CAPITAL GAINS ON SHARE TRANSFER FROM NON-RESIDENT TO RESIDENT. - AO ON VIOLATION OF RBI'S NORMS ON VALUATION OF SHARES

CASE:-ZEPPELIN MOBILE SYSTEM GMBH VS ADIT

M/s Zeppelin Mobile Systems India Ltd an unlisted Indian subsidiary of M/s Zeppelin Mobile

Systems GmbH (herein after referred to as assessee) a Germany based company. The Indian company is engaged in the business of designing, manufacturing and assembling of Polyurethanes Foam based Prefab Structures, Telecom Shelters and derivatives.

During the year, the assessee had sold part of the shares held by it in its Indian subsidiary

to M/s Sintex Industries Ltd and returned capital gains from such sale on basis of sale price of Rs. 390 per share.

The A.O. made additions in the total income of the assessee by taking the sale consideration

of the shares @ 400/- per share, as against the actual sale consideration of Rs. 390/- per share as taken by the assessee in accordance with pricing guidelines of RBI. income tax consultant in delhi

DRP confirmed the assessment order passed by AO. While doing so, it was observed that,

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

Whether DRP has illegally confirmed the action of the AO for taking the value of sale consideration @ Rs.400 per share instead of actual sale consideration received @ Rs.390/-

per share a Capital Gain is liable to be computed at Rs.9,55,73,488/-?

It was held that RBI Guidelines are Guidelines for the banks, issued for FEMA purposes. The

very opening paragraph of these Guidelines shows that they are addressed to 'Authorised Dealer (AD) Banks'. Thus the duty to examine the compliance or otherwise of these Guidelines lies squarely within the purview of the 'Authorised Dealer Banks' and not the

Income-tax Authorities

If the assessee, in the view of the Income-tax Authorities, had committed any violation of

these Guidelines, the appropriate course open to them was to bring it to the notice of the banks. Since the Guidelines have been issued for FEMA purposes, it is the FEMA Authorities who are competent to take appropriate action against the assessee on breach of the Guidelines. Rather, it is seen that no objection whatsoever has been raised by the RBI. Had the alleged difference between the rates existed, thereby constituting a violation of the RBI Guidelines by the assessee, such violation would obviously have been taken care of and the approval would not have been accorded. On merits also, Sintex Industries Ltd., to whom the shares were sold by the assessee, has not denied such rate of Rs. 390/-per share. Rather, such rate stands admitted in the Memorandum of Understanding between the assessee and Sintex Industries Ltd. In view of the above, finding the grievance of the assessee to be justified, we accept it assuch. Appeal allowed.Know more about information: Service tax registration and New company registration India

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