DCIT 7(2), MUMBAI V. SOLVAY SPECIALITIES INDIA P. LTD, MUMBAI

ITA 1702/MUM/2014

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2705 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2015
• Appeal Filed By: Department
• Bench Allotted: K
• Next Hearing Date: 12-11-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 12-03-2014
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: HEMAN CHANDURIYA
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Additional evidence; Wholly owned subsidiary; Fair market value; Notional interest; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI LALIT KUMAR, JUDICIAL MEMBER I.T.A. NO. 1702/M/2014 (AY:2009 - 2010 ) I.T.A. NO. 630/M/2015 (AY:2010 - 2011 ) C.O.104/M/2015 (ARISING OUT OF I.T.A. NO. 1702/M/2014 (AY:2009 - 2010 ) C.O. NO.41/M/2015 (ARISING OUT OF I.T.A. NO. 630/M/2015 (AY:2010 - 2011 ) M/S. SOLVAY SPECIALITIES INDIA PRIVATE LIMITED, PLOT NO.3526/27, GIDC ESTATE, PANOLI - 394116, DISTRING, BHARUCH (GUJA RAT). / VS. DCIT - 7(2), 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. ./ PAN : AAJCS0613F ( / APPELLANT) .. ( / RESPONDENT ) I.T.A. NO. 1853/M/2014 (AY:2009 - 2010 ) I.T.A. NO. 425/M/2015 (AY:2010 - 2011 ) A CIT - 7(2), 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. / VS. M/S. SOLVAY SPECIALITIES INDIA PRIVATE LIMITED, PLOT NO.3526/27, GIDC ESTATE, PANOLI - 394116, DISTRING, BHARUCH (GUJARAT). ./ PAN : AAJCS0613F ( / APPELLANT) .. ( / RESPONDENT ) / ASSESSEE BY : SHRI M.P. LOHIA & SHRI HEMAN CHANDURIYA / REVENUE BY : SHRI N.K. CHAND CIT, DR / DATE OF HEARING : 31.8 .2015 / DATE OF PRONOUNCEMENT : 4.11 .2015 / O R D E R PER D. KARUNAKARA RAO, AM: THERE ARE SIX APPEALS UNDER CONSIDERATION INVOLVING THE ASSESSMENT YEARS 2009 - 10 AND 2010 - 2011. OUT OF THESE APPEALS, 2 APPEALS & 2 CROSS OBJECTIONS ARE FILED BY THE ASSESSEE AND THE OTHER 2 APPEALS ARE FILED BY THE REVENUE. SINCE, THE ISSUES RAISED IN THESE APPEALS ARE EITHER IDENTICAL OR INTER - CONNECTED, THEREFORE, FOR 2 THE SAKE OF CONVENIENCE, THEY ARE CLUBBED, HEARD COMBINEDLY A ND DISPOSED OF IN THIS CONSOLIDATED ORDER. I. APPEALS FOR THE AY 2009 - 2010 2. THERE ARE THREE APPEALS UNDER CONSIDERATION FOR THIS AY 2009 - 2010. APPEAL ITA NO.1853/M/2014 IS FILED BY THE ASSESSEE; APPEAL ITA NO. 1702/M/2014 IS FILED BY THE REVENUE AND C.O.NO.104/M/2015 AROSE OUT OF APPEAL ITA NO.1853/M/2014. APPEAL WISE ADJUDICATION IS GIVEN IN THE FOLLOWING PARAGRAPHS OF THIS ORDER. ITA NO.1853/M/2014 (BY ASSESSEE) 3. THIS APPEAL FILED BY THE ASSESSEE ON 18.3.2014 IS AGAINST THE ORDER OF THE DRP - II, MUMBAI READ WITH ORDER OF THE AO / TPO. IN THIS APPEAL, ASSESSEE RAISED 14 GROUNDS IN TOTO. AT THE OUTSET, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE SAID GR OUNDS AND MENTIONED THAT GROUND NOS. 1 AND 2 ARE GENERAL IN NATURE. ON HEARING BOTH THE PARTIES IN THIS REGARD, THE SAID GROUND NOS. 1 AND 2 ARE DISMISSED AS GENERAL . FURTHER, BRINGING OUR ATTENTION TO GROUND NOS. 4 TO 6, LD COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE SAID GROUNDS ARE NOT PRESSED. AFTER HEARING THE LD DR, THE SAID GROUNDS NOS. 4, 5 AND 6 ARE DISMISSED AS NOT PRESSED . FURTHER, LD COUNSEL FOR THE ASSESSEE ALSO MENTIONED THAT GROUND NO.10 IS REQUIRED TO BE DISMISSED AS INFRUCTUOUS IN VIEW OF THE AMENDMENT TO THE LAW. ACCORDINGLY, AFTER HEARING THE LD DR IN THIS REGARD, THE SAID GROUND NO.10 IS DISMISSED AS INFRUCTUOUS . BRINGING OUR ATTENTION TO GROUND NOS. 12 TO 14, LD COUNSEL FOR THE ASSESSEE MENTIONED THAT THEY ARE CONSIDERING THEIR CON SEQUENTIAL NATURE, THEY ARE REQUIRED TO BE DISMISSED AS CONSEQUENTIAL. WE ACCEPT THE ARGUMENT OF THE LD COUNSEL. THUS, WHAT IS LEFT FOR ADJUDICATION RELATES TO THE ISSUES RAISED IN GROUND NOS. 3, 7, 8, 9 AND 11 AND THE SAME READ AS UNDER: 3. THE LD AO / TPO / LD DRP HAS ERRED I N REJECTING THE SEGMENTAL APPROACH ADOPTED BY THE ASSESSEE AND ADOPTING COMBINED APPROACH FOR THE PURPOSE OF BENCHMARKING THE TRANSACTION OF EXPORT OF FINISHED GOODS. 