| 2018-TII-INSTANT-ALL-528 | 09 February 2018 |
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CASE LAWS DAIMLER INDIA COMMERCIAL VEHICLES PVT LTD Vs DCIT: MADRAS HIGH COURT (Dated: January 30, 2018) Income tax - Writ - Sections 92CA, 92E, 143(3) & 148 Keywords - ALP - escape of income - order of TPO - reasons for reopening - verification of Form 3CEB The Assessee company is incorporated with its main objects being designing, manufacturing, distributing, selling and conducting research and development of commercial vehicles and related products and components for Indian and overseas markets. For the A.Y 2009-10, it had filed the return declaring loss, which resulted in scrutiny proceedings and the case of assessee was referred to the TPO u/s 92CA, for determination of ALP of the international transaction done by assessee with its AE. During TP proceedings, the TPO accepted the ALP and the AO after considering the order of the TPO and independently examining the documents placed on record by assessee, completed the assessment u/s 143(3). Subsequently, the AO seeks to reopen the assessment, for which the assessee objected stating that reopening notice was beyond jurisdiction, barred by limitation, based on change of opinion etc., and hence liable to be quashed. The ACIT however rejected the objections raised by assessee. On Writ, the HC held that, Whether mere escape of income is sufficient to justify initiation of reopening after expiry of four years, unless such escapment is by reason of the failure on the part of assessee to fully disclose material facts necessary for assessment - NO: HC Whether the AO has power to review his earlier order, in the garb of reopening such assessment order - NO: HC Whether AO can seek departure from the Form No. 3CEB furnished by Assessee before TPO, for purpose of initiating reopening, by claiming that he is not duty bound to verify such Form - NO: HC + it is seen that in the reasons for reopening, the Assessing Officer would admit that he has referred to the details mentioned in the annexure to the return filed by the assessee for the assessment year 2009-10. Thus, there was no independent material to come to the conclusion that there has been no full and true disclosure made by the assessee. In such circumstances, it has to be seen whether the AO was justified in reopening the assessment year. It is seen that High Court of Delhi in the recent decision in case of TATA Power Delhi Distribution, considered this very issue wherein it was pointed out that the expression "reason to belief" was subject matter of extensive discussion by the Full Bench of High Court of Delhi, in CIT Vs. Kelvinator of India Limited - 2003-TIOL-179-HC-DEL-IT-LB and the Supreme Court considered the correctness of that judgment and held that information received by AO after completion of assessment alone, is the sound foundation for exercising power u/s 147 r/w/s 148. Therefore, the Court rejected the contention of Revenue. However, it was pointed out that as far as the judgment in A.L.A. Firm is concerned, assessment was for the year 1961-62, whereas Section 147 was amended in 1989, Consequently, the declaration of law in A.L.A. Firm was of the pre existing law and the law as existed was dealt with in Kelvinator of India Limited; + it is therefore seen that the Supreme Court of India in Kelvinator of India Limited - 2003-TIOL-179-HC-DEL-IT-LB has observed that the AO has no power to review, but he has the power to reassess. However, reassessment has to be based on fulfilment of certain preconditions and if the concept of "change of opinion" is removed, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the AO. In the light of this legal position, the impugned proceedings are liable to be set aside for the sole reason that there was no tangible material available with the AO except that which was disclosed in the return of income filed by assessee for the relevant assessment year. This has been held to be not a sound foundation for exercising power u/s 147 r/w/s 148, and therefore, this would be sufficient to set aside the impugned proceedings. However, since elaborate submissions were made on either side, touching upon the factual issues only to test whether reopening was justified or whether it was a change of opinion, this Court proposed to consider the said issue. The question revolves upon whether the assessee had made full and true disclosure with regard to the year of commencement of business; + the counsel for assessee pointed out that this aspect was mentioned in the return of income and duly explained in the notes to the financial statements, which forms part of the return and specifically dealt with by the TPO, as it was disclosed by the assessee in Form No.3 CEB. The AO issued notices u/s 142(1) and called for information. A brief note on the business activity of the Company was furnished which shows that the assessee was to set up a truck manufacturing facility with R & D facility activity for Research and Development. The TPO considered this issue and while passing the order, specifically recorded that the commercial production proposes to start in the year 2012. This material was available and considered by the AO in scrutiny proceeding. The counsel for Revenue however urged that the AO will not look into Form No.3 CEB and it is for the TPO to take note of the same and only in that said document, it has been stated that production has not commenced. This court is unable to countenance the submission of the counsel for more than one reason. Firstly, assessment proceedings are not a one way proceedings, even in the case of assessee, the AO while completing the regular assessment, called for details and documents which were furnished by the assessee. There is sufficient indication to show that the AO has considered the order passed by TPO. This would be sufficient to hold that the materials which were placed in Form No.3 CEB, resulting in an order was part of the assessment file, perused by the AO, but for which he would not have referred to the same. Even assuming that AO did not look into Form No. 3 CEB, he is bound to look into the order passed by TPO, as he is required to see any other additions have been made. This is so because the order passed