Income Tax Appellate Tribunal - Delhi
Bycell Telecommunications India Pvt. ... vs Pr. Cit- 2, New Delhi on 24 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A" New Delhi
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
&
SHRI L.P. SAHU, ACCOUNTANT MEMBER
I.T.As. No.2819, 2820, 2821, 2822 & 2823/DEL/2017
Assessment Years: 2006-07 to 2010-11
Bycell Telecommunications vs. Pr. Commissioner of Income
India Pvt. Ltd., Tax-II,
Suite No.10, 1- Link Road, Room No.394,
Jangpura Extension, C.R. Building, I.P. Estate,
New Delhi. New Delhi.
TAN/PAN: AACCB 7403K
(Appellant) (Respondent)
Appellant by: Shri Ajay Vohra, Sr. Adv & Shri
Gaurav Jain, Adv.
Respondent by: Smt. Aparna Karan, CIT(DR)
Date of hearing: 27 10 2017
Date of pronouncement: 24 01 2018
ORDER
PER AMIT SHUKLA, J.M.:
The aforesaid appeals have been filed by the assessee against common impugned order dated 30.03.2017, passed by Ld. Principal Commissioner of Income Tax-II, (PCIT) Delhi, under section 263 of the Income Tax Act, 1961, for the Assessment Years 2006-07; 2007-08; 2008-09; 2009-10 & 2010-11.
2. Since the issues involved in all the appeals are common arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of this consolidated order. The entire issue which revolves around the impugned revision order u/s. 263 is that, re-assessment proceedings for the impugned I.T.As. No.2819 to 2823/DEL/2017 2 Assessment Years are erroneous and prejudicial to the interest of revenue, because the Assessing Officer has failed to examine the share application money received from the foreign entity, i.e., Bycell Holding AG, Switzerland, as the Assessing Officer has only verified the identity of the said entity but has failed to verify the creditworthiness of such investor and also the genuineness of the transaction. The amount of share application money received from Bycell Holding AG, Switzerland which is one of the main subject matter of present revision proceedings u/s.263 are as under:-
Amount of share application money (from ByCell AG, S.No A.Y. Switzerland)
1. 2006-07 Rs. 17,68,00,000
2. 2007-08 (Rs.4,87,97,080) [Repayment of share application money during the year, inadvertently considered as inflow by Ld. PCIT]
3. 2008-09 Rs.70,90,15,846
4. 2009-10 Rs.7,09,84,431
5. 2010-11 Rs.96,36,035
3. To challenge the impugned order, the assessee has raised the following grounds which are common and are identical in all the years.
A. The Ld. PCIT has erred in law and in fact in holding that the sufficient inquiries were not made to ascertain the genuineness and credit worthiness of the transactions undertaken by the Assessee in the Assessment Year 2006-07.
B. That the Ld PCIT has erred by not taking into account the fact that the genuineness and creditworthiness of the share application money received by the Assessee from its foreign promoter, namely Bycell Holding AG, was examined by the Assessing Officer by seeking information from the FT& TR, division of the CBDT.
I.T.As. No.2819 to 2823/DEL/2017 3C. The Ld. PCIT has erred in law and in fact in holding that the earlier orders of the AO under Section 143(3)/147 of the Act were erroneous and prejudicial to the interests of the revenue.
D. The order of the Ld. PCIT was passed without giving a reasonable and fair opportunity to the Assessee to respond to the issue of identity of the Assessee's shareholders, as this issue was neither mentioned in the Show Cause Notice nor brought up by the Ld. PCIT during the proceedings under Section 263.
E. The order of the Ld. PCIT was passed without giving a reasonable and fair opportunity to the Assessee to respond to the issue of genuineness and creditworthiness of share application money received by the Assessee from Bitcorp Private Limited as this issue was neither mentioned in the Show Cause Notice nor during the proceedings under Section 263 before the Ld. PCIT.
F. The order of the Ld. PCIT was passed mechanically without any application of mind."
BRIEF FACTS & BACKGROUND
4. Before dealing with the relevant issues and points as raised by the learned PCIT in the impugned order, it would be pertinent to deal with the relevant facts and backgrounds of the case as culled out from the material placed on record before us. The assessee is a private limited Company which was incorporated in India with the main object of carrying business in the field of Telecommunication Services in India. The 74% equity was held by a foreign company, namely, Bycell Holding AG, Switzerland and remaining 26% was held by an Indian Company, namely, Bitcorp Pvt. Ltd. The Swiss entity in turn was held by a Cyprus entity, M/s. Tenoch Holding Ltd, Cyprus (97% holding). M/s. Tenoch Holding Ltd., Cyprus was in turn was equally held by M/s. Quallis Inc., Panama and M/s. Kynance Business Ltd., British Virgin Islands. M/s. Quallis Inc., Panama in return was 100% held by Mr. Maxim Naumchenko; and M/s. Kynance Business Ltd., British I.T.As. No.2819 to 2823/DEL/2017 4 Virgin Islands was 100% held by Mr. Andrey Polvektow. Considering the fact that foreign investment in telecomm sector was regulated by Foreign Investment Promotion Board, (FIPB) Ministry of Finance, Government of India, the Bycell Holding AG, Switzerland applied for approval of investment to the extent of 74% in equity share of the Indian Company to undertake the business of Telecom Services in India. The said approval was accorded by FIPB vide letter dated 17.01.2006. Later on, the assessee filed another application dated 26.09.2007 by FIPB for enhancement of amount of investment in India so as to expand the area for providing telecom services in India. Necessary approval was granted by FIPB including approval dated 08.02.2008 for additional investment by the Swiss entity. Based on such approvals, M/s Bycell Holding AG, Switzerland remitted funds from overseas towards share application money/ share capital in the Indian Company from time to time which was utilized for applying of telecom licenses to the Department of Telecommunication, (DoT) Government of India. An aggregate amount of Rs.23 crore was given to the DoT towards entry fee for obtaining UAS License for North-East, West Bengal, Orissa, Assam and Bihar service area. Later on, on account of certain security clearance issue based by Ministry of Home Affairs (MHA), FIPB on 13.05.2009 withdrew the approvals granted to the assessee company for carrying out any telecom operation in India with foreign equity participations. The said withdrawal of approval as well as for the refund of entry fee paid by the assessee to DOT for obtaining the Telecom Licenses were challenged by the assessee under writ jurisdiction before Hon'ble Delhi High Court. The Hon'ble Delhi High Court dismissed the writ petition on the ground that the court would not interfere with the policy decision of the Central Government. Thereafter, the foreign investor had invoked arbitration proceedings under bilateral treaties seeking compensation for I.T.As. No.2819 to 2823/DEL/2017 5 withdrawal of approvals and refund of entry fees paid by the assessee. The said arbitration has been stated to be pending for disposal before the 'Permanent Court of Arbitration' at Hague.
5. For the impugned assessment years regular return of income were filed and such returns were subjected to scrutiny proceedings from time to time and assessments were completed mostly u/s.143(3). In the said assessments, the amounts shown in the balance sheet towards share application money/share capital were duly accepted by the then Assessing Officer. The year-wise positions of completed assessment are as under:-
S. No. AY Assessed income Remark
1. 2006-07 Rs.4,49,567 Assessment completed vide order dated
02.04.2008 passed under section 143(3)
accepting returned income
2. 2007-08 Rs. 1,18,37,231 Assessment completed vide order dated
30.11.2009 passed under section 143(3)
3. 2008-09 Rs.84,33,099 accepting
Assessmentreturned income.
completed vide order dated
30.06.2010 passed under section 143(3)
accepting returned income.
4. 2009-10 Rs.5,50,40,150 Assessment completed vide order dated
20.12.2011 passed under section 143(3)
accepting returned income.
Processed under section 143(1) accepting
5. 2010-11 Rs. 1,90,54,266
returned income.
6. In the wake of withdrawal of approval by FIPB on the ground of security clearance by Ministry of Home Affairs, Foreign Tax and Tax Research (FT&TR) Division of CBDT referred the matter to the concerned Chief Commissioner of Income Tax for conducting necessary examination and verification of source of funds of the investment made by Bycell Holding AG, Switzerland in the assessee- company. Based on the aforesaid information received from FT&TR I.T.As. No.2819 to 2823/DEL/2017 6 Division, the Assessing Officer initiated the reopening of the assessments u/s. 147 vide issuance of notices u/s.148 for all the impugned Assessment Years, to verify the identity, creditworthiness of the foreign investor and the genuineness of the transaction in terms of Section 68. The relevant 'reasons recorded' by the Assessing Officer read as under:-
"Return of income in this case for A.Y. 2006-07 was filed on declaring total income at Rs.4,49,567/-. The return was processed - u/s 143(1) of the Income-tax Act at the returned income. The assessee has shown share capital of Rs.17,30,76,920/-. Further, the assessee has shown unsecured loans amounting to Rs.4,97,43,080/- Following information was forwarded by the OSD, Foreign Promotion Investment Board, FT&TR, CBDT to the office of the undersigned:
"M/s ByCell Telecommunication India Pvt Ltd is and India company with registered and corporate office at 249, Ground floor, Okhla Industrial Estate Phase-III, New Delhi-20. The shareholders of the company are (i) M/s ByCell Holding AG, Switzerland holding 64.66% and (ii) M/s Bitcorp Pvt. Ltd. M/s ByCell Holding AG, Switzerland in turn is 97% held by M/s Tenoch Holdings, Cyprus the shareholding of which is equally held by M/s Quallis Inc, Panama and M/s Kynance Business Ltd, British Virgin Islands. M/s Quallis Lnc, Panama is 100% held by Mr. Maxim Naumchenko and M/s Kynance Busniess Ltd, British Virgin Islands is 100% held by Mr. Andrey poluektow. A diagrammatic representation of the corporate structure is enclosed as Annexure-1.
1.13 M/s ByCell Holding A.G. Switzerland was granted Foreign Collaboration Approval vide No. 24(2006)/ 382 (2005) dated 17.01.2006 to undertake the activities of offering CGM based cellular telephone services in India in thirteen states across the five circle of Assam, Bihar, Jharkhand, North East, Orissa and West Bengal. Vide amendment letter dated J2.02.2007 the shareholding pattern of the implemented company i.e., ByCell Telecommunication India Pvt Ltd was noted by FIPB as under:-
i. M/s ByCell Holding AG, Switzerland: 64.66% ii. M/s Bitcorp Private Limited (Indian Promoter): 35.34% I.T.As. No.2819 to 2823/DEL/2017 7 1.14 The M/s ByCell Telecommunications India Pvt Ltd vide letter dated 26.09.2007 has sought the following permission from FIPB:
i. To undertake activities of offering GSM based cellular telephone services under UAS license agreement all over India. ii. Foreign equity participation of 74% amounting to USD 500 million in the next 3-5 year in the paid up capital of the company.
1.15 The approval of the Government was conveyed to the Company vide letter dated14.02.2008 subject to the following condition: iii. The company shall adhere to the conditions as mentioned in Press Note 3 of2007;
iv. The operating license for telecom services shall be considered only under Unified Access Service (UAS); and v. The FIPB approval may not be construed as any commitment of Government for allocation of spectrum for the operation of mobile telephone services.
1.16 It is stated that M/s ByCell Holding AG, Switzerland invested over Rs. 120 crores in M/s ByCell Telecommunications India Pvt Ltd as FDI since January, 2006 for operations in India. 1.17 Ministry of Home Affairs (MHA) has furnished certain inputs to FIPB from the security angle regarding the investment: i. While ByCell Holding AG is based in Zug, Switzerland, it does not have significant presence there, and the Swiss address provided by the company is only a postal address without any physical office and staff. The Registrar of Companies, Geneva which keeps a track record of companies with operational offices in Switzerland is reportedly not aware of the existence of this company.
ii. 97% stake in ByCell Holding AG Switzerland is owned by Tenoch Holding Cyprus which is jointly owned and controlled by Andrey Polouektov and Maxim Naumchenko. Maxim Naumchenko is major shareholder in M/s ByCell Holding AG and also simultaneously holds post in a number of companies Involved in different business, including the St. Petersburg Telecom Sector, set up a company by the name of Megafon which was set up with flowing currency invested by rich individuals in St. Petersburg and this company was allegedly involved in a money laundering scandal.
iii. It has come to the notice that Tenoch Holding Cyprus, which holds 97% stake in ByCell AG Switzerland, is jointly held by (a) Quallis I.T.As. No.2819 to 2823/DEL/2017 8 Incorporated, Panama (50%) and; (b) Kynance Business Limited, British Virgin Island (50%). Both Panam and British Virgin Islands arc well known tax havens and there is no information about who are the owners of Quallis Incorporated and Kynance Business Limited and what is the sources of funds for these two companies which control ByCell Telecommunications India Limited.
