M/s. Jaypee Capital Services Ltd., New Delhi V. DCIT, New Delhi

ITA 1384/DEL/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 8582 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 07-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B RAMANJANEYULU SENIOR
• Keywords: Transfer pricing; International transaction; Permanent establishment; Question of law; Wholly owned subsidiary; Commercial expediency; Rule 8D; Set aside
• Section: 92B; 14A; 64; 48; 73; 13; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1384/DEL./2017 (ASSESSMENT YEAR : 2013-14) M/S. JAYPEE CAPITAL SERVICES LTD., VS. DCIT, CENTR AL CIRCLE 29, FA 45, LOWER GROUND FLOOR, NEW DELHI. SHIVAJI ENCLAVE, NEW DELHI. (PAN : AAACJ0628A) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VED JAIN, CA SHRI ASHISH GOEL, CA SHRI AKSHIT GOEL, CA REVENUE BY : SHRI B. RAMANJANEYULU, SENIOR DR DATE OF HEARING : 06.01.2020 DATE OF ORDER : 17.01.2020 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. JAYPEE CAPITAL SERVICES LTD. (HEREI NAFTER REFERRED TO AS THE ASSESSEE) BY FILING THE PRESEN T APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 30.01.2017 PASSE D BY COMMISSIONER OF INCOME-TAX (APPEALS) 30, NEW DELH I QUA THE ASSESSMENT YEAR 2013-14 ON THE GROUNDS INTER ALIA T HAT:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE OR DER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) [C IT(A)] IS BAD BOTH IN THE EYE OF LAW AND ON FACTS. ITA NO.1384/DEL./2017 2 2. (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED, BOTH ON FACTS AND IN LAW, IN CONFIRMING THE DISALLOWANCE OF AN AMOUNT OF RS.55,7 3,9701- MADE BY THE AO INVOKING THE PROVISIONS OF SECTION 1 4A READ WITH RULE 8D. (II) THAT THE LEARNED CIT(A) HAS ERRED IN CONFIRMIN G THE DISALLOWANCE REJECTING THE CONTENTION OF THE ASSESS EE THAT NO EXPENDITURE ON EARNING TAX FREE INCOME HAS BEEN INC URRED BY THE ASSESSEE. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN REJECT ING THE CONTENTION OF THE ASSESSEE THAT THE SHARES HAVING B EEN HELD BY THE ASSESSEE AS STOCK-IN-TRADE FOR REGULAR BUSINESS OF THE ASSESSEE, THE DIVIDEND INCOME ON SUCH SHARES BEING INCIDENTAL , THE DISALLOWANCE UNDER SECTION 14A IS NOT CALLED FOR. 5. WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALTERN ATIVE, THE LEARNED CIT(A) HAS ERRED IN REJECTING THE CONTENTIO N OF THE ASSESSEE THAT THE INVESTMENTS BEING STRATEGIC IN NA TURE THE DIVIDEND IS ONLY INCIDENTAL, THEREFORE DISALLOWANCE UNDER SECTION 14A IS NOT CALLED FOR. 5. WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALTERN ATIVE, THE ASSESSEE HAVING SUFFICIENT OWNED FUNDS, INVESTMENTS HAVING NOT BEEN MADE OUT OF BORROWED FUNDS, NO DISALLOWANCE OF INTEREST UNDER SECTION 14A CAN BE MADE. 6. (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW I N CONFIRMING DISALLOWANCE OF AN AMOUNT OF RS.24,15,000/- MADE BY THE AO ON ACCOUNT OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT. (II) THAT THE DISALLOWANCE HAS BEEN CONFIRMED REJEC TING THE CONTENTION OF THE ASSESSEE THAT THE IMPUGNED ADVANC ES HAVE BEEN MADE OUT OF BUSINESS EXPEDIENCY. 7. WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALTERN ATIVE, THE ASSESSEE HAVING SUFFICIENT OWNED FUNDS, THE LOANS H AVING NOT BEEN GIVEN OUT OF BORROWED FUNDS, DISALLOWANCE UNDE R SECTION 36(1 )(III) IS NOT CALLED FOR. 8. WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALTERN ATIVE, THE CALCULATION OF DISALLOWANCE OF INTEREST UNDER SECTI ON 36(1)(III) MADE BY THE AO IS WRONG. ITA NO.1384/DEL./2017 3 9. (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW I N CONFIRMING DISALLOWANCE OF AN AMOUNT OF RS.4,48,911/- MADE BY THE AO ON ACCOUNT OF FOREIGN TOURS AND TRAVEL EXPENSES. (II) THAT THE DISALLOWANCE HAS BEEN CONFIRMED DESPI TE THE EXPENSES BEING INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. (III) THAT THE DISALLOWANCE HAS BEEN CONFIRMED REJE CTING THE CONTENTION OF THE ASSESSEE THAT SHRI SAURAV ARORA, DIRECTOR OF THE COMPANY HAVING GONE ON FOREIGN TOUR FOR BUSINESS PU RPOSES, THE DISALLOWANCE IS NOT CALLED FOR. 10. (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW I N CONFIRMING ADDITION OF AN AMOUNT OF RS.1,41,95,888/- ON ACCOUN T OF DIFFERENCE IN ARM'S LENGTH PRICE ON INTEREST ON EQU ITY PROVIDED TO THE FOREIGN SUBSIDIARY. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN REJECT ING THE CONTENTION OF THE ASSESSEE THAT THE ACTION OF THE A O IN MAKING THE ABOVE SAID ADDITION UNDER SECTION 92 OF THE ACT WITHOUT REFERRING THE CASE TO THE TRANSFER PRICING OFFICER IS BAD IN LAW. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN REJECT ING THE CONTENTION OF THE ASSESSEE THAT THE ACT OF THE AO I N MAKING THE ABOVE SAID ADDITION WITHOUT BRINGING ANY COMPARABLE ON RECORD TO DETERMINE THE ARM'S LENGTH PRICE IS BAD IN LAW. 11. (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN JAW I N REJECTING THE CONTENTION OF THE ASSESSEE THAT THE TRANSACTION OF PROVIDING EQUITY TO THE AE IS NOT AN INTERNATIONAL TRANSACTIO N AS DEFINED UNDER SECTION 92B OF THE ACT. (II) THAT THE TRANSACTION OF PROVIDING EQUITY DOES NOT HAVE ANY IMPACT ON PROFITS OR ASSETS OF THE ASSESSEE, TH E SAME IS NOT AN INTERNATIONAL TRANSACTION. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN REJECT ING THE CONTENTION OF THE ASSESSEE THAT THE AO HAS ERRED IN RE- CHARACTERIZING THE TRANSACTION OF PROVIDING EQUITY INTO A LOAN TRANSACTION. 12. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIR MING THE ITA NO.1384/DEL./2017 4 ACTION OF THE AO IN TREATING THE AMOUNT OF RS.10,51 ,54,723/- STANDING IN THE NAME OF THE ASSESSEE IN THE LAST YE AR AS A LOAN GIVEN TO THE SUBSIDIARY DURING THE CURRENT YEAR ALS O. 13. WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALTER NATIVE, THE LEARNED CIT(A) HAS ERRED IN REJECTING THE CONTENTIO N OF THE ASSESSEE THAT THE TRANSACTION BEING IN FOREIGN CURR ENCY THE LIBOR RATE IS THE APPROPRIATE RATE OF INTEREST, NOT THE RATE AS APPLIED BY THE AO. ' 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. JAYPEE CAPITAL SERVI CES LTD., THE ASSESSEE COMPANY IS INTO THE BUSINESS OF TRADING OF EQUITY, COMMODITY AND DERIVATIVES OF EQUITY AND FOREX MARKE T. ASSESSEE COMPANY IS ALSO INTO TRADING OF SHARES THROUGH RECO GNIZED STOCK EXCHANGES VIZ. NATIONAL STOCK EXCHANGE (NSE), BOMBA Y STOCK EXCHANGE (BSE), ETC. INITIALLY, ASSESSEE COMPANY H AD FILED RETURN OF INCOME ON 30.09.2013 DECLARING TOTAL INCOME AT R S.1,89,260/-, WHICH WAS SUBSEQUENTLY REVISED BY DECLARING INCOME OF RS.22,42,240/- DECLARING INTEREST INCOME OF RS.21,8 3,329/- ON FDRS. 3. FROM THE FINANCIALS OF THE ASSESSEE COMPANY, ASS ESSING OFFICER (AO) NOTICED THAT THE ASSESSEE COMPANY PAID INTEREST EXPENSES TO THE TUNE OF RS.81,33,342/- ON THE FUNDS BORROWED. DECLINING THE CONTENTIONS RAISED BY THE ASSESSEE TH AT INTEREST EXPENSES CLAIMED IN PROFIT & LOSS ACCOUNT OF INTERE ST WHICH WAS PAID ON THE LOAN WAS REQUIRED FOR RUNNING THE BUSIN ESS ACTIVITIES. ITA NO.1384/DEL./2017 5 AO MADE ADDITION OF RS.24,15,000/- UNDER SECTION 36 (1)(III) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT). AO BY INVOKING THE PROVISIONS CONTAINED U/S 14A OF THE ACT READ WITH R ULE 8D OF THE INCOME-TAX RULES, 1962 (FOR SHORT THE RULES) MADE DISALLOWANCE OF RS.55,73,970/-. AO ALSO MADE DISALLOWANCE OF RS .4,48,911/- ON ACCOUNT OF FOREIGN TOURS AND TRAVEL EXPENSES ON THE GROUND THAT SHRI SAURAV ARORA IS NEITHER DIRECTOR NOR EMPLOYEE OF THE ASSESSEE COMPANY NOR THE ASSESSEE COMPANY HAS CONDUCTED ANY TRANSACTION IN AUSTRALIA AND NEW ZEALAND STOCK EXCHANGES. 