TaxTMI 
TaxTMI 
2018 (12) TMI 1346
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.... and the Arms Length Price ("ALP") of the said transactions are required to be determined by making a reference to Respondent No.2. It is pursuant to this order that the reference dated 29th December, 2016 was made to Respondent No.2 under section 92CA(1) of the I.T. Act for determination of the ALP in the Petitioner's case for the Assessment Year (for short "A.Y.") 2014-15. It is the case of the Petitioner that the impugned order as well as the impugned reference are ex-facie without jurisdiction, illegal, unsustainable, contrary to the principles of natural justice and contrary to law, and therefore, ought to be quashed and set aside by us in our writ jurisdiction. This is how the present Writ Petition 2. Before we set out the legal submissions of the respective parties, the brief facts of the case and which would be necessary to determine the controversy before us, are as under:- (a) The Petitioner is a public limited company registered under the Companies Act, 1956 and is also registered as a banking company with the Reserve Bank of India ("RBI"). The primary business of the Petitioner is banking. The Petitioner filed its assessment of income for the Assessment ....
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.... cause notice was issued. (d) According to the Petitioner no personal hearing was given to them by Respondent No.1 in relation to these transactions. Be that as it may, the Petitioner, vide its letter dated 29th December, 2016, submitted a reply with respect to each of these above mentioned three transactions and gave an explanation as to why they could not be termed as SDTs. This being the case the Petitioner stated that there was no requirement on their part to disclose the same in Form 3CEB and correpondingly there was no question of making a reference to the TPO for determining the ALP in relation to these three transactions. (e) In a nutshell, it was the Petitioner's case that the transaction referred to in item (i) above [the purchase of loans from HDFC Ltd], firstly did not relate to A.Y. 2014- 2015 but in fact the aforesaid transaction was entered into by the Petitioner in the earlier year and were relating to A.Y. 2013-2014. For A.Y. 2013-14 transfer pricing assessment had already been completed and become final. The Petitioner further submitted that in any event, none of the promoters of the Petitioner held more than 20% of the shareholding individually ....
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....ted party falls under section 40A(2)(b) of the IT Act. Respondent No.1 further held that the consolidated holding of the promoters was in excess of 20 % of the shareholding of the Petitioner and hence, the beneficial ownership clause was applicable. Respondent No.1 further went on to hold that since the Petitioner holds 29% shareholding of ADFC Ltd., which in turn holds 98.4% of the shares of HBL Global, the Petitioner had beneficial ownership and voting rights of more than 20% of HBL Global and hence the transaction with HBL Global was with a person/party as covered by section 40A(2)(b) of the I.T. Act. As far as the Trust was concerned, Respondent No.1 held that the Petitioner possesses more than 20% of the rights in the said Trust which makes it a related party as per the provisions of section 40A(2)(b) of the Act. It is in these circumstances that Respondent No.1 passed the impugned order and thereafter, on the very same day (namely, on 29th December, 2016) made a reference (in relation to all the abovementioned three transactions) under section 92CA(1) of the Act to Respondent No.2 for determining the ALP. (i) Once this reference was made, Respondent No.2 issued a not....
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....the Revenue had alleged, were SDTs. They are - (1) Loans of Rs. 5164 Crores purchased by the Petitioner from the promoters (HDFC Ltd.) and loans of Rs. 27.72 Crores purchased from the subsidiaries; (2) Payment of Rs. 492.50 Crores by the Petitioner to HBL Global for rendering services; and (3) payment of interest of Rs. 4.41 Crores by the Petitioner to HDB Welfare Trust. Mr Mistri submitted that it is only when the aforesaid transactions, or any of them, are a SDT, and which are not reported by the assessee, then the A.O. is required to issue a show cause notice to the assessee and pass an order disposing of the objections of the assessee before referring the said SDT to the TPO for determining the ALP. He submitted that to challenge the order of the A.O. there is no other alternate efficacious remedy and in fact this Court in the case of Vodafone India Services Pvt. Ltd. Vs. Union of India [361 ITR 531] has held that such an order passed by the A.O. rejecting the objections of the assessee that the transactions are not SDTs, can be challenged by way of a Writ Petition. Another reason stated by Mr Mistri why the Writ Petition came to be filed was that once the transaction is treate....