1.18 FIPB in its I36 meeting held on 11-05-2005 deliberated the issued raised by MHA and has withdrawn the approval granted by it earlier. Department of Revenue forwarded the following comments to FIPB for its reviewing:
"M/s ByCell Holding AG, Switzerland was formed in 2005 with 100 shares of CHF 1,000 each. It is stated that M/s ByCell Holding AS has already invested in M/s ByCell Telecommunication India Private Limited loan amount of over Rs. 120 crores as FDI. No supporting documents like balance sheet etc., have been provided to examine the company's capacity to invest that amount. Moreover, the share capital of the holding company of ByCell Holding AG i.e., Tenoch Holding, Cyprus is only EUR 17,100 and neither its financial statements are given nor the financial statements of M/s Kynance Business Ltd, BVI and M/s Quallis Inc, Panama. Further it is stated that the source of funds for the investment by Mr. Maxim V Naumchenko and Mr. Andrey Plouektov, is the retained earnings of the companies in which they hold shares. The retained earnings of the companies are not furnished. In view of the above, DOR cannot offer any comments on the source of funds for investment until all documents are made available."
3. On perusal of records, it is noticed that the assessee has not offered such income for taxation purpose even though the assessee failed to prove the identity, creditworthiness and genuineness of the investors. Moreover the approval accorded by the Govt .has also been withdrawn in the case of the assessee.
From the above, it is clear that unexplained investments have been made in the assessee co. and the same axe liable to be taxed u/s. 68 of the IT Act. The assessee failed to disclose the same in the return of income filed by it for the relevant period.
4. In view of the above, I have reasons to believe that taxable income to the tune of the investments amounting to Rs. 17,30,76,920/- has escaped assessment and I am satisfied that it is a fit case for issue of notice u/s148 of the Income-tax Act.
I.T.As. No.2819 to 2823/DEL/2017 95. Since the income chargeable to the tax escaped assessment is more than one lakh rupees as per section 149 of the I.T. Act, the prior approval of the worthy CIT, Delhi-1, New Delhi is required for the issue of the notice u/s 148 as per section 151(2) of the I.T. Act 1961. Hence the same is put up for your kind approval.
Put up for kind perusal."
(Shiv Swaroop Singh) DCIT, Circle-3(1), New Delhi.
7. Thus, the assessments were reopened to verify the source of fund received by the assessee company from Bycell Holding AG, Switzerland. During the course of re-assessment proceedings, the learned Assessing Officer had raised questionnaires to verify the transaction of foreign investment in the share application/ share holdings in the assessee company. In response to which, the assessee had also filed its respective replies/explanations and documents. All the relevant questionnaires and reply submitted by the assessee have been submitted by the Department as directed by the Bench at the time of hearing in the form of separate compilation.
8. On behalf of the assessee, Learned Senior Counsel, Shri Ajay Vohra, at the outset pointed out that following details and materials were furnished by the assessee company before the Assessing Officer during the course of assessment/reassessment proceedings to establish the identity/creditworthiness of the foreign investor and the genuineness of the transaction.
Financial statements of the appellant wherein details/ amounts of share application money received and shares allotted were duly reflected;
Approval obtained from FIPB by the foreign investor & appellant;
I.T.As. No.2819 to 2823/DEL/2017 10 RBI approval for allotment for shares by the appellant company in favour of the foreign investor;
Copy of FIRCs establishing the source of foreign remittance and receipt of funds through banking channel;
Incorporation certificate, Memorandum & Articles of Association of the foreign investor, ByCell Holding AG, Switzerland.
Explanation qua source of funds of the foreign investor, in the form of loans and advances from its holding company, i.e., Tenoch Holding Ltd, Cyprus.
Incorporation certificate, Memorandum & Articles of Association of Tenoch Holding Limited, Cyprus, Nicosia, from whom ByCell Holding AG had received the loan for further investment in the appellant company in India.
9. The learned Assessing Officer completed the assessment for all the Assessment Years u/s.147/143(3) vide order dated 20.03.2015. The relevant observations of the Assessing Officer in the impugned assessment order for the A.Y. 2006-07 which is common to all the years under appeal, reads as under:-
2.1 The brief facts of the case leading to the reopening of the assessment are as discussed above. The details were called for from the assessee regarding the aforesaid issue to prove the identity and creditworthiness of the investors in regard to the share application money received from it foreign holding company and other details relevant to the issue. The details of the amounts received are as follows:I.T.As. No.2819 to 2823/DEL/2017 11
Financial Name of the Share Share Allotted Share Remaining Year Company Application Application Share Money Money Application Received Returned Money 2005-06 Bycell 17,68,00,000 12,80.02.920 Nil Holding (including AG 74,000 Purchased from initial subscribers) 4,87,97,080 2.2 The matter was also simultaneously referred to the FT&TR, CBDT for exchange of information vide this office letter dated 20.01.2014 in order to verify the identity and credit worthiness of the holding company ByCell Holding AG and its promoters.
3. In response to the queries the assessee filed replies from time to time which include the Certificate of Incorporation of ByCell AG.
Switzerland, the details of the share application money received during the year, copies of the FIRC etc. It was submitted that the amount had come through proper banking channels and after following all KYC and RBI norms and as tire source and identity of the promoter company was proved, it was not necessary to prove the source of source and the same would not have arty relevance on the nature of receipt once tire source is proved. It was submitted that the withdrawal of F1PB approval would not change the nature of receipt and could not be the sole reason to tax the receipt as unexplained cash credit. It was also argued that "if the identity of the non-resident remitter is established and the money has come through normal banking channels it cannot be I.T.As. No.2819 to 2823/DEL/2017 12 treated as deemed income under section 68 or 69 of the income tax act 1961. The assessee relied on several rulings to drive home the aforesaid arguments which are on record.
3.1 The details brought on record by the assessee have been verified and submissions considered. The information received from FT&TR is also on record and not being discussed in detail as it is covered under the confidentiality obligations as per the DTAA between the Swiss Confederation and the republic of The Government of India.
After examination of details filed and discussion with the AR, returned income of Rs.4,49,567/- is accepted.
10. One very important fact as culled out from the aforesaid reading of the assessment order besides considering the documents and evidences filed by the assessee was that, the Assessing Officer in the course of his enquiry had referred the matter to FT&TR CBDT for exchange of information from Swiss Tax Authorities in order to verify the identity and creditworthiness of the holding company, Bycell Holding AG, Switzerland and its promoters. Such information was received by the Assessing Officer through FT&TR CBDT which has been kept on record in the assessment records. During the course of the hearing, the Bench directed the learned CIT-DR to produce the said information received from FT & TR and also the 'office note' of the Assessing Officer while completing the assessment order u/s. 143(3)/147, which is very vital to the issue involved and also to examine, whether Assessing Officer has applied his mind or has carried out inquiry or not, while completing the assessment. The said 'office note' has been kept on record by the Assessing Officer while I.T.As. No.2819 to 2823/DEL/2017 13 accepting the share application money which for sake of appreciation of case is reproduced hereunder:-
OFFICE NOTE:
The issue relevant in the aforesaid assessment was referred to the FT&TR, CBDT for exchange of information this office letter dated 20.01.2014 in order to verify the identity and credit worthiness of the holding company ByCell Holding AG and its promoters.
As per the information received by this office vide letter dated 04.02.2015 from the FT&TR through their counterparts in Switzerland M/s ByCell AG, Switzerland is a company registered in Zug, Switzerland. The company had no revenue but had assets from investors in the form of a subordinated and conditional loan from its sole shareholder Tenoch Holding Ltd, Cyprus. Bycell Holding AG received the asset which, they then invested in the Indian Company ByCell Telecommunication India Pvt Ltd. The details of the receipts for share application money, shares allotted and money returned from the promoter company have been provided.
It is also been mentioned in the report that in view of refusal of India authorities to grant the telecom license the funds were returned in part by Bycell Telecommunications India Private Limited to Bycell AG, Switzerland and in turn to the investors with exception of the amount used for functioning of the company in India.
The Federal Tax Administration Switzerland (FTA for service of exchange of information on tax matters) has however observed that the information on fiscal years prior to Fiscal year 2011/12 are not covered under the temporal scope of article 26 of the updated DTAA between Switzerland and India as held by the Swiss Federal Administrative Court in its Decision A-4232/2013 of 17th December 2013.
On verification of the, submissions and financial statements of the assessee company regarding the receipt of share application money, shares allotted and amount returned the following year wise details are gathered:
I.T.As. No.2819 to 2823/DEL/2017 14Asst. Period Name of the Opening Share Shares Allotted Share Remaining Year Company Balance Application Application Share Money Money Application Received Returned Money 2006-07 01.04.2005 ByCell Nil 17,68,00,000 Nil 4,87,97,080 12,80,02,920 to Holding (Including AG 31.03.2006 74,000 recd.
from initial subscriber) 2007-08 01.04.2006 4,87,97,080 - 4,87,97,080 --
ByCell
to Holding
31.03.2007 AG
2008-09 01.04.2007 - 70,90,15,846 - -- 70,90,15,846
to ByCell
31.03.2008 Holding AG
2009-10 70,90,15,846 7,09,84,431 7,18,72,740 -- 70,81,27,537
01.04.2008
to ByCell
31.03.2009 Holding AG
2010-11 01.04.2009 ByCell 70,81,27,537 86,36,035 71,77,63,572
to Holding AG
31.03.2010 and Bit 10,00,000
Corp India
Pvt. Ltd.
2011-12 01.04.2010 71,77,63,572 45,00,00,000 26,77,63,572
ByCell
31.03.2011 Holding AG
2012-13 01.04,2011 ByCell 26,77,63,572 8,77,63,572
to Holding AG
31.03.2012 18,00,00,000
96,64,36,312 19,98,75,660
67,87,97,080
Aforesaid details were tallied with the information received from FT&TR and are found to be in order except for an error in the FT&TR report in the A.Y 2011-12 where in the corresponding period is wrongly mentioned as 01.04.2011 to 31.03.2012 while it should be 01.04.2010 to 31.03.2011.The amount returned to ByCell AG in that period is per the information received.
There is also typographical error in the report for share application money received in A.Y 2009-10 which actually is 7,09,84,431/- while shown in the report as amounting to 70,90,15,846/-. However the column of remaining application money at the end of the year confirms that the same is an error, hence no adverse view is taken.
The informationn received from FT&TR is on record and has not being discussed in detail in the order in view of the confidentiality obligations as per article 26 on exchange of information in the I.T.As. No.2819 to 2823/DEL/2017 15 DTAA between the Swiss Confederation and the Republic of The Government of India.
It is seen that an amount of Rs 23 crores paid as license entry fee is lying as with the Department of Telecom Government of India as of date for which the promoters of ByCell AG have initiated arbitration proceedings against Government of India under UNCITRAL Arbitration rules, 1976 on 04.10.2010 and the matter is pending before, "The permanent .court of Arbitration, The international Court of Justice, The Hague, Netherlands.
The breakup of the total receipts and payments from ByCell AG till date is as is as follows:
Total Amount Received - 96,54,36,312/--
Amount Refunded - 67,87,97,080/-
Balance - 28,66,39,232/-
Shares Allotted for Rs. -19,98,75,660)
In view of the above, no adverse view is taken in this case.
Sd/-
Dy. Commissioner of Income Tax, Circle-5(1), New Delhi.
