISITION OF SHARES IS AS FOLLOWS: NO.OF SHARES PRICE AS PER ASSESSEE PRICE AS COMPUTED ABOVE EXCESS PRICE PAID 1000 $4240 @914 33,26,000 457 $4240 $914 15,19,982 300.365 $12720 $914 35,46,110 TOTAL 83,92,092 16. THE ABOVE EXCESS PRICE PAID BY THE ASSESSEE IS IN SUBSTANCE A 'LOAN' ADVANCED TO ITS AES IN THE GARB OF EQUITY/INVESTMENT AS IT I S ON CAPITAL ACCOUNT. INSTEAD OF ADVANCING LOAN ON WHICH INTEREST WOULD HAVE BEEN AS SESSED TO TAX IN INDIAAT THE MAXIMUM MARGINAL RATE, THE COMPANY CHOSE TO INVEST IN EQUITY CAPITAL BY PAYING HIGHER PRICE FOR THE SHARES DIRECTLY AS WELL AS THR OUGH THE MAURITIUS ROUTE. HAD THE ASSESSEE ACQUIRED THE SHARES AT THE ACTUAL FAIR VAL UE IT COULD NOT HAVE REMITTED NECESSARY FUNDS REQUIRED BY ITS AES COST-FREE. HOWE VER BY PAYING HIGHER PRICE FOR SHARES THE ASSESSEE WAS EFFECTIVELY ABLE TO REMIT F UNDS TO ITS FOREIGN AES WITHOUT HAVING TO ADVANCE LOAN FUNDS ON WHICH INTEREST WOUL D HAVE BEEN ASSESSED TO TAX INDIA. 17. BASED ON THE ABOVE, IT IS HELD THAT THE EXCESS PAYMENTS OF USD 83,92,O92 BY WAY OF SHARE PURCHASE/SUBSCRIPTION TO ITS AES WAS I N SUBSTANCE A LOAN ADVANCED TO AE ON WHICH INTEREST OUGHT TO HAVE BEEN CHARGED BY THE ASSESSEE. INTERNATIONAL TRANSACTION OF PURCHASE OF SHARES OF RPI 23. IN VIEW OF THE ABOVE, THE VALUATION REPORT SUB MITTED BY THE ASSESSEE BASED ON THE DCF METHOD IS REJECTED. IN THE SCENARIO, MAKING FURTHER ASSUMPTIONS AND CARRYING OUT A SEPARATE DCF METHOD BASED VALUATION ON THE BASIS OF MEAGRE AND UNRELIABLE DATA WOULD NOT BE PRUDENT. ACCORDINGLY, AS WAS DONE IN THE CASE OF LVSI, IN THIS CASE ALSO, A MORE REASONABLE METHOD W OULD BE 'NET ASSET VALUE' ('NAV') METHOD. IT IS REITERATED THAT EVEN IN THE P AST YEARS THE ASSESSEE HAS APPLIED THE NAV METHOD TO VALUE TO SHARES TO BE PURCHASED/S OLD IN THE CONTEXT OF INTERNATIONAL TRANSACTIONS UNDER THE ACT. THE SAME IS FOLLOWED IN THE PRESENT CASE ALSO. 24. SINCE THE NET WORTH OF THE COMPANY IS NEGATIVE, THE INTRINSIC VALUE OF THE SHARE IS NIL. BASED ON THE INFORMATION ON RECORD, THE FAI R VALUE OF THE SHARES SHOULD BE THE FACE VALUE LE. USD 0.01 PER SHARE. ANY EXCESS P AYMENT OVER AND ABOVE THE FACE VALUE IS NOTHING BUT IN SUBSTANCE A LOAN TO TH E COMPANY. HAD THE ASSESSEE ACQUIRED THE SHARES AT THE ACTUAL FAIR VALUE IT COU LD NOT HAVE REMITTED NECESSARY FUNDS REQUIRED BY ITS AE COST-FREE. HOWEVER BY PAYI NG HIGHER PRICE FOR SHARES, THE 8 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 ASSESSEE WAS EFFECTIVELY ABLE TO REMIT FUNDS TO ITS FOREIGN AES WITHOUT HAVING TO ADVANCE LOAN FUNDS ON WHICH INTEREST WOULD HAVE BEE N ASSESSED TO TAX INDIA. 25. BASED ON THE ABOVE, IT IS HELD THAT THE EXCESS PAYMENT OF USD 91,13,758 ($91,18,000 - $4242) TO THE AE WAS IN SUBSTANCE A L OAN ADVANCED ON WHICH INTEREST OUGHT TO HAVE BEEN CHARGED BY THE ASSESSEE. 26. IT IS PERTINENT TO MENTION HERE THAT THE ARM'S LENGTH PRICE OF USD 0.01 PER SHARE WHICH HAS BEEN DETERMINED ABOVE SHOULD BE CONSIDERE D AS THE COST OF ACQUISITION OF SHARES FOR ALL TAXATION PURPOSES. 8. THE TPO THEREAFTER PROCEEDED TO DETERMINE THE A LP 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 INTERNATIONAL (MAURITIUS) LIMITED USD 33,26,000 FY 2009-10 LAB VANTAGE SOLUTIONS INC., USA USD 50,66,092 FY 2009-10 RISHI PHARMACEUITCALS INC., USA USD 91,13,758 FY 2009-10 9. THE AO ULTIMATELY CONCLUDED THAT THE ASSESSEE O UGHT TO HAVE CHARGED INTEREST OF RS.11,78,64,440/- ON THE ABOVE TRANSACTIONS AND SIN CE THE ASSESSEE DID NOT CHARGE ANY INTEREST A SUM OF RS.11,78,64,440/- WAS TO BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENT TO ALP OF INTERNATIONAL TR ANSACTION OF PROVIDING LOAN TO ITS AE. THE FOLLOWING WERE THE CONCLUSIONS OF THE TPO IN THIS REGARD. 52. BASED ON THE ABOVE, THE ARMS LENGTH INTEREST RATE OF THE LOAN ADVANCED BY THE ASSESSEE TO ITS AES IS COMPUTED AS FOLLOWS : AE TO WHOM LOAN ADVANCED BASE RISK FREE FEE RATE CREDIT SPREAD RATE OF INTEREST XIML 10% 10% 20% LVSI 10% 9% 19% RPI 10% 10% 20% 9 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 53. APPLYING THE AFORESAID INTEREST RATE, THE INTER EST INCOME WHICH THE ASSESSEE SHOULD HAVE EARNED ON ITS EXCESS INVESTMENT IS AS F OLLOWS :- LOAN CONSIDERED IN THE HANDS OF XIML PERIOD BEGINNING FROM EXCESS INVESTMENT (HELD TO BE LOAN) INTEREST RATE NO.OF DAYS INTEREST AMOUNT 16/07/2009 16,63,000 20% 257 2,34,186 30/-7/2009 16,663,000 20% 242 2,20,518 TOTA L $4,50,704 AVERAGE 1 USD TO INR 45.004 ARMS LENGTH PRICE 2,04,63,498 LOAN CONSIDERED IN THE HANDS OF LVSI PERIOD BEGINNING FROM EXCESS INVESTMENT (HELD