TP: Purchase of Shares of AE can’t be regarded as International Transaction

M/s. TCG Life sciences Pvt. Ltd. Vs. DCIT (ITAT Kolkata)

Assessee raised an objection that since the subscription/purchase of shares being on capital account and therefore does not give raise to any “income” and hence the provisions of Sec. 92 of the Act would not be applicable. The DRP did not agree with the submissions of the Assessee and it held that such transaction was also an international transaction and ALP of such transaction has to be computed in accordance with the provisions of Sec.92 of the Act. In AY 2011-12, the DRP upheld the quantum of addition and the rate of interest determined by the TPO. In AY 2012- 13, the DRP gave partial relief to the Assessee by directing the TPO to adopt a lessor interest rate on the international transaction of deemed loan by the Assessee to its AE by directing the TPO to adopt rate of interest at LIBOR rate plus 350 bps.

At the time of hearing of the appeal, it was brought to our notice by the learned counsel for the Assessee that identical issue as is sought to be raised in the present appeals for AY 2011-12 and 2012-13 had been considered and decided by the Tribunal in Assessee’s case in AY 2010-11. It was submitted that the facts and circumstances and the basis of addition made in AY 2010-11 and AY 2011-12 and 2012-13 are one and the same. A copy of the order of the Tribunal in ITA No.1053/Kol/2017 and ITA No.966/Kol/2017 for AY 2010-11 dated 9.2017 was also filed before us. The learned DR however, while agreeing with the submission of the learned AR that identical issue was decided by the Tribunal in Assessee’ s own case, however reiterated submissions as were made in the case of the Assessee in AY 2010-11. He also made further submissions with regard to deemed loan transaction in a case where purchase of shares is at a higher price than NAV and relied on the decision of the ITAT Hyderabad Bench in the case of North gate Technologies Ltd. Vs. DCIT TS 164 ITAT 2013 (Hyd.)-TP.

We do not find any merit in the submission of the learned DR because the decision rendered by the Tribunal in Assessee’s own case in AY 2010-11 will squarely apply to the present AY also. The decision of the Hyderabad Bench in the case of North gate Technologies (supra) is again a decision rendered prior to the decision of the Hon’ble Bombay High Court in the case of Vodafone (infra) which the Tribunal has considered and followed while deciding the case of the Assessee for AY 2010-11. When the transaction of purchase of shares are held to be outside the purview of the provisions of Sec.92 of the Act, we fail to understand as to how the excess price paid for acquiring shares can be treated as a deemed loan and an international transaction. We therefore find no merits in the argument advanced by the learned DR.

Full Text of the ITAT Order is as follows:-

ITA No.121/Kol/2016 & ITA No.647/Kol/2017 are appeals by the Assessee against the order dated 11.12.2015 and 30.1.2017 of the DCIT, Circle 11(2), Kolkata, u/s.143(3) read with Sec.144C(1) of the Income Tax Act, 1961 (Act), in relation to AY 2011-12 and 2012-13 respectively. Both these appeals were heard together as some common issues arise for consideration. We deem it convenient to pass a common order.

2. First we shall take up for consideration the common issue in ITA No.121/Kol/2016 for AY 2011-12 and 2012-13. The common issue relates to the purchase of shares by the Assessee of three of its Associated Enterprises (AE) M/S.Labvantage Solutions Inc., USA (LSVI), Ztec International (Mauritius Ltd. (Xtec) and Rishi Pharmaceuticals Inc.(RPI) in the previous year relevant to AY 2010-11. The case of the Revenue is that purchase of shares by the Assessee of its AEs was an international transaction and income from such international transaction has to be computed having regard to Arm’s Length Price (ALP) as laid down in Sec.92 of the Act. According to the revenue the value at which the shares were purchased by the Assessee was enormous and therefore the price paid to the extent it was in excess of the value of the shares determined on the basis of Net Asset Value (NAV) Method had to be regarded as loan by the Assessee to its AE. On such deemed loan the Assessee ought to have charged interest which the Assessee did not charge. The revenue determined notional interest on such deemed loan and added the same to the total income of the Assessee as an Adjustment to the ALP u/s.92 of the Act. The relevant grounds of Appeal of the Assessee in ITA No. 121/Kol/2016 are Grounds No.1 to 6 and in ITA No. 647/Kol/2017 are Grounds 1, 1.1 to 1.12.

