TaxTMI 
TaxTMI 
2026 (7) TMI 544
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....Income-tax Act, 1961 ("Act") (hereinafter referred to as "Impugned Order") passed pursuant to the directions of the Dispute Resolution Panel ("DRP"), assessing the total income of the Appellant for the subject assessment year at INR 88,22,44,867/- as against returned income of INR 59,57,25,985 and taxing the differential amount of INR 28,65,18,882 as 'other income', is erroneous and bad in law and deserves to be set aside. 2. The Ld. AO/DRP erred on facts and in law, in alleging that the Appellant had transferred the shares of SLK Global Solutions Private Limited ("SLK India") (now Coforge Business Process Solutions Pvt Ltd.) ("Coforge BPS") to Coforge Limited at an inflated sale price and then arbitrarily recharacterizing a part of the 'capital gains' as 'other income' in the hands of the Appellant (i.e. 20.80% of sale consideration amounting to INR 28,65,18,882) without any legal basis, and solely based on extraneous considerations, conjectures and surmises, and ignoring the facts underlying the transaction and submissions of the Appellant. 3. On the facts and circumstances of the case and in law, the Ld. AO/DRP erred in casting aspersion....
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.... fair market value. The above grounds are independent and without prejudice to one another. The Appellant prays leave to add, amend, alter, delete or forego any of the grounds either before or during the course of hearing." 3. The brief facts of the case are that the assessee filed the return by declaring total income of Rs. 59,57,25,985/- and claimed of refund of Rs. 14,53,30,590/-. The case was selected for scrutiny under CASS. The assessee a wholly owned subsidiary of "Fifth Third Investment Company (A US Corporation)", is engaged in investment holding activities for "Fifth Third Bancorp Group". The assessee managed its investment portfolio by making strategic decision on buying and holding investment. During the impugned assessment year, the assessee had declared income from other sources amount to Rs. 59,57,25,985/- dividend from SLK Global Solutions Pvt. Ltd. (now known as 'Coforge Business Process Solutions P. Ltd.') which is offered to tax in return of income. The SLK Global Solutions (P.) Ltd. (in short, 'SLK India') a company incorporated under Companies Act in 2001 is a business process transforming enterprise, offering business process management and digital....
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....ase commitment by FTBNA to SLK India was artificially inflate the value of shares of SLK India and FTBNA has not got any benefit out of giving such purchase commitment. Accordingly, the addition was confirmed amount to Rs. 28,65,18,882/-. Being aggrieved assessee filed an appeal before us. 5. The Ld. AR argued filed a paper book comprising pages 1 to 200 which has been placed on record. The Ld. AR contended that the Ld. AO has re-characterised the income which is declared by the assessee as a capital gain. The Ld. AO had wrongly considered the income from other sources and considering the purchase commitment in proportion basis calculated the rate of 20.80% on 5 years commitment of FTBNA. The Ld. AR prayed for deletion the addition made by the Ld. AO. 6. The Ld. AR further stated that the provision of purchase commitment by FTBNA to SLK India was merely an assurance provided to a third party of genuine projected purchase based on past trends. It was not given to inflate the sale consideration. The assessee explicitly committed to a staggered minimum purchases totaling about Rs. 100/- crore (USD 133mn) over six years. The assessee has also honored the agreement and has underta....
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....y 55% (on an average) of its revenue from services being rendered to FTBNA. Thus, the average proportion of revenue of SLK India from FTBNA for past 5 years (i.e., ~55%) is much higher than the alleged 20.80% as highlighted by the AO for years post sale of shares. 15. Accordingly, in the future projections of SLK entities also, revenues from FTBNA were included. Considering that the Appellant selling the shares is a part of FTB group, the buyer being a third party sought assurance in the form of a purchase commitment for the projected revenues from FTBNA by the SLK entities, which is also a standard market practice (please refer to para 17 below for a snapshot of certain market precedents). In order to provide that comfort to the buyer of the shares, FTBNA provided such purchase commitment. This clearly proves that FTBNA had not provided purchase commitment to SLK India to inflate the sales consideration for the Appellant but to provide a comfort to the buyer of shares to enable the Appellant to offload its shares of SLK India. 16. The AO has failed to understand that the current case is not one where the Appellant group has committed anything unusual. The Appella....
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....onsideration to the Appellant, which FTBNA has repaid to SLK India in the form of service fee for future services. Had that been the case, FTBNA would not have availed services beyond the purchase commitment, which is not the case here- FTBNA has availed services worth much more than the purchase commitment (please see Table 3 below, paragraph 20). (II) Transaction of services availed by FTBNA from SLK India is a genuine and bonafide business transaction and not a hoax undertaken just to inflate the value of shares of SLK India 19. It is respectfully submitted that the rendering of services to FTBNA by SLK India is a genuine business transaction and had a bonafide existence even prior to transfer of shares of SLK India by the Appellant. The purchase commitment essentially is a testament of continuance of the business relationship between FTBNA and SLK India even post transfer of a partial stake by the Appellant in SLK India. 20. Further, the Appellant wishes to respectfully submit the following: a. The AO has not challenged the genuineness of such service transactions between SLK India and FTBΝΑ. b. Further, even post sale of sh....
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....ng sold by independent third parties. This also implies that FTBNA had given a purchase commitment essentially to benefit third parties who have sold 51% shares and the Appellant (a group company of FTBNA) would benefit only to the extent of 9% shares sale, which is highly illogical and grossly incorrect to presume. In view of the same, it is egregious to presume that one of the largest listed banking group of USA (i.e. FTB Group) would inflate sale consideration of shares of an Indian entity (i.e. SLK India) to accord benefit to third party shareholders, wherein a group company (i.e. the Appellant) of that US group is selling only 9% of the shares and other third party shareholders are transferring 51% of the shareholding of that Indian entity. (IV) Revenue cannot challenge or recharacterize the sales consideration (or any part thereof) agreed between two independent third parties 23. It is respectfully submitted that absent any specific provision in the Act, the revenue authorities cannot challenge the quantum of sales consideration of shares in relation to a transaction occurring between third parties. It is an undisputed fact that the Appellant and Coforge Lim....
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....oning if two different set of shareholders (i.e. Appellant and promoters of SLK India) sold the same shares on the same day to one purchaser (i.e. Coforge Limited), it is not open to the Revenue to treat the sale price as different for both the shareholders, viz., INR 16,946.48 for the Indian promotors and INR 13,421 for the Appellant [i.e. INR 137,74,94,626 (representing sale consideration received by Appellant) less INR 28,65,18,882 (representing 20.80% of the sale consideration, assessed as 'income from other sources' by the AO) divided by 81,285 (representing the number of shares sold by Appellant)). 26. It is further submitted that the Assessing Officer has no power to re-characterise a receipt in the absence of a statutory provision to that effect [see DIT Vs. Besix Kier Dabhol SA (2012) 26 Taxmann.com 169 (Bom) (pages 70-72 of this synopsis); PCIT Vs. Aegis Ltd (2019)102 Taxmann.com 495 (Bombay) (pages 74-76 of this synopsis)). Such power is to be found in Chapter X-A but those provisions have not been invoked by the Assessing Officer. 27. It is further submitted that even assuming the Assessing Officer was justified in re-characterising the conside....
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....ords, it can be said that the residuary head of income can be resorted to only if none of the other specific head is applicable to the income in question. 29. In view of the aforesaid legal framework, it follows that: a. Shares of SLK India will qualify as capital assets within the meaning of section 2(14) of the Act. Receipts on account of transfer of a capital asset shall be chargeable to tax in the hands of the Appellant as capital gains income. b. Section 45(1) says 'any profits or gains arising from transfer of a capital asset', hence, even if it is assumed that Appellant has transferred shares at an excess value (vis-à-vis FMV, since there is no embargo to sell shares at a value higher than FMV), then also, such receipts being on account of capital field can be taxed only under the head of Capital gains. c. Since, the income gain arising to the Appellant on the sale of the shares is indisputably chargeable under the head "Capital gains", it is unlawful on the part of AO to arbitrarily categorise a part of such sale consideration as 'other income'." 9. The Ld. DR argued and stated that the entire transaction is colo....
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....ndia and its subsidiaries (as considered in the valuation report)' and arrived at the figure of 20.80%." 10. The Ld. DR submitted that the Ld. AO has correctly appreciated the substance of the transaction and has rightly held that the consideration received by the assessee was not solely attributable to the transfer of shares of "SLK India". The facts on record clearly demonstrate that the purchase commitment provided by "FTBNA", an affiliate of the assessee group, was an integral and inseparable component of the overall transaction and substantially influenced the valuation of the shares acquired by Coforge Limited. The Ld. DR contended that the valuation of shares under the Discounted Cash Flow (DCF) method was significantly dependent upon the projected future revenues of SLK India and its subsidiaries. The projected revenues included substantial assured business from FTBNA under the purchase commitment arrangement. Therefore, the enhanced valuation of the shares was directly linked to the purchase commitment and not merely to the intrinsic worth of the shares. In the absence of such commitment, the valuation adopted by Coforge Limited would have been materially lower. The....
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....AO determined that 20.80% of the value embedded in the transaction was attributable to the purchase commitment. The assessee has not furnished any alternate valuation report or credible material to dislodge this computation. 12. The Ld. DR further submitted that the exemption claimed by the assessee under Article 13 of the India-Mauritius DTAA is available only in respect of gains arising from the transfer of shares. Any receipt attributable to a separate commercial commitment or contractual obligation cannot automatically assume the character of capital gains merely because it is embedded within the overall consideration received under the transaction documents. Consequently, the portion attributable to the purchase commitment is not eligible for treaty protection. The Ld. DR contended that the Ld. AO has rightly treated the amount attributable to the purchase commitment as taxable under the residuary head "Income from Other Sources". The receipt does not arise from the transfer of a capital asset but from a valuable commercial assurance furnished by an affiliate of the assessee group, which enhanced the transaction value and resulted in additional economic benefit to the asses....
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....sdiary of SLK India 6,001 7,913 10,818 14,473 39,205 SLK Philippines - subsdiary of SLK India 10,341 12,920 17,250 23,559 64,070 SLK India 70,516 90,483 120319 1,42,399 4,23,716 Total Projected Turnover (a) 86,858 1,11,316 148387 1,80,431 5,26,992 Purchase Commitment by FTB (b) 28,800 28,300 26,900 25,600 1,09,600 %age(c=b/a) 33.16% 25.42% 18.13% 14.19% 20.80% 4.16. Accordingly, 20.80% of the amount received by the Assessee on sale of shares of SLK India, i.e. 137,74,94,626 20.80% = Rs. 28,65,18,882 is treated as other income of the Assessee, taxable in India." 13. We have heard the rival submissions and perused the material available on record. The undisputed facts reveal that the assessee, a tax resident of Mauritius, transferred 81,285 equity shares representing 9% of the share capital of SLK Global Solutions Private Limited (now Coforge Business Process Solutions Pvt. Ltd.) to Coforge Limited for a consideration of Rs. 137,74,94,626/-. The assessee claimed that the gains arising from the transfer of shares were not taxable in India in terms of Article 13 of the I....