TO BE LOAN) INTEREST RATE NO.OF DAYS INTEREST AMOUNT 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 ARMS 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 TOTA L 18,22,751 AVERAGE 1 USD TO INR 45.004 ARMS LENGTH PRICE 8,20,31,086 THUS, THE COMPUTATION OF THE ARMS LENGTH PRICE OF THE LOAN IS RS.11,78,64,440/-. THE ARMS LENGTH PRICE OF THE LOAN IN THE BOOKS OF THE ASSESSEE IS NIL. THE MARGIN OF +/-5% ON THIS AMOUNT IF RS.NIL. THUS, THE ARMS LENGTH PRICE OF THE LOAN COMPUTED UNDER SECTION 92CA(3) READ WITH SECTION 92 C(3) IS BEYOND THIS MARGIN. ACCORDINGLY, AN UPWARD ADJUSTMENT OF RS.11,78,64,44 0/- IS BEING MADE TO THE ARMS 10 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 LENGTH PRICE OF THE LOAN. THE TOTAL INCOME OF THE A SSESSEE IS TO BE UPWARDLY ADJUSTED BY THIS AMOUNT. 10. BEFORE THE CIT(A), APART FROM THE CHALLENGE TO THE MERITS OF THE ADDITION MADE BY THE TPO, THE ASSESSEE RAISED AN OBJECTION THAT SINC E THE SUBSCRIPTION/PURCHASE OF SHARES BEING ON CAPITAL ACCOUNT AND THEREFORE DOES NOT GIV E RAISE TO ANY INCOME AND HENCE THE PROVISIONS OF SEC.92 OF THE ACT WOULD NOT BE AP PLICABLE. THE ASSESSEE PLACED RELIANCE ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES PVT.LTD. VS. UNION OF INDIA AND 3 OT HERS IN W.P. NO. 871 OF 2014 DATED 10.10.2014 WHEREIN IT WAS HELD THAT FOR APPLICATION OF CHAPTER X OF THE ACT INCOME SHOULD ARISE FROM AN INTERNATIONAL TRANSACTION AND THAT IS THE CONDITION PRECEDENT FOR APPLICATION OF CHAPTER X OF THE ACT. THE FACTS IN THE CASE OF VODAFONE (SUPRA) WAS THAT VODAFONE INDIA SERVICES PVT. LTD., (PETITIONER) WAS A WHOLLY OWNED SUBSIDIARY OF A NON-RESIDENT COMPANY, VODAFONE TELE-SERVICES (INDIA ) HOLDINGS LIMITED (THE HOLDING COMPANY). THE PETITIONER ISSUED 2,89,224 EQUITY SHA RES OF THE FACE VALUE OF RS.10/- EACH ON A PREMIUM OF RS.8,509/- PER SHARE TO ITS HO LDING COMPANY. THIS RESULTED IN THE PETITIONER RECEIVING A TOTAL CONSIDERATION OF RS.24 6.38 CRORES FROM ITS 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 THE PETITIONER IN ACCORDANCE WITH THE METHODOLOGY PRESCRIBED BY THE G OVERNMENT OF INDIA UNDER THE CAPITAL ISSUES (CONTROL) ACT, 1947. THE INTERNATIO NAL TRANSACTION WAS REPORTED IN THE PRESCRIBED FORM 3CEB. THE AO MADE A REFERENCE FOR DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTION TO THE TPO. SUCH REFEREN CE TO THE TPO WAS CHALLENGED BY THE ASSESSEE BEFORE THE HONBLE BOMBAY HIGH COURT. IT WAS CONTENDED THAT THE TRANSACTION OF ISSUE OF SHARES CANNOT GIVE RAISE TO INCOME, AS INCOME WILL NOT IN ITS NORMAL MEANING INCLUDE CAPITAL RECEIPTS UNLESS IT I S SO SPECIFIED. IT WAS SUBMITTED THAT U/S.92(1) OF THE ACT ANY INCOME ARISING OUT OF INTE RNATIONAL TRANSACTION HAS TO BE DETERMINED HAVING REGARD TO ARMS LENGTH PRICE. WH EN THERE IS NO INCOME, SEC.92(1) OF THE ACT IS NOT ATTRACTED AT ALL. IT WAS CONTEND ED THAT THE AO BEFORE MAKING A 11 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 REFERENCE TO THE TPO HAS TO GIVE HIS FINDING AS TO WHETHER THERE WAS INCOME AND WHY IT IS NECESSARY OR EXPEDIENT TO MAKE A REFERENCE TO THE TPO. ON SUCH OBJECTION THE HONBLE BOMBAY HIGH COURT HELD THAT IT WOULD BE FOR THE ASSESSING OFFICER TO FIRST DETERMINE THE ISSUE OF ANY INCOME ARISING AND/OR BE ING AFFECTED OR POTENTIALLY ARISING ON DETERMINATION OF ALP BEFORE REFERRING THE TRANSA CTION TO THE TPO, WHEN SPECIFICALLY CONTENDED BY THE PETITIONER/ASSESSEE. THIS IS ALSO INDICATED IN SECTION 92CA(1) WHICH REQUIRES AN ASSESSING OFFICER TO REFER AN INTERNATI ONAL TRANSACTION FOR DETERMINATION TO THE TPO ONLY IF HE CONSIDERS IT 'NECESSARY OR EXPED IENT' TO REFER THE MATER TO THE TPO. THE EXERCISE OF FINDING OUT WHETHER ANY INCOME ARIS ES AND/OR IS AFFECTED OR POTENTIALLY ARISES AND/OR IS AFFECTED BY THE INTERNATIONAL TRAN SACTION WOULD CERTAINLY BE A FACTOR TO DETERMINE WHETHER OR NOT IT IS NECESSARY OR EXPEDIE NT TO REFER THE MATTER TO THE TPO. IN CASE NO OBJECTION IS RAISED BY THE ASSESSEE TO THE APPLICABILITY OF CHAPTER X THEN THE PRIMA FACIE VIEW OF THE ASSESSING OFFICER WOULD BE SUFFICIENT BEFORE REFERRING THE TRANSACTION TO THE TPO FOR DETERMINING THE ALP. HOW EVER WHERE AN OBJECTION IS RAISED ABOUT THE APPLICABILITY OF CHAPTER X BY AN ASSESSEE THEN THE REQUIREMENT FOR TAKING A DECISION AFTER TAKING ON BOARD THE OBJECTION BECOME S NECESSARY. WE MAY ALSO ADD THAT SUBSEQUENTLY IN THE DECISION OF VODOFONE INDIA SERV ICES PV.LTD. IV 368 ITR 1 (BOM), THE HONBLE BOMBAY HIGH COURT REACHED THE SAME CONC LUSION THAT THE WORD INCOME FOR THE PURPOSE OF THE ACT HAS A WELL UNDERSTOOD MEANIN G 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 N ORMAL 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 INCLUDIN G THE PREMIUM IS UNDOUBTEDLY ON CAPITAL ACCOUNT. SHARE PREMIUM HAVE BEEN MADE TAXAB LE 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 F AIR MARKET VALUE OF THE SHARES. IN THIS CASE WHAT IS BEING SOUGHT TO BE TAXED IS CAPIT AL NOT RECEIVED FROM A NON-RESIDENT I.E. 12 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 PREMIUM ALLEGEDLY NOT RECEIVED ON APPLICATION OF AL P. 