Company gifting shares to a foreign company is exempt u/s 47(iii) and also not an international transaction u/s 92B – Chennai ITAT

Redington (India) Limited v JCIT (ITA No.513/Mds/2014 dated 07.07.2014) – Chennai ITAT

Background:

The assessee, M/s. Redington (India) Limited provides end-to-end supply chain solutions for all categories of Information Technology(IT) products. The assessee has a wholly owned subsidiary company M/s. Redington Gulf FZE(‘RGF Gulf’) in Dubai. In 2008, a Private Equity Fund(PE fund)- IVC evinced interest to invest in the overseas operations of the assessee group. The assessee company set up another wholly owned subsidiary company in Mauritius in July, 2008 (‘RIML Mauritius’). The assessee made an initial investment of US$ 25000 equivalent of ` 10.78 lakhs. The said newly set up subsidiary M/s. RIML Mauritius, in turn, set up its own wholly owned subsidiary in Cayman Islands (‘RIHL Cayman’). IVC has infused a sum of US$ 65 millions into M/s. RIHL Cayman for fresh allotment of shares.

After the above incorporation exercises, the assessee company transferred its entire shareholding in M/s. RGF Gulf to M/s. RIHL Cayman on 13th November, 2008. The transfer was made without any consideration. Once this transfer of shareholding was made, RGF Gulf became a step down subsidiary of RIML Mauritius and the assessee company. As the shares were transferred without consideration, the assessee company took the stand that it is a gift within the meaning of section 47(iii) and therefore, not chargeable to tax as capital gains. Further, it is also not an international transaction. It stated that in order to come under the purview of an international transaction, the transaction must generate income. 

The TPO held that the transfer of shares made by the assessee is an international transaction. In computing the value of shares transferred by the assessee, the TPO has adopted the price paid by IVC, the PE fund on allotment of shares in RIHL Cayman, as the comparable. The fresh infusion of funds by M/s. IVC and allotment of shares in M/s. RIHL Cayman, resulted in M/s. IVC, holding a stake of 27.17%. The TPO extrapolated the said shareholding and determined an amount of US$ 174.23 millions, as representing 100% of the value of M/s. RIHL Cayman and on that basis determined the ALP of RGF Gulf shares transferred by the assessee. Accordingly, the TPO determined the ALP of M/s. RGF Gulf shares at Rs 865,40,04,100. The Assessing Officer modified the above gross amount by setting off the indexed cost of acquisition and determined the long term capital gains adjustment at Rs 610,15,75,820.

The DRP stated that a gift as generally understood is made out of love and affection by natural persons; that corporate entities cannot make gifts, as the term “gift” in sec.47(iii) is used in conjunction with the word “will”. It directed to give a marginal relief in the capital gains addition proposed against the transfer of shares. They accepted the argument that in view of the buy-back agreement between the Venture capital fund (PE fund) and the assessee, the PE investment was relatively risk-free. Consequently, the DRP agreed that to the extent of the risk premium, the market price of the shares would be less than what was paid by the PE fund. The DRP estimated this risk factor at 10% and directed the Assessing Officer to allow 10% adjustment by way of reduction in the ALP of RGF Gulf shares. This relief is worked out at ` 88.51 crores. (more…)

Penalty u/s 271(1)(c) not applicable in case of bonafide mistake on account of change in law – Supreme Court

CIT v Chittorgarh Kendriya Sahakari Bank Ltd (SLP - CC No(s). 8127/2014 dated 02.07.2014)

Supreme Court dismissed the SLP filed by Tax Authorities against the Rajasthan High Court ruling in the case of Chittorgarh Kendriya Sahakari Bank Ltd [2014] 41 taxmann.com 11 wherein it was held penalty under section 271(1)(c) levied upon the assessee on incorrect claim for deduction was not justifiable as the same was on account of change of law and therefore, a matter of bona fide mistake. (more…)

BUDGET 2014 – Analysis of the key Direct Tax Proposals

The Union Budget for the year 2014-15 was tabled by the Finance Minister Mr Arun Jaitley on 10 July 2014. 

Certain significant tax proposals contained in the Finance (No.2) Bill, 2014 were made by the Finance Minister during the Budget 2014-15 speech. 

In relation to the retrospective amendments made in earlier Budgets, the Finance Minister recognized the harsh implications in the international business community. The Finance Minister proposed that all fresh cases of indirect transfer taxation arising will be scrutinized by a high level committee. Unfortunately, contrary to expectations, the budget does not contain any proposal to provide relief to taxpayers who are already in litigation on this matter.

Most of the direct tax proposals in the Finance Bill, 2014 are effective from the financial year commencing on 1 April 2014, unless otherwise specified.