4. AO ALSO MADE AN ADDITION OF RS.1,41,95,888/- ON ACCOUNT OF DIFFERENCE IN THE ARMS LENGTH PRICE ON INTEREST ON EQUITY PROVIDED TO THE FOREIGN SUBSIDIARY. AO ALSO TREATED THE AMO UNT OF RS.10,51,54,723/- STANDING IN THE NAME OF THE ASSES SEE IN THE LAST YEAR AS A LOAN GIVEN TO THE SUBSIDIARY DURING THE C URRENT YEAR AND THEREBY ASSESSED THE TOTAL INCOME OF THE ASSESSEE A T RS.2,48,76,010/-. 5. ASSESSEE CARRIED THE MATTER BY WAY OF APPEAL BEF ORE THE LD. CIT (A) WHO HAS CONFIRMED THE ADDITIONS BY DISMISSI NG THE APPEAL. FEELING AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ITA NO.1384/DEL./2017 6 ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUND NO.1 7. GROUND NO.1 IS GENERAL IN NATURE, HENCE NEEDS NO ADJUDICATION. GROUNDS NO.2, 3 & 4 8. GROUNDS NO.2, 3 & 4 ARE DISMISSED HAVING NOT BEE N PRESSED DURING THE COURSE OF ARGUMENTS. GROUNDS NO.5, 6, 7 & 8 9. UNDISPUTEDLY, DURING THE YEAR UNDER ASSESSMENT, ASSESSEE COMPANY HAS EARNED DIVIDEND INCOME OF RS.1,36,19,20 0/- AND CLAIMED THE SAME AS EXEMPT U/S 10(34) OF THE ACT. LD. AR FOR THE ASSESSEE CHALLENGING THE IMPUGNED ORDER CONTENDED T HAT THE ENTIRE INVESTMENT IN THE SHARES HAVE BEEN MADE BY THE ASSE SSEE COMPANY OUT OF ITS OWN FUNDS AND DREW OUR ATTENTION TOWARDS BALANCE SHEET, AVAILABLE AT PAGE 16 OF THE PAPER BOOK. PERUSAL OF THE BALANCE SHEET QUA THE YEAR UNDER ASSESSMENT SHOWS THAT THE ASSESSEE COMPANY IS HAVING PAID UP SHARE CAPITAL OF RS.7,64, 75,500/- WITH RESERVE AND SURPLUS OF RS.3,17,17,14,177/- (TOTAL RS.3,24,81,89,677/-). THESE FACTS GO TO PROVE THAT AS AGAINST THE TOTAL INVESTMENT OF RS.2,97,33,89,709/-, ASSESSEE C OMPANY WAS HAVING ITS OWN SHARE CAPITAL AND SURPLUS & RESERVES TO THE TUNE OF ITA NO.1384/DEL./2017 7 RS.3,24,81,89,677/-. IT IS SETTLED PRINCIPLE OF LA W THAT IN CASE THE ASSESSEE COMPANY IS HAVING SUFFICIENT OWN INTEREST FREE FUNDS, IT IS TO BE PRESUMED THAT THE INVESTMENT IS NOT MADE OUT OF BORROWED FUNDS BUT OUT OF ITS OWN INTEREST FREE FUNDS. RELI ANCE IN THIS REGARD IS PLACED ON THE DECISION RENDERED BY HONBLE SUPRE ME COURT IN CASE OF CIT VS. RELIANCE INDUSTRIES LTD. IN CIVIL APPEAL NO .10 OF 2019 DATED 02.01.2019 AND DECISION RENDERED BY HONBLE HIGH COURT OF PUNJAB & HARYANA IN CIT VS. MAX INDIA LTD. IN ITA NO.186 OF 2013 DATED 06.09.2016 . 10. MORE-SO, BEFORE INVOKING THE PROVISIONS CONTAIN ED U/S 14A OF THE ACT, AO HAS NOT RECORDED HIS SATISFACTION AS REQUIRED U/S 14A(2) THAT THE WORKING GIVEN BY THE ASSESSEE IS NO T CORRECT. HONBLE HIGH COURT OF DELHI IN CASE OF MAXOPP INVESTMENT LTD. VS. CIT 347 ITR 272 (DEL.), CONFIRMED BY HONBLE SUPREME COURT, HELD THAT, IT IS INCUMBENT UPON THE AO TO RECORD SATISFACTION AS TO THE WORKING GIVEN BY THE ASSESSEE THAT NO EXPENSES HAVE BEEN INCURRED BY IT TO EARN THE DIVIDEND INCOME. IN VIEW OF THE MATTER, WE ARE OF THE CONSIDERED VIEW THAT ADDITION MADE BY THE AO AND CONFIRMED BY THE LD. CIT (A) U/S 14A IS NOT SUSTAIN ABLE, HENCE ORDERED TO BE DELETED. 