TaxTMI 
TaxTMI 
2020 (12) TMI 516
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.... "1.Whether the ITAT was right in applying the General provision Law ignoring the specific provisions of sub Section 47(iv) and holding that the transfer of shares by the assessee to its wholly owned subsidiary is to be considered as a Gift? 2. Whether the order of the ITAT upholding the decision of the Dispute Resolution Panel in granting10% risk adjustment allowance is not perverse? 3.Whether the order of the ITAT in allowing the claim of Trade Mark Fee and deleting the addition on account of Corporate and Bank Guarantee are not perverse?" 3. The assessee filed its return of income for the assessment year under consideration (AY 2009-10) on 28.09.2009 admitting taxable income at Rs. 125,57,70,310/-. The return was processed under Section 143(1) of the Act on 23.07.2010. Subsequently, the case was selected for scrutiny on the ground that the assessee had international transactions exceeding Rs. 15 Crores and the case was referred to the Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP). After hearing the assessee, the draft assessment order was passed on 31.03.2013 proposing the following additions/disallowances:- Sl. No. ....
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.... submitted that the assessee had transferred without consideration its entire holding in Redington Gulf FZE to RC on November 13, 2008 and within a very short period of less than a week, a private equity fund investment corporation invested USD 65 million in the assessee's overseas step down subsidiary Redington International (Holdings) Limited for 27.17% stake and claimed it as a gift and claimed exemption under Section 47(iii) of the Act. It is submitted that the transfer of shares by the assessee is not a gift falling under Section 47(iii) of the Act for the reason that the assessee transferred the shares only by way of re-structuring the company investment in RGF. The learned counsel referred to the minutes of the Board Meeting as well as Deed of Share Transfer and submitted that neither in the minutes of the Board Meeting, nor in the Share Transfer Deed, the word "gift" has been mentioned and the document shows that the entire transaction is in the form of re-structuring the assessee. Further, it is submitted that the Board Resolution towards re-structuring the concern of the Board be and hereby, accorded to transfer the investments held by the company in RGTF to inter se ....
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....ance was placed on the ruling of the Authority for Advance Rulings (AAR) in the case of In Re Orient Green Power Pte. Ltd. vs. [(2012) 346 ITR 557]. It is further submitted that assuming for the sake of arguments that the transfer of share to the entity abroad is a gift which should satisfy the conditions stipulated in Section 122 of the Transfer of Property Act (hereinafter referred to as "the T.P.Act") and the necessary ingredients being that such transfer should be voluntary, it should be without consideration and there should be acceptance by or on behalf of the donee. It is submitted that the transaction done by the assessee is not a voluntary transaction, which has been brought out in the findings of the TPO in paragraphs 17.2.3 and 17.2.5 of the order dated 29.01.2013. Further, the learned counsel referred to the findings rendered by the TPO and in particular, with regard to the transactions which took place outside the country. It is submitted that after the incorporation of RC, the Redington Gulf's shares were gifted to RC Islands and the TPO has thoroughly analysed the transaction and found that the transaction has been devised to accommodate the fund Investment Corpo....
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....sted by the Council of European Union by referring to the Article in Globe Tax Alert dated 19.02.2020. It is submitted that tax planning may be legitimate, if it is within the framework of law, colourable device cannot be part of tax planning. In this regard, the learned counsel referred to the judgment of the Hon'ble Supreme Court in McDowell & Co. Ltd. vs. Commercial Tax Officer [AIR 1986 SC 649] and CIT vs. Durga Prasad Mored [(1971) 82 ITR 540 (SC)]. Reliance was placed on the decision in Juggi Lal Kamalapet vs. CIT [1969 73 ITR 702 (SC)] for the proposition that the Court is entitled to lift the mask of corporate entity, if the conception is used for tax evasion or to circumvent tax obligation or to perpetrate fraud. For the same proposition, reliance was placed on the decision in the case of CIT vs. Sri Meenakshi Mills Ltd. [AIR 1967 SC 819]. 9. The learned counsel further submitted that Section 6 of the T.P.Act deals with what are the kinds of property that may be transferred. Clause (vi) in Section 6 states that no transfer can be made for an unlawful object or consideration within the meaning of Section 23 of the Indian Contract Act and the transaction done by the a....
