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TMI Blog2020 (12) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... an analysis as to how there is a loss in real income and loss of revenue by shifting profits outside the country Finding rendered by the TOP which ultimately stood crystallised in an assessment order after the directions issued by the DRP has not been touched upon for its correctness by the Tribunal. We find that the above factual conclusion would go a long way to demolish the case of the assessee which they now project before us. Consequently, the contention that there is no capital gain chargeable under Section 45, there can be no income in terms of Section 2(24) is also not acceptable. The issue as to whether there is any income or business income etc., is a question of fact. The authorities below have dealt with the same elaborately, but unfortunately, the Tribunal did not venture to examine the correctness of such finding and in our considered view, the Tribunal failed to examine the factual matrix despite being the last authority to render findings of fact. Thus, in the absence of any such finding, we are to hold that factual findings remain unassailed which we are inclined to confirm. TP Adjustment - Claim of trade mark fee and deleting the addition on account of Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the assessee in RC at the time of transfer. TPO referred to the Organisation for Economic Co- operation and Development Guidelines ['OECD' for brevity] the decisions of the Tribunal about the Moore Stephensons Valuation Report, discussed about the Discounted Cash Flow Method ['DCF' for brevity], took note of the historical performance and future profitability of the company, what are the parameters which have to be taken into consideration for applying DCF method and concluded that the ALP should be determined by CUP Method. TPO proposed that a sum of ₹ 885,13,80,000/- may be added as the value of the shares that has been transferred to RC, which is also the ALP of the shares that have been transferred and the AO may also calculate the Capital gains accruing as a result of such share transfer after giving necessary opportunity. As was seen from the order passed by the DRP, it was in substantial agreement with regard to the finding rendered by the TPO that the value of the shares of RC determined at the time of investment by IVC represents the best possible estimate of the market value of the shares of RC. Though such finding was rendered, the DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate and Bank Guarantee are not perverse? 3. The assessee filed its return of income for the assessment year under consideration (AY 2009-10) on 28.09.2009 admitting taxable income at ₹ 125,57,70,310/-. The return was processed under Section 143(1) of the Act on 23.07.2010. Subsequently, the case was selected for scrutiny on the ground that the assessee had international transactions exceeding ₹ 15 Crores and the case was referred to the Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP). After hearing the assessee, the draft assessment order was passed on 31.03.2013 proposing the following additions/disallowances:- Sl. No. Addition/Disallowances proposed in the Draft Order Amount 1 LTCG adjustment determined by TPO 610,15,75,820 2 Corporate and bank guarantee charges (adjustment suggested by the TPO) 9,28,73,000 3 Trade mark and licence fee (adjustment suggested by the TPO) 1,89,33,150 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate equity fund investment corporation invested USD 65 million in the assessee's overseas step down subsidiary Redington International (Holdings) Limited for 27.17% stake and claimed it as a gift and claimed exemption under Section 47(iii) of the Act. It is submitted that the transfer of shares by the assessee is not a gift falling under Section 47(iii) of the Act for the reason that the assessee transferred the shares only by way of re-structuring the company investment in RGF. The learned counsel referred to the minutes of the Board Meeting as well as Deed of Share Transfer and submitted that neither in the minutes of the Board Meeting, nor in the Share Transfer Deed, the word gift has been mentioned and the document shows that the entire transaction is in the form of re-structuring the assessee. Further, it is submitted that the Board Resolution towards re-structuring the concern of the Board be and hereby, accorded to transfer the investments held by the company in RGTF to inter se subsidiary companies with or without consideration. Thus, it is submitted that the words clearly show that the transfer is not by way of gift but for re-structuring the company. Furthermore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sake of arguments that the transfer of share to the entity abroad is a gift which should satisfy the conditions stipulated in Section 122 of the Transfer of Property Act (hereinafter referred to as the T.P.Act ) and the necessary ingredients being that such transfer should be voluntary, it should be without consideration and there should be acceptance by or on behalf of the donee. It is submitted that the transaction done by the assessee is not a voluntary transaction, which has been brought out in the findings of the TPO in paragraphs 17.2.3 and 17.2.5 of the order dated 29.01.2013. Further, the learned counsel referred to the findings rendered by the TPO and in particular, with regard to the transactions which took place outside the country. It is submitted that after the incorporation of RC, the Redington Gulf's shares were gifted to RC Islands and the TPO has thoroughly analysed the transaction and found that the transaction has been devised to accommodate the fund Investment Corporation (IVC) which invested USD 65 million in RIHF Cayman Islands for 27.17% stake and these PE investors have compelled them to do so and a transaction owing to such compulsion or enforcement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , colourable device cannot be part of tax planning. In this regard, the learned counsel referred to the judgment of the Hon'ble Supreme Court in McDowell Co. Ltd. vs. Commercial Tax Officer [AIR 1986 SC 649] and CIT vs. Durga Prasad Mored [(1971) 82 ITR 540 (SC)]. Reliance was placed on the decision in Juggi Lal Kamalapet vs. CIT [1969 73 ITR 702 (SC)] for the proposition that the Court is entitled to lift the mask of corporate entity, if the conception is used for tax evasion or to circumvent tax obligation or to perpetrate fraud. For the same proposition, reliance was placed on the decision in the case of CIT vs. Sri Meenakshi Mills Ltd. [AIR 1967 SC 819]. 