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 ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF SHELL INDIA MARKETS PVT. LTD VS ACIT [2014] 51 TAXMANN.COM 519 (BOMBAY)] WHEREIN THE DECISION RENDERED IN THE CASE OF VODOFONE (SUPRA) WAS FOLLOWED. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE COURT: '12. AS HELD IN VODAFONE IV, THE JURISDICTION TO AP PLY CHAPTER X OF THE ACT WOULD OCCASION ONLY WHEN INCOME ARISES OUT OF INTERNATION AL TRANSACTION AND SUCH INCOME IS CHARGEABLE TO TAX UNDER THE ACT. THE ISSU ES RAISED IN THE PRESENT PETITION ARE IDENTICAL TO THE ISSUES WHICH AROSE FOR CONSIDE RATION BEFORE THIS COURT IN VODAFONE IV. THEREFORE, FOLLOWING THE AFORESAID DEC ISION WE SET ASIDE THE ORDER DATED 30 JANUARY 2013 OF THE TPO TO THE EXTENT IT H OLDS THAT ALP OF ISSUE OF EQUITY SHARES IS RS.183.44 PER SHARE AS AGAINST RS.10 PER SHARE AS DECLARED BY THE PETITIONER AND CONSEQUENT DEEMED INTEREST BROUGHT T O TAX ON THE AMOUNT NOT RECEIVED WHEN BENCH MARKED TO THE ALP. ' 11. FURTHER RELIANCE WAS PLACED ON THE DECISION OF THE ITAT MUMBAI IN THE CASE OF TOPSGROUP ELECTRONIC SYSTEMS [2016] 67 TAXMANN.COM 310 (MUMBAI - TRIB.)] [ITA NO. 2115/MUM /2015] WHEREIN IT WAS HELD THAT THE RULING IN THE CASE OF VODOFONE (SUPRA) WOULD EQUALLY APPLY TO SHARES SUBS CRIPTION BY AN INDIAN ENTITY IN THE SHARE CAPITAL OF ITS AE. THE FOLLOWING WERE THE RE LEVANT OBSERVATIONS OF THE TRIBUNAL: '7.1.8 THEREFORE, WHETHER THE TRANSACTION UNDER COM PARABILITY IS INBOUND SHARE INVESTMENT OR OUTBOUND SHARE INVESTMENT, THE COMPAR ISON HAS TO BE WITH COMPARABLES AND NOT WITH WHAT OPTIONS OR CHOICES WE RE AVAILABLE TO THE ASSESSEE FOR EARNING INCOME OR MAXIMIZING RETURNS. THUS, WHA T IS MADE APPLICABLE FOR INBOUND SHARE INVESTMENT WOULD BE EQUALLY APPLICABL E TO OUTBOUND SHARE INVESTMENTS ALSO. THE PARAMETERS TO BE APPLIED CANN OT BE DIFFERENT FOR OUTBOUND INVESTMENT AND INBOUND INVESTMENTS. THEREFORE, IN O UR VIEW, THE ARGUMENT THAT DIFFERENT PARAMETERS WOULD APPLY FOR INBOUND AND OU TBOUND INVESTMENTS DOES NOT HAVE ANY BASIS THAT EMANATE FROM THE TRANSFER PRICI NG RULES. 12. THE CIT(A) HOWEVER DID NOT AGREE WITH THE SUBM ISSIONS MADE BY THE ASSESSEE. HE HELD THAT THE FACTS OF THE CASE CITED BY THE ASSESS EE ARE DISTINGUISHABLE. HE DID NOT 13 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 ELABORATE ON WHAT ARE THE DISTINGUISHING FEATURES. THE CIT(A) OBSERVED THAT THE ISSUE IN THE CASES CITED BY THE ASSESSEE WAS INVESTMENT IN S HARES OF THE SUBSIDIARY WHEREAS IN THE CASE OF THE ASSESSEE THE FACTS WERE DIFFERENT. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE CIT(A) IN THIS REGARD. 1. I HAVE CONSIDERED THE ABOVE SUBMISSIONS MADE BY THE APPELLANT WITH REGARD TO THE INTERNATIONAL TRANSACTION OF PURCHASE / SUBSCRI PTION OF SHARE. ON EXAMINATION OF THE ISSUE AND THE DETAILS AS RECORDED BY THE LD. TP O, I FIND MYSELF IN AGREEMENT WITH THE APPROACH OF THE LD. TPO. THE LD. TPO HAS T REATED THE TRANSACTION AS INTERNATIONAL TRANSACTION AND THE SAME IS A VALID P OSITION IN VIEW OF THE EXPLANATION CLAUSE I CC) TO SECTION 92 B. THE SHARE S IN QUESTION ARE MARKETABLE SECURITIES, HENCE SUBJECT TO THE PROVISIONS OF CHAP TER X OF THE INCOME TAX ACT 1961. THE APPELLANT IN THE PRESENT CASE HAS MADE PA YMENTS DISGUISED AS EQUITY SUBSCRIPTION WHICH IS OVERVALUED. ALSO, THE CITATIO N OF JUDGMENTS IN VODAFONE AND SHELL ARE ALSO DISTINGUISHABLE ON THE FACTS AND CIR CUMSTANCES OF THE CASE. THE ISSUE IN THOSE MATTERS WAS IN RESPECT OF SHARES ISSUED TO THE SUBSIDIARY WHEREAS THE SITUATION IS NOT THE SAME FOR THE CASE AT HAND. IN MY CONSIDERED VIEW OF THE MATTER, THE BASIC ASSETS CREATING VALUE FOR THE SHARES IN T HE JUDGMENTS REFERRED WERE SITUATED IN INDIA AND ACCORDINGLY THE FACTS WERE DI FFERENT. THE APPELLANT HAS CONTENDED THAT THE NEED WAS TO INVEST CERTAIN FUNDS , AND IF VALUATION WAS THE ISSUE, MORE SHARES WOULD HAVE BEEN SUBSCRIBED. SUCH AN ARG UMENT AND CONTENTION, IN MY VIEW IS WELL BEYOND THE SCOPE OF THE ISSUES INVOLVE D. BASICALLY, THE INVESTMENT IN CERTAIN NUMBER OF SHARES IS A BUSINESS DECISION AND SUBJECT TO LOCAL LAWS THE LD. TPO WOULD HAVE NO LOCUS STANDI IN THE MATTER. 