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.... assessee (in the present case the Petitioner). He submitted that explanation (a) sets out what is the meaning of 'substantial interest' and stipulates that in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of the shares carrying not less than 20% of the voting power. In the facts of the present case, Mr. Mistri submitted that admittedly HDFC Ltd. is the beneficial owner of only 16.39% of the shares of the Petitioner and hence section 40A(2)(b) was not at all applicable to the present transaction. He submitted that the Revenue had grossly erred in clubbing the shareholding of HDFC Ltd. with the shareholding of its subsidiary, namely, HDFC Investments Ltd. (and which has a 6.25% shareholding in the Petitioner), to cross the threshold of 20%. To put it differently, Mr Mistri submitted that HDFC Ltd. holds 16.39% of the shareholding of the Petitioner and HDFC Investments Ltd. holds 6.25% of the shares of the Petitioner. To cross the threshold of 20% as required under section 40A(2)(b), the Revenue is seeking to club both these shareholdings together. He submitted that in law, this c....
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.... to accept the submission of the Revenue, the same would lead to a complete absurdity. Mr Mistri submitted that take for example Company 'A' has a wholly owned subsidiary, Company 'B'. In turn, the shares of Company 'C' are held 90% by Company 'B' and 10% by Company 'A'. If one was to give the interpretation as sought for by the Revenue, then it would mean that Company 'A' beneficially owns 100% of Company 'C' which would lead to an absurd situation that Company 'B'; though owning 90% of the shareholding in Company 'C', would not be regarded as having a substantial interest in Company 'C' as Company 'B' cannot be said to be the beneficial owner of its 90% shareholding in Company 'C'. Further, if the interpretation of the Revenue was to be held as correct then one will not have to not stop there and then also see the shareholders of Company 'A' as the beneficial owner of the shares of Company 'C'. This would then lead to absurd results, namely, that then even Company 'A' also would not have a substantial interest in Company 'C' and it would be the shareholders of Company 'A' that would have a substantial....
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.... asset in the balance-sheet. He submitted that even the A.O. accepts in the impugned order that the transaction of purchase of loans is an asset of the Petitioner. Mr Mistri submitted that section 92BA(i) would apply only when an expenditure is incurred for which a payment is made to a party covered under section 40A(2)(b) of the Act. In the present case, the purchase of loans was not an 'expenditure' but payment made for acquiring an asset, and hence, the same could never fall within the ambit of section 92BA(i) at all. Mr Mistri submitted that it is not possible to purchase an asset without making payment but that by itelf, without anything more, would not mean that such payment is an 'expenditure' as understood under the Act. He submitted that for purchasing an asset the purchaser pays a price for acquiring the asset and it is referred to as the consideration for the purchase of that asset and not an 'expenditure' for that asset. He submitted that the consideration paid for acquiring the asset can never be said to be in the nature of 'expenditure' so as to come within the ambit of section 92BA(i) of the Act. Mr Mistri was at pains to point out that an asset would be reflected in....
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....tion 92BA(i) read with section 40A(2)(b) of the Act. Mr Mistri submitted that if the logic of Respondent No.1 was to be taken to its logical conclusion, then it would mean that it is not even the Petitioner who is the beneficial owner of the shares of HBL Global, but it is the shareholders of the Petitioner who were the beneficial owners of the shares of HBL Global. As stated earlier, Mr Mistri submitted that this would lead to an absurd situation. He submitted that this could never been the intention of the Legislature as such an interpretation would lead to startling results and therefore has to be avoided. 11. As far as the transaction of payment of interest of Rs. 4.41 Crores to HDB Welfare Trust is concerned, Mr Mistri submitted that the beneficiaries of the said Trust are the employees of the Petitioner and not the Petitioner. He, therefore, submitted that the Trust does not come within the ambit of section 40A(2)(b) of the Act as explanation (b) to section 40A(2)(b) clearly provides that the Petitioner must be beneficially entitled to 20% of the profits in the said Trust. He submitted that in the facts of the present case this transaction did not fall within explanation (....