7. THE LD AO / TPO / LD DRP HAS ERRED IN REJECTING THE ECONOMIC ADJUSTMENT ON ACCOUNT OF HIGHER DEPRECIATION COST CLAIMED BY THE ASSESSEE IN ACCORDANCE WITH RULE 10B(1)(E)(III) OF THE IT RULES, 1962. 8. THE LD AO / TPO / LD DRP HAS ERRED IN REJECTING THE PLEA OF THE ASSESSEE TO COMPARE THE PROFITABILITY OF THE ASSESSEE AND COMPARABLES AT EBDITA LEVEL. 3 9. THE LD AO / TPO / LD DRP HAS ERRED IN REJECTING THE ECONOMIC ADJUSTMENT ON ACCOUNT OF UNDERUTILIZATION OF CAPACITY CLAIMED BY THE ASSESSEE IN ACCORDANCE WITH RULE 10B(1)(E)(III) OF THE IT RULES, 1962. 11. THE LD AO / TP O / LD DRP HAS ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT AT ENTITY LEVEL AND NOT CONFINING ONLY TO INTERNATIONAL TRANSACTIONS WITH AE. 4. BEFORE US, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO A LETTER DATED 24.8.2015 AND SUBMITTED THAT THE LETTER CONTAINS ENCLOSURES VIZ, A CERTIFICATE BY THE CHARTERED ACCOUNTANTS OF O R MALOO & CO AND A SHEET CONTAINING SEGMENTAL PROFIT & LOSS ACCO UNT FOR THE AY 2008 - 2009 AND MENTIONED THE SAME CONSTITUTES AN ADDITIONAL EVIDENCE. HE FURTHER SUBMITTED THAT THESE ARE THE AUDITORS CERTIFICATES DATED 24.2.2015, WHICH WERE NOT AVAILABLE AT THE RELEVANT POINT OF TIME FOR SUBMISSION BEFORE THE AO / DRP / CIT (A). ELABORATING THAT ISSUE, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO WANTED SEGMENTAL PROFIT & LOSS DULY AUDITED BY THE CAS, WHEREAS THE ASSESSEE COULD ONLY SUBMIT THE CERTIFIED PROFIT & LOSS ACCOUNT CONTAINING SEGMENTAL REFERENCE WHICH IS DULY APPROVED BY THE MANAGEMENT OF THE COMPANY. OTHERWISE, ASSESSEE HAS THREE SEGMENTS VIZ., (I) MANUFACTURING OF SPECIALITY CHEMICALS; (II) TRADING AND (III) INDENTING / AGENCY SERVICES. BRINGING OUR ATTENTION TO THE PAGE 2 OF THE ORDER OF THE TPO, DATE D 30.1.2013, LD COUNSEL FOR THE ASSESSEE ARGUED THAT THE TPO ERRONEOUSLY INVOKED THE PROVISIONS OF AS - 17 AND CONCLUDED THAT THE SEGMENTAL ACCOUNTS ARE REQUIRED TO BE SHOWN IN THE TP STUDIES. FURTHER, LD COUNSEL FOR THE ASSESSEE READ OUT THE SAID AS - 17 AND SUBMITTED THAT THE SAID REQUIREMENT IS NOT APPLICABLE WHEN THE TURNOVER OF A SEGMENT IS LESS THAN 10% OF THE GROSS TURNOVER. FURTHER, NOTWITHSTANDING THE INAPPLICABILITY OF THE SAID CONDITION IN MATTERS OF DISCLOSURE OF THE SEGMENTAL ACCOUNT, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS PER THE REQUIREMENT OF THE TPO, DULY AUDITED SEGMENTAL DATA IS NOW SUBMITTED. IN THIS REGARD, HE PRAYED FOR ADMITTING THE SAME AND REMANDING THE ISSUE TO THE FILE OF THE TPO / AO FOR A FRESH LOOKS INTO THE WHOLE ISSUE AN D TO SEE WHETHER THE TP STUDIES OF THE ASSESSEE SHOULD BE EXCLUDED IN DATA WITHOUT ANY DISTURBANCE. HE, HOWEVER, MENTIONED THAT IN THE CASE OF TECHNOPLAST / TECHTRIP IT WAS HELD THAT THERE IS NO REQUIREMENT OF AUDITED SEGMENTAL DETAILS AND ALSO CITED VARI OUS DECISIONS IN SUPPORT OF THE SAID PROPOSITION. FURTHER, REFERRING TO THE TP ADJUSTMENTS QUA THE NOTIONAL INTEREST ON THE INVESTMENT IN EQUITY SHARES, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS PART OF THE ISSUE IS ALSO REQUIRED TO BE 4 DELETED CONSI DERING THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF SHELL INDIA MARKETS P. LTD VS. ACIT [2014] 369 ITR 516 (BOM). 