3. It is necessary to narrate about assessment for AY 2010-11 in Assessee’s case because it has relevance to the issues that arise for consideration in AY 11-12 & 12-13. TCG Life Sciences Private Limited (formerly TCG Life sciences Limited), (“hereinafter referred to as the “Appellant”/ “Assessee:/“TCGLS”) is a company incorporated under the Companies Act, 1956. It carries on the business of providing Contract Research & Development Service and Drug Discovery. It is a wholly owned subsidiary of TCG Life sciences Mauritius Ltd. (“TCGM“). The ownership structure of the TCG group is as follows:

Relevant Ownership Structure of the Group

4. The Assessee entered into the following transactions with its Associated Enterprises (“AEs”) during the AY 2010-11 as mentioned below :

Summary of TCGLS’s International Transactions for FY 2009-10(AY2010-11)

5. The term “international transaction’ has been defined in section 92B(1) or the Act to mean a transaction between two or more “associated enterprises” either or both of whom are non-residents in the nature of inter alia purchase, sale or lease of intangible property or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. It is not in dispute that the Xtec, LVSI and RPI and the Assessee are AEs within the meaning of Section 92A of the Act which defines the term “associated enterprise” as including, in relation to another enterprise, if one enterprise directly or indirectly participates in the Management, control or capital of the other enterprise. The term “arm’s length price” has been defined in clause (ii) of section 92F of the Act, to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Section 92C( 1) of the Act provides that the arm’s length price in relation to an international transaction shall be determined by any of the several methods, specified therein, having regard to the nature of the transaction or class of transaction or class of associated person or functions performed by such persons or such other relevant factors as the Central Hoard of Direct Taxes (hereinafter referred to as “Board”) may prescribe.

6. During the previous year relevant to AY 2010-11, the Assessee purchased 4,24,173 shares of RPI for a consideration of Rs. 5,38,12,000/-. The Assessee also purchased 1000 shares of LVSI from Xtec International (Mauritius) Ltd. for a consideration of Rs. 20,64,03,200/-. Besides the above, the Assessee also purchased 456.921 shares of LSVI for a consideration of 2,02,290 per share on 4.8.2009 and 300.365 shares at Rs.5,83,466 per share on 7.1.2010. In all the Assessee paid a consideration of Rs.26,76,83,395 for purchase of shares of 757 shares (456.921 + 300.365 = 757 ) of LSVI. The Assessee relied on a valuation report by an independent valuer to support the value at which the aforesaid transactions were carried out by the Assessee. The valuers in their report had adopted Discounted Cash Flow Method (DCFM) for arriving at the valuation of the shares that were purchased by the Assessee.

7. The AO referred to the Transfer Pricing Officer (TPO) for determination of ALP of the international transaction of purchase of shares as per the provisions of Sec.92CA(1) of the Act. The TPO was of the view that DCFM was not the appropriate method of valuation and that the appropriate method would only be the Net Asset Valuation method (NAV). On the basis of such finding, the TPO determined the value of shares of acquired by the Assessee and their NAV and determined the excess price paid for acquisition of shares of LVSI as follows:

The TPO further came to a conclusion that the above excess price paid by the assessee is in substance a “loan” advanced to its AEs in the garb of equity/investment as it is on capital account. Instead of advancing loan on which interest would have been assessed to tax in India at the maximum marginal rate, the Assessee chose to invest in equity capital by paying higher price for the shares directly as well as through the Mauritius route. Had the assessee acquired the shares at the actual fair value it could not have remitted necessary funds required by its AEs cost-free. However by paying higher price for shares the assessee was effectively able to remit funds to its foreign AEs without having to advance loan funds on which interest would have been assessed to tax India. Based on the above reasoning the TPO held that there was excess payments of US$ 83,92,092 by way of share purchase/ subscription to its AEs was in substance a loan advanced to AE on which interest ought to have been charged by the assessee.