ISSUES RAISED BY LD. PCIT U/S 263
11. After the conclusion of the assessment in the aforesaid manner, learned PCIT under his revisionary jurisdiction u/s. 263 issued a show cause notice dated 23.02.2017 stating that order passed u/s.147/143(3) is erroneous in so far as it is prejudicial to the interest of the Revenue. His sole allegation is that the Assessing Officer has only verified the identity of the share applicant by placing reliance on documents like certificate of incorporation of Bycell Holding AG, Switzerland and copies of I.T.As. No.2819 to 2823/DEL/2017 16 FIRC filed by the Assessing Officer, however he has failed to verify the second and third limb of these transactions, i.e., genuineness of the transactions and creditworthiness of the Swiss entity The relevant observations with regard to the show cause notice for each Assessment Year has been incorporated by him from pages 2 to 4 of the appellate order. After perusing the entire records, he has made certain observations in the impugned year which are basically the narration of facts and background of the case which by and large has been discussed by us in the earlier part of our order, however for the sake of ready reference some of his observations on the background and facts of the cases are reproduced hereunder:-
(i) M/s Bycell Telecommunications India Private Limited is an Indian company with registered and corporate address at 249, ground Floor, Okhla Industrial Estate, Phase-III, New Delhi-20. A perusal of assessment records of the case revealed that the major share holders of the company are M/s Bycell Holding AG, Switzerland (64.66%) and M/s Bitcorp Private Limited,(35.34%).
M/s Bycell Holding AG, Switzerland in turn is 97% held by M/s Tenoch Holdings Cyprus, the shareholding of which is equally held by M/s Quallis Inc, Panama and M/s Kynance business limited, British Virgin Islands.
(ii) M/s Bycell Holding AG, Switzerland was granted foreign Collaboration approval by FIPB, Ministry of Finance vide letter dated 17.01.2006 so as to undertake the activities of offering CGM based cellular telephone services in thirteen States.
(iii) Bycell Telecommunications India Private Limited vide its letter dated 26.09.2007 sought permission from FIPB to undertake activities of offering GSM based cellular telephone services under UAS license agreement all over India and permission for foreign equity participation of 74%, i.e., amounting to USD 500 Million in next 3-5 years in the form of addition to paid-up capital of the I.T.As. No.2819 to 2823/DEL/2017 17 company. The approval of government of India was conveyed to the company on 14.02.2008.
(iv) Subsequently, Ministry of Home Affairs furnished specific inputs to F.I.P.B from the security perspective which cast serious aspersions regarding genuineness of the source of investment made in the assessee company, which are elaborated as under:-
i. While Bycell Holding is based in Zug Switzerland, it does not have any significant presence there and the Swiss address provided is merely a postal address, without any physical presence or staff. The registrar of companies, Geneva which keeps a track record of companies with operational address in Switzerland is reportedly not aware of existence of the said company.
ii. 97% stake in Bycell Holding A.G is owned by M/s Tenoch Holding, Cyprus which is jointly owned and controlled by Audrey Polouektev and Maxim Naumchenko. Maxim Naumchenko is also a major shareholder in M/s Bycell Holding A.G and also a number of other businesses including St Petersburg telecom sector.
iii. It has also come to the notice that M/s Tenoch Holding, Cyprus is jointly held by (a) Qualis Incorporated, Panarna(50%) and (b) Kynance business Limited, British virgin Islands(50%).Both, Panama and are well known tax havens and there is no information about who are the owners of these two companies, which actually control M/s Bycell Holding A.G.
(v) In these circumstances, F.I .P.B withdrew the approval granted earlier to the assessee, and forwarded the said inputs to this office vide its letter dated 15.05.2009 for necessary action in accordance with provisions of law. Therefore, after due examination and analysis of inputs received from FIPB, notice u/s 148 of the Income tax Act, 1961 was issued in this case for assessment years 2006-07 to 2010-11.
(vi) Thereafter, vide a letter dated 06.02.2014, a request was made u/s 90 of the Income tax Act, 1961 to tax authorities in Switzerland to examine the genuineness of I.T.As. No.2819 to 2823/DEL/2017 18 source of income claimed to have been received by the assessee from M/s Bycell Holding A.G. Switzerland and the actual; beneficiaries to whom share application money claimed to have been returned.
(viii) Subsequently, the requisite' information was received from Switzerland tax authorities and after conducting hearing from time to time, the AO has passed Orders u/s 147/143(3) of the Income tax Act, 1961 in respect of assessment years 2006-07,2007-08,2008-09,2009-10, and 2010-11 on 20.03.2015.
[Emphasis in bold added is ours]
12. Thereafter, the ld. PCIT observed that assessee company had received substantial amount of share application money from Bitcorp Pvt. Ltd. for which only preliminary information pertaining to certificate of incorporation, company master data and PAN have been submitted which only proves the identity of Bitcorp Pvt. Ltd., but the documentary evidence to prove the genuineness and creditworthiness have not been submitted during the course of assessment proceedings like bank statement, income tax return, balance sheets, etc., which have not been analyzed by the AO. Apart from that, Assessing Officer has not made any inquiry by issuing a notices u/s. 133(6). Similarly with regard to the share application money by Bycell Holding AG, Switzerland, the Assessing Officer has only examined the preliminary information but no documentary evidence in support of the genuineness and creditworthiness have been found on record. Here again the bank statement of the share applicant money has not been brought on record including P & L account and balance sheet of M/s. Bycell Holding AG, I.T.As. No.2819 to 2823/DEL/2017 19 Switzerland. Based on the perusal of the assessment record, he held that following issues have remained unverified during the course of assessment proceedings:-
1. No enquiries have been conducted to ascertain whether any business activity was carried out by M/s Bycell Holding AG in Switzerland, nature of business activities carried out by that company, details of directors & staff employed by M/s Bycell Holding AG in Switzerland, and whether the credentials of that company are genuine and reliable.
2. No enquiries were made with the relevant banks to obtain the bank statements of M/s Bycell Holding AG, Switzerland which could have lead to trail of source of funds in the bank accounts of M/s Bycell Holding, AG.
3. Despite specific information on record, particularly the inputs received from Ministry of Home Affairs as discussed in preceding paragraphs, the AO has not made any enquiries regarding genuineness and creditworthiness of the company M/s Tenoch Holding, Cyprus which holds more than 97% shareholding M/s M/s Bycell Holding, AG., and which was the actual source from which funds were invested in assessee company. The AO has not taken cognizance of inputs from MHA, which constituted the vital reason for reopening of the case.
In view of the facts and findings discussed above, the identity, creditworthiness and genuineness of source of share application money introduced into the books of accounts of the assessee company during the period AY-2006-07 to AY-2010-11 have not been properly inquired into and examined."
13. After considering the assessee's reply and invoking the provision of Explanation-2 to Section 263 inserted by the Finance Act, 2015, he held that the assessment orders passed u/s. 147/143(3) for the Assessment Years 2006-07 to 2010-11 are erroneous ins so far as prejudicial to the interest of Revenue as he has not done proper inquiry and accordingly, directed the I.T.As. No.2819 to 2823/DEL/2017 20 Assessing Officer to pass fresh assessment orders after making proper inquiries and verification with regard to the money received during the year in the form of share application money/share capital.
DOCUMENTS REQUIRED BY THE BENCH DURING THE HEARING
14. During the course of hearing, we required both the parties to furnish various documents, vide separate order sheet entries (as per records), like:-
firstly, copy of 'office note' by the Assessing Officer accepting the share application money, which has been produce of learned CIT-DR (the relevant content has already been extracted above);
secondly, information sent by Switzerland Tax Authorities to FT & TR Division, produced by Ld. CIT DR which shall be discussed in our later part of the order;
thirdly, questionnaire and replies submitted by the assessee during the course of the original assessment proceedings as well as re-assessment proceedings (submitted by Ld. CIT DR);
fourthly, copies of audited financial statement of Bycell Holding AG, Switzerland along with English translation for all the Assessment Years so that availability of funds with the Bycell Holding AG, Switzerland can be seen (submitted by assessee);I.T.As. No.2819 to 2823/DEL/2017 21
lastly, copies of FIRCs which have been filed before the Assessing Officer during the course of re-assessment proceedings relating to remittance of funds by Bycell Holding AG, Switzerland (submitted by assessee).
All these documents have been filed before us by the respective parties on the basis of which we have heard both the parties at length.
ARGUMENTS ON BEHALF OF THE ASSESSEE
15. Before us, learned Senior Counsel, Shri Ajay Vohra after explaining the entire facts and material placed on record in this case, gave following sequence of events to explain the entire facts and material which was filed by the assessee before the Assessing Officer to prove the genuineness of the transaction and how this issue has been examined by the Assessing Officer during the course of two round of assessment proceedings. The said date chart specifically for the Assessment Year 2006-07 is reproduced herein below, which is almost identical with the other Assessment Years:-
Date Particulars
- The appellant filed return of income declaring income of Rs.4,49,567.
I.T.As. No.2819 to 2823/DEL/2017 22
November
ByCell Holding AG, Switzerland filed application for FIPB approval for 2005 to Feb 74% foreign investment in telecom sector in India (in the appellant 2008 Company). After due verification of all the details and after obtaining mandatory requisite security clearances, FIPB approval was issued in favour of the investor Company.
02.04.2008 Original assessment, after due verification of records, was completed under section 143(3) of the Income Tax Act, 1961 ("the Act") (Original assessment order) accepting the income returned by the appellant. May 2009 FIPB approval withdrawn on the basis that Ministry of Home Affairs ("MHA") had withdrawn the security clearance.
15.05.2009 After withdrawal of FIPB approval on the basis of inputs from the MHA regarding investments received from ByCell Holding AG, Switzerland, the Foreign Tax and Tax Research (FT&TR) Division of CBDT referred the matter to the CCIT/ income tax Department requesting related examination of source of funds of investment made by (a) ByCell Holding AG, Switzerland; and (b) Bitcorp Pvt Ltd. (India promoter), in the appellant company.
14.03.2013 Purely on the basis of information from the FT & TR Division, CBDT, the assessing officer reopened the case of the appellant under section 147/148 of the Act for the specific purpose of examination of source of funds received by the appellant from the foreign investor.
Examination of details/ replies filed during reassessment proceedings 22.11.2013 Appellant filed the audited financial statement for the relevant year.
Complete details of share capital/ application money is reflected on the face of the balance sheet and Schedule 1 thereto.
07.01.2014 In response to the queries of the assessing officer the appellant filed:
Details of FDI received from ByCell Holding AG, Switzerland along-with relevant Foreign Inward Remittance Certificate (FIRC);
- Approval issued by RBI for issuance of equity shares in favour of ByCell Holding AG, Switzerland I.T.As. No.2819 to 2823/DEL/2017 23 15.01.2014 The appellant explained the source of funds received by the appellant from ByCell Holding AG, Switzerland.
The appellant filed:-
18.02.2014
- Details of Bitcorp Pvt. Ltd. from ROC master data, certificate of incorporation and proof of PAN;
Details of share application money received from ByCell Holding AG, Switzerland February/ The appellant filed:
March 2015 Certificate of incorporation, Memorandum and Articles of Association of ByCell Holding AG, Switzerland;
Certificate of incorporation, Memorandum and Articles of Association of Tenoch Holding Ltd, Cyprus (further holding of ByCell Holding AG, Switzerland).
Vide the said reply, the appellant also explained the source of funds (creditworthiness) in the hands of the investor company (ByCell Holding AG, Switzerland). It was categorically stated that the investor company had received these funds in the form of loans and advances from Tenoch Holding Ltd, Cyprus (further holding of ByCell Holding AG, Switzerland).I.T.As. No.2819 to 2823/DEL/2017 24
20.03.2015 Re-assessment order under section 147/143(3) of the Act was passed wherein after examination of all the aspects, considering the replies and the documentary evidences placed on record, the assessing officer accepted the returned income of the appellant.
The assessing officer had, in para 2.1, categorically stated that the enquiries made to verify the identity and creditworthiness of the share application money received from the foreign holding company.
It would be pertinent to note that before conclusion of the assessment the assessing officer had sought a report from the FT & TR Division, CBDT (the very wing which had directed the Department/ assessing officer to examine the issue, as explained above) in respect of the share application money received by the appellant from ByCell Holding AG, Switzerland. The penultimate paragraph of the reassessment order clearly states that the report was received by the assessing officer from the FT & TR Division, CBDT. After considering the report and the details filed by the appellant, no doubts about the identity and creditworthiness of the investor and the genuineness of the transaction were left.
In light of this specific report, the assessing officer had accepted the returned income.
Show cause notice under section 263 of the Act issued by PCIT on the 08.03.2017 ground that only identity of the foreign investor, ByCell Holding AG, Switzerland, was examined by the assessing officer but genuineness of transaction & creditworthiness of ByCell Holding AG, Switzerland was not verified.
