TaxTMI 
TaxTMI 
2024 (2) TMI 104
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....1. Erred in determining the Appellant's total income (after 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 n....
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....he Appellant had adhered to all the conditions laid out in Section 92C(3) of the Act. 13. Without prejudice, failed in adopting a scientific approach in conformity with 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. ....
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.... TNMM 3. Recovery of Expenses 1964511 Other Method 4. Interest on CCD 8049383 Other Method 5. Payment of purchase consideration pursuant to scheme of amalgamation Other Method Issue of equity shares 33533120 Issue of CCDs 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 ....
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....h a transaction at the price at which it was entered into by the assessee. Accordingly, the TPO held that the cash of Rs. 100 crore paid to DIHBV represents a deemed loan and the payment in the form of CCDs also represents excessive payment, thus the ALP of the interest paid on such CCDs should be treated as Nil as the payment 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 ....
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.... is that there is no change in the economic interest of DIHBV, as earlier DIHBV was holding interest in the assessee and other two subsidiaries through DIHPL. However, as a result of the merger, DIHBV directly holds 100% shares of the assessee and the other two subsidiaries through the assessee. Therefore, DIHBV is in the same position 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 o....
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....re and after the merger. The learned DR further submitted that the transaction itself is not the issue of shares and issuance of shares is only a part of the consideration, which has not been questioned by the TPO. It was further submitted that the transaction involved is the sale of investment by DIHBV and the payment in return. Further, 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 consid....
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....e and assistance, (iii) carrying on business as an investment holding company and for that purpose to invest or use the money and property of the company in such manner as the directors may think fit. Thus, it cannot be disputed that DIHPL was merely in the business of an investment holding company. 16. Pursuant to the approval of the aforesaid scheme of amalgamation by the Hon'ble 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....
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.... 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement 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 owners....
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....ssued CCDs to DIHBV which carries interest. As per the TPO/learned DRP, the assessee has paid interest on CCDs, and the same definitely impacts the profit/losses of the assessee. Therefore also it is an "international transaction". 21. In the present case, as part of the business restructuring, the assessee agreed to pay a total consideration of Rs. 188,25,33,120 to DIHBV in the form of equity shares, CCDs, and cash. As per the assessee, the payment of merger consideration 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....
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....ation Ltd. v/s ADIT, [2016] 49 ITR(T) 589 (Kolkata - Trib.) (SB), also becomes relevant, wherein it was held that while a notional interest income cannot indeed be brought to tax in general, the arm's length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. Therefore, we find no merits in the aforesaid plea of the assessee and once a transaction falls within the ambit of "international 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 c....
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....rms of the scheme also cannot override the requirement of computing the arm's length price under the provisions of the Act. It is pertinent to note that the approval of the scheme by the Hon'ble NCLT and computation of arm's length price under the provisions of Chapter-X of the Act operates in different fields. We further find that in the decisions relied upon by the assessee in support of its contention, the computation of arm's length price and transfer pricing adjustment 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 ....
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....e Consideration of Rs. 1,883,533,120/- (Rupees One Hundred and Eighty Eight Crores Thirty Five Lakhs Thirty Three Thousand One Hundred and Twenty Only) considering the Net Payment Method, to be discharged to the ultimate shareholder i.e Dimexon International Holding BV in the following manner: * For every 22.49 shares of Dimexon (India) Holding Private Limited of Rs. 10/- each, the shareholder would get 1 share of Dimexon Diamonds Limited of Rs. 10/- (Fraction of shares may be given in cash) * 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 th....
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....ves and surplus 5,37,11,435 Total 80,78,36,205 Less: Cost of Investment in DDL 47,77,11,240 Add: Book value of DDL 3,36,26,93,249 Book value of DIHPL as on 31 March 2016 3,69,28,18,214 Calculation of book value of assessee ("DDL") as on 31 March 2016 Particulars Amount as on 31 March 2016 (INR) Share capital 3,35,33,120 Reserves and surplus 3,32,91,60,129 Book value of DDL as on 31 March 2016 3,36,26,93,249 30. It is further the submission of the assessee that as part of 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 269,28,9....
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....er book from pages 228-244, we find that the company has a share capital of Rs. 75,41,24,770, which is entirely held by DIHBV and reserves and surplus of Rs. 5,27,11,435. Further, we find that the company does not have any fixed assets and only holds investments of Rs. 48,57,83,640 in its subsidiaries including the assessee. Further, the cash and cash equivalents are only Rs. 9,10,541. We further find that DIHPL holds corporate deposits of Rs. 30,69,72,037 with its subsidiary company from which it earned interest of Rs. 1,19,82,097. Therefore, from the above, it is evident that apart from holding investments in subsidiaries, DIHPL does not have any other business or assets. 34. In the 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, ....
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....upon the decision of the Hon'ble jurisdictional High Court in CIT v/s Tata Autocomp Systems Ltd., (2015) 374 ITR 516 (Bom.), wherein it was held that the arm's length price in case of loan advanced to associated enterprises would be determined on the basis of the rate of interest being charged in the country where the loan is received/consumed. Accordingly, it was submitted that since in the present case, the cash paid to DIHBV is treated as a deemed loan, therefore the interest computed by applying SBI PLR plus 300 basis points spread risk is not in conformity with the aforesaid decision of the Hon'ble jurisdictional High Court. Since the findings of the lower authorities in treating payment 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....