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PER BENCH

1. IT(SS) A. No. 411/Del/04 is an appeal by the assessee and IT(SS) A. No. 45/Del/05 is an appeal by the Revenue. Both these appeals arise out of the order of learned CIT(A)-III, New Delhi dated 30/11/2004. They are being disposed of by this consolidated order.

2. First we shall take up the Assessee's appeal i.e. IT(SS) A. No: 411/Del/04 for consideration. The facts and circumstances giving rise to the appeal by the Assessee are as follows. The Assessee is a company. M/s HCL Corporation Ltd., (hereinafter referred to as 'M/s HCLCL'), M/s Shiv Nadar Investment Pvt.Ltd. (hereinafter referred to as 'M/s SNIPL') and the assessee company were promoters of a company by name, M/s HCL Consulting Ltd. The main objects of these three companies were making investments in various companies. The investments are in the form of contribution to share capital of various companies. They promote companies and hold shares of companies promoted. The shares are held by these companies in order to have power to control and manage the companies, which they promote. The assessee, M/s HCLCL and M/s SNIPL sold 41,00,000, 14,50,000 and 14,50,000 shares respectively of M/s HCL Consulting Ltd. to one Overseas Corporate Body (OCB) i.e. M/s Wintech Investment Pvt.Ltd., Mauritius (hereinafter referred to as 'M/s WIPL') at Rs. 50/- per share. All the three transactions took place in June, 1999. The three companies passed a Board Resolution all dated 3.6.99 offering shares held by them in the capital of M/s HCL Consulting Ltd., to M/s WIPL. M/s WIPL by Board resolution dated 4.6.99 agreed to buy the shares in question subject to the required Governmental approvals. The RBI granted in principle approval on 23.9.99 and final approval on 23.10.99. The assessee, M/s SNIPL and HCLCL received the sale proceeds on 13.10.99, 14.10.99 and 12.10.99 respectively in the form of remittances in foreign exchange duly evidenced by the Foreign Exchange Remittance Certificates. Therefore, there was a completed sale of the shares in the P.Y. relevant to A.Y. 2000-2001, i.e., Financial Year 99-2000, by the Assessee, SNIPL & HCLCL respectively. Prior to this sale, M/s WIPL was holding 20,00,000 shares of M/s HCL Consulting Ltd. and after acquiring 70,00,000 shares from the aforesaid three companies, it sold 4,15,000 shares leaving with it 85,85,000 shares of M/s HCL Consulting Ltd. of the face value of Rs. 10/- per share. Subsequently, M/s HCL Consulting Ltd. capitalized part of its free reserves/profit by issuing bonus shares. Each shareholder was issued one equity share of Rs. 10/- as bonus for every two shares held in M/s HCL Consulting Ltd. Thus M/s WIPL held 1,28,77,500 shares of M/s HCL Consulting Ltd. after such issue of bonus shares. The share capital of M/s HCL Consulting Ltd. was consolidated and shares of the face value of Rs. 10 each were sub-divided into shares of face value of Rs. 4/- each in November, 1999. Accordingly, 1,28,77,500 shares of the face value of Rs. 10/- each held by M/s Wintech Investment Pvt.Ltd. became 3,21,93,750 shares of the face value of Rs. 4/- each. Such consolidation and sub-division happened in the month of November 1999. This holding by M/s WIPL in M/s HCL Consulting Ltd. represented a controlling interest in the said company. Meanwhile, the name of M/s HCL Consulting Ltd. was changed to M/s HCL Technologies Ltd. on 6/10/1999 and in this new name, the said company came up with an Initial Public Offer (IPO) of shares in the month of November 1999.

d. The contention of the assessee that department is having shifting stand on valuation of shares is again not correct. The assessee was specifically asked vide order sheet entry dated 17.02.2004 why valuation of shares of HCL Consulting Pvt.Ltd. should not be done at Rs. 1807/- per share based on seized material.