8. As far as purchase of share of RPI is concerned, the TPO determined the value of shares of TPI on the basis of NAV of face value of US$ 0.01. The TPO held that any excess payment over and above the face value is nothing but in substance a loan to the company. The TPO held that there was excess payment of USD 91,13,758 ($91,18,000 – $4242) for acquisition of shares of RPI and such excess payment to the AE was in substance a loan advanced on which interest ought to have been charged by the assessee.

9. The TPO thereafter proceeded to determine the ALP of the interest that the Assessee ought to have charged for the following loan by the Assessee to its AE:

10. The AO ultimately concluded that the Assessee ought to have charged interest of Rs. 11,78,64,440/- on the above transactions and since the Assessee did not charge any interest a sum of Rs. 11,78,64,440/- was to be added to the total income of the Assessee on account of adjustment to ALP of international transaction of providing loan to it’s AE. The following were the conclusions of the TPO in this regard.

“52. Based on the above, the arm’s length interest rate of the loan advanced by the assessee to its AEs is computed as follows :

53. Applying the aforesaid interest rate, the interest income which the assessee should have earned on its excess investment is as follows :-

Loan considered in the hands of XIML

Loan considered in the hands of LVSI

Loan considered in the hands of RPI

Thus, the computation of the arm’s length price of the loan is Rs. 11,78,64,440/-. The arm’s length price of the loan in the books of the assessee is NIL. The margin of +/-5% on this amount if Rs.Nil. Thus, the arm’s length price of the loan computed under section 92CA(3) read with section 92C(3) is beyond this margin. Accordingly, an upward adjustment of rs.1 1,78,64,440/- is being made to the arm’s length price of the loan. The total income of the assessee is to be upwardly adjusted by this amount. “

11. In AY 2011-12 the Assessee subscribed to the shares of LVSI of 13.129 numbers for a consideration of Rs. 74,14,800 at Rs. 5,64,765 per share. The TPO on a reference by the AO treated the investments made in the earlier years as continuing, priced the excess value paid for shares of the AE by the Assessee in the same manner and methodology as adopted in AY 2010-11. In respect of subscription of 13.129 shares of LSVI during the previous year relevant to AY 2011-12, the TPO followed the same methodology as was adopted in AY 2010-11 and he determined the value per share of LVSI on NAV at US $ 4471 and treated the differential as loan and computed interest on the same. The details of the addition made by way of adjustment to ALP in AY 2010-11, 2011-12 and 2012-13 were as follows:

12. The Assessee filed objections to the draft order of assessment of the AO for both the AY 2011-12 and 2012-13, before the Disputes Resolution Panel (DRP). Before the DRP, apart from the challenge to the merits of the addition made by the TPO, the Assessee raised an objection that since the subscription/purchase of shares being on capital account and therefore does not give raise to any “income” and hence the provisions of Sec. 92 of the Act would not be applicable. The DRP did not agree with the submissions of the Assessee and it held that such transaction was also an international transaction and ALP of such transaction has to be computed in accordance with the provisions of Sec.92 of the Act. In AY 2011-12, the DRP upheld the quantum of addition and the rate of interest determined by the TPO. In AY 2012- 13, the DRP gave partial relief to the Assessee by directing the TPO to adopt a lessor interest rate on the international transaction of deemed loan by the Assessee to its AE by directing the TPO to adopt rate of interest at LIBOR rate plus 350 bps. The following chart would show the interest rate determined by the TPO and the rate as directed by the DRP in AY 2010-11 to 2012- 13:

13. The directions of the DRP were incorporated in the fair order of assessment by the AO in AY 2011-12 and 20 12-13. Against the addition made consequent to directions of the DRP by the AO in the fair order of assessment the Assessee has raised the various grounds of appeal which we have narrated in the earlier part of this order.