9. The learned counsel further submitted that Section 6 of the T.P.Act deals with what are the kinds of property that may be transferred. Clause (vi) in Section 6 states that no transfer can be made for an unlawful object or consideration within the meaning of Section 23 of the Indian Contract Act and the transaction done by the assessee is clearly hit by these provisions and therefore, the transaction is void. It is submitted that Explanation I to Section 92D was inserted by Finance Act, 2012 with retrospective effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was established in 1993 and much before the said company was formed, they were using the word Redington for their products sold in India. The assessee has not placed any material to controvert this factual position. The certificate of registration granted by the trade mark registry though issued only in 2009, it is deemed to have been granted from the date of application, that is, from the year 2000 onwards, in terms of Section 23 of the Trade Marks Act, 1999. Therefore, the Tribunal committed an error in permitting the assessee for adjustment of the licence fee for use of the trade mark to the subsidiary company, which was formed much later in point of time. In this regard, the learned counsel has drawn the attention of this Court to the trade mark licence granted to the assessee. Therefore, there was absolutely no necessity for payment of any licence fee and the Tribunal ought not to have interfered with the order passed by the TPO disallowing the said claim. With the above submission, the learned Senior Standing Counsel prayed for allowing the tax case appeals and answering the substantial questions of law framed in favour of the Revenue. 12. Mr.Percy Pardiwalla, learned S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed IVC GOF RG in Cayman Islands. The explanation of the assessee for incorporating RM in Mauritius is because IVC imposed a pre-condition for investing in RC that it would be required to be listed within three years failing which, IVC had an option to exit by selling its shares to the Redington Group at a price determined having regard to the fair market value of the shares, but in any event, it would guarantee an internal rate of return of at least 7% for IVC. Further, it is submitted that the Redington Group was saddled with a liability to re- acquire the shares of RC from IVC, if the shares of RC are not listed on a stock exchange within three years. Further, the assessee would state that they (RI) had plans to expand its overseas activities outside Middle East and Africa and the funds raised by IVC was only for Middle East and Africa. Therefore, the assessee (RI) decided to have RM as an overseas holding company into which, non-Middle East, Africa can be consolidated, more so because, Mauritius is centrally located in European, Middle East and African Markets and has direct Air access. It is submitted that the assessee could not secure the listing of RC within a period of three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man Islands is a 'gift', not a transfer for the purposes of Section 45 of the Act. In this regard, reliance was placed on the decision in Prakriya Pharmachem vs. ITO [(2016) 66 taxmann.com 149 (Guj.)] and the decision of the High Court of Judicature at Bombay in Asian Satellite Broadcast Pvt. Ltd. vs. ITO in W.P.No.2749 of 2019, dated 28.09.2020. The finding of the Tribunal that the transaction is a gift is a factual finding and the Revenue cannot challenge the same in the present appeal. In this regard, reliance was placed on the decision in CIT vs. Gillanders Arbuthnot Co. [(1973) 87 ITR 407 (SC)]. The fact that the transaction was for business purpose does not mean that the transfer is for consideration. In this regard, reliance was placed on the decision of the Authority of Advance Ruling, in Amiantit International Holding Ltd., In re [(2010) 322 ITR 678 (AAR)]. Further, it is submitted that the Revenue is incorrect in contending that the assessee was compelled to carry out the transaction and the transaction cannot become involuntary merely because it is undertaken with a view to achieve some commercial growth. In support of such contention, reliance was placed on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce was placed on the decision in Cadell Weaving Co. P. Ltd. [(2001) 249 ITR 265 (Bom.)] and CIT vs. D.P.Sandhu Brothers [(2005) 273 ITR 1 (SC)]. It is further submitted that the Revenue by invoking the provisions of Section 92 of the Act, seeks to re-characterize the transaction from 'gift' to that of 'sale' to bring the income to taxation and such an action is not permissible under Chapter X. It is submitted that the power to re-characterize the transaction was introduced by inserting Chapter XA and in particular Section 98 thereof; as provided in Section 95(2), the said chapter is applicable to assessment year 2018-19 and thereafter, has no application for the year under consideration (AY 2009-10). The allegation that the transfer of shares of RG to RC sham is allegation made by the Revenue, as if the transaction was sham, then the shares of RG would continue to vest in the assessee (RI) and there can be no question of any transfer because ownership continues to vest with the assessee. The Revenue does not state that the entire transaction is sham, but only the gift of shares is a sham transaction and if this argument is to be accepted, then the consequences is, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the acquisition of the asset has no impact on the income of the assessee at the time of acquisition, but may have an impact at the time of its