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....ssessee and Redington, Singapore was on 01.06.2006 and the assessee was using the trade mark from 1993 onwards. The Singapore entity was formed only in the year 2005 whereas, the Indian entity was established in 1993 and much before the said company was formed, they were using the word "Redington" for their products sold in India. The assessee has not placed any material to controvert this factual position. The certificate of registration granted by the trade mark registry though issued only in 2009, it is deemed to have been granted from the date of application, that is, from the year 2000 onwards, in terms of Section 23 of the Trade Marks Act, 1999. Therefore, the Tribunal committed an error in permitting the assessee for adjustment of the licence fee for use of the trade mark to the subsidiary company, which was formed much later in point of time. In this regard, the learned counsel has drawn the attention of this Court to the trade mark licence granted to the assessee. Therefore, there was absolutely no necessity for payment of any licence fee and the Tribunal ought not to have interfered with the order passed by the TPO disallowing the said claim. With the above submission, th....
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....e for incorporating RC in Cayman Islands is that the private equity fund (IVC) was interested in investing in the Middle East and Africa operations of the assessee and to facilitate the same, it established IVC GOF RG in Cayman Islands. The explanation of the assessee for incorporating RM in Mauritius is because IVC imposed a pre-condition for investing in RC that it would be required to be listed within three years failing which, IVC had an option to exit by selling its shares to the Redington Group at a price determined having regard to the fair market value of the shares, but in any event, it would guarantee an internal rate of return of at least 7% for IVC. Further, it is submitted that the Redington Group was saddled with a liability to re- acquire the shares of RC from IVC, if the shares of RC are not listed on a stock exchange within three years. Further, the assessee would state that they (RI) had plans to expand its overseas activities outside Middle East and Africa and the funds raised by IVC was only for Middle East and Africa. Therefore, the assessee (RI) decided to have RM as an overseas holding company into which, non-Middle East, Africa can be consolidated, more so b....
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.... placed on the decision of the Hon'ble Supreme Court in CIT vs. B.C.Srinivasa Shetty [(1981) 128 ITR 294 (SC)]. 14. It is submitted that the transfer of shares of RG by the assessee (RI) to RC, Cayman Islands is a 'gift', not a transfer for the purposes of Section 45 of the Act. In this regard, reliance was placed on the decision in Prakriya Pharmachem vs. ITO [(2016) 66 taxmann.com 149 (Guj.)] and the decision of the High Court of Judicature at Bombay in Asian Satellite Broadcast Pvt. Ltd. vs. ITO in W.P.No.2749 of 2019, dated 28.09.2020. The finding of the Tribunal that the transaction is a gift is a factual finding and the Revenue cannot challenge the same in the present appeal. In this regard, reliance was placed on the decision in CIT vs. Gillanders Arbuthnot & Co. [(1973) 87 ITR 407 (SC)]. The fact that the transaction was for business purpose does not mean that the transfer is for consideration. In this regard, reliance was placed on the decision of the Authority of Advance Ruling, in Amiantit International Holding Ltd., In re [(2010) 322 ITR 678 (AAR)]. Further, it is submitted that the Revenue is incorrect in contending that the assessee was compelled to car....
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....) 360 ITR 159 (Delhi). Further, it is submitted that if there is no capital gain chargeable under Section 45 of the Act, there can be no income in terms of Section 2(24) of the Act. In this regard, reliance was placed on the decision in Cadell Weaving Co. P. Ltd. [(2001) 249 ITR 265 (Bom.)] and CIT vs. D.P.Sandhu Brothers [(2005) 273 ITR 1 (SC)]. It is further submitted that the Revenue by invoking the provisions of Section 92 of the Act, seeks to re-characterize the transaction from 'gift' to that of 'sale' to bring the income to taxation and such an action is not permissible under Chapter X. It is submitted that the power to re-characterize the transaction was introduced by inserting Chapter XA and in particular Section 98 thereof; as provided in Section 95(2), the said chapter is applicable to assessment year 2018-19 and thereafter, has no application for the year under consideration (AY 2009-10). The allegation that the transfer of shares of RG to RC sham is allegation made by the Revenue, as if the transaction was sham, then the shares of RG would continue to vest in the assessee (RI) and there can be no question of any transfer because ownership continues to v....
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....ncome and in the assessee's case, the transaction does not have an impact on the assessee's income either in the relevant assessment year or at any time in future. In the assessee's case, although the acquisition of the asset has no impact on the income of the assessee at the time of acquisition, but may have an impact at the time of its subsequent transfer, the transaction would still be regarded as an international transaction. Thus, when income does not arise, the question of computation of income at ALP also does not arise. In the present case, no income of any nature whatsoever arises to the assessee and therefore, the argument of the Revenue has no legal basis. Further, Chapter X has to be construed in consonance with and in harmony with the other provisions of the Act and if it is so construed, it must mean that if any transaction gives rise to income which is chargeable to tax under the Act, then under such circumstances, the income that would be brought to charge would have to be computed at the ALP irrespective of the contractual agreed price. The provisions of Chapter X can never be interpreted to set at naught in any exemption that is given in the other prov....
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....h was received gratis and having regard to the circumstances, in which it was given was of an income character. The decision in P.Krishnamenon is a case where the Revenue sought to bring the tax amount in the hands of the recipient. The decision in Durga Prasad Morde is not applicable to the facts of the case on hand, as there is no transfer of shares of RG held by RC (Cayman Islands) which it has received as gift and the proceeds thereof came back to the respondent in a manner that it did not make them taxable and this is not the case on hand, as RC continued to hold shares of RG till its amalgamation with RM and thereafter, RM continues to hold the shares of RG to date. The decisions relied on by the Revenue in the case of Juggi Lal Kamalpat and Sri Meenakshi Mills Ltd., are not applicable to the case on hand, as there is no question of lifting of the corporate veil as a consequence there of bring to tax alleged capital gain in the hands of the assessee. 18. With regard to the determination of ALP of the trade mark fee, during the assessment year under consideration, the assessee had paid a sum of Rs. 1,89,33,150/- towards trade mark and licence fee for using trade mark "Redin....
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....espondent submits that prior to the amendment brought about in Section 92B by the Finance Act, 2012, the Tribunal had decided that the furnishing of a guarantee by an assessee was not an international transaction, as it did not fall within any of the limbs of Section 92B. It was to get over the judicial pronouncements that an attempt was made to rope in transactions of furnishing bank guarantees, i.e., guarantees given to banks to secure them against a default by an associated enterprise that has borrowed monies from the bank. Clause (e) of the Explanation in- fact supports its case inasmuch as the Explanation makes it clear that giving of a corporate guarantee is not a service, since it explains service to mean provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; without prejudice to above, it is submitted that only corporate guarantees given by the assessee which are in the nature of lending (viz., guarantees to secure a loan) are covered under Clause (c) of Explanation 1 to Section 92B. Corporate guarantee....
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....2014) 227 Taxman 121 (SC)], the Explanation ought to be read as prospective in its application and retrospective in its effect such that it will also cover within its ambit guarantees issued prior to the introduction of the Explanation by the Finance Act, 2012. Reliance was also placed on the decision of the Hon'ble Supreme Court in CIT vs. Sarkar Builders [2015] 375 ITR 392 (SC). 22. It is further submitted that the appropriate way to give effect to it, is to construe all guarantees that are covered within the scope of the definition to fall within the definition provided they are entered into after April 1, 2001 but the arm's length price, if any, can be substituted for the contracted terms, if at all, from the assessment year 2012-13 only. Interpreting the Explanation in any other manner shall cause grave hardship. With the above submissions, the learned Senior Counsel for the assessee sought for affirming the impugned order and answering the substantial questions of law against the Revenue and in favour of the assessee. 23. Heard Ms.R.Hemalatha, learned Senior Standing Counsel for the Revenue and Mr.Percy Pardiwalla, learned Senior Counsel for Mr.N.V.Balaji, le....
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.... CFO of the assessee was asking him to list out the assets and liabilities of RC and also the net asset value of RC as on 18.11.2008, before the transfer of shares of RG held by the assessee, when IVC had invested USD 65 million. The CFO in his reply stated that RC was incorporated on 14.07.2008 in Cayman Island and only they had a share capital of USD 10,400. Responding to the query with regard to the assets of RC, the CFO has stated that RC holds only investments in RG and except this investment in RG, there were no other assets or income accruing to it. The assessee has not reckoned the transfer of shares of RG to RC as a sale of investment. In the audited financial statement for the financial year 2008-09, it has been stated that after the re-structuring of the assessee's overseas investment, the assessee continues to have effective control over all the subsidiaries and all the economic benefits which would accrue to the assessee. Based on the note prepared by the Auditors of the assessee, which formed part of the Annual Report, the assessee contended that the share transfer is not a disposal of investment as per para no.17 of AS 13 of Accounting for Investments. That the s....
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....ed on the auditor's certificate, contended that the transaction is not an international transaction. The TPO did not agree with the said contention and held that Section 92B gives the meaning of 'international transaction' between two or more associated enterprises either or both of whom are non-residents having a bearing on the profits or income or losses or assets of such enterprises. The TPO held that the share transfer transaction done by the assessee has a bearing on the profits or loss of the enterprises under study and therefore, it has to be considered as an international transaction and ALP has to be determined. Further, by referring to the amendment to Section 92B with effect from April, 2002, it is stated that a transaction of business re-structuring or re-organisation is also an international transaction and once the transaction is classified as an international transaction, the assessee was required to determine ALP of the transaction. Considering the correctness of the plea raised by the assessee that the transfer was without consideration and a gift voluntarily made by the assessee and accepted by the donee, the TPO referred to the sworn statement of the ....
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....hareholder can be incorporated as FZCO and there is no marked difference between FZE and FZCO, as both type of companies enjoy tax and other benefits and they are at par and nothing prevented the assessee to form their company as FZCO. The TPO also analysed the transaction as to how there is a loss to the Revenue by shifting profits outside the country. Thus, the TPO concluded that the transfer of shares held by the assessee in RG, Dubai to RC is an international transaction as per Section 92B of the Act and ALP has to be determined. The incorporation of RM and RC just before the share transfer was seen as means to avoid capital gain tax, these two entities have no commercial substance on their own and are used as a conduit to avoid the incidence of tax. Since the investment was transferred from one company to another company and each company being a separate legal entity in different countries, the capital gain has to be taxed in the hands of the transferor (assessee). Further, it is to be seen that the investment was transferred from a resident to non-resident and hence, after such transfer, the income from the investments would accrue only to the non-resident and not to the resi....
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....le only when a transaction results into taxable income in the hands of the tax payer in India. In other words, it was contended that the transfer pricing provisions are applicable only when there is a charge of tax in India and in the assessee's case, the transaction does no result in a taxable income and transfer pricing provisions would not be applicable. The TPO disagreed with the contentions raised and held that Section 92 is a charging provision more particularly, as it is placed in Chapter X of the Act, a special set of provisions relating to avoidance of tax, so that the profits chargeable to tax in India do not get diverted elsewhere. To support his conclusion, several decisions were referred to which we shall discuss in the later part of this judgment. 31. The TPO next proceeded to consider the contention of the assessee that gifts are not to be considered as transfer as per Section 47(iii) of the Act. The TPO held that to qualify as a gift under Section 122 of the TP Act, it has to be voluntary, which was absent in the transaction as it had been devised to accommodate Investcorp (IVC) on account of compulsion placed upon the assessee. In this regard, the TPO referr....
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....air market value on such date and the assessee had determined the fair market value of Rs. 214.12 Crores for investment in RC, but the CFO stated that it is only a representative value, which submission was rejected by the TPO. In this regard, the TPO after analysing the transaction, held that the shares in RG has been disposed of for valuable consideration as per the audited balance sheet of the company itself. Ultimately, the TPO held that none of the requirements under Section 122 of the TP Act stands fulfilled and the transaction cannot be regarded as a gift. The assessee contended that the TPO had no jurisdiction to question the business decision or wisdom of the assessee. The TPO held that it has not questioned the business decision or wisdom of the assessee, but has examined the transaction elaborately to show that there is a shifting of the tax base from India to Cayman Island, which is a tax haven. In this regard, the TPO once again referred to the sworn statement of the CFO, who accepted that before the transfer of shares of RG to RC by the assessee, if there was any sale by the assessee, the resultant income would have been offered to tax in India by the assessee and aft....
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....Cards and M/s.Baskar Digital Press. The explanation offered by the assessee was considered by the TPO by taking note of the amendment to Section 92B by insertion of the explanation with retrospective effect from 01.04.2002 by Finance Act, 2012, which includes guarantees to fall within the scope of international transaction. After taking note of the factual explanation offered by the assessee, the TPO noted that in the assessee's case, there is no time period for expiry of the bank guarantee and naturally such guarantees would demand more commission charges payable to the banks and the assessee has taken maximum risk in providing such guarantees to its subsidiaries. 35. The TPO compared differences between the guarantee issued by bank and the guarantee issued by the assessee on behalf of its associated enterprise and pointed out that the bank's commission charges is not comparable to the commission charges that are payable to the assessee by the associate enterprise, the assessee is in a position to charge the commission charges along with higher risk premium and it is not a shareholder's activity. The TPO, thus, concluded that it is a clear financial service rendered....
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....03.2013 to the assessee by affording them an opportunity to put forth their submission. 37. After considering the written submission filed by the assessee on 19.03.2013, the Assessing Officer examined the transaction, took note of the suggestions of the TPO, submissions of the assessee and rejected the same and passed a draft assessment order dated 31.03.2013 under Section 143(3) read with Section 92CA(4) read with Section 144C of the Act. The assessee filed their objections before the DRP against the draft assessment order dated 31.03.2013, who rejected the contentions raised by the assessee on all grounds by order dated 20.12.2013. The assessee filed an application for rectification before the DRP and it appears that the assessee filed a writ petition before this Court, which was disposed of on 17.02.2014 directing the DRP to decide the rectification application within a time frame. The first issue raised in the rectification application was regarding the adjustment on account of transfer of shares of RG. The DRP took into consideration the grounds raised and found that the grievances of the assessee were already been redressed by the Assessing Officer himself and therefore, h....