Click here to download an analysis of the key Direct Tax Proposals in the Budget

Linkedin Profiles of Employees can be used to determine PE in India – Delhi ITAT’s interim order

GE Energy Parts Inc v Addl DIT ITA No. 671/Del/2011 dated 04.07.2014 (Delhi ITAT’s interim order)

Decision:

Whether Re-assessment proceedings are valid:

  • In the reasons recorded by assessing officer it was categorically stated that the information regarding the employees of GE in India prior to the present expats was not given by GE group.  
  • Assessing officer had recorded a finding that there had been the persons working for such sales through out the period 1-4-2000 to till date. This factual finding recorded by assessing officer was not objected to by the assessee while filing objections before assessing officer. 
  • It cannot be said that assessing officer had not made inquiries regarding the employees of GEIPL who were working for other GE entities. The assessee did not provide this information. In the back drop of these facts, now the department is seeking admission of Linkedin profiles of various employees which has been down loaded from the website and is available in public domain.

On Admissibility of additional evidence:

  • Section 254(1) provides that the Tribunal may, after giving both parties to the appeal an opportunity of being heard, “pass such orders therein as it thinks fit”. Section 255 deals with the procedure before the Appellate Tribunal in discharge of its powers and functions.
  • On perusal of the above section, Tribunal has all the powers vested in it which are vested in the income-tax authorities with reference to section 131.
  • The basic ingredient for exercising powers under Rule 29 for admission of additional evidence is that Tribunal should come to the conclusion that a particular document would be necessary for consideration to enable it to pass orders or for any other substantial cause. The document can be brought to the notice of Tribunal by either party.
  • The Tribunal is final fact finding body and, therefore, the powers have been conferred on it u/s 131 and Rule 29 to enable it to record a factual finding after considering the entire evidence. For dispensation of justice wide powers have been given to Tribunal.

On LInkedIN profiles:

  • Ld. Sr. Counsel has submitted that Linkedin profiles is an hearsay evidence and has no probative value. In this regard ld. Sr. counsel has relied on two decisions of US courts.  Further, Linkedin profiles is self appraisal of employees and, therefore, it is hearsay evidence.
  • We are unable to accept this contention. Linkedin profiles is not in the nature of hearsay because it is the employee who himself has given all the relevant details and the same relate to him. These detalis are akin to admission made by a person. No third party is involved in creating of this Linkedin profiles and, therefore, it cannot be said to be an hearsay evidence.
  • The Linkedin profiles are in the nature of admissions of persons on their job profile. The data is in pubic domain.

On violation of S. 47(xiiib) (for LLP), capital gains to be computed considering value at which assets are transferred and not the market value – Kol ITAT

Aravali Polymers LLP v JCIT (I.T.A. No. 718/Kol. / 2014 dated 27.06.2014) (Kol ITAT)

Background:

A Private Limited Company namely Aravali Polymers Pvt. Ltd. was converted into a Limited Liability Partnership under section 56 of the ertwhile Companies Act and the assessee Aravali Polymers LLP came into existence. After the conversion of the Private Limited Company into the Assessee LLP, 31,84,807 equity shares of the East India Hotels Ltd. was sold by the appellant for an amount of Rs.53,56,69,888/- and the same was offered for taxation as long-term capital gains. After paying the capital gains tax, the assessee had approximately Rs. 49 crores profit. The assessee had also received Reserves and Surplus amounting to Rs.3,06,31,969/- of the Private Limited Company. The assessee had given an amount of Rs.50 crores as interest-free loans to the partners of the LLP. When the assessee filed its return, the assessee had offered the capital gains on the sale of the equity shares of East India Hotels Ltd. and had also claimed exemption under section 47(xiiib).

The AO observed that the assessee had provided interest-free loan to the partners of the assessee-firm out of the Reserve and Surplus received by the assessee firm on the conversion. The AO held that there was violation of the provisions of section 47(xiiib) and consequently held that in view of the provisions of section 47A(4), the amount of profit and gains arising from the transfer of the capital assets or shares is to be profit and gains chargeable to tax on the assessee. The AO adopted the value of the shares in East India Hotels Ltd. held by the Pvt. Limited Company and transferred to the assessee-firm as liable to be valued at market price as on the date of the transfer(more…)

Reimbursement of costs to AE without markup cannot be treated as ALP in the absence of TP Study – Delhi HC

CIT v M/s CUSHMAN AND WAKEFIELD (INDIA) PVT LTD [ITA No.475/2012 dated 23.05.2014] (Delhi HC)

Background:

The assessee, an Indian company, is engaged in the business of rendering services connected to acquisition, sales and lease of real estate and other services. The assessee reported following transactions under Section 92B:

(a) Payment of referral fee of Rs. 1,73,26,631/- by the assessee to several foreign AEs for referring clients, and

(b) Payment of Rs. 1,06,39,865/- as reimbursement to CWS (Singapore entity) and CWHK (Hong Kong entity) for costs incurred by them for certain coordination and liaison services in respect of their client, IBM.

