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TMI Blog2014 (10) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... se company to its step down subsidiary, RIHL Cayman is a gift eligible for exemption u/s 47(iii) - no capital gains tax is imputable to the transfer of shares. Invocation of section 45 – Capital gain taxation – Held that:- As the transfer of shares was made without consideration, the foremost ingredient of computation provisions is missing and as such, capital gains cannot be computed under sec. 48 - This leads to a situation, where sec. 45 cannot be invoked and charge of capital gains taxation fails - even otherwise, as it was a transfer without consideration, no levy of capital gains tax can be made - the shares were transferred by way of gift and no income arose in the hands of the assessee - As such, ALP determination does not extend to this transaction - The gift of shares made by the assessee company cannot therefore, be subjected to TP provisions - TP provisions would apply only to those international transactions, which are liable to income tax in India – thus, as far as the issue of transfer of shares is concerned, TP provisions do not apply. Corporate and bank guarantees – Held that:- The assessee has not granted any new guarantee in the previous year relevant to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and by the Revenue. The relevant assessment year is 2009-10. These appeals arise out of the assessment order passed under sec.143(3) read with sections 92CA(4) and 144C(5) of the Income-tax Act, 1961. 2. The assessee, M/s. Redington (India) Limited ( Redington India for short) provides end-to-end supply chain solutions for all categories of Information Technology(IT) products. It also carries on business in office automation products. The assessee provides supply chain solutions primarily in India, Middle East and Africa. Those solutions are mainly provided in IT products, like Personal Computers(PC), peripherals, PC building blocks, networking products, software products and enterprise solution products. The assessee also deals in non-IT items, like telecom products, gaming consoles and titles, digital lifestyle products and consumer durables etc. 3. The assessee company filed its return for the impugned assessment year on a taxable income of ₹ 125,57,70,310/-. In the course of assessment proceedings, the Assessing Officer found that the assessee had entered into international transactions exceeding ₹ 15 crores. Accordingly, the case was referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with taxation of capital gains. Sec.45 comes into operation only when a transfer takes place for consideration and profits or gains arise out of such transaction. Since there is no consideration involved in the impugned transfer of shares, the question of computing profits or gains does not arise. The computation is impossible. The assessee explained that since the transfer of shares was made without consideration, charging sec.45 is not attracted. The assessee also relied on sec.47 in support of its stand on the ground that the transfer is a gift. Sec.47 provides that certain transactions are not to be regarded as transfer for the purpose of capital gains taxation. Among such excluded transfers, clause (iii) of sec.47 provides that any transfer of a capital asset under a gift or will or an irrevocable trust may not be regarded as a transfer. 8. Apart from relying on the law stated in sections 45 47(iii), the assessee also took the view that the transfer of shares held by the assessee in its subsidiary, M/s. RGF Gulf to its step down subsidiary M/s. RIHL Cayman Islands does not dilute or diminish the value of the asset base of the assessee company. As the transfer is only an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der two categories. He added a sum of ₹ 9,28,73,000/- towards corporate and bank guarantee charges and ₹ 1,89,33,150/- towards trademark license fees, as directed by the TPO in the nature of ALP adjustments. The Assessing Officer further added two disallowances made by him; one relating to bad debts of ₹ 3,25,47,000/- and the other relating to factoring charges of ₹ 17,07,56,151/-. The total business income of the assessee was thus determined at ₹ 157,08,79,610/- as against the returned income of ₹ 125,57,70,310/-. Under the second category, the Assessing Officer has made the addition of long term capital gains arising out of the transfer of shares as ALP adjustment suggested by the TPO. The gross amount suggested by the TPO was ₹ 865,40,04,100/-. The Assessing Officer modified the above gross amount by setting off the indexed cost of acquisition and determined the long term capital gains adjustment at ₹ 610,15,75,820/-. 14. The above draft assessment order was framed by the assessing authority on 31st March, 2013. The draft assessment order was communicated to the assessee company, as required by law. 15. The assessee company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges) and, therefore, the order passed by the assessing authority is bad in law, in view of the peremptory language of sec.144C(13) of the Act. 21. Coming to the specific issues, the assessee has raised six set of grounds. 22. The first issue raised by the assessee is on the transfer of shares. As it was a voluntary transfer of shares of M/s. RGF Gulf, without consideration to the step down subsidiary, M/s. RIHL Cayman, it is the case of the assessee that the transaction is a gift and therefore covered by the exclusion contained in sec.47(iii) of the Act. That the authorities below have erred in holding that a corporate entity cannot make a gift for the reason that love and affection are the pre-requisites for making a gift. That the lower authorities have erred in holding that sec.47(iv) would be applicable to the transfer and sec.47(iii) does not have any application. The assessee contends that the lower authorities have erred in concluding that there was no business rationale in setting up overseas subsidiary companies. That the lower authorities ought to have appreciated that gift and transfer of property without consideration are synonyms, as held by the Hon ble Madras Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out consideration to M/s. RIHL Cayman, as a capital gains transaction. They held it is not a gift and, therefore, not covered by sec.47(iii) to claim exclusion from long term capital gains. The TPO exceeded his jurisdiction by treating the gift of shares of M/s.RGF Gulf to its step down subsidiary, M/s. RIHL Cayman, as a taxable transaction subject to Transfer Pricing provisions. The lower authorities have relied on the retrospective amendment made to sec.92B by the Finance Act, 2012, to hold the gift as an international transaction . In computing the value of shares transferred by the assessee, the TPO has adopted the price paid by M/s. IVC, the PE fund on allotment of shares in RIHL Cayman, as the comparable. M/s. IVC has infused a sum of US$ 65 millions into M/s. RIHL Cayman for fresh allotment of shares. The fresh infusion of funds by M/s. IVC and allotment of shares in M/s. RIHL Cayman, resulted in M/s. IVC, the PE fund, holding a stake of 27.17%. The TPO extrapolated the said shareholding and determined an amount of US$ 174.23 millions, as representing 100% of the value of M/s. RIHL Cayman before infusion of the fresh capital by M/s. IVC, and on that basis determined the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assesse company, as such, was not commercially feasible. M/s. RIML Mauritius was set up in Mauritius again for best commercial reasons. The funds raised by the PE fund, M/s. IVC was specifically Middle East and Africa focussed. M/s. RIHL Cayman alone cannot be used as a vehicle for the expansion of assessee s operations. Therefore, the assessee decided to have M/s. RIML Mauritius as an overseas holding company into which non-Middle East and African investments also could be consolidated. Since Mauritius is centrally located for, European, Middle East and African markets, that location was selected. So also, the PE fund, M/s. IVC had put a precondition for investing into M/s. RIHL Cayman. That is, M/s. RIHL Cayman would require to be listed within three years failing which it was open for M/s. IVC to exit by selling the shares to the assesees group for a price which would guarantee an Internal Rate of Return (IRR) of atleast 7%. The assessee group was saddled with a liability to reacquire the shares of M/s.RGF Gulf from the PE fund, M/s. IVC, if the shares of M/s. RIHL Cayman were not listed in an overseas stock exchange within three years. The shares of RGF Gulf wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ror in law. He relied on sec.2(xii) of the erstwhile Gift-tax Act, 1958 which defines gift as voluntary transfer of property by one person to another without consideration. Person includes a company as well, as provided in sec.2(xviii) of that Act.. He also pointed out to sec.45 of the said Act, which granted exclusion from levy of gift tax in respect of certain entities which included a company in which the public are substantially interested and a company or companies involved in a scheme of amalgamation. He, thereafter referred to sec.56(2)(viia) of the Income-tax Act, inserted by the Finance Act, 2010, wherein it provides that where a company, not being a company in which the public are substantially interested, receives, without consideration shares in excess of ₹ 50,000/-, the shares shall be treated as its income of the previous year in which the shares was received. He also referred to sec.115(WB)(2)(O) of the Income-tax Act, in the context of Fringe Benefits Tax, which provided that a corporate body can also make gift. Sec.540 of the Companies Act, 1956, recognizes that property belonging to a company could be disposed of by its officers by way of gifts. 30. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a gift, the same should be exempt under sec.47(iii) of the Act. He explained that sec.47(iii) provides that sec.45 shall not apply to the transfer of a capital asset under a gift. There is no restriction provided in the Act, which prohibits a company from claiming exemption under sec.47(iii). If the intention was to exempt only individuals under that section, the legislature would have specifically stated so as in so many other sections dealing with exemption from capital gains like sections 54, 55 etc. Sec.47(iii) does not restrict the exemption to the gifts made only to the residents. If it was so, a specific stipulation would have been made in the Act, as provided in sec.47(iv) and (v). When there is no such restriction, sec.47(iii) should be read in its natural way to see that gifts made to non-residents also qualify for exemption under sec.47(iii). The learned counsel insisted that literary interpretation should be adopted in this context, as there is no ambiguity in the law. For that matter, the learned senior counsel has relied on the following decisions. 