5. IN RESPONSE, LD DR FOR THE REVENUE VEHEMENTLY ARGUED STATING THAT THE ASSESSEE FAILED TO SUBMIT THE SEGMENTAL DETAILS AT THE FIRST INSTANCE BEFORE THE AO / TPO AND THE DRP. FURTHER, HE MENTIONED THAT IF THESE DOCUMENTS ARE ADMITTED BY THE TRIBUNAL, THEY ARE REQUIRED TO BE REMANDED TO THE FILE OF THE AO FOR FRESH ADJUDICATION INTO THE ISSUE. FURTHER ALSO, LD DR MENTIONED THAT WHILE REMANDING, ALL THE ISSUES SHOULD BE KEPT OPEN. 6. WE HAVE HEARD BOTH THE PARTIES ON THE PRELIMINARY ISSUE RELATING TO THE ADMITTING OF ADDITIONAL EVIDENCE FILED BY THE LD COUNSEL FOR THE ASSESSEE BEFORE US. IT IS AN ADMITTED FACT THAT THE AUDITED SEGMENT AL FINANCIAL STATEMENTS (P & L ACCOUNT) ARE NOT AVAILABLE TO THE AO / TPO AT THE RELEVANT POINT OF TIME. WE ALSO FIND UNDER THE HEAD TPO COMMENTS, THE TPO HEAVILY RELIED ON THE ASSESSEES FAILURE TO FURNISH THE SAID AUDITED SEGMENTAL PROFIT AND LOSS ACC OUNTS AND ALSO ASSESSEES FAILURE TO DISCHARGE ITS ONUS IN THIS REGARD. WHILE REJECTING THE TP STUDY REPORTS OF THE ASSESSEE, TPO RESORTED TO APPLY TNMM METHOD FOR TAKING ENTITY LEVEL PROFITS. CONSIDERING THE ABOVE DEFICIENCIES ON PART OF THE ASSESSEE DU RING THE ASSESSMENT PROCEEDINGS, WE ARE OF THE OPINION THAT THE DOCUMENTS PRESENTLY FILED BEFORE US CONSTITUTE ADDITIONAL EVIDENCE AND THEY WILL GO INTO THE ROOT OF THE MATTER RELATING TO ACCEPTABILITY OR OTHERWISE TP STUDY REPORTS. THEREFORE, WE FIND IT VERY APPROPRIATE TO ADMIT THE SAME . CONSIDERING THE PRINCIPLES OF NATURAL JUSTICE, WE ARE OF THE OPINION THAT THESE EVIDENCE SHOULD BE REMANDED TO THE FILE OF THE AO / TPO FOR ADMITTING AND CONSIDERING THE SAME DURING THEIR DE NOVO EXAMINATION INTO THE ISSUES RAISED IN THE ASSESSMENT. ACCORDINGLY, THE AO IS DIRECTED TO CONSIDER ALL THE ASSESSEES ARGUMENTS AND OTHER EVIDENCES, IF ANY, TO BE FURNISHED BEFORE THEM IN ACCORDANCE WITH LAW. ACCORDINGLY, THE PRELIMINARY ISSUE IS DECIDED IN FAVOUR OF THE ASSE SSEE. 7. REGARDING THE OTHER ISSUES RAISED IN GROUND NOS.3, 4, 8, 9 AND 11, WE FIND THAT THESE ISSUES CANNOT BE ADJUDICATED AT THIS STAGE CONSIDERING OUR FINDING / DECISION ON THE ISSUE OF ADDITIONAL EVIDENCES DESCRIBED IN DETAILS IN THE ABOVE PARAS OF THI S ORDER. ACCORDINGLY, THESE ISSUES ARE ALSO REMANDED FOR FRESH CONSIDERATION AND DE NOVO DECISION. AO IS DIRECTED TO ADJUDICATE THESE ISSUES CONSIDERING ALL THE 5 DECISIONS AVAILABLE ON THE SUBJECT AFTER GRANTING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . ITA NO.1702/M/2014 (BY REVENUE) 9. THIS APPEAL FILED BY THE REVENUE ON 12.3.2014 IS AGAINST THE DIRECTIONS OF THE DRP - II, MUMBAI DATED 28.11.2013. IN THIS APPEAL, REVENUE RAISED THE FOLLOWING GROUNDS WHICH READ AS UNDER: I) THE LD DRP HAS ERRED ON FACTS AND IN LAW IN DELETING THE TRANSFER PRICING ADJUSTMENT OF RS. 163,96,23,293/ - MADE ON ACCOUNT OF INTERNATIONAL TRANSACTION OF ISSUE OF EQUITY SHAR ES (RS. 144,55,27,000/ - ) AND RS. 19,40,96,293/ - ON ACCOUNT OF NOTIONAL INTEREST WITHOUT PROPERLY APPRECIATING THE FACTUAL AND LEGAL MATRIX OF THE CASE AS CLEARLY BROUGHT OUT BY THE TPO AND AO IN THE DRAFT ASSESSMENT ORDER. II) THE LD DRP HAS ERRED ON FACTS AND IN LAW IN JUSTIFYING EBIDTA GROWTH OF 7% WITHOUT ANY BASIS OF ASSUMPTION INSTEAD OF 11.25% AS COMPUTED BY TPO ON SCIENTIFIC BASIS FOR FY 2012 - 2013. III) THE LD DRP HAS ERRED ON FACTS AND IN LAW IN JUSTIFYING ON RELYING UPON EXCERPTS OF ECONOMICS SURV EY FILED BY THE ASSESSEE FOR AY 2008 - 2009 AS THE SAME WERE NOT PRESENTED BEFORE TPO. IV) THE LD DRP HAS ERRED ON FACTS AND IN LAW IN DELETING THE ADDITION ON ACCOUNT OF NOTIONAL INTEREST BY HOLDING AS THE CONSEQUENTIAL EFFECT OF DELETING THE ADJUSTMENT ON SHARE VALUATION. V) THE DIRECTION OF DRP - II, MUMBAI IS CONTRARY IN LAW AND ON FACTS AND DESERVES TO BE SET ASIDE 10. AT THE OUTSET, LD REPRESENTATIVES OF BOTH THE PARTIES MENTIONED THAT THE ISSUES RAISED IN GROUND NO.