2. THUS, THE APPROACH OF THE LD. TPO TO CONSIDER TH E EXCESS PAYMENT ON ACCOUNT OF SHARE ACQUISITION AS LOAN IS UPHELD AND GROUND IS D ISMISSED. 13. THE CIT(A) THEREAFTER PROCEEDED TO DETERMINE T HE CORRECTNESS OF THE QUANTUM OF ADDITION MADE BY THE AO AND FINALLY GAVE PARTIAL RE LIEF TO THE ASSESSEE BY DIRECTING THE AO TO ADOPT A LESSER INTEREST RATE ON THE INTERNATI ONAL TRANSACTION OF DEEMED LOAN BY THE ASSESSEE TO ITS AE. THE FOLLOWING WERE THE RELEVAN T OBSERVATIONS OF THE CIT(A): 1. I HAVE CAREFULLY CONSIDERED THE ABOVE RECORDED SUBMISSIONS MADE BY THE APPELLANT ON A WITHOUT PREJUDICE BASIS WITH REGARD TO THE INTEREST RATE TO BE APPLIED ON THE DEEMED LOAN. IT IS WORTHWHILE TO MENTION THA T IN RELATION TO THE DRP PROCEEDINGS FOR AY 2012-13 IN ASSESSEES OWN CASE, THE HONBLE PANEL HAS DIRECTED TO COMPUTE INTEREST AT THE RATE OF LIBOR PLUS 350 BPS ON THE DEEMED LOAN . BASED ON THE JUDICIAL PRECEDENTS AND ARGUMENTS PROV IDED DURING THIS APPEAL, AS 14 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 WELL AS THE FINDINGS OF THE LD. DRP, I FIND MYSELF IN AGREEMENT WITH THE APPELLANT THAT THE APPROACH OF LD. TPO IS ERRONEOUS. WHILE CO MPUTING THE RATE OF INTEREST LIBRO SHOULD HAVE BEEN CONSIDERED A THE BASE RATE B Y THE LD. TPO. 2. IN THE NARRATED CIRCUMSTANCES, I DIRECT THE RATE OF INTEREST TO BE CONSIDERED AT LIBOR PLUS 350 BPS FOR THE PURPOSE OF COMPUTING INT EREST ON DEEMED LOAN. THUS, THE GROUND IS ALLOWED. 14. AGGRIEVED BY THE ORDER OF THE CIT(A) IN UPHOLD ING THE ORDER OF THE AO IN SO FAR AS IT RELATES TO REJECTION OF THE CLAIM OF THE ASSESSE E THAT THE TRANSACTION IN QUESTION CANNOT BE SUBJECT MATTER OF PROCEEDINGS U/S.92 OF THE ACT AND AGGRIEVED BY THE DETERMINATION OF QUANTUM OF ADJUSTMENT TO THE ALP AS DETERMINED BY T HE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AND HAS RAISED GROUNDS N O. 2 TO 2.11 BEFORE TRIBUNAL. AGGRIEVED BY THE RELIEF ALLOWED TO THE ASSESSEE AS ABOVE IN THE COMPUTATION OF ALP, THE REVENUE HAS RAISED GR.NO.3 IN ITS APPEAL. WE M AY MENTION HERE THAT IF THE PRELIMINARY OBJECTION THAT THE TRANSACTION OF INVES TMENT IN SHARES IS ON CAPITAL ACCOUNT AND IS THEREFORE OUTSIDE THE PURVIEW OF THE PROVISI ONS OF SEC.92 OF THE ACT IS ACCEPTED THEN THERE WOULD BE NO NEED TO ADJUDICATE GR.NO.3 R AISED BY THE REVENUE AND THAT GROUND WOULD BECOME INFRUCTUOUS. 15. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE PR ELIMINARY ISSUE THAT ARISES FOR OUR CONSIDERATION IS WHETHER INTERNATIONAL TRANSACTION OF INVESTMENT IN EQUITY SHARES OF AN AE WOULD NOT FALL WITHIN THE PURVIEW OF SEC.92 OF T HE ACT, BECAUSE NO INCOME ARISES OUT OF SUCH INTERNATIONAL TRANSACTIONS? AS WE HAVE ALREADY SEEN THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SHELL INDIA MARKETS LTD. (SUPRA) AND VODAFONE (SUPRA) HAS TAKEN THE VIEW THAT AMOUNTS RECEIVED ON ISSUE OF SHARE CAPITAL INCLUDIN G PREMIUM IS ON CAPITAL ACCOUNT. SHARE PREMIUM HAVE BEEN MADE TAXAB LE 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 F AIR MARKET VALUE OF THE SHARES. IN THIS CASE WHAT IS BEING SOUGHT TO BE TAXED IS CAPIT AL NOT RECEIVED FROM A NON-RESIDENT I.E. 15 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 PREMIUM ALLEGEDLY NOT RECEIVED ON APPLICATION OF AL P. 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 MARKET S LTD. (SUPRA). THE ITAT MUMBAI IN THE CASE OF TOPSGROUP ELECTRONIC SYSTEMS (SUPRA) HAS TAKEN THE VIEW THAT THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COUR T 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 INBO UND SHARE INVESTMENT (INVESTMENTS IN SHARES OF INDIAN SUBSIDIARY BY THE HOLDING COMPA NY (NON-RESIDENT) WOULD BE EQUALLY APPLICABLE TO OUTBOUND SHARE INVESTMENTS ALSO (INVE STMENT BY A RESIDENT INDIAN COMPANY IN THE SHARES OF THE NON-RESIDENT AE). THE PARAMETERS TO BE APPLIED CANNOT BE DIFFERENT FOR OUTBOUND INVESTMENT AND INBOUND INVES TMENTS. THE TRANSACTION OF PURCHASE OF SHARES BEING ON CAPITAL ACCOUNT HAS NOW BEEN SETTLED WITH THE PRESS NOTE RELEASED BY THE GOVERNMENT OF INDIA DATED 28.01.201 5. THE UNION CABINET ACCEPTED THE ORDER OF BOMBAY HIGH COURT IN THE CASE OF VODAF ONE INDIA SERVICES PRIVATE LIMITED (VISPL) DATED 10.10.2014. 