9911796707
TMI Blog2024 (8) TMI 222X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreed Revenue Certificates reflects Revenue higher than the Target Revenue but lower than the 2019 Revenue, then, the manner of determination of the quantum of deferred consideration and its time of accrual shall be as prescribed therein. We find that as per section 45 any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax in the previous year in which the transfer took place, such capital gains has to be computed as per section 48 of the Act. It is well settled by now that, the charging provision and the computation provision has to be read together. A bare perusal of section 48 shows that such income has to be computed by deducting from the full value of consideration received or accrued as a result of the transfer of the capital asset the specified heads of expenses/cost as provided therein. Therefore, what is relevant is the full value of consideration 'received' or 'accruing' as a result of the transfer. In the present case, it is an admitted position that the deferred consideration was not received during the previous year relevant to AY 2021-22. Hence, the issue is whether such consideration could be regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rong objection against the assessee. So, we admit the additional ground of the assessee and we remand the matter back to the file of the AO for adjudication denovo. - Shri Anikesh Banerjee, Judicial Member And Miss. Padmavathy S., Accountant Member For the Assessee : Shri Nitesh Joshi For the Respondent : Smt. Shailaja Rai, CIT. DR ORDER PER ANIKESH BANERJEE, J.M: Instant appeal of the Revenue was filed against the order of the Learned Deputy Commissioner of Income-tax, Circle 2(2)(2), Mumbai passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (in short, the Act ), date of order 23.10.2023 for Assessment Year 2021-22. The impugned order is emanated from the direction of the Dispute Resolution Panel-I, Mumbai-2 order passed under section 144C(5)of the Act date of order 27/09/2023. 2. The assessee has taken the following grounds of appeal: - Ground No. 1: Year of taxability of deferred (i.e.. contingent) consideration of Rs. 131,18,91,783 1.1. The learned AO/ DRP erred in facts and in law in concluding that the deferred (i.e., contingent) consideration is taxable in the year under consideration without appreciating that the 1.2. Without prejudice, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash balance USD 0.26 million plus the refund consideration all are taken together as sale consideration. The notice was issued for initiating the assessment proceedings and it is found that 10% of the income was not taken during the impugned assessment year which is amount to Rs. 131,18,91,783/- which is treated as deferred income. As per the assessee it is a contingent in nature and income received for 18 months so the next six months was taken in the next assessment year i.e. in A.Y. 2022-23. The assessee earned dividend also from the company amount to Rs. 209,57,89,065/- and offered tax @5% in view of Most Favoured Nation (MFN) clause in the protocol to India Netherlands Treaty (DTAA) read with India Slovenia DTAA and the decree issued by the Netherlands accepting the lower tax rate applying MFN. The assessee has claimed lower tax @5% in view of Article 10(a) of India Slovenia DTAA, but the revenue has confirmed the tax @10% on dividend for the assessee. The assessee further claimed the cost of acquisition will be increased. As per the assessee s submission, the refund computation was filed and additional claim for cost of acquisition seems inadvertently lower cost was claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration (i.e., point 2 above), the same is offered to tax in the subsequent assessment year (AY 2022-23) since the conditions in clause 2.6 and 2.7 were fulfilled in FY 2021-22. Copy of the ITR form for AY 2022-23 is enclosed at Annexure E which evidences that amount has been duly offered in the return of income. Further, in case where any income is payable to a person outside India in foreign currency, then such income needs to be converted into Indian Rupees as per telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted as per Rule 115 read with Rule 26. For the purposes of the computation of capital gains, SBI U Buying Rate (1USD - INR 73.95) as on 03 November 2020 has been considered as tax is deducted by the buyer on this date. 4.1. The assessee vide submission dated 22.12.2022 uploaded its reply along with working of deferred consideration of USD 1,77,40,254/-. On considering the submission of the assessee, show cause notice has been issued on 23.12.2022 which was duly served upon the assessee. Vide above show cause notice, the assessee was asked as to why deferred sale consideration of US$ 1,77,40,254/-should not be added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red consideration is nothing but amount which was accrued to the assessee to be received in future period of 18 months only. 6. In view of the above discussion, the amount of deferred consideration of Rs. US$ 1,77,40,254/- equivalent to Rs. 131,18,91,783/-(1 US $=Rs.73.95) is added to the total income of the assessee. Penalty proceeding u/s. 270A of the Act for under reporting is initiated. 