14. At the time of hearing of the appeal, it was brought to our notice by the learned counsel for the Assessee that identical issue as is sought to be raised in the present appeals for AY 2011-12 and 2012-13 had been considered and decided by the Tribunal in Assessee’s case in AY 2010-11. It was submitted that the facts and circumstances and the basis of addition made in AY 2010-11 and AY 2011-12 and 2012-13 are one and the same. A copy of the order of the Tribunal in ITA No.1053/Kol/2017 and ITA No.966/Kol/2017 for AY 2010-11 dated 9.2017 was also filed before us. The learned DR however, while agreeing with the submission of the learned AR that identical issue was decided by the Tribunal in Assessee’ s own case, however reiterated submissions as were made in the case of the Assessee in AY 2010-11. He also made further submissions with regard to deemed loan transaction in a case where purchase of shares is at a higher price than NAV and relied on the decision of the ITAT Hyderabad Bench in the case of North gate Technologies Ltd. Vs. DCIT TS 164 ITAT 2013 (Hyd.)-TP.

15. We do not find any merit in the submission of the learned DR because the decision rendered by the Tribunal in Assessee’s own case in AY 2010-11 will squarely apply to the present AY also. The decision of the Hyderabad Bench in the case of North gate Technologies (supra) is again a decision rendered prior to the decision of the Hon’ble Bombay High Court in the case of Vodafone (infra) which the Tribunal has considered and followed while deciding the case of the Assessee for AY 2010-11. When the transaction of purchase of shares are held to be outside the purview of the provisions of Sec.92 of the Act, we fail to understand as to how the excess price paid for acquiring shares can be treated as a deemed loan and an international transaction. We therefore find no merits in the argument advanced by the learned DR.

16. We find that identical issue as to whether the transaction of purchase of shares of AE can be subject matter of proceedings u/s.92 of the Act came up for consideration in Assessee’ s own case in AY 2010-11 and the ITAT in ITA No. 1053/Kol/2017 and ITA No.966/Kol/2017 for AY 2010-11 dated 22.9.2017 held that the transaction of purchase of shares of AE cannot be regarded as international transaction and cannot be subject matter of investigation u/s.92 of the The following were the relevant observations of the Tribunal.

“14  We may mention here that if the preliminary objection that the transaction of investment in shares is on capital account and is therefore outside the purview of the provisions of Sec.92 of the Act is accepted then there would be no need to adjudicate Gr. No. 3 raised by the Revenue and that ground would become infructuous.

15. We have heard the rival submissions. The preliminary issue that arises for our consideration is whether international transaction of investment in equity shares of an AE would not fall within the purview of Sec.92 of the Act, because no income arises out of such international transactions? As we have already seen the Hon’ble Bombay High Court in the case of Shell India Markets Ltd. (supra) and Vodafone (supra) has taken the view that amounts received on issue of share capital including premium is 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 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 application of ALP. Therefore, in the absence of express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. The said view has been reiterated by the Bombay High Court in the case of Shell India Markets Ltd. (supra). The ITAT Mumbai in the case of Tops group Electronic Systems (supra) has taken the view that the ratio laid down by the Hon’ble Bombay High Court in the case of Vodafone (supra) will apply to a case where an Indian entity invests in shares of an AE also. The Tribunal held that what is made applicable for inbound share investment (investments in shares of Indian subsidiary by the holding company (Non-resident) would be equally applicable to outbound share investments also (Investment by a resident Indian company in the shares of the Non-resident AE). The parameters to be applied cannot be different for outbound investment and inbound investments. The transaction of purchase of shares being on capital account has now been settled with the Press note released by the Government of India dated 28.01.2015. The Union Cabinet accepted the order of Bombay High Court in the case of Vodafone India Services Private Limited (VISPL) dated 10.10.2014.

16. The Union Cabinet while accepting the Bombay High Court order, dated 10.10.2014, specifically noted the following observations:

b) The crucial words “shall be chargeable to income tax” which are found in Section 42(2) of the 1922 Act are absent in Chapter X of the Act. …. Therefore it is clear that the deemed income which was charged to tax under Section 42(2) of 1922 Act was done away with under this Act. “

c) The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of Arm’s Length Pricing to transactional value/ consideration itself does not arise.”

d) If its income which is chargeable to tax, under the normal provisions of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2 (24) of the Act. The amount received on issue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2)(viib) of the Act. Thus such capital account cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in impugned order

e) The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when the income arises in case of an International transaction between AEs. It does not warrant re- computation of a consideration received/given on capital account.”

