No additions for mere violation of RBI’s norms on valuation of shares sold by non-resident to resident

ITAT DELHI BENCH ‘H’

Zeppelin Mobile System GmbH

versus

Additional Director of Income-tax

IT Appeal No. 5179 (Delhi) of 2010
[ASSESSMENT YEAR 2007-08]

Date of Pronouncement – 12.04.2013

Smt. IndraBansal for the Appellant. Sameer Sharma for the Respondent.

ORDER

A.D. Jain, Judicial Member

This is Assessee’s appeal for Assessment Year 2007-08 against the assessment order dated 29.10.2010 passed by the Addl. Director of Income Tax, Range-2, International Taxation, New Delhi. The following grounds of appeal have been taken:-

“1. The Learned Dispute Resolution Panel-II, Delhi has illegally confirmed the action of the Assessing Officer for taking the value of sale consideration @ Rs.400 per share instead of actual sale consideration received @ Rs. 390/- per share a Capital Gain is liable to be computed at Rs.9,55,73,488/-.

2. The Learned Dispute Resolution Panel-II, Delhi was not justified in making the addition of Rs.28,73,000/- under the head capital gain the same deserves to be fully deleted.

3. The Learned Dispute Resolution Panel-II, Delhi was not justified in computing the capital gain as per the provision of Section 48 of the IT Act, 1961 at Rs.9,88,76,204/-. The same deserves to be computed at Rs. 9,55,73,488/-.”

2. The facts of the case in brief are that the assessee, M/s Zeppelin Mobile Systems GmbH is a tax resident of Germany. It has an Indian subsidiary called Zeppelin Mobile Systems India Ltd., which is a closely held unlisted company under the Indian Companies Act, 1956. It is engaged in the business of designing, manufacturing and assembling of Polyurethanes Foam based Prefab Structures, Telecom Shelters and derivatives. During the year, the assessee had sold part of the shares held by it in its Indian subsidiary to M/s Sintex Industries Ltd. The assessee filed its original return of income under Section 139 (1) of the Income Tax Act, 1961 for Assessment Year 2007-08 on 18.10.2007, reporting total income of Rs. 9,55,73,488/- on account of capital gain from sale of shares. Pursuant to scrutiny assessment proceedings, the Assessing Officer issued a draft order dated 29th December, 2009 under Section 143 (3) of the Act as per provisions of Section 144C(1) of the Act wherein the total income was proposed to be assessed at Rs. 9,91,56,204/- after making, inter alia, the following adjustment:-

3. Before the Ld. DRP, the assessee submitted that the Assessing Officer had erred in taking the sale consideration of the shares @ 400/- per share, as against the actual sale consideration of Rs. 390/- per share; that while doing so, the Assessing Officer had wrongly applied the RBI Guidelines, whereas the same were under FEMA; that the mode of computation of Capital Gain, on the other hand, is provided u/s 48 of the IT Act; that though in the assessment order, the Assessing Officer had observed that the valuation as per the RBI Guidelines should be adopted, the word ‘should’ nowhere stands mentioned in the RBI Guidelines.

4. By virtue of the impugned Order, the DRP confirmed the assessment order. While doing so, it was observed that the RBI Guidelines are in respect of pricing of shares, when shares are being sold by a non-resident to a resident, and were binding on the assessee; that the case of the assessee fell squarely under Clause 2.3 read with sub-clause (b) (ii) and Option (C) of the RBI Guidelines; that these clauses and sub-clauses in the RBI Guidelines were binding in nature, as they employed the expression ‘shall be’; that the RBI Guidelines strictly direct the assessee to adopt the lower of the two valuations required to be done and the assessee has no choice to negotiate the price; that therefore, the assessee was wrong in contending that the Assessing Officer had wrongly observed that the RBI Guidelines should be adopted; and that therefore, the Assessing Officer was correct in adopting the valuation of the shares @ Rs. 400 per share as against the negotiated price of Rs. 390 per share disclosed by the assessee.

5. The aforesaid relevant portion of the RBI Guidelines, as reproduced in the order passed by the DRP is as follows:-

“2.3 Transfer by non-resident………to resident

Sale of shares by a non-resident to resident shall be in accordance with Regulation 10B(2) of Notification No.FEMA 20/2000-RRB dated May 3, 2010 which as below

(b) Where the shares of an Indian company are not listed on stock exchange or are thinly traded,

(i) if the consideration payable for the transfer does not exceed Rs. 20 lakhs per seller per company, at a price mutually agreed to between the seller and the buyer, based on any valuation methodology currently in vogue……….