11. SO FAR AS ADDITION OF RS.24,15,000/- MADE BY TH E AO AND CONFIRMED BY THE LD. CIT (A) U/S 36(1)(III) IS CONC ERNED ON ACCOUNT ITA NO.1384/DEL./2017 8 OF DISALLOWANCE OF INTEREST IS CONCERNED, ASSESSEE COMPANY HAS COME UP WITH SPECIFIC PLEA THAT IT HAS NOT GRANTED ANY LOANS TO FUTURZ NEXT SERVICES PVT. LTD. RATHER ALL ARE REGUL AR BUSINESS TRANSACTIONS SUPPORTED WITH REGULAR RECEIPT AND PAY MENT TRANSACTIONS OCCURRING IN THE ACCOUNT. IT IS ALS O CONTENDED BY THE LD. AR FOR THE ASSESSEE THAT ALL THE TRANSACTIONS A RE ATTRIBUTED TO THE BUSINESS OF SHARES/FUTURE/OPTION OF SECURITIES AND DREW OUR ATTENTION TOWARDS ITS FINANCIAL LEDGER FOR THE PERI OD 01.04.2012 TO 31.03.2013, AVAILABLE AT PAGES 64 TO 68 OF THE PAPE R BOOK WHEREIN BUSINESS TRANSACTIONS WITH FUTURZ NEXT SERVICES PVT . LTD. HAVE BEEN RECORDED. 12. IT IS ALSO CONTENDED BY THE LD. AR FOR THE ASS ESSEE THAT ADVANCES TO THE GROUP COMPANIES HAVE BEEN GIVEN OUT OF ITS OWN PAID UP SHARE CAPITAL AND RESERVE & SURPLUS OF RS.3 ,24,81,89,677/- FOR COMMERCIAL EXPEDIENCY TO THE GROUP COMPANIES AN D RELIED UPON THE DECISION OF S.A. BUILDERS LTD. VS. CIT (2007) 158 TAXMAN 74 (SC) . SO, IN VIEW OF THE FINANCIALS BROUGHT ON RECORD BY THE ASSESSEE COMPANY DISCUSSED IN THE PRECEDING PARA, WE ARE OF THE CONSIDERED VIEW THAT SINCE TRANSACTIONS ARE PER TAINING OF BUSINESS OF SHARES/FUTURE/OPTION OF SECURITIES & AD VANCES HAVING BEEN GIVEN ON ACCOUNT OF COMMERCIAL EXPEDIENCY OF T HE GROUP COMPANIES, DISALLOWANCE MADE BY THE AO AND CONFIRME D BY THE LD. ITA NO.1384/DEL./2017 9 CIT (A) U/S 36(1)(III) IS NOT SUSTAINABLE, HENCE OR DERED TO BE DELETED. SO, GROUNDS NO.5, 6, 7 & 8 ARE DETERMINED IN FAVOUR OF THE ASSESSEE. GROUND NO.9 13. AO MADE DISALLOWANCE OF RS.4,48,911/- ON ACCOUN T OF FOREIGN TOUR AND TRAVEL EXPENSES INCURRED BY SHRI S AURAV ARORA WHICH ARE PERTAINING TO HIS TRAVEL TO AUSTRALIA AND NEW ZEALAND ON THE GROUND THAT SHRI SAURAV ARORA IS NEITHER DIRECT OR NOR EMPLOYEE OF THE ASSESSEE COMPANY AND ASSESSEE COMPANY HAS NO T CONDUCTED ANY TRANSACTIONS WITH AUSTRALIA AND NEW ZEALAND STO CK EXCHANGES AND LD. CIT (A) ALSO CONFIRMED THE DISALLOWANCE. 14. CHALLENGING THE IMPUGNED ORDER, LD. AR FOR THE ASSESSEE CONTENDED THAT DISALLOWANCE HAS BEEN MADE AND CONFI RMED BY AO/ CIT (A) BY RECORDING INCORRECT FACTS AND DREW OUR A TTENTION TOWARDS PAGE 16 OF THE PAPER BOOK WHICH IS BALANCE SHEET OF THE ASSESSEE COMPANY SHOWING THAT SHRI SAURAV ARORA IS ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY. 15. HOWEVER, FROM THE PERUSAL OF THE REPLY FILED BY THE ASSESSEE COMPANY BEFORE THE LD. CIT (A), EXTRACTED IN PARA 7 .2 OF THE IMPUGNED ORDER, ASSESSEE COMPANY HAS FAILED TO PROV E THE PURPOSE FOR WHICH FOREIGN TOURS HAVE BEEN CARRIED OUT BY SH RI SAURAV ARORA. EMAILS BROUGHT ON RECORD BY THE ASSESSEE CO MPANY ALSO ITA NO.1384/DEL./2017 10 FAILED TO EXPLAIN THE PURPOSE OF FOREIGN VISITS. P ERUSAL OF THE FOREIGN DETAIL GIVEN BY THE ASSESSEE COMPANY, AVAIL ABLE AT PAGE 50 OF THE PAPER BOOK, ALSO DOES NOT DISCLOSE THE PURPO SE AND RESULT OF THE FOREIGN VISITS. 16. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT EXP ENSES OF RS.4,48,911/- INCURRED BY SHRI SAURAV ARORA, DIRECT OR OF THE ASSESSEE COMPANY WHEN NOT PROVED TO BE INCURRED FOR BUSINESS PURPOSE OF THE ASSESSEE COMPANY, ITS ADDITION CANNO T BE MADE AGAINST ASSESSEE COMPANY RATHER ITS ADDITION CAN BE MADE AGAINST SHRI SAURAV ARORA IN HIS INDIVIDUAL CAPACITY. IN T HESE CIRCUMSTANCES, ADDITION OF RS.4,48,911/- MADE IN TH E NAME OF ASSESSEE COMPANY IS NOT SUSTAINABLE, HENCE ORDERED TO BE DELETED. SO, GROUND NO.9 IS DETERMINED IN FAVOUR OF THE ASSE SSEE COMPANY. GROUNDS NO.10, 11, 12 & 13 17. AO NOTICED INVESTMENT MADE BY THE ASSESSEE COMP ANY IN FOREIGN COMPANIES, NAMELY, JAYPEE CAPITAL INC., USA AND JAYPEE SINGAPORE PTE LTD.. AO MADE ADDITION OF RS.1,04,24 ,675/- ON ACCOUNT OF ARMS LENGTH PRICE VALUE OF THE INTEREST RECEIVABLE ON LOANS OUTSTANDING IN THE NAME OF JAYPEE SINGAPORE P TE LTD. AGAINST WHICH THE ASSESSEE HAS SHOWN NIL INTEREST. IT IS C ATEGORIC PLEA OF THE ASSESSEE COMPANY THAT REMITTANCE TO FOREIGN SUB SIDIARIES HAS BEEN MADE VIDE CAPITAL INFUSION IN ORDER TO EXTEN D ITS BUSINESS ITA NO.1384/DEL./2017 11 AND TO KEEP ITS CONTROL OVER FOREIGN SUBSIDIARIES. HOWEVER, THE AO HAS TREATED THE CAPITAL INFUSION AS DEEMED LOAN A ND THEREBY MADE ADDITION ON ACCOUNT OF INTEREST @ 13.5% ON DEEMED L OAN AS ITS ARMS LENGTH PRICE VALUE. 18. ASSESSEE COMPANY HAS RAISED CATEGORIC PLEA THAT FOREIGN SUBSIDIARIES IN WHICH CAPITAL INFUSION WAS MADE, IS PART OF JAYPEE CAPITAL SERVICES PVT. LTD. AND AS SUCH, THERE IS NO QUESTION OF CHARGING INTEREST ON THE SAME. IT IS CONTENDED BY THE LD. AR FOR THE ASSESSEE THAT TRANSACTION OF INVESTMENT INTO LOAN C ANNOT BE RECHARACTERIZED BY THE AO. 19. UNDISPUTEDLY, FOR THE YEAR UNDER ASSESSMENT, TH ERE IS NO LOAN OUTSTANDING AGAINST THE SUBSIDIARY. WHEN WE EXAMIN E NOTES ON FINANCIAL STATEMENT ENDING 31.03.2013, AVAILABLE AT PAGE 21 OF THE PAPER BOOK, IT IS PROVED THAT INVESTMENT HAS BEEN M ADE IN EQUITY SHARES OF SUBSIDIARY OF THE ASSESSEE, NAMELY, JAYPE E SINGAPORE PTE. LTD. BY WAY OF INFUSION OF CAPITAL IN ACCORDANCE WI TH THE RBI GUIDELINES UNDER AUTOMATIC APPROVAL ROUTE. MOREOVE R, JAYPEE SINGAPORE PTE. LTD. HAS MADE FINAL ALLOTMENT TO THE ASSESSEE COMPANY IN AY 2014-15. 20. HONBLE HIGH COURT OF DELHI IN CASE OF CIT VS. EKL APPLIANCES LTD. 345 ITR 241 HELD AS UNDER :- ITA NO.1384/DEL./2017 12 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES LIES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPTIONAL C ASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRAN SACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR THEM AND THE EXAM INATION OF A CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED O N THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. IT IS OF FURTHER SIGNIF ICANCE THAT THE GUIDELINES DISCOURAGE RE-STRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS. THE REASON FOR CHARACTERISATION OF SU CH RE- STRUCTURING AS AN ARBITRARY EXERCISE, AS GIVEN IN T HE GUIDELINES, IS THAT IT HAS THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAME VIEW AS TO H OW THE TRANSACTION SHOULD BE STRUCTURED. 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORES AID PRINCIPLE AND THEY ARE (I) WHERE THE ECONOMIC SUBST ANCE OF A TRANSACTION DIFFERS FROM ITS FORM AND (II) WHERE TH E FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRAN GEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEI R TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPEN DENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MAN NER. 21. SIMILARLY, COORDINATE BENCH OF THE TRIBUNAL IN CASE OF TOPSGRUP ELECTRONIC SYSTEM LTD. VS. ITO (2016) 48 I TR (TRIB) 753 ALSO HELD THAT RE-CHARACTERIZATION OF CAPITAL TRANS ACTION INTO LOAN BY THE TRANSFER PRICING OFFICER IS NOT SUSTAINABLE IN THE EYES OF LAW IN VIEW OF THE DECISION RENDERED BY HONBLE BOMBAY HIG H COURT IN CASE OF BESIX KIER DABHOL SA 2012 (10) TMI 817 (BOMBAY) . OPERATIVE PART OF THE ORDER IS EXTRACTED FOR READY PERUSAL AS UNDER:- IN THIS CASE