TaxTMI 
TaxTMI 
2014 (10) TMI 669
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....lution products. The assessee also deals in non-IT items, like telecom products, gaming consoles and titles, digital lifestyle products and consumer durables etc. 3. The assessee company filed its return for the impugned assessment year on a taxable income of Rs. 125,57,70,310/-. In the course of assessment proceedings, the Assessing Officer found that the assessee had entered into international transactions exceeding Rs. 15 crores. Accordingly, the case was referred to Transfer Pricing Officer(TPO) for the determination of Arm's Length Price(ALP) in respect of those international transactions. The TPO examined the overseas transactions entered into by the assessee company in the previous year relevant to the assessment year under appeal. 4. The assessee, M/s. Redington India is having a wholly owned subsidiary company by name, M/s. Redington Gulf FZE('RGF Gulf' for short). The subsidiary company, M/s. RGF Gulf is engaged in the same line of business carried on by the assessee company, of distributing IT products like PCs, printers, scanners, displays, cameras, copiers, consumables, other peripherals and accessories. M/s. RGF Gulf is mainly focusing its operations in Middle East ....
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....es that any transfer of a capital asset under a gift or will or an irrevocable trust may not be regarded as a transfer. 8. Apart from relying on the law stated in sections 45 & 47(iii), the assessee also took the view that the transfer of shares held by the assessee in its subsidiary, M/s. RGF Gulf to its step down subsidiary M/s. RIHL Cayman Islands does not dilute or diminish the value of the asset base of the assessee company. As the transfer is only an appropriation within the same group and the assessee company is having the ultimate control as the holding company, nothing has gone out of the group, as such and, therefore, it is not possible to construe the impugned transfer of shares as transfer of a capital asset generating capital gains. On the basis of the above premises, the assessee did not offer the transfer of shares as an international transaction. 9. But the TPO, on the basis of detailed discussion made in his order, held that the transfer of shares made by the assessee company is an international transaction coming under the purview of transfer pricing regulations. Accordingly, the TPO determined the ALP of M/s. RGF Gulf shares at Rs. 865,40,04,100/-. 10. The TPO....
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..../-. The Assessing Officer modified the above gross amount by setting off the indexed cost of acquisition and determined the long term capital gains adjustment at Rs. 610,15,75,820/-. 14. The above draft assessment order was framed by the assessing authority on 31st March, 2013. The draft assessment order was communicated to the assessee company, as required by law. 15. The assessee company filed its objections against all the additions proposed by the assessing authority before the Dispute Resolution Panel, at Chennai. The DRP, after examining the case in detail, agreed with the ALP adjustments suggested by the TPO. The DRP agreed with the TPO that transfer of shares made by the assessee company amounted to international transaction falling within the jurisdiction of TP regulations. They also agreed with the view of the TPO that corporate and bank guarantee charges as well as trademark license fees are amenable to ALP adjustments. 16. But the DRP directed to give a marginal relief in the capital gains addition proposed against the transfer of shares. They accepted the argument of the assessee company that in view of the buy-back agreement between the Venture capital fund(PE fund....
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....le to the transfer and sec.47(iii) does not have any application. The assessee contends that the lower authorities have erred in concluding that there was no business rationale in setting up overseas subsidiary companies. That the lower authorities ought to have appreciated that gift and transfer of property without consideration are synonyms, as held by the Hon'ble Madras High Court in the case of CIT v. Bharani Pictures (129 ITR 244). That the voluntary transfer of shares without consideration is not covered by Chapter X(special provisions relating to avoidance of tax), of the Act. Therefore, it is the case of the assessee that the ALP addition of Rs. 610,15,75,820/- made by the assessing authority is unlawful and requires to be deleted. 23. We heard Shri Percy Pardiwalla, the learned senior advocate appearing for the assessee. 24. According to the learned senior counsel, the brief facts of the issue are as follows: * The assessee company and its group concerns mainly operate in Middle East and African countries. It has a plan to expand its business operation in that geographic area. It also has a plan to quote its shares in an overseas stock exchange. While those expansions w....