subsequent transfer, the transaction would still be regarded as an international transaction. Thus, when income does not arise, the question of computation of income at ALP also does not arise. In the present case, no income of any nature whatsoever arises to the assessee and therefore, the argument of the Revenue has no legal basis. Further, Chapter X has to be construed in consonance with and in harmony with the other provisions of the Act and if it is so construed, it must mean that if any transaction gives rise to income which is chargeable to tax under the Act, then under such circumstances, the income that would be brought to charge would have to be computed at the ALP irrespective of the contractual agreed price. The provisions of Chapter X can never be interpreted to set at naught in any exemption that is given in the other provisions of the Act. If the Revenue's argument was to be accepted, the same would be contrary to the law laid down in the case of Vodafone India Services Private Ltd. vs. UoI [(2014) 368 ITR 1 (Bom.)]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the recipient. The decision in Durga Prasad Morde is not applicable to the facts of the case on hand, as there is no transfer of shares of RG held by RC (Cayman Islands) which it has received as gift and the proceeds thereof came back to the respondent in a manner that it did not make them taxable and this is not the case on hand, as RC continued to hold shares of RG till its amalgamation with RM and thereafter, RM continues to hold the shares of RG to date. The decisions relied on by the Revenue in the case of Juggi Lal Kamalpat and Sri Meenakshi Mills Ltd., are not applicable to the case on hand, as there is no question of lifting of the corporate veil as a consequence there of bring to tax alleged capital gain in the hands of the assessee. 18. With regard to the determination of ALP of the trade mark fee, during the assessment year under consideration, the assessee had paid a sum of ₹ 1,89,33,150/- towards trade mark and licence fee for using trade mark Redington to its associated enterprise Redington Distribution PTE Ltd., Singapore (RDPL). The TPO determined the ALP of the said trade mark/licence fee at NIL by stating that there is no genuine rationale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction, as it did not fall within any of the limbs of Section 92B. It was to get over the judicial pronouncements that an attempt was made to rope in transactions of furnishing bank guarantees, i.e., guarantees given to banks to secure them against a default by an associated enterprise that has borrowed monies from the bank. Clause (e) of the Explanation in- fact supports its case inasmuch as the Explanation makes it clear that giving of a corporate guarantee is not a service, since it explains service to mean provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; without prejudice to above, it is submitted that only corporate guarantees given by the assessee which are in the nature of lending (viz., guarantees to secure a loan) are covered under Clause (c) of Explanation 1 to Section 92B. Corporate guarantees given by the assessee which are not to secure the repayment obligation of a lending transaction but to offer support to its associated enterprise in its dealings with its suppliers who offer credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the introduction of the Explanation by the Finance Act, 2012. Reliance was also placed on the decision of the Hon'ble Supreme Court in CIT vs. Sarkar Builders [2015] 375 ITR 392 (SC). 22. It is further submitted that the appropriate way to give effect to it, is to construe all guarantees that are covered within the scope of the definition to fall within the definition provided they are entered into after April 1, 2001 but the arm's length price, if any, can be substituted for the contracted terms, if at all, from the assessment year 2012-13 only. Interpreting the Explanation in any other manner shall cause grave hardship. With the above submissions, the learned Senior Counsel for the assessee sought for affirming the impugned order and answering the substantial questions of law against the Revenue and in favour of the assessee. 23. Heard Ms.R.Hemalatha, learned Senior Standing Counsel for the Revenue and Mr.Percy Pardiwalla, learned Senior Counsel for Mr.N.V.Balaji, learned counsel for the assessee. 24. The common substantial question of law, framed for consideration in both the appeals which requires to be answered, requires the factual matrix to be gone into. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, when IVC had invested USD 65 million. The CFO in his reply stated that RC was incorporated on 14.07.2008 in Cayman Island and only they had a share capital of USD 10,400. Responding to the query with regard to the assets of RC, the CFO has stated that RC holds only investments in RG and except this investment in RG, there were no other assets or income accruing to it. The assessee has not reckoned the transfer of shares of RG to RC as a sale of investment. In the audited financial statement for the financial year 2008-09, it has been stated that after the re-structuring of the assessee's overseas investment, the assessee continues to have effective control over all the subsidiaries and all the economic benefits which would accrue to the assessee. Based on the note prepared by the Auditors of the assessee, which formed part of the Annual Report, the assessee contended that the share transfer is not a disposal of investment as per para no.17 of AS 13 of Accounting for Investments. That the share transfer is not an international transaction due to the reasons mentioned in Note 2(e)(b) in Schedule 16. The Assessing Officer made a reference under Section 92CA(1) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves the meaning of 'international transaction' between two or more associated enterprises either or both of whom are non-residents having a bearing on the profits or income or losses or assets of such enterprises. The TPO held that the share transfer transaction done by the assessee has a bearing on the profits or loss of the enterprises