1. Sarala Birla vs. CWT 176 ITR 98(SC) 2. CIT vs. Central Bank of India Ltd. ,185 ITR 6(Bombay) 3. CIT v. Nation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, the lower authorities have adopted the fair value on a deemed basis adopting the value of shares allotted to the PE fund while infusing funds to M/s. RIML Mauritius. This value substitution is absolutely against the law. The learned counsel has relied on the following decisions in support of the above proposition : CIT v. George Henderson and Co. Ltd., 66 ITR 622(SC) CIT v. Smt. Nilofer I. Singh, 309 ITR 233 (Delhi) CIT v. Gillanders Arbuthnot Co., 87 ITR 407(SC) Tej Pratap Singh v. ACIT, 307 ITR (AT) 244(ITAT Delhi) 38. The learned senior counsel, accordingly, submitted that it is a settled legal position that the computation of capital gains for charge of tax would fail in the event of transaction being undertaken without consideration. 39. The learned senior counsel also advanced his arguments against the observation of the lower authorities that sec.47(iv) would be the correct provision of law applicable to the assessee s case and not sec.47(iii). On the basis of that conclusion, the lower authorities have held the view that once the assessee does not satisfy the conditions laid down in sec.47(iv), the transaction cannot be said to be exempt from capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and not clarificatory in nature. Therefore, if at all the amendment is relied on, the amendment cannot be retrospective. As far as the facts of the present case are concerned, the learned senior counsel explained that the gift of shares of M/s. RGF Gulf to M/s. RIHL Cayman resulted in a change in the holding structure of the entities within the same Redington group. It does not constitute a business restructure or reorganization , which is generally understood to be a restructure or reorganization of the value of an enterprise involving reorganization of the functions, risks and/ or assets of the enterprise group. This view is supported by the Transfer Pricing guidelines issued by OECD. The inference made by the Assessing Officer that sec.92 of the Act, is a charging section, is erroneous. It is a machinery provision. It is provided for determining ALP in certain cases. It is applicable only if the transaction results in taxable income in the hands of the tax payer in India. In case, the transaction does not result in taxable income, Transfer Pricing Regulations would not be applicable. The above proposition is reflected in Memorandum to Finance Bill, 2001 and also in the CBDT i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher than that of a risk bearing investment. The agreement provides the PE fund, M/s. IVC a right in the management of M/s. RIHL Cayman. Such a right is not ordinarily available for a shareholder having only 27.17%. This management right further justifies that the price paid by the PE fund, M/s. IVC was higher because of the functional and economic difference existed between the objectives of the assessee company and the PE fund. The price paid by the PE fund, cannot be considered as comparable under the CUP method for valuing the transaction. The CUP method can be applied only in a case, where difference arising on account of such functional and economic differences can be adjusted for, with reliable accuracy in order to eliminate the effect on the ALP. The economic and functional differences between the investment objectives of M/s. IVC and the assessee are significant in character and cannot be adjusted with reliable accuracy to make them comparable. Therefore, it was not proper on the part of the TPO to treat the investment price of M/s. IVC as comparable for the purpose of CUP method. 44. On the question of valuation vis-a-vis ALP, the argument of the learned senior couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the definition of the term international transaction as amended by the Finance Act, 2012, with retrospective effect from 1st April, 2002 to include guarantee in its ambit. The TPO has made this adjustment, notwithstanding that the corporate guarantees issued in the earlier assessment years were already subject to transfer pricing adjustment at the rate of 0.85% of the value of corporate guarantees. The DRP in their order upheld the addition made on account of corporate guarantee but directed that the adjustment should be restricted to 0.85% of the value of corporate guarantees issued rather than 2% proposed by the TPO. Accordingly, the Assessing Officer has re-determined the ALP adjustment of the corporate guarantees. 47. Regarding the above issue, the learned senior counsel contended that corporate guarantee granted by the assessee company is not an international transaction . The assessee has not granted any new guarantee in the previous year. Therefore, the reliance placed by the TPO on the definition of the term international transaction as retrospectively amended by the Finance Act, 2012, is erroneous and bad in law. The corporate guarantees provided by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under appeal, the assessee had made a payment of ₹ 1,89,33,150/- towards trademark and license fee for the use of trademark REDINGTON , to its AE, Redington Distribution Pte. Ltd., Singapore(RDPL, Singapore). The TPO determined the ALP of the said trademark/license fee at nil. But he made the adjustment on the ground that there is no genuine reason for paying trademark/license fee to RDPL Singapore. An ALP adjustment is not contemplated only on the opinion of the TPO that there was no commercial justification for such payments. In fact, the TPO has exceeded his jurisdiction by dwelling into commercial justification for the payment of trademark/license fee. It is not the prerogative of the Revenue Authorities to dwell into commercial rationale and justification for the transaction entered into by an assessee. The learned senior counsel contended that the Revenue Authorities are not justified in analyzing the commercial justification and rationale to determine, whether the assessee ought to have incurred an expenditure or not. In support of this general principle, he has relied on the judgment of the Hon ble Supreme Court in the case of S.A.Builders vs. CIT (288 ITR 1). Alt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut also made schemes to avoid tax perpetually, through a series of corporate re-structures undertaken during the period relevant to the assessment year under appeal. 