2016 (8) TMI 566 - HC - Income Tax

Transfer pricing adjustment - would the exceeding of 20% of share holding by the directors and relatives of the petitioner-company in the aggregate in Writers Publishers Pvt. Ltd satisfy the requirement of clause (vi) of Section 40A(2)(b)? Held that - Chapter X of the Act pertains to special provisions relating to avoidance of tax. Section 92 contained therein pertains to computation of income from international transaction having regard to arm's length price. Sub section (2) of Section 92 by virtue of Finance Act of 2012 w.e.f. 01.04.2013 includes the reference to the specified domestic transaction. Essentially by virtue of the said provision in case of specified domestic transaction also, given other requirements being satisfied; transactions would be computed having regard to arms length price. As per the sub section (2A) which was also added by virtue of the same amendment any allowance or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction would be computed having regard to the arm's length price. The directors of the petitioner company, in the aggregate, held more than 20% of the shares in voting power in Writers Publishers Pvt. Ltd. The aggregate of expenditure incurred by the petitioner to such company exceeded ₹ 5 crores. Under the circumstances, we would allow the transfer pricing procedure to carry on further without interjecting at this intermediary stage. The legal contention of the petitioner that in the report of the Assessing Officer dated 08.03.2016, the basis of Section 40A(2)(b) was not taken and therefore, now cannot be raised versus the Revenue's contention, that if on admitted facts on the strength of correct statutory provisions the exercise of powers can be saved the order should not be quashed, are kept open. Likewise, the question whether Section 40A(2)(b) Clause (vi) would cover only the international holding of the director or the relative of the director of the assessee company or the aggregate of the holdings is also not concluded in this petition.

Summary

Issues Involved:
1. Validity of the reference made by the Assessing Officer to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act, 1961.
2. Applicability of transfer pricing provisions to the petitioner.
3. Interpretation of Section 40A(2)(b) and Section 92BA of the Income Tax Act.
4. Whether the aggregate shareholding of directors and their relatives should be considered for determining substantial interest under Section 40A(2)(b).

Issue-wise Detailed Analysis:

1. Validity of the Reference by the Assessing Officer:
The petitioner challenged the reference made by the Assessing Officer to the TPO for computation of arm's length price in relation to specified domestic transactions. The petitioner contended that the provisions of transfer pricing did not apply as there were no international transactions or specified domestic transactions within the meaning of Section 92BA during the relevant period. The court noted that the Assessing Officer had the power to make such a reference under Section 92CA(1) of the Act, provided there was material suggesting that the transactions exceeded the prescribed threshold.

2. Applicability of Transfer Pricing Provisions:
The petitioner argued that the transfer pricing provisions were not applicable as there were no transactions with associated enterprises. The Assessing Officer, however, identified transactions with entities where the directors and their relatives held substantial interest, thereby bringing the transactions within the ambit of specified domestic transactions under Section 92BA. The court observed that the petitioner had entered into transactions exceeding ?5 crores with entities where directors and their relatives held more than 20% shareholding, thus making the provisions applicable.

3. Interpretation of Section 40A(2)(b) and Section 92BA:
The court examined the statutory provisions, noting that Section 92BA includes any expenditure in respect of which payment is made to a person referred to in Section 40A(2)(b). The petitioner contended that clause (vi) of Section 40A(2)(b) should not include the aggregate shareholding of directors and their relatives. The court referred to the detailed report by the Assessing Officer, which indicated that the petitioner had misinterpreted the provisions and failed to obtain the required report under Section 92E.

4. Aggregate Shareholding Consideration:
The court addressed whether the aggregate shareholding of directors and their relatives should be considered for determining substantial interest under Section 40A(2)(b). The respondents provided evidence that the directors and their relatives held more than 20% shareholding in Writers and Publishers Pvt. Ltd., thereby satisfying the requirement of substantial interest. The court noted that the aggregate shareholding should be considered, allowing the transfer pricing procedure to continue.

Conclusion:
The court dismissed the petition, allowing the transfer pricing procedure to proceed. It held that there was prima facie material suggesting that the directors and their relatives held substantial interest in the entities involved, and the transactions exceeded the ?5 crore threshold. The legal contentions regarding the basis of Section 40A(2)(b) and the interpretation of aggregate shareholding were kept open for further adjudication.