(I) RELATES TO THE APPLICABILITY OF THE PRINCIPLES OF ARMS LENGTH TO A TRANSACTION RELATING TO THE ISSUANCE OF EQUITY SHARES ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRIS ES (AES). REFERRING TO THE GROUND NOS. (II) TO (V) OF THE INSTANT APPEAL , B OTH THE REPRESENTATIVES MENTIONED THAT THESE ISSUES RELATE TO THE VALUATION OF SUCH EQUITY SHARES FOR THE PURPOSE OF TP STUDIES. REFERRING TO THE FIRST ISSUE RELATING TO THE APPLICABILITY OF THE TP PROVISIONS TO THE INTERNATIONAL TRANSACTIONS INVOLVING WI TH AES EQUITY SHARES, LD REPRESENTATIVES OF BOTH THE PARTIES MENTIONED THAT THIS ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY VARIOUS DECISIONS IN THE CASE OF VODAFONE VS. UNION OF INDIA (368 ITR 1), DATED 10.10.2014. HE ALSO REFERRED A CIRCULAR OF C BDT, INSTRUCTION NO.2 OF 2013, COPY OF WHICH IS PLACED AT PAGE NO.225 OF THE PAPER BOOK, WHICH CONTAINS THE ADVICE TO THE AO TO ACCEPT THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE (SUPRA) WITHOUT 6 FURTHER LITIGATION IN THE MATTER. F URTHER, ON HEARING BOTH THE PARTIES, WE FIND THIS ISSUE NOW STANDS FINALIZED IN FAVOUR OF THE ASSESSEE AND SUCH TRANSACTIONS ARE NOW OUTSIDE THE SCOPE OF TP PROVISIONS AS SUCH TRANSACTIONS FALL IN CAPITAL FIELD. WE HAVE ALSO REFERRED TO AN ORDER OF THE ITAT, MUMBAI WHEREIN ONE OF US (A) IS A PARTY TO THE ORDER IN THE CASE OF M/S. ANGLO - EASTERN SHIP MANAGEMENT (INDIA) PRIVATE LIMITED IN ITA NO.1824/M/2014 (AY 2009 - 2010), DATED 25.2.2015. ON PERUSAL OF THE SAID ORDER, WE FIND PARAS 5 AND 6 OF THE SAID TRI BUNALS ORDER (SUPRA) ARE RELEVANT IN THIS REGARD AND FOR THE SAKE OF COMPLETENESS OF THIS ORDER THE SAME ARE EXTRACTED AS UNDER: 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE CITED DECISION OF THE TRIB UNAL IN THE CASE OF MSC CREWING SERVICES P LTD (SUPRA) AND ALSO THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES (P) LTD (SUPRA). AFTER HEARING LD REPRESENTATIVES OF BOTH THE PARTIES AND ON PERUSAL OF THE SAID DECISION OF THE TRIBUNAL IN THE CASE OF MSC CREWING SERVICES P LTD (SUPRA), WE FIND PARAS 2 AND 3 OF THE TRIBUNALS ARE RELEVANT IN THIS REGARD. CONSIDERING THE SIGNIFICANCE OF THE SAID PARAS 2 AND 3 OF THE TRIBUNALS ORDER (SUPRA) AND FOR THE SAKE OF COMPLETENESS OF THIS ORDER, THE SAID PARAS ARE EXTRACTED AS UNDER: 2.EFFECTIVE GROUND OF APPEAL IS ABOUT TRANSFER PRICING ADJUSTMENT OF RS 122.62 CRORES.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT 1,00,000 SHARES OF THE FACE VALUE OF RS. 10 EACH WERE ISSUED BY THE ASSESSEE TO MSC SHIP MANAGEMENT (HONG KONG) LTD. OF WHICH THE ASSESSEE WAS A WHOLLY OWNED SUBSIDIARY,THAT THE ASSESSEE HAD ISSUED IN THREE TRANCHES TOTALING TO 13,37, 553 SHARES AND REALISED RS.3,67,59,192/ - (RS.1,33,75,530/ - AS SHARE CAPITAL AND RS .2,33,83,662/ - AS PREMIUM).THE AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER(TPO) WHO HELD THAT A 3 ITA NOS.1666&1739/M/2014 MSC CREWING SERVICES P. LTD. PREMIUM OF RS.1187.0005 PER SHARE(AGGREGATING RS.1,58,76,76,118)OUGHT TO HAVE BEEN CHARGED AND P ROPOSED AN ADDITION OF RS.1,56,42,92,456/ - BEING THE DIFFERENCE BETWEEN WHAT SHOULD HAVE BEEN CHARGED ACCORDING TO HIM AS A PREMIUM. PREMIUM ACTUALLY CHARGED BY THE ASSESSEE, AMOUNTING TO RS.2.33 CRORES WAS TREATED AS A RECEIPT ON CAPITAL ACCOUNT. THE TPO ALSO TOOK THE VIEW THAT THE PREMIUM ALLEGEDLY UNDER CHARGED WAS A RECEIVABLE ARISING OUT OF THE INTERNATIONAL TRANSACTION OF ISSUE OF SHARES BY THE ASSSSEE TO ITS AE AND PROPOSED A FURTHER ADDITION OF RS.17, 52,89,368/ - BEING INTEREST @ 15.55%.AGAINST THE PROPOSED ADDITION MATTER WAS REFERRED TO DRP BY THE ASSESSEE.IT WAS HELD BY THE DRP THAT THE CORRECT AMOUNT WHICH OUGHT TO HAVE BEEN CHARGED AS PREMIUM WAS RS.876.75 PER SHARE.THE DRP ALSO HELD THAT THE RATE OF INTEREST SHOULD BE ARRIVED AT BY ADDING 3% T O THE RETURN OBTAINED BY THE ASSESSEE FROM A FIXED