KAR Therapeutics & Estates Pvt.Ltd., Hyd, Hyderabad V. DCIT, Circle-2(1), Hyderabad, Hyderabad

ITA 86/HYD/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6591 (ITAT-HYDERABAD)
• Duration Of Justice: 3 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 25-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NIVEDITA BISWAS
• Assessee Lawyers: S RAGHUNATHAN
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92B; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 86/HYD/2016 ASSESSMENT YEAR: 2011-12 KAR THERAPEUTICS & ESTATES PVT. LTD., HYDERABAD. PAN AABCD 2306 A VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 2(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S. RAGHUNATHAN REVENUE BY : SMT. NIVEDITA BISWAS DATE OF HEARING 25-04-2016 DATE OF PRONOUNCEMENT 06-05-2016 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS AGAINST THE DIRECTION OF THE DISPUTE RESOLUTION PANEL (DRP) U/S 144C(5) AND THE ASSESSMENT ORDER PA SSED U/S 143(3) READ WITH SECTION 192CA(4) R.W.S. 144C(13) I N CONSEQUENCE THERETO. THE APPEAL IS PERTAINING TO AY 2011-12. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E HAS MADE A PAYMENT TO ITS SUBSIDIARY, KAR HOLDINGS (SINGAPORE) PTE LTD. A SUM OF RS. 15,73,82,624/- (IN USD 3387182) TOWARDS SHARE C APITAL, THE DETAILS OF WHICH ARE AS UNDER: DATE OF REMITTANCE AMOUNT REMITTED (IN RS.) AMOUNT REMITTED (IN USD) 06/05/2010 13,51,124.00 32182 11/06/2010 52,16,200.00 110000 02/07/2010 10,15,81,800.00 2165000 27/09/2010 1,73,66,000.00 380000 2 ITA NO. 86/H/16 KAR THERAPEUTICS & ESTATES PVT. LTD. 20/12/2010 1,60,23,000.00 350000 23/03/2011 1,58,44,500.00 350000 TOTAL 15,73,82,624.00 3387182 2.1 OF THE ABOVE AMOUNT OF USD 3387182, SHARES WORT H USD 2654797 WERE ALLOTTED AND THE BALANCE AMOUNT OF USD 732385 WERE SHARE APPLICATION MONEY PENDING ALLOTMENT AS ON 31 ST MARCH 2011. SHARES ON THE ABOVE VALUE WAS ALLOTTED ON 15TH MARC H 2012. 2.2 THE LD. TRANSFER PRICING OFFICER (TPO) AND ASSE SSING OFFICER (AO) TREATED SUCH OUTSTANDING SHARE APPLICATION MON EY AS AN INTERNATIONAL TRANSACTION SINCE THE SUBSIDIARY COMP ANY HAS SHOWN IN THEIR FINANCIAL STATEMENT AS UNSECURED LOAN, INTERE ST FREE AND REPAYABLE ON DEMAND. AND RE-CHARACTERIZED THE ABOVE OUTSTANDING SHARE APPLICATION MONEY AS LOAN AND PROVIDED FOR AR M'S LENGTH PRICE INTEREST AT THE PRIME LENDING INTEREST (PLI) RATE O F 12.5%. 3. THE ASSESSEE PREFERRED REFERENCE BEFORE DISPUTE RESOLUTION PANEL, INTER-ALIA ON THE FOLLOWING: A. SINCE THE INVESTMENTS ARE IN THE NATURE OF SHARE APPLICATION MONEY, IT CANNOT BE TREATED AS LOANS AND ADVANCES. B. THE INVESTMENTS ARE TOWARDS EQUITY TO A GREAT EX TENT IS BORNE OUT FROM THE FACT THAT SHARES HAVE ACTUALLY BEEN AL LOTTED TO THE ASSESSEE IN THE IMMEDIATELY SUBSEQUENT YEAR. IF THA T IS THE CASE INVESTMENTS MADE BY THE ASSESSEE CANNOT BE TREATED AS LOAN. C. ARM'S LENGTH PRICE (ALP) WAS MEANT TO DETERMINE THE REAL VALUE OF THE TRANSACTION ENTERED INTO BETWEEN AES. IT WAS A RE- COMPUTATION EXERCISE