Income Tax Appellate Tribunal - Chennai
Vox Spectrum Private Limited, Chennai vs Assessee on 12 October, 2011
IN THE INCOME-TAX APPELLATE TRIBUNAL
CHENNAI 'D' BENCH, CHENNAI.
Before Dr. O.K. Narayanan, Vice President and
Shri Hari Om Maratha, Judicial Member
I.T.A. No. 699/Mds/2011
Assessment Year: 2007-08
The Deputy Commissioner of M/s. Vox Spectrum (P) Ltd.,
Income Tax, Vs. A-3,, level 1, Zachas Enclave,
Company Circle III(4), 2nd Avenue, Anna Nagar,
121 Mahatma Gandhi Road, Chennai 600 040
Chennai 600 034. [PAN:AABCV5785D]
(Appellant) (Respondent)
I.T.A. No. 522/Mds/2011
Assessment Year: 2007-08
M/s. Vox Spectrum (P) Ltd., The Deputy Commissioner of
A-3,, level 1, Zachas Enclave, Income Tax,
2nd Avenue, Anna Nagar, Company Circle III(4),
Vs.
Chennai 600 040 121 Mahatma Gandhi Road,
[PAN:AABCV5785D] Chennai 600 034.
(Appellant) (Respondent)
Revenue by Shri K.E.B. Rengarajan,
:
Jr. Standing Counsel
Assessee by Ms. Pushya Sittaraman,
:
Sr. Advocate
Date of Hearing : 12.10.2011
Date of pronouncement 28.11.2011
ORDER
PER Hari Om Maratha, J.M.
These are cross appeals filed against the order of the ld. CIT(A) III, Chennai dated 21.01.2011 pertaining to the assessment year 2007-08.
2. Briefly stated, the facts of the case are that the assessee company, 2 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 who derives its come from assembling, marketing and distributing voice loggers, fleet and asset tracking and mobile locating and net working, filed its return of income on 31.10.2007 admitting loss of `.33,48,233/-. This return was revised on 29.09.2008 by filing a revised computation of income. This return was processed under section 143(1). Subsequently, regular assessment under section 143(3) was made on 31.12.2009.
3. In the Balance Sheet, under the heading 'share holders fund', the share application money pending allotment of `.23,79,32,760/- has been shown. As per the Assessing Officer, this share application money is a major source of the share holder's fund, which comes to 99.958%. As per the assessee company, these moneys were received from its parent company and for that purpose details of remittances was produced, which is as under:
Date of Transferor Remitting Recipient FIRC Amount remittance Bank Bank DOC No. (INR)
1. 5/2/2006 SAUDI OSUL CITI BANK ICICI 137592 116558000 COMPANY Chennai, India
2. 9/28/2006 VOX BVI EMIRATES ICICI 23409 3745318 BANK Chennai, India
3. 10/26/2006 VOX BVI EMIRATES ICICI 23410 45214724 BANK Chennai, India
4. 11/08/2006 VOX BVI EMIRATES ICICI 23411 12000000 BANK Chennai, India
5. 11/13/06 VOX BVI EMIRATES ICICI 23412 36275695 BANK Chennai, India
6. 11/21/06 VOX BVI EMIRATES ICICI 23413 2439024 BANK Chennai, India 3 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11
7. 11/30/06 VOX BVI EMIRATES ICICI 23414 4800000 BANK Chennai, India
8. 12/13/06 VOX BVI EMIRATES ICICI 23415 1000000 BANK Chennai, India
9. 1/12/2007 VOX BVI EMIRATES ICICI 23416 3000000 BANK Chennai, India
10. 2/12/2007 VOX BVI EMIRATES ICICI 28094 2500000 BANK Chennai, India
11. 2/27/2007 VOX BVI EMIRATES ICICI 28095 2500000 BANK Chennai, India
12. 3/13/2007 VOX BVI EMIRATES ICICI 28096 2500000 BANK Chennai, India
13. 3/16/2007 VOX BVI EMIRATES ICICI 28097 7200000 BANK Chennai, India Total 239732762
4. The assessee also filed further required details and on the analysis of foreign inward remittance, it was noticed that all the amounts except for the one were received from the company named Vox BVI through Emirates Bank. This company is situated in British Virgin Islands. As per the assessee, there is no requirement of clearance from FIPB, RBI in this case. Therefore, the case was referred to the Additional Commissioner of Income Tax under section 144A of the Act. The Additional Commissioner of Income Tax vide his letter dated 22.12.2009 gave following directions:
"The A.O. is seeking directions on allowing share application money of `.23,79,32,760/-. The A.O. was directed to examine the requirement of approval of FIPB for such transactions. The same has been received on 17.12.2009.
