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TMI Blog2018 (12) TMI 1346X X X X Extracts X X X X X X X X Extracts X X X X ..... e case, there was no question of Respondent No.1 treating it so and thereafter referring the same to the TPO under section 92CA(1) for determining the ALP Payment made by petitioner by petitioner to HBL global for rendering service - Held that:-Transaction with a person falling within section 40A(2)(b)(vi)(B) - Held that:- There is no question in the facts of the present case to refer to or consider any indirect shareholding. As mentioned earlier, on a plain reading of explanation (a) to section 40A(2)(b), for there to be a substantial interest, the person has to be the beneficial owner of shares holding not less than 20% of the voting power. In this transaction, the Petitioner can never be said to be beneficial owner of the shares in HBL Global for the simple reason that it holds absolutely no shares in HBD Global. It holds shares in a company called ADFC Ltd., which in turn holds 98.4% shares in HBL Global. This would not mean that either directly or indirectly the Petitioner is the beneficial owner of the shares of HBD Global. We, therefore, find no merit in this contention. We are unable to accept the submission of Mr. Chhotaray that the present transaction (namely the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, the Petitioner bank seeks a writ of certiorari for quashing the impugned order dated 29th December, 2016 (Exh F ) and the impugned reference dated 29th December, 2016. The impugned order dated 29th December, 2016 (Exh F ) passed by Respondent No.1 holds that certain transactions entered into by the Petitioner are Specified Domestic Transactions (for short SDTs ) as per section 92BA(i) of the Income Tax Act, 1961 (for short the I.T. Act ) and the Arms Length Price ( ALP ) of the said transactions are required to be determined by making a reference to Respondent No.2. It is pursuant to this order that the reference dated 29th December, 2016 was made to Respondent No.2 under section 92CA(1) of the I.T. Act for determination of the ALP in the Petitioner's case for the Assessment Year (for short A.Y . ) 2014-15. It is the case of the Petitioner that the impugned order as well as the impugned reference are ex-facie without jurisdiction, illegal, unsustainable, contrary to the principles of natural justice and contrary to law, and therefore, ought to be quashed and set aside by us in our writ jurisdiction. This is how the present Writ Petition 2. Before we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . and the Petitioner was having beneficial ownership of HBL Global. iii. The Petitioner has paid interest amount 4.41 Crore to HDB Welfare Trust which was a Trust created by the Petitioner. (c) Since Respondent No.1 was of the opinion that these transactions were entered into with related parties as set out in section 40A(2)(b) of the IT Act, they ought to have found place in Form 3CEB filed by the Petitioner. Since this was not done, the show cause notice was issued. (d) According to the Petitioner no personal hearing was given to them by Respondent No.1 in relation to these transactions. Be that as it may, the Petitioner, vide its letter dated 29th December, 2016, submitted a reply with respect to each of these above mentioned three transactions and gave an explanation as to why they could not be termed as SDTs. This being the case the Petitioner stated that there was no requirement on their part to disclose the same in Form 3CEB and correpondingly there was no question of making a reference to the TPO for determining the ALP in relation to these three transactions. (e) In a nutshell, it was the Petitioner s case that the transaction referred to in item (i) above [the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Petitioner, Respondent No.1, vide his impugned order dated 29th December, 2016, rejected the objections that the aforesaid transactions were not SDTs, and therefore, held that domestic transfer pricing provisions would be applicable. In a nutshell, Respondent No.1 held that the Petitioner was involved in the transaction of purchase of loan which is a business asset of the Petitioner and the purchase of such asset from a related party falls under section 40A(2)(b) of the IT Act. Respondent No.1 further held that the consolidated holding of the promoters was in excess of 20 % of the shareholding of the Petitioner and hence, the beneficial ownership clause was applicable. Respondent No.1 further went on to hold that since the Petitioner holds 29% shareholding of ADFC Ltd., which in turn holds 98.4% of the shares of HBL Global, the Petitioner had beneficial ownership and voting rights of more than 20% of HBL Global and hence the transaction with HBL Global was with a person/party as covered by section 40A(2)(b) of the I.T. Act. As far as the Trust was concerned, Respondent No.1 held that the Petitioner possesses more than 20% of the rights in the said Trust which makes it a relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has now come up before us and with the consent of parties we have heard it finally. In these circumstances we issue Rule. The Respondents waive service. By consent, Rule is made returnable forthwith and heard finally. 3. In this factual backdrop, learned Senior Counsel Mr J.D. Mistri appearing on behalf of the Petitioner, submitted that in the facts of the present case there were three transactions which the Revenue had alleged, were SDTs. They are - (1) Loans of ₹ 5164 Crores purchased by the Petitioner from the promoters (HDFC Ltd.) and loans of ₹ 27.72 Crores purchased from the subsidiaries; (2) Payment of ₹ 492.50 Crores by the Petitioner to HBL Global for rendering services; and (3) payment of interest of ₹ 4.41 Crores by the Petitioner to HDB Welfare Trust. Mr Mistri submitted that it is only when the aforesaid transactions, or any of them, are a SDT, and which are not reported by the assessee, then the A.O. is required to issue a show cause notice to the assessee and pass an order disposing of the objections of the assessee before referring the said SDT to the TPO for determining the ALP. He submitted that to challenge the order of the A.O. the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase of loans from the promoters of the Petitioner (HDFC Ltd.) did not fall within any of the persons mentioned in section 40A(2)(b) read with explanation (a) thereof, and which is appended to section 40A(2)(b) of the Act. In this regard, he brought to our attention section 40A(2)(b)(iv) of the Act and contended that the person referred to in the said sub-section has to have a substantial interest in the business or profession of the assessee (in the present case the Petitioner). He submitted that explanation (a) sets out what is the meaning of 'substantial interest' and stipulates that in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of the shares carrying not less than 20% of the voting power. In the facts of the present case, Mr. Mistri submitted that admittedly HDFC Ltd. is the beneficial owner of only 16.39% of the shares of the Petitioner and hence section 40A(2)(b) was not at all applicable to the present transaction. He submitted that the Revenue had grossly erred in clubbing the shareholding of HDFC Ltd. with the shareholding of its subsidiary, namely, HDFC Investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 89, by HDFC Investments Ltd. He therefore submitted that HDFC Ltd. (the parent company of HDFC Investments Ltd.) could never be said to be the beneficial owner of the shares owned by HDFC Investments Ltd. in the Petitioner. 7. Mr Mistri then submitted that it is undisputed that there cannot be more than one beneficial owner of the shares. It cannot be that two different persons are the beneficial owners of the same shares. If we were to accept the submission of the Revenue, the same would lead to a complete absurdity. Mr Mistri submitted that take for example Company 'A' has a wholly owned subsidiary, Company 'B' . In turn, the shares of Company 'C' are held 90% by Company 'B' and 10% by Company 'A' . If one was to give the interpretation as sought for by the Revenue, then it would mean that Company A beneficially owns 100% of Company 'C' which would lead to an absurd situation that Company 'B' ; though owning 90% of the shareholding in Company C , would not be regarded as having a substantial interest in Company C as Company B cannot be said to be the beneficial owner of its 90% shareholding i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the alternative to the above argument, Mr Mistri submitted that the purchase of these loans can never be an expenditure as covered under sections 28 to 37 of the Act. It was basically a purchase of an asset and hence not an expenditure covered under section 92B(A)(i). Mr Mistri submitted that section 40A would be applicable when an amount expended or paid is claimed as a deduction whereas loans purchased by the Petitioner is not claimed as a deduction and which is reflected as an asset in the balance-sheet. He submitted that even the A.O. accepts in the impugned order that the transaction of purchase of loans is an asset of the Petitioner. Mr Mistri submitted that section 92BA(i) would apply only when an expenditure is incurred for which a payment is made to a party covered under section 40A(2)(b) of the Act. In the present case, the purchase of loans was not an expenditure but payment made for acquiring an asset, and hence, the same could never fall within the ambit of section 92BA(i) at all. Mr Mistri submitted that it is not possible to purchase an asset without making payment but that by itelf, without anything more, would not mean that such payment is an expenditure as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is now well settled that the shareholders of a company cannot be said to have any beneficial interest in the assets of that company. He submitted that 98.4% shareholding of ADFC Ltd. in HBL Global was an asset / movable property of ADFC Ltd. By no stretch of the imagination, therefore, could the Petitioner be held to be the beneficial owner of the shares held by ADFC Ltd in HBL Global. He, therefore, submitted that this transaction could never be termed as a SDT as understood under section 92BA(i) read with section 40A(2)(b) of the Act. Mr Mistri submitted that if the logic of Respondent No.1 was to be taken to its logical conclusion, then it would mean that it is not even the Petitioner who is the beneficial owner of the shares of HBL Global, but it is the shareholders of the Petitioner who were the beneficial owners of the shares of HBL Global. As stated earlier, Mr Mistri submitted that this would lead to an absurd situation. He submitted that this could never been the intention of the Legislature as such an interpretation would lead to startling results and therefore has to be avoided. 