19. The Assessing Officer once again referred to the various documents found and seized during the course of search giving higher indications of the market value of the shares of HCL Consulting Ltd. at the relevant time and came to a conclusion based thereon that the management of HCL group was aware of the fact that the market value of the shares of HCL Consulting Ltd. was much higher than Rs. 50/- per share and transfer of these shares at such a higher value would have given rise to a substantial capital gain chargeable to tax in India. According to him, the management was also aware of the fact that the said shares are going to be listed in the stock exchange following the IPO at a higher value and it is only before such IPO that the shares could have been transferred at a suitable value and parked in a tax heaven without losing control over the HCL Consulting Ltd. In order to serve this purpose, not only prices of shares but also date of transfer were managed and arranged in such a manner so as to avoid paying any capital gain tax and the shares were parked with a Mauritius company so that the control can be retained on the one hand and shares also could be sold in the open market at a higher value without incidence of any capital gain tax in India. In this regard, the Assessing Officer pointed out from the relevant seized documents the extraordinary urgency in which the entire process of transfer of shares of HCL Consulting Ltd. from the assessee company to M/s Wintech Investment Pvt.Ltd., Mauritius was completed. He also relied on the relevant seized documents identified as page Nos. 15, 16 & 17 of Annexure A-4 of Party P-4 wherein the price of Rs. 50/- per share was stated to be taken to complete the transaction tax neutral. He concluded that the price of Rs. 50/- thus was taken to be a tax neutral price and the valuation was arranged or managed just to substantiate the same. The Assessing Officer also relied on a letter found and seized during the course of search as page Nos. 156 & 157 of Annexure A-1 of Party P-2 which was written by Mr. Anil Chanana to Mr. Shiv Nadar on 5.6.98 indicating clearly that once HCLT goes public, it would become almost impossible to do the externalization of HCL Consulting shares as discussed and decided earlier. As regards the transfer of shares of HCL Consulting Ltd. by Shri Arjun Malhotra and his companies at the same price of Rs. 50/- each during the relevant period, the Assessing Officer held that such a price, in any case, was suitable to the said transferors in order to avoid the payment of capital gains tax.

20. To sum up, the Assessing Officer held that the main idea behind the entire exercise of transfer of shares of HCL Consulting Ltd. by the assessee M/s HCLCL and M/s SNIPL to M/s Wintech Investment Pvt.Ltd, Mauritius was to avoid payment of capital gains tax and it was a well-planned, discussed, consulted, understood and executed exercise with the clear picture in mind that in the atmosphere of strong sentiments towards the technology shares, the IPO of HCL Consulting Ltd. will fetch a very good price and after IPO, it will be literally impossible to transfer the shares of HCL Consulting Ltd. at a price lower than the market price. He found support for this inference from the fact that M/s HCL Holdings Pvt.Ltd., Mauritius (formerly M/s Wintech Investment Pvt.Ltd., Mauritius) had subsequently sold 15,82,430 shares of M/s HCL Technologies Ltd. (formerly HCL Consulting Pvt.Ltd.) in the Indian capital market at a very high price of about Rs. 104 crores as against the effective cost price of Rs. 1.34 crores paid to the assessee M/s HCLCL and M/s SNIPL resulting in the long term capital gain of Rs. 102.66 crores without any incidence of tax in India. Accordingly, the Assessing Officer held that the transaction of transfer of shares of HCL Consulting Ltd. by the assessee M/s HCLCL and M/s SNIPL to the Mauritius company was not done at arm's length price and thus the said transaction attracted the provisions of Section 92 empowering him to compute the income from the said transactions between a resident and Q non-resident company having regard to arm's length price. He then proceeded to ascertain the arm's length price of shares of HCL Consulting Ltd. at the relevant time and recorded the following findings/observations based on the relevant seized documents in this regard:

Permission of SIA was received vide letter dated 2-7-1999, as modified by their letter dated 21-9-1999 giving approval to invest in India by acquiring 70,00,000 shares of M/s HCL Consulting Ltd.

(2) At the time of transfer of shares to M/s Wintech Investment (P) Ltd., there was no such plan for M/s HCL Consulting Ltd. to go public in India.

(3) M/s HCL Technologies Pvt.Ltd. was merged with M/s HCL Consulting Ltd. vide Delhi High Court's order dated 30-8-1999 and, thereafter, its name was changed to M/s HCL Technologies Ltd. w.e.f. 6-10-1999. With a view to make M/s HCL Technologies a global technology and software services company, vide Board's meeting of M/s HCL Consulting Ltd. dated 13-9-1999, it was decided to make it a widely held limited company. Accordingly, an offer document was issued inviting bids for the IPO, which opened on 16-11-1999. For determining the price for its IPO, M/s HCL Technologies Ltd. adopted a book building process i.e. the company estimated the prices that its shares are likely to fetch in the market, based upon its financially position and market performance as well as the prevalent market conditions and perceptions about the company among the investors. Since there was no guideline or restriction for valuation of shares for the purpose of determining the premium, the company informed the investor and advised them to make their own judgment about investment prior to making a bid or application in the issue.