The appellant duly responded to the aforesaid notice issued under section 21.03.2017 263 of the Act.
I.T.As. No.2819 to 2823/DEL/2017 2530.03.2017 Impugned order under section 263 of the Act passed by the PCIT setting aside the reassessment order dated 30.03.2015 holding that the assessing officer did not make enquiry relating to business, directors & staff, credential of the investor companies. The CIT directed the assessing officer to make necessary enquiries and verification on:
(a) Source of funds received by the appellant company from ByCell Holding AG, Switzerland;
(b) Source of funds received by the appellant company from Bitcorp Pvt Ltd. (India promoter), which was not part of the notice under section 263 of the Act nor any opportunity was granted to the appellant in this regard during the revisionary proceedings.
16. From the above, Mr. Vohra submitted that here in this case, the issue of share application money/share capital was not only examined during the course of the original assessment proceedings but very extensively during the course of reassessment proceedings also, because the case was reopened u/s.148 specifically in the case of ByCell Holdings AG, to examine the identity and creditworthiness of the creditor and also the genuineness of the transaction which is evident from the 'reasons recorded'. The assessee had duly submitted all the relevant records and documents required from time to time by the Assessing Officer and it is not the case of the Assessing Officer that any documents required has not been furnished. Here in this case the share application money has come from a foreign entity after FIPB approval and all the remittances are duly backed by FIRCs issued by the banks. The said FIRCs clearly state the name of the remitter and the purpose of the remittance.
I.T.As. No.2819 to 2823/DEL/2017 26He also pointed out that the report/information was requisitioned by the FT & TR division of CBDT on the behest of the AO as a part of his inquiry from the Swiss Tax Authorities from whom specific information with regard to the remittance and genuineness of the said transaction was enquired for. In response, the Swiss Authorities have duly provided the details, whereby it is conclusively proved that Bycell Holding AG, Switzerland has given the funds for the share application money to the Indian Company and this is an investment company which in turn has received the funds from its holding company, M/s Tenoch Holdings Cyprus. Even the FIRCs issued by RBI contains name of remitter as Frixan Services Ltd., Nicosia Cyprus. Bycell Holding AG, Switzerland has initially obtained loan from its holding company Tenoch Holding Cyprus. The report obtained through FT&TR clearly mentions that Bycell Holding AG, Switzerland has arranged fund as subordinated loan from its sole share holders, i.e., Tenoch Holdings Cyprus for the purpose of investment in the Indian Company. Thus, the documentary evidences which has been sought by the Assessing Officer through CBDT goes to prove the source of funds and in fact, even the source of the source stands proved, as ByCell Holdings AG has received the funds from Cyprus entity, its holding company. When source is explained from the balance sheet of the foreign entity, then creditworthiness automatically stands established. Once these evidences and documents have been appreciated by the Assessing Officer, then it cannot be held that the Assessing Officer has failed to carry out any inquiry or has not applied his I.T.As. No.2819 to 2823/DEL/2017 27 mind properly on the facts and material on record while framing the assessment.
17. He further submitted that it is quite settled proposition that the twin condition as envisaged in Section 263, i.e., firstly, it is erroneous and secondly, it is prejudicial to the interest of the Revenue should be satisfied simultaneously and in support he relied upon various decisions including that of Hon'ble Supreme Court in the case of Malabar Industries Company Ltd. Vs. CIT, 243 ITR 83 (SC); CIT vs. Kwality Steel Suppliers Complex, 395 ITR 1 (SC); CIT vs. Max India Limited, 295 ITR 282 (SC). Here in this case, the assessment order cannot be held to be erroneous, as the AO has passed the order after carrying out detail inquiry and duly examining the evidences.
18. Mr. Vohra's second limb of argument was that the ld. PCIT cannot set aside the assessment merely because, according to him inquiry should have been conducted in a particular manner or any further inquiry ought to have been done by the Assessing Officer. Inadequacy of inquiry cannot be the ground for acquiring jurisdiction u/s.263. Apart from that, the learned PCIT prima facie should have recorded his findings on merits before setting aside the assessment and that to be after conducting some kind of inquiry especially when AO has diligently done his job; and simply cannot make blanket set aside of such an assessment order on the ground that sufficient inquiries were not conducted by the Assessing Officer. In support of his aforesaid contentions, he relied upon the following decisions:-
I.T.As. No.2819 to 2823/DEL/2017 28• ITO v. DG Housing Projects Ltd.:343 ITR 329 (Del.) • DIT v. Jyoti Foundation: 357 ITR 388 (Del.) • CIT v. Delhi Airport Metro Express (P) Ltd.: ITA No. 705/2017 (dated 5.9.2017);
• CIT v. Modicare Ltd.: 759/2016 (dated 20.9.2017)
19. On the issue of Section 68 also, he has again cited and relied upon the various judicial propositions, the list of which have been duly elaborated in his written synopsis. His submission with regard to the various issues raised by him to challenge the impugned order, including the new issue raised of share application money from Bitcorp Pvt. Ltd. which was not even arising from the reassessment order or show cause notice u/s 263, is reproduced hereunder:-
Re: Order not erroneous much less prejudicial to the interest of the Revenue:
In the facts of the present case, as explained above, since all the necessary documents and explanation to establish the identity, creditworthiness of the foreign investor and genuineness of the transaction were furnished by the appellant, the initial burden placed upon on the appellant was discharged.
It would further be pertinent to point out that the appellant never shied away from disclosing the identity of the foreign investors to the Government, inter alia, by way of (i) filing FIPB applications seeking approval of foreign investment in the Indian company; (ii) applying for telecom licenses and payment of license fee therefor; (iii) filing various writ petition(s) before the Delhi High Court against withdrawal of FIPB approval; (iv) and invoking arbitration proceedings before PCA, etc. It is submitted that, if the appellant had entered into any suspicious transaction with alleged non-existent investors, the appellant would not I.T.As. No.2819 to 2823/DEL/2017 29 have risked the same by applying to Government for necessary approvals, issue of licenses and then raising disputes with Government at different stages. In that view of the matter, it is the respectful submission of the appellant that the entire contours of section 68 of the Act with respect to the impugned amount of share application money received from the foreign investor, viz. identity and creditworthiness of the foreign investor and genuineness of the transaction, were satisfied in the instant case.
Be the case as it may, since the appellant had, as explained above, during the course of reassessment proceedings discharged the initial burden placed on it by establishing the identity, creditworthiness of the investor as also genuineness of the transaction, the burden shifted to the assessing officer/ Revenue to conduct further enquiries to corroborate the aforesaid transaction.
Considering that the aforesaid investment was received from the foreign investor, the assessing officer, while discharging the burden shifted on him, followed the only available recourse of conducting necessary enquiries qua establishing identity and creditworthiness of the foreign investor, by making reference to the FT&TR Division of the CBDT, which was a competent forum to conduct further necessary enquiries from the foreign investor through the foreign tax division of the other country i.e., Switzerland in the present case, in exercise of power available under Article 26 (Exchange of Information) of Indo-Switzerland DTAA.
The ex-parte report received by FT&TR Division of the CBDT from the Federal Tax Administration Division of Switzerland, pursuant to reference made at the request of the assessing officer, corroborated the documents / information / material furnished by the appellant with regard to the identity and creditworthiness of ByCell Holding AG, Switzerland and genuineness of the transaction, viz, subscription to share capital of the appellant company.
It would be appreciated that since FT&TR division of CBDT, on whose I.T.As. No.2819 to 2823/DEL/2017 30 direction the reassessment proceedings under section 147 were initiated by the assessing officer, issued a clean report or in other words there was no material with the assessing officer even after making reference to the FTA Division of Switzerland to doubt the identity / creditworthiness of the investor as also genuineness of the transaction, the assessing officer completed the assessment(s) at the returned income. It would be pertinent to point out that the assessing officer specifically relied upon the aforesaid report issued by FT&TR division of CBDT in the reassessment order(s) and also recorded office note to that effect before accepting the said transaction.
Having regard to the aforesaid documents placed on record by the appellant, specific report of the FT & TR Division and the fact that amendment to section 68 of the Act by insertion of the proviso thereto was also not applicable since reassessments completed under section 147 pertain to assessment years 2006-07 to 2010-11 and the share capital/ application moneys in question were received from a non-
resident investor, the assessing officer rightly accepted the amounts remitted by ByCell Holding AG, Switzerland as genuine and did not make addition to the income of the appellant under section 68 of the Act.
In light of the aforesaid documents forming part of the assessment records, on the basis of examination of which the CIT issued notice under section 263 and having regard to the settled legal position qua section 68 of the Act, it could not be said that the assessment order(s) passed by the AO accepting as genuine the amounts received from ByCell Holding AG, Switzerland, was erroneous much less prejudicial to the interest of the Revenue, in the absence of any contrary material against the appellant being on record. In that view of the matter, the jurisdiction assumed by the CIT is clearly flawed, being contrary to the law laid down by the apex Court in Malabar Industrial Co. Ltd. (supra) and followed in Max India (supra) and Kwality Steel Suppliers (supra).
I.T.As. No.2819 to 2823/DEL/2017 31Re: Order cannot be set aside for making further enquiries:
It is also important to note that in the impugned order, it is not the case of the CIT that the appellant had not discharged its initial / primary onus; on the contrary the CIT has merely directed the assessing officer to make further enquiries qua (i) source of funds received by the appellant company from its holding company ByCell Holding AG, Switzerland; and (ii) source of funds received by the appellant company from Bitcorp Pvt. Ltd. (Indian promoter) for the purposes of section 68 of the Act.
In the context of section 68 of the Act, the Courts have in the under noted cases unanimously held that where the Revenue does not bring on record any contrary material and fails to discharge the onus that shifted to the Revenue, post discharge of initial/ primary onus by the assessee, the addition made under section 68 of the Act had to be deleted:
CIT v. Oasis Hospitalities P. Ltd: 333 ITR 119 (Del) CIT v. Dwarkadhish Investment Ltd: 194 Taxman 43 (Del) CIT v. Kamdhenu Steel and Alloys Ltd: 361 ITR 220 (Del) CIT v. Gangeshwari Metal (P) Ltd: 264 CTR 277 (Del) The plea of the Revenue to set aside the matter to the assessing officer, to grant another opportunity for further investigation, was specifically negative in the following decisions:
CIT v. Kamdhenu Steel and Alloys Ltd: 361 ITR 220 (Del) PCIT v. Laxman Industrial Resources Ltd.: ITA 169/2017 (Del.) dt. 14.3.2017 The facts of the present case, it is submitted, stands on a much better footing inasmuch as the assessing officer, apart from the details filed by the appellant, duly made independent inquiries during the reassessment proceedings, qua the source of funds received from the foreign investor through the FT & TR Division before the accepting the I.T.As. No.2819 to 2823/DEL/2017 32 share application money/ capital as genuine. Being so, the CIT could not have set aside the said reassessment order(s) directing the assessing officer to make any further inquiries qua source of such funds, without even pointing out how the assessing officer was to proceed to conduct enquiries in a foreign jurisdiction, other than invoking the Exchange of Information article in the DTAA, which had already been done.
Matter debatable- jurisdiction under section 263 cannot be assumed:
The question whether addition under section 68 of the Act was not to be made or the assessing officer was to be directed to carry further enquiries, specially once it is accepted that (i) the assessee had discharged the initial burden cast upon the appellant (ii) the report received from the Foreign Tax office pursuant to ex-parted reference made by the assessing officer confirmed the stand of the assessed, and
(iii) there was material to the contrary on record, may, at the highest, be regarded as debatable, on which there can conceivably be two opinions.
In that view of the matter, the CIT could not have assumed jurisdiction under section 263 of the Act to set aside the reassessment(s) and direct the AO to make further enquiries qua verification into source of funds received by the appellant company (i) from its holding company ByCell Holding AG, Switzerland; and (ii) from Bitcorp Pvt. Ltd. (Indian promoter), as held by the Hon'ble apex Court in Malabar Industrial and Max India Limited {supra).
Re: No prima facie finding by the CIT;
On perusal of the impugned order passed under section 263 of the Act, it would be appreciated that the CIT has simply set aside the reassessment order(s) passed by the assessing officer on the ground that necessary inquiries qua source of funds were not conducted during the course of assessment proceedings without himself conducting any inquiry whatsoever or rendering any independent finding qua share I.T.As. No.2819 to 2823/DEL/2017 33 application money/ contribution towards share capital received from ByCell Holding, AG constituting unexplained moneys of the appellant which, as explained above, is impermissible in law. [refer DG Housing, CIT v. Delhi Airport Metro and CIT v. Modicare Ltd. (supra)].
