Western India Regional Council of
The Institute of Chartered Accountants of India

(Setup by an Act of Parliament)

August 23, 2019

CA. Bhavesh Dedhia, CA. Bhavya Goyal, CA. Shazia Khatri

  1. The Ministry of Corporate Affairs has amended the Companies (Share Capital & Debentures) Rules by removing Debenture Redemption Reserve requirement for Listed Companies, NCFCs and HFCs wide a press release dated 19th August 2019.
  2. Companies (Share Capital and Debentures) Amendment Rules, 2019 – Amendment in Rules 4, 5, 12 & 18 vide Notification G.S.R. 574(E) [F. No. 1/4/2013-CL-V-Part-III], dated 16/8/2019
  3. Central Government has made Protection of Children from Sexual Offences (Amendment) Act, 2019 (25 of 2019) applicable from 16th August 2019.

Case Law Update

The Pr. Commissioner of Income Tax vs. M/s. S. G. Asia Holdings (India) Pvt. Ltd. [Supreme Court in Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019]

The Assessee had entered into an international transaction of receipt of brokerage income from its parent company. The Assessing Officer (‘AO’) was of the view that the brokerage rate charged was lower than that prevalent in the market. The AO accordingly, made a transfer pricing adjustment under Section 92 of the Act. The said adjustment was made without a reference to the Transfer Pricing Officer (‘TPO’). The CIT(A) upheld the order of the AO. The ITAT setting aside the orders held that the transfer pricing adjustment made by the AO was contrary to the mandatory instructions issued by CBDT in its Instruction No.3/2003 dated 20/5/2003 and therefore bad in law. ITAT has refused to restore the matter observing that “The Tribunal cannot make any good to such lapse made by the AO.” The Hon’ble High Court upheld the order of ITAT.

The Hon’ble Supreme Court observed that a discretion was vested with the AO as per Section 92CA of the Act and it would not be mandatory refer every single case to the TPO. However, the CBDT’s instruction No.3/2003 put across a different perspective wherein it stated that if the aggregate value of international transactions exceeded INR 5 crs, the transactions should be referred to the TPO. In view of the guidelines issued by the CBDT, the Hon’ble Supreme Court upheld that by not making reference to the TPO, the AO had breached the mandatory instructions.

However, the Hon’ble Supreme Court observed that the ITAT ought to have accepted the submission made by the Departmental Representative and restore the file to the AO so that appropriate reference could be made to the TPO. Accordingly, Hon’ble Supreme Court stated -“We, therefore, allow this Appeal to the aforesaid extent and direct that it would now be upto the Assessing Officer to take appropriate steps in terms of Instruction No.3/2003.”

Toyota Kirloskar Motor Private Limited vs. Union of India & Others. [TS-657-HC- 2019(KAR)-TP]

The Assessee is engaged in the manufacture and trading of passenger car and multi-utility vehicles. The Assessee was subject to TP adjustment during the course of assessment proceedings in relation to its international transactions with its AE. The AO also issued a penalty notice calling upon the Assessee to show-cause why a penalty should not be imposed under Section 271(1)(c) of the Act. The Assessee initiated Mutual Agreement Procedure (‘MAP’) under India – Japan DTAA along with appellate route under Indian domestic law. MAP agreement between the competent authorities of India and Japan resulted in the reduction of TP adjustment. This reduced TP adjustment was accepted by the Assessee. The AO gave effect to the MAP and also imposed the penalty on the TP adjustment sustained in the MAP. The Assessee filed an appeal against the penalty order before the CIT(A) on merit and simultaneously preferred a writ petition before the Hon’ble HC challenging the constitutional validity of the penalty proceedings for adjustments sustained under MAP.

The Hon’ble HC upholding the constitutional validity of imposing penalty on TP adjustment determined under MAP observed that “unless a specific provision is made in the Double Taxation Avoidance Agreement in as much as penalty is concerned, the provisions of Section 271[1][c] of the Act shall continue to apply.” The Hon’ble HC observed that unless specific provision is made in MAP waiving the penalty, the penalty under Section 271(1)(c) of the Act would continue to apply.

Having said that, the Hon’ble High Court observed that penalty on TP adjustment sustained in MAP is not automatic. The levy of penalty needs to be adjudicated based on the merits, facts and circumstances and in accordance with the law.

Dy. Commissioner of Income Tax vs. M/s TMW ASPF I Cyprus Holding Company Limited [2019-TII-197-ITAT-DEL-INTL]

The Assessee, resident of Cyprus, is engaged in the business of making investment in real estate sectors via fully convertible debentures (‘FCCDs’). Due to this investment, the investee companies and the Assessee are treated as Associated Enterprises. Per the investment agreements between Assessee and investee companies, there were three independent events:

a) Subscription to FCCDs bearing an annual interest of 4%;
b) Conversion of FCCDs into equity at a conversion price on the completion of the specified term or as may be determined by the parties; and
c) Post conversion, sale of equity shares to the promoters at a consideration providing annualized 18%/19% return on investment.

The last two events are contingent and futuristic. Due to bad financial positions and cash crunch, the investee companies requested for waiver of annual interest and such request was accepted by the Assessee. Also, part of FCCDs held in one of the investee company was sold to a third party during the year at a loss.

During the TP assessment proceedings, the TPO observed that an independent company would be compensated at higher value than the rate of 4% agreed by the Assessee. Further, the TPO observed that the Assessee was to earn an assured interest rate of 18%. As the interest paid also includes payable, the TPO computed TP adjustment with respect to notional interest income in the hands of non-resident Assessee at the rate of 18% instead of 4%. The DRP deleted the adjustment. Revenue Department filed an appeal before the ITAT.

The ITAT observed that, the TP adjustment has been made on hypothetical amount of interest receivable and based on contingent event which Assessee was supposed to receive. The ITAT upholding the directions of DRP ruled that – “If income is not taxable in terms of section 4, then chapter X cannot be made applicable, because section 92 provides for computing the income arising from international transactions with regard to the ALP. Only the interest income chargeable to tax can be subject matter of transfer pricing in India. Making any transfer pricing adjustment on interest which has neither been received nor accrued to the assessee cannot be held to be chargeable in terms of the Income Tax Act read with Article 11(1) of DTAA. Here it cannot be the case of accrual of interest also, because none of the investee companies have acknowledge that any interest payment is due, albeit they have been requesting for waiving of interest of even coupon rate of 4%, leave alone the return of 18% which was dependent upon some future contingencies.”

M/s. DE Shaw India Advisory Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax [2019-TII-381-ITAT-DEL-TP]

The TPO held inter-company receivables arising from the international transactions undertaken by the Assessee to constitute a separate international transaction and alleged a notional interest on the same.

The ITAT remanded the matter to the file of the AO following the coordinate bench ruling in Assessee’s own case and appreciating Hon’ble High Court decision in case of Kusum Health Care Pvt. Ltd. in I.T.A. No. 765/2016 wherein it was observed that “The inclusion in the Explanation to Section 92B of the Act of the expression ‘receivables’ does not mean that de hors the context every item of ‘receivables’ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.”

Pr CIT vs S.G. ASIA HOLDINGS (INDIA)PVT. LTD {Supreme Court of India}

The assessee, S.G. Asia Holdings (India) provides broking and clearing services to associated and unrelated parties. During AY 2005-06, assessee, received brokerage from its parent company SG Paris (AE) at 0.06% (after excluding transaction charges, investor protection fund, stamp duty, etc.). As the brokerage was at a lower rate, AO held that AE was involved in directional trade and brokerage was calculated based on the rate prevalent in the market i.e. 0.25% for cash market and 0.05% for futures. Thus, addition of Rs.2.89 crores was made by AO which was confirmed by CIT(A) vide order dated 16/2/2009.

ITAT order:

Mumbai ITAT set aside the CIT(A)’s findings and held that TP adjustment made by the AO without referring the matter to TPO was contrary to the mandatory instructions issued by CBDT in its Instruction No.3/2003 dated 20/5/2003. ITAT also clarified that while the assessment order was good in law, the TP adjustments made therein were bad in law.

HC order:

Hon’ble High Court in its order affirmed ITAT’s decision. In context of the given case, the HC noted that given the nature of the transaction, the Instruction No. 3/2003 was applicable and accordingly opined that “If they were applicable, then, there ought to be some solid ground for ignoring a mandate flowing therefrom. The mandate is that the Assessing Officer should make a reference to the Transfer Pricing Officer. That is to make the transfer pricing adjustment.”

Thus, HC concluded that, “The Tribunal’s possible view in the backdrop of these facts and circumstances cannot be interfered with.”

The revenue filed a SLP before the SC.

SC order:

SC rejected Revenue’s argument that the expression in Instruction 3/2003 to the extent that “...the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm’s length price in relation to the said international transaction or specified domestic transaction under Section 92C to the Transfer Pricing Officer” occurring in Section 92CA of the Act signified that discretion was vested in AO and it would not be mandatory in every single case that he must refer the issue of ALP-computation to TPO.

In this regard, SC noted that certain expressions in Instruction 3/2003 put the matter in a different perspective, such as: “...The Assessing Officer can arrive at prima facie belief on the basis of these details whether a reference is considered necessary.

No detailed enquiries are needed at this stage and the Assessing Officer should not embark upon scrutinizing the correctness or otherwise of the price of the international transaction at this stage... If there are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprise the aggregate value of which exceeds Rs.5 crores, the transactions should be referred to the TPO…”, “Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment” and “….Role of the Assessing Officer after receipt of “arm’s length price”: Under sub-section (4) of section 92C, the Assessing Officer has to compute total income of the assessee having regard to the arm’s length price so determined by the TPO.”

SC held that “In view of the guidelines issued by the CBDT in Instruction No.3/2003 the Tribunal was right in observing that by not making reference to the TPO, the Assessing Officer had breached the mandatory instructions issued by the CBDT”. However, SC remarked that ITAT ought to have accepted Revenue’s submission of restoring the matter back to the file of AO so that appropriate reference could be made to TPO. Thus, SC opined that “It would therefore be upto the authorities and the Commissioner concerned to consider the matter in terms of Sub-Section (1) of Section 92CA of the Act”.

Accordingly, SC concluded by stating that “We, therefore, allow this Appeal to the aforesaid extent and direct that it would now be upto the Assessing Officer to take appropriate steps in terms of Instruction No.3/2003.”

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