ANGLO -EASTERN SHIP MANAGEMENT (INDIA) P.LTD, MUMBAI V. DCIT 5(1), MUMBAI

ITA 1824/MUM/2014

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9403 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2015
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 11-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 14-03-2014
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA
• Assessee Lawyers: NIRAJ SHETH K K VED N A PATADE
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Fair market value; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ./I.T.A. NO.1824/M/2014 ( / ASSESSMENT YEAR: 2009 - 2010 ) M/S. ANGLO - EASTERN SHIP MANAGEMENT (INDIA) PRIVATE LIMITED, 303, LEELA BUSINESS PART, 3 RD FLR, ANDHERI - KURLA ROAD, MAROL, ANDHERI (E), MUMBAI - 400 059. / VS. DCIT 5(1), MUMBAI. ./ PAN : AAECA6185F ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI NIRAJ SHETH, K.K. VED, N.A. PATADE / RESPONDENT BY : SHRI S.D. SRIVASTAVA, CIT - DR / DATE OF HEARING : 11.2.2015 / DATE OF PRONOUNCEMENT : 25 .2.2015 / O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER/ DISPUTE RESOLUTION PANEL (DRP)/TPO FOR THE AY 2009 - 2010, WHO MADE UPWARD ADJUSTMENT AMOUNTING TO RS. 18,66,46,818/ - BY HO LDING THAT THE INTERNATIONAL TRANSACTIONS RELATING TO THE ISSUANCE OF EQUITY SHARES ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE) WERE NOT AT ARMS LENGTH. ALL THE GROUNDS RAISED IN THE APPEAL ARE ARGUMENTATIVE IN CONNECTION WITH THE ABOVE STATED ISSUE. 2. AT THE OUTSET, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SHIP MANAGEMENT AND OTHER RELATED SERVICES AND ITS AE AT HONG KONG NAMELY M/S. ANGRO - EASTERN AGENCIES (HK) L TD (AEHK). IN THE YEAR U NDER CONSIDERATION, ASSESSEE HAD AN INTERNATIONAL TRANSACTION WITH THE AE IN CONNECTION WITH THE ISSUE OF 25000 EQUITY SHARES TO THE AE. THE FACE VALUE OF THE SHARE IS RS. 10 EACH AND THE PREMIUM IS RS. 790/ - PER SHARE. THE TRANSF ER PRICING 2 OFFICER (TPO) ADJUSTED THE ABOVE PRICE AND THE ARMS LENGTH PRICE (ALP) OF THE PREMIUM SEGMENT IS DETERMINED AT RS. 9,163/ - PER SHARE. THEREFORE, THESE ADJUSTMENTS RESULTED IN ADDITION OF RS. 18,66,46,818/ - . 3. BEFORE US, AT THE VERY OUTSET, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS NO W STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES (P) LTD VS. UNION OF INDIA [2014] 368 ITR 1 (BOMBAY), DATED 10.10.2014 . HE ALSO MENTIONED THAT AN IDENTICAL ISSUE WAS DECIDED BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MSC CREWING SERVICES P LTD VS. DCIT VIDE ITA NO.1666/M/2014 (AY 2009 - 2010), DATED 11.12.2014. IN THIS REGARD, LD COUNSEL BROUGHT OUR ATTENTION TO PARA 2 TO END OF THE SAID ORDER OF THE TRIBUNAL DATED 11.12.2014 (SUPRA) AND SUBMITTED THAT THE SHARE PREMIUM AND THE IN TEREST CHARGE ON ACCOUNT OF UNDER CHARGED PREMIUM ACCOUNT CANNOT BE ADJUSTED BY VIRTUE OF THE TRANSFER PRICING (TP) PROVISIONS AS SUC H RECEIPTS CONSTITUTE CAPITAL RECEIPTS AND ARE NOT IN THE NATURE OF INCOME. 4. ON THE OTHER HAND, LD DR RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE CITE D DECISION OF THE TRIBUNAL 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 TH E 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 HA VE BEEN CHARGED AND PROPOSED AN ADDITION OF RS.1,56,42,92,456/ - BEING THE DIFFERENCE BETWEEN WHAT 3 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 CAPI TAL 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 ARRI VED AT BY ADDING 3% TO THE RETURN OBTAINED BY THE ASSESSEE FROM A FIXED DEPOSIT PLACED WITH THE BANK AGAINST BAN K 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)IN ITIALLY PROPOSED BY T HE TPO,THE AO FINALLY 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 JURISDICTIONAL HIGH COURT. 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 VISPLIT WAS FOUND THAT IT WAS A WHOLLY OWNE D 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 ISSU ED 2,89,224 EQUITY 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 NOVEM BER 2008.THE FAIR 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 EACH 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 CRORES.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 DEEM ED LOAN GIVEN 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 FICTION 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 L OAN OR TAXING 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 NOT GIVE RISE TO ANY INCOME FROM INTERNATIONAL TRANSACTION,THAT ARISING OF INCOME ON ACCOUNT 4 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 THIS 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 HA VE EXAMINED 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 I NCOME 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 ISS UE 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 I S BOUGHT INTO THE AMBIT OF INCOME IS THE PREMIUM RECEIVED FROM A RESIDENT IN EXCESS OF THE FAIR MARKET VALUE OF THE SHARES. IN THIS CASE WHAT IS BEING SOUGHT TO BE TAXED IS CAPITAL NOT RECEIVED FROM A NON - RESIDENT I.E. PREMIUM ALLEGEDLY NOT RECEIVED ON APP LICATION 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 WA S UPHELD 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 LEGISLA TURE HAS EXPRESSLY STATED, INTER ALIA, THAT INCOME SHALL INCLUDE 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 WHIC H 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 SEC TION 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 INCOME. 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 RE QUIRED 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 WO RDS '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 1 956. 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 RECEIVE D BY THE ASSESSEE ON ISSUE OF EQUITY SHARES TO ITS HOLDING COMPANY, A NONRESIDENT 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 TH E MEANING OF THE EXPRESSION AS DEFINED UNDER THE ACT.(EMPHASIS BY US.) 5 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.RESPECTFULLY,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 EN DORSED.WE ALSO HOLD THAT TP PROVISIONS ARE NOT APPLICABLE TO SUCH TRANSACTION.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 GROU ND 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 TRANSACTIO N IN QUESTION, WE ARE OF THE OPINION THAT THE ADJUSTMENTS MADE BY THE 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 ARE ALLOWED. 7. IN THE RESU LT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCE D IN THE OPEN COURT ON 25 TH FEBRUARY, 2015. SD/ - SD/ - (VIJAY PAL RAO) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 25 .2.2015 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI