2023 (5) TMI 1036 - AT - Income Tax

TP Adjustment - comparable selection - inclusion of comparable of Axis Integrated Systems Limited - HELD THAT - No hesitation in holding that, (i) in absence of any change in the facts and circumstances in the case, (ii) as well as functional profile of the assessee and the comparable company, i.e. Axis Integrated Systems Limited, remaining the same, respectfully following the decision of the co-ordinate Bench, we hold that Axis Integrated Systems Limited should be excluded from the comparability analysis. Accordingly, we uphold the order of the learned CIT (A) in excluding the above comparable. Capital gain - transfer of a capital asset by assessee to its subsidiary company, which is also an Indian company - HELD THAT - 3. According to us, the 'share capital' includes equity as well as preference shares both. Because, the share capital is deriving its meaning from The Companies Act which includes equity and preference capital both. It is also because wherever legislature wanted particular percentage of particular share capital qua voting right, etc same is provided in those sections, such as Section 47 (xiii) and (xiv) of the Act. Similarly section 2(22) and section 40 A of the Income tax Act provides for beneficial ownership of shares. Section 47 (iv) exempts transfer of capital assets from Holding company to subsidiary company only where share capital in its entirety is held by holding company. Plain meaning of the words of the section clearly suggest so. We find that the requirement of holding the whole of the share capital applies to both the types of share capital i.e. equity share capital and preference share capital. As apparent that entire issued and paid-up share capital of the subsidiary company should be held by holding company or its nominees for claiming exemption from capital gains under this clause. There are different shareholders of preference share capital other than the holding company and holding company only holds along with its nominees, 100 % equity shares of the transferee company. Therefore, according to us the conditions of section 47 (iv) of the act are not satisfied and if any capital gain or loss arising on transfer of a capital asset by the assessee company to its subsidiary company, is chargeable to tax under the provisions of section 45 of the act. Assessee is not eligible for exemption of section 47 (iv) of the act as we hold that transactions of the transfer of capital asset by the holding company to its subsidiary company is to be regarded as 'transfer'. Therefore we direct the learned assessing officer to hold that capital gain or loss arising to the assessee on transfer of shares to its subsidiary company is not tax-exempt u/s 47 (iv) of the act. There is no occasion to compute the capital gain or loss arising on the transfer of the above shares. Accordingly, we direct the assessee to substantiate sale consideration, cost of acquisition and indexed cost of acquisition before the learned assessing officer and its computation of capital gain/loss. AO is directed to verify the computation and accordingly decide the quantum of such gain or loss.

Summary

Issues Involved:

1. Exclusion of Axis Integrated Systems Limited as a comparable.
2. Claim of long-term capital loss on the sale of shares.

Issue 1: Exclusion of Axis Integrated Systems Limited as a Comparable

The primary issue in ITA No. 136/Mum/2017 was the inclusion of Axis Integrated Systems Limited as a comparable. The Revenue argued that the CIT(A) erred in excluding Axis Integrated Systems Limited, asserting that Business Support Services (BSS) and Management Services (MSS) are highly skill-based and cannot be considered low-end services. Both parties acknowledged that this comparable was previously excluded by the co-ordinate Bench in earlier years (ITA No.1547/Mum/2016, ITA No.2733/Mum/2017, and ITA No.5842/Mum/2017). The Bench noted that Axis Integrated Systems Ltd provides high-end regulatory and licensing services, whereas the assessee offers low-end back-office support services. Therefore, following the earlier decision, the Bench upheld the CIT(A)'s order excluding Axis Integrated Systems Limited from the comparability analysis. Consequently, ground no.36 of the Revenue's appeal was dismissed.

Issue 2: Claim of Long-Term Capital Loss on the Sale of Shares

The additional ground no.6 raised by the assessee in ITA No. 7299/Mum/2017 involved the claim of long-term capital loss on the sale of equity and preference shares of M/s. Reliance Exploration and Production DMCC to its subsidiary M/s. Reliance Industrial Investments and Holdings Ltd (RIIHL). The assessee argued that the loss was not claimed in the Return of Income due to an erroneous understanding that the transaction was not a 'transfer' under section 47(iv) of the Income Tax Act, 1961. The assessee contended that the sale was not exempt under section 47(iv) as it did not hold the whole share capital of the subsidiary, only the equity share capital.

The Tribunal examined the details and found that the assessee did not hold any of the preference shares of RIIHL, which were held by other entities. Thus, the assessee did not hold the "whole of the share capital" as required by section 47(iv). Consequently, the transaction did not qualify for exemption, and the capital loss was chargeable to tax under section 45. The Tribunal directed the Assessing Officer to verify the computation of the capital gain/loss.

In conclusion, the additional ground no.6 raised by the assessee was adjudicated and allowed, while the Revenue's appeal regarding the exclusion of Axis Integrated Systems Limited was dismissed. The order was pronounced in the open court on 20.04.2023.