TaxTMI 
TaxTMI 
2024 (2) TMI 104
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....fter setting off losses) at INR 18,77,16,715 as against the returned income of INR 17,88,45,251. 2. Erred in proposing transfer pricing adjustment of INR 88,71,465 to the income of the Appellant. Transfer pricing provisions not applicable in absence of "income" 3. Erred in making a transfer pricing adjustment in respect of the transaction of discharge of purchase consideration by the Appellant pursuant to a scheme of merger approved by the National Company Law Tribunal (NCLT) without appreciating the fact that the said transaction does not give rise to income under the provisions of the Act leading to inapplicability of Chapter X of the Act for the said transaction. Without prejudice: Scheme of arrangement approved by NCLT and purchase consideration discharged after approval from Reserve Bank of India (RBI) 4. Erred in disregarding the fact that scheme of merger (including the amount and form of purchase consideration) was duly approved by the NCLT vide its order dated 11 January 2018 where Hon'ble NCLT specifically states that the scheme is fair and reasonable and not in violation of any provisions of law. 5. Erred in not appreciating the principle of law that on....
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....the Act and the Income Tax Rules, 1962 for identifying a comparable interest rate for the alleged excessive payment of INR 100 Crores and CCDs. 14. Without prejudice, erred in not following/ incorrectly following any of the methods prescribed under Section 92C(1) of the Act for benchmarking the impugned excessive payment of INR 100 Crores. 15. Without prejudice, erred in not following/ incorrectly following any of the methods prescribed under Section 92C(1) of the Act for benchmarking the interest rate for the CCDs issued. 16. Without prejudice, failed to appreciate that if at all adjustment for interest is to be made, the same should be based on international rates (such as LIBOR) and not SBI PLR. Short grant of credit of Advance tax and Taxes deducted at Source ("TDS") 17. Erred in not granting advance tax credit of INR 20,93,675. 18. Erred in not granting TDS credit of INR 8,60,996 claimed by the Appellant in the return of income of AY 2018-19. Incorrect levy of interest under Section 234C of the Act 19. Erred in levying additional interest amounting to INR 1,52,106 under Section 234C of the Act. Initiation of penalty proceedings under Section 270A of the Act ....
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.... 850000000 Cash 1000000000 6. During the year under consideration, the assessee entered into a scheme of amalgamation with its holding company DIHPL, which in turn is a wholly-owned subsidiary of DIHBV. The aforesaid scheme of amalgamation was sanctioned by the Hon'ble National Company Law Tribunal ("Hon'ble NCLT") vide order dated 07/12/2017 and the appointed date for amalgamation was 01/04/2016. Pursuant to the sanction, the amalgamating company, i.e. DIHPL got merged into the assessee. For the said merger, the assessee paid a total purchase consideration of Rs. 188.35 crore to DIHBV (i.e. the holding company of DIHPL) as under:- Issue of equity shares Rs. 3,35,33,120 Issue of CCDs Rs. 85,00,00,000 Cash Rs. 100,00,00,000 7. Therefore, pursuant to the aforesaid merger, the holding company of the assessee was changed from DIHPL to DIHBV in view of the cancellation of existing shares of the assessee held by DIHPL and the issuance of new shares to DIHBV. Since the book value of DIHPL as on 31/03/2016 was Rs. 369,28,18,214 and pursuant to the merger, the total purchase consideration of only Rs. 188.35 crore was paid to DIHBV in the form of equit....
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.... made to DIHBV vide CCDs itself was not at arm's length. The TPO also rejected the contention of the assessee that as the scheme of merger has been approved by Hon'ble NCLT the said transaction is at arm's length on the basis that the only authority of the law to determine the ALP of the international transaction is the TPO. The assessee's contention that the purchase of shares of DIHPL by the assessee and issuance of equity shares to DIHBV is a transaction on capital account, wherein no income arises was also rejected by the TPO on the basis that the assessee has made excessive payment to the tune of Rs. 185 crore in the form of CCDs and cash to DIHBV, which represents an artificial liability created in the books of the assessee for the sole purpose of shifting profits outside India. The TPO also held that it is not the case of re-characterisation but in the present case pursuant to the scheme of amalgamation, the entire character of the original equity was changed into equity, CCDs, and cash based on an unscientific valuation report prepared solely on management's guidance without any independent application of the mind by the valuer. Accordingly, the AO treated the cash paid to ....
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....ition as it was prior to the merger once it gets 100% shareholding of the assessee. Therefore, it was held that there is no other change insofar as DIHBV is concerned, as DIHBV has not parted anything that needs to be compensated. The learned DRP held that the essence of the scheme of amalgamation is that the holding company of the assessee has changed from DIHPL to DIHBV and therefore in substance there is no change in the parent holding company. Thus, the learned DRP upheld the findings of the TPO that the fresh equity shares issued to DIHBV represent a fair value of shares of the assessee post amalgamation, and the consideration paid in the form of CCDs and cash represents an excessive payment in lieu of the purchase consideration and the same is not at arm's length. Allowing the alternative plea of the assessee, the learned DRP directed that interest on excessive payment of cash, re-characterised as deemed loan, should be charged from the date of actual payment of cash instead of the complete year. 11. In conformity with the directions issued by the learned DRP, the AO vide impugned final assessment order dated 26/07/2022 passed under section 143(3) read with section 144C(13) ....