DEPOSIT PLACED WITH THE BANK AGAINST BANK GUARANTEE OBTAINED BY IT. AS A RESULT, AS AGAINST THE TOT AL ADJUSTMENT OF RS.1,73,95,81,824(1,56,42,92,456+17,52,89,368)INITIALLY PROPOSED BY THE TPO,THE AO FINALL Y SUSTAINED ADDITION OF RS.1,22,62,39,100/ - (RS.114,93,15,931+7,69, 23,169/ - ),AS PER THE DIRECTIONS OF THE DRP. 3.AT THE TIME OF HEARING BEFORE US, THE AUTHORISED REPRESENTATIVE OF THE ASSESSEE STATED THAT THE ISSUE OF SHARE PREMIUM HAS BEEN DECIDED BY THE HONBLE BOMBAY COURT IN THE CASE OF VODAFONE INDIA SERVICES PRIVATE LIMITED(VISPL)IN WP.871OF 2014 ON 23.07.2014.DEPARTMENT - AL REPRESENTATIVE (DR)FAIRLY CONCEDED THAT THE ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE BY THE SAID JUDGMENT OF THE HONBLE JUR ISDICTIONAL HIGH COURT. 7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT IDENTICAL ISSUE HAD ARISEN IN THE CASE OF VISPL(SUPRA).BRIEFLY STATED IN THE CASE OF VISPL IT WAS FOUND THAT IT WAS A WHOLLY OWNED SUBSIDIARY OF A NON - RESIDENT COMPANY, VODAFONE TELESERVICES (INDIA)HOLDINGS LIMITED(VTIHL). IT REQUIRED FUNDS FOR ITS TELECOMMUNICATION SERVICES PROJECT IN INDIA FROM IT HOLDING COMPANY I.E. FROM VTIHL DURING THE AY.2009 - 10.ON 21.08. 2008,THE ASSESSEE ISSUED 2,89,224 EQU ITY SHARES OF THE FACE VALUE OF RS.10/ - EACH ON A PREMIUM OF RS.8,509/ - PER SHARE TO VTIHL. THIS RESULTED IN THE ASSESSEE RECEIVING A TOTAL CONSIDERATION OF RS.246.38 CRORES FROM THE HOLDING COMPANY ON ISSUE OF SHARES BETWEEN AUGUST AND NOVEMBER 2008.THE F AIR MARKET VALUE OF THE ISSUE OF EQUITY SHARES AT RS.8,519/ - PER SHARE WAS DETERMINED BY IT IN ACCORDANCE WITH THE METHODOLOGY PRESCRIBED BY THE GOVERNMENT OF INDIA. ACCORDING TO THE AO AND TRANSFER PRICING OFFICER (TPO), THE ASSESSEE OUGHT TO HAVE VALUED E ACH EQUITY SHARE AT RS.53,775/ - AS AGAINST THE AFORESAID VALUATION DONE UNDER THE CAPITAL ISSUES (CONTROL) ACT, 1947 AT RS. 8,519/ - AND ON THAT BASIS SHORTFALL IN PREMIUM TO THE EXTENT OF RS.45,256/ - PER SHARE RESULTED INTO TOTAL SHORTFALL OF RS. 1308.91 C RORES. BOTH THE AO AND THE TPO ON APPLICATION OF THE TRANSFER PRICING PROVISIONS OF THE ACT HELD THAT THIS AMOUNT OF RS.1308.91 CRORES WAS INCOME. AS A CONSEQUENCE OF THE ABOVE, SAID AMOUNT OF RS.1308.91 CRORES WAS REQUIRED TO BE TREATED AS DEEMED LOAN GIV EN BY THE ASSESSEE TO VTIHL AND PERIODICAL INTEREST THEREON WAS TO BE CHARGED TO TAX AS INTEREST INCOME OF RS.88.35 CRORES IN THE AY.2009 - 10.ACCORDING TO THE ASSESSEE, THE ACT DID NOT TAX INFLOW OF CAPITAL INTO THE COUNTRY NOR DID IT CREATE ANY LEGAL FICTI ON TO TREAT SUCH ALLEGED SHORTFALL IN CAPITAL RECEIPT ON ISSUE OF EQUITY SHARES BY AN INDIAN COMPANY TO ITS NON - RESIDENT HOLDING COMPANY, AS INCOME. IT WAS ALSO ARGUED THAT THERE COULD BE NO QUESTION OF TREATING THE ALLEGED SHORTFALL AS A DEEMED LOAN OR TA XING THE ALLEGED DEEMED INTEREST ON A DEEMED LOAN. IT WAS CONTENDED THAT THAT PROVISIONS OF CHAPTER X HAD NO APPLICATION IN CASES WHERE NO INCOME WAS ARISING FROM AN INTERNATIONAL TRANSACTION, THAT THE ISSUE OF EQUITY SHARES BY THE ASSESSEE TO VTIHL DID NO T GIVE RISE TO ANY INCOME FROM INTERNATIONAL TRANSACTION, THAT ARISING OF INCOME ON ACCOUNT OF INTERNATIONAL TRANSACTION WAS A CONDITION PRECEDENT FOR APPLICATION OF CHAPTER X OF THE ACT. DECIDING THE WRIT PETITION,THE HONBLE COURT HELD AS FOLLOW: 24.A PLAIN READING OF SECTION 92(1) OF THE ACT VERY CLEARLY BRINGS OUT THAT INCOME ARISING FROM A INTERNATIONAL TRANSACTION IS A CONDITION PRECEDENT FOR APPLICATION OF CHAPTER X OF THE ACT. THIS HAS ALREADY BEEN SO HELD BY THE ORDER DATED 29 NOVEMBER 2013 OF TH IS COURT IN VODAFONE - III. WE 4 ITA NOS.1666&1739/M/2014 MSC CREWING SERVICES P. LTD. COULD HAVE STRAIGHT WAY HELD THAT THE ISSUE OF EXAMINING THE JURISDICTION