(ii) If the amount of consideration payable for the transfer exceeds Rs. 20 lakhs per seller per company, at a price arrived at, at the seller’s option, in any of the following manner namely

(A) Or (B)** ** **

(C) Where the shares are not listed on any stock exchange, at a price which is lower of the two independent valuations of share, one by statutory auditors of the company and the other by a Chartered Accountant or by a Merchant Banker in Category 1 registered with Securities and Exchange Board of India.”

6. Before us, challenging the impugned Order, the ld. counsel for the assessee has contended that the ld. DRP has erred in confirming the action of the Assessing Officer in taking the value of the sale consideration of the shares @ Rs. 400 per share instead of the actual sale consideration received @ Rs. 390 per share; that the ld. DRP has erred in making the addition of Rs. 28,73,000/- under the head ‘Capital gain’; and that the ld. DRP has erred in computing the capital gain as per the provisions of Section 48 of the IT Act at Rs. 9,88,76,204/- rather than at Rs. 9,55,73,488/-; that the ld. DRP has failed to consider the fact that the RBI Guidelines are for remittance of money, on sale of shares and they are not binding for the purposes of the IT Act; that the ld. DRP has also not taken into consideration the fact that as per the certificate of remittance (APB, page 6) in the assessee’s case, qua Sintex Industries Ltd., to which company, the assessee had sold the shares held by it in its Indian subsidiary, the rate of sale has been shown at Rs. 390 per share; that the ld. DRP has also wrongly ignored the Memorandum of Understanding (APB 12-17, relevant portion in para 8.2 at APB 17) between, inter alia, Sintex Industries Ltd. and the assessee, as per the conditions whereof, Sintex Industries Ltd. agreed to the said rate of Rs. 390/- per share; and that still further, the ld. DRP failed to take into consideration the factum of grant of permission by the RBI, which could not have come about, if the rate had been Rs. 400/- and not Rs. 390/-, as maintained by the assessee.

7. The ld. DR, on the other hand, has placed strong reliance on the impugned order. It has been contended that the assessee has remained unable to explain as to how the RBI Guidelines are not applicable to the assessee. It has further been contended that the Certificate of Remittance as well as the Memorandum of Understanding relate to the assessee and Sintex Industries Ltd. and so, the Assessing Officer was well justified in computing the veracity of the alleged negotiated rate of Rs. 390/-.

8. We have heard the parties and have perused the material on record. Undoubtedly, the RBI Guidelines are Guidelines for the banks, issued for FEMA purposes. Clause 2.3 (supra) of these Guidelines refers to Regulation 10B (2) of the Foreign Exchange Management (Approval or Issue of Security By a Person Resident Outside India) Regulations, 2000. The very opening paragraph of these Guidelines (APB-III) shows that they are addressed to ‘Authorized Dealer (AD) Banks’. Thus, the duty to examine the compliance or otherwise of these Guidelines lies squarely within the purview of the ‘Authorized Dealer Banks’ and not the Income-tax Authorities. If the assessee, in the view of the Income-tax Authorities, had committed any violation of these Guidelines, the appropriate course open to them was to bring it to the notice of the banks. No further. Then, since the Guidelines have been issued for FEMA purposes, it is the FEMA Authorities who are competent to take appropriate action against the assessee on breach of the Guidelines. Rather, it is seen that no objection whatsoever has been raised by the RBI to the rate of Rs. 390/- per share, as maintained by the assessee and the RBI has accorded its approval. Had the alleged difference between the rates existed, thereby constituting a violation of the RBI Guidelines by the assessee, such violation would obviously have been taken care of and the approval would not have been accorded. On merits also, Sintex Industries Ltd., to whom the shares were sold by the assessee, has not denied such rate of Rs. 390/-per share. Rather, such rate stands admitted in the Memorandum of Understanding (supra) between the assessee and Sintex Industries Ltd. Nothing adverse or detrimental to the assessee’s case has been brought on record by the authorities below.

9. It is also pertinent to note that though the MoU (supra) has been discussed in the assessment order, neither the said document, nor the Remittance Certificate has been adverted to by the DRP. The Certificate of Remittance has also, as per the stamp borne on the copy of the assessee’s paper book filed before the DRP, been shown to have been filed before the DRP.

10. In view of the above, finding the grievance of the assessee to be justified, we accept it as such.

11. In the result, the appeal filed by the assessee is allowed.