TO BE CARRIED OUT ONLY WHEN IN COME AROSE IN CASE OF AN INTERNATIONAL TRANSACTION BETWEEN AES . IT DID NOT WARRANT RE-COMPUTATION IN RESPECT OF A CONSIDERATIO N RECEIVED/ GIVEN ON CAPITAL ACCOUNT 3 ITA NO. 86/H/16 KAR THERAPEUTICS & ESTATES PVT. LTD. D. EVEN IF THE INVESTMENTS ARE TREATED AS LOANS AND ADVANCES, THE RISK BASIS RATE ADOPTED BY THE TPO WOULD HAVE NO AP PLICABILITY, ARM'S LENGTH INTEREST HAS TO BE DETERMINED BY THE T PO AFTER CONSIDERING WHETHER A THIRD PARTY WOULD HAVE TREATE D SUCH ADVANCES PENDING FOR CAPITAL SUBSCRIPTION AS INTERE ST BEARING ADVANCE, TAKING INTO CONSIDERATION PURE COMMERCIAL FACTORS, THE MANAGEMENT, CAPITAL AND CONTROL RELATIONSHIP BETWEE N THE PARTIES. 4. THE DISPUTE RESOLUTION PANEL (DRP) DIRECTED THE AO TO REWORK THE INTEREST BASED ON NUMBER OF DAYS FROM THE DATE OF INVESTMENT TO THE ACCOUNTING YEAR END. 5. AS PER THE DIRECTIONS OF THE DRP, THE AO COMPLET ED THE ASSESSMENT U/S 143(3) RWS 92CA(4) R.WS. 144C(13) OF THE ACT BY DETERMINING THE INCOME OF THE ASSESSEE AT RS. 32,14 ,25,453/- AS AGAINST THE INCOME OF RS. 32,05,37,113/- ADMITTED B Y THE ASSESSEE. 6. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US R AISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE LD. TPO/DRP ERRED IN TREATING THE SHARE APPL ICATION MONEY, BEING A SHARE INVESTMENT RELATED TRANSACTION AS 'INTERNATIONAL TRANSACTION' IN TERMS OF SECTION 92B OF THE INCOME TAX ACT. 2. WITHOUT PREJUDICE TO ABOVE GROUND OF APPEAL, THE LD. AO/TPO/ DRP FURTHER ERRED IN RE-CHARACTERIZING THE SHARE AP PLICATION MONEY AS LOANS AND ADVANCES. 3. WITHOUT PREJUDICE TO GROUNDS OF APPEAL (1) AND ( 2), THE LD AO/TPO/DRP FURTHER ERRED IN APPLYING THE RATE OF 12 .5% AS THE PLI ARMS' LENGTH PRICE. 7. THE LD. AR SUBMITTED THAT THE WHOLE TRANSFER MAD E TO THE SUBSIDIARY COMPANY ARE ONLY TOWARDS SHARE APPLICATI ON AND 4 ITA NO. 86/H/16 KAR THERAPEUTICS & ESTATES PVT. LTD. SUBSEQUENTLY SHARES WERE ALLOTTED, MAJOR AMOUNT OF SHARES WERE ISSUED WITHIN THE YEAR AND BALANCE UNALLOTTED AMOUN T OF $ 732385 WERE TREATED BY THE SUBSIDIARY AS UNSECURED LOAN DU E TO THE FACT THAT THE SUBSIDIARY COMPANY, FOLLOWS THE ACCOUNTING POLI CIES AS PER WHICH, THE UNALLOTTED PORTION OF REMITTANCE AS UNSECURED A ND REPAYABLE ON DEMAND. IN FACT, THE SUBSIDIARY COMPANY, HAS ALLOTT ED THE SHARES IN THE FOLLOWING YEAR I.E. ON 15/03/2012. LD. AR RELYI NG ON THE CASE OF PRITHVI INFORMATION SOLUTIONS LTD., VS. ACIT (ITA N O. 1816/HYD/2012), SUBMITTED THAT THE REMITTANCE TO THE SUBSIDIARY COM PANY, TOWARDS SHARE CAPITAL CANNOT BE TREATED AS INTERNATIONAL TR ANSACTION. THE TPO IS NOT JUSTIFIED IN RE-CHARACTERIZING THE SHARE APP LICATION MONEY AS LOANS & ADVANCES. LD. AR ALSO SUBMITTED THAT TPO/AO IS NOT JUSTIFIED IN APPLYING THE RATE OF 12.5% AS PLI FOR ALP. 8. THE LD. DR RELIED ON THE ORDERS OF DRP AND AO. 9. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES A ND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES. THERE IS NO DISPUTE THAT THE ASSESSEE HAD REMITTED $ 3387182 TOWARDS INVESTMENT IN SHARE CAPITAL. THE SHARES WER E ALLOTTED TO THE EXTENT OF $ 2654797 IN THE SAME AY. THE SUBSIDIARY COMPANY HAS TREATED THE BALANCE REMITTANCE AS INTEREST FREE UNS ECURED LOAN AND REPAYABLE ON DEMAND IN THEIR FINANCIAL STATEMENT. I N THE NEXT AY, THE SUBSIDIARY COMPANY HAS ALLOTTED THE SHARES ON 15/03 /2012. NOW, CAN THESE TRANSACTIONS BE TREATED AS INTERNATIONAL TRA NSACTION, WHICH QUALIFIES FOR ALP ADJUSTMENT. IN OUR CONSIDERED VIE W, THE AMOUNT $ 732.385 IS TOWARDS INVESTMENT IN SHARE CAPITAL OF T HE SUBSIDIARY OUTSIDE INDIA AND THE TRANSACTIONS ARE NOT IN THE N ATURE OF INTERNATIONAL TRANSACTION REFERRED TO SECTION 92-B OF THE IT ACT AND TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE AS T HERE IS NO INCOME AS WELL AS THERE IS NO MUTUAL AGREEMENT BETWEEN THE CO MPANIES FOR SUCH PAYMENT OF INTEREST. MOREOVER, THE SUBSIDIARY COMPA NY ALSO DISCLOSED 5 ITA NO. 86/H/16 KAR THERAPEUTICS & ESTATES PVT. LTD. AS INTEREST FREE. MOREOVER, IN THE SIMILAR SITUATI ON WITH UNCONTROLLED TRANSACTION, THE ALLOTTEE COMPANY IN NORMAL COURSE OF TRANSACTION WILL NOT BE EXPECTED TO RECEIVE ANY INTEREST LEAVE AWAY THE INTERNATIONAL TRANSACTION. WITHOUT ANY CERTAINTY OR ANY AGREEMENT ON RECEIVING ANY INTEREST BUT MERELY RELYING ON THE ACCOUNTING METHO D AND DISCLOSURE OF THE SUBSIDIARY IN THEIR FINANCIAL STATEMENT CANN OT LEAD TO THIS TRANSACTION AS INTERNATIONAL TRANSACTION WHICH REQU IRE ALP ADJUSTMENT. ASSESSEE HAD RELIED ON THE CASE OF PRITHVI INFORMAT ION SOLUTIONS LTD. (SUPRA) WHEREIN ON THE SIMILAR SET OF FACTS AND CIR CUMSTANCES, THE COORDINATE BENCH OF THIS TRIBUNAL HAS HELD AS BELOW : 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUS ED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTH ORITIES BELOW AS WELL AS DECISIONS CITED. IN OUR OPINION, THE AMO UNT REPRESENTING 2118.84 IS TOWARDS INVESTMENT IN SHARE CAPITAL OF THE SUBSIDIARIES OUTSIDE INDIA AS THE TRANSACTIONS ARE NOT IN THE NATURE OF TRANSACTIONS REFERRED TO SECTION 92-B OF THE IT ACT AND THE TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE AS THERE IS NO INCOME. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE CIT U/S 263 AND THAT OF THE AO IS RESTORED AND THE GROU NDS RAISED BY THE ASSESSEE IN THIS REGARD ARE ALLOWED. AS HELD IN THE ABOVE, WE ARE INCLINED TO TREAT THE ABOVE TRANSACTION AS NOT AN INTERNATIONAL TRANSACTION AND ACCORDINGLY GR OUND NO. 1 OF THE ASSESSEE IS ALLOWED. SINCE WE HAVE ADJUDICATED GROU ND NO. 1 AS ALLOWED, THE GROUND NOS. 2 & 3 ARE ONLY ACADEMIC IN NATURE AND ACCORDINGLY, DISMISSED. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 6 TH MAY, 2016 SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 6 TH MAY, 2016 KV 6 ITA NO. 86/H/16 KAR THERAPEUTICS & ESTATES PVT. LTD. COPY TO:- 1) DCIT, CIRCLE 2(1), HYDERABAD. 2) M/S KAR THERAPUETICS & ESTATES PVT. LTD., D.NO.7 -1-27, AMEERPET, HYDERABAD - 500 016 3 PR. CIT 2, HYDERABAD 4) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.