2018 (12) TMI 1346 - HC - Income Tax

Interpretation of section 92BA(i) read with section 40A(2)(b) - Purchase of loans by the Petitioner from the HDFC Ltd. - Meaning of specified domestic transaction - Held that - In the facts of the present case, the loans purchased by the Petitioner from HDFC Ltd. were reflected in the balance-sheet and not in the Profit and Loss account. This being the case, we find that this is not an expenditure at all as contemplated under section 92BA(i), and therefore, the money expended for purchasing these loans can never be termed as an expenditure incurred by the Petitioner. It would, therefore, not fall within the meaning of a SDT as understood under section 92BA(i) of the Act. We therefore have no hesitation in holding that this transaction of purchase of loans by the Petitioner from HDFC Ltd. would not fall within the meaning of a SDT. This being the case, there was no question of Respondent No.1 treating it so and thereafter referring the same to the TPO under section 92CA(1) for determining the ALP Payment made by petitioner by petitioner to HBL global for rendering service - Held that -Transaction with a person falling within section 40A(2)(b)(vi)(B) - Held that - There is no question in the facts of the present case to refer to or consider any indirect shareholding. As mentioned earlier, on a plain reading of explanation (a) to section 40A(2)(b), for there to be a substantial interest, the person has to be the beneficial owner of shares holding not less than 20% of the voting power. In this transaction, the Petitioner can never be said to be beneficial owner of the shares in HBL Global for the simple reason that it holds absolutely no shares in HBD Global. It holds shares in a company called ADFC Ltd., which in turn holds 98.4% shares in HBL Global. This would not mean that either directly or indirectly the Petitioner is the beneficial owner of the shares of HBD Global. We, therefore, find no merit in this contention. We are unable to accept the submission of Mr. Chhotaray that the present transaction (namely the payment made by the Petitioner to HBL Global for services rendered) would fall within the meaning of a SDT as understood and covered under section 92BA(i) of the I.T. Act. Payment of interest by the petitioner to HBD welfare trust - Held that - It is not even the case of the Revenue that the Petitioner is entitled to at least 20% of the profits of the said Trust. The Trust has been set up exclusively for the welfare of its employees and there is no question of the Petitioner being entitled to 20% of the profits of such Trust. This being the case, we find that this transaction also clearly would not fall within section 40A(2)(b) read with explanation (b) thereof to be a SDT as understood and covered by section 92BA(i) of the I. T. Act. one peruses section 79 of the I.T.Act, it is clear that the same deals with carry forward and set off of losses in the case of certain companies. It is on the wording of section 79 of the I.T. Act, that the Karnataka High Court has given a finding that since ABL was having complete control over APIL and even though the shareholding of ABL was reduced to 6% in the year in question, yet by virtue of being the holding company, owning 100 % shares of APIL, the voting power of ABL could not be said to have been reduced to less than 51%. It came to this finding because ABL, together with APIL were having voting power of 51%. This finding of the Karnataka High Court was given because the wordings of section 79 of the I.T. Act are materially different from the wordings of Section 40A(2)(b). In view of the foregoing discussion, we find that none of the three transactions that form the subject matter of this Petition fall within the meaning of a SDT as required under section 92BA(i) of the I.T. Act. This being the case, we find that Respondent No.1 was clearly in error in concluding that these transactions were SDTs, and therefore required to be disclosed by the Petitioner by filing Form 3CEB. He therefore could not have referred these transactions to Respondent No.2 for determining the ALP.

Summary

Issues Involved:
1. Jurisdiction and legality of the impugned order and reference.
2. Classification of transactions as Specified Domestic Transactions (SDTs).
3. Compliance with principles of natural justice.

Issue-wise Detailed Analysis:

1. Jurisdiction and Legality of the Impugned Order and Reference:
The petitioner, a bank, challenged the order dated 29th December 2016, which classified certain transactions as SDTs under section 92BA(i) of the Income Tax Act, 1961, and referred them to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP). The petitioner argued that the order and reference were ex-facie without jurisdiction, illegal, unsustainable, and contrary to the principles of natural justice and law. The court noted that the petitioner had filed its income assessment for the Assessment Year (A.Y.) 2014-15 and disclosed certain SDTs in Form 3CEB. However, the petitioner received a show cause notice from the respondent for non-reporting of certain related party transactions, which were not reflected in Form 3CEB. The court found that the impugned order and reference were made without proper jurisdiction and contrary to the principles of natural justice.

2. Classification of Transactions as Specified Domestic Transactions (SDTs):
The court examined whether the transactions in question fell within the meaning of SDTs under section 92BA(i) of the Income Tax Act, 1961, which involves transactions between the assessee and a person referred to in section 40A(2)(b) for an expenditure in respect of which payment has been made or is to be made. The court analyzed each transaction in detail:

a. Loans Purchased from HDFC Ltd.:
The petitioner argued that the transaction did not relate to A.Y. 2014-15 but to A.Y. 2013-14, and that HDFC Ltd. did not hold more than 20% of the shareholding individually. The court held that HDFC Ltd. did not have a substantial interest in the petitioner as required under section 40A(2)(b)(iv) since it held only 16.39% of the shares. The court rejected the Revenue's argument to club the shareholding of HDFC Ltd. with its subsidiary, HDFC Investments Ltd., to cross the 20% threshold. The court also held that the purchase of loans was not an expenditure but an asset acquisition, and thus, did not fall within the ambit of section 92BA(i).

b. Payment to HBL Global Pvt. Ltd.:
The petitioner contended that it did not have any direct shareholding in HBL Global, and the transaction could not be termed as an SDT. The court agreed, stating that the petitioner could not be regarded as the beneficial owner of the shares of HBL Global held by ADFC Ltd., as the beneficial owner of these shares was ADFC Ltd. The court held that the transaction did not fall within section 40A(2)(b)(vi)(B).

c. Payment of Interest to HDB Welfare Trust:
The petitioner argued that the trust was established for the welfare of its employees, and the beneficiaries were the employees, not the petitioner. The court held that the transaction did not fall within explanation (b) to section 40A(2)(b), as the petitioner was not entitled to at least 20% of the profits of the trust.

3. Compliance with Principles of Natural Justice:
The court found that the principles of natural justice were violated as the petitioner was not given a proper opportunity to respond to the show cause notice. The notice was served at 1:29 a.m. on 29th December 2016, requiring a response by 11:00 a.m. on the same day, and no personal hearing was granted. The court noted that the impugned order and reference were made in undue haste, violating the principles of natural justice.

Conclusion:
The court allowed the writ petition, quashing the impugned order and reference dated 29th December 2016. The court held that the transactions in question did not fall within the meaning of SDTs under section 92BA(i) of the Income Tax Act, 1961, and the impugned order was contrary to the principles of natural justice. The court made the rule absolute without any order as to costs.