under study and therefore, it has to be considered as an international transaction and ALP has to be determined. Further, by referring to the amendment to Section 92B with effect from April, 2002, it is stated that a transaction of business re-structuring or re-organisation is also an international transaction and once the transaction is classified as an international transaction, the assessee was required to determine ALP of the transaction. Considering the correctness of the plea raised by the assessee that the transfer was without consideration and a gift voluntarily made by the assessee and accepted by the donee, the TPO referred to the sworn statement of the CFO wherein, he had stated that the gifts are exempted from transaction as per Section 47(iii). The TPO noted that there is no written gift deed/memorandum submitted by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g prevented the assessee to form their company as FZCO. The TPO also analysed the transaction as to how there is a loss to the Revenue by shifting profits outside the country. Thus, the TPO concluded that the transfer of shares held by the assessee in RG, Dubai to RC is an international transaction as per Section 92B of the Act and ALP has to be determined. The incorporation of RM and RC just before the share transfer was seen as means to avoid capital gain tax, these two entities have no commercial substance on their own and are used as a conduit to avoid the incidence of tax. Since the investment was transferred from one company to another company and each company being a separate legal entity in different countries, the capital gain has to be taxed in the hands of the transferor (assessee). Further, it is to be seen that the investment was transferred from a resident to non-resident and hence, after such transfer, the income from the investments would accrue only to the non-resident and not to the resident. The transaction was with a motive of profit maximization and to avoid the incidence of tax in India which cannot be exempted under Section 47(iii) of the Act. 27. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only when there is a charge of tax in India and in the assessee's case, the transaction does no result in a taxable income and transfer pricing provisions would not be applicable. The TPO disagreed with the contentions raised and held that Section 92 is a charging provision more particularly, as it is placed in Chapter X of the Act, a special set of provisions relating to avoidance of tax, so that the profits chargeable to tax in India do not get diverted elsewhere. To support his conclusion, several decisions were referred to which we shall discuss in the later part of this judgment. 31. The TPO next proceeded to consider the contention of the assessee that gifts are not to be considered as transfer as per Section 47(iii) of the Act. The TPO held that to qualify as a gift under Section 122 of the TP Act, it has to be voluntary, which was absent in the transaction as it had been devised to accommodate Investcorp (IVC) on account of compulsion placed upon the assessee. In this regard, the TPO referred to the sworn statement given by the CFO on 18.10.2012 wherein, he has stated that the IVC is a listed entity in Bahrain, the investor fund was head quartered in Cayman Island an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve value, which submission was rejected by the TPO. In this regard, the TPO after analysing the transaction, held that the shares in RG has been disposed of for valuable consideration as per the audited balance sheet of the company itself. Ultimately, the TPO held that none of the requirements under Section 122 of the TP Act stands fulfilled and the transaction cannot be regarded as a gift. The assessee contended that the TPO had no jurisdiction to question the business decision or wisdom of the assessee. The TPO held that it has not questioned the business decision or wisdom of the assessee, but has examined the transaction elaborately to show that there is a shifting of the tax base from India to Cayman Island, which is a tax haven. In this regard, the TPO once again referred to the sworn statement of the CFO, who accepted that before the transfer of shares of RG to RC by the assessee, if there was any sale by the assessee, the resultant income would have been offered to tax in India by the assessee and after the transfer of the shares of RG to RC, if RC sells the shares, it would be offered to tax in Cayman, which is the country of incorporation of RC. Further, the CFO stated af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the explanation with retrospective effect from 01.04.2002 by Finance Act, 2012, which includes guarantees to fall within the scope of international transaction. After taking note of the factual explanation offered by the assessee, the TPO noted that in the assessee's case, there is no time period for expiry of the bank guarantee and naturally such guarantees would demand more commission charges payable to the banks and the assessee has taken maximum risk in providing such guarantees to its subsidiaries. 35. The TPO compared differences between the guarantee issued by bank and the guarantee issued by the assessee on behalf of its associated enterprise and pointed out that the bank's commission charges is not comparable to the commission charges that are payable to the assessee by the associate enterprise, the assessee is in a position to charge the commission charges along with higher risk premium and it is not a shareholder's activity. The TPO, thus, concluded that it is a clear financial service rendered by the assessee company to their associated enterprise, which has to be compensated by proper commission charges. Based on such conclusion, 2% of ₹ 40862.34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee on 19.03.2013, the Assessing Officer examined the transaction, took note of the suggestions of the TPO, submissions of the assessee and rejected the same and passed a draft assessment order dated 31.03.2013 under Section 143(3) read with Section 92CA(4) read with Section 144C of the Act. The assessee filed their objections