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....r, the sale of investment has an impact on the income/expense of the assessee. Accordingly, it was submitted that this is a capital transaction that has an impact on the income/expense based on a payment mechanism-interest on CCDs and the interest-free loan. It was further submitted that the assessee increased the value of its holding company, i.e. DIHPL, by including its own value. It was further submitted that if the entire consideration of Rs. 188 crore is paid as equity shares then there is no dispute, but the assessee is issuing CCDs on which interest is paid and has also paid Rs. 100 crore in cash, which has been disputed by the TPO. The learned DR further submitted that the valuation as per valuation reports submitted by the assessee cannot be relied upon as in the said valuation reports it has been specifically stated that the purchase consideration has been determined by the management. 14. We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the basic facts that DIHBV, the ultimate parent company, held 100% shares of its subsidiary DIHPL, which in turn held 100% shares of the ass....
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....e NCLT vide order dated 07/12/2017, the shareholding of DIHPL in the assessee was cancelled and fresh shares of the assessee was issued to the ultimate parent company, i.e. DIHBV. Further, the shareholding of DIHBV in DIHPL was also cancelled. Therefore, pursuant to the aforesaid merger, the holding company of the assessee was changed from DIHPL to DIHBV. From clause 11 of the aforesaid scheme of amalgamation, we find that for the amalgamation, the assessee paid a total purchase consideration of Rs. 188,25,33,120 to DIHBV, i.e. the shareholders of the DIHPL, in the following manner:- Issue of equity shares Rs. 3,35,33,120 Issue of CCDs Rs. 85,00,00,000 Cash Rs. 100,00,00,000 Total Rs. 188,35,33,120 17. In its transfer pricing study report, the assessee declared the transaction of payment of purchase consideration pursuant to the scheme of amalgamation as one of the international transactions undertaken by it. The assessee claimed that while the transaction qualifies as an international transaction by virtue of section 92B of the Act, however, such transaction does not require to be benchmarked since the assessee neither generated any income nor incurred any expenditure....
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....ent or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) ...... Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of market....
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....ideration is on the capital account and does not result in any income to the assessee. Further, it was submitted that since, in the present case, the merger transaction does not result in any income nor any allowance or deduction has been claimed by the assessee, therefore the issuance of CCDs and payment of cash consideration does not come within the purview of section 92 of the Act. Accordingly, it was submitted that the issuance of CCDs and payment of cash consideration by the assessee cannot be subjected to transfer pricing provisions. In this regard, the learned AR placed reliance upon the decision of the Hon'ble jurisdictional High Court in Vodafone India Services Private Limited v/s Union of India, [2014] 368 ITR 1 (Bom.). From the perusal of the aforesaid decision, we find that the Petitioner challenged the addition made by the Revenue on account of the re-valuation of the equity shares issued by it to a higher price. The Hon'ble jurisdictional High Court while allowing the writ petition filed by the taxpayer held that the issue of shares at a premium by the assessee to its non-resident holding company does not give rise to any income from an admitted international transact....
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....rnational transaction", Chapter-X of the Act provides a mechanism for computation of arm's length price in relation to such international transaction. 23. The learned AR further submitted that the Hon'ble NCLT has approved the scheme of amalgamation and therefore the TPO has no jurisdiction to rewrite the scheme and re-characterise the nature of the merger transaction or the nature of instruments issued as part of the scheme. It was further submitted that the Hon'ble NCLT has expressly recognised that the merger is not in violation of public policy and is in the best interest of the assessee and thus the TPO cannot sit over the judgment of an order passed by the Hon'ble NCLT. It was also submitted that the merger consideration has been approved by the RBI and no objection was raised by the Income Tax Department during the proceedings before the Hon'ble NCLT. 24. As noted above, the Hon'ble NCLT vide order dated 07/12/2017 approved the scheme of amalgamation under section 230 to section 232 of the Companies Act, 2013 amongst DIHPL and the assessee. From the perusal of the aforesaid order, forming part of the paper book from pages 121-120, we find that the Hon'ble NCLT took into co....
