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2024 (2) TMI 104 - AT - Income TaxTP adjustment - consideration paid to the associated enterprise pursuant to the merger of the holding company (i.e. subsidiary of associated enterprise) with the assessee (i.e. step down subsidiary of the associated enterprise) - As per the assessee, the merger transaction does not result in any income for the assessee and it is also not a case wherein the assessee has sought to claim any allowance or deduction for the equity shares, CCDs, or cash paid/issued to DIHBV - Whether entire transaction is on the capital account, and transfer pricing provisions are not applicable to the transactions on the capital account? - whether the transfer pricing provisions under Chapter X of the Act are applicable to the present case? HELD THAT - It is pertinent to note that as per Explanation to section 92B of the Act, the transaction of business restructuring shall be considered an international transaction, irrespective of the fact whether it has a bearing on the profit, income, losses, or assets of such enterprises. In this regard, the observations in Instrumentarium Corporation Ltd. 2016 (7) TMI 760 - ITAT KOLKATA also becomes relevant, wherein it was held that while a notional interest income cannot indeed be brought to tax in general, the arm s length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. Therefore, we find no merits in the aforesaid plea of the assessee and once a transaction falls within the ambit of international transaction , Chapter-X of the Act provides a mechanism for computation of arm s length price in relation to such international transaction. We find that the Hon ble NCLT took into consideration the report of the Regional Director, wherein it was stated that the tax implications if any arising out of the scheme is subject to the final decision of the Income Tax authorities - we find that before the Hon ble NCLT, the counsel for the Petitioner companies also undertook to comply with all applicable provisions of the Act and agreed that all tax issues arising out of the scheme would be met and answered in accordance with the law. Therefore, it is evident that in the order passed by the Hon ble NCLT, the Department has not waived off its right to examine the tax issues arising out of the scheme of amalgamation. As pertinent to note that the transaction pursuant to which the assessee paid consideration of Rs. 188.35 crore to DIHBV is an international transaction as per the provisions of section 92B. We find that accordingly, the TPO proceeded to compute the arm s length price of the aforesaid international transaction. There is no material available on record to show that the above exercise was conducted and the merger consideration was found to be at arm s length by the Revenue at the time of approval of the scheme of amalgamation by the Hon ble NCLT. This aspect is further evident from the observations of the Hon ble NCLT wherein the undertaking of the Petitioner companies to comply with the applicable provisions of the Act is recorded. Therefore, we agree with the findings of the learned DRP that the TPO is not questioning the scheme of amalgamation as approved by the Hon ble NCLT, and what is being questioned is whether the payments made to the parent holding company in the guise of payment for amalgamation are consistent with the provisions of transfer pricing as contained in the Act. Accordingly, we do not find any merits in the aforesaid submission of the learned AR and accordingly, the same is rejected. What has been transferred pursuant to the merger is merely an investment company without any erosion in function, asset, and risk profile of DIHBV requiring additional compensation apart from issuance of shares of the assessee. Therefore, in the present case, the entire merger transaction is a mere restatement of accounts of the subsidiary companies without the actual transfer of any asset and liability by DIHBV. As we agree with the findings of lower authorities that in substance the transaction is really a relocation of shares of the amalgamating company by the amalgamated company to the existing shareholders of the amalgamating company and insofar as the parent holding company is concerned nothing has changed in substance. In view of the facts and circumstances as noted above, we are of the considered view that the lower authorities have rightly held that shares of the assessee now held by DIHBV represent the fair value of the aforesaid merger transaction. At this stage, it is also pertinent to reiterate the findings in the valuation report dated 30/12/2016 that the management has decided to give a cash consideration to the ultimate shareholder, considering the fact that excess cash is available with the assessee, which has not been fully utilised. Therefore, in view of the above, we find no infirmity in the findings of the lower authorities that issuance of CCDs and payment of cash of Rs. 100 crore represents excessive payment. Since the findings of the lower authorities in treating payment of cash to DIHBV as a deemed loan has been upheld, we direct the TPO/AO to compute the interest on the same in conformity with the observations of the Hon ble jurisdictional High Court in Tata Autocomp Systems Ltd 2015 (4) TMI 681 - BOMBAY HIGH COURT To this extent, the benchmarking by the TPO/AO is modified. As regards the disallowance of interest paid on CCDs is concerned, in view of the aforesaid findings the benchmarking by the TPO/AO is upheld. Decided against assessee.
Issues Involved:
1. Transfer pricing adjustment. 2. Short grant of credit of Advance tax and TDS. 3. Incorrect levy of interest under Section 234C of the Act. 4. Initiation of penalty proceedings under Section 270A of the Act. Summary: 1. Transfer Pricing Adjustment: The primary issue pertains to the transfer pricing adjustment on account of consideration paid by the assessee to the associated enterprise pursuant to the merger of the holding company with the assessee. The assessee, engaged in the diamond manufacturing/distribution business, entered into a scheme of amalgamation with its holding company, DIHPL, which was sanctioned by the National Company Law Tribunal (NCLT). The assessee paid a total purchase consideration of Rs. 188.35 crore to DIHBV, the ultimate parent company. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) held that the consideration paid in the form of Compulsory Convertible Debentures (CCDs) and cash was excessive and not at arm's length, leading to a transfer pricing adjustment. The Tribunal upheld the findings of the lower authorities, agreeing that the issuance of CCDs and payment of cash represented excessive payment. However, it directed the TPO/AO to compute the interest on the deemed loan in conformity with the jurisdictional High Court's observations. 2. Short Grant of Credit of Advance Tax and TDS: The assessee raised the issue of short grant of credit of advance tax and TDS. This issue was restored to the file of the Assessing Officer (AO) with the direction to grant credit of advance tax and TDS in accordance with the law after conducting the necessary verification. 3. Incorrect Levy of Interest under Section 234C of the Act: The issue of incorrect levy of interest under Section 234C of the Act was deemed consequential in nature and required no separate adjudication. 4. Initiation of Penalty Proceedings under Section 270A of the Act: The initiation of penalty proceedings under Section 270A of the Act was considered premature and therefore dismissed. Conclusion: The appeal by the assessee was partly allowed for statistical purposes, with specific directions to the AO regarding the grant of credit for advance tax and TDS and the computation of interest on the deemed loan. The Tribunal upheld the transfer pricing adjustment related to the issuance of CCDs and payment of cash but directed a modification in the benchmarking of interest computation.
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