TO APPLY CHAPTER X OF THE ACT STANDS CONCLUDED BY THE ORDER IN VODAFONE - III. 25.BUT WE HAVE EXA MINED THE ISSUE AFRESH. THE WORD INCOME FOR THE PURPOSE OF THE ACT HAS A WELL UNDERSTOOD MEANING 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 NORMAL 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 INCLUDING THE PREMIUM IS UNDOUBTEDLY ON CAPITAL ACCOUNT. SHARE 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 BOU GHT 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 APPLICAT ION OF ALP. THEREFORE, ABSENT EXPRESS LEGISLATION, NO AMOUNT RECEIVED, ACCRUED OR ARISING ON CAPITAL ACCOUNT TRANSACTION CAN BE SUBJECTED TO TAX AS INCOME. THIS IS SETTLED BY THE DECISION OF THIS COURT IN CADELL WEAVING MILL CO. VS. CIT 249 ITR 265 WAS UPH ELD BY THE APEX COURT IN CIT VS. D.P. SANDU BROS. CHEMBER (P) LTD. 273 ITR 1. THIS COURT HAS IN CADELL WEAVING MILLS CO. (SUPRA) INTER ALIA, OBSERVED AS UNDER: - ' IT IS WELL SETTLED THAT ALL RECEIPTS ARE NOT TAXABLE UNDER THE INCOME TAX ACT. SECTION 2(24) DEFINES 'INCOME'. IT IS NO DOUBT AN INCLUSIVE DEFINITION. HOWEVER, A CAPITAL RECEIPT IS NOT INCOME UNDER SECTION 2(24) UNLESS IT IS CHARGABLE TO TAX AS CAPITAL GAINS UNDER SECTION 45. IT IS FOR THIS REASON THAT UNDER SECTION 2(24)(VI) THAT THE LEGISLATURE HAS EXPRESSLY STATED, INTER ALIA, THAT INCOME SHALL INCLUDE 8 ANY CAPITAL GAINS CHARGEABLE UNDER SECTION 45. UNDER SECTION 2(24)(VI), THE LEGISLATURE HAS NOT INCLUDED ALL CAPITAL GAINS AS INCOME. IT IS ONLY CAPITAL GAINS CHARGEABLE UNDER SECTION 45 WHICH HAS BEEN TREATED AS INCOME UNDER SECTION 2(24). IF THE ARGUMENT OF THE DEPARTMENT IS ACCEPTED THEN ALL CAPITAL GAINS WHETHER CHARGEABLE UNDER SECTION 45 OF NOT, WOULD COME WITHIN THE DEFINITION OF THE WORD 'INCOME' UNDER SECTION 2(24). FURTHER, UNDER SECTION 2(24)(VI) THE LEGISLATURE HAS NOT STATED THAT 'ANY CAPITAL GAINS' WILL BE COVERED UNDER THE WORD INCOME. ON THE CONTRARY, THE LEGISLATURE HAS ADVISEDLY STATED THAT ONLY CAPITAL GAINS WHICH ARE CHARGEABLE UNDER SECTION 45 OF THE ACT COULD BE TREATED AS INCO ME. IN OTHER WORDS, CAPITAL GAINS NOT CHARGEABLE TO TAX UNDER SECTION 45 FALL OUTSIDE THE DEFINITION OF THE WORD 'INCOME' IN SECTION 2(24) OF THE ACT. IT IS TRUE THAT SECTION 2(24) OF THE ACT IS AN INCLUSIVE DEFINITION HOWEVER, IN THIS CASE, WE ARE REQUIRE D TO ASCERTAIN THE SCOPE OF SECTION 2(24)(VI) AND FOR THAT PURPOSE WE HAVE TO READ THE SUB SECTION STRICTLY. WE CANNOT WIDEN THE SCOPE OF SUB SECTION BY SAYING THAT THE DEFINITION AS A WHOLE IS INCLUSIVE AND NOT EXHAUSTIVE. IN THE PRESENT CASE, THE WORDS ' CHARGEABLE UNDER SECTION 45' ARE VERY IMPORTANT. THEY ARE NOT BEING READ BY THE DEPARTMENT. THESE WORDS CANNOT BE OMITTED. IN FACT, THE PRIOR HISTORY SHOWS THAT CAPITAL GAINS WERE NOT CHARGEABLE BEFORE 1946. THEY WERE NOT CHARGEABLE BETWEEN 1948 AND 1956. THEREFORE, WHENEVER AN AMOUNT WHICH IS OTHERWISE A CAPITAL RECEIPT IS TO BE CHARGED TO TAX, SECTION 2(24) SPECIFICALLY SO PROVIDES.' IN VIEW OF THE ABOVE, WE FIND CONSIDERABLE SUBSTANCE IN THE ASSESSEE'S CASE THAT NEITHER THE CAPITAL RECEIPTS RECEIVED BY THE ASSESSEE ON ISSUE OF EQUITY SHARES TO ITS HOLDING COMPANY, A NON - RESIDENT ENTITY, NOR THE ALLEGED SHORT - FALL BETWEEN THE SO CALLED FAIR MARKET PRICE OF ITS EQUITY SHARES AND THE ISSUE PRICE OF THE EQUITY SHARES CAN BE CONSIDERED AS INCOME WITHIN THE MEANING OF THE EXPRESSION AS DEFINED UNDER THE ACT.(EMPHASIS BY US.) WE FIND THAT THE FACTS OF THE CASE UNDER CONSIDERATION ARE SIMILAR TO THE FACT OF VIHPL. HONBLE BOMBAY HIGH COURT HAS HELD THAT THE CAPITAL RECEIPTS RECEIVED BY THE ASSESSEE ON ISSUE OF EQUITY SHARES TO ITS HOLDING COMPANY CANNOT BE CONSIDERED INCOME. RES PECTFULLY, FOLLOWING THE ABOVE JUDGMENT, WE HOLD THAT ADJUSTMENT MADE BY THE AO ON ACCOUNT OF SHARE PREMIUM AND INTEREST CHARGED ON ACCOUNT OF UNDER CHARGED PREMIUM AMOUNT CANNOT BE ENDORSED. WE ALSO HOLD THAT TP PROVISIONS ARE NOT APPLICABLE TO SUCH TR ANSACTION. EFFECTIVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. 