It is clear from a reading of para ‘e’ of the Cabinet Press release that, computation of ALP will arise income arises from an International transaction between AEs. It does not warrant determination or re-computation of a consideration received / given on capital account. Thus, going by the above, the transaction of investment in shares being payment on capital account falls outside the purview.

17. The learned DR submitted that the transaction of investment in shares of AE cannot be said to be not an international transaction. He further placed reliance on the decision of the Delhi ITAT in the case of First Blue Home Finance Ltd. Vs. DCIT (2015) 59 Taxmann.com 431 (Delhi- Trib.). In the aforesaid decision the ratio laid down is that in a case of issue of shares by Indian resident company to its AE Non-resident, there is no provision in Chapter X mandating addition on account of less share premium received also consequential interest on resultant deemed loan. The decision cited by the learned DR in fact supports the case of the Assessee. We however agree with the learned DR that the transaction of investment in shares of AE per se is an international transaction but the condition that income does not arise out of a capital account is the basis on which Courts have held that . To this submission is correct but the principle laid down is that the transaction of investment in shares being payment on capital account falls outside the purview of Chapter X of the Act. In that view of the matter, we hold that the determination of ALP in the present case cannot be sustained as the transaction in question is on capital account and determination of ALP in respect of such transactions is outside the purview of Chapter X of the Act. Consequently, the addition made by the AO in this regard is directed to be deleted. Since the preliminary ground on the issue of jurisdiction is held in favour of the Assessee, the other grounds with regard to the quantification of ALP does not arise for consideration and are dismissed as infructuous.”

17. Respectfully following the decision of the Tribunal referred to above, we hold that the determination of ALP in the present case cannot be sustained as the transaction in question is on capital account and determination of ALP in respect of such transactions is outside the purview of Chapter X of the Act. Consequently, the addition made by the AO in this regard is directed to be deleted. Since the preliminary ground on the issue of jurisdiction is held in favour of the Assessee, the other grounds with regard to the quantification of ALP does not arise for consideration and are dismissed as infructuous.

18. The next common issue that arises for consideration in the appeal by the Assessee is as to whether transaction of providing guarantee by the Assessee in respect of a loan taken by its AE can be said to be an international transaction and if yes whether the determination of ALP in respect of the said international transaction as determined by the DRP is sustainable.

19. In the case of Guarantee extended by unrelated parties, they would charge a commission. The commission charged by one AE for providing Guarantee for a loan granted to another AE should be at Arm’s Length, i.e., similar quantum as unrelated party would charge for providing Guarantee. The quantum of commission would depend on several factors like the credit rating of the person availing the loan, the person providing the Guarantee etc. This issue is also an issue flowing from the assessment made on same guarantee provided by the Assessee to its AE in AY 2010-11 and therefore we will first set out the facts as it transpired in AY 2010-11.

20. During the financial year relevant to AY 2010-11, LVSI borrowed funds from Axis Bank for the purpose of growing its business and the Assessee provided corporate guarantee to Axis Bank, Singapore, on behalf of LVSI. The purpose of the guarantee was explicitly mentioned in the guarantee agreement wherein loan was extended for acquisition as well for the working capital facility for LVSI since it was unable to borrow funds it needed on a stand-alone basis and was not in a position to obtain a guarantee from an independent party to support the borrowings it needed. It was the plea of the Assessee that it provided such guarantee to protect its own investment and in anticipation of backward integration which would increase its business. This guarantee was for a loan of USD 16 million availed by LVSI. The Assessee charged guarantee fee @1% based on an analysis of US industrial Bond yield for the relevant period.