Re: Invocation of Explanation 2 to section 263 not valid:
In the impugned order passed under section 263 of the Act, the CIT, in support of the assumption of jurisdiction under the said section in the present case, has relied upon the provisions of Explanation 2 to section 263 of the Act, inserted in the statute by the Finance Act 2015 w.e.f. 1-
6-2015, which, empowers the CIT to revise the assessment order, if in the opinion of the CIT, the order is, inter alia, passed without making any inquiries or inquiries/ verification which should have been made.
The said Explanation cannot, in our respectful submission, be read to provide unfettered powers to the CIT to set aside an assessment order, on a paltry ground of insufficient enquiry being conducted by the assessing officer, at his whims and fancies. Even after insertion of the aforesaid Explanation, the CIT, would, in our respectful submission, need to point out failure on the part of the assessing officer in not conducting relevant enquiries which were critical for decision on an issue, before rendering the assessment order to be erroneous and prejudicial to the interest of the Revenue. Any failure on the part of the assessing officer in conducting an enquiry, which is not critical for an issue or did not render the decision of the assessing officer to be fatal, would not, in our respectful submission, validate assumption of jurisdiction by the CIT under section 263 of the Act, in accordance with the consistent view of the Courts referred supra.
Re: Share application money/ capital from Bitcorp India Pvt. Ltd. (Indian partner) In the facts of the present case, show cause notice dated 8.3.2017 was issued by the CIT under section 263, requiring the I.T.As. No.2819 to 2823/DEL/2017 34 appellant to show cause as to why the reassessment order(s) under section 147 of the Act be not regarded as erroneous and prejudicial to the interest of revenue for lack of conducting necessary enquiries qua source of funds received from ByCell Holdings AG, Switzerland (refer page 152 of paper book) which was duly responded by the appellant vide reply dated 21.03.2017 It is submitted that, neither in the aforesaid notice nor during the course of hearing, any query was raised with respect to share application money received from the Indian partner, viz., Bitcorp Pvt. Ltd. However, in the impugned order dated 30.03.2017, the CIT had, without affording any opportunity of being heard to the appellant, set aside the reassessment order, inter alia, for verification of source of funds received by the appellant from Bitcorp India Pvt. Ltd. as well, which is beyond jurisdiction and outside the scope of section 263 of the Act in as much as the said findings have been given in violation of principles of natural justice, which vitiates the impugned order qua the aforesaid issue. Reliance, in this regard, is placed on the following decisions:
• CIT v. Amitabh Bachchan: 384 ITR 200 (SC) • Commissioner of Customs v. Toyo Engg. India Ltd. [2006] 7 SCC 592 • PCIT v. Krishak Bharti Co-operative Ltd.: 395 ITR 572 (Del.) • CIT v. Ashish Rajpal: 320 ITR 674 (Delhi) • CIT v. Contimeters Electricals (P.) Ltd.: 317 ITR 249 (Delhi) • Maxpak Investment v. ACIT: 104 TTJ 881 (Del.)/13 SOT 67 (Del.) • CIT v. Jagadhri Electric Supply & Industrial Co.: 140 ITR 490 (P&H.) • CIT v. R.G. Umaranee [2003] 262 ITR 507 2 (Mad.) I.T.As. No.2819 to 2823/DEL/2017 35 Being so, in view of the legal position elaborated supra, the action of the CIT in setting aside the reassessment order qua funds received from the India promoter is illegal and bad in law.
That apart, the reassessment proceedings under section 147/148 of the Act were, as is evident from the reasons recorded by the assessing officer (refer pages 44-46 of the paper book), initiated to verify sum received by the appellant from the foreign investor i.e., ByCell Holding AG, Switzerland in terms of section 68 of the Act. It is well settled that, the assessing officer is not permitted to conduct roving and fishing enquiries during the course of re- assessment proceedings under section 147 of the Act and the scope of re-assessment is restricted to issues raised in the reasons recorded or in terms of Explanation 3 thereto on issues which come to the notice of the assessing officer during the course of re-assessment proceedings.
In the present case, as pointed out above, the issue of genuineness of share application money received from Bitcorp Private Limited neither formed part of the reasons recorded before issuing notice under section 148 of the Act, nor any material came to the notice of the assessing officer subsequently during the course of re-assessment proceedings to doubt the source of such funds received from the Indian promoter. In fact the CIT, too, in the impugned order passed under section 263 of the Act has not made reference to any adverse material regarding share application money received from Bitcorp Private Limited and the aforesaid issue was set aside in the impugned order only on the ground that no enquiry qua that party/ investor was conducted by the assessing officer during the course of re-assessment proceedings.
In that view of the matter, since inquiries on the aforesaid issue of I.T.As. No.2819 to 2823/DEL/2017 36 share application money received from Bitcorp India Private Limited were beyond the scope of jurisdiction under section 147, no error can be attributed to the assessing officer in not making inquiries on the aforesaid issue or not making any addition thereof under section 68 in the reassessment order(s) passed under section 147 of the Act.
Reliance in this regard is placed on the following decisions, wherein it has been held that what the assessing officer could not directly do, the CIT cannot indirectly do the same in exercise of power under section 263 of the Act:
• CIT v. Software Consultants: 341ITR 240 (Del.) • Abad Fisheries v. DCIT: 80 ITD 153 (Coch.) affirmed by Ker. HC in 246 CTR 513.
• Simbhaoli Industries Ltd. v. DCIT: 78 ITD 161 (Del.)(SB) • Paul John, Delicious Cashew Co.: 94 1TD 131 (Coch.) • Gift Land Handicrafts v. CIT: 108 TTJ 312 (Del.) • Peerless General Finance & Investment Co. v. ACIT: 96 TTJ 834 (Kol) • Rajasthan Spinning & Weaving Mills v. DCIT: 281 ITR 177 (Raj.) • Smt. N. Sasikala v. DCIT: 115 TTJ 563 (Chenn.) In view of the above, the impugned order passed by the CIT to the extent of setting aside the issue of verifying source of funds received from the Bitcorp Private Limited is beyond jurisdiction, illegal and bad in law."I.T.As. No.2819 to 2823/DEL/2017 37
ARGUMENTS ON BEHALF OF THE REVENUE
20. On the other hand, learned CIT-DR after explaining the facts and background of the case, submitted that, when the assessment was reopened u/s.147 by the Assessing Officer solely on the basis of information received through FT&TR, that genuineness and creditworthiness of the share application money/share capital needs to be examined, then the Assessing Officer under the law was required to carry out necessary inquiries not only for establishing the identity and creditworthiness of the foreign entity but also to examine the genuineness of the transaction. The Assessing Officer has only examined the identity and factum of remittance of the money by relying on FIPB approval and FIRC Certificates. The Assessing Officer has miserably failed to carry out any inquiry to examine the creditworthiness and the business activity of M/s. Bycell Holdings AG and also the credentials of the company, whether it is genuine or just a paper company. The Assessing Officer has even not asked for relevant bank accounts of M/s. Bycell Holdings AG from where he could have verified the source and trail of funds in the bank account. Here in this case M/s. Tenoch Holding Cyprus holds more than 97% of share holding in M/s. Bycell Holdings AG, which has been stated to be the actual source of providing the funds for the investment in the assessee company. The Assessing Officer has even failed to examine the genuineness and creditworthiness of this Cyprus Company. In her submissions she highlighted that, the issues and the facts I.T.As. No.2819 to 2823/DEL/2017 38 which require consideration by this Bench while adjudicating the matter are:-
1. In the case of assessee, Bycell Holding AG Switzerland invested over Rs.120 crores as FDI since 2006 for operation in India. Bycell Holding AG Switzerland was granted foreign collaboration approval on 17.01.2006 to undertake the activities of offering CGB based cellular telephone services in India in thirteen states, which was withdrawn by FIPB in its 136th meeting held on 11.05.2009. FIPB withdrew all approvals on 24.07.2009.
2. Approval was withdrawn on the basis of inputs furnished by Ministry of Home Affairs to FIPB from the security angle regarding the investment as under:-
(i) While ByCell Holding AG is based in ZUG, Switzerland, it does not have significant presence there, and the Swiss address provided by the company is only a postal address without any physical office and staff. The Registrar of Company, Geneva which keeps a track record of companies with operational offices in Switzerland is reportedly not aware of the existence of this company.
(ii) 97% stake in ByCell Holding AG Switzerland is owned by Tenoch Holding of Cyprus which is jointly owned and controlled by Andrey Polouektov and Maxim Naumchenko.
Maxim Naumchenko is a major shareholder in M/s ByCell Holding AG and also simultaneously holds posts in a number of companies involved in different business, including the St. Petersburg Telecom Sector.
(iii) Andrery Polouektov, who is the Director of the Indian Venture and is also a partner with Naumchenko in ByCell I.T.As. No.2819 to 2823/DEL/2017 39 Holding, was earlier associated with a company called Gamma Group which was set up with funds from individuals involved in the telecom sector in St. Petersburg. The Gamma group further set up a company by the name of Megafon which was set up with floating currency invested by rich individuals in St. Petersburg and this company was allegedly involved in a money laundering scandal.
(iv) It has come to the notice that Tenoch Holdings Cyprus, which holds 97% stake in ByCell AG Switzerland, is jointly held by (a) Quallis Incorporated, Panama (50%) and; (b) Kynance Business Limited, British Virgin Islands (50%). Both Panama and British Virgin Islands are well known tax havens and there is no information about who are the owners of Quallis Inc. and Kynance Business Limited and what is the source of funds for these two companies which control ByCell Telecommunications India Limited.
3. Issue required to the examined as per the inputs provided by MHA & comments of Department of Revenue as under:-
(i) The source of funds for the foreign investment in M/s ByCell Telecommunications India Pvt. Ltd. by M/s ByCell Holding AG, Switzerland. This may lead to examination of source of funds of M/s Tenoch Holdings, Cyprus, M/s Quallis Inc. Panama, M/s Kynance Business Ltd., British Virgin Islands, Mr. Mamim Naumchenko and Mr. Andrey Poluektov.
(ii) The source of funds for domestic investment in M/s ByCell Telecommunications India Pvt. Ltd. by M/s Bitcorp Pvt. Ltd.
4. Against withdrawal of FIPB approval, assessee has filed writ I.T.As. No.2819 to 2823/DEL/2017 40 petition in Delhi High Court. Hon'ble Delhi High Court dismissed the writ petition by order dated 16th April, 2010. Hon'ble High Court considered the MHA inputs received by Ministry of Home Affairs from the security agencies in respect of the documents furnished by the appellant and activities of the entities and their directors i.e. Quallis and KBL both of which have 50% shareholding on THC and which in turn had a controlling interest in ByCell AG. ByCell AG hold 73.99% share of ByCell Telecommunication Ltd. Assessee has provided the information on the source of funds on the basis of which inputs were called for from security agencies by MHA. Majority of funds (more than 50%) were sought to be raised from loans from two Russian nationals.
5. Even in regular decision dated 09.12.2011, Hon'ble Delhi High Court dismissed assessee's appeal with the observation in para 11 which reads as under:-
"We are again not satisfied. Once the appropriate agencies have found it unsafe to allow inroads on the country to a particular foreign entity, merely because such foreign entity undergoes a mutation would not change the position. Such mutation cannot wash away the taint which investment was found to be suffering."
Since the investments which were made in the form of share capital not found genuine. FIPB approval, payment received through banking channel & FTRC could not make it explained. Assessee tried to prove genuineness and creditworthiness without furnishing any evidence in support of its contention. Even Hon'ble High Court of Delhi while dismissing appeal of assessee against FIPB approval given observation about tainted investment.
I.T.As. No.2819 to 2823/DEL/2017 416. Assessee has shown investment in share capital from ByCell AG Switzerland, whereas it is observed that assessee has filed one FIRC certificate for A. Y. 2006-07 on P-64 of paper book in which name of the remitter is shown Frixan Services Ltd. Nicosia, Cyprus not ByCell AG Switzerland. This shows the state of affair of assessee regarding investment is share capital.
