2014 (10) TMI 669 - AT - Income Tax

Tribunal allows appeal on Transfer Pricing adjustments, dismisses Revenue's appeal, directs accurate TDS credit computation

Redington (India) Ltd. Versus Joint Commissioner of Income-tax, Company Range-V (3), Chennai

The Tribunal partly allowed the appeal, deleting Transfer Pricing (TP) adjustments for transfer of shares, corporate and bank guarantees, and ... Transfer pricing adjustment - Transfer of shares without consideration to be treated as gift or not – Transaction covered u/s 47(iii) or not - Held that:- It is a fact that the transfer of shares was made without consideration - there is nothing against a company making gift of its property to another company - A transfer without consideration when claimed as a gift is always a gift - It is not possible to give any other colour - There is nothing anywhere in law, which prescribes that only natural persons can make gift on the ground of “love and affection” - the lower authorities have erred in law in concluding that the assessee being a corporate body cannot make a gift – thus, the transfer of shares made by the assessee company without consideration was a valid gift and as the transaction was a gift, the transfer of shares cannot be regarded as transfer of capital asset for the purpose of capital gains taxation, as provided in sec.47(iii) of the Act - the contention of the assessee company is accepted that the transfer of shares made by the assesse company to its step down subsidiary, RIHL Cayman is a gift eligible for exemption u/s 47(iii) - no capital gains tax is imputable to the transfer of shares. Invocation of section 45 – Capital gain taxation – Held that:- As the transfer of shares was made without consideration, the foremost ingredient of computation provisions is missing and as such, capital gains cannot be computed under sec. 48 - This leads to a situation, where sec. 45 cannot be invoked and charge of capital gains taxation fails - even otherwise, as it was a transfer without consideration, no levy of capital gains tax can be made - the shares were transferred by way of gift and no income arose in the hands of the assessee - As such, ALP determination does not extend to this transaction - The gift of shares made by the assessee company cannot therefore, be subjected to TP provisions - TP provisions would apply only to those international transactions, which are liable to income tax in India – thus, as far as the issue of transfer of shares is concerned, TP provisions do not apply. Corporate and bank guarantees – Held that:- The assessee has not granted any new guarantee in the previous year relevant to the AY - reliance placed by the TPO on the definition of the term “international transaction” as retrospectively amended by the Finance Act, 2012, does not seem to be proper - The corporate and bank guarantees provided by the assessee company enable its associates to secure credit in their overseas jurisdiction - It is necessary for the associate concerns to depend on local source of funds for supporting their business activities - the assessee has provided the corporate and bank guarantees for the over-all interests of its business. Relying upon Bharti Airtel Ltd. vs. Addl. CIT [2014 (3) TMI 495 - ITAT DELHI] - providing of corporate guarantee does not involve any cost to the assessee and, therefore, it is not “an international transaction”, even under the definition of the term as amended by the Finance Act, 2012 - This is because, the guarantee provided by an assessee does not have any bearing on profits, income, loss or assets of the assessee – thus, the TP addition made against corporate and bank guarantees is not sustainable in law. ALP adjustment of trademark/license fees – Held that:- The adjustment made by the TPO is not proper - The assessee is exploiting the trademark “REDINGTON” for the purpose of carrying on its business - there is nothing uncommon in assessee’s making payment to the use of the trade-mark to M/s. Redington Distribution Pte. Ltd., Singapore - It is not necessary for the TPO to go beyond this plausible explanation, since it is a widely accepted business practice around the world - This is not an unique case for the assessee company alone - Further, it is for the assessee to decide the dynamics of its business - The assessee is the best judge to decide on such issues –relying upon S.A. Builders vs. CIT [2006 (12) TMI 82 - SUPREME COURT] - any expenditure incurred by the assessee, if justified by commercial expediency, is an expenditure allowable for the purpose of taxation and what is commercial expediency is a matter to be decided by the assessee – the addition is to be deleted – Decided in favour of assessee. Issues Involved:1. Transfer of shares and applicability of capital gains tax.2. Treatment of corporate and bank guarantees as international transactions.3. ALP adjustment for trademark/license fees.4. Non-TP additions of bad debts and factoring charges.5. Credit for taxes deducted at source (TDS).6. Levy of interest under sections 234B and 234D.Detailed Analysis:1. Transfer of Shares and Applicability of Capital Gains Tax:The primary issue was whether the transfer of shares by the assessee company to its step-down subsidiary without consideration constituted a gift and was exempt from capital gains tax under section 47(iii) of the IT Act. The assessee argued that the transfer was a gift and thus not taxable. The Tribunal concluded that the transfer was indeed a valid gift under the Transfer of Property Act, 1882, and the Gift Tax Act, 1958, as it was voluntary and without consideration. The Tribunal rejected the Revenue's argument that a corporate entity cannot make a gift and that section 47(iv) was applicable instead of section 47(iii). The Tribunal held that the transfer of shares was exempt from capital gains tax under section 47(iii) and that the computation provisions of section 48 could not be applied due to the absence of consideration, leading to the failure of the charging section 45.2. Treatment of Corporate and Bank Guarantees as International Transactions:The TPO had made an ALP adjustment for corporate and bank guarantees provided by the assessee to its AEs, treating them as international transactions under the amended definition by the Finance Act, 2012. The Tribunal held that since no new guarantees were issued during the relevant assessment year, the reliance on the retrospective amendment was improper. The Tribunal also noted that providing corporate guarantees did not involve any cost to the assessee and did not affect its profits, income, losses, or assets, following the ITAT Delhi Bench's decision in Bharti Airtel Ltd. Therefore, the addition made by the TPO was deleted.3. ALP Adjustment for Trademark/License Fees:The TPO had determined the ALP for the trademark/license fee paid by the assessee to its AE at nil, questioning the commercial rationale for such payment. The Tribunal held that the payment for using the trademark 'REDINGTON' was justified by commercial expediency and was a common business practice. The Tribunal emphasized that it was not within the TPO's jurisdiction to question the commercial justification for the expenditure. Citing the Supreme Court's decision in S.A. Builders vs. CIT, the Tribunal deleted the addition.4. Non-TP Additions of Bad Debts and Factoring Charges:The assessee did not press the grounds related to the non-TP additions of bad debts and factoring charges during the hearing. Consequently, these grounds were dismissed, and the additions made by the assessing authority were confirmed.5. Credit for Taxes Deducted at Source (TDS):The Tribunal directed the assessing authority to verify the details of the TDS credit available to the assessee and to give proper credit for such TDS after providing the assessee an effective opportunity to present the necessary details and evidence.6. Levy of Interest under Sections 234B and 234D:The Tribunal noted that the levy of interest under sections 234B and 234D was consequential and dependent on the revised income determined based on the Tribunal's order. The assessing officer was directed to provide the assessee an opportunity to present its case before levying the interest.Conclusion:The appeal filed by the assessee was partly allowed, with the Tribunal deleting the TP adjustments related to the transfer of shares, corporate and bank guarantees, and trademark/license fees. The non-TP additions of bad debts and factoring charges were confirmed as the assessee did not press these grounds. The appeal filed by the Revenue was dismissed. The Tribunal directed the assessing authority to verify and correctly compute the TDS credit and the consequential interest under sections 234B and 234D.