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....th Price and the second is the Transfer Price. The ALP is the price between unrelated parties. This price is determined by the market forces. Transfer Price, on the other hand, is the price of the transaction fixed between two related parties. Since these related parties are subject to common control, the price of inter se transactions amongst the related parties can be manipulated to transfer profit from one party to another in order to evade tax. It is for this very reason that the Transfer Pricing provisions were brought into force by the Legislature so as to determine the ALP of a transaction between related parties. He submitted that this was done in order to evade tax. If the Transfer Price was different from the ALP the Taxing Officer could make adjustments after following the provisions as set out in Chapter X of the Income Tax Act, 1961. 14. As far as the transaction of purchase of loans by the Petitioner from HDFC Ltd. is concerned, Mr Chhotaray submitted that it was wrong on the part of the Petitioner to claim that the purchase of these loans is not an 'expenditure' since it is not debited to the Profit and Loss Account. He submitted that the Petitioner is a bank invo....
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....ubsidiary has to be clubbed with its own share holding. In the facts before Karnataka High Court, Mr Chhotaray submitted that the shareholding of the company was only 6% whereas its wholly owned subsidiary had a 45% share holding. In these circumstances, it was held that taking into consideration the shareholding of 45% of the wholly owned subsidiary, the voting power of the company was 51% (i.e. 6% + 45%). Mr Chhotaray submitted that in the facts of the present case, the situation is identical. He submitted that taking into consideration the shareholding of 6.25% of HDFC Investments Ltd. (and which is a wholly owned subsidiary of HDFC Ltd.) in the Petitioner alongwith the shareholding of 16.39% of HDFC Ltd. in the Petitioner, the total voting power HDFC Ltd. had in the Petitioner was 22.64%. This was clearly above 20% as required under explanation (a) to section 40A(2)(b) of the Act. Mr Chhotaray submitted that the word "beneficial" appearing in explanation (a) is totally misconstrued by the Petitioner. Mr Chhotaray submitted that if the Petitioner's submissions are accepted, the word 'beneficial' would become totally redundant. In support of this proposition, Mr Chhot....
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....o HDB Trust is concerned, Mr Chhotaray submitted that the Petitioner has a deposit of Rs. 45.12 Crores from HDB Welfare Trust and has paid interest of Rs. 4.41 Crores. He submitted that the Petitioner has a substantial interest in terms of explanation (b) to section 40A(2)(b) of the Act. He submitted that this issue has been discussed in detail by the Revenue in its affidavit at page 355 to 358 of the paper book. Mr Chhotaray submitted that section 92(2)(A) specifically mentions interest as an item for determination of ALP. He submitted that the Petitioner is the founder member of this Trust and the Trust held shares in the Petitioner till 2006. The benefits enjoyed by the Trust when it was a shareholder continues even now. The Petitioner has included the reserves of HDB Welfare Trust of Rs. 60.03 Crores in its reserve while preparing a consolidated financial statement. The activities of the Employees Welfare Trust have been included as other business activities in the annual report of the Petitioner. He submitted that in any case the payment of interest is an expenditure and it needs examination whether the rate of interest was proper. He submitted that for all these reasons even ....
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.... (vi). As far as the above three transactions are concerned, it is common ground before us that if they were to fall within the term of a SDT, they would be covered under clause (i) of section 92BA which provides that it should be a transaction between the assessee and a person referred to in section 40A(2)(b) for an expenditure in respect of which payment has been made or is to be made to such person. In other words, if a transaction is with reference to an expenditure in respect of which payment has been made or is to be made by the assessee to a person referred to in section 40A(2)(b), only then would the same be a SDT. For this purpose it would therefore also be necessary to reproduce section 40A, to the extent it is relevant to decide the present controversy. Section 40A deals with expenses or payments not deductible in certain circumstances and the relevant portion thereof reads thus: "40-A. Expenses or payment not deductible in certain circumstances.- (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of busi....