7. Assessee failed to explain the source of investment by ByCell AG, Switzerland and Bitcorp Pvt. Ltd. The genuineness of transaction is also doubtful as the FIPB approval withdrawn only on the basis of the information provided by assessee in respect of investment as FDI.
8. Assessee failed to satisfy the conditions as per provision of section 68. It has to prove identity, creditworthiness and genuineness of the transaction in respect of the amount credited in its books of account as share capital.
9. FIPB is the deciding authority in respect of investment of foreign entity in India but it does not examine the source of investment (share capital) whether it is from disclosed sources or undisclosed sources. FIPB approval is subject to Indian laws. Assessee has claimed that creditworthiness and genuineness of the transaction proved as amount received through banking channels and FIRCs are there. It is worthwhile to mention here that amount received through banking channel could not make it genuine because bank does not examine the source of funds for which FIRC is issued.
10. In this case, the issue which was required to be examined as per the inputs received were the source of funding from Tenoch I.T.As. No.2819 to 2823/DEL/2017 42 holding Cyprus M/s Quallis Inc. Panama, M/s Kynance Business Ltd., British Virgin Islands, Mr. Mamim Naumchenko and Mr. Andrey Poluektov. AO even failed to examine the source of investment from ByCell holdings AG Switzerland and Bitcorp Pvt. Ltd. Assessee has not filed balance sheet, bank account, copy of return etc. in support of creditworthiness of the subscriber company whom it has received share capital. It is held by the judicial authorities that there should be some positive evidence to show the nature and source of the resources of the shares subscribers and bank statement filed before the AO may not be sufficient to prove the creditworthiness without any explanation for the deposits in the accounts and their source.
11. In this case assessee failed to explain the source of investment in share capital & whatever information was provided by it to FIPB regarding investment was not sufficient to establish genuineness and creditworthiness of the share applicant.
21. Ld. CIT (DR) further relied upon the decisions on Section 68, wherein in the cases of share application money, strict interpretation have been given by the Hon'ble Courts, like:-
"1. CIT vs. Nipun Builders & Developers (P.) Ltd, Delhi High Court, 2013, 30 taxmann.com 292.
Where assessee failed to prove identity and capacity of subscriber companies to pay share application money, amount so received was liable to be taxed under section 68.
2. CIT vs. Navodaya Castle Pvt. Ltd., Delhi High Court, 2014, [2014] 50 taxmann.com 110 (Delhi) I.T.As. No.2819 to 2823/DEL/2017 43 Section 68 of the Income-tax Act, 1961 - Cash credits (Share application money) - Assessment year 2002-03 - Whether certificate of incorporation, PAN, etc., are relevant for purpose of identification, but have their limitation when there is evidence and material to show that subscriber was a paper company and not a genuine investor - Held, yes
- Whether in case of private limited companies, generally persons known to directors or shareholders, directly or indirectly, buy or subscribe to shares and, therefore, an assessee cannot simply furnish some details and remain quiet when summons issued to shareholders remain un-served and uncomplied; their reluctance and hiding may reflect on genuineness of transaction and creditworthiness of creditors -
Held, yes - Whether creditworthiness is not proved by showing issue and receipt of a cheque or by furnishing a copy of statement of bank account, when circumstances require that there should be some more evidence of positive nature to show that subscribers had made genuine investment or had acted as angel investors after due diligence or for personal reasons - Held, yes [Paras 13-18] [Matter remanded]
3. CIT Vs. Bikram Singh, Delhi High Court, 2017, ITA 55/2017.
The use of deceptive loan entries to bring unaccounted money into banking channels plagues the legitimate economy of our country. The mere fact that the identity of the lenders is established & payments are made by cheques does not mean they are genuine. If the lenders do not have the financial strength to lend such huge sums and if there is no explanation as to their relationship with the assessee, no collateral security and no agreement, the transactions have to be treated as bogus unexplained credits.
4. Dhingra Global Credence (P.) Ltd. Vs ITO, ITAT Delhi, 2009,1 ITR(T)
529. Where basic identity of respective share applicants itself was not proved, addition of share application money allegedly received from them was justified.
I.T.As. No.2819 to 2823/DEL/2017 445. CIT Vs Empire Builtech (P.) Ltd., Delhi High Court, 2014, 366 ITR 110 Under section 68 it is not sufficient for assessee to merely disclose address and identities of shareholders; it has to show genuineness of such individuals or entities
6. B.R. Petrochem (P.) Ltd. Vs ITO, Madras High Court, 2017, [2017] 81 taxmann.com 424 (Madras) Where assessee received share capital from various contributors, in view of fact that those contributors were persons of insignificant means and their creditworthiness to have made contributions had not been established, impugned addition made by authorities below in respect of amount in question under section 68 was to be confirmed."
22. Thus, in sum and substance, she submitted that; firstly, the Assessing Officer has failed to enquire about the creditworthiness of M/s. Bycell Holdings AG by not looking into bank accounts and sources of funds himself and the entire flow of funds from various chains of entities; secondly, has not examined the genuineness of the transaction especially in the background of the fact that Ministry of Home Affairs had given its adverse report though it was in respect of security reasons, but also the Hon'ble High Court too have dismissed their writ petitions, and lastly, the assessee before the Ld. PCIT or before this Tribunal has not filed any document like, statement of bank account, copy of return, etc. in support of the creditworthiness of the subscriber companies from whom it has received the share capital and in support she has relied upon various judgments on powers of Ld. PCIT under section 263 and on Section 68.
I.T.As. No.2819 to 2823/DEL/2017 45REJOINDER BY ASSESSEE
23. In Rejoinder, Mr. Vohra submitted that when the information received from the Swiss Tax Authorities to the Government of India, clearly gives the details of the transaction and also the source of the funds, then their remains no doubt about the source of the money received and the creditworthiness of the M/s. Bycell Holdings AG which stands conclusively proved. In any case, he submitted that assessee has also filed the copies of balance sheets for all the years under dispute as directed by this Bench, which clearly points out that money given for share capital is duly reflected in the balance sheets for various years and also provides the source of funds with M/s. Bycell Holdings AG, which was from loan by its holding company M/s Tenoch Holdings Ltd. Cyprus. Apart from that, certificate of foreign inward remittances also categorically proves that the money has come from the foreign entity towards share capital through its banks. Thus, the entire onus upon which lied upon the assessee not only stands discharged in terms of Section 68; but also the Assessing Officer who has completed the assessment after carrying out inquiries by seeking the information from the Swiss Tax Authorities who have verified and certified the transaction, then it cannot be held that the Assessing Officer has neither carried out any inquiry nor has applied his mind while deciding the issue of share capital.
I.T.As. No.2819 to 2823/DEL/2017 46DECISION
24. We have heard the rival submissions, perused the relevant findings given in the impugned order as well as the material placed on record. The core issue before us is, whether the Ld. PCIT was justified in law and on facts in exercising his revisionary jurisdiction u/s 263 for cancelling and setting aside the reassessment order which was reopened u/s 147 for examining the share application money received from a holding foreign entity, ByCell Holdings AG, Switzerland; on the ground that Assessing Officer has not conducted proper inquiry in so far as to establish the creditworthiness of the investor. For coming to his conclusion he has by and large incorporated the facts as have been incorporated in the "reasons recorded" which in turn was based on information received from FT&TR about the chains of entities involved with ByCell Holding AG, Switzerland and cancellation of FIPB approval. He has mainly gone by his premise that the AO has accepted the credit of share application without looking to the documents, like bank statements, return of income, etc., and no document is found on records which can establish the creditworthiness of the parties and the genuineness of the transactions. Thus, dispute is not with regard to nature of credit, albeit, whether the onus to prove the entire limbs of source in terms of section 68 is established or not. The amount of share application money involved in the impugned Assessment Years before us and the details of the assessments made in various sections are as under:-
I.T.As. No.2819 to 2823/DEL/2017 47Sl.No. Assessment Amount of share Remark
Year application
money (from
ByCell AG,
1. 2006-07 Switzerland)
17,68,00,000[Rs.] Assessments under
sections:
(i) 143(3);
147/143(3).
(ii)
2. 2007-08 4,87,97,080 Assessments under
sections:
(i) 143(3);
(ii) 147/143(3).
The amount of
Rs.4,87,97,080 has been
inadvertently mentioned
as inflow of share
application money, which
in fact is repayment/
outflow by the assessee
company to the foreign
entity.
3. 2008-09 70,90,15,846 Assessments under
sections:
(i) 143(3);
(ii) 147/143(3).
4. 2009-10 7,09,84,431 Assessments under
sections:
(i) 143(3);
(ii) 147/143(3).
5. 2010-11 96,36,035 Assessments under
sections:
(i) 143(1);
(ii) 147/143(3).
I.T.As. No.2819 to 2823/DEL/2017 48
25. As discussed in the earlier part of the order, the assessee company was incorporated for providing telecom services in India in which, 74% equity was held by a foreign company, viz., M/s. Bycell Holdings AG; and remaining 26% was held by an Indian Company, viz., M/s. Bitcorp Pvt. Ltd. For making the investment in the equity share capital in the Indian Company, M/s. Bycell Holdings AG filed application before the FIPB for seeking approval and the said approval was accorded by FIPB from time to time. On the basis of said approvals, M/s. Bycell Holdings AG remitted to the Indian company (assessee), funds from overseas towards share application money/share capital which was partly utilized by the assessee in applying for telecom licenses to the DOT (Department of Telecommunication). Later on, due to certain security clearance raised by the Ministry of Home Affairs, FIPB withdrew the approval granted to the assessee for carrying out telecom operations in India with foreign equity participations. Against such withdrawal of approval the assessee company had approached the Hon'ble Delhi High Court under writ jurisdiction, which was dismissed by the Hon'ble High Court on the ground that the Court will not interfere in the policy decision of the Government of India. At present the matter is subjudice in arbitration proceedings before the Permanent Court of Arbitration at Hague. In all the years before us, the original assessments were completed u/s. 143(3) barring for the Assessment Year 2010-11, wherein the return was accepted u/s. 143(1). In all such assessments, the amount of share application money stood accepted. Later on, in the wake of withdrawal of approval by I.T.As. No.2819 to 2823/DEL/2017 49 FIPB, FT&TR division of CBDT referred the matter to the concerned CCIT for conducting necessary examination and verification of source of funds of investment made by M/s. Bycell Holdings AG in the Indian Company. Based on this information, all the assessments were reopened u/s.147 as per the 'reasons recorded' (reproduced in the foregoing paragraphs). Thus, the cases were reopened by the Assessing Officer with sole purpose of verifying the entire source and genuineness of the share application money/share capital made by M/s. Bycell Holdings AG. From the assessment records produced by the learned CIT- DR before us, we find that Assessing Officer did enquire from the assessee to prove the identity and creditworthiness of the foreign investor and the genuineness of the transaction which have been responded also by the assessee. The main documents relied upon by the assessee were mainly; the financial statements of the assessee company, wherein details of amount of share application money received and share allotted were duly reflected; approval obtained from FIPB; RBI approval for allotment of shares in favour of the foreign investor; copy of FIRCs establishing the foreign remittance received through banking channels; the incorporation certificate and Memorandum and Articles of Association of M/s. Bycell Holdings AG; explanation regarding the source of funds of foreign investor which was in the form of loan and advance from its holding company, i.e., Tenoch Holding, Cyprus; and lastly, incorporation certificate and Memorandum of Association of Tenoch Holding, Cyprus from whom M/s. Bycell Holdings AG has received the loan for further I.T.As. No.2819 to 2823/DEL/2017 50 investment in the Indian Company. The Assessing Officer after examining such material and record produced before him during the course of re-assessment proceedings, made further inquiry by seeking information from Switzerland Tax Authorities through proper channel of FT&TR division of CBDT, for exchange of information so as to verify the identity, source of funds and creditworthiness of the holding company, M/s. Bycell Holdings AG and its promoters. The said information was duly received to the Assessing Officer vide letter dated 04.02.2015 through FT&TR which was received from their counter parts in Switzerland. The Swiss Tax Authorities have categorically stated that M/s. Bycell Holdings AG is registered in Zug Switzerland. The said company though had no revenue but had assets from investors in the form of a subordinated and conditional loan from his sole shareholder M/s Tenoch Holding Pvt. Ltd., Cyprus; and M/s. Bycell Holdings AG after receiving the asset had then invested in the Indian Company. The details of share application and share allotted and money returned from the promoter company was duly provided. This fact has been noted by the Assessing Officer in his 'office note' as reproduced in the earlier part of the order. Such an information was made available by Swiss Authorities from the Financial Statements of ByCell Holdings AG. Based on this information AO had accepted the source of funds, creditworthiness of the investor and genuineness of the transaction.