4 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 The A.O. has in his letter stated that it is very difficult to examine the creditor as they are based in British Virgin Island. The genuineness of credit has not been examined for the same reason. The A.O. is directed to take the proper channel for verification of the same by forwarding the issue to the FTD division of CBDT for verification, in the proforma, through proper channel. (copy of the proforma is enclosed for ready reference).
Pending such verification, the A.O. is directed to take a decision in the interest of revenue and as per law."
5. Thereafter the case was again posted for hearing, during which, the assessee was required to file (i) RBI clearance i.e. FIPB clearance and (ii) original FIRC certificate. The assessee did not file the original FIRC certificate but filed a duplicate of the same. The reason for the same was stated that the original certificate was deposited with ICICI Bank Limited, Nungambakkam, Chennai on 13.11.2009 for onward transmission to RBI for verification in respect of FCGPR. It was further stated that this was an investment under automatic route and is a sector which do not require prior approval. The assessee filed copies of full set of documents filed by it with ICICI Bank. It was stated that filling of FCGPR is only a reporting requirement and is not a condition precedent to the issue of shares. In respect of issue of shares for the said amount, filing of form FCGPR with the RBI through authorized dealer namely ICICI Bank, Chennai was required in terms of FEMA regulation. It was stated that FIPB approval is not required to be obtained in view of para 2.1 of Policy & Procedural Manual on FDI in India which basically mention about two types of FDI permitted by the laws 5 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 in India i.e. (i) automatic route and (ii) through specific government approval [FIPB]. The Assessing officer reproduced para 2.1 of the Manual, which reads as under:
"Foreign direct investment is freely allowed in all sectors including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all items/ activities can be brought in through the Automatic Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB)."
6. It was further explained by the assessee that the remittance comes under the first category which is the automatic route and therefore obtaining of FIPB approval is not necessary. The Assessing Officer relied on Para 9.2 Policy and Proceedure Manual on FDI in India published by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry in May, 2003, which is reproduced below:
"9.2 All other proposals for foreign technology agreement, no meeting any or all the parameters for automatic approval, and all cases of extention of existing foreign technical collaboration agreement, are considered for approval, on merits, by the Government. Application in respect of such proposals should be submitted in Form FC-IL to the Secretariat for Industrial Assistance, Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Udyog Bhavan, New DeIhi.
6 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 No fee is payable. The following information should form part of the proposals submitted to SlA:
i. Whether the applicant has had or has any previous financial/ technical collaboration or trade mark agreement in India in the same or allied field for which approval has been sought; and ii. If so, details thereof and the justifications for proposing the new venture/ technical collaboration (including trade marks).
On consideration of the proposal by the Project Approval Board/FIPB, decisions are normally conveyed within 4 to 6 weeks of filing the application."
7. This para talks about the requirement, whether the applicant had or has any previous financial/technical collaboration or trade mark agreement in India in the same or allied field for which approval has been sought. The Assessing Officer has mentioned that this para does not mention about the 'automatic route' and that it is also the preferable and appropriate channel for foreign remittance. He has further referred to Annexure - III of this Manual, which deals with guidelines for the consideration of Foreign Direct Investment [FDI] proposal by the Foreign Investment Promotion Board [FIPB]. This Annexure has to be read in conjunction with para 2.11 of the Manual. Para 2.11 reads as under:
"2.11 For greater transparency in the approval process, Government has announced guidelines for consideration of FDI proposal by the FIPB. The guidelines are stated in annexure - III. The sector specific guidelines for FDI and Foreign Technology 7 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 Collaborations are stated in Annexure - IV [For procedure relating to Government Approval, refer to para 8.2]".
In para 8.a of this annexure, it has been stated as follows:
"The extent of foreign equity proposed to be held (keeping in view sectoral caps if any e.g. 24% for SSI units, 40% for air taxi/airlines operators, 49% in basic/cellular/paging etc., in Telecom section)."
8. So, according to the Assessing Officer, when the assessee has received foreign remittance of 49%, it should have gotten FIPB approval. The Assessing Officer has also relied on Annexure IV of the Manual, which talks about sectors specific guidelines for foreign direct investments. Under para 3, limitation for FDI in telecommunication has been placed at 49% subjected to licensing and security requirement and adherence of the companies, who are investing and the companies in which investment has been made to the license conditions for foreign equity cap and lock - in period for transfer and addition of equity and other license provisions of stake. Thereafter, the Assessing Officer has examined the main objects of the assessee company, which are given in the Memorandum of Association and reads as under:
"To carry on all kinds of business as designers, manufactures, processors, assemblers etc. of the following:
1) Telecommunication equipments, telecommunication network, telecommunication signaling equipments etc. 8 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11
2) Radio communication equipment.