4. The Ld.AR also placed that the fair market value is deemed to be full consideration. The Ld.DRP has considered the issue from a different angle and directed to implement section 50D for computation of capital gain on deferred gain. The relevant paragraph of the order of DRP is reproduced as below: - 5.2.3 The Ld.AR has submitted and argued that the said consideration is contingent in nature and has accrued only in the subsequent A.Y. i.e. 2022-23 even if this stand of assessee is considered , the issue is squarely covered by the provisions of section SOD of the I.T. Act. The provisions of section SOD are being reproduced here as under: Fair market value deemed to be full value of consideration in certain cases. 5OD Where the consideration received or accruing as a result of the transfer of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Clause 5.2(a); and (b) the Total Deferred Consideration shall be paid by the Purchaser to the Sellers, subject to Clause 2.6 and in accordance with Clause 2.7 below, within 18 months of the date of this Agreement (the Deferred Consideration Period), in the proportion set forth in Schedule 5. 2.4 The Company shall prepare, and the Purchaser shall procure that the Company prepares, Revenue certificates (the Revenue Certificates) in the format provided in Schedule 14, each month following the Closing Date, each six-month rolling period within the Deferred Consideration Period starting from the date following the Closing Date, unless the Closing Date falls within the first 21 days of a calendar month, in which case starting from the first day of such calendar month in which Closing occurs (each such period, the Revenue Period), specifying in each such Revenue Certificate, the Company's Revenue for the relevant Revenue Period multiplied by two, and provide such Revenue Certificates to the Sellers within three Business Days of the end of each month (Date of Revenue Certificate). By way of illustration, the Company shall be required to obtain its first Revenue Certificate at the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree Business Days of the Decision Date, whichever is later, I but in any event before the expiry of the Deferred Consideration Period, in accordance with Clause 2.7; or (e) Notwithstanding the above, the Purchaser shall pay the Sellers the amount equivalent to the Refund Consideration, if any, within three Business Days of the Actual Consideration Longstop Date. 6. The Ld.AR respectfully relied on the following judgements: - 6.1 Commissioner of Income-tax-8, Mumbai vs Mrs. Hemal Raju Shete (2016) 68 taxmann.com 319 (Bombay): 8. In the present case, from the reading of the above clauses of the agreement the deferred consideration is payable over a period of four years i.e. 2006-07, 2007-08, 2008-09 and 2009-10. Further the formula prescribed in the agreement itself makes it clear that the deferred consideration to be received by the respondent-assessee in the four years would be dependent upon the profits made by M/s. Unisol in each of the years. Thus in case M/s. Unisol does not make net profit in terms of the formula for the year under consideration for payment of deferred consideration then no amount would be payable to the respondent-assessee as deferred consideration. The consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144 Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., the accrual of its income or its receipt; but the substance of the matter is income, if income does not result, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialize. In this case Rs. 20 crores cap in the agreement is not income in the subject assessment year. It has been observed by the Apex Court in the case of KP. Varghese v. 1TO [19811 131 ITR 59.7/7 Taxman 13 that one has to read capital gain provision along with computation provision and the starting point of the computation is the full value of the consideration received or accruing . In this case the amount of Rs. 20 crores is neither received nor it has accrued to the respondent-assessee during the subject assessment year. We are informed that for the subsequent assessment year (save Assessment Year 2007-08 for which there is no deferred consideration on application of formula), the Assessee has offered to tax the amounts which have been received on the application of formula provided in the agreement dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount would accrue to the assessee only on fulfillment of certain condition. Further, joint reading of clause 7.3 and clause 7.4 shows that if the condition mentioned in clause 7.3 is not fulfilled, then business purchase agreement will be terminated. Thus, the deposit in Escrow Account is intrinsic ar integral to the transfer of marketing division under business purchase agreement without it, the sale shall incomplete. Further, clause 3.1 and clause 3.9 is prescribed that assessee and the purchaser shall enter into agreement for the supply by the seller of pharmaceutical product that is manufactured by assessee. A draft of supply agreement was also prepared as a part of business purchase agreement as a schedule to the agreement. 