26. We had also directed the learned CIT-DR to produce the relevant copy of said information received from Switzerland I.T.As. No.2819 to 2823/DEL/2017 51 Authorities with regard to M/s. Bycell Holdings AG. In response, the Department has produced the said report, which for the sake of ready reference is reproduced herein below:-
"6 NOV 2014 Administrative assistance in accordance with the Agreement dated 2 November 1994 between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on income (DTA CH-IN, SR 0.672.942.31)concerning M/s By Cell Telecommunications India Pvt. Ltd.
Dear Mr. Ranjan, We refer to the aforementioned requests for information. Based on Article 26 DTA CH-IN we can provide you with the following information for the fiscal year 2011/2012, which is the applicable time period under the DTA IN-CH;
1. The legal identity of ByCell AG Switzerland is to be verified. ByCell Holding AG is registered in the commercial registry as well as with the tax office under the following address:
Bahnhofstrasse 23, 6300 Zug, Switzerland.
Please find enclosed an extract of the commercial registry.
2. The sources of income of ByCell AG Switzerland wherefore it had made investments in capital shares of ByCell Telecommunications India Private Limited, year-wise details of which are mentioned below.
Federal Tax Administration FTA Nina Ulrich Eigerstra6Ee 65 CH-3003 Bern Tel. +41 58 464 46 76, Fax +41 58 462 35 99 [email protected] www.estv.admin.ch I.T.As. No.2819 to 2823/DEL/2017 52 The company has strictly speaking no income, but has assets from its investors. In the context of a subordinated and conditioned loan from its sole shareholder Tenoch Holdings Limited, Nicosia, Cyprus, ByCell Holding AG received the assets which they then invested in the Indian company ByCell Telecommunications India Private Limited.
1. Details of where the money has gone, which was returned by ByCell Telecommunication India Private Limited to ByCell AG Switzerland, year-wise details of which are mentioned below:
Period Share Share allotted Share Remaining
Asst Opening
application Application Share
Year Balance
money money application
received returned money
2006 - 2007 Nil 176800000 128 002 920 + Nil 4897 080
01/04/2005 7400
Purchased
31/03/2006 from initial
subscribers
01/04/2006 Nil Nil Nil
2007-2008 48 797 080 48 797 080
31/03/2007
Nil Nil Nil
01/04/2007 709 015846 7095 846
2008 - 2009
31/03/2008
01/04/2008 Nil
2009-2010 709 015 846 709015 846 71872540 708 127 537
31/03/2009
2010 - 2011 01/04/2009 Nil Nil
708 127 537 9636 035 717 763 572
31/03/2010
01/04/2011 Nil Nil
2011 - 2012 to 717 763 572 450 000 000 267 763 572
31/03/2012
Due to the recent decision of the Swiss Federal Administrative Court (Swiss Federal Administrative Court Decision A-4232/2013 of 17 December 2013), administrative assistance can only provide information for tax years from the fiscal year 2011/2012 as the prior years are not covered by the temporal scope of Article 26 of the updated Agreement between India and Switzerland. Having invested the mentioned amount, ByCell Holding AG claims that the Indian authorities refused to provide ByCell Telecommunications India Private Limited with a mobile phone I.T.As. No.2819 to 2823/DEL/2017 53 license. In this context, certain portions of the invested assets were returned (mainly by bank deposit guaranties). The Indian authorities hold funds which were transferred by ByCell Telecommunications India Private for fees related to licenses, but that these had not been issued up to today. The original owner of these funds is ByCell Holding AG.
According to the decision of the shareholders, and in the absence of any debts or other investment purposes, the funds returned by ByCell Telecommunications India Private Limited to ByCell Holding AG were reimbursed to the shareholder and therefore to the investors who provided these funds, with the exception of marginal amounts used for the functioning of this company.
ByCell Holding AG stated that the figures in the above mentioned table for the time period from 1 April 2011 to 31 March 2012 could not be located in their books. They did however state that one transaction took place on 19 April 2011 when ByCell Telecommunications India Private Limited transferred the amount of $ 4'026'815.00 to ByCell Holding AG. On the 26 April 2011 an amount of $ 4'003'000.00 was transferred by ByCell Holding AG to Tenoch Holdings Limited, Nicosia, Cyprus.
With regard to the aforementioned information we would like to draw your attention to the restrictions on the usability of the transmitted information as well as the confidentiality obligations under the administrative assistance provisions of the applicable agreement (Article 20 Paragraph 2 TAAA) in connection with Article 26 DBA CH-IN.
Please do not hesitate to contact us should you have any further questions.
Kindly confirm receipt of this letter.
Yours sincerely, Service for Exchange of Information in Tax Matters Sd/- Sd/-
Miek Haller Nina Ulrich
Deputy Head SEI Lawyer
I.T.As. No.2819 to 2823/DEL/2017 54
27. The above information ostensibly divulge following facts:-
Legal identity of ByCell Holding AG is established as it is registered in the commercial registry as well as with the Tax Office at Zug Switzerland. Hence Tax Resident of Switzerland.
Sources from where it has made investment in the Indian Company is from the assets received from its investors by way subordinated and conditioned loan from its sole shareholder, Tenoch Holdings Ltd. Nicosia, Cyprus. Thus, the source from where the funds have been invested has been provided.
Year wise details of money gone to Indian Company from Swiss Company and later on returned back have been duly elaborated.
Part of the funds returned by the Indian Company has been reimbursed to the shareholders and Indian Authorities have still hold part of the funds which were transferred by ByCell Indian Company for fees and license to DoT.
The aforesaid facts clearly establish the nature and source of funds received by ByCell Telecommunications India (Pvt.) Ltd., i.e., assessee from its holding company. Ld. AO, when in wake of such credible material has accepted the share application/share capital made by Swiss Entity in the Indian Company, coupled with other material placed by assessee before him, then we do find any infirmity in his order either in law or on facts that in I.T.As. No.2819 to 2823/DEL/2017 55 terms of requirement under the provision of section 68, the credits does not stand proved.
28. Ld. PCIT while exercising his revisionary jurisdiction u/s. 263 has stressed upon the fact that only identity of the share application money has been examined by the Assessing Officer, but the genuineness of the transaction and creditworthiness of the investor has not been verified and no inquiry whatsoever has been done by the Assessing Officer in this regard. In the impugned order, the learned PCIT though has acknowledged the aforesaid information received from Switzerland Tax Authorities requisitioned by CBDT itself, but nowhere has commented or given any finding as to how the said information received from Swiss Tax Authority does not either prove the source or creditworthiness of the investor or the genuineness of the transaction. Great emphasis has been laid by the learned PCIT as well as the learned CIT-DR before us that bank accounts of the M/s. Bycell Holdings AG has not been brought on record during the assessment proceedings so that the genuineness of the financial transaction can be verified and also the copy of audited balance sheets. Whence the money is flowing from the books of the investor as certified by Swiss Tax Authorities from their financial accounts including the source of their funds for investing in Indian Company and remittances are certified from FIRCs issued by respective banks of the investor and the investee duly approved by RBI, then how mere not filing of bank statement vitiates the onus of proving the source. Further, nowhere in the impugned order learned PCIT has even uttered a I.T.As. No.2819 to 2823/DEL/2017 56 whisper as to what kind of further inquiry was required to be done by the Assessing Officer especially when the Swiss Authority have clearly confirmed, firstly, the source of fund of M/s. Bycell Holdings AG for investing in share application money in the Indian Company (which was in the form of loan from its sole shareholder company, M/s. Tenoch Holdings Ltd., Nicosia Cyprus); and secondly, the details of money gone from Switzerland to India and also the return of funds by the Indian Company to M/s. Bycell Holdings AG. Year-wise details have been given which was on the basis of books of account of M/s. Bycell Holdings AG. In the wake of this information/confirmation, we are unable to appreciate as to, what else was required from the Assessing Officer or what kind of further inquiry was required to be done or otherwise the entire source of the share capital made in the Indian company would be disbelieved.
29. Here in this case the entire exercise of doubting the genuineness of the transaction is from the fact that the Ministry of Home Affairs have raised the issue of security concern, on the basis of which FIPB approval was withdrawn. However, this fact alone does not ipso facto can lead to an inference that entire share application money received from the foreign entity has become non genuine. When the money was invested there was a due approval by Govt. Of India (FIPB) which was given for obtaining telecom license with DoT and the flow of transaction was duly certified by FIRC Certificate which was placed on record not only before the Assessing Officer but also before the learned PCIT. These FIRCs duly provide the source of entity who has I.T.As. No.2819 to 2823/DEL/2017 57 given the money and also the person who had received the money in India and the purpose for which the said money was given. Further, much has been harped upon by the Ld. PCIT and ld. CIT-DR who tried to impress upon us that, M/s. Tenoch Holdings Ltd. Cyprus was just a holding company which was further held by two different entities, M/s. Quallis Inc, Panama and M/s. Kyanance Business Ltd, British Virgin Island and both these companies were held by some individuals, one of whom allegedly had some shady past or were involved in some kind of scams, though not much has not been brought on record in this regard. On these facts, she had submitted that the Assessing Officer should have inquired about the entire link while examining the creditworthiness of the foreign entities.
30. Under the deeming provision of section 68 as was applicable at the relevant time, the person in whose books of account any sum is found credited during the relevant previous year, was require to explain the 'nature' and 'source' of such credit. For proving the source, the courts since time immemorial have laid down that assessee needs to prima facie prove the identity and creditworthiness of the creditor and the genuineness of the transaction. Once it is prima facie established by the assessee, then onus shifts upon the Assessing Officer to rebut such evidence if he is not satisfied with the explanation based on the evidence filed, by bringing cogent material on record after carrying out necessary inquiry. If the AO fails to unearth any incriminating material to dislodge assessee's evidence, then he cannot obdurately disbelieve the transaction on his suspicion.
I.T.As. No.2819 to 2823/DEL/2017 58Inquiry should be made to examine whether the creditor/lender or investor is legally identified and has the creditworthiness to lend/ advance or give the money. The proving of source is limited qua the creditor/lender/investor. It cannot be extended to look the source of fund of such person unless, it is found by the AO that money of the assessee has been circuitously routed through that person. If there is no material to doubt the creditor's source then it has to be accepted. Proving of source of the source is not required to be gone into and can only be resorted to under exceptional circumstances when there is strong prima facie material that source itself is not genuine. Here in this case, source of funds ostensibly flows from ByCell Holdings AG, Switzerland and not only this, its source of advancing the sum is traceable to its holding company, M/s Tenoch Holdings Ltd. Cyprus. Thus, in the present case, source of the source has also been established. Beyond that, is not the mandate or requirement of law to be adhered by the Assessing Officer. Nothing has been brought on record by the Ld. PCIT or the Ld. CIT DR that assessee's own money has been routed through multi layered entities or money has flown from the coffers of the assessee. Here in this case it has already been found that when license was cancelled by FIPB, the money has been refunded back to the shareholders. This further proves that it was not the assessee's money brought under the garb of share application money. Swiss entity is major shareholder of the Indian Company which was established solely with a view to carry out telecom business in India post granting of license by DoT and it is an I.T.As. No.2819 to 2823/DEL/2017 59 admitted fact that it could not carry out the operation after cancellation of license, which dispute between Assessee Company and Govt. Of India is before International Court of Arbitration. All the doubt by Ld. PCIT is based on suspicion and surmise sans any material. As regard the allegation that creditworthiness of M/s. Bycell Holdings AG was not looked into or examined by the Assessing Officer, it is seen from the from records that the Assessing Officer did not just merely accepted the assessee's explanation or evidence in air, but carried out inquiry to ascertain the assessee's version by calling for the information from Swiss Authorities who had the jurisdiction on the investor company and after receiving the aforesaid report from the Swiss Authority was satisfied that the money which was given by the M/s. Bycell Holdings AG to the Indian company towards share application money has come from its sole promoter company, M/s. Tenoch Holding, Nicosia Cyprus. Thus, the entire creditworthiness of the investor stands proved and onus that lied upon the assessee and AO stood discharged. Further it is not necessary, whether the M/s. Bycell Holdings AG was having its own revenue from operation or not but if the funds have been given from the loan taken from the holding company, it suffices the test of creditworthiness for proving the source. Whether the Tenoch Holding had the creditworthiness to give such amount to M/s. Bycell Holdings AG to prove the credit of share application money in the books of account of the Indian company, as held by us, was not the requirement either under the facts of the case or under the law.