11. As far as the transaction of payment of interest of ₹ 4.41 Crores to HDB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He, therefore, submitted that all this clearly goes to show that the impugned order and the impugned reference are clearly illegal and bad in law, and therefore, ought to be set aside by us in our extraordinary, equitable and discretionary jurisdiction under Article 226 of the Constitution of India. 13. On the other hand, Mr Chhotaray, learned advocate appearing on behalf of the Revenue, submitted that for a specified domestic transaction there are two types of pricing. First is the Arms Length Price and the second is the Transfer Price. The ALP is the price between unrelated parties. This price is determined by the market forces. Transfer Price, on the other hand, is the price of the transaction fixed between two related parties. Since these related parties are subject to common control, the price of inter se transactions amongst the related parties can be manipulated to transfer profit from one party to another in order to evade tax. It is for this very reason that the Transfer Pricing provisions were brought into force by the Legislature so as to determine the ALP of a transaction between related parties. He submitted that this was done in order to evade tax. If the Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Petitioner. Mr Chhotaray submitted that what is important to note is the voting power and not the shareholding so as to fall within explanation (a). According to Mr Chhotaray this issue is squarely covered by a decision of Karnataka High Court in the case of Commissioner of Income Tax Vs. Amco Power Ltd. [(379 ITR 375) (KARN)]. He submitted that this decision clearly holds that for the purpose of computing voting power of the company in another company, the shareholding of its wholly owned subsidiary has to be clubbed with its own share holding. In the facts before Karnataka High Court, Mr Chhotaray submitted that the shareholding of the company was only 6% whereas its wholly owned subsidiary had a 45% share holding. In these circumstances, it was held that taking into consideration the shareholding of 45% of the wholly owned subsidiary, the voting power of the company was 51% (i.e. 6% + 45%). Mr Chhotaray submitted that in the facts of the present case, the situation is identical. He submitted that taking into consideration the shareholding of 6.25% of HDFC Investments Ltd. (and which is a wholly owned subsidiary of HDFC Ltd.) in the Petitioner alongwith the shareholding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 40A(2)(b)(vi)(B) of the Act. Here also Mr Chhotaray relied upon the CBDT circular dated 6th July, 1968 to contend that even indirect shareholding would be covered. This being the case, Mr Chhotaray submitted that even this transaction with HBL Global would squarely fall within the meaning of a SDT as contemplated under section 92BA(i) of the Act as it was a transaction between two related parties. 18. As far as the third transaction is concerned, namely, the payment of interest of ₹ 4.41 Crores to HDB Trust is concerned, Mr Chhotaray submitted that the Petitioner has a deposit of ₹ 45.12 Crores from HDB Welfare Trust and has paid interest of ₹ 4.41 Crores. He submitted that the Petitioner has a substantial interest in terms of explanation (b) to section 40A(2)(b) of the Act. He submitted that this issue has been discussed in detail by the Revenue in its affidavit at page 355 to 358 of the paper book. Mr Chhotaray submitted that section 92(2)(A) specifically mentions interest as an item for determination of ALP. He submitted that the Petitioner is the founder member of this Trust and the Trust held shares in the Petitioner till 2006. The benefits enjoyed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 80-IA are applicable; or ( vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of five crore rupees. 20. Section 92BA of the I. T. Act sets out the meaning of a SDT and stipulates that for the purposes of this section and sections 92, 92C, 92D and 92E Specified Domestic Transactions in the case of an assessee inter alia means the transactions set out thereunder from clauses (i) to (vi). As far as the above three transactions are concerned, it is common ground before us that if they were to fall within the term of a SDT, they would be covered under clause (i) of section 92BA which provides that it should be a transaction between the assessee and a person referred to in section 40A(2)(b) for an expenditure in respect of which payment has been made or is to be made to such person. In other words, if a transaction is with reference to an expenditure in respect of which payment has been made or is to be made by the assessee to a person referred to in section 40A(2)(b), only then would the same be a SDT. For this purpose it would therefore also be neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has substantial interest; ( v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; ( vi) any