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2020 (12) TMI 516 - HC - Income TaxCapital gain tax - Transfer of shares by assessee to its wholly owned subsidiary - transfer of shares by way of alleged gift - applicability of specific provisions of sub Section 47(iv) - HELD THAT - Section 47(iii) will not apply, as we have held that the transfer was not a valid gift. Therefore, the said argument does not merit consideration. The assessee by placing reliance on the decision in Sunil Siddharthbhai 1985 (9) TMI 7 - SUPREME COURT , Dheer Co. 2011 (5) TMI 239 - AUTHORITY FOR ADVANCE RULINGS , Dana Corporation 2009 (11) TMI 32 - AUTHORITY FOR ADVANCE RULINGS and Goodyear Tire Rubber Co. 2013 (3) TMI 413 - DELHI HIGH COURT by way of alternate submission contended that assuming that there is a transfer, there is no gain that is chargeable to tax in terms of Section 45, as there is no consideration that accrues or arises or is received by the assessee. Firstly, we need to point out that the transaction is a circular transaction and is a measure adopted to avoid tax. The TPO in his order has done an analysis as to how there is a loss in real income and loss of revenue by shifting profits outside the country Finding rendered by the TOP which ultimately stood crystallised in an assessment order after the directions issued by the DRP has not been touched upon for its correctness by the Tribunal. We find that the above factual conclusion would go a long way to demolish the case of the assessee which they now project before us. Consequently, the contention that there is no capital gain chargeable under Section 45, there can be no income in terms of Section 2(24) is also not acceptable. The issue as to whether there is any income or business income etc., is a question of fact. The authorities below have dealt with the same elaborately, but unfortunately, the Tribunal did not venture to examine the correctness of such finding and in our considered view, the Tribunal failed to examine the factual matrix despite being the last authority to render findings of fact. Thus, in the absence of any such finding, we are to hold that factual findings remain unassailed which we are inclined to confirm. TP Adjustment - Claim of trade mark fee and deleting the addition on account of Corporate and Bank Guarantee - In terms of sub- section 3 of Section 92C, then the TPO is bound to determine the ALP in terms of sub-sections 1 and 2 of Section 92C. The finding of the TPO is that there is absolutely no rationale for effecting such a payment to wholly owned subsidiary by the Parent company, the case as projected by the assessee is illogical and in other words, the claim was baseless and therefore, the ALP was determined at 'NIL'. No error in the decision making process, considering the factual situation whole of which has been admitted and the assessee miserably failed in dislodging the factual finding rendered by the TPO by producing any document before the DRP. We find absolutely no justification on the part of the assessee to seek for a remand to the Assessing Officer to redo the assessment on the said issue. We hold that the finding rendered by the Tribunal is wholly erroneous and the same is set aside. Corporate Guarantee and Bank Guarantee - Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist on non-charging any commission from Associated Enterprise as a commercial principle. Further, it has been observed that this position indicates that provision of guarantee always involves risk and there is a service provided to the Associate Enterprise in increasing its creditworthiness in obtaining loans in the market, be from Financial institutions or from others.There may not be immediate charge on P L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise. We hold that the Tribunal committed an error in deleting the additions made against Corporate and Bank Guarantee and restore the order passed by the DRP. Challenging the order passed by the DRP, regarding a finding that the PE Fund was relatively risk free investment - TPO held that the value of shares of RC determined at the time of investment by IVC represents the best possible estimate of the market value of the share of RC and this represents the value of shares held by the assessee in RC at the time of transfer. TPO referred to the Organisation for Economic Co- operation and Development Guidelines 'OECD' for brevity the decisions of the Tribunal about the Moore Stephensons Valuation Report, discussed about the Discounted Cash Flow Method 'DCF' for brevity , took note of the historical performance and future profitability of the company, what are the parameters which have to be taken into consideration for applying DCF method and concluded that the ALP should be determined by CUP Method. TPO proposed that a sum of ₹ 885,13,80,000/- may be added as the value of the shares that has been transferred to RC, which is also the ALP of the shares that have been transferred and the AO may also calculate the Capital gains accruing as a result of such share transfer after giving necessary opportunity. As was seen from the order passed by the DRP, it was in substantial agreement with regard to the finding rendered by the TPO that the value of the shares of RC determined at the time of investment by IVC represents the best possible estimate of the market value of the shares of RC. Though such finding was rendered, the DRP agreed with the assessee that because there was a buy back arrangement, the PE fund was making a relatively risk free investment. However, such finding has been rendered by the DRP without setting aside what has been factually found and recorded by the TPO. Reasoning given by the TPO is legally sustainable, reflects not only the factual position, but also the manner in which the PE funds are managed worldwide as to how they conduct detailed due diligence before making the investment, because the investment is with a sole intention of making a profit. Therefore, we find that the decision of the DRP in granting 10% risk adjustment allowance is perverse and without any analysis of the factual position which has been rightly brought out by the TPO in his order. Therefore, the order of the DRP, as confirmed by the Tribunal is set aside and the order of the TPO is restored and the Assessing Officer is directed to give effect to the said order.