21. The TPO rejected the claim of the Assessee that providing Guarantee to a subsidiary AE was in the nature of a shareholder activity and therefore such transactions are outside the purview of Sec.92 of the Act. The Ld. TPO determined the guarantee fee rate @ 2.34%. The TPO assumed the credit rating of the Assessee to be around B-1 CCC+ on S&P scale, as against the claim of the Assessee that its credit rating was BBB+ assigned by CRISIL. The TPO arrived at a credit rating of CC for LVSI. The Ld. TPO proceeded on the basis that LVSI’s credit rating was CC and therefore they could get loan at Libor + 900 basis points. Since LVSI had borrowed loan from Axis Bank @ Libor +5.33%, the TPO determined cost of funds from Axis Bank @ LIBOR plus 1 % and arrived at a credit spread of 433 bps. Thereby, the TPO determined the benefit derived by LVSI by obtaining guarantee from its parent company was 467 bps. Based on above and applying the 50% split, the TPO determined an arm’s length guarantee rate of 2.34%.

22. The CIT(A) in AY 2010-11 rejected the contention of the Assessee that provision of Guarantee was a shareholder activity and held that LVSI was benefitted in terms of interest saved on loan borrowed from Axis Bank and it is fair to assume a rating of B- for LVSI. Further, placing reliance on the DRP directions of AY 2012-13 in the Assessee’s own case, the Ld. CIT(A) re-determined the guarantee fee at 2.19%.

23. In AY 2011-12 the Assessee had charged 1% of the loan as guarantee fee from AE and in AY 20 12-13 the Assessee had charged 2% of the loan as guarantee fee from AE. Based on the earlier Assessment year i.e., AY 2010-11, the learned TPO in AY 2011-12 and 2012-13 determined Arm’s Length guarantee fee at 2.34%. The order of the TPO was incorporated by the AO in the draft order of assessment. Against such draft order of assessment, the Assessee preferred objections before the DRP. In AY 2012-13, the DRP held that LVSI benefited in terms of interest saved on loan borrowed from Axis Bank and it was fair to assume a rate of B- for LSVI. Further, based on a 50% split, redetermined the guarantee fee at 2.19%. In AY 2011-12, the addition of 2.34% made by the TPO was upheld by the DRP.

24. At the time of hearing it was agreed by the parties that the decision of the Tribunal in AY 2010-11 holding that the guarantee fee charged by the Assessee is at ALP would apply to the present AY 2011-12 and 2012-13 also. In AY 2010-11 identical issue was considered by this Tribunal and the Tribunal in ITA No. 1053/Kol/2017 and ITA No. 966/Kol/2017 for AY 2010- 11 dated 22.9.2017 held as follows:

“24. On the quantum of Guarantee Commission that has to be considered as at Arm’s length, the learned counsel for the Assessee placed reliance on various judicial precedents, wherein the arm’s length guarantee fee has been upheld mostly in the range of 0.25% to 0.60%. The learned DR relied on the order of the CIT(A).

25. We have considered the rival submissions. In the following decisions, various benches of ITAT have taken the view that 0.25% to 0.60% Guarantee commission charged for providing Guarantee was at Arm’s Length:

26. In the light of the aforesaid judicial pronouncements, we are of the view that the addition made by the AO ought to have been deleted by the CIT(A) as the Guarantee Commission charged by the Assessee has to be regarded as at Arm’s Length. We therefore direct the addition made in this regard be deleted. Further, it is worthwhile to mention that the recent Safe Harbour Rules notified by the Central Board of Direct Taxes (Notification No. 46/2017 dated 7 June 2017) the guarantee commission / fee declared in relation to the eligible international transaction is at the rate not less than 1% per annum on the amount guaranteed. The relevant extracts are reproduced below:

Thus, based on the above, it is evident that the guarantee fees charged by the Assessee is at arm’s length. We therefore direct that the adjustment proposed by the Ld. TPO/AO be deleted.”

The above decision of the Tribunal will equally apply to the present AYs under appeal We therefore hold that the addition made by way of adjustment to ALP in respect of transaction of providing guarantee to AE cannot be sustained and the same is directed to the deleted.