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....n of funds by M/s. IVC and allotment of shares in M/s. RIHL Cayman, resulted in M/s. IVC, the PE fund, holding a stake of 27.17%. The TPO extrapolated the said shareholding and determined an amount of US$ 174.23 millions, as representing 100% of the value of M/s. RIHL Cayman before infusion of the fresh capital by M/s. IVC, and on that basis determined the ALP of RGF Gulf shares transferred by the assessee company. * The DRP upheld the adjustment made by the TPO in respect of the transfer of shares, stating that a gift as generally understood is made out of love and affection by natural persons; that corporate entities cannot make gifts, as the term "gift" in sec.47(iii) is used in conjunction with the word "will"; that transfer of capital assets between a holding company and a subsidiary company would be governed by specific provisions of sections 47(iv) and 47(v) rather than sec.47(iii). 25. In the above scenario, the learned senior counsel explained before the Tribunal what is the rationale in setting up of overseas subsidiaries : * The setting up of overseas subsidiary was driven by commercial reasons mainly to raise funds for the expansion of business operation of the asses....
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.... the assesees group for a price which would guarantee an Internal Rate of Return (IRR) of atleast 7%. * The assessee group was saddled with a liability to reacquire the shares of M/s.RGF Gulf from the PE fund, M/s. IVC, if the shares of M/s. RIHL Cayman were not listed in an overseas stock exchange within three years. The shares of RGF Gulf would have to be bought back at a premium, to ensure a minimum return of 7% to M/s. IVC. Given that the assessee is an Indian listed company and that it controlled its business globally, it would not be viable to the assessee company to expose itself to fund the Middle East and African operations. * The assessee was not able to secure the listing of M/s. RIHL Cayman within the period of three years and had to reacquire the shares from M/s. IVC at a premium in the year, 2012. The reacquisition was funded by the assesse, infusing fresh funds into M/s. RIML Mauritius and also by borrowing funds from overseas. Had the assesse company been not insulated itself by setting up these two subsidiary structures, the burden of reacquiring the shares of M/s. RIHL Cayman from M/s. IVC would have totally fallen on the assesse itself; which would badly affect....
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....the shares was received. He also referred to sec.115(WB)(2)(O) of the Income-tax Act, in the context of Fringe Benefits Tax, which provided that a corporate body can also make gift. Sec.540 of the Companies Act, 1956, recognizes that property belonging to a company could be disposed of by its officers by way of gifts. 30. The learned senior counsel relied on the provisions of the Transfer of Property Act, 1882, to support his argument that a corporate body can make gift to another corporate body as like any other person. Sec.5 of the T.P.Act, 1882, defines the expression "transfer of property". "Transfer of property" means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons; and "to transfer property" is to perform such act. The section further provides that "living person" includes among other things a company. Sec.122 of the TP Act, 1882 defines a "gift". "Gift" is defined as the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accept....
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....d counsel insisted that literary interpretation should be adopted in this context, as there is no ambiguity in the law. For that matter, the learned senior counsel has relied on the following decisions. 1. Sarala Birla vs. CWT 176 ITR 98(SC) 2. CIT vs. Central Bank of India Ltd. ,185 ITR 6(Bombay) 3. CIT v. National Agricultural Co-operative Marketing Federation of India Ltd., 236 ITR 766(SC) 4. M/s. Grace Mac Corporation vs. ADIT, 134 TTJ 257(ITATDelhi 34. In the light of the above, the learned senior counsel submitted that the transaction of gifting shares of M/s.RGF Gulf to M/s. RIHL Cayman is exempt under sec.47(iii) of the Act. 35. The learned senior counsel, without prejudice to his earlier proposition that the impugned transaction is exempt from the levy of capital gains tax under sec.47(iii) of the Act, further contended that the computation of capital gains for charge of tax would fail for the reason that the transaction was undertaken without consideration. He explained that there is no dispute regarding the fact as reconfirmed by the DRP that transfer of shares was voluntary and without consideration. Even if, such transaction is not regarded as a gift, the transac....