16. THE UNION CABINET WHILE ACCEPTING THE BOMBAY H IGH COURT ORDER, DATED 10.10.2014, SPECIFICALLY NOTED THE FOLLOWING OBSERV ATIONS: ..... B) THE CRUCIAL WORDS 'SHALL BE CHARGEABLE TO INCOME TAX' WHICH ARE FOUND IN SECTION 42(2) OF THE 1922 ACT ARE ABSENT IN CHAPTER X OF THE ACT. .... THEREFORE IT IS CLEAR THAT THE DEEMED INCOME WHICH WAS CHARGED T O TAX UNDER SECTION 42(2) OF 1922 ACT WAS DONE AWAY WITH UNDER THIS ACT. ' C) THE TAX CAN BE CHARGED ONLY ON INCOME AND IN THE ABSENCE OF ANY INCOME ARISING, THE ISSUE OF APPLYING THE MEASURE OF ARM'S LENGTH PRICING TO TRANSACTIONAL VALUE/ CONSIDERATION ITSELF DOES NOT ARISE.' D) IF ITS INCOME WHICH IS CHARGEABLE TO TAX, UNDER THE NORMAL PROVISIONS OF THE ACT, THEN ALONE CHAPTER X OF THE ACT COULD BE INVOK ED. SECTIONS 4 AND 5 OF THE ACT BRINGS /CHARGES TO TAX TOTAL INCOME OF THE PREV IOUS YEAR. THIS WOULD TAKE US TO THE MEANING OF THE WORD INCOME UNDER THE ACT AS DEFINED IN SECTION 2 (24) OF THE ACT. THE AMOUNT RECEIVED ON ISSUE OF SHARES IS ADMITTEDLY A CAPITAL ACCOUNT TRANSACTION NOT SEPARATELY BROUGHT WITHIN THE DEFIN ITION OF INCOME, EXCEPT IN 16 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 CASES COVERED BY SECTION 56(2)(VIIB) OF THE ACT. TH US SUCH CAPITAL ACCOUNT CANNOT BE BROUGHT TO TAX AS ALREADY DISCUSSED HEREI N ABOVE WHILE CONSIDERING THE CHALLENGE TO THE GROUNDS AS MENTIONED IN IMPUGNED O RDER E) .THE ALP IS MEANT TO DETERMINE THE REAL VALUE OF THE TRANSACTION ENTERED INTO BETWEEN AES. IT IS A RE-COMPUTATION EX ERCISE TO BE CARRIED OUT ONLY WHEN THE INCOME ARISES IN CASE OF AN INTERNATIONAL TRANSACTION BETWEEN AES. IT DOES NOT WARRANT RE- COMPUTATION OF A CONSIDERATION RECEIVED/GIVEN ON CAPITAL ACCOUNT.' IT IS CLEAR FROM A READING OF PARA 'E' OF THE CABIN ET PRESS RELEASE THAT, COMPUTATION OF ALP WILL ARISE INCOME ARISES FROM AN INTERNATIONAL TRANSACTION BETWEEN AES. IT DOES NOT WARRANT DETERMINATION OR RE-COMPUTATION OF A CO NSIDERATION RECEIVED / GIVEN ON CAPITAL ACCOUNT. THUS, GOING BY THE ABOVE, THE TRAN SACTION OF INVESTMENT IN SHARES BEING PAYMENT ON CAPITAL ACCOUNT FALLS OUTSIDE THE PURVIE W. 17. THE LEARNED DR SUBMITTED THAT THE TRANSACTION OF INVESTMENT IN SHARES OF AE CANNOT BE SAID TO BE NOT AN INTERNATIONAL TRANSACTI ON. HE FURTHER PLACED RELIANCE ON THE DECISION OF THE DELHI ITAT IN THE CASE OF FIRST BLU E HOME FINANCE LTD. VS. DCIT (2015) 59 TAXMANN.COM 431 (DELHI-TRIB.). IN THE AF ORESAID 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 MANDAT ING ADDITION ON ACCOUNT OF LESS SHARE PREMIUM RECEIVED ALSO CONSEQUENTIAL INTEREST ON RE SULTANT DEEMED LOAN. THE DECISION CITED BY THE LEARNED DR IN FACT SUPPORTS THE CASE O F THE ASSESSEE. WE HOWEVER AGREE WITH THE LEARNED DR THAT THE TRANSACTION OF INVESTM ENT IN SHARES OF AE PER SE IS AN INTERNATIONAL TRANSACTION BUT THE CONDITION THAT IN COME 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 R X OF THE ACT. IN THAT VIEW OF THE MATTER, WE HOLD THAT THE DETERMINATION OF ALP IN TH E PRESENT CASE CANNOT BE SUSTAINED AS THE TRANSACTION IN QUESTION IS ON CAPITAL ACCOUN T AND DETERMINATION OF ALP IN RESPECT OF SUCH TRANSACTIONS IS OUTSIDE THE PURVIEW OF CHAP TER X OF THE ACT. CONSEQUENTLY, THE 17 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 ADDITION MADE BY THE AO IN THIS REGARD IS DIRECTED TO BE DELETED. SINCE THE PRELIMINARY GROUND ON THE ISSUE OF JURISDICTION IS HELD IN FAVO UR OF THE ASSESSEE, THE OTHER GROUNDS WITH REGARD TO THE QUANTIFICATION OF ALP DOES NOT A RISE FOR CONSIDERATION AND ARE DISMISSED AS INFRUCTUOUS. 18. THE NEXT ISSUE THAT ARISES FOR CONSIDERATION I N THE APPEAL BY THE ASSESSEE IS AS TO WHETHER TRANSACTION OF PROVIDING GUARANTEE BY THE A SSESSEE IN RESPECT OF A LOAN TAKEN BY ITS AE CAN BE SAID TO BE AN INTERNATIONAL TRANSA CTION AND IF YES WHETHER THE DETERMINATION OF ALP IN RESPECT OF THE SAID INTERNA TIONAL TRANSACTION AS DETERMINED BY THE CIT(A) IS SUSTAINABLE. 19. IN THE CASE OF GUARANTEE EXTENDED BY UNRELATED PARTIES, THEY WOULD CHARGE A COMMISSION. THE COMMISSION CHARGED BY ONE AE FOR P ROVIDING GUARANTEE FOR A LOAN GRANTED TO ANOTHER AE SHOULD BE AT ARMS LENGTH, I. E., SIMILAR QUANTUM AS UNRELATED PARTY WOULD CHARGE FOR PROVIDING GUARANTEE. THE QU ANTUM OF COMMISSION WOULD DEPEND ON SEVERAL FACTORS LIKE THE CREDIT RATING OF THE PERSON AVAILING THE LOAN, THE PERSON PROVIDING THE GUARANTEE ETC. 20. DURING THE FINANCIAL YEAR RELEVANT TO AY 2010- 11, LVSI BORROWED FUNDS FROM AXIS BANK FOR THE PURPOSE OF GROWING ITS BUSINESS AND TH E ASSESSEE PROVIDED CORPORATE GUARANTEE TO AXIS BANK, SINGAPORE, ON BEHALF OF LVS I. THE PURPOSE OF THE GUARANTEE WAS EXPLICITLY MENTIONED IN THE GUARANTEE AGREEMENT WHEREIN LOAN WAS EXTENDED FOR ACQUISITION AS WELL FOR THE WORKING CAPITAL FACILIT Y FOR LVSI SINCE IT WAS UNABLE TO BORROW FUNDS IT NEEDED ON A STAND-ALONE BASIS AND W AS 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 GUARANTE E 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 INDUST RIAL BOND YIELD FOR THE RELEVANT PERIOD. 