person who carries on a business or profession,- ( A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or ( B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest in the business or profession of the assessee, or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has a substantial interest, and the A.O. is of the opinion that such expenditure is excessive or unreasonable, then he can disallow such expenditure as a deduction. What is the meaning of substantial interest has then been set out by the Legislature in the explanations (a) and (b) to section 40A(2)(b). Explanation (a) clearly sets that in the case where a business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits), carrying not less than 20% of the voting power, would be deemed to have a substantial interest. Explanation (b) stipulates that in any other case, such person is, at any time during the previous year, beneficially entitled to not less than 20% of the profits of such business or profession. 23. On a conjoint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of a SDT, in which case, for this transaction, the ALP has to be determined by the TPO. 27. On a plain reading of the aforesaid provisions, we are unable to agree with the submissions of the Revenue. What explanation (a) to section 40A(2)(b) clearly stipulates is that a person shall be deemed to have a substantial interest in a business or profession in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares carrying not less than 20% of the voting power. In other words, explanation (a) when broken down, requires two conditions that need to be fulfilled. The first condition is that, that the person should be the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits); and second that these shares (of which the person is the beneficial owner) are carrying not less than 20% of the voting power. In the facts of the present case, admittedly HDFC Ltd., on its own, is not the beneficial owner of shares carrying at least 20% of the voting power as required under explanation (a) to section 40A (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills Case[(1950) SCR 869, 904] . That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the, sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voting stock of another company, the company is said to be a WOS of the parent company. Holding companies and their subsidiaries can create pyramids, whereby a subsidiary owns a controlling interest in another company, thus becoming its parent company. 257. The legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. In Bacha F. Guzdar v. CIT [AIR 1955 SC 74] , this Court held that shareholders' only right is to get dividend if and when the company declares it, to participate in the liquidation proceeds and to vote at the shareholders' meeting. Refer also to Carew and Co. Ltd. v. Union of India [(1975) 2 SCC 791] and Carrasco Investments Ltd. v. Directorate of Enforcement [(1994) 79 Comp Cas 631 (Del)] . 258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desires by a resolution in the general body meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts Ltd. holds in the Petitioner is its asset, and HDFC Ltd., though being a 100% shareholder of HDFC Investments Ltd., cannot be termed as the owner (beneficial or otherwise) of the assets and properties of HDFC Investments Ltd. In these circumstances, therefore, the shareholding of HDFC Ltd. and HDFC Investments Ltd. cannot be clubbed together to cross the threshold of 20% as required under explanation (a). This being the position, we have no hesitation in holding that the HDFC Ltd. does not have a substantial interest in the Petitioner, and therefore, is not a person as contemplated under section 40A(2)(b)(iv) for the present transaction to fall within the meaning of a SDT as set out in section 92BA (i) of the I. T. Act. 31. There is another reason for coming to this conclusion. If we were to interpret this provision as is sought to be contended by the Revenue, it would lead to an absurd situation, as correctly contended by Mr. Mistri. It is undisputed that there cannot be more than one beneficial owner of the same shares. If we were to take the example that was given by Mr. Mistri during arguments, it would effectively lead to a completely absurd result. Take for example Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92BA (i) of the Act. It is true that consideration has to be paid for purchasing an asset but that would not mean that it is an expenditure . Mr. Mistri is correct when he submits that an asset would be reflected in the balance-sheet of the company whereas an expenditure would be reflected in the Profit and Loss account. In fact, in the facts of the present case, the loans purchased by the Petitioner from HDFC Ltd. were reflected in the balance-sheet and not in the Profit and Loss account. This being the case, we find that this is not an expenditure at all as contemplated under section 92BA(i), and therefore, the money expended for purchasing these loans can never be termed as an expenditure incurred by the Petitioner. It would, therefore, not fall within the meaning of a SDT as understood under section 92BA(i) of the Act. 33. For all the aforesaid reasons, we therefore have no hesitation in holding that this transaction of purchase of loans by the Petitioner from HDFC Ltd. would not fall within the meaning of a SDT. This being the case, there was no question of Respondent No.1 treating it so and thereafter referring the same to the TPO under section 92CA(1) for determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the beneficial owner of the shares of HBL Global. This could never have been the intention of the Legislature. 