2014 (10) TMI 669 - AT - Income Tax

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

The Tribunal partly allowed the appeal, deleting Transfer Pricing (TP) adjustments for transfer of shares, corporate and bank guarantees, and ... Validity of corporate gift - exemption under section 47(iii) of the Income tax Act - failure of computation under section 48 negating charge under section 45 - non applicability of transfer pricing provisions where no income arises - corporate guarantees not constituting an international transaction - arm's length pricing (ALP) - commercial expediency and trademark/license feesValidity of corporate gift - exemption under section 47(iii) of the Income tax Act - Transfer of shares by the assessee to its step down subsidiary, made voluntarily and without consideration, is a valid gift and is exempt from capital gains under section 47(iii). - HELD THAT: - The Tribunal applied the Transfer of Property Act, 1882 (sections 5 and 122) and the principles in the Gift Tax Act to hold that a company is a 'person' capable of making a gift and that love and affection are not legal prerequisites for a valid gift. Having found the transfer to RIHL Cayman to be a voluntary transfer without consideration, the Tribunal concluded that the transaction falls within the exemption in section 47(iii) and therefore cannot be treated as a chargeable transfer attracting capital gains tax. The Tribunal rejected the Revenue's alternative reliance on section 47(iv) because that provision applies to transfers to an Indian subsidiary and presupposes a different factual and legal matrix which is not present here. [Paras 76, 79, 80, 81, 82]The transfer is a valid gift and is exempt under section 47(iii); the ALP addition made on account of capital gains arising from that transfer is deleted.Failure of computation under section 48 negating charge under section 45 - Where a transfer is without consideration and the essential ingredient for computing capital gains is missing, section 48 cannot operate and consequently section 45 (the charging provision) cannot be invoked. - HELD THAT: - The Tribunal followed Supreme Court authority that charging and computation provisions form an integrated code. Since the transfer was admitted to be without consideration, the Tribunal held that the computation mechanism under section 48 cannot be applied; therefore the charging provision in section 45 does not operate. The Tribunal further held that substituting consideration by reference to a separate transaction (the PE fund's investment) to compute consideration is impermissible when no actual consideration has been received by the transferor. [Paras 84, 85, 86, 87, 88]Computation of capital gains fails for lack of consideration and charge under section 45 cannot be sustained.Non applicability of transfer pricing provisions where no income arises - Transfer pricing provisions do not apply to the gift transfer because no income arose in India on the transfer and ALP determination is consequential upon an income arising from an international transaction. - HELD THAT: - Section 92 requires computation of income from an international transaction with regard to ALP; where the transfer yields no income (being a gift without consideration) there is nothing to compute under section 92. The Tribunal relied on administrative and AAR authorities holding that TP provisions apply only to transactions which are liable to income tax in India and therefore deleted the ALP adjustments made by the TPO in respect of the share transfer. [Paras 89, 90, 91]Transaction is outside the purview of transfer pricing provisions; ALP adjustment on account of share transfer deleted.Corporate guarantees not constituting an international transaction - ALP adjustment in respect of outstanding corporate and bank guarantees given by the assessee to its associates is not sustainable because such guarantees (in the facts of this case) do not constitute an international transaction liable to transfer pricing adjustment. - HELD THAT: - The Tribunal observed that no fresh guarantees were granted in the year under consideration and that the guarantees operated to facilitate local financing of associate enterprises as a group/shareholder activity. Following precedent (ITAT Delhi in Bharti Airtel), the Tribunal held that guarantees in these circumstances do not affect the assessee's profits, income, losses or assets so as to attract TP adjustments. The DRP's reliance on retrospective amendment to the definition of 'international transaction' was held inapplicable to these outstanding guarantees in the year under appeal. [Paras 92, 93, 94, 95]TP addition in respect of corporate and bank guarantees deleted.Arm's length pricing (ALP) - commercial expediency and trademark/license fees - The ALP adjustment disallowing the trademark/license fee paid for use of the 'REDINGTON' mark is unsustainable; the payment is commercially expedient and allowable. - HELD THAT: - The Tribunal held that payment for exploitation of a group trademark to an associate, supported by plausible commercial explanation, cannot be disregarded merely on the TPO's view that there is no commercial rationale. Citing the Supreme Court's view that commercial expediency is for the assessee to judge, the Tribunal found the TPO's ALP determination (nil) unjustified and deleted the adjustment. [Paras 96, 97]ALP adjustment in respect of trademark/license fees deleted.Non TP additions - bad debts and factoring charges - The assessee did not press grounds against two non TP additions (bad debts and factoring charges); those additions are confirmed as not pressed. - HELD THAT: - On the record, the assessee expressly chose not to press the challenges to the Assessing Officer's non TP additions. The Tribunal therefore declined to adjudicate the merits and dismissed the grounds as not pressed while confirming the additions. [Paras 50, 100]Grounds against bad debts and factoring charges dismissed as not pressed; additions confirmed.Verification of TDS credit and consequential interest - The Assessing Officer is directed to verify TDS credits claimed by the assessee and to give opportunity before levying consequential interest under sections 234B and 234D. - HELD THAT: - The Tribunal directed the Assessing Officer to re verify and give the assessee an effective opportunity to produce evidence of TDS credits. As interest consequences flow from the revised computation, the Tribunal ordered that the assessee be heard before interest is levied. [Paras 101, 102]Assessing Officer to verify TDS credit and grant opportunity; interest levy to be reconsidered after revised computation.Final Conclusion: The Tribunal deleted the three transfer pricing/alp additions (share transfer, corporate guarantees, trademark/license fee), held the share transfer to be a valid gift exempt under section 47(iii) and not subject to section 45/92 ALP adjustments, confirmed non TP additions as not pressed, directed verification of TDS credit and reconsideration of interest; assessee's appeal partly allowed and Revenue's appeal dismissed. 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.