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....was not in the issue, therefore these decisions are distinguishable on facts. It is further pertinent to note that for computation of arm's length price, Chapter-X of the Act provides a complete machinery under which the assessee is also required to substantiate, with necessary documentation, that the price paid in an international transaction is at arm's length price following the procedure prescribed under Chapter-X of the Act. However, there is no material available on record to show that the above exercise was conducted and the merger consideration was found to be at arm's length by the Revenue at the time of approval of the scheme of amalgamation by the Hon'ble NCLT. This aspect is further evident from the observations of the Hon'ble NCLT in para 8 of its order, wherein the undertaking of the Petitioner companies to comply with the applicable provisions of the Act is recorded. Therefore, we agree with the findings of the learned DRP that the TPO is not questioning the scheme of amalgamation as approved by the Hon'ble NCLT, and what is being questioned is whether the payments made to the parent holding company in the guise of payment for amalgamation are consistent with the pro....
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....) * For Every 8.872 Shares of Dimexon (India) Holding Private Limited of Rs. 10/- each, the shareholder would get 1 Compulsory Convertible Debentures of Rs. 100 each, Total amounting to Rs. 85,00,00,000/- (Rupees Eighty Five Crores Only) (Fraction of Compulsory Convertible Debentures may be adjusted in Cash) * Consideration in cash of Rs. 100,00,00,000/- (Rupees One Hundred Crores Only)" 28. We find that in the aforesaid valuation report, it has also been mentioned that the management has decided to give cash consideration to DIHBV as excess cash is available with the assessee, which has not been fully utilised. Further, the valuer also came to the conclusion that the purchase consideration determined is not detrimental to the shareholders since the merger is within the same group and the ultimate owner continues to be DIHBV. We find that similar purchase consideration is mentioned in the valuation report dated 05/01/2017 prepared by M/s V.R.Pandya & Co., forming part of the paper book from pages 161-168. It is pertinent to note that in both valuation reports the purchase consideration of Rs. 188,35,33,120 is stated to have been determined by the management of the Companies. T....
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.... the merger transaction, the assessee had to provide a consideration of Rs. 369,28,18,214, which represented the adjusted book value of the amalgamating company, i.e. DIHPL, to the shareholders of the amalgamating company, i.e. DIHBV. Therefore, the assessee did the same by way of giving equity shares and CCDs of the assessee, which represented a total value of Rs. 269,28,90,977, computed as under:- Instrument Value (in Rs. ) 33,53,312 equity shares of face value Rs. 10 each 3,35,33,120 85,00,000 CCDs of face value Rs. 100 each 85,00,00,000 Other equity 180,93,57,857 Total 269,28,90,977 31. It is further the submission of the assessee that additionally it gave consideration of Rs. 100 crore which represents the difference in the value of DIHPL (pre-merger) and the book value of the assessee (post-merger). Accordingly, it is the submission of the assessee that there is no excess consideration which was paid to the ultimate holding company, i.e. DIHBV and what was recognised by the valuation report is fair. 32. The actual delineation of transaction, as evident from the record, is as under:- (a) DIHPL (an Indian company) is a wholly owned subsidiary of DIHBV (a Neth....
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.... present case, it is the claim of the assessee that DIHBV has transferred its subsidiary, i.e. DIHPL, having a book value of Rs. 369,28,18,214 to the assessee pursuant to the merger transaction, and therefore is entitled to receive a consideration of Rs. 369,28,18,214, which it has received by way of the shareholding of the entity, i.e. the assessee, having a total value of Rs. 269,28,90,977 (post-merger) and Rs. 100 crore in cash. At the outset, it is unfathomable that in an arm's length scenario, a company can be transferred at its book value. Be that as it may, it is evident from the record that merger consideration is paid to the ultimate holding company upon an amalgamation of the subsidiary company with the step-down subsidiary, wherein the ultimate holding company, i.e. DIHBV is not transferring any of its underlying interest in shares in DIHPL, which after the merger still remains with DIHBV. As earlier DIHBV was holding the assessee and the other two subsidiaries through DIHPL, and now as a result of the merger, DIHBV directly holds 100% shares of the assessee and the other two subsidiaries through the assessee. We find that the merger transaction, in the present case, is ....
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....ent of cash to DIHBV as a deemed loan has been upheld, we direct the TPO/AO to compute the interest on the same in conformity with the observations of the Hon'ble jurisdictional High Court in Tata Autocomp Systems Ltd. (supra). To this extent, the benchmarking by the TPO/AO is modified. As regards the disallowance of interest paid on CCDs is concerned, in view of the aforesaid findings the benchmarking by the TPO/AO is upheld. 36. As regards the reliance placed by the learned AR on the decision of the Hon'ble Delhi High Court in CIT v/s EKL Appliances Ltd, (2012) 345 ITR 241 (Delhi), we agree with the findings of the learned DRP on page 40 of its directions that the exceptions as laid down by the Hon'ble High Court in para 18 of its decision are clearly applicable in the present case. Further, we are of the view that the exceptions as noted by the Hon'ble jurisdictional High Court in para 2 of its judgment in PCIT v/s Aegis Ltd., 2019 SCC Online 2256 (Bom.) are applicable in the present case. 37. During the hearing, the learned AR furnished the scheme of arrangement in certain cases wherein cash consideration was paid in the event of a merger. However, nothing has been brought on....