THE QUESTION BEFORE THE COURT WAS: - 'I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS RIGHT IN HOLDING T HAT IN THE ABSENCE OF ANY SPECIFIC THIN CAPITALIZATION RUL ES IN INDIA, THE ASSESSING OFFICER CANNOT DISALLOW THE IN TEREST PAYMENT ON DEBT CAPITAL AFTER HAVING OBSERVED THE ABNORMAL THIN CAPITALIZATION RATIO OF 248:1?' IN THIS REGARD IT WAS SUBMITTED THAT THE HON'BLE CO URT HELD AS UNDER AT PARAS 4 TO 8 OF ITS ORDER: - ITA NO.1384/DEL./2017 13 '4) THE RESPONDENT-ASSESSEE IS A COMPANY INCORPORA TED UNDER THE LAWS OF BELGIUM. THE SOLE BUSINESS OF THE RESPO NDENT- ASSESSEE IS TO CARRY OUT THE PROJECT OF CONSTRUCTIO N OF FUEL JETTY NEAR DABHOL IN INDIA. THE RESPONDENT-ASSESSEE HAD F ULLY PAID CAPITAL OF 25.00 LACS (BELGIUM FRANCS) DIVIDED INTO 2500 SHARES OF 1000 BELGIUM FRANCS EACH. THIS EQUITY CAPITAL WA S DIVIDED IN THE RATIO OF 60:40 BETWEEN THE TWO JOINT VENTURE PA RTNERS N V BESIX SA, BELGIUM AND KIER INTERNATIONAL (INVESTMEN T) LIMITED OF U.K. THE RESPONDENT ASSESSEE ALSO BORROWED FROM ITS SHAREHOLDERS IN THE SAME RATIO AS THE EQUITY SHARE HOLDING AMOUNT OF RS.57.09 CRORES FROM N.A. BASIX SA AND RS .37.01 CRORES FROM KIER INTERNATIONAL INVESTMENT LIMITED. IN THE CIRCUMSTANCES, THE RESPONDENT HAD EQUITY CAPITAL OF RS. 38.00 LACS AND DEBT CAPITAL OF RS.9410 LACS. THUS, DEBT E QUITY RATIO WORKED OUT IS TO 248:1. 5) THE RESPONDENT ASSESSEE PAID INTEREST OF RS. 5. 73 CRORES ON THE AFORESAID BORROWING OF RS.57.09 CRORES AND R S.37.01 CRORES FROM NV BASIX SA AND KIER INTERNATIONAL (INV ESTMENTS) LIMITED RESPECTIVELY. HOWEVER, THE ASSESSING OFFICE R DISALLOWED THE PAYMENT OF INTEREST IN VIEW OF THE RESERVE BANK OF INDIA'S APPROVAL LETTER DATED 3/11/1998 GRANTING APPROVAL T O THE ASSESSEE TO DO BUSINESS IN INDIA. THE APPROVAL LETTER DATED 03/11/1998 SPECIFICALLY PROVIDED THAT INDIA BRANCH OFFICE WILL NOT BORROW OR LEND FROM/TO ANY PERSON IN INDIA WITHOUT SPECIFIC P ERMISSION OF THE RESERVE BANK OF INDIA. THE ASSESSING OFFICER FU RTHER OBSERVED THAT IN VIEW OF INDIA BELGIUM DOUBLE TAXATION AVOID ANCE AGREEMENT INTEREST ON MONIES PAID BY THE HEAD OFFIC E TO THE BRANCHES WAS NOT ALLOWABLE AS A DEDUCTION. 6) IN APPEAL, THE COMMISSIONER OF INCOME TAX (APPE ALS) BY AN ORDER DATED 29/3/2007 UPHELD THE ORDER OF THE AS SESSING OFFICER AND DISALLOWED THE DEDUCTION ON ACCOUNT OF INTEREST OF RS.5.73 CRORES PAID TO JOINT VENTURE PARTNERS. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT ARTICLE 7(3)(B) O F THE DOUBLE TAXATION AVOIDANCE AGREEMENT FORBIDS ALLOWANCE OF A NY INTEREST PAID TO THE HEAD OFFICE BY PERMANENT ESTABLISHMENT IN INDIA AS A DEDUCTION. FURTHER, THE PAYMENT OF INTEREST ALSO DI RECTLY VIOLATES THE CONDITIONS IMPOSED BY RBI IN ITS LETTER DATED 3 /11/1998. THEREFORE, THE ORDER OF THE ASSESSING OFFICER WAS U PHELD. 7) HOWEVER, THE TRIBUNAL ALLOWED THE RESPONDENT-AS SESSEE'S APPEAL. DURING THE COURSE OF THE PROCEEDINGS BEFORE THE TRIBUNAL THE REVENUE CONTENDED THAT THE BORROWINGS ON WHICH THE INTEREST HAS BEEN CLAIMED AS A DEDUCTION ARE IN FACT CAPITAL OF THE ASSESSEE AND BROUGHT ONLY UNDER THE NOMENCLATURE OF LOAN FOR TAX CONSIDERATION. IT WAS THE CASE OF THE APPELLANT -REVENUE BEFORE THE TRIBUNAL THAT DEBT CAPITAL IS REQUIRED TO BE RE -CHARACTERIZED AS EQUITY CAPITAL. HOWEVER, THE TRIBUNAL HELD THAT IN INDIA AS THE LAW STANDS THERE WERE NO RULES WITH REGARD TO THIN CAPITALIZATION ITA NO.1384/DEL./2017 14 SO AS TO CONSIDER DEBT AS AN EQUITY. IT IS ONLY IN THE PROPOSED DIRECT TAX CODE BILL OF 2010 THAT AS A PART OF THE GENERAL ANTI AVOIDANCE RULES IT IS PROPOSED TO INTRODUCE A PROVI SION BY WHICH A ARRANGEMENT MAY BE DECLARED AS AN IMPERMISSIBLE A VOIDANCE ARRANGEMENT AND MAY BE DETERMINED BY RECHARACTERSIN G ANY EQUITY INTO DEBT OR VICE VERSA. 