before the DRP against the draft assessment order dated 31.03.2013, who rejected the contentions raised by the assessee on all grounds by order dated 20.12.2013. The assessee filed an application for rectification before the DRP and it appears that the assessee filed a writ petition before this Court, which was disposed of on 17.02.2014 directing the DRP to decide the rectification application within a time frame. The first issue raised in the rectification application was regarding the adjustment on account of transfer of shares of RG. The DRP took into consideration the grounds raised and found that the grievances of the assessee were already been redressed by the Assessing Officer himself and therefore, held the said ground to be infructuous. The second ground raised in the rectification application is with regard to the factoring charges, which were dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. Therefore, we need not dwell into the said aspect, but can safely proceed to consider as to whether the theory of gift as pleaded by the assessee has been established, whether it was a valid gift in terms of the definition in Section 122 of the TP Act. Therefore, the discussion in the impugned order of the Tribunal from paragraphs 72 to 79 need not be examined for its correctness, as the legal position is clear in terms of Section 5 of the TP Act. 39. The Revenue does not dispute the fact that the assessee had transferred without consideration its entire share holding in RG to RC on 13.11.2008. The Revenue's contention is that the same is not a gift under Section 47(iii) of the Act for the reason that the assessee transferred the shares only by way of re-structuring the company's investment in RG; neither in the Board Resolution, nor in the deed of share transfer, the word gift has been used, which will clearly demonstrate that the entire transaction is in the form of re-structuring the company. In this regard, specific reference was made to the Board Resolution which stated that it is resolved that towards re-structuring the concern, the Board accorded to tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finition contained in Section 2(iii) read with Section 4 of the Gift Tax Act. Block Stone states that gift are always gratuitous, grants or upon some consideration or equivalent. In several decisions, it has been held that for proving a document of gift was executed with free and voluntary consent of the donor, it must be proved that the physical act of signing the deed coincide with the mental act viz., the intention to execute the gift. The principles laid down in the Indian Contract Act relating to free consent would apply in determining whether gift is voluntary. 41. In Tulsidas Kilachand vs. CIT [AIR 1961 SC 1023], it was held that the word consideration is used in the same sense as in the Indian Contract Act and executes natural love and affection. A transfer in consideration of an acceptance of spiritual and moral benefit, or in consideration of natural love and affection is a gift for such consideration is not with contemplated by the conclusion. The donor is the person who gives the gift. The donee is the person who accepts the gift. In terms of Section 123 of the TP Act for the purpose of making a gift of immovable property, the transfer must be effected by a registe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate Of U.P. [(1981) 2 SCC 585]. The question arose with regard to the interpretation of sub-Section (6) of Section 5 of the Uttar Pradesh Imposition of Ceiling on Land Holdings Act, 1960 and the proviso therein in order to determine the validity of the deed of gift. This decision was pressed into service to explain the concept of gift as contemplated by the T.P.Act and it is submitted that consideration means a reasonable equivalent or other valuable benefit passed on by the promisor to the promise or by the transferor to the tranferee and that a 'gift' is undoubtedly a transfer which does not contain any element of consideration in any shape or form. There cannot be any dispute as regards the general proposition as to what connotes a valid gift, but without considering the factual position, one cannot take a decision as to whether the gift was a valid gift and whether the test laid down under Section 122 of the T.P.Act stands fulfilled. Therefore, in our considered view, the said decision cannot be made applicable to the facts of this case. 43. Reliance was placed on the decision in Goodyear Tire Rubber Co. The decision arose out of a writ petition filed by the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 and Accounting for Investments. 45. In McDowell Co. Ltd., it was held that tax planning may be legitimate provided it is within the frame work of law. The learned counsel for the assessee would contend that the decision in McDowell Co. Ltd., should be read in the manner explained by the Hon'ble Supreme Court in Azadi Bachao Andolan and Vodafone International Holdings B.V. There can be no quarrel to the proposition that the assessing authorities have to look into all the circumstances under which the transaction took place. The authorities are required to examine as well as the Tribunal and Court as to whether the assessee had adopted any ingineous method to avoid taxation. Therefore, the authorities as well as the Courts and Tribunals are entitled to go behind the veil to examine the real intention of the parties in effecting transactions to come to a conclusion whether the gifts were genuine (See Rajeev Tandon vs. ACIT [(2008) 215 CTR 272]). The chain of events speak for themselves; the decision of the Board of the assessee in resolving to approve the transfer of shares with or without consideration is a clear indicator to show that the transaction is not voluntary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer was effected and ultimately the investment landing in a tax haven will clearly show that it is a sham transaction devised to avoid tax in India. Furthermore, RC had no commercial substance on its own and the third party investor acquired about 27% stake in RC because, it had acquired the shares of RG held by the assessee, which