18 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 21. THE TPO REJECTED THE CLAIM OF THE ASSESSEE THA T PROVIDING GUARANTEE TO A SUBSIDIARY AE WAS IN THE NATURE OF A SHAREHOLDER AC TIVITY AND THEREFORE SUCH TRANSACTIONS ARE OUTSIDE THE PURVIEW OF SEC.92 OF T HE ACT. THE LD. TPO DETERMINED THE GUARANTEE FEE RATE @ 2.34%. THE TPO ASSUMED THE CRE DIT 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. (PARA 71, PAGE 67 OF THE TPO ORDER). THE TPO ARRIVED AT A CREDIT RATING OF CC FOR LVSI, (PARA 44 , PAGE 37 OF HIS ORDER. THE LD. TPO PROCEEDED ON THE BASIS THAT LVSIS CREDIT RATING WA S CC AND THEREFORE THEY COULD GET LOAN AT LIBOR + 900 BASIS POINTS. (PAGE 68 OF THE T PO ORDER). SINCE LVSI HAD BORROWED LOAN FROM AXIS BANK @ LIBOR +5.33%, THE TP O DETERMINED COST OF FUNDS FROM AXIS BANK @ LIBOR PLUS 1 % AND ARRIVED AT A CR EDIT SPREAD OF 433 BPS. THEREBY, THE TPO DETERMINED THE BENEFIT DERIVED BY LVSI BY OBTAINING GUARANTEE FROM ITS PARENT COMPANY WAS 467 BPS (900-433 BPS). ( PAR A 75 ON PAGE 68 OF THE TPO ORDER). BASED ON ABOVE AND APPLYING THE 50% SPLIT, THE TPO DETERMINED AN ARM'S LENGTH GUARANTEE RATE OF 2.34%. ( PARA 74 TO 77 ON PAGE 68 TO 69 OF THE TPO ORDER). 22. THE CIT(A) REJECTED THE CONTENTION OF THE ASSE SSEE THAT PROVISION OF GUARANTEE WAS A SHAREHOLDER ACTIVITY AND HELD THAT LVSI WAS B ENEFITTED IN TERMS OF INTEREST SAVED ON LOAN BORROWED FROM AXIS BANK AND IT IS FAIR TO A SSUME A RATING OF B- FOR LVSI. FURTHER, PLACING RELIANCE ON THE DRP DIRECTIONS OF AY 2012-13 IN THE ASSESSEE'S OWN CASE, THE LD. C!T(A) RE-DETERMINED THE GUARANTEE FE E AT 2.19%. [ PARA 16.1/ 16.2 ON PAGE 63 AND 64 OF THE CIT(A) ORDER] 23. BEFORE THE TRIBUNAL, THE FIRST AND FOREMOST SU BMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THE TRANSACTION OF GIVING GUARANT EE ON A LOAN AVAILED BY THE AE CANNOT BE REGARDED AS AN INTERNATIONAL TRANSACTION AT ALL. AT THE TIME OF HEARING, THE BENCH EXPRESSED THE VIEW THAT THIS ISSUE IS NO LONG ER RES INTEGRA AND HAS BEEN CONCLUDED BY A DECISION OF THE SPECIAL BENCH IN THE CASE OF INSTRUMENTARIUM CORPORATION LTD. V. 19 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 ASSISTANT DIRECTOR OF INCOME-TAX, INTERNATIONAL TAX ATION-I, KOLKATA 160 ITD 1 (SB) (KOL). FOLLOWING THE PRINCIPLE LAID DOWN IN THE AFORESAI D DECISION, WE ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE IN THIS REGARD CANNOT BE SUSTAINED. THE CASES CITED IN SUPPORT OF THE ASSESSEES CONTENTION ALSO DO NOT RE QUIRE ANY CONSIDERATION AS THE DECISION OF THE SPECIAL BENCH WAS RENDERED MUCH AFT ER THOSE DECISIONS. 24. ON THE QUANTUM OF GUARANTEE COMMISSION THAT HA S TO BE CONSIDERED AS AT ARMS LENGTH, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON VARIOUS JUDICIAL PRECEDENTS, WHEREIN THE ARM'S LENGTH GUARANTEE FEE HAS BEEN UPHELD MOSTLY IN THE RANGE OF 0.25% TO 0.60%. THE LEARNED DR RELIED ON THE ORD ER 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 ARMS LENGTH : SL.NO. NAME OF CASE LAWS RELEVANT PARA REFER ENCE 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 ARMS 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 ENTIRETY OF FACTS AND CIRCUMSTANCES OF THE CASE AND ON THE BASIS OF THE MATERIAL AVAILABLE NO RECORD, WE, THEREFORE PROCEED TO UPHOLD THE RATE OF 0.50% FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH RATE OF THE GUARANTEE COMMISSION FEE. PARA-6 PG NO.5 3. GODREJ CONSUMER PRODUCTS LTD. VS ACIT [2016] 69 TAXMANN. COM 436 46.THUS, ON CONSIDERATION OF OVERALL FACTS AND CIRCUMSTANCES IN THE LIGHT OF JUDICIAL PRONOUNCEMENTS REFERRED TO ABOVE, WE ARE OF THE PARA 46 PG NO.- 16 20 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 (MUMBAI-TRI.) CONSIDERED OPINION THAT THE ARMS LENGTH PRICE OF THE CORPORATE GUARANTEE SHOULD BE FIXED AT 0.5% 4. EVEREST KANTO CYLINDER LTD. VS ACIT [ 2015] 56 TAXMANN.COM 361 (MUMBAI TRIN.) 15 FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL AND ALSO CONSIDERING THE INTERNAL CUP BEING THE GUARANTEE COMMISSION PAID BY THE ASSESSEE TO THE ICICI BANK FOR OBTAINING GUARANTEE, WE HOLD THAT THE ARMS LENGTH GUARANTEE COMMISSION IN RESPECT OF ALL THREE TRANSACTIONS OF GUARANTEE TO ITS AE AT DUBAI, CHINA AND USA SHALL BE TAKEN AT 0.5%. