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Dy.CIT, Circle 6(1) New Delhi vs M/s Messe Dusseldorf India P.Ltd. 1, Commercial complex, 2nd floor Pocket HJ, Sarita vihar New Delhi 110 076
March, 24th 2014
                       DELHI BENCH: `E' NEW DELHI


                                 I.T.A .No. 2139/Del/2012
                              (ASSESSMENT YEAR-2005-06)

      Dy.CIT, Circle 6(1)                            M/s Messe Dusseldorf India
      New Delhi                                      P.Ltd.
                                              vs     1, Commercial complex, 2nd
                                                     Pocket HJ, Sarita vihar
                                                     New Delhi 110 076

      (Appellant)                                    (Respondent)

               Appellant by           Sh. Piyush Kaushik, Adv.
               Respondent by          Sh. Keyur Patel, Sr. DR



       This is an appeal by the Revenue directed against the order of the Ld.CIT(A)-XX,

New Delhi dated 27.2.2012 pertaining to the AY 2005-06.

2.       Brief facts:-    Assessee is a private limited company incorporated under the

provisions of Indian Companies Act, 1956.          It is engaged in the business of event

management. The assessee company is a 50:50 joint venture of Messe Dusseldorf Gmbh

based in Dusseldorf in Germany and Koelnmesse International GmBH based in Koln in

Germany (hereinafter collective referred to as "promoters" or "shareholders".) As a part

of its business activities, the assessee organizes and performs trade fairs, trade

exhibitions, conventions etc. on industry related themes.

Vide submissions before the AO it was submitted that the assessee has received the

amount of Rs.34,511,880 to resurrect the financial position and to rejuvenate the

company. It was submitted that the said amount is in the nature of a capital receipt and is

classified under `capital reserve' in the accounts.

Vide another submission before the AO it was submitted that the said amount is received

by the company essentially for restoration of its capital structure i.e. net worth required

for the revival of company in future years. It was submitted that as is clearly evident

from the accounts, the assessee company is having a negative capital base (net worth), if

the effect of this capital receipt is excluded, as a result of which it would have not been

possible for the company to carry on its operations at all. It was submitted that the

purpose of this receipt from the promoters (shareholders) is to provide long term

enduring benefits by way of revival of the company and restoration of its capital base.

3.      The A.O. for the reasons given in his order at page 3 and 4 held that the receipt in

question is in the Revenue field. He further made addition of transfer pricing adjustment

of Rs.1,10,55,815/-, based on the order of the TPO. Aggrieved the assessee carried the

matter in appeal. The First Appellate Authority granted part relief. Aggrieved, the

Revenue is in appeal before us on the following grounds.

"1. The order of Ld.CIT(A) is erroneous and contrary to facts of law.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred
in deleting the addition of Rs.3,45,11,880/- on account of reserves and surplus treating
the same as capital receipt.
3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred
in deleting the addition of Rs.1,10,55,815/- on the basis of TPO's order u/s 92CA(3).
4. The appellant craves leave to add, alter, amend any grounds of appeal raised above at
the time of the hearing."

4.          We have heard Mr.Keyur Patel, the Ld.Sr.D.R. on behalf of the Revenue and

Mr.Piyush Kaushik, the Ld.Counsel for the assessee.

5.      The Ld.D.R. Mr.Keyur Patel relied on the order of the AO and submitted that ­
     (a) the non refundable, non distributable and nonconvertible contribution by a
            shareholder, was used for the purpose of its current business and hence a revenue

     (b) Copy of the letter addressed by the assessee to Reserve Bank of India which is at
            pages 16 to 21 states that the said financial assistance was towards erosion of net
            worth of the company whereas in the Minutes of the third AGM of the
            shareholders which is given at pages 22 and 23 at para 8 it is stated that the
            contribution was received for restoration of the net worth of the company, which
            was required for revival of the same. He referred to page 25 of the paper book
            which is a copy of the permission letter given by Reserve Bank of India dated 5th
            November,2004 and pointed out that the amount was given only to meet the
            accumulated losses of CIDEX and not for the erosion of net worth. He referred
            to page 28 of the paper book and submitted that the assessee has reserves and
            surplus. The sum and substance of his submission is that RBI permitted the
            assessee to receive the amount in question for recoupment of accumulated losses.
            He distinguished the judgments relied upon by the Ld.CIT(A).