3) Ultrasonic and Radio frequency ranging.
4) Signaling telecommunication used in roads and railways.
5) To maintain all types of telecommunication services.
6) Satellite and to provide telecommunication services through satellite.
7) To establish private telephone networks.
8. To provide telecom establishments to Government and Private.
9) To provide basic telecom services attached to public telephone network."
9. The perusal of the above objects go to suggest that the main object of the assessee company is to manufacture/deal in equipments and network relating to telecommunication. In the background of the above guidelines, etc., the Assessing Officer has concluded that the remittance made by the assessee company does not fall under the category of automatic route and therefore it necessarily requires permission as per FIPB guidelines. Therefore, he has not accepted the remittance in question as genuine. Accordingly, the sums introduced as share application money pending allotment being `.23,97,32,760/- has been treated as undisclosed income of the assessee company and has been added back to the returned income under section 68 of the Act.
10. Against the above finding, the assessee company went before the ld.
9 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 CIT(A), who, in turn, has accepted the genuinity of the transactions with M/s. Vox Spectrum Limited, British Virgin Islands being a total of 12 remittances amounting to `.12,31,74,762/-, because according to him, the assessee has brought on record the proof regarding identity of the share holder by providing its address; details of incorporation of existence of that company under the law by producing copy of Form 2 and allotment of shares, bank statements, etc. Because the amount was received through banking channel, the genuinity of the transaction has also been accepted. Regarding the issue of FIPB verification, he has mentioned that even in the remand report dated 14.10.2010, nothing adverse has been reported by FTB, CBDT till date and no other positive material/evidence has been brought on record, except for simply indicating that the share application money, as such, represented applicant's own undisclosed money brought back in the garb of share capital. He has ignored Assessing Officer's observation that these foreign remittances are subjected to FIPB guidelines. According to the ld. CIT(A), this fact alone does not give jurisdiction to the Assessing Officer to treat the share subscription from Vox Spectrum Ltd as deemed income under section 68.
11. Regarding other foreign inward remittance of `.11,65,58,000/- received from Saudi Osul Investment Holding Company (SOIHC), he has treated the details furnished by the assessee as incomplete and therefore, has sustained this addition. Accordingly, he has partly allowed the appeal of 10 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 the assessee. Now, both the parties are aggrieved and have preferred their respective appeals. The assessee has raised the following grounds:
"1. The CIT -A erred, in law and on facts, in Paras 8.1 and 8.1.1 of the Appellate Order, by confirming the Deputy Commissioner of Income-tax's ("Assessing Officer") addition of `. 11,65,58,000 representing share application money received by the Appellant from Saudi Osul Investment Holding Company ("SOIHC"), which is the 48. 53% shareholder of Vox Spectrum Limited and which had remitted the amounts on behalf of Vox Spectrum Limited during the assessment year, 2007-08.
1.1. The CIT-A erred in disregarding the Company registration certificate dated 04/11/1426H (6.12.2005G) and charter documents of SOIHC filed by the Appellant that establishes the identity of SOIHC, which remitted the share application money on behalf of Vox Spectrum Limited.
1.2. The CIT -A erred in disregarding the Subscription Agreement dated June 6, 2007 and bank remittance documents filed by the Appellant which establishes the capital nature and genuineness of the share application money received by the Appellant.
1.3. The CIT-A, while confirming and accepting the identity of Vox Spectrum Limited and the genuineness of capital remittances directly made by Vox Spectrum Limited, erred in disregarding the identity of SOIHC and the genuineness of share application money remitted by SOIHC on behalf of Vox Spectrum Limited.
1.4. The CIT -A failed to see that since the assessment order itself was on a protective basis to protect the interest of the revenue pending any information from the Foreign Tax Division, there was no basis or material to confirm this addition, especially in view of the fact that the Foreign Tax Division has not till date given any negative information to the assessing officer.