Issues Involved:
1. Validity of the transfer of shares as a gift under Section 47(iii) of the Income Tax Act. 2. Legality of the Dispute Resolution Panel's (DRP) decision to grant a 10% risk adjustment allowance. 3. Justification for the Tribunal's decision to allow the claim of Trade Mark Fee. 4. Justification for the Tribunal's decision to delete the addition on account of Corporate and Bank Guarantee. Detailed Analysis: 1. Validity of the Transfer of Shares as a Gift under Section 47(iii) of the Income Tax Act: The Tribunal examined whether a company can execute a valid gift and concluded that a company is a person both for the purposes of the Transfer of Property Act (TP Act) and the Gift Tax Act, 1958, and can make a gift to another company. However, the Tribunal failed to examine whether the essential ingredients of a valid gift under Section 122 of the TP Act were fulfilled. The essential elements of a gift include the absence of consideration, voluntariness, and acceptance by the donee. The Revenue argued that the transfer was not a gift but a restructuring of the company's investment. The Board Resolution and the deed of share transfer did not mention the word "gift," indicating that the transaction was not intended to be gratuitous. The Tribunal did not adequately address the voluntariness of the transaction, which was a crucial factor. The transaction was driven by the need to accommodate a third-party investor, Investcorp (IVC), which invested USD 65 million in RC for a 27.17% stake shortly after the transfer. This indicated that the transfer was not voluntary and was done for consideration, failing the test of a valid gift under Section 122 of the TP Act. The TPO and DRP found that the transfer was not voluntary and was structured to avoid capital gains tax. The incorporation of subsidiaries in Mauritius and Cayman Islands just before the transfer was seen as a means to avoid taxation. The TPO concluded that the transaction was not a gift and attracted capital gains tax under Section 45 of the Act. 2. Legality of the DRP's Decision to Grant a 10% Risk Adjustment Allowance: The DRP agreed with the TPO that the value of the shares of RC determined at the time of investment by IVC represented the best possible estimate of the market value. However, the DRP allowed a 10% risk adjustment allowance, considering the buy-back arrangement made the PE fund investment relatively risk-free. The TPO had rejected the claim that the PE investment was risk-free, stating that the investment was made with the expectation of profit, and any buy-back arrangement was a standard business practice. The Tribunal did not provide a detailed analysis of the factual position and merely dismissed the Revenue's appeal. The Court found the DRP's decision to grant a 10% risk adjustment allowance perverse and unsupported by the factual findings of the TPO. The Court restored the TPO's order, rejecting the risk adjustment allowance. 3. Justification for the Tribunal's Decision to Allow the Claim of Trade Mark Fee: The Tribunal allowed the claim of Trade Mark Fee, stating that it is not for the TPO to question the commercial rationale of the payment. However, the TPO and DRP found that the assessee had been using the trademark "Redington" since 1993, and Redington, Singapore, established in 2005, was not the legal owner of the trademark. The assessee failed to provide documentary evidence to support its claim. The Tribunal's conclusion that it is a widely accepted business practice was not supported by any records or documents. The TPO's decision was based on the lack of evidence and the illogical nature of the payment to a subsidiary for a trademark already registered in the assessee's name. The Court found the Tribunal's decision perverse and restored the TPO's order disallowing the claim. 4. Justification for the Tribunal's Decision to Delete the Addition on Account of Corporate and Bank Guarantee: The Tribunal deleted the addition on account of Corporate and Bank Guarantee, relying on the decision in Bharti Airtel Ltd., which held that Corporate Guarantee does not involve any cost to the assessee and is not an "international transaction." The TPO had found that providing guarantees was a financial service that should be remunerated appropriately, as it involved inherent risk. The Tribunal did not provide reasons for applying the decision in Bharti Airtel Ltd. to the assessee's case and failed to address the factual findings of the TPO. The Court found the Tribunal's decision perverse and restored the TPO's order, directing the Assessing Officer to give effect to it. Conclusion: The Court allowed the appeals, answering the substantial questions of law in favor of the Revenue, and restored the orders of the TPO and DRP on all issues.
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