2017 (8) TMI 729 - HC - Income Tax

Re-opening of assessment - issuance of the Step Up Coupon Bonds by NNPLC and guaranteed by NDTV - Held that - The complex and circuitous structure of subsidiaries and the transactions entered therein are closely connected and provide a live link for the formation of the belief of the AO that there has been escapement of income in AY 2009-10 and for the previous assessment year, AY 2008-09 as well because the investments continued that year. Mere disclosure of a transaction at the time of the original assessment proceedings does not protect the assessee from a re-assessment under Section 147 if the AO has information that indicates that the transaction is sham or bogus. In the present case, NDTV has alleged that the details of the corporate guarantee issued by NDTV to NNPLC regarding the Step Up Coupon Bonds was intimated to the Revenue during the original assessment proceeding. This argument of NDTV falls flat considering that the AO has reason to believe that this transaction is bogus. For these reasons, this Court is of the view that the impugned reassessment notice is valid in law and can be sustained. Provisional attachment of NDTV s assets - validity of attachment and permissible under Section 281B - Held that - In terms of Para 10 of the provisional attachment order dated 14.09.2015, NDTV issued unconditional and irrevocable guarantee to the extent of ₹ 3.5 crore and ₹ 5 crore for obtaining a term loan from Yes Bank by its subsidiary NDTV Convergence Limited. However, while pledging these assets, NDTV failed to seek permission from the Department as per the provisions of section 281 of the Act read with CBDT s Circular No. 4 of 2011 dated 19.07.2011. It is submitted that NDTV is aware of the Circular, because the AO had issued an advisory to the petitioner by letter no. 529 dated 01.08.2014. This Court is of the view that a reasonable apprehension that NDTV may liquidate the assets thwarting the recovery of tax liability is not unwarranted. This court further notes the AO s decision not to attach the bank accounts and other trade receivables of NDTV so as to ensure unhampered operation of its business. This decision is in line with the judgment of the Bombay High Court in Gandhi Trading v. Assistant Commissioner of Income Tax and Others 1999 (7) TMI 59 - BOMBAY High Court wherein the Court held that the action taken under Section 281B must not hamper the business activities of the assessee and accordingly, attachment of bank accounts must be the last resort. This Court is of the opinion that the impugned order under Section 281B does not suffer from any infirmities and is valid under the Act. Assessee appeal dismissed.

Summary

Issues Involved:
1. Validity of the notice for re-opening of assessment for AY 2008-09 under Section 147 of the Income Tax Act.
2. Validity and permissibility of the provisional attachment of NDTV’s assets under Section 281B of the Income Tax Act.

Issue 1: Validity of the Notice for Re-opening of Assessment

12. The learned counsel for NDTV argued that the complete details regarding the issuance of the Step Up Coupon Bonds by NNPLC and guaranteed by NDTV were submitted during the original assessment proceedings under Section 143 of the Act. On the basis of this information, the AO had made enquiries to FT & TR, Central Board of Direct Taxes (CBDT) in respect of the bonds issued and made a transfer pricing adjustment of the guarantee fee earned by NDTV in the original assessment order. NDTV stressed that there had been no suppression or withholding of any material fact by it and the impugned notice under Section 147 of the Act was issued on a “mere change of opinion”. For this, the learned counsel for NDTV relied on Madhya Pradesh Industries Ltd. v. ITO, 57 ITR 637 (SC) and Ranbaxy Laboratories Ltd. v. CIT, 336 ITR 136 (Del.)

13. It was submitted by Mr. S. Ganesh, learned senior counsel, for NDTV that the “reasons to believe” supplied by the AO did not substantiate on how it had failed to disclose all material facts and instead merely repeated the statutory language. Additionally, it was submitted that the AO’s allegation that it were the funds that belonged to NDTV that were introduced in NNPLC under the pretext of the issued bonds is baseless and merely a reason to suspect. It was urged on behalf of NDTV that the re-assessment has been opened not on the basis of any tangible material, but only on a mere change of opinion and therefore the notice has been issued without jurisdiction. NDTV placed reliance on CIT v. Kelvinator of India Ltd. [2010] 228 CTR 488.

14. Mr. Ganesh argued that during the course of proceedings in the regular, scrutiny assessment, for the relevant assessment year, the AO had made inquiries with respect to the investment in the Step Up coupons. In reply to these queries, it had written a letter:

"During the course of assessment proceedings, the assessee was asked to state whether any corporate guarantee has been given by the assessee for NNPLC and justification thereof. The assessee was further asked to specify the fee charged for the same and computation thereof.

In this regard, it is respectfully submitted that during the financial year relevant to the subject assessment year, NDTV Networks Plc, (NNPLC), had raised funds by issuing US $100 million convertible bonds. As per the terms of the bonds, NDTV had given an undertaking to provide a corporate guarantee for and on behalf of NNPLC, as and when required.

However, the requirement for giving the corporate guarantee never arose and therefore no corporate guarantee was given. Accordingly, no fee was charged as there was no requirement to charge the same and neither any corporate guarantee was given. The assessee had duly submitted these details vide submission dated I91h December'20I I and 26th December'2011 along with a Copy of the extracts of the resolution dated 22nd May'2007. The above understanding was contained in Terms and Conditions of the Bonds which form a part of the Subscription Agreement. A copy Subscription Agreement alongwith the relevant Terms and Conditions of the Bonds is attached as Annexure.”

15. Reliance was placed on NDTV’s letter of 28.05.2011, to the revenue, the relevant part of which is extracted below:

“Further, in respect of corporate guarantee extended with respect to NNPLC, you have asked to give a note on benefit accruing to NDTV from the same and also specify when the coupon bonds were received and profits arising to NNPLC/NOTV from the same.

In regard to above query, it is submitted that no corporate guarantee was issued by the NDTV in respect of the above transaction for or on behalf of NDTV Networks Plc. The above fact had duly been reported in the Audited Accounts of the assessee Company wherein it has been stated that the Company has merely given an undertaking to provide a corporate guarantee for and on behalf of NNPLC, as and when required. However, it is again reiterated that no such corporate guarantee was issued by the assessee Company in favour of any person in relation to raising USO 100m from the issue of stepup coupon convertible bonds by NNLPC. Accordingly, it is respectfully submitted that the question of accruing any benefit in the hands of NOTV does notarise. It is further submitted that NOTV had not received any income for giving an undertaking to provide a corporate guarantee for and on behalf of NOTV Networks in relation to raising USO 100m Step Up Coupon Convertible bonds.

With respect to the query when the coupons were received, it is submitted that, NNPLC has raised funds by issuing $ 100m coupon convertible bonds on 30 May 2007 by entering into Subscription Agreement with the Jefferies International Ltd ('Jefferies’), a leading global securities and investment banking group having it s registered office at Brachen House, 4th Floor, One Friday Street, London EC4M9J A, UK. Jefferies were also appointed, as an underwriter and the placing agent for offer and issuance of bonds..”

16. Mr. Ganesh also stated that NNPLC’s identity is as a non-resident, and accordingly is liable to tax in UK and that any gain/(loss) on the redemption of bonds was duly considered in accordance with UK Tax Laws and disclosed in the Tax Returns filed by the NNPLC in UK. He relied on the letter written to the revenue, for AY 2008-09, on 31.05.2012. A letter dated 20.07.2012, reiterating the same facts, was shown to the court.

17. It was submitted that all the documents placed on record in the regular assessments, demonstrated that the AO sought and obtained every possible piece of information regarding the Step Up Coupon Bonds. The Subscription Agreement, names of bondholders, Trust Deed were all referred to and relied upon in the said letters filed by the Petitioner and NNPLC. If the AO wanted any further details/information, he could have asked for the same from NDTV. After examination of all the aforesaid data, the AO vide Order dated 03.08.2012 passed under 143(3) of the Act holds that since NDTV stood as a guarantor for issuance of the Step up Coupon Bonds and"exposed itself to risks pertaining to the transaction", it should have received arm's length consideration for such service/guarantee. Accordingly, a transfer pricing adjustment ofRs.18.72 crores was made in the hands of the NDTV. AO was of the view that the issuance of Step Up Coupon Bonds by NNPLC was a bonafide and genuine commercial transaction and without the provision of the guarantee by NDTV, NNPLC would not have been able to raise the money through the said bonds. The case made out in the reasons recorded by revenue that the money introduced in NNPLC is the NDTV's own money is, therefore, inconsistent and diametrically opposite, to the case made out by AO in the original assessment proceedings.

18. Mr. Ganesh argued that in the assessment proceedings for the AY 2009-10, the same transfer pricing adjustment in respect of the Step up Coupon Bonds was proposed by the AO against which the Petitioner filed objections before the Dispute Resolution Panel ("DRP"). Before the DRP, though the AO doubted the legality of other transactions, however, in respect of the issuance of Bonds, the revenue contended that unless NDTV stood guarantor for the issuance of Step up Coupon Bonds, NNPLC would not have been able to raise the funds from the Bondholders. The DRP by directions dated 31.12.2013, upheld the submissions of the AO and confirmed the transfer pricing addition proposed in the draft order, albeit after reducing the quantum of adjustment. The CIT(A), for AY 2008-09, by Order dated 29.4.2014 followed the order of the DRP for AY 2009-10 and confirmed the addition in principle, but reduced the quantum of adjustment. Therefore, the consistent case of the Respondents has been that the issuance of Step up Coupon Bonds by NNPLC was a legitimate and genuine commercial transaction and without the NDTV’s provision of the guarantee, NNPLC would not have been able to raise the money through the said bonds. Lastly, NDTV also contended that second proviso of Section 147 cannot be invoked by the revenue as no mention of this ground is found in the reasons recorded by the AO. This amounts to supplementing the reasons recorded, which is not permitted by the law.

19. It is submitted that a mere allegation in the reasons recorded that there is failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment is insufficient for initiating proceedings under Section 147 of the Act. The mere repetition of the expression in the “reasons to believe” about failure to disclose fully and truly all material facts will not empower the AO to assume jurisdiction under section 147 of the Act and he is required to state in the reasons recorded which material facts have not been disclosed in the reasons recorded. Learned senior counsel emphasized that there is no whisper or even an allegation that the facts disclosed by the Petitioner were false and that there has been any denial by the investors i.e. bond holders that they did not make any such investment or that investment made by them was the investment made from NDTV’s funds. Counsel also argues that in the reasons recorded the AO's inference that it could be NDTV's own funds introduced in NNPLC in the garb of impugned bonds is without any material and only on account of suspicion and conjectures and the assessment has been reopened to make roving and fishing enquiries. Counsel submitted that all particulars relating to the transactions were fully disclosed; further the UK revenue authorities furnished the documents.

20. Learned counsel relied on JSRS Udyog Limited and Another v. Income Tax Officer [2009] 313 ITR 321 (Del) where this court held that:

"Apart from merely saying that the receipts of the share application money were bogus and sham transactions, there is nothing indicated either in the reasons or in the impugned order dated November 28, 2008, to enable us to arrive at such a conclusion.."

"20. In the reasons supplied to the petitioner, there is no whisper, what to speak of any allegation, that the petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been an escapement of income chargeable to tax. Merely having a reason to believe that income had escaped assessment, is not sufficient to reopen assessments beyond the four year period indicated above. The escapement of income from assessment must also be occasioned by the failure on the part of the assessee to disclose material facts, fully and truly. This is a necessary condition for overcoming the bar set up by the proviso to section 147. If this condition is not satisfied, the bar would operate and no action under section 147 could be taken. We have already mentioned above that the reasons supplied to the petitioner does not contain any such allegation.”

21. It was argued that the tangibility of materials should be the basis for valid “reasons”; they cannot be merely based on “reasons to suspect”. In other words, there should be a trigger by an external matter, outside the record, leading to a genuine “reasons to believe”. Learned counsel relied on Union of India v Rai Singh Deb Bisht 77 ITR 802 in this regard. It is submitted that in the “reasons” recorded there is reference to some complaints. However, the revenue acknowledges that the complaint relates to a later year. Therefore it has no nexus with the matter of issuance of bonds by NNPLC in the year under consideration. Furthermore, the revenue in the impugned letter/order dated 23.01.2015 has sought to supplement the reasons recorded and has referred to second Proviso to Section 147 of the Act as an afterthought. It is submitted that it is well settled that the AO cannot supplement the reasons recorded and it is the reasons, alone which are to be looked into to justify the reopening of proceedings under Section147 of the Act. Mr. Ganesh relied on Atma Ram Properties Pvt. Ltd. v. Deputy Commissioner of Income Tax 343 ITR 141 (Del) and Bombay Stock Exchange Ltd. v Deputy Director Income Tax (2014) 365 ITR 160. Counsel also relied on Pardesi Developers and infrastructure (P) Ltd v. CIT (2013) 351 ITR 8 (Del) and Rasalika Trading & Investment Co. (P) Ltd v Deputy Commissioner of Income Tax & Anr (2014) 365 ITR 447.

22. Mr. P.S. Patwalia, learned Additional Solicitor General appearing for the revenue argued that despite repeated notices, NDTV had not submitted the financial statements of its subsidiaries including the Balance Sheet, Profit & Loss Accounts, report of Board of Directors, Report of auditors etc., during the original assessment. It was further contended that the AO. had “reason to believe” that there had been escapement of income. This was on the basis of the DRP proceedings for the AY 2009-10 wherein the DRP held that the transaction routed through NDTV’s subsidiary NNBV was sham and required lifting of the corporate veil. The DRP also noted that given the financial strength of NNPLC, it was doubtful that investors purchased the Step Up Coupon bonds only to resell them at a loss in AY 2011-12. In addition to this, the AO also relied on the tax evasion petitions filed by the shareholders of NDTV alleging that the investment introduced in NDTV’s subsidiaries was NDTV’s own unaccounted money that was later transferred to NDTV through merger and liquidation of the said subsidiaries. On the basis of this information, the AO formed an opinion that the investment made through Step Up Coupon Bonds is a sham transaction and NDTV’s own unaccounted money, similar to the investment made in NNBV of US $150 million. Thus, there was tangible material to reopen the assessment for AY 2008-09 and the impugned notice must not be quashed.

23. The learned ASG also submitted that in cases of sham transactions, it was not necessary to record how NDTV had failed to disclose material facts. The counsel further argued that second proviso to Section 147 can be invoked in the present case. The respondent contended that the law does not bar applicability of the second proviso as the reasons recorded by the AO can be supplemented through the counter-affidavit. Accordingly, on both grounds, the impugned notice issued by the AO is valid.

24. It was submitted that during FY 2005-06, the NDTV had only two subsidiaries, i.e. 'M/s NDTV News Limited' and 'M/s NDTV Media Limited', both Indian companies. During FY 2006-07, it incorporated two subsidiaries –M/s Emerging Markets 24X7 and M/s. NDTV Networks BV ("NNBV") in Netherlands and one subsidiary - M/s. NDTV Networks Plc ("NNPLC") in UK apart from four subsidiaries in India, namely M/s. NDTV Imagine Limited, M/s. NDTV Labs Limited, M/s. NDTV Convergence Limited and M/s. NDTV Lifestyle Limited. During the FYs 2007-08 to 2011-12, NDTV created a complex web of Indian and foreign subsidiaries and the number of NDTV's subsidiaries and associates drastically increased to 33, with 21 subsidiaries, one Joint Venture (JV) and 11 associates. Of these 33 entities, 11 subsidiaries were incorporated abroad - 4 each in Mauritius and Netherland and 1 each in UK, Sweden and UAE. The key subsidiaries were situated in UK and Netherlands and these were all liquidated by FY 2011-12. During FY 2006-07 to FY 2008-09, NDTV received funds amounting to ? 1127 crore through these subsidiaries situated in Netherlands and UK, as per following details:

(i) US $ 20 million (Rs.86 crores) through investment made in M/s. NDTV Networks Plc, UK ("NNPLC") by M/s. Com Ventures, V.I.,L.P. during FY 2006-07

(ii) US $ 100 million (Rs.405 crores) through Step Up Coupon Bonds due 2012 issued by NNPLC during FY 2007-08;

(iii) US $ 150 million (Rs. 642 crores) through investment made in M/s. NDTV Networks International Holding BV ("NNIH") by M/s. Universal Studios International BV, Netherlands ("USBV") during FY 2008-09.

25. The introduction of funds in these main subsidiaries, followed by immediate routing of these funds to other supporting entities, which finally merged into the ultimate parent company NDTV, i.e. destination of these funds was the petitioner. It was argued that, the entities investing funds in NDTV’s subsidiaries incurred huge losses within short period of time; for example, the investors in bonds were allegedly returned ? 290 crores out of investment of ? 405 Crores, while USBV was returned only ? 58 crores out of investment of ? 642 Crores. The balance funds of ? 699 Crores [i.e. ? 115 Crores (Rs. 405 Crore - ? 290 Crores) + ? 584 Crore (Rs. 642 Crore - ? 58 Crore) = ? 699 Crores] were retained by the foreign subsidiaries of the petitioner, which were ultimately transferred to petitioner itself. The real source of these funds was and is unexplained and all the key subsidiaries in Netherlands and UK were liquidated by FY 2011-12, which created considerable problems for the revenue in gathering of information from tax officials of foreign countries, particularly about their bank accounts. It was argued that during the original assessment proceedings, by notice issued under Sections 143(2)/142(1) dated 05.11.2009, the AO specifically required NDTV to furnish all statutory reports as per the Income Tax Act, copies of which could not be filed with return of income. However, in response to this notice, it furnished only “standalone” financial statements of NDTV and did not furnish copies of