No benchmarking or a transfer pricing analysis was conducted by the assessee. In this respect, the transfer pricing study submitted by it stated:

“A cost sharing agreement is a commercial decision of the company and helps the company liaise with international clients; it helps create a better understanding of client needs and disseminate information of the real estate market in India. The effort of these individuals is not a full marketing effort but provides a liaison and market access basis for the Company. The strong international presence of the Cushman and Wakefield group places it is a better position to identify and engage such a professional in a more cost effective manner than for the Company to do so directly with its own efforts.”

In respect of the reimbursement of costs to the AEs, the TPO disallowed deduction of the expenditureAdditionally, the AO disallowed the referral fees as a deductible expenditure, stating that no benefit was derived by the assessee from the referral fees paid to the AEs. The assessee preferred objections before the Dispute Resolution Panel (“DRP”), against both findings. The DRP concurred with the AO, leading to a final assessment order under Section 143(3) read with Section 144C. The assessee then appealed to the ITAT, which held in its favour.   (more…)

Transfer pricing adjustment not required for 10A unit where exempt income declared is lower than ALP – Ahmd ITAT

Motif India Infotech (P.) Ltd. v  ACIT [IT APPEAL NO. 3043 (AHD.) OF 2010 dated 25.03.2014] – Ahmedabad ITAT

Background:

Assessee is an offshore business process outsourcing service provider whereby it renders data support services. Before the Transfer Pricing Officer (“TPO”), the assessee submitted that Transfer Pricing Laws are not applicable to the assessee as its income was exempt under section 10A. The assessee relied on the decision of the Bangalore Tribunal in the case of Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226. TPO did not accept the contention of the assessee stating that proviso to section 92C clearly provides that no deduction u/s 10A or section 10AA or sec 10B or Chapter VI A shall be allowed in respect of the amount of income by which total income of the assessee is enhanced after computation of ALP. TPO held that The TPO held that the assessee had disclosed its profit derived from the said business at the rate 17.89%, whereas on the basis of some comparable cases TPO determined the same at 34.26%(more…)

Sales promotion and marketing activity cannot be construed as ‘fees for technical service’ – AAR

OXFORD UNIVERSITY PRESS (AAR No.1110 of 2011)

Background

The assessee (applicant) is engaged in publishing, printing and reprinting of educational books for schools, Universities, Professional and other educational institutions or scholarly books. The applicant has appointed Ms Geetha Kumararaja, a resident of Colombo, Sri Lanka as a marketing executive that involves promotion of sale of books published by the applicant. The question before the AAR was whether the remuneration received by Ms Geetha was chargeable to tax in India and consequently, whether the payment should be subjected to tax deduction under the income tax Act.  (more…)

Delhi HC lays down important principles in treatment of profit on sale of shares lying in PMS

RADIALS INTERNATIONAL v ACIT ITA No.485/2012 dated 25.04.2014 (Delhi HC)

Background:

Assessee is a partnership firm, engaged in the business of providing technical, marketing and maintenance services. Assessee offered the profit on sale of shares lying in PMS as capital gains. The AO held that since the motive of the transactions was the earning of profit and not a dividend, where the holding period was ranging from a few days to a few months, it was concluded that the income was business income earned by way of adventure in the nature of trade.

Commissioner of Income Tax (Appeals) held that the intention at the time of purchase and sale, the magnitude and frequency of transactions has to be seen to test whether the sum of gain made “was a mere enhancement of value by realizing a security” or a “gain made in operation of business in carrying out a scheme for profit-making”. It was concluded that the shares were not in the nature of property which yielded any income or personal enjoyment to the owner, by virtue solely of its ownership. Thus, the intention was concluded to be profit-making, and the gains were found to be business income.  (more…)

No disallowance of interest, if interest-free unsecured loans are sufficient to meet interest-free advances – Guj HC

CIT v KAJAL EXPORTS [Tax Appeal No. 756 of 2013 dated 23.01.2014] (Gujarat High Court)

Background:

Assessee is engaged in business of export activities. During the course of assessment proceedings, the AO observed that the assessee had made borrowings throughout the year under the banner of business necessity and on review of the purchases and the sales patterns of the assessee, held that the funds borrowed were utilised for purposes other than business. The AO further noted that the assessee had advanced money to close relatives/ sister concerns without charging the interest. Accordingly, the AO disallowed the interest expenditure.

CIT(Appeals) concluded that the borrowed funds were not used for the business purposes in the AY 2003-04 and the AO was justified in disallowing the expenditure on such borrowed funds to the extent it is claimed in the P&L account. The Tribunal deleted the entire amount except Rs.21,900/-, i.e. 15% of Rs.1.46 lakhs.  (more…)

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