5 ITA NOS.1666&1739/M/2014 MSC CREWING SERVICES P. LTD. AS THE GROUND OF APPEAL TAKEN BY THE AO IS CONSEQUENTIAL TO THE GROUND RAISED BY THE ASSESSEE AND WE HAVE ALREADY DECIDED THE APPEAL OF THE ASSESSEE IN ITS FAVOUR,SO,THE GROUND OF APPEAL FILED BY THE AO IS DECIDED AGAINST HIM. 6. CONSIDERING THE ABOVE AS WELL AS THE UNDISPUTED ISSUE OF THE CAPITAL NATURE OF THE TRANSACTION IN QUESTION, WE ARE OF THE OPINION THAT THE ADJUSTMENTS MADE BY T HE TPO ARE OUTSIDE THE SCOPE OF THE TP PROVISIONS . WE ACCORDINGLY ALLOW THE ISSUE RAISED BY THE ASSESSEE IN ITS FAVOUR. THUS, THE GROUNDS RAISED BY THE ASSESSE E ARE ALLOWED. 11. CONSIDERING THE ABOVE SETTLED NATURE OF THE ISSUE, WE ARE OF THE OPINION THAT THE ORDER OF THE DRP IS ACCEPTABLE FOR THE ABOVE SAID REASONS ALSO. ACCORDINGLY, GROUND NO. (I) RAISED BY THE REVENUE IS DISMISSED . 12. REGARDING THE SECOND ISSUE RAISED ON THE V ALUATION OF SHARES, WE FIND THE ADJUDICATION OF THIS ISSUE BECOMES AN ACADEMIC EXERCISE CONSIDERING OUR DECISION ON 9 GROUND NO.(I) OF THE REVENUE. ACCORDINGLY, GROUND NOS. (II) TO (V) OF THE REVENUES APPEAL ARE DISMISSED AS ACADEMIC . 13. IN THE RESULT, AP PEAL OF THE REVENUE IS DISMISSED. C.O. NO.104/M/2015 (BY ASSESSEE) (ARISING OUT OF ITA NO.1702/M/2014) 14. THIS CROSS OBJECTION (CO) RAISED BY THE ASSESSEE ON 16.7.2015 AROSE OUT OF THE REVENUES APPEAL ITA NO.1702/M/2014 FOR THE AY 2009 - 2010. 15. BEFORE US, AT THE OUTSET, LD REPRESENTATIVES OF BOTH THE PARTIES FAIRLY MENTIONED THAT THE PRESENT C.O. IS REQUIRED TO BE DISMISSED AS ACADEMIC AS THE ISSUE RAISED IN THIS CROSS OBJECTION IS ONLY TO STRENGTHEN THE DECISION OF THE DRP ON THE ISSUE RELATING TO THE SCOPE OF TP PROVISIONS QUA THE INVESTMENT IN THE EQUITY SHARES OF THE ASSESSEE IN THE AES. AS WE HAVE ALREADY APPROVED THE DECISION OF THE DRP AND DISMISSED THE GROUND NO.(I) RAISED BY THE REVENUE WHILE ADJUDICATING ITS APPEAL ITA NO.1702/M/2014 IN THE ABOVE PARAGRAPHS OF THIS ORDER, WE ARE OF THE OPINION THAT THE C.O. RAISED BY THE ASSESSEE SHOULD ALSO BE DISMISSED AS INFRUCTUOUS. ACCORDINGLY, THE CROSS OBJECTION RAISED BY THE ASSESSEE IS DISMISSED AS INFRUCTUOUS. 16. IN THE RESULT, ASSESSEES CROS S OBJECTION IS DISMISSED . I I. APPEALS FOR THE AY 2010 - 2011 17. THERE ARE THREE APPEALS UNDER CONSIDERATION FOR THE AY 2010 - 2011. APPEAL ITA NO.630/M/2015 IS FILED BY THE ASSESSEE; APPEAL ITA NO.425/M/2015 IS FILED BY THE REVENUE AND C.O.NO.41/M/2015 ARO SE OUT OF APPEAL ITA NO.425/M/2015. APPEAL WISE ADJUDICATION IS GIVEN IN THE FOLLOWING PARAGRAPHS OF THIS ORDER. ITA NO.630/M/2015 (BY ASSESSEE) 18. THIS APPEAL FILED BY THE ASSESSEE ON 29.01.2015 IS AGAINST THE DIRECTION OF THE DRP - IV, MUMBAI DATED 10.11 .2014. 19. AT THE OUTSET, LD COUNSEL FOR THE ASSESSEE DEMONSTRATED THAT THE ISSUES RAIED IN THIS APPEAL ARE IDENTICAL TO THAT OF THE ONES RAISED BY THE ASSESSEE FOR THE AY 2009 - 201 AND THE SIMILAR ADDITIONAL EVIDENCES CONTAINING SEGMENTAL PROFIT & LOSS ACC OUNT / FINANCIAL STATEMENTS ARE FILED FOR THE FIRST TIME BEFORE THE DRP. HOWEVER, 10 THE SAID DRP DID NOT ENTERTAIN THE SAME BY GIVING REASONING THAT THE SAME WERE NOT FILED BEFORE THE AO / TPO. HOWEVER, REFERRING TO THE TPO COMMENTS FOR REJECTION OF THE TP STUDIES OF THE ASSESSEE, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE STATED REASON IS IN THE ABSENCE OF AUDITED SEGMENTAL FINANCIAL STATEMENTS AND THE ASSESSEES FAILURE TO DISCHARGE ITS ONUS AND THE SAME IS A COMMON