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....er of property to or by company's association or bodies of individuals. Thus, a company would be entitled to execute a gift in terms of Section 5 of the Act. Therefore, we need not dwell into the said aspect, but can safely proceed to consider as to whether the theory of gift as pleaded by the assessee has been established, whether it was a valid gift in terms of the definition in Section 122 of the TP Act. Therefore, the discussion in the impugned order of the Tribunal from paragraphs 72 to 79 need not be examined for its correctness, as the legal position is clear in terms of Section 5 of the TP Act. 39. The Revenue does not dispute the fact that the assessee had transferred without consideration its entire share holding in RG to RC on 13.11.2008. The Revenue's contention is that the same is not a gift under Section 47(iii) of the Act for the reason that the assessee transferred the shares only by way of re-structuring the company's investment in RG; neither in the Board Resolution, nor in the deed of share transfer, the word "gift" has been used, which will clearly demonstrate that the entire transaction is in the form of re-structuring the company. In this regard....
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....to gift within the meaning of Section 122 of the TP Act, but would qualify as gift for the purpose of levy of tax under the Gift Tax Act owing to the definition contained in Section 2(iii) read with Section 4 of the Gift Tax Act. Block Stone states that "gift" are always gratuitous, grants or upon some consideration or equivalent. In several decisions, it has been held that for proving a document of gift was executed with free and voluntary consent of the donor, it must be proved that the physical act of signing the deed coincide with the mental act viz., the intention to execute the gift. The principles laid down in the Indian Contract Act relating to free consent would apply in determining whether gift is voluntary. 41. In Tulsidas Kilachand vs. CIT [AIR 1961 SC 1023], it was held that the word consideration is used in the same sense as in the Indian Contract Act and executes natural love and affection. A transfer in consideration of an acceptance of spiritual and moral benefit, or in consideration of natural love and affection is a gift for such consideration is not with contemplated by the conclusion. The donor is the person who gives the gift. The donee is the person who ac....
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....r, as also by the DRP and the assessment order as well. 42. The learned Senior Counsel for the assessee referred to the decision in Sonia Bhatia vs State Of U.P. [(1981) 2 SCC 585]. The question arose with regard to the interpretation of sub-Section (6) of Section 5 of the Uttar Pradesh Imposition of Ceiling on Land Holdings Act, 1960 and the proviso therein in order to determine the validity of the deed of gift. This decision was pressed into service to explain the concept of "gift" as contemplated by the T.P.Act and it is submitted that "consideration" means a reasonable equivalent or other valuable benefit passed on by the promisor to the promise or by the transferor to the tranferee and that a 'gift' is undoubtedly a transfer which does not contain any element of consideration in any shape or form. There cannot be any dispute as regards the general proposition as to what connotes a valid gift, but without considering the factual position, one cannot take a decision as to whether the gift was a valid gift and whether the test laid down under Section 122 of the T.P.Act stands fulfilled. Therefore, in our considered view, the said decision cannot be made applicable to t....
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....assessee by relying upon the auditor's report would contend that the share transfer is not a disposal of investment as per paragraph 7 of AS 13 and Accounting for Investments. 45. In McDowell & Co. Ltd., it was held that tax planning may be legitimate provided it is within the frame work of law. The learned counsel for the assessee would contend that the decision in McDowell & Co. Ltd., should be read in the manner explained by the Hon'ble Supreme Court in Azadi Bachao Andolan and Vodafone International Holdings B.V. There can be no quarrel to the proposition that the assessing authorities have to look into all the circumstances under which the transaction took place. The authorities are required to examine as well as the Tribunal and Court as to whether the assessee had adopted any ingineous method to avoid taxation. Therefore, the authorities as well as the Courts and Tribunals are entitled to go behind the veil to examine the real intention of the parties in effecting transactions to come to a conclusion whether the "gifts"were genuine (See Rajeev Tandon vs. ACIT [(2008) 215 CTR 272]). The chain of events speak for themselves; the decision of the Board of the assessee....