I.T.As. No.2819 to 2823/DEL/2017 6031. Even under the amended provision of section 68, brought by the Finance Act, 2012, w.e.f. 01.04.2013, whereby proviso has been inserted qua the deeming fiction on share application money, share capital, share premium or any such credit, has been made applicable to resident entity only and not to non- resident entity. This inter-alia means that deeming fiction cannot be extended to non-resident entities. Be it as may be, under the amended law also the onus stands discharged as the investor company has explained the nature and source of credit, that is, the share application money/share capital has been given out of its declared sources in its books of account. Thus, under amended provision also the addition could not have been made and AO has rightly accepted the assessee's explanation after finding it satisfactorily.
32. Here in impugned order, nowhere the Ld. PCIT has specified as to after conclusive confirmation by Swiss Tax Authorities, what other inquiry was required under the law which Assessing Officer has failed to carry out. Without specifying as to what possible inquiry under jurisdictional power of AO could have been done, he cannot set aside the assessment. Is the Ld. PCIT meant that AO should have made the inquiry from Cyprus Tax Authorities for the source of providing loan to its Swiss holding Company by the Tenoch Holding Ltd.? Then in that case, he should have himself invoked his powers under the treaty provision with Cyprus to obtain further information through CBDT. He has not made any kind of inquiry to dislodge AO's inquiry or finding, which in terms of Section 263, is required if he I.T.As. No.2819 to 2823/DEL/2017 61 deems necessary, albeit has simply discarded the AO's effort without any cogent material brought on record by him. In various judgments as highlighted by the learned senior counsel, it has been categorically held that, under section 263, Ld. CIT if required, himself has to undertake a minimal inquiry and give reasons for coming to the conclusion that assessment order was erroneous and prejudicial to the interest of the revenue. There has to be some finding on merits after carrying out necessary inquiry. This proposition has been explained in the judgment of ITO vs. DG Housing Projects Ltd. reported in 343 ITR 329 (Del); DIT Vs. Jyoti Foundation reported in 357 ITR 388 (Del.); CIT vs. Delhi Airport Metro Express (P) Ltd., in ITA No.705/2017; CIT vs. Modicare Ltd in ITA No.759/2016. Thus, the impugned order of Ld. PCIT cancelling and setting aside the assessment order cannot be upheld on this ground also.
32. Once again on merits, as discussed above, it evidently borne out that the money for share application/share capital in the Indian Company is flowing from the Swiss Company from the sources disclosed in its regular books duly reflected in the annual financial accounts and has come through the banking channel. Merely because the relevant bank statement was not given before the AO and to draw adverse inference, in our opinion cannot be the sole deciding factor when the foreign bank as well as the Indian bank have duly confirmed the transaction by the flow of money from Switzerland to India. In such circumstances it cannot be said that bank statement was required to see the genuineness or the creditworthiness. Here in this case the I.T.As. No.2819 to 2823/DEL/2017 62 creditworthiness is further borne out from the balance sheets of ByCell Holdings AG, (the English version of which was produced before us by the assessee as per our direction along with the original balance sheet which was in French). From the perusal of the balance sheet, we find that the entire share application money given to the Indian company has been duly reflected including the loan taken from its holding company in Cyprus. This proves the link of money flown from the coffers of its holding company, M/s. Tenoch Ltd. Cyprus to M/s. Bycell Holdings AG. During the course of the hearing the ld. CIT-DR tried to impress upon the fact that M/s. Tenoch Ltd. Cyprus was the holding company further held by M/s. Quallis Inc, Panama and M/s. Kyanance Business Ltd, British Version Island and both these companies were held by some individuals. On this premise, she submitted that the Assessing Officer should have inquired about the entire link while examining the creditworthiness of the foreign entities. We are unable to appreciate such kind of remote link especially when the Assessing Officer under the law was required to see the nature and source of the credit which had come from a Swiss company and not to examine the source of money advanced by M/s. Tenoch Holding Ltd to Swiss company. Going beyond as to how the M/s. Tenoch Holding Company has received the money and what is the source of M/s. Tenoch Holding Ltd. is definitely not the requirement of the law unless any contrary material is found. Otherwise there would be no end to roving and fishing inquiry. Thus, the contention raised by the learned CIT-DR about the background of the persons who were I.T.As. No.2819 to 2823/DEL/2017 63 holding Tenoch Holding Ltd. through their companies will not make much difference in the law in so far as to further examine the source of share application money/share capital brought by non-resident entity. Here in this case the Learned PCIT has completely ignored the factum of report received from Swiss Tax Authorities, which perhaps clinches the entire issue in favour of the assessee and has not even laid down the parameters as to what should have been the inquiry made by the Assessing Officer after receiving such a report. Accordingly, the reassessment orders passed by the AO for the impugned assessment years cannot be reckoned as erroneous in so far as it is prejudicial to the interest of revenue.
33. Lastly, at the time of hearing, Ld. Counsel for the assessee has strongly relied upon the judgment of ITAT Delhi Bench in the case of Russian Technology Centre vs. DCIT, reported in 155 TTJ 316, to contend that on similar set and circumstances, the identity of the non-resident remitter and source of funds stood established through FIPB approval and FIRCs issued by the authorised dealer, RBI, it was held the share application money stands proved and no addition can be made u/s 68. We find that now that decision of the Tribunal has been affirmed the Hon'ble Jurisdictional High Court, vide judgment dated 5.12.2017 reported in (2017) 100 CCH 0141 (Del) in the case of CIT and Another vs. Russian Technology Pvt. Ltd. Though this judgment came to our notice after the hearing of the case, we are yet taking note of this judgment being the judgment of Hon'ble Jurisdictional High Court. In this case, the assessee company I.T.As. No.2819 to 2823/DEL/2017 64 had received various amounts from its holding foreign company to its subsidiary. The assessee to prove the genuineness and identity of the shareholder furnished FIPB approval copy of certificate of incorporation of shareholders copy of bank statement and copy of Form-II filed before ROC and balance sheets. Despite all those evidences the Assessing Officer had made the addition which was confirmed by the ld. CIT (A), however the Tribunal had deleted the said addition. In the wake of this background the Hon'ble High court has observed and held as under:-
"12. The preceding enumeration of the circumstances of the case show that the assessee had furnished all relevant data before the AO and the CIT(A), which, however, were not inquired into by the AO. Instead he obdurately adhered to his first impression and/or initial understanding that the entire transaction was neither creditworthy nor genuine. The assessee relied upon the documents to prove that the monies had been received through banking channels from its principal and other related companies; it had submitted the FIPB Approval dated 10.12.2005 authorizing the assessee company to raise capital upto Rs.600 crores, copy of certificates of incorporation of share holders, copy of bank statement, copy of Form 2 filed before ROC, copies of Certificates of (i) Incorporation of RTCFIL, (ii) Incumbency of RTCFIL, (iii) Good Standing of RTCFIL, (iv) Director Certificate of RTCHL as well as the Balance Sheet of RTCFIL for the years 2004-05 and the confirmation given by the remitters towards remittance of share capital etc. This was all that the assessee could have furnished in the circumstances. It could not be expected to prove the negative I.T.As. No.2819 to 2823/DEL/2017 65 that the monies received by it were suspicious or not genuine infusion of capital etc. The assessee had discharged its burden of proof in terms of the settled dicta in Divine Leasing (supra). It is only logical to expect that if the AO was not convinced about the genuineness of the said documents, he would have inquired into their veracity from the bank(s) to ascertain the truth of the assessee's claims. Having not done so, he was not justified in disregarding the assessee's contentions that the infusion of monies into its accounts was legitimate. Consequently, the AO was not justified in making additions of the various sums under Section 68 of the Act."
This judgment merely corroborates our finding on merits that the share application money received from the holding foreign entity, the documents as mentioned above are sufficient to hold that transaction is genuine, and in the present case also all these documents have been placed on record at some stage or the other and therefore, on merits also the additions u/s.68 is not called for.
34. Now in so far as the observation and the finding of the learned PCIT with regard to the share application money received from other Indian partner, M/s. Bitcorp India Pvt. Ltd., first of all, we find that this issue was neither there in the "reasons recorded" by the Assessing Officer as the information which was received for reopening of the assessment completed u/s.143(3) was only with regard to the examination of the fund received from the foreign investor, M/s. Bycell Holdings AG in terms of Section 68; nor any 'reason to believe' has been entertained by AO during I.T.As. No.2819 to 2823/DEL/2017 66 the course of assessment proceedings based on any tangible material coming on record. Once the case was reopened u/s 147 only to examine the source of share application money/share capital of the non-resident entity and without there being any tangible material on record that the share application money received from M/s. Bitcorp India Pvt. Ltd. is not genuine, the Assessing Officer under the law was not required to conduct any roving and fishing inquiry within the scope of re-assessment proceedings which is circumscribed or limited only to the issues raised and 'reason to believe' entertained in the 'reasons recorded'; or in the terms of Explanation-3 to Section 147, i.e., on the issue which comes to the notice of the Assessing Officer during the course of re-assessment proceedings. Not only that, we find that even the learned PCIT while issuing the show cause notice to the assessee u/s.263, no issue with respect to share application received to India partners, viz. M/s. Bitcorp India Pvt. Ltd. was raised by him. It is also not coming from the impugned order as to what was the adverse material available in the assessment record or coming to his notice with regard to the share application money received from M/s. Bitcorp Pvt. Ltd. Once this issue is neither flowing from the initiation of re- assessment proceedings u/s.147, i.e., "reasons recorded" nor arising from the reassessment order, then without there being any adverse material on record and without issuing any show cause notice to the assessee on this point, learned PCIT cannot set aside this issue on the ground that no inquiry qua that party/ investor has been conducted by the Assessing Officer. We are I.T.As. No.2819 to 2823/DEL/2017 67 aware of the proposition that even if the issue which has not been raised in the show cause notice u/s 263 by the Ld. PCIT, but same can be raked up in the course of revisionary proceedings, however, Ld. PCIT can deal upon the issue only when it is confronted to the assessee at the time of the revisionary proceedings and that to be when reasonable opportunity is given to the assessee for explaining the same. However, in the present case, nowhere the learned PCIT has pointed out that inquiry of the share application money received from M/s. Bitcorp India Pvt. Ltd. was within the scope of jurisdiction u/w.147 or is flowing from the "reasons recorded" by the AO; and once such inquiry was beyond the scope of the re-assessment proceedings, then no error can be attributed to the Assessing Officer for not making the inquiries on the issue or he was required to make any addition u/s.68 on this score. Here in this case another very important fact is that, in all these years, the assessments were completed u/s. 143(3) and prior to the initiation of re-assessment proceedings all these transaction have been examined and the same has been duly accepted. While reopening such assessments u/s.147, Assessing Officer should have credible information and tangible material coming to his possession to entertain reason to believe that the share application money received from M/s. Bitcorp India Pvt. Ltd. during the assessment year 2006-07 to 2008-09 was not genuine. Once there is no such material, then the finality attained in terms of orders passed u/s. 143(3) accepting the said share application money can neither be raised nor can be disturbed. Thus, on this score also, we hold that I.T.As. No.2819 to 2823/DEL/2017 68 learned PCIT was not justified either in law or on facts in setting aside the issue of share application money received from M/s. Bitcorp India Pvt. Ltd. for carrying out any further inquiry or pass any fresh assessment order as it is beyond the scope of Section 263 in the present case.
35. Accordingly, in view of our finding given above, we hold that the impugned order passed by Ld. PCIT u/s 263 for all the impugned assessment years are not sustainable and is thus, quashed.
In the result, all the appeals of the assessee are allowed.
Order pronounced in the open Court on 24th, January, 2018.
Sd/- Sd/-
[L.P. SAHU] [AMIT SHUKLA]
ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED: 24th January, 2017
PKK:
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
Assistant Registrar