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.... correct provision of law applicable to the assessee's case and not sec.47(iii). On the basis of that conclusion, the lower authorities have held the view that once the assessee does not satisfy the conditions laid down in sec.47(iv), the transaction cannot be said to be exempt from capital gains transaction. The learned senior counsel explained that sec.47(iv) is applicable only in such cases, where the capital asset is transferred by a holding company to its wholly owned subsidiary company, which should be an Indian company. In the present case, the assessee has gifted its shares to a step down subsidiary, M/s. RIHL Cayman. It is not an Indian company. Sec.47(iv), cannot therefore, be applied in this case. He further explained that the conclusion of the Assessing Officer that setting up an intermediary company, M/s. RIML Mauritius was to frustrate the legislative intent enacting sec.47(iv), is erroneous for the reason that both M/s. RIML Mauritius and M/s. RIHL Cayman are not Indian companies. The learned senior counsel further explained that sec. 47(iv) and (v) do not apply to a gift. A gift involves a voluntary transfer of capital asset of one person to another without consider....
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....he transaction results in taxable income in the hands of the tax payer in India. In case, the transaction does not result in taxable income, Transfer Pricing Regulations would not be applicable. The above proposition is reflected in Memorandum to Finance Bill, 2001 and also in the CBDT instruction No.12/2001 dated 23.8.2001. 41. The learned senior counsel concluded his argument on this issue by reiterating that gift of shares is exempt under sec47(iii) of the Act, and in any case, the transaction having been undertaken without consideration, the computation provision would fail and consequently the charging section as well. Even if, for the argument sake, the transaction is treated as an international transaction, it would not be subject to Transfer Pricing provisions, as the transaction did not give rise to any income in India. 42. In support of his argument that Transfer Pricing provisions would apply only to those international transactions, which are liable to income tax in India, the learned senior counsel has relied on the following decisions: Vanenburg Group B.V. (289 ITR 464-AAR) Dana Corporation (227 CTR 441-AAR) Amiantit International Holding Ltd. (230 CTR 19-AAR) G....
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....e accuracy to make them comparable. Therefore, it was not proper on the part of the TPO to treat the investment price of M/s. IVC as comparable for the purpose of CUP method. 44. On the question of valuation vis-a-vis ALP, the argument of the learned senior counsel, is that the appropriate price to be fixed in the present case, is the Discounted Cash Flow(DCF) method. The Tribunal has held in various decisions that the DCF method is an appropriate method for valuation of shares of a company. The learned senior counsel has placed reliance on the following decisions: Ascendas (India) (P.) Ltd., DCIT, 143 ITD 208(Chennai) Mahindra Holidays & Resorts India Ltd. v. JCIT(LTU), 62 SOT 25(Chennai) 45. With the above detailed arguments, the leaned senior counsel has summed up his contentions on the issue of gift of shares for the following reliefs: * The transaction of gift of shares is a valid gift and, therefore, exempt from capital gains in the light of specific exemption under sec.47(iii) of the Act. * Without prejudice to the above, the DRP having accepted that the transaction is undertaken without consideration, the transaction would not result in any chargeable capital gains, a....
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....e previous year. Therefore, the reliance placed by the TPO on the definition of the term "international transaction" as retrospectively amended by the Finance Act, 2012, is erroneous and bad in law. The corporate guarantees provided by the assessee company to its AEs enable them to secure credit in their respective overseas jurisdictions and to comply with the laws, in those jurisdictions. Such corporate guarantees granted by the assessee to the AEs enabled them to secure funds for their working on competitive rates in the relevant jurisdictions. In the absence of such locally sourced funding, the assessee would have to support its AEs business operations by providing funds through equity or otherwise. Accordingly, the transaction can be said to be one of quasi-equity or shareholder activity. The well-being of the AEs is of deep interest to the assessee; especially, where the business of the subsidiary generates synergies for the assessee. It is in the best interest of the group that the assessee has provided corporate guarantees to its AEs. The learned senior counsel relied on the decision of the ITAT, Delhi Bench, rendered in the case of Bharti Airtel Ltd. v. ACIT (43 taxman.com ....