33. In our view, once the condition of contract is reduced in writing, one must look at the substance of term i the contract. The contract must be read as a whole and not in a pick and choose manner. Further, the intent of parties must be found in the words used by them and if more than one interpretation is possible, one whit gives effect and proper meaning of all parts of the contract should be adopted. 34. The Hon'ble Supreme Court in Bharat Aluminiu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that The test of accrual is whether there is a right to receive the amount though later and such right is legally enforceable. the conclusions drawn are entirely incorrect and based on misconceptions / incorrect application of facts and law. 10.12 Further, the learned AO has noted (at para 5 of the draft assessment order) the following aspects for concluding that the deferred consideration should be taxed in the captioned year i.e., AY 2021-22: the assessee has claimed entire purchase consideration during the year the share transfer has completed during the year; the deferred consideration was received on 18 May 2021 which is before filing of return for AY 2021-22. 10.13 The assessee submits that the conclusions drawn by the learned AO based on the above are entirely misplaced. In this regard, the assessee submits as under: There is no dispute that the share transfer was undertaken and completed during the captioned year i.e., AY 2021-22. On this basis, the assessee correctly claimed the entire purchase consideration while computing capital gains for AY 2021-22. The assessee also correctly offered full value of sales consideration i.e., entire sales consideration, excluding the &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it in A Y 2021-22. Further, the buyer has deducted taxes from the 'deferred (contingent) consideration' in AY 2022-23. The assessee has claimed credit thereof in AY 2022-23. 10.14 Accordingly, the assessee submits that deferred (contingent) consideration cannot be brought to tax in the captioned AY. 10.15 Without prejudice, the assessee submits that if the deferred (contingent) consideration is to be taxed in AY 2021-22, corresponding credit needs to be given in A Y 2021-22 for the taxes deducted thereon by the buyer amounting to Rs. 14,33,14,056. 5.2 Discussion and Direction of the DRP: 5.2.1 The Panel has considered the content of the objection, the submissions made by the Ld.AR, the stance of the Ld.AO in his draft assessment order and the argument made by the Ld.AR during the hearing of the case. 5.2.2 The Panel notes that the AO is justified in taxing the deferred consideration in the instant assessment year. According to the AO the total consideration is already determined and fixed. Therefore, the 'test of accrual', wherein the right to receive the amount is created, applies in this case. 8. We heard the rival submission and considered the documents availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 million and the 'Deferred consideration' of USD 28.1 million. In this regard, clause 2.3 of the SPA is reproduced hereunder for ease of reference: 2.3 The purchase consideration payable by the Purchaser to the Sellers for the Sale Share shall be US$ 285 million plus the Cash Balance plus US$ 0.26 million plus the Refund Consideration together, the Sale Consideration of which: (a) The Closing Date Consideration shall be paid by the Purchaser to the Sellers on the Closing Date in accordance with Clause 5.2(a); and (b) The Total Deferred Consideration shall be paid by the Purchaser to the Sellers, subject to Clause 2.6 and in accordance with Clause 2.7 below, within 18 months of the date of this Agreement (the Deferred Consideration Period), in the proportion set forth in Schedue 5. For the aforesaid purpose, the meaning of the 'Closing Date Consideration' and the 'Deferred Consideration' which are also reproduced hereunder: Closing Date Consideration means US$ 256.0 million).plus the Cash Balance plus US$ 0.26 million; Deferral Consideration means the INR equivalent of US$ 28. 1 million the realised Deferred Consideration, as the case may be, as per the fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transfer. In the present case, it is an admitted position that the deferred consideration was not received during the previous year relevant to AY 2021-22. Hence, the issue is whether such consideration could be regarded as accrued during the said year. The stage of 'accrual1 is reached only when the assessee has a legally enforceable right to receive the said amount. In the present case, as explained in greater detail hereinabove, the deferred consideration was contingent on achievement of Revenue in excess of the Target Revenue/ the 2019 Revenue by HAMSPL. If the said event had not occurred, the assessee would not be entitled to any deferred consideration. In our considered view that the ld. AO has erred in not appreciating the deferred (contingent) consideration was contingent in nature and accrued only in the AY 2022-23. We respectfully relied on the order of the jurisdictional High Court in the case of Mrs.Hemal Raju Shete (supra) and order of Coordinate bench in the case of Universal Medical (P) Ltd(supra). So, the ground of the assessee succeeded. Accordingly, the appeal of the assessee in Ground no 1.1 is allowed. 8.2. Related to grant of credit of Rs. 14,33,14,05 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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