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO COMPUTE THE ADJUSTMENT ON ACCOUNT OF GUARANTEE COMMISSION BY TAKING THE ARMS LENGTH GUARANTEE COMMISSION AT 0.5%. PARA-15 PG NO.- 7 5. ADITYA BIRLA MINACS WORLDWIDE LTD.VS. DCIT [2015] 56 TAXMANN. COM 317 (MUMBAI TRIB.) 2.6ACCORDINGLY, FOLLOWING THE EARLIER DECISIONS OF THIS TRIBUNAL, WE DIRECT THE AO/TPO TO ADOPT 0.5% AS ARMS LENGTH GUARANTEE COMMISSION CHARGES IN RESPECT OF THE GUARANTEE PROVIDED BY THE ASSESSEE FOR OBTAINING THE LOAN BY THE AE. PARA 26 PAG NO.-6 6. MYLAN LABORATORIES LTD. VS ACIT [2015] 63 TAXMANN.COM 179 (HYDERABAD TRIB.) 7.2..RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE TPO TO ADOPT 0.53% AS THE GUARANTEE COMMISSION RATE INSTEAD OF 2% ADOPTED BY HIM PARA 7.2 PG NO. - 8 M/S. MAHINDRA INTERTRADE LTD. VS DCIT [ITA NO.269/MUM/2014] 5CONSIDERING THE DECISION OF CO-ORDINATE 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 PRONOUN CEMENTS, 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 REGARD ED AS AT ARMS LENGTH. WE THEREFORE DIRECT THE ADDITION MADE IN THIS REGARD B E 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 21 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 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 DECLARED IN RELATION TO THE ELIGIBLE INTERNATIONAL TRANSACTION IS AT THE RATE NOT LESS THAN ONE PER CENT. PER ANNUM ON THE AMOUNT GUARANTEED. THUS, BASED ON THE ABOVE, IT IS EVIDENT THAT THE GU ARANTEE FEES CHARGED BY THE ASSESSEE IS AT ARM'S LENGTH. WE THEREFORE DIRECT THAT THE A DJUSTMENT PROPOSED BY THE LD. TPO/AO BE DELETED. 27. THE APPEAL BY THE ASSESSEE IS ACCORDINGLY ALLO WED. ITA NO.1053/KOL/2017 (REVENUES APPEAL): 28. GROUNDS NO.1 AND 2 RAISED BY THE REVENUE READ AS FOLLOWS :- 1. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE CIT(A) ERRED IN ALLOWING EXPENSES INCURRED DURING F.Y.-2007-08 & 2008-09. 2. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE CIT(A) ERRED IN ALLOWING EXPENSES MADE ON ACCOUNT OF PREPARATION OF OFFER DO CUMENT FOR IPO, WHICH CLEARLY WAS CAPITAL IN NATURE. 29. THE ASSESEE INCURRED CERTAIN EXPENDITURE IN RE LATION TO BUSINESS OF RESTRUCTURING. THIS EXPENDITURE WAS INCURRED IN THE FINANCIAL YEAR 2007-08 AND 2008-09 RELEVANT TO A.Y.2008-09 AND 2009-10. DURING THE FINANCIAL YEAR 2009-10 THE PROPOSED BUSINESS RESTRUCTURING EXERCISE WAS ABANDONED. THE ASSESSEE THEREFORE WROTE OFF THE SAID EXPENDITURE OF RS.2.69 CRORES AS EXCEPTIONAL ITEM IN ITS PROFIT AND LOSS ACCOUNT. THE QUESTION BEFORE THE AO WAS AS TO WHETHER THE AFORES AID EXPENDITURE CAN BE ALLOWED AS A 22 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 DEDUCTION. THE AO HELD THAT THE EXPENSES WERE CAPI TAL IN NATURE AND CANNOT BE ALLOWED AS A DEDUCTION. 30. ON APPEAL BY THE ASSESSEE, THE CIT(A) DIRECTED THE AO TO ALLOW THE DEDUCTION CLAIMED BY THE ASSESSEE. THE CIT(A) HELD THAT THE E XPENSES WERE IN CONNECTION WITH ISSUE OF SHARE CAPITAL, MOSTLY PROFESSIONAL FEES FO R PREPARATION AND ISSUANCE OF DRAFT PROSPECTUS. HE WAS OF THE VIEW THAT SINCE THE PROP OSED IPO WAS SHELVED, IT CANNOT BE SAID THAT THE EXPENDITURE IN QUESTION WAS CAPITAL E XPENDITURE. HE THEREFORE HELD THAT EXPENSES INCURRED IN CONNECTION WITH RESPECT TO AN ABANDONED PROJECT WAS REVENUE EXPENDITURE AND IN COMING TO THE ABOVE CONCLUSION, HE PLACED RELIANCE ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF B INANI CEMENTS (INFRA). THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF CIT(A) : UPON GOING THROUGH THE ASSESSMENT ORDER AS WELL AS THE SUBMISSIONS OF THE APPELLANT, IT EMERGES THAT THE MOOT ISSUE IN THE PR ESENT CASE IS WHETHER EXPENSES INCURRED BY THE COMPANY TOWARDS PROFESSIONAL FEES FOR PREPARATION AND ISSUANCE OF THE DRAFT PROSPECTUS FOR THE PROPOSED IPO, WHIC H WAS POSTPONED DUE TO POOR MARKET CONDITIONS AND LATER ON ABANDONED IN FY 2009 -10 AND CHARGED TO PROFIT AND LOSS ACCOUNT IN FY 2009-10 WOULD BE CAPITAL IN NATURE OR IN THE NATURE OF REVENUE EXPENDITURE ARE ALLOWABLE AS DEDUCTION DUR ING FY 2009-10. 2. IN THE INSTANT ANT CASE, THE IPO WAS PROPOSED BY THE COMPANY WITH A VIEW TO OBTAINING FUNDS FOR ENHANCEMENT/ EXPANSION OF ITS B USINESS OPERATIONS, HENCE THERE IS NO DOUBTING THE BUSINESS RATIONALE OF SUCH IPO R ELATED EXPENSES. 3. NOW, COMING TO THE ISSUE OF THE EXPENSES BEING C APITAL OR REVENUE IN NATURE, IN THIS REGARD, RELYING ON THE DECISIONS OF THE APEX C OURT IN THE CASE OF MADRAS AUTO SERVICE (P.) LTD. (1998) (233 ITR 468) AND THE JURI SDICTIONAL HON'BLE HIGH COURT IN THE CASES OF BINANI CEMENT LTD. (ITA NO. 265 OF 2009) AND GRAPHITE INDIA (221 ITR 420) (1996), IT EMERGES THAT AN EXPENDITURE OF CAPITAL NATURE OUGHT TO BRING INTO EXISTENCE ANY ITEM OF CAPITAL NATURE. IN THE I NSTANT CASE, THE EXPENSES FOR PREPARATION OF THE OFFER DOCUMENTS FOR PROPOSED ISS UE OF SHARES BUT ABANDONED DID NOT BRING INTO EXISTENCE ANY ITEM OF CAPITAL NATURE FOR THE COMPANY. 