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....tionale to determine, whether the assessee ought to have incurred an expenditure or not. In support of this general principle, he has relied on the judgment of the Hon'ble Supreme Court in the case of S.A.Builders vs. CIT (288 ITR 1). Alternatively, he submitted that the transactions need not to be tested independently for ALP determination, as the same is already at Arm's length under the combined transaction TNMM approach. 50. The learned senior counsel confined his arguments to the three transfer-pricing issues discussed in paragraphs above. Even though two more issues are raised in the grounds of appeal; one relating to bad debts and the other relating to factoring charges, the learned senior counsel submitted, at the time of hearing, that the assessee company is not pressing those two issues. The additions towards bad debts and factoring charges have been made by the Assessing Officer as non-TP items. As the assessee does not press the grounds raised against the said two additions, the relevant grounds need not be adjudicated. 51. The sixth and the last issue raised by the assessee in the present appeal is in respect of not giving credit against TDS and levy of interest unde....
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....n M/s. RGF Gulf. 55. But the assessee opted a circuitous route. The assessee set up a new wholly owned subsidiary in Mauritius in July, 2008 by name, M/s. RIML Mauritius. The said M/s. RIML Mauritius, in turn, set up another wholly owned subsidiary in Cayman Islands by name, M/s. RIHL Cayman. The assessee company transferred without consideration its entire shareholding in M/s. RGF Gulf to M/s. RIHL Cayman in November, 2008 and subsequently, M/s. RGF Gulf became a step down subsidiary of M/s.RIML Mauritius. Immediately, thereafter, on 18th November, 2008, a PE fund, M/s. IVC invested USD 65 millions equivalent to Rs. 325.78 crores in M/s. RIHL Cayman for 27.17% stake. This works out to the enterprise value of USD 239 millions equivalent to 1197.87 crores, as on that date. Thereafter, the step down subsidiary issued and allotted 59,035 equity shares to the employees of the parent company and its subsidiaries under an Employee Share Purchase Scheme(ESPS). M/s. RIML Mauritius, in that way held 69.94% stake in the step down subsidiary, M/s. RIHL Cayman as on 31.3.2009. 56. Thereafter in the financial year 2011-12, the assessee company acquired the shares in its step down subsidiary, ....
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....nly if there is not at all any means to compute the value of the asset transferred. That part of the consideration must be a vacuum. Here, it is not the case. The shares transferred by the assessee company to M/s. RIHL Cayman do have a defined value. The asset and business base of the assessee company are the strength of that value. It is on that basis, the PE fund, M/s. IVC has pumped funds into M/s. RIHL Cayman. Therefore, it is futile to argue that the transaction did not have any valuable consideration. When the value of the shares is computable, there is no question of failure of computation provision under sec.48. When sections 45 & 48 are read together as an integrated code, the result does not defeat the present case. Therefore, the argument of the learned senior counsel that the case of the Revenue fails at the threshold of sec.45 itself, is not sustainable in law. 61. The learned Commissioner further argued that even though literally, the assessee would prefer to call the transfer as a gift, the assessee company itself has stated in its notes to accounts that the transfer has not diminished the asset base of the group. The transaction was from one company to another comp....
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....old good against the appeal filed by the Revenue. 69. We heard both sides in detail and perused the materials including the paper books filed before us and also considered volumes of case laws relied on by both the sides. 70. Out of the three issues of TP adjustments made in the impugned assessment, let us first consider the issue of transfer of shares made by the assessee company. 71. M/s. RGF Gulf is the wholly owned subsidiary of the assessee company. The assessee company has transferred its shares in M/s. RGF Gulf to M/s. RIHL Cayman, which is a step down subsidiary. It is a fact that the transfer of shares was made without consideration. It is for this reason that the assessee company contends that the transfer is a gift. As it is a gift, it is the case of the assessee, that if at all it is treated as a transfer of capital asset for the purpose of capital gains taxation, it is exempt under sec.47(iii) of the IT Act, 1961. The case of the Revenue is that a company cannot make a gift and also even if it is treated as a gift, it is not eligible for exemption provided under sec.47(iii), as correct provision of law applies to the case of the assessee is sec.47(iv) of which the c....