were transferred and this acquisition took place within a week after the RG's share was transferred to RC. Thus, the asset owned by the assessee viz., the shares in RG, which were hither to within the network of the Indian tax laws, stood shifted to Cayman Island which is a tax haven. Therefore, it is evidently clear that the entire transaction was so structured to accommodate the third party investor, who has put certain conditions even prior to effecting the transfer and this has been spelt out by the CFO of the assessee in his sworn statement wherein, he would candidly admit that as per the request of the third party investor, they had incorporated RC and, RG's shares were transferred to RC. Thus, the factual matrix clearly demolishes the case of the assessee, as there is absolutely no voluntary element, it was executed for consideration an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the assessee. That apart, we cannot decide the matter on assumptions and presumptions and we are called upon to decide the substantial questions of law on the facts, which were available when the assessments were completed. The argument that no dividend had been declared by RC till date could hardly be a factor to test as to whether the theory of 'gift' as propounded by the assessee was valid and sustainable. Therefore, the argument that if there is no capital gain chargeable under Section 45, there could be no income in terms of Section 2(24) can at best be argued as a general proposition and cannot be applied to the facts of the instant case. Consequently, the decisions in the case of Cadell Weaving Co. P. Ltd., Dheer Co., Dana Corporation cannot be applied to the facts of the instant case. 49. The reliance placed on the decision in Vodafone International Holdings B.V., is stretching the matter far beyond the permissible limit in the given facts. Further, we note from the grounds of appeal filed by the assessee before the Tribunal, no such plea was even remotely canvassed. Thus, dehors foundational facts, we cannot decide these issues for academic purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessment and incidentally, the factual issue has been touched upon and in one of the cases, the Assessing Officer himself did not dispute the theory of gift which is missing in the case on hand. Therefore, both the decisions will not render any assistance to the case of the assessee. It was argued by the learned Senior Counsel that the Tribunal has rendered the factual finding that the transaction is a gift and the said finding, on fact, cannot be interfered in this appeal. To support such contention, reliance was placed on the decision in Gillanders Arbuthnot. 51. We had earlier pointed out that the Tribunal had elaborately examined as to whether a company can execute a gift in favour of another company and after noting the various provisions, rendered a finding that in terms of Section 5, a company would be entitled to execute a gift. However, there is no in depth analysis of the correctness of the findings of the TPO/DRP/Assessing Officer that the essential ingredients of a valid gift remained unsatisfied. Therefore, the Revenue cannot be non-suited from arguing the said contention that the theory of gift itself is false, as none of the ingredients for a valid gift h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s activities of conducting horse races with amateur riders, it charged for admission into the enclosure of the club, a resolution was passed by the General Body for levying surcharge for local charity in addition to admission fee. Receipts on account of surcharge were not treated as trading receipts of the assessee therein and were not brought to tax. The ITO took a different view by holding that the amounts received on account of surcharge is application of the income belonging to the assessee and included it in the total income of the assessee. The first appellate authority affirmed the view taken by the ITO, which was reversed by the Tribunal and upheld by the High Court. On appeal before the Hon'ble Supreme Court, the case was decided in favour of the assessee that the receipts from the surcharge levied on admission tickets for the purposes of charity could not be included in the assessee's taxable income. We fail to understand as to how this decision can render any assistance to the case of the assessee. The factual scenario as projected shows chains of events which took place prior to the incorporation of the subsidiary and step down subsidiary and also the events whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the words on caution expressed by the Hon'ble Supreme Court as regards the duty of the Courts and Tribunals while examining a transaction to consider it as to whether it is legitimate tax planning or device adopted for tax evasion. Factually we have held that the transaction is not covered under Section 47(iii), as it is not a transfer of capital asset under a gift and the authorities below rightly classified the transaction under Clause (iv) of Section 47. The argument of the assessee is that clause (iv) of Section 47 would not be attracted, as it would apply only to a wholly owned subsidiary. It should not be forgotten that we have been called upon to decide as to whether the subsidiary company and the step down subsidiary were incorporated as a device to act as a conduit to avoid tax in India. Therefore, the transaction effected in favour of RG would undoubtedly fall within clause (iv) of Section 47 and the incorporation of the step down subsidiary and transfer of shares in favour of a third party investor within a short span of less than a week for a stake of more than 27% and surrounding circumstances will clearly bring the transaction as transfer of the capital asset by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crue to the Indian company and consequently the transaction does not attract capital gain tax. The incorporation of the new entities in the abroad and transferring a revenue generating asset to such entities will essentially mean that in future the income from such asset will accrue directly to the non-resident and not to