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....erefore, the plea raised by the assessee by stating that only one shareholder is permissible has to necessarily fail. The manner in which the transfer was effected and ultimately the investment landing in a tax haven will clearly show that it is a sham transaction devised to avoid tax in India. Furthermore, RC had no commercial substance on its own and the third party investor acquired about 27% stake in RC because, it had acquired the shares of RG held by the assessee, which were transferred and this acquisition took place within a week after the RG's share was transferred to RC. Thus, the asset owned by the assessee viz., the shares in RG, which were hither to within the network of the Indian tax laws, stood shifted to Cayman Island which is a tax haven. Therefore, it is evidently clear that the entire transaction was so structured to accommodate the third party investor, who has put certain conditions even prior to effecting the transfer and this has been spelt out by the CFO of the assessee in his sworn statement wherein, he would candidly admit that as per the request of the third party investor, they had incorporated RC and, RG's shares were transferred to RC. Thus, t....
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....ssessee, who had made dubious transaction to escape the tax net from the Indian continents. Therefore, we are unable to apply these decisions to the case of the assessee. That apart, we cannot decide the matter on assumptions and presumptions and we are called upon to decide the substantial questions of law on the facts, which were available when the assessments were completed. The argument that no dividend had been declared by RC till date could hardly be a factor to test as to whether the theory of 'gift' as propounded by the assessee was valid and sustainable. Therefore, the argument that if there is no capital gain chargeable under Section 45, there could be no income in terms of Section 2(24) can at best be argued as a general proposition and cannot be applied to the facts of the instant case. Consequently, the decisions in the case of Cadell Weaving Co. P. Ltd., Dheer & Co., Dana Corporation cannot be applied to the facts of the instant case. 49. The reliance placed on the decision in Vodafone International Holdings B.V., is stretching the matter far beyond the permissible limit in the given facts. Further, we note from the grounds of appeal filed by the assessee b....
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....y the said assessee. Firstly, both the decisions relied on by the learned Senior Counsel were rendered in writ petitions quashing the reopening of the assessment and incidentally, the factual issue has been touched upon and in one of the cases, the Assessing Officer himself did not dispute the theory of gift which is missing in the case on hand. Therefore, both the decisions will not render any assistance to the case of the assessee. It was argued by the learned Senior Counsel that the Tribunal has rendered the factual finding that the transaction is a gift and the said finding, on fact, cannot be interfered in this appeal. To support such contention, reliance was placed on the decision in Gillanders Arbuthnot. 51. We had earlier pointed out that the Tribunal had elaborately examined as to whether a company can execute a gift in favour of another company and after noting the various provisions, rendered a finding that in terms of Section 5, a company would be entitled to execute a gift. However, there is no in depth analysis of the correctness of the findings of the TPO/DRP/Assessing Officer that the essential ingredients of a valid gift remained unsatisfied. Therefore, the Reve....
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....rt such contention, heavy reliance was placed on the decision in Tollygunge Club. The assessee therein was Social and Sports Club with one of its activities of conducting horse races with amateur riders, it charged for admission into the enclosure of the club, a resolution was passed by the General Body for levying surcharge for local charity in addition to admission fee. Receipts on account of surcharge were not treated as trading receipts of the assessee therein and were not brought to tax. The ITO took a different view by holding that the amounts received on account of surcharge is application of the income belonging to the assessee and included it in the total income of the assessee. The first appellate authority affirmed the view taken by the ITO, which was reversed by the Tribunal and upheld by the High Court. On appeal before the Hon'ble Supreme Court, the case was decided in favour of the assessee that the receipts from the surcharge levied on admission tickets for the purposes of charity could not be included in the assessee's taxable income. We fail to understand as to how this decision can render any assistance to the case of the assessee. The factual scenario as....
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....ely on the basis of the title of the document, but are guided by the form and substance and the intention behind the transaction bearing in mind the words on caution expressed by the Hon'ble Supreme Court as regards the duty of the Courts and Tribunals while examining a transaction to consider it as to whether it is legitimate tax planning or device adopted for tax evasion. Factually we have held that the transaction is not covered under Section 47(iii), as it is not a transfer of capital asset under a gift and the authorities below rightly classified the transaction under Clause (iv) of Section 47. The argument of the assessee is that clause (iv) of Section 47 would not be attracted, as it would apply only to a wholly owned subsidiary. It should not be forgotten that we have been called upon to decide as to whether the subsidiary company and the step down subsidiary were incorporated as a device to act as a conduit to avoid tax in India. Therefore, the transaction effected in favour of RG would undoubtedly fall within clause (iv) of Section 47 and the incorporation of the step down subsidiary and transfer of shares in favour of a third party investor within a short span of les....
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....hout the TP proceedings the assessee tends to portray that the above transfer of shares is within the group companies only, the economic benefits will accrue to the Indian company and consequently the transaction does not attract capital gain tax. The incorporation of the new entities in the abroad and transferring a revenue generating asset to such entities will essentially mean that in future the income from such asset will accrue directly to the non-resident and not to the Indian company. In this case, previous to the share transfer, the Indian company was holding the Redington, Gulf's shares and hence dividend declared will accrue to the Indian company. This dividend if accrued to the Indian company has to be taxed in the hands of Indian company as per the Act, and such dividends are not exempted even under DTAA. As matter of fact, this particular issue was studied with respect to the dividend declared by the Redington, Gulf from FY 2005-06 which is tabulated as below:- FY Dividend declared by Dubai Company (which accrued to Cayman Islands company) Dividend declared by Cayman Islands Company (which accrued to Mauritius Company) Dividend declared by Mauritius Com....
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....rprise, Redington, Singapore. The TPO determined the ALP of the trademark/license fee as 'Nil' on the ground that there is no genuine rationale for payment of the said trademark/license fee to Redington, Singapore. The DRP affirmed the said findings of the TPO. The Tribunal deleted the same by stating that the tax payer is the best judge of his business affairs and it is not for the TPO to question the commercial rationale of payment and in this regard, placed reliance on the decision of the Hon'ble Supreme Court in S.A.Builders. The following factual aspect requires to be noted. The assessee filed an application before the trademark Registry for obtaining registration of the word mark 'Redington' on 29.02.2000. The Trademark Registry issued Certificate of Registration on 17.03.2009 and in terms of provisions of the Trade Marks Act, the Certificate of Registration is deemed to have been granted from the date of application i.e., from February 2000. It is an undisputed fact that the assessee has been using the Trademark 'Redington' ever since 1993. Redington, Singapore was established in the year 2005 and the Trademark agreement was entered into between t....
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....bsence of clarity on facts, the assessee would request this Court to remand the matter back to the Assessing Officer to re-adjudicate the allowability of the deduction on the touchstone of Section 37(1) of the Act. Thus, we have to consider as to whether the TPO had evaluated the commercial expediency behind incurring the expenditure towards Trademark/license fee and if the answer to the said question is in favour of the assessee, then the issue would be whether the determination of the ALP at 'NIL' is proper and lastly whether the prayer made by the assessee to remand the issue back to the Assessing Officer needs to be granted. 61. As could be seen from the order passed by the TPO dated 29.01.2013, the assessee failed to submit any documents to establish that Redington, Singapore was the legal owner of the Trademark. All that the assessee stated was that they entered into an agreement with its wholly owned subsidiary for payment of Trademark license fees for a period of 10 years at USD 4,00,000 per annum with effect from 01.04.2006 and an amount of Rs. 1.89 crores was paid during the Assessment Year under consideration. The TPO noted that the assessee company has been u....
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....ting the trademark 'Redington' for the purpose of carrying on its business and there is nothing uncommon in assessee's making payment to Redington, Singapore for use of the Trademark and it is not necessary for the TPO to go beyond this plausible explanation since it is a widely accepted business practice around the world and it is not an unique case for the assessee company alone. Further, it is for the assessee to decide dynamics of its business and the assessee is the best judge to decide on such issues. In this regard, reliance was placed on the decision in S.A.Builders. Unfortunately, the Tribunal did not examine the facts as mentioned above. The TPO has specifically recorded that the assessee did not produce any document to show that the original owner of the Trademark was Redington, Singapore. The admitted fact, as rightly noted by the TPO and the DRP is that the assessee has been using the mark ever since 1993. Redington, Singapore, a wholly owned subsidiary of the assessee, was established only in 2005 and the agreement to pay Trademark/license fee was in the year 2006. The assessee applied to the Trademark registry for registration of the mark 'Redington&#....
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.... and therefore, the ALP was determined at 'NIL'. We find no error in the decision making process, considering the factual situation whole of which has been admitted and the assessee miserably failed in dislodging the factual finding rendered by the TPO by producing any document before the DRP. In such circumstances, we find absolutely no justification on the part of the assessee to seek for a remand to the Assessing Officer to redo the assessment on the said issue. For all the above reasons, we hold that the finding rendered by the Tribunal is wholly erroneous and the same is set aside. 67. The next issue is with regard to the Corporate Guarantee and Bank Guarantee. 68. From the Annual Report of the assessee, it was seen that the assessee had issued guarantees on behalf of its subsidiaries to the tune of Rs. 464.36 crores and on behalf of others, to the tune of Rs. 3.42 crores. The assessee was called to explain the same. The assessee stated that they had not issued any fresh guarantee during the Assessment Year 2009-10 and the guarantee is outstanding, is purely on account of the currency transition adjustment on restatement of guarantees outstanding at the closing r....