25. We shall now deal with other issues that are not common in both the AY 2011-12 and 2012-13. Ground No. 8 raised by the Assessee in the appeal for AY 2011-12 is with regard to dis-allowance u/s. 14A of the Act. The Assessee earned dividend income of Rs. 14,37,503 from investments in debt mutual fund schemes. The Assessee also holds investment in its subsidiary company Rishi Pharmaceuticals Inc. which is a foreign company, the dividend, if any, that might be received from this company is taxable. The Assessee, without prejudice to its claim that no expenses can be disallowed, computed a dis allowance of Rs. 63,929/- as expenses that have to be disallowed u/s.14A of the Act which lays down that any expenditure incurred for the purpose of earning any income which is not chargeable to tax cannot be allowed as deduction. The AO applied Rule 8D(2)(iii) of the Income Tax Rules, 1962 (Rules) and computed dis allowance u/s. 14A of the Act of Rs. 3,44,150.

27. Before DRP the submission of the Assessee was that dividend from debt fund scheme of mutual fund is not exempt from tax and so also dividend from investments in shares of foreign subsidiary company and therefore no dis allowance u/s. 14A of the Act could be made. The DRP directed the AO to verify the claim of the Assessee and exclude only investments which do not yield tax free income. The AO pursuant to the directions of the DRP did not allow the claim of the Assessee that no dis allowance u/s.14A of the Act could be made by holding that the foreign company in which investments in the form of shares were made by the Assessee was not its subsidiary and therefore the claim of the Assessee cannot be accepted.

28. We have considered the rival submissions. Dividend from debts funds of mutual funds and dividend from foreign company are taxable. In such circumstances, we are of the view no dis allowance u/s.14A of the Act could have been made. The Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT 317 ITD 33 (Delhi) has held that there can be no dis allowance of expenses u/s.14A of the Act, if there is no exempt income during the relevant previous year. In the light of the aforesaid decision, we are of the view that there cannot be any dis allowance u/s. 14A of the Act. The dis allowance is directed to be deleted.

29. In AY 2011-12, the Assessee has filed an application for leave to file the following additional ground of appeal:

“1. That on the facts and in the circumstances of the case, the petitioner be allowed foreign tax credit for the taxes paid in Japan on the doubly taxed income in accordance with the provisions of section 90 of the Act, read with the India- Japan tax treaty.

2. Without prejudice to the above, the petitioner be allowed foreign tax credit for the taxes paid in Japan on the doubly taxed income in accordance with the provisions of section 91 of the Act.”

30. The facts and circumstances under which the additional ground is sought to be filed is as follows. From the FY 2010-11 on wards, Assessee has been deriving income from rendering of services in Japan. However, Assessee did not at any time have a permanent establishment in Japan as defined under Article 5 of the tax treaty between India and Japan. For A.Y.2011-12 the assessee filed its tax return in India inclusive of the incomes earned from the transactions carried out of Japan. The assessee was under a bona fide belief that it was not required to file a tax return in Japan for the said transactions carried out in Japan. Accordingly, Assessee had not filed any tax return in Japan for FY 2010-11 and subsequent years. However, recently, Assessee had been advised that as per the domestic tax law of Japan, it was required to file tax returns in Japan from FY 2010-11 on wards. Accordingly, following its global policy of adhering to statutory compliances in all segments wherein it operates, Assessee immediately decided to comply with the requirement of tax filings in Japan. The Assessee has now filed its tax return in Japan for FY 2010-11 on 31 May 2016, computing a total income of JPY 16,619,970 and determining a tax liability of JPY 4,985,700 which has been duly paid by assessee in Japan. Income determined and offered to corporate tax in Japan is also included in the total income as per the return of income in India and tax on the same is paid in India under provisions of section 115JB. Hence, income is doubly once in Japan as a source country and in India as a resident country. Hence, Assessee is eligible to claim foreign tax credit of taxes paid in Japan against the tax liability determined in India. It has been submitted that at the time of filing of income-tax return in India for the A.Y. 2011-12 assessee had not claimed foreign tax credit on account of taxes paid in Japan as no tax was paid in Japan at that time and also the tax return was not filed in Japan. Hence, the assessee now after payment of taxes in Japan and since the time for filing of revised return in India has expired is now seeking to raise the aforesaid Additional ground.