the Indian company. In this case, previous to the share transfer, the Indian company was holding the Redington, Gulf's shares and hence dividend declared will accrue to the Indian company. This dividend if accrued to the Indian company has to be taxed in the hands of Indian company as per the Act, and such dividends are not exempted even under DTAA. As matter of fact, this particular issue was studied with respect to the dividend declared by the Redington, Gulf from FY 2005-06 which is tabulated as below:- FY Dividend declared by Dubai Company (which accrued to Cayman Islands company) Dividend declared by Cayman Islands Company (which accrued to Mauritius Company) Dividend declared by Mauritius Company (which accrued to Indian Company) 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the order passed by the Tribunal, allowing the claim of trade mark fee and deleting the addition on account of Corporate and Bank Guarantee. 58. During the Assessment Year under consideration, the assessee had made a payment of ₹ 1,89,33,150/- towards trademark and license fee for using the trademark REDINGTON to its Associated Enterprise, Redington, Singapore. The TPO determined the ALP of the trademark/license fee as 'Nil' on the ground that there is no genuine rationale for payment of the said trademark/license fee to Redington, Singapore. The DRP affirmed the said findings of the TPO. The Tribunal deleted the same by stating that the tax payer is the best judge of his business affairs and it is not for the TPO to question the commercial rationale of payment and in this regard, placed reliance on the decision of the Hon'ble Supreme Court in S.A.Builders. The following factual aspect requires to be noted. The assessee filed an application before the trademark Registry for obtaining registration of the word mark 'Redington' on 29.02.2000. The Trademark Registry issued Certificate of Registration on 17.03.2009 and in terms of provisions of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see name was changed to the present name namely Redington India Limited and subsequently, in 1993, the assessee took over the business of the Branch of Redington, Singapore. Further, the application for registration of the Trademark also refers to the Trademark being used by the assessee since 1986. The learned Senior counsel would submit that in the absence of clarity on facts, the assessee would request this Court to remand the matter back to the Assessing Officer to re-adjudicate the allowability of the deduction on the touchstone of Section 37(1) of the Act. Thus, we have to consider as to whether the TPO had evaluated the commercial expediency behind incurring the expenditure towards Trademark/license fee and if the answer to the said question is in favour of the assessee, then the issue would be whether the determination of the ALP at 'NIL' is proper and lastly whether the prayer made by the assessee to remand the issue back to the Assessing Officer needs to be granted. 61. As could be seen from the order passed by the TPO dated 29.01.2013, the assessee failed to submit any documents to establish that Redington, Singapore was the legal owner of the Trademark. All t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this payment and in the given facts, in an uncontrolled situation, no one would have made such a payment. Hence, they declined to interfere with the order of the TPO. 63. In paragraph 97 of the order passed by the Tribunal, the issue relating to payment of Trademark/license fee has been dealt with. 64. The Tribunal stated that the assessee is exploiting the trademark 'Redington' for the purpose of carrying on its business and there is nothing uncommon in assessee's making payment to Redington, Singapore for use of the Trademark and it is not necessary for the TPO to go beyond this plausible explanation since it is a widely accepted business practice around the world and it is not an unique case for the assessee company alone. Further, it is for the assessee to decide dynamics of its business and the assessee is the best judge to decide on such issues. In this regard, reliance was placed on the decision in S.A.Builders. Unfortunately, the Tribunal did not examine the facts as mentioned above. The TPO has specifically recorded that the assessee did not produce any document to show that the original owner of the Trademark was Redington, Singapore. The admitted fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub- section 3 of Section 92C, then the TPO is bound to determine the ALP in terms of sub-sections 1 and 2 of Section 92C. The finding of the TPO is that there is absolutely no rationale for effecting such a payment to wholly owned subsidiary by the Parent company, the case as projected by the assessee is illogical and in other words, the claim was baseless and therefore, the ALP was determined at 'NIL'. We find no error in the decision making process, considering the factual situation whole of which has been admitted and the assessee miserably failed in dislodging the factual finding rendered by the TPO by producing any document before the DRP. In such circumstances, we find absolutely no justification on the part of the assessee to seek for a remand to the Assessing Officer to redo the assessment on the said issue. For all the above reasons, we hold that the finding rendered by the Tribunal is wholly erroneous and the same is set aside. 67. The next issue is with regard to the Corporate Guarantee and Bank Guarantee. 68. From the Annual Report of the assessee, it was seen that the assessee had issued guarantees on behalf of its subsidiaries to the tune of ₹ 464. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had taken maximum risk in providing Bank Guarantee to their subsidiaries and the entire credit risk is owned by the assessee, the Indian Company and it has to be reimbursed at maximum percentage of fees. Further, the TPO noted as to the manner in which the Bank's charge commission on guarantees extended and observed that the Bank will insist upon cash deposits / guarantee deposits / asset mortgage etc., to extend guarantees on behalf of their clients. Further, it was pointed out that if a situation arises that the Bank Guarantee has to be invoked, when the Associate Enterprise is not in good financial position, obviously, the assessee is at risk and they claim that there is no risk in providing guarantees cannot be accepted. The TPO drew a comparison between the Guarantees issued by the Bank and Guarantees issued by the assessee on behalf of the Associated Enterprise to the Bank. It has been recorded that the Associated Enterprises of the assessee have not provided any security to the assessee. In the agreement / contract between the Associated Enterprises and the assessee, no condition has been imposed on the Associated Enterprises to pay the amount to the assessee and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the decision in Bharti Airtel Limited would apply to the assessee's case. Furthermore, there was no record placed before the Tribunal by the assessee that they have not incurred any cost for providing Bank Guarantee. As observed earlier, the TPO has compared the nature of documentation executed by the assessee in favour of his Associated Enterprise to come to the factual conclusion that it is a financial service. This finding of fact has not been interfered by the DRP, but the DRP was of the view that the same treatment, which was given in the previous Assessment Year should be extended for the Assessment Year under consideration also and there is no reason given by the TPO for taking a divergent view. The finding that the very same transaction for the previous Assessment Year was subject matter of TP adjustment, has not been disputed by the Tribunal rather not even dealt with by the Tribunal. Therefore, the finding rendered by the Tribunal is utterly perverse. 70. The argument of the learned Senior counsel appearing for the assessee is that prior to the amendment brought about in Section 92B by Finance Act 2012, the Tribunal had decided that furnishing of a guarantee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect. That apart, even before the DRP, such contention was not raised. The Hon'ble Supreme Court in Gold Coin Health Food Private Limited, while deciding the issue whether an amendment was clarificatory or substantive in nature or whether it will have retrospective effect held as follows: 14. The presumption against retrospective operation is not applicable to declaratory statutes In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is to explain an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect (ibid., pp. 468-69). 15. Though retrospectivity is not to be presumed and rather there is presumption against retrosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overed by the definition of international transaction after retrospective amendment made by Finance Act, 2012. The assessee argued that the Corporate Guarantee is an additional guarantee, provided by the Parent company. It does not involve any cost of risk to the shareholders. Further, the retrospective amendment of Section 92B does not enlarge the scope of the term international transaction to include the Corporate Guarantee in the nature provided by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist on non-charging any commission from Associated Enterprise as a commercial principle. Further, it has been observed that this position indicates that provision of guarantee always involves risk and there is a service provided to the Associate Enterprise in increasing its creditworthiness in obtaining loans in the market, be from Financial institutions or from others. There may not be immediate charge on P L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; for brevity] Method on the basis of the amount infused by IVC. It was submitted that for argument sake, even if gift of shares are considered as an international transaction, which is required to be tested for arm's length, the same cannot be compared with fund infused by IVC. Since the assessee's investment in RC is strategic and would have different investment objectives when compared to objectives of IVC. IVC is a private equity fund engaged in acquisition of investments, holds them for a certain period (3-5 years) and disposes the same at the end of the agreed period whereas the objective of the assessee is to promote their overseas business including their business in Middle East Africa. It is further contended that IVC gets assured return and this would mean that IVC does not bear the risk of loss that may arise on account of the business of RG. The DRP agreed with the TPO and held that the value of the shares of RC determined at the time of investment by the IVC represents the best possible estimate of the market value RC share and this represents the value of the shares, held by the assessee in RC at the time of its transfer. Having held so, the DRP proceeded to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omics. On analysing the nature of transaction, the TPO recorded as follows: 20.3 ...................The assessee himself had admitted that the International Transactions in question were carried out with a view to list the Dubai business in stock exchanges so that additional funds can be mobilised. Once such listing is done, then the strategic investors like IVC have to exit only through the sale of shares through stock exchange. In such a situation, the investor may earn a good return if the stock does well in the market. He stands to loose if the stock does not do well. Only if the company fails to list the shares within an agreed period of time, the investor is given the exit option with an agreed rate of return on the investment, as it is the inability/failure of the company to list the shares within the agreed timeframe for whatever reasons. 79. The TPO proceeded to discuss about the various cases in the nature, where the Private Equity Investors had lost heavily on their investment as the target company in which they invested faired very badly in the stock market after the listing of their shares. Further, the TPO has also taken note of as to how the funds are very ..... X X X X Extracts X X X X X X X X Extracts X X X X
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