36. To counter this argument, Mr. Chhotaray placed reliance on the Circular dated 6th July, 1968 and stated that the said Circular issued by the CBDT clearly states that for the purposes of section 40A(2)(b) direct and indirect shareholding has to be taken into account. We are unable to agree with the submissions of Mr. Chhotaray. There is no question in the facts of the present case to refer to or consider any indirect shareholding. As mentioned earlier, on a plain reading of explanation (a) to section 40A(2)(b), for there to be a substantial interest, the person has to be the beneficial owner of shares holding not less than 20% of the voting power. In this transaction, the Petitioner can never be said to be beneficial owner of the shares in HBL Global for the simple reason that it holds absolutely no shares in HBD Global. It holds shares in a company called ADFC Ltd., which in turn holds 98.4% shares in HBL Global. This would not mean that either directly or indirectly the Petitioner is the beneficial owner of the shares of HBD Global. We, therefore, find no merit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing documentation and accountant's report. With regard to ensuring completeness of such information, the accountant should obtain a written representation from the assessee detailing the list of persons specified in section 40A(2)(b) and expenditure transactions with them. 38. From this Guidance Note what is clear is that the word beneficial owner needs to be construed in contrast to legal owner and not in the context of determining indirect ownership of shares. Hence, the emphasis is on covering the real owner of the shares and not the nominal owner. The report further states that this proposition is also supported by legal jurisprudence which states that in a multi-tier structure, a parent cannot be regarded as the beneficial owner of shares in a downstream subsidiary merely because it owns the shares of the intermediate subsidiary companies. It is important to respect the fact that the entities are separate legal entities. This Guidance Note also gives an example which clearly indicates that for the purpose of section 40A(2)(b) it may be appropriate to consider only a direct shareholding and not a derivative or indirect shareholding. In fact, the Supreme Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the Revenue can contend that the transaction of payment of interest to HBD Welfare Trust and which Trust has been set up for the benefit of its employees, would fall within Explanation (b) to section 40A (2)(b) of the I. T. Act. It is not even the case of the Revenue that the Petitioner is entitled to at least 20% of the profits of the said Trust. The Trust has been set up exclusively for the welfare of its employees and there is no question of the Petitioner being entitled to 20% of the profits of such Trust. This being the case, we find that this transaction also clearly would not fall within section 40A(2)(b) read with explanation (b) thereof to be a SDT as understood and covered by section 92BA(i) of the I. T. Act. 42. Before parting, it would only be fair to deal with the judgments relied upon by Mr. Chhotaray. The first decision was of the Karnataka High Court and the other was of the Supreme Court. On carefully going through the decision of the Karnataka High Court in the case of Commissioner of Income Tax Vs. Amco Power Systems Ltd. (supra) , we find that the reliance thereon by Mr Chhotaray is wholly misplaced. What the Karnataka High Court was considering in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allotted or leased under a house building scheme of the society, shall be deemed to be the owner of that building or part thereof. Section 27(iii)(a) and (iii)(b) also set out who shall be deemed to be the owner in certain circumstances. It is whilst interpreting these provisions, the Supreme Court was deciding as to who would be the owner as contemplated under section 22 of the Act. We fail to see that this judgment can be of any assistance to the Revenue in the facts and circumstances of the present case. The Supreme Court was considering completely different sections of Income Tax Act and whose wordings are materially different from the wordings of section 40A(2)(b) of the Act. We therefore find that the reliance placed by Mr Chhotaray on this decision is also wholly misplaced. 44. In view of the foregoing discussion, we find that none of the three transactions that form the subject matter of this Petition fall within the meaning of a SDT as required under section 92BA(i) of the I.T. Act. This being the case, we find that Respondent No.1 was clearly in error in concluding that these transactions were SDTs, and therefore required to be disclosed by the Petitioner by filing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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