REASONING GIVEN BY THE LOWER AUTHORITIES FOR REJECTION OF THE TP STUDIES OF THE ASSESSEE. LD COUNSEL FOR THE ASSESSEE ALSO MENTIONED THAT, SINCE, THE ISSUES RAISED IN THE PRESENT APPEAL ARE IDENTICAL TO THAT OF THE ONES RAISED BY THE ASSESSEE IN ITS APPEAL ITA NO.1853/M/2014 FOR THE AY 2009 - 2010, CONSIDERING THE COMMONALITY OF THE GROUNDS, ALL THE GROUNDS RAISED IN THE PRESENT APPEAL SHOULD BE REMANDED TO THE FILE OF THE AO WITH A DIRECTION TO AO TO ADMIT THE SAID AUDITED SEGMENTAL PROFIT & LOSS ACCOUNTS AND ADJUDICATE THE ISSUE AFRE SH. 20. AFTER HEARING THE LD DR, WE ARE THE CONSIDERED OPINION THAT THE ISSUES RAISED IN THIS APPEAL SHOULD BE REMANDED , WITH IDENTICAL DIRECTIONS AS GIVEN ABOVE IN CONNECTION WITH THE ISSUE OF ADDITIONAL EVIDENCES / ADMITTING OF ADDITIONAL EVIDENCES FOR THE AY 2009 - 2010 , TO THE FILE OF THE AO / TPO. WE ORDER ACCORDINGLY. AO / TPO SHALL CONSIDER THE SAID AUDITED SEGMENTAL ACCOUNTS AND TAKEN A FRESH DECISION ON THE ISSUE IN ACCORDANCE WITH LAW. ACCORDINGLY, THE RELEVANT GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 21. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . ITA NO. 425/M/2015 (BY REVENUE) 22. THIS APPEAL FILED BY THE REVENUE ON 16.1.2015 IS AGAINST THE DIRECTIONS OF THE DRP - IV, MUMBAI DATED 10.11.2014. IN THIS APPEAL, REVENUE RAISED THE FOLLOWING GROUNDS WHICH READ AS UNDER: 1 ) THE LD DRP HAS ERRED ON FACTS AND IN LAW IN DELETING THE TRANSFER PRICING ADJUSTMENT OF RS. 16,98,49,423 / - MADE ON ACCOUNT OF NOTIONAL INTEREST ON DEEMED LOAN WITHOUT PROPERLY APPRECIATING THE FACTUAL AND LEGAL MATRIX OF THE CASE AS CLEARLY BROUGHT OUT BY THE TPO AND AO IN THE DRAFT ASSESSMENT ORDER. 2) THE DIRECTION OF DRP - IV, MUMBAI IS ORDER IN CONTRARY IN LAW AND ON FACTS AND DESERVES TO BE SET ASIDE. 23. THE ABOVE GROUNDS RAISED BY THE REVENUE ARE IDENTICAL TO THAT OF THE ONES RAISED FOR THE AY 2009 - 2 010 IN ITA NO.1702/M/2014 AND THE SAME ARE DISMISSED. CONSIDERING THE COMMONALITY OF THE ISSUES RAISED IN THE APPEAL UNDE R CONSIDERATION 11 AS WELL AS THE REVENUES APPEAL FOR THE AY 2009 - 2010, OUR DECISION GIVEN THEREIN SQUARELY APPLIES TO THE INSTANT APPEA L TOO. CONSIDERING THE SAME, APPEAL OF THE REVENUE IS DISMISSED. 24. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. C.O. NO. 41 /M/2015 (BY ASSESSEE) (ARISING OUT OF ITA NO. 425/M/2015 ) 25. THIS CROSS OBJECTION (CO) RAISED BY THE ASSESSEE ON 19.12.2015 AROSE OUT OF THE REVENUES APPEAL ITA NO.425/M/2015 FOR THE AY 2010 - 2011. 26. BEFORE US, AT THE OUTSET, LD REPRESENTATIVES OF BOTH THE PARTIES FAIRLY MENTIONED THAT THE PRESENT C.O. IS REQUIRED TO BE DISMISSED AS ACADEMIC AS THE ISSUE RAISED IN THIS CROSS OBJECTION IS ONLY TO STRENGTHEN THE DECISION OF THE DRP ON THE ISSUE RELATING TO THE SCOPE OF TP PROVISIONS QUA THE INVESTMENT IN THE EQUITY SHARES OF THE ASSESSEE IN THE AES. AS WE HAVE ALREADY APPROVED THE DECISION OF THE DRP AND DISMISSED THE REVENUES APPEAL ITA NO.425/M/2015 IN THE ABOVE PARAGRAPHS OF THIS ORDER, WE ARE OF THE OPINION THAT THE C.O. RAISED BY THE ASSESSEE SHOULD ALSO BE DISMISSED AS INFRUCTUOUS. ACCORDINGLY, THE CROSS OBJECTION RAISED BY THE ASSESSEE IS DISMISSED AS INFRUCTUOUS. 27. I N THE RESULT, ASSESSEES CROSS OBJECTION IS DISMISSED . 28. CONCLUSIVELY, TWO ASSESSEES APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES . TWO APPEALS OF THE REVENUE AS WELL AS THE TWO CROSS OBJECTIONS RAISED BY THE ASSESSEE ARE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT O N 4 T H N O V E M B E R , 2015. S D / - S D / - ( LALIT KUMAR ) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 4 . 1 1 .2015 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 12 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI