2018 (1) TMI 1302 - AT - Income Tax

Arm s length price adjustment - applicability of transfer pricing provisions - termination of call options under the Framework Agreement 2007 - Held that - The conditions precedent for invoking section 92B(1) are satisfied inasmuch as, with legally enforceable rights or not, foreign AEs, namely VIH-BV and HTIL-M are part of the arrangements and action in concert, and the transaction has a bearing on the profits of the assessee. The present transaction before us is that of not only termination of options, but also, as we have seen in our analysis earlier, transfer of the shareholdings in SMMS Investments to of an Indian subsidiary of VIH-BV at a fraction of its market worth, and this arrangement involves an agreement between not only between Indian entities but also foreign AEs of the assessee, i.e. HTIL-M and VIH-BV. It is really strange that an assessee, which makes these submissions before Hon ble Bombay High Court, now contends that the arrangements for framework agreement donot involve the foreign AEs. The fact and evidence about the terms of arrangements of this transaction being decided, in substance, by the foreign AEs is something which is in exclusive knowledge domain of the assessee and its group entities and when the assessee decide not to share it and the circumstances are such that the terms of the transactions are established to not at all justified by the known commercial considerations of the assessee, the assessee cannot blame the revenue authorities for not brining on record the evidence of the terms of arrangement being decided by the foreign AE. In these peculiar facts, which are very unsusal facts by any standards, even in the absence of such an evidence, the terms of arrangements being decided by the foreign AE can be reasonably accepted. In view of these discussions, the arrangement, understanding and action in concert, with respect to framework agreement and termination thereof, is an international transaction under section 92B(2) as well. In other words, while foreign AE and parent company of the assessee is not only a party to the agreement but the terms of the agreement, in substance, are being decided by the foreign AE. The arguments of the assessee proceed on the basis that there is a need of clearly conclusive evidence to the effect that the assessee and the AEs has acted in concert, but, as is the well settled legal position- discussed earlier in this order, it is not required to be established, with conclusive evidence, that the assessee and the foreign AE has acted in concert; all that is necessary is that the circumstances are such that human experience tells us that it can safely be taken that they must be acting together. In view of these discussions, as also bearing in mind entirety of the case, we see no legally sustainable merits in the aforesaid stand of the assessee. Even if a transaction does not report or show any income but application of arm s length prices are to result in an income, the conditions of Section 92(1) will be satisfied. Learned counsel, however, is interpreting the press release as a statute and is seeking a literal implementation of the words in the press release. Such a pedantic and literalistic approach cannot meet our approval. The words used in the press release are not the words of the statute; these are the words of the laymen which are required to be given contextual meaning. In any case, we are unable to read the press release as implying that when there is no income chargeable to tax is reported, the arm s length standards can not be applied. As long as an income, within the meanings of section 2(24), can arise from an international transaction, the arm s length standards are to be applied in computation of an income. We, therefore, see no legally sustainable merits in this plea as well. Capital asset - right to nominate an assignee under framework options - Held that - The right to nominate an assignee under framework options meets the tests laid down in Explanation to Section 2(14).6. In case we are to accept the contentions of the learned counsel, Explanation to Section 2(14) will have to be treated as otiose because if the an asset meets the description of property without taking into the impact of Explanation to Section 2(14), there is obviously no need to look at the Explanation. In our humble understanding, Explanation to Section 2(14) should be read as enlarging the scope of expression property in the main definition clause, and, when such is the position, whether or not the asset in question is a property as per meanings in main provision of Section 2(14), as long as it meets the test laid down in Explanation to Section 2(14), it is to be treated as a Capital Asset nevertheless. Thus the right to nominate the assignee of the option rights, which was exercised by the assessee during the relevant previous year, was a capital asset. Whether there was any transfer of capital asset in the relevant previous year? - Held that - As the assessee had exercised the right of nomination, which could have been done only once, the right of nomination came to end, and was thus, in terms of Explanation 2 to Section 2(47), this was covered by the definition of transfer . Whether, even if there is a capital asset and it was transferred, such a capital asset had any cost of acquisition? - Held that - Cost of acquisition in this case is clearly identifiable and, therefore, the provisions for computations of capital gain are workable. The law laid down by Hon ble Supreme Court in the case of B C Srinivas Shetty (1981 (2) TMI 1 - SUPREME Court) does not come to the rescue of the assessee. Whether there is no consideration for the transfer and, for this reason, the computation of capital gains in not possible? - Held that - while the income is question is indeed of the nature which can may, in certain circumstances, can be taxable under the head profits and gains from business and profession , given the facts and circumstances of the present case, it is required to be taxed as capital gains. Error in attributing 3.15% stake of SMMS indirectly held in VIL, through Omega, overlooking that CGP held 79.98% stake in SMMS, through TII, and, as a corollary held 2.52% in VIL, through TII via SMMS/Omega, with the balance controlled by Analjit Singh Group, which again, in an error that DRP failed to rectify - Held that - The question that is relevant for finding out the ALP of consideration is as to what is really transferred, and undisputedly that is 100% equity shares in SMMS Investment which entitles the assignee to control 3.15% shareholding in VEL. What the assignee actually does with what he gets does not affect the consideration. In any event, sufficient specific details and complete facts were not placed on record at any stage, and even before us. In the absence of specific details in support of this plea and in view of the fact that the nomination was in respect of entire equity in SMMS Investments, we reject this plea as well. Accepting the assignment of cashless options to Vodafone as a comparable case since this event took place more than three years ago, and, since, going by the stand of the revenue, it was an intra AE transaction anyway - Held that - how liberal an adjustment is made for indirect holding, in any event, the ALP of nomination to buy the entire equity of SMMS Investments, which held 3.15% shareholding in VEL, for a consideration of ₹ 2 crores plus interest, this ALP will be far more than 1,588.85 crores. Since this Tribunal has no powers of enhancement, even if we discard the comparable as adopted (i.e. assignment of rights by IDFC to acquires 0.1234% shareholding in VEL for ₹ 50 crores), the assessee does not derive any advantage. The plea raised by the assessee is thus wholly academic and does not deserve any adjudication by us at this stage. As for issues raised by the learned counsel with respect to dissimilarities between the nomination rights exercised by the assessee and the transactions compared with, all we can say is that even if the comparable transaction is not a mirror image of the international transaction in question, it does not cease to be relevant in determination of ALP as long as, in substance, and in effect, things are comparable- though, depending upon the facts of the case, adjustments will be justified. - Decided against assessee Denying depreciation on goodwill on account of its amortization - Held that - Goodwill in question forms an intangible asset u/s.32(1)(ii) of the Act or not to be entitled for depreciation relief is no more res integra as hon ble apex court s land mark judgment in Smiffs Securities Ltd. case 2012 (8) TMI 713 - SUPREME COURT . We see no substance in the instant argument since there is no change so far as all facts pertinent to this issue vis-a-vis those involved in preceding assessment years are concerned. The authorities below have already adopted the very reasoning as in said earlier years to reject assessee s instant claim. It is not clear as to what is the fate of these assessment years before this Tribunal. Learned counsel at this stage submits that assessee s appeal for the said earlier assessment year 2011-12 is pending but the position of the earlier years is not clear. In any event, there is no independent adjudication on this issue by the Assessing Officer. In view of these discussions, in our considered view, the matter is required to be remitted to the file of the Assessing Officer for adjudication de novo Invoking Section 14A r.w. Rule 8D disallowance - Held that - The lower authorities fail to dispel assessee s basic plea of having not derived any exempt income in the impugned assessment year. Hon ble jurisdictional high court s recent judgment in CIT Vs Corrtech Energy (P) Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT holds that such a disallowance under section 14(A) is not sustainable in absence of any exempt income having been derived in the relevant previous year Disallowing club membership expenditure - Held that - We find from assessment order that the assessee itself had clarified to have paid subscription fee regarding Puna Club for seven years in the nature of entrance fee etc. This has made the Assessing Officer to accept its case qua the corresponding 1/7th extent coming to ₹ 3,97,080/- only thereby disallowing the remaining amount of ₹ 23,82,480/-. Learned counsel fails to dispute that the assessee had not filed the relevant details qua a similar time duration relating to latter Karnavati Club. We therefore reject assessee s arguments qua former club payment issue after concluding that the authorities below have rightly followed matching concept in accepting the impugned expenditure pertaining to the relevant assessment year. Coming to latter club, we direct the AO to verify the relevant facts as to whether the impugned membership expenditure has been incurred for the relevant previous year in entirety or not

Summary

Issues Involved:
1. Substitution of apparent consideration with market value by Revenue.
2. Applicability of Arm's Length Price (ALP) in the absence of income.
3. Taxability of foregone income under Section 92B.
4. ALP adjustment as capital gains.
5. Determination of cost of acquisition for capital gains computation.
6. Applicability of transfer pricing provisions when there is no income.
7. Classification of income as business income or capital gains.
8. Validity of comparables used for ALP determination.
9. Depreciation on goodwill.
10. Disallowance under Section 14A.
11. Disallowance of club membership expenditure.

Detailed Analysis:

1. Substitution of Apparent Consideration with Market Value by Revenue:
The judgment emphasizes that "the Revenue has no right to substitute for apparent consideration, market value." This principle is upheld consistently throughout the judgment, indicating that the Revenue's attempt to replace the declared consideration with market value is not permissible.

2. Applicability of ALP in the Absence of Income:
The judgment states, "ALP cannot be substituted, where there is no income to the Assessee." It further clarifies that even if income is assumed to be business income, transfer pricing provisions would not apply in the absence of taxability under domestic provisions. The Assessee paid ?21.25 crores to IDFC Investors and did not receive any money, reinforcing the non-applicability of ALP in this scenario.

3. Taxability of Foregone Income under Section 92B:
The judgment asserts that "if a taxpayer foregoes income, it cannot be taxed in his hands merely because section 92B of the Act entitles ALP to be substituted for a consideration." It relies on the ruling in Vodafone India Services (P) Ltd. vs. Union of India, emphasizing that absent any consideration/income, there is no scope for introducing consideration where there is none.

4. ALP Adjustment as Capital Gains:
The judgment outlines the prerequisites for taxing capital gains: a capital asset, transfer of a capital asset, receipt of consideration on transfer, and application of machinery provisions for computing capital gains. It concludes that none of these conditions are satisfied in the present case, referencing the Supreme Court's observations in Vodafone International Holdings BV.

5. Determination of Cost of Acquisition for Capital Gains Computation:
The judgment highlights that "in order to compute the capital gains, the cost of the asset should be determinable, and such a cost has to be real rather than a notional or hypothetical cost." It points out that the authorities did not establish the actual cost of acquisition, leading to the failure of the computation mechanism.

6. Applicability of Transfer Pricing Provisions When There is No Income:
The judgment reiterates that "the provisions of transfer pricing can come into play only when, as a result of an international transaction involving a non-resident, an income shifts from one tax jurisdiction to another." It emphasizes that in the present case, the payment is made by one resident entity to another, with no tax implications beyond the Indian tax jurisdiction.

7. Classification of Income as Business Income or Capital Gains:
The judgment clarifies that "chargeability to tax under the head 'business income' can only arise where the income generates from stock in trade." It references the Supreme Court's judgment in CIT Vs Calcutta Discount Co Ltd and the Gujarat High Court's judgment in A Raman & Co Vs ITO, concluding that the Assessee's income from the termination of options cannot be treated as business income since the Assessee was holding investments, not stock in trade.

8. Validity of Comparables Used for ALP Determination:
The judgment addresses the errors in benchmarking the alleged international transaction and ascertaining the arm's length price. It critiques the TPO's reliance on outdated data and the failure to demonstrate comparability before making an addition.

9. Depreciation on Goodwill:
The judgment remits the issue of depreciation on goodwill to the Assessing Officer for fresh adjudication, considering the pending appeals for earlier assessment years and the need for independent adjudication on this issue.

10. Disallowance under Section 14A:
The judgment deletes the disallowance under Section 14A, citing the jurisdictional High Court's ruling in CIT Vs Corrtech Energy (P) Ltd., which holds that such disallowance is not sustainable in the absence of any exempt income derived in the relevant previous year.

11. Disallowance of Club Membership Expenditure:
The judgment partially allows the Assessee's claim for club membership expenditure, directing the Assessing Officer to verify the relevant facts and determine whether the expenditure pertains to the relevant assessment year.

Conclusion:
The judgment provides a comprehensive analysis of various issues related to transfer pricing, capital gains, and business income, emphasizing the importance of adhering to statutory provisions and judicial precedents. It highlights the need for accurate determination of cost of acquisition and the non-applicability of transfer pricing provisions in the absence of income. The judgment also addresses procedural aspects, such as the validity of comparables and the treatment of specific expenditures.