1.5. The CIT(A) failed to see that the Hon'ble Supreme Court has held in the case of CIT v. Lovely Exports [2009] 319 lTR 5(SC) that if there is an allegation that the shareholder is bogus, it is that person who must be followed and brought to tax, and not the company in whose shares the investments have been made. The appellant has provided sufficient material to show
11 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 that SOIHC is an incorporated company, and the funds have been in fact transferred from its bank accounts and the remittance has been through normal banking channels. 1.6. The CIT-A erred, in law and on facts, in confirming the addition of capital receipts in the nature of share application money as the Appellant's taxable income.
2. The CIT-A erred, in law and on facts, in Para 9 of the Appellate Order, by confirming the Assessing Officer's order charging interest under Section 23413 of the Income Tax Act, 1967.
The Appellant craves leave to add, alter or amend any of the aforesaid grounds at any time or at the time of hearing."
12. The Revenue has raised the following grounds:
"1. The Order of the learned Commissioner of Income Tax (Appeals) is contrary to the Law and facts of the case.
2. The learned CIT(A) has erred in deleting the share application money taxed in the hands of the assessee amounting to `.12,31,74,762/-.
2.1 The learned CIT(A) ought to have upheld the action of the assessing officer treating the share application money as income u/s.68 wholly, instead of partially allowing the assessee's claim. It is submitted that the assessing officer had brought all the facts and circumstances of the case clearly in the order.
2.2 It is submitted that no approval of the RBI was obtained by the assessee and the action of the assessee in this regard was not in accordance with the conditions stipulated for the introduction of the share application money.
2.3 It is further submitted that on verification of the FIRCs, the purpose of remittance of the assessee company was 'other inward remittance'. Such other inward remittances constituted `.10,84,79,761 out of total remittances of `.23,97,32,761. The assessee itself is not clear about the purpose of remittance received from others.
12 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 2.4 It is submitted that where there are violations of conditions laid down with regard share application money as above, the assessee's claim if permitted would defeat the provisions of Income tax and other laws/Rules made in this regard.
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (appeals) be set aside and that of the Assessing Officer be restored."
13. We have heard the rival submissions and have carefully cogitated the entire records available before us including the paper books, etc. filed by the parties. The case of the ld. AR Smt. Pushya Sittaraman as put forth before us is that this is a simple case of share application money, where no permission is required, but only information is to be given to the RBI. On the other hand, the ld. DR's case in simple words is that this is a case of foreign remittance, which is subjected to RBI clearance [FIPB clearance] and the assessee has miserably failed to prove these remittances as per the guidelines issued through Manuals relating to Policy and Procedure on FDI in India published by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry in May, 2003 and other related provisions thereof, which the Assessing Officer has mentioned in his order elaborately. We have considered the rival submissions and have carefully examined the entire records. After going through the assessment order and the appellate order, we have found that the ld. CIT(A) has not adverted to the foreign investment policy procedure in detail and has not dealt with the 13 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 issue in its correct perspective. He has simply treated these additions as normal additions made under section 68 of the Act. The ld. CIT(A) has not even discussed about the Manuals, guidelines, etc, which we have incorporated in the earlier part of this order and which were extensively dealt with by the Assessing Officer in his order. Therefore, the order of the ld. CIT(A) cannot be treated as a speaking order on the issue. As is evident from the grounds, raised by the assessee that the ld. CIT(A) has not correctly investigated into the relevant documents, which were filed on record by the assessee in proof of SOIHC remittance. Likewise, we have found that the ld. CIT(A) has ignored the factum of approval to be obtained from the RBI and the assessee itself is not clear about the purpose of remittance received from others. In our opinion, the Assessing Officer has also not correctly investigated into the impugned issue with reference to relevant provisions of Income Tax Act. Therefore, we are of the considered opinion that the entire issue involved in these appeals needs to be remitted back to the file of the Assessing Officer and accordingly he has to redo the same. He has to accord opportunity of being heard to the assessee, as per law. The Assessing Officer shall decide the issue de novo with reference to the relevant provisions of FDI and shall also take into consideration the regular provisions of Income Tax Act. We may appreciate that the Assessing Officer has done a good home work while deciding the issue, but his decision seems to be lop-sided. Consequently, we remit the entire issue with 14 I.T.A. Nos Nos.699 & 522/ 522/Mds/11 Mds/11 the above observations and directions.
14. In the result, both the cross appeals are allowed for statistical purposes.
Order pronounced in the open Court on 28.11.2011.
Sd/- Sd/- (Dr. O.K. NARAYANAN) (HARI OM MARATHA) VICE PRESIDENT JUDICIAL MEMBER Chennai, Dated, the 28.11.2011 Vm/-
To: The assessee//A.O./CIT(A)/CIT/D.R.