31. We have considered the plea of the Assessee and the objection of the learned DR who submitted that the issue sought to be raised in the Additional Ground does not arise out of the order of the DRP. In our view keeping in mind the ratio of the Hon’ble supreme Court decision in the case of NTPC Vs. CIT 229 ITR 383 (SC), wherein it was held that legal questions on admitted facts can be permitted to be raised at any stage of the proceedings before Tribunal by way of additional grounds, the additional ground should be admitted for adjudication.

32. As far as the question of giving credit to taxes paid in Japan is concerned, it requires verification by the AO and therefore the AO is directed to consider the plea of the Assessee raised in the additional ground in accordance with law after due verification. The Assessee should be given an opportunity of being heard before any decision is taken on the issue.

33. In the result, ITA No. 121/Kol/2016 is partly allowed.

34. As far as ITA No. 647/Kol/2017 for AY 2012-13 is concerned, the only other issue which is not common with the appeal for AY 2011-12 is the issue with regard to disallowance of employees contribution to Provident Fund made by the AO by invoking the provisions of 36(1)(va) of the Act. The Assessee as an employer withheld the provident fund contribution payable by its employees from their salaries payable, as their share of contribution to Provident Fund (PF) and Employees State Insurance (ESI). As per section 36(1)(va) of the Act, the sum so withheld as employees contribution to PF & ESI, if it is not paid on or before the due date as provided under the relevant law governing the provident fund, will not be allowed as deduction. It is the plea of the assessee that the employees’ contribution to PF & ESI had been paid by the assessee on or before the due date of filing the return of income for the relevant assessment year u/s 139(1) of the Act and therefore deduction claimed should be allowed as provided under the proviso to section 43B of the Act. The said plea of the assessee was rejected by the AO for the reason that the proviso to section 43B of the Act cannot be read into the provision of section 36(1)(va) of the Act. The DRP directed the AO to verify and allow the claim of the Assessee in accordance with law. The AO in the order giving effect to the directions of the DRP took a stand that due date as per provisions of Sec.36( 1)(va) of the Act alone should be looked into and not the due date for filing return u/s.139(1) of the Act. Aggrieved by the order of the AO, the Assessee has raised Gr.No.3 before the Tribunal.

35. We have heard the rival submissions. At the time of hearing it was brought to our notice that the Hon’ble Calcutta High Court has also taken the view that employees’ contribution to PF paid on or before the due date of filing the return of income u/s 139(1) of the Act should be allowed as deduction. In this regard the decision of the Hon’ble Calcutta High Court in the case of M/s. Akzo Nobel India Ltd. Vs CIT in ITA 110 of 2011 order dated 14.06.2016 and in the case of CIT vs Vijayshree Ltd., of the Hon’ble Calcutta High Court in GA No.2607 of 2011 order dated 06.09.2011 was filed before us. In the order in the case of Vijayshree Ltd., (supra), the Hon’ble Calcutta High Court held as follows :

“The only issue involved in this appeal is as to whether the deletion of the addition by the Assessing Officer on account of Employees ’Contribution to ESI and PF by invoking the provision of Section 36(1)(va) read with Section 2(24)(x) of the Act was correct or not. It appears that the Tribunal below, in View of the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., reported in 2009 Vol.390 ITR 306, held that the deletion was justified.

Being dissatisfied, the Revenue has come up with the present appeal.

After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the Income Tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1 st April, 1988.

Such being the position, the deletion of the amount paid by the Employees’ Contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act.

We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appeal.”

36. In view of the aforesaid decision of the Hon’ble Calcutta High Court, we are of the view that the deduction claimed should be allowed as the employees contribution to the provident fund had admittedly been paid on or before the due date for filing return of income u/s.139(1) of the Act. We hold and direct accordingly.

37. S.A.No.03/Kol/2016 in ITA No.121/Kol/2016 is an application for grant of stay of recovery of outstanding demand arising out of assessment in AY 2011-12. Since the concerned appeal for AY 2011-12 has been disposed, the application for grant of stay has become infructuous and hence dismissed.

38. In the result ITA No. 121/Kol/2016 is partly allowed while ITA No. 647/Kol/2017 is allowed. S.A. No. 03/Kol/2016 is dismissed as infructuous.

Order pronounced in the Court on 17.11.2017.