6.              The Ld.Counsel for the assessee on the other hand relied on the order of the
First Appellate Authority and supported the same. He referred to the various documents
in the paper book to demonstrate that the amount in question was received from parent
company on account of erosion of net worth. He relied on the following case laws:-

     (i)        CIT vs.Deutsche Post Home Finance Ltd. (2012) TIOL-545-HC-Del dt.
                2.7.2012 for the proposition that contribution received towards erosion of net
                worth is a capital receipt;
     (ii)       ACIT vs. Handicrafts and Handloom Export Corporation, 133 ITR 590 (Del);
     (iii)      Handicrafts and Handloom Export Corporation of India vs. CIT, 140 ITR

(iv) He relied on the various decisions referred to by the Ld.CIT(A). He also submitted

that the Jurisdictional High Court decisions in the case of Deutsche Post Bank Home

Finance Ltd. (supra), which was upheld by the Hon'ble Supreme Court in CC

no.4139/2013 jdugement dt. 22.2.2013.

7.     On the issue of transfer pricing adjustment the Ld.D.R. relied on the order of the

TPO and the Ld.Counsel for the assessee relied on the order of the Ld.CIT(A).

8.     Rival contentions heard.          On a careful consideration of the facts and

circumstances of the case and the perusal of papers on record and the orders of the

authorities below, we hold as follows.

9.     The Ld.D.R. argued that the amount in question was not received by the assessee

towards erosion of net worth. A perusal of copies of the documents suggest that the

amount was received essentially for restoration of the capital structure by recoupment of

net worth. The assessee company had incurred accumulated losses and this has resulted

in erosion of net worth. The parent company received non refundable financial assistance

of upto Euros 6 lakhs from its shareholder company. The proposal with RBI which is a

letter, a copy of which is placed at pages 16 to 21 of the paper book, states as follows.

"The sole purpose of providing the financial assistance, we reiterate, is:
                     -   to restore the erosion in the capital of the company,
                     -   to place at the disposal of CIDEX liquid resources that will
                         enable it to focus on its business operations
                     -   not to burden CIDEX with additional costs and liabilities.
We would further reiterate that :
                     -   the monies provided by both the shareholders are not refundable
                         and hence will form part of CIDEX funds

                    -   the monies provided will bear no costs
                    -   the monies provided will be used solely for purposes of the
                        business of CIDEX and for no other purpose."

9.1.         The RBI approved the same vide its approval dt. 5th November,2004 with

subject matter given as "financial assistance towards erosion of net worth."

9.2.        Hence we hold that the Ld.CIT(A) was right in his factual findings given at

para 3.5 to 3.7 of his order on the above issue. Thus, on facts we uphold the factual

finding of the Ld.CIT(A) that the amount was received towards erosion of net worth of

the company.

9.3.       Coming to the legal position, the Hon'ble Delhi High Court in the case of

Deutsche Post Bank Home Finance Ltd. (supra) held as follows.

"Income Tax ­ Section 2(24) ­ "Subvention assistance", purposive test ­ Whether

voluntary cash assistance received from parent company for recouping losses and

restoring negative net worth, is a capital receipt, exempt from tax ­ whether only

assistance or voluntary payments received from government out of public funds and not

from private parties, is considered as capital receipt ­ whether it is only the purpose of

the assistance and not the mechanism, is the conclusive test to determine the nature of

such receipts".

9.4.   This decision has been upheld by the Hon'ble Supreme Court. The Hon'ble

Jurisdictional High Court had followed its own decision in the case of Handicrafts and

Handloom Export Corporation of India vs. CIT, 140 ITR 532.

9.5.      Applying the binding decision       we uphold the order of the First Appellate

Authority and dismiss these grounds of Revenue.

10.       Ground no.3 is against deletion of transfer pricing adjustment. The Ld.CIT(A) in

his order had accepted the method adopted by the TPO as the most appropriate method.

Hence the Revenue has no grievance. The Ld.CIT(A) also accepted all the comparables

adopted by the TPO except in the case of one comparable i.e. Infomedia India Ltd. We

find that Infomedia India Ltd. is a company which is engaged in the business of printing

and publishing which is totally a different line of business vis a vis assessee's business of

trade fares and exhibitions. Hence the rejection of this comparable by the Ld.CIT(A) is

upheld. The only other relief given by the Ld.CIT(A) is that the TPO was directed to

exclude domestic transactions in computation while computing adjustement based on

ALP of international transactions. We find no infirmity in this finding as transfer

pricing adjustments are to be confined only to international transactions. Thus, we

uphold these findings of the Ld.CIT(A). In the result ground no.3 is dismissed.

11.       In the result the appeal of the Revenue is dismissed.

          The order is pronounced in the Open Court on 19th March, 2014.

          Sd/-                                                    Sd/-
  (A.T.VARKEY)                                              (J. SUDHAKAR REDDY)
ACCOUNTANT MEMBER                                             JUDICIAL MEMBER

Dated: 19th March, 2014

* Manga

Copy forwarded to:

Appellant; Respondent; CIT; CIT(Appeals); DR: ITAT

                                                     ASSISTANT REGISTRAR
                                                       ITAT, NEW DELHI
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