4. THUS CONSIDERING THE FACTS OF THE CASE IN LIGHT OF THE PRINCIPLES LAID DOWN VIDE THE AFORESAID APEX COURT RULING AND THE JURISDICTIO NAL HIGH COURT RULINGS, I AM OF THE VIEW THAT THE EXPENSES INCURRED BY THE COMPANY ON PROFESSIONAL FEES IN CONNECTION TO THE ABANDONED IPO ISSUES BE ALLOWED A S REVENUE EXPENDITURE UNDER 23 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 SECTION 37 OF THE ACT BEING INCURRED FOR THE PURPOS E OF BUSINESS. THUS, THIS GROUND IS ALLOWED. 31. AGGRIEVED BY THE ORDER OF CIT(A) THE REVENUE H AS RAISED GROUND NO.1 AND 2 BEFORE THE TRIBUNAL. 32. THE LD. DR RELIED ON THE ORDER OF AO AND THE L D. COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF CIT(A). WE ARE OF THE VIEW THAT THE EX PENDITURE IN QUESTION WAS RIGHTLY DIRECTED TO BE ALLOWED BY CIT(A). IT IS NOT DISPUT ED THAT THE EXPENDITURE WAS INCURRED AS PART OF THE RESTRUCTURING EXERCISE. THE ASSESSEE WANTED TO RAISE MONEYS FROM THE PUBLIC THROUGH THE ISSUE OF SHARES. THE IPO WAS POS TPONED DUE TO POOR MARKET CONDITIONS. THE IPO PROPOSED TO MEET THE CAPITAL CO ST OF BUSINESS RESTRUCTURING. BECAUSE OF THE POOR MARKET CONDITIONS THE IPO WAS A BANDONED SO ALSO THE PROPOSAL FOR RESTRUCTURING THE BUSINESS OF THE ASSESSEE WAS ALSO ABANDONED. THE EXPENDITURE INCURRED IN THIS REGARD WERE IN THE NATURE OF ADVERTISING EX PENSES, LEGAL EXPENSES, CREDITING ANALYSIS RESEARCH FEES, PAYMENT TO COMPANY SECRETAR IES AND OTHER PROFESSIONAL ORGANIZATIONS IN CONNECTION WITH THE PROPOSED IPO. THE RESTRUCTURING EXERCISE WAS ABANDONED AND THE EXPENSES INCURRED WERE WRITTEN OF F IN THE BOOKS OF ACCOUNT DURING THE PREVIOUS YEAR RELEVANT TO A.Y.2010-11. IN THE L IGHT OF THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF BINANI CEMENT LT D.(SUPRA) AS WELL AS GRAPHITE INDIA LTD.(SUPRA), WE ARE OF THE VIEW THAT THE EXPE NDITURE INCURRED ON THE ABANDONED PROJECT DEVELOPMENT SHOULD BE TREATED AS A REVENUE EXPENDITURE AND ALLOWED AS A DEDUCTION. THE CIT(A) HAS TAKEN NOTE OF THE AFORES AID DECISIONS AND HAS RIGHTLY DELETED THE ADDITION MADE BY THE AO. ORDER OF CIT(A) IS THE REFORE UPHELD AND GROUNDS NO.1 AND 2 RAISED BY THE REVENUE ARE DISMISSED. 33. GROUNDS NO.3 AND 4 RAISED BY THE REVENUE READ AS FOLLOWS :- 3. THAT THE LD . CIT(A) HAS ERRED IN LAW AND ON TH E FACTS AND CIRCUMSTANCES OF THE CASE IN RESTRICTING THE INTEREST IN LOAN ADVANCED T O AE @ LLBOR+350 BPS ARBITRARILY AND NOT SUPPORTED BY ANY DATA ANALYSIS. 4. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN NOT CONSIDERING THE COST OF FUNDS OF THE LE NDER-ASSESSEE AND 24 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11 CREDITWORTHINESS OF BORROWER USING DATA ON PUBLIC D OMAIN RELIED UPON BY THE TPO, FOR DETERMINING THE ALP OF INTEREST ON LOAN ADVANCE D BY ASSESSEE TO ITS AE. 34. WHILE DECIDING GROUND NO.2 OF THE ASSESSEE WE HAVE ALREADY HELD THAT NO INCOME ARISES ON A TRANSACTION OF INVESTMENTS IN SHARES IN SUBSIDIARY COMPANY (AE). IN VIEW OF THE AFORESAID CONCLUSION THE ACTION OF THE AO IN CO NSIDERING THE EXCESS VALUE OF CONSIDERATION PAID BY THE ASSESSEE FOR PURCHASE OF SHARES AS LOAN TRANSACTIONS IS NOT SUSTAINABLE. GROUNDS NO.3 AND 4 RAISED BY THE REVEN UE ARE ON THE COMPUTATION OF ALP ON A PRESUMED LOAN TRANSACTIONS BY THE ASSESSEE TO ITS SUBSIDIARIES. SINCE IT HAS ALREADY BEEN HELD THAT THERE WAS NO LOAN TRANSACTION AT ALL , THE QUESTION OF COMPUTATION OF ALP INTEREST ON SUCH LOAN TRANSACTIONS DOES NOT ARISE F OR CONSIDERATION. THEREFORE GROUNDS NO.3 AND 4 RAISED BY THE REVENUE ARE INFRUCTUOUS AN D ARE ACCORDINGLY DISMISSED. 35. IN THE RESULT, APPEAL BY THE REVENUE IS DISMIS SED. 36. IN THE RESULT THE APPEAL BY THE ASSESSEE IS AL LOWED AND THE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 22.09.2017. SD/- SD/- [J.SUDHAKAR REDDY] [ N.V .VASUDEVAN ] ACCOUNTANT MEMBER JUDI CIAL MEMBER DATED : 22.09.2017. [RG PS] COPY OF THE ORDER FORWARDED TO: 1. M/S. TCG LIFESCIENCES LIMITED, BLOCK-BN, PLOT-7, SECTOR-V, KOLKATA-700091. 2. A. C.I.T., CIRCLE-11(2), KOLKATA. 3. C.I.T.(A)-22, KOLKATA 4. C.I.T.-4 KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVATE SECR ETARY HEAD OF OFFICE/ D.D.O., ITAT KOLKATA BENCHES 25 ITA NO.1053/KOL/2017 & 966/KOL/2017 M/S. TCG LIFESCIENCES LTD. A.YR.2010-11