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.... and without consideration in money or money's worth. The "gift" for the purpose of Gift Tax Act, 1958, is further qualified, as a property in money or monies worth. Sec.2(xviii) of the Gift Tax Act, 1958 defines a person which includes a company, as well. In the Gift Tax Act also, there is no attributes like "love and affection". 76. In the light of the law explained above, 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". Therefore, we find that the lower authorities have erred in law in concluding that the assessee being a corporate body cannot make a gift. 77. Traditionally, in majority of the gift deeds, it is a common recital usually found that a person is making the gift "out of love and affection". Therefore, the lower authorities in their capacity as Assessing Officers while dealing with a number of cases falling under the Gift Tax Act, 1958 might have gone through a number of such documents, a....
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....erstwhile Gift Tax Act, 1958. As reflected in the discussions already made, it is clear that a company is a person both for the purpose of TP Act, 1882 and GT Act, 1958 and a company can make a gift to another company, which is valid in law. Accordingly, we accept the legal capacity of the assessee company to gift its shares in RGF Gulf to RIHL Cayman. 80. Once it is found that the transfer of shares made by the assessee company to its step down subsidiary, RIHL Cayman, is a valid gift, the next question to be considered is, whether the assessee is justified in claiming exemption from levy of capital gains tax under sec.47(iii) of the IT Act. Sec. 47(iii) specifically provides that sec.45 shall not apply to the transfer of a capital asset made under a gift. There is no restriction provided under the Act, which prohibits a company from claiming exemption under sec.47(iii). If that was the intention, as rightly argued by the learned senior counsel, the legislature would have specifically stated in sec.47(iii) that the exemption is available for the individuals alone, as the law has specifically provided such conditions in other provisions relating to capital gains tax like sec.54, 5....
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.... exemption under sec.47(iii). Accordingly, no capital gains tax is imputable to the said transfer of shares. 83. Another issue to be considered is, whether sec.45, which is the charging section of capital gains taxation, could be invoked in the present case or not. The transfer of shares was without consideration. This has been well confirmed by the DRP in their order. When there is no consideration involved in a transfer, the computation provisions contained in sec.48 fail. In the scheme of capital gains taxation, sec.45 is the charging section. Sec.45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save or otherwise provided in sections xxxxx be chargeable to tax under the head "Capital gains". Sec.48 provides the mode of computation of income chargeable under the head "Capital gains". Capital gains is computed by deducting the cost of acquisition of the asset with cost of improvement if any and the expenditure incurred in connection with the transfer from the value of consideration received or accruing as a result of a transfer. Therefore, the essential ingredients necessary for computing the capital gains und....
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....s 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. Therefore, in the present case, even otherwise, as it was a transfer without consideration, no levy of capital gains tax can be made. 88. In the present case, the authorities have computed the consideration attributable to the transfer of shares applying the ratio of the cost incurred by M/s. IVC, the PE fund in acquiring the shares of RIHL Cayman. That value is only a substitute value. The full value of consideration for the purpose of computation of capital gains tax should be the actual consideration received by the transferor. This de facto, value of the consideration cannot be made good by transplanting valuation reflected in another transaction. 89. Sec.92 provides that any income arising from an international transaction shall be computed having regard to the ALP. The computation of the ALP, therefore, is dependent on the income arising to an assessee from an international transaction. In the present case, the shares were transferred by way of gift and no income arose in the hands of the assessee. As such, ALP determin....
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.... because, the guarantee provided by an assessee does not have any bearing on profits, income, loss or assets of the assessee. 95. In view of the nature of corporate and bank guarantees given by the assessee company and in the light of the above order of the ITAT, Delhi Bench, we hold that the TP addition made against corporate and bank guarantees is not sustainable in law. The addition is therefore deleted. 96. The third TP issue raised by the assessee is against the addition made by way of ALP adjustment in the case of trademark/license fees. The assessee has made a payment of Rs. 1,89,33,150/- towards trademark/license fees to its AE, Redington Distribution Pte. Ltd., Singapore. The payment was made for using the trade-mark "REDINGTON". The TPO determined the ALP of the trade-mark/license fee at Nil. He held so, on the ground that there is no genuine rationale for making such a payment as trade-mark/license fees. 97. We think that this adjustment made by the TPO is not proper. The assessee is exploiting the trademark "REDINGTON" for the purpose of carrying on its business. Therefore, there is nothing uncommon in assessee's making payment to the use of the trade-mark to M/s. Re....