54. The assessee company was already carrying on its Middle East and African operations through its wholly owned subsidiary, M/s. RGF Gulf. If the assessee had an intention to expand its business in those countries, it would have been a convincing option, if the assessee company directly pumps funds into its wholly owned subsidiary, M/s. RGF Gulf. There would be no apprehension regarding the violation of one-shareholder regulation of FZA. Regarding the number of shareholders, M/s. RGF Gulf is the wholly owned subsidiary company of the assessee and the assessee is the sole shareholder in that subsidiary and even if the assessee company pumps more funds to its subsidiary company for the purpose of financing and expanding its operations, still the assessee company would be the lone shareholder in M/s. RGF Gulf. 55. But the assessee opted a circuitous route. The assessee set up a new wholly owned subsidiary in Mauritius in July, 2008 by name, M/s. RIML Mauritius. The said M/s. RIML Mauritius, in turn, set up another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was transferred to a non- resident without any consideration. Secondly, the income from such transfer of shares is directed to the non-resident and not to the resident. Therefore, this is a clear case of tax evasion. 58. The learned Commissioner submitted that because of the reasons stated above, it is a sham transaction arranged by the assessee company. It is clear from the fact that the newly formed subsidiary, M/s. RIHL Cayman and M/s. RIML Mauritius do not have any commercial substance or relevance and they were set up only with the object of avoiding capital gains tax. 59. In this context, the TPO is justified in relying on the decision of the Supreme Court in the case of McDowell Co. Ltd. (154 ITR 148). 60. The learned Commissioner contended that the arguments of the learned senior counsel regarding the failure of sec.45 vis- -vis sec.48 are not acceptable. Sec.45 is the charging section of capital gains. Sec.48 is computation provision. Sec.48 would fail only if there is not at all any means to compute the value of the asset transferred. That part of the consideration must be a vacuum. Here, it is not the case. The shares transferred by the assessee company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing corporate and bank guarantee charges and trademark license fees into the fold of APL adjustments, in view of the amendment made in sec.92B of the Act, with retrospective effect from 1st April, 2002. 66. As far as the appeal filed by the Revenue is concerned, there is only one issue that the DRP has erred in its finding that the PE fund investment was relatively risk-free investment and thereby allowing a deduction of 10% towards risk adjustment allowance. 67. The learned Commissioner contended that there was no basis to measure the volume of risk free environment and in such circumstances, the DRP ought not have ordered a modification of 10% only on the basis of a theoretical explanation. He, therefore, submitted that the entire adjustment made by the TPO against the transfer of shares may be upheld. 68. The learned senior counsel appearing for the assessee, submitted that the contentions raised by him regarding the transfer of shares in the appeal filed by the assessee equally hold good against the appeal filed by the Revenue. 69. We heard both sides in detail and perused the materials including the paper books filed before us and also considered volumes of case la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany being a living person can transfer property by way of gift. 73. As per sec.122 of the TP Act, 1882 the following are the ingredients of a gift valid in law: Transfer of existing movable or immovable property Transfer made voluntarily Without consideration By donor to the donee Accepted by the donee. 74. The essential ingredients of a valid gift are the existence of the property, voluntary nature of the transfer and absence of consideration. As a pre-condition for making a valid gift, the law does not prescribe any attributes like love and affection . 75. Transfer of property as the general law contemplates is the transfer of both existing property and future property. But in a gift, the transfer must be of an existing property. The meaning given to the expression gift in the erstwhile Gift Tax Act, 1958 is the same. A gift is defined in the said Act in sec.2(xii), as the transfer by one person to another person of any existing movable or immovable property made voluntarily and without consideration in money or money s worth. The gift for the purpose of Gift Tax Act, 1958, is further qualified, as a property in money or monies worth. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture Ltd., 163 comp. case 119, has held that there is no legal impediment to a company transferring property to another company, by gift. The Hon ble AAR in rulings given in the case of Deere Co. (337 ITR 277) have held that love and affection are not required to make a gift. They held that a corporate body construed as not having natural love and affection can also make a valid gift. 79. The learned senior counsel, appearing for the assessee has also referred to various other enactments in which contextual reference has been made to show that a company can make gift to another person. He has referred to sec.115(WB)(2)(O) of the IT Act, pertaining to Fringe Benefits Tax and sec.540 of the Companies Act, 1956. We are not going deep into those incidental provisions available in other enactments. The term gift is not defined in the Income-tax Act, 1961. Therefore, the nearest enactments, that may be relied on for the purpose of deciding the issue under the Income-tax Act, is the Transfer of Property Act, 1882 and the erstwhile Gift Tax Act, 1958. As reflected in the discussions already made, it is clear that a company is a person both for the purpose of TP Act, 1882 and GT Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , RIHL Cayman, both are not Indian companies. Gift is a transfer of capital asset of one person to another, without consideration. The transaction contemplated in sec.47(iv) / (v) is a transfer arising out of contractual obligation. The transfer must also be enriched by consideration. The transfer without consideration is not the subject matter of sec.47(iv) / (v). The law stated in those sections presupposes a consideration for the transfer while sec.47(iii) is applicable only to a transaction without consideration. 82. In the facts and circumstances of the case, we find that the transfer of shares made by the assessee company without consideration was a valid gift and as the transaction was a gift, the transfer of shares cannot be regarded as transfer of capital asset for the purpose of capital gains taxation, as provided in sec.47(iii) of the Act. Therefore, we accept the contention of the assessee company that the transfer of shares made by the assesse company to its step down subsidiary, RIHL Cayman is a gift eligible for exemption under sec.47(iii). Accordingly, no capital gains tax is imputable to the said transfer of shares. 83. Another issue to be considered is, whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o international taxation. In the case of Dana Corporation, 227 CTR 441, the Hon ble AAR observed that sec.45 must be read with sec.48 and if the computation provisions cannot be given effect to, for any reason, charging sec.45 fails. In the case of Amiantit International Holding, 230 CTR 19, the Hon ble AAR, held that if the consideration in the transaction is such that it is incapable of being valued in definite terms or it remains unascertainable on the date of occurrence of taxable event, the question of applying sec.45 read with sec.48 of the IT Act, does not arise. In the case of Goodyear Tire and Rubber Co., 334 ITR 69, the Hon ble AAR, held that where consideration is incapable of being valued in definite terms or it remains unascertainable on the date of occurrence of taxable event, the question of applying sec.45 read with sec.48 of the IT Act, would not arise. 87. As far as the present case is concerned, as the transfer of shares was made without consideration, the foremost ingredient of computation provisions is missing and as such, capital gains cannot be computed under sec.48. This leads to a situation, where sec.45 cannot be invoked and charge of capital gains taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in the earlier assessment years, modified it to 0.85%. 93. The assessee has not granted any new guarantee in the previous year relevant to the assessment year under appeal. Therefore, reliance placed by the TPO on the definition of the term international transaction as retrospectively amended by the Finance Act, 2012, does not seem to be proper. The corporate and bank guarantees provided by the assessee company enable its associates to secure credit in their overseas jurisdiction. It is necessary for the associate concerns to depend on local source of funds for supporting their business activities. It is seen therefore, that the assessee has provided the corporate and bank guarantees for the over-all interests of its business. 94. The ITAT, Delhi Bench, in the case of Bharti Airtel Ltd. vs. Addl. CIT, 43 Taxmann.com 150, has held that providing of corporate guarantee does not involve any cost to the assessee and, therefore, it is not an international transaction , even under the definition of the said term as amended by the Finance Act, 2012. This is because, the guarantee provided by an assessee does not have any bearing on profits, income, loss or assets of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whether combined approach under TNMM method would be acceptable or not. But, as the additions have already been deleted, these alternative grounds have become academic and do not call for any adjudication. 100. The assessee has raised two grounds against non-TP additions made by the Assessing Officer; one against bad debts and the other against factoring charges. As already mentioned elsewhere in this order, it was stated at the time of hearing, before the Bench that the assessee is not pressing those grounds. Accordingly, the grounds raised by the assessee against the additions of bad debts and factoring charges are dismissed, as not pressed. Those additions made by the assessing authority are confirmed. 101. Another issue raised by the assessee is that the lower authorities have erred in not giving credit for taxes deducted at source. We direct the assessing authority to verify the details of the TDS credit available to the assessee and give the assessee company proper credit for such TDS. The assessee company shall be given an effective opportunity for producing details and evidences available with them. 102. The last issue raised by the assessee is against the levy o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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