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....uch company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession,- (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner, or member, has a substantial interest in the business or profession of that person. Explanation.-For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,- (a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profit) carrying not less than twenty per cent of the voting power; and (b) in any other case, such person is, at any....
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....ession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits), carrying not less than 20% of the voting power, would be deemed to have a substantial interest. Explanation (b) stipulates that in any other case, such person is, at any time during the previous year, beneficially entitled to not less than 20% of the profits of such business or profession. 23. On a conjoint reading of section 92BA(i) read with section 40A(2)(b), in the facts of the present case, what becomes clear is that for the transactions referred to earlier to fall within the meaning of a SDT, the assessee has to have a transaction (not being an international transaction) with a person as listed in clauses (i) to (vi) of section 40A(2)(b). 24. In the facts before us, it is common ground that the transactions which form the subject matter of the present Writ Petition, if were to be construed as a SDT, then the same would have to fall within section 92BA(i) which states that any transaction in which any expenditure in respect of which payment....
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....ed. The first condition is that, that the person should be the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits); and second that these shares (of which the person is the beneficial owner) are carrying not less than 20% of the voting power. In the facts of the present case, admittedly HDFC Ltd., on its own, is not the beneficial owner of shares carrying at least 20% of the voting power as required under explanation (a) to section 40A (2) (b) of the I. T. Act. The shareholding that HDFC Ltd. has in the Petitioner is only 16.39%. 28. We cannot, and the law does not permit us, to hold that HDFC Ltd. is the beneficial owner of 22.64% of the shares in the Petitioner by clubbing the share holding of HDFC Investments Ltd. with the shareholding of HDFC Ltd. If we were to do this, we would be effectively holding that HDFC Ltd., being a shareholder of HDFC Investments Ltd., is the beneficial owner of the shares which HDFC Investments Ltd. holds in the Petitioner. This, in law, is clearly impermissible because a shareholder of a company can never have any beneficial interest in the assets (movable or....
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....s of the company and are entitled, as provided by the Articles of Association to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders. Reliance is placed on behalf of the appellant on a passage in Buckley's Companies Act (12th Edn.), p. 894 where the etymological meaning of dividend is given as dividendum, the total divisible sum but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient. This statement does not justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company. The proper approach to the solution of the Question 1s to concentrate on the plain words of the definition of agricu....
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....clares it, to participate in the liquidation proceeds and to vote at the shareholders' meeting. Refer also to Carew and Co. Ltd. v. Union of India [(1975) 2 SCC 791] and Carrasco Investments Ltd. v. Directorate of Enforcement [(1994) 79 Comp Cas 631 (Del)] . 258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desires by a resolution in the general body meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises. Shares of stock in the subsidiary company are held as assets on the books of the parent company and can be issued as collateral for additional debt financing. Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary is allowed decentralised management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and competent services for the benefit of the subsidiaries." (emphasis suppli....
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....DT as set out in section 92BA (i) of the I. T. Act. 31. There is another reason for coming to this conclusion. If we were to interpret this provision as is sought to be contended by the Revenue, it would lead to an absurd situation, as correctly contended by Mr. Mistri. It is undisputed that there cannot be more than one beneficial owner of the same shares. If we were to take the example that was given by Mr. Mistri during arguments, it would effectively lead to a completely absurd result. Take for example Company 'A' has a wholly owned subsidiary Company 'B'. In turn, the shares of Company 'C' are held 90% by Company 'B' and 10% by Company 'A'. If one was to give the interpretation as sought for by the Revenue, then it would mean that Company 'A' beneficially owns 100% of Company 'C' which would lead to an absurd situation that Company 'B'; though owning 90% of the shareholding in Company 'C', would not be regarded as having a substantial interest in Company 'C' as Company 'B' cannot be said to be the beneficial owner of its 90% shareholding in Company 'C'. Further, if the interpretation of the Revenue was to be held as co....