8) WE FIND NO FAULT WITH THE ABOVE OBSERVATIONS OF THE TRIBUNAL. THERE WERE AT THE RELEVANT TIME AND EVEN TODAY NO THIN CAPITALIZATION RULES IN FORCE. CONSEQUENTLY, THE IN TEREST PAYMENT ON DEBT CAPITAL CANNOT BE DISALLOWED. IN VIEW OF TH E ABOVE, THE QUESTION (I) RAISES NO SUBSTANTIAL QUESTION OF LAW AND IS THEREFORE, DISMISSED.' 22. SO, THERE IS UMPTEEN NUMBER OF JUDGMENT DECLARI NG THAT TRANSACTION INVOLVING SHARE APPLICATION MONEY CANNO T BE RECHARACTERIZED AS INTERNATIONAL TRANSACTION OF LOA N UNDER TRANSFER PRICING PROVISION. 23. HONBLE BOMBAY HIGH COURT IN CASE OF PR. CIT VS. AEGIS LIMITED IN ITA NO.1248 OF 2016 DATED 28.01.2019 HELD THAT IN THE ABSENCE OF FINDING THAT THE TRANSACTION WAS SHAM, T HE TPO COULD NOT HAVE TREATED SUCH TRANSACTION AS A LOAN AND CHA RGE INTEREST THEREON ON NOTIONAL BASIS. COORDINATE BENCH OF THE TRIBUNAL IN CASE OF VOLTAS LTD. VS. DCIT, RANGE 8(3)(2), MUMBAI IN ITA NO.2822/MUM/2017 & ORS. IN THE IDENTICAL FACTS AND CIRCUMSTANCES OF THE CASE HELD THAT, THE PAYMENT OF SHARE APPLICATION MONEY CANNOT BE TREATED AS PARTLY IN TH E NATURE OF INTEREST FREE LOANS TO THE ASSOCIATED ENTERPRISES A ND AS SUCH, ALP ADJUSTMENT BASED ON THAT HYPOTHESIS IS NOT LEGALLY SUSTAINABLE. OPERATIVE PART OF THE JUDGMENT IS AS UNDER ;- ITA NO.1384/DEL./2017 15 3.5.7 UPON CAREFUL CONSIDERATION OF FACTUAL MATRI X AS ENUMERATED BY US IN THE PRECEDING PARAGRAPHS, THE U NDISPUTED POSITION THAT EMERGES IS THE FACT THAT THE ASSESSEE HAS ADVANCED SHARE APPLICATION MONEY TO ONE OF ITS AE SITUATED I N SAUDI ARABIA WITH A VIEW TO ACQUIRE FURTHER STAKE IN THAT ENTITY. THE ENTITY HAS BECOME WHOLLY OWNED SUBSIDIARY OF THE AS SESSEE COMPANY DURING THE MONTH OF JANUARY, 2009. THE FINA NCIAL HEALTH OF ITS AE WAS NOT GOOD AND THE MONEY WAS ADV ANCED WITH A VIEW TO INFUSE FURTHER CAPITAL IN THE AE AND WITH A VIEW TO ACQUIRE CONTROLLING STAKE IN ITS AE. THE MONEY HAS BEEN UTILIZED BY ITS AE TO PAY-OFF BUSINESS DEBTS AND TO MEET WOR KING CAPITAL REQUIREMENTS. ANOTHER UNDISPUTED FACT IS THAT ULTIM ATELY THE SHARES HAVE BEEN ALLOTTED TO THE ASSESSEE DURING DE CEMBER, 2015 AFTER GETTING THE DESIRED REGULATORY APPROVALS FROM CONCERNED AUTHORITY I.E. SAGIA. IT IS ALSO UNDISPUTED FACT TH AT THERE WAS DELAY IN THE LEGAL PROCESS WHICH HAS BEEN SUBSTANTI ATED BY THE ASSESSEE, INTER-ALIA, BY FURNISHING EMAIL CORRESPON DENCES ETC. THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES WOULD DEMON STRATE THAT THE INVESTMENT MADE BY THE ASSESSEE WAS FOR GENUINE BUSINESS PURPOSE AND THE STATED TRANSACTION WAS NOT FOUND TO BE A SHAM TRANSACTION, IN ANY MANNER. ANOTHER FACT IS THAT WH ATEVER BENEFIT WOULD ACCRUE TO ASSESSEE'S AE, THEY WOULD INDIRECTL Y ACCRUE TO THE ASSESSEE SINCE AE ULTIMATELY BECAME WHOLLY OWNE D SUBSIDIARY OF THE ASSESSEE COMPANY. NO DOUBT, THERE WAS INORDI NATE DELAY IN ALLOTMENT OF SHARES, NEVERTHELESS, THE ASSESSEE WAS SUCCESSFUL IN EXPLAINING THE DELAY IN ALLOTMENT OF SHARE AND WAS ABLE TO DEMONSTRATE WITH EVIDENCES THE CIRCUMSTANCES WHICH LED TO DELAY IN ALLOTMENT OF SHARES. THEREFORE, RE-CHARACTERIZAT ION OF THIS TRANSACTION AS ADVANCE / LOAN BY REVENUE AUTHORITIE S, IN OUR CONSIDERED OPINION, WAS NOT CORRECT APPROACH AND TH IS TRANSACTION COULD NOT BE EQUATED WITH LOAN TRANSACT IONS. THE LD. DR HAS CONTENDED