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.... guarantee deposits / asset mortgage etc., to extend guarantees on behalf of their clients. Further, it was pointed out that if a situation arises that the Bank Guarantee has to be invoked, when the Associate Enterprise is not in good financial position, obviously, the assessee is at risk and they claim that there is no risk in providing guarantees cannot be accepted. The TPO drew a comparison between the Guarantees issued by the Bank and Guarantees issued by the assessee on behalf of the Associated Enterprise to the Bank. It has been recorded that the Associated Enterprises of the assessee have not provided any security to the assessee. In the agreement / contract between the Associated Enterprises and the assessee, no condition has been imposed on the Associated Enterprises to pay the amount to the assessee and even in some agreements if it is mentioned, in the event of the Associated Enterprises financially becoming weak, the risk undertaken by the assessee becomes greater. Further, invoking a guarantee provided to an Associated Enterprise is very difficult as it depends on the financial condition of the Associated Enterprise and the law governing such transactions in that count....
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.... conclusion that it is a financial service. This finding of fact has not been interfered by the DRP, but the DRP was of the view that the same treatment, which was given in the previous Assessment Year should be extended for the Assessment Year under consideration also and there is no reason given by the TPO for taking a divergent view. The finding that the very same transaction for the previous Assessment Year was subject matter of TP adjustment, has not been disputed by the Tribunal rather not even dealt with by the Tribunal. Therefore, the finding rendered by the Tribunal is utterly perverse. 70. The argument of the learned Senior counsel appearing for the assessee is that prior to the amendment brought about in Section 92B by Finance Act 2012, the Tribunal had decided that furnishing of a guarantee by an assessee was not an "international transaction" as it did not fall within any of the limbs of Section 92B. It is submitted that to get over the judicial pronouncement, the explanation was inserted. The argument is that Clause (c) of the Explanation supports the case of the assessee inasmuch as the Explanation makes it clear that giving of a Corporate Guarantee is not a servi....
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....ratory statutes ... In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended ... An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect (ibid., pp. 468-69). 15. Though retrospectivity is not to be presumed and rather there is presumption against retrospectivity, according to Craies (Statute Law, 7th Edn.), it is open for the legislature to enact laws having retrospective operation. This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective oper....
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....international transaction" to include the Corporate Guarantee in the nature provided by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist on non-charging any commission from Associated Enterprise as a commercial principle. Further, it has been observed that this position indicates that provision of guarantee always involves risk and there is a service provided to the Associate Enterprise in increasing its creditworthiness in obtaining loans in the market, be from Financial institutions or from others. There may not be immediate charge on P & L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise. 76. In the light of the above decisions, we hold that the Tribunal committed an error in deleting the additions made against Corporate and Bank Guara....
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....ment objectives when compared to objectives of IVC. IVC is a private equity fund engaged in acquisition of investments, holds them for a certain period (3-5 years) and disposes the same at the end of the agreed period whereas the objective of the assessee is to promote their overseas business including their business in Middle East Africa. It is further contended that IVC gets assured return and this would mean that IVC does not bear the risk of loss that may arise on account of the business of RG. The DRP agreed with the TPO and held that the value of the shares of RC determined at the time of investment by the IVC represents the best possible estimate of the market value RC share and this represents the value of the shares, held by the assessee in RC at the time of its transfer. Having held so, the DRP proceeded to hold that they are in agreement with the argument of the assessee that in view of the buy back arrangement, the PE fund was making a relatively risk free investment, the market price would have been less than what was paid by the PE fund. The DRP ultimately held that it can be said that the PE fund paid 10% extra, on account of the buy back assurance and directed the T....
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.... have to exit only through the sale of shares through stock exchange. In such a situation, the investor may earn a good return if the stock does well in the market. He stands to loose if the stock does not do well. Only if the company fails to list the shares within an agreed period of time, the investor is given the exit option with an agreed rate of return on the investment, as it is the inability/failure of the company to list the shares within the agreed timeframe for whatever reasons." 79. The TPO proceeded to discuss about the various cases in the nature, where the Private Equity Investors had lost heavily on their investment as the target company in which they invested faired very badly in the stock market after the listing of their shares. Further, the TPO has also taken note of as to how the funds are very professionally managed and there is detailed due diligence conducted before making the investment which is with the sole view of making profits. Therefore, the TPO held that the value of shares of RC determined at the time of investment by IVC represents the best possible estimate of the market value of the share of RC and this represents the value of shares held by t....