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....by the Petitioner. It would, therefore, not fall within the meaning of a SDT as understood under section 92BA(i) of the Act. 33. For all the aforesaid reasons, we therefore have no hesitation in holding that this transaction of purchase of loans by the Petitioner from HDFC Ltd. would not fall within the meaning of a SDT. This being the case, there was no question of Respondent No.1 treating it so and thereafter referring the same to the TPO under section 92CA(1) for determining the ALP. TRANSACTION-2 PAYMENT MADE BY THE PETITIONER TO HBL GLOBAL PRIVATE LIMITED FOR RENDERING SERVICES:- 34. As far as this transaction is concerned, it is the contention of the Revenue that it would be a transaction with a person falling within section 40A(2)(b)(vi)(B) of the I. T. Act. Section 40A(2)(b)(vi) reads thus:- "(vi) any person who carries on a business or profession,- (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partn....
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....ss than 20% of the voting power. In this transaction, the Petitioner can never be said to be beneficial owner of the shares in HBL Global for the simple reason that it holds absolutely no shares in HBD Global. It holds shares in a company called ADFC Ltd., which in turn holds 98.4% shares in HBL Global. This would not mean that either directly or indirectly the Petitioner is the beneficial owner of the shares of HBD Global. We, therefore, find no merit in this contention. 37. We would also like to take note of the Guidance Note on Report under section 92E of I.T. Act issued by Institute of Chartered Accounts of India which states as under:- "4A.16 As in the case of section 92A(2)(a) and (b) (which defines the term 'associated enterprise' for the purposes of international transactions) the phrase "directly or indirectly" is not used in Section 40A(2)(b). However, in this regard, reference should be made to the Central Board of Direct Taxes' Circular number 6-P dated 6 July 1968 explaining the then newly inserted provisions in section 40A(2). This circular sets out the categories of the persons, payments to whom fall within the purview of section 40A(2). It me....
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....eneficial owner of shares in a downstream subsidiary merely because it owns the shares of the intermediate subsidiary companies. It is important to respect the fact that the entities are separate legal entities. This Guidance Note also gives an example which clearly indicates that for the purpose of section 40A(2)(b) it may be appropriate to consider only a direct shareholding and not a derivative or indirect shareholding. In fact, the Supreme Court in the case of Commissioner of Income Tax v/s Virtual Soft Systems Limited [(2018) 404 ITR 409 (SC) : (2018) 6 SCC 584)] has categorically discussed the relevancy of the Guidance Note and for the purposes of interpretation, the Supreme Court has held that it can certainly be used as an aid to interpret the provision. Paragraph 18 [of the SCC report] of this decision reads thus:- "18. Without a doubt, in a catena of cases, this Court has discussed the relevancy of the Guidance Note. While dealing with one of such matters, this Court, in CIT v. Punjab Stainless Steel Industries [CIT v. Punjab Stainless Steel Industries, (2014) 15 SCC 129] held as under: (SCC p. 134, para 17) "17. So as to be more accurate about the word ....
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.... deal with the judgments relied upon by Mr. Chhotaray. The first decision was of the Karnataka High Court and the other was of the Supreme Court. On carefully going through the decision of the Karnataka High Court in the case of Commissioner of Income Tax Vs. Amco Power Systems Ltd. (supra), we find that the reliance thereon by Mr Chhotaray is wholly misplaced. What the Karnataka High Court was considering in the facts of that case were the provisions of section 79 of the I.T. Act and which are materially different from section 40A(2)(b) which is being considered by us in the present Writ Petition. In fact when one peruses section 79 of the I.T.Act, it is clear that the same deals with carry forward and set off of losses in the case of certain companies. It is on the wording of section 79 of the I.T. Act, that the Karnataka High Court has given a finding that since ABL was having complete control over APIL and even though the shareholding of ABL was reduced to 6% in the year in question, yet by virtue of being the holding company, owning 100 % shares of APIL, the voting power of ABL could not be said to have been reduced to less than 51%. It came to this finding because ABL, tog....