THAT THE TRANSACTIONS HAVE NOT BEE N RE- CHARACTERIZED AS LOAN BUT THE SAME HAS BEEN BENCHMA RKED SINCE CERTAIN BENEFITS HAVE ACCRUED TO AE BY INFUSION OF FUND WHICH MUST BE SHARED WITH THE ASSESSEE. HOWEVER, WE FIND THAT ALP OF THE TRANSACTION HAS BEEN COMPUTED IN SIMILAR MANNER AS IT WOULD BE COMPUTED FOR A LOAN TRANSACTION. FURTHER AS ALRE ADY NOTED, ASSESSEE'S AE ULTIMATELY BECAME WHOLLY OWNED SUBSID IARY OF THE ASSESSEE AND THEREFORE, WHATEVER BENEFIT WOULD ACCR UE TO AE, THE SAME WOULD INDIRECTLY ACCRUE TO THE ASSESSEE. THERE FORE, NOT CONVINCED WITH THE APPROACH OF LOWER AUTHORITIES, W E HOLD THAT NO ADDITION WOULD BE WARRANTED ON THIS ACCOUNT. .. 50. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING I N MIND ENTIRETY OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW WERE IN ERROR IN TREATING THE PAY MENT OF SHARE APPLICATION MONEY, AS PARTLY IN THE NATURE OF INTER EST 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 RS.19,15,45,943. THE ASSESSEE ITA NO.1384/DEL./2017 16 GETS THE RELIEF ACCORDINGLY. AS WE HAVE DECIDED THI S GROUND OF APPEAL ON THE FUNDAMENTAL ISSUE THAT THE PAYMENT OF SHARE APPLICATION MONEY COULD NOT BE PARTLY TREATED AS IN TEREST FREE LOAN TO AE, WE SEE NO NEED TO DEAL WITH OTHER ASPECTS OF THE MATTER. 24. LD. DR FOR THE REVENUE BY RELYING UPON THE ORDE R PASSED BY THE AO/CIT (A) CONTENDED THAT HEALTH OF THE AE NEED S TO BE LOOKED INTO AND IT IS NOT DISCLOSED BY THE ASSESSEE COMPANY THAT IF THE LOAN WAS GIVEN AND LATER ON CONVERTED INTO EQUI TY. THIS CONTENTION OF THE LD. DR IS NOT TENABLE FOR THE REA SON THAT IT IS CATEGORIC CASE OF THE ASSESSEE COMPANY SINCE VERY O UTSET THAT FUNDS WERE GIVEN TO THE SUBSIDIARY FOR BUSINESS PURPOSE A ND TO HAVE CONTROL OVER IT. MOREOVER IT WAS INVESTMENT IN EQU ITY. 25. IN VIEW OF THE DECISIONS RENDERED BY HONBLE HI GH COURTS AND COORDINATE BENCH OF THE TRIBUNAL DISCUSSED IN T HE PRECEDING PARAS, WE ARE OF THE CONSIDERED VIEW THAT FIRSTLY, AO HAS NO AUTHORITY TO RE-CHARACTERIZE THE TRANSACTION OF MAK ING INVESTMENT BY THE ASSESSEE COMPANY IN EQUITY SHARES OF SUBSIDI ARIES AS A LOAN; SECONDLY, OECD GUIDELINES ALSO DISCOURAGE RESTRICTI NG OF LEGITIMATE BUSINESS TRANSACTION; THIRDLY, WHEN THE AO HAS NOT COME UP WITH SPECIFIC FINDING THAT THE TRANSACTION IN QU ESTION IS A SHAM TRANSACTION, HE CANNOT TREAT THE TRANSACTION OF CA PITAL INFUSION BY THE ASSESSEE COMPANY AS A LOAN AND TO CHARGE THE IN TEREST THEREON ON NOTIONAL BASIS; AND FOURTHLY, IN THE ABSENCE OF ANY SPECIFIC ITA NO.1384/DEL./2017 17 FINDING BY THE AO THAT ANY INCOME HAS ARISEN FROM I NTERNATIONAL TRANSACTION, TP PROVISIONS CONTAINED IN CHAPTER-X O F THE ACT DO NOT APPLY. SECTION 92(1) OF THE ACT SAYS THAT INCO ME ARISEN FROM INTERNATIONAL TRANSACTION IS A CONDITION PRECEDENT FOR APPLICATION OF CHAPTER-X OF THE ACT. CONSEQUENTLY, WE ARE OF THE CONSIDERED VIEW THAT ADDITION MADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF ARMS LENGTH PRICE OF VALUE OF INTEREST RECEIVABLE ON LOANS OUTSTANDING OF RS.1,04,24,675/- IN THE NAME OF JAYPEE SINGAPORE PTE LTD. IS NOT SUSTAINABLE, HENCE ORDERED TO BE DELETED. SO, GROUNDS NO.10 TO 13 ARE DETERMINED IN FAVOUR OF THE ASSESSEE. 26. RESULTANTLY, THE APPEAL FILED BY THE ASSESSEE I S PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 17 TH DAY OF JANUARY, 2020. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 17 TH DAY OF JANUARY, 2020. TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-30, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.