by the TPO is binding on the AO; + thus, in the absence of any new material in the hands of AO or discovery of some materials or a new insight after the completion of the original assessment, the question of reopening does not arise. The conclusion arrived by the AO in the impugned order that merely the assessee has produced books of account before the AO and that there is no presumption that all the books were seen by the AO is factually incorrect, as during the course of assessment proceedings, documents and evidences were called for from the assessee which were produced and after perusal of the same, the assessment was completed. Thus, the impugned reopening proceedings is a clear case of change of opinion as there has been full and true disclosure by the assessee at the time of scrutiny assessment/original assessment. Assessee's petition allowed AB HOLDINGS: AAR (Dated: November 8, 2017) Income Tax - Sections - 92, 93, 115JB, 195 - CBDT Circular 789 - India–Mauritius DTAC - Article 13. Keywords: Actual funds - Benami shareholder - Capital gains - Finance Act, 2016 - Independent legal entity - Pacta Sunt Servanda - Short term transactions - Subsidiary company - Transfer of shares & Tax Residency Certificate. The applicant is a tax resident of Mauritius holding a category1 Global Business License. The applicant was a part of 'C' Equity Portfolio II LP and 'C' Affiliates Fund LP ('C' Group), which cumulatively held 87.56% shares of the applicant and the balance 12.44% shares were held by other individual investors. The applicant's business activities were carried by Board of Directors from Mauritius itself. The Board of Directors comprised of 3, out of which 2 were residents of Mauritius, at the time of making the said investments. The sole purpose of its incorporation was to invest in 'S' sector in India and other Asian markets, and had invested in 'AB' International and companies in Philippines and Indonesia, which were engaged in 'S' business. Both the initial and subsequent investment decisions were discussed and approved by the BOD. The original SPA was executed by the director of the applicant. The considerations were limited to the banking channels. Details of the investments were also provided to the RBI and accordingly FIRC was obtained which showed that remittances were for the acquisition of shares and the money had come from the applicant. In order to support its business in the Asia-Pacific region in the medium to long term, and to obtain operational and cost benefits from centralizing the ownership of investments and operations in Asia-Pacific region, a regional headquarters in Singapore was proposed by the applicant. Pursuant to filing the application, 'AB' Singapore was incorporated in August 2011. Keeping in view of all the objectives, the re-organized Group and 'AB' Singapore had invested substantial amount in Singapore (more than USD 3 mn), including a state of art biotechnology lab in Singapore and also hired specialist scientist to run the same. Further, in order to achieve the their objectives, the applicant had proposed to transfer the shares held in 'AB' International to 'AB' Singapore, a Group company. Ultimately the shares were transferred by the applicant to Singapore. The shares of other Group companies were also transferred to 'AB' Singapore in exchange of shares to achieve the objective and solely for business and commercial reasons. Later, 'AB' Singapore also made investments in 'AB' International. The applicant has sought Advance Ruling on the issue - whether the applicant will be entitled to the benefits of the agreement between the Government of Mauritius and Republic of India for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains? The AAR held that, Whether a Mauritian tax resident can be denied treaty benefits when the investment in India was made on the basis of a restructing plan implemented for group companies - NO: AAR + the transfer of shares from 'AB' International to 'AB' Singapore, a group company, in 2012 was done along with shares of other Group companies also, as part of a re-organisation, which indicates a long term business and commercial purpose. In fact, later 'AB' Singapore made further investments in 'AB' International in 2013, showing a long term business perspective of the holding company, as also ongoing business of investment, spread over almost 7 years, and not short term or overnight transactions for avoiding tax. This Authortiy finds nothing that invites any curious investigation on this issue also; + in the instant case, the money was invested by the applicant through banking channels in the initial as well as subsequent investments out of its own sources. Since the applicant is an independent legal entity, it is not material that the money was received from the holding company, as held in several decisions. The shares were held and registered in its own name, both beneficially and legally; the motive was to invest in the 'S' sector in India and other Asian markets as disclosed to various regulatory authorities; it was a subsidiary of the 'C' Group but acted independently; and it had the custody of the share certificates which were dematerialized in 2012, being the shareholder. Thus, it met all the requirements and no adverse conclusion is possible, such as to hold that it was a benami of the holding company; + on the facts of the instant case, the applicant fulfills all the criterion laid by the Apex Court in the case of Vodafone International Holdings BV, and its investments in the Indian company cannot be questioned, when no other peculiarity or illegality is noticed, especially with regard to the flow of actual funds for investment in 'AB' International. It is the legal and beneficial owner of shares and fully competent to transfer the same. This Authority also finds that the applicant's attempt to take support from the cases of E*Trade, Ardex, and JSH Mauritius was justified, in the facts of the instant case wherein its was ruled by this Authority that "... it is difficult to assume that the capital gain has not arisen in the hands of the Applicant, more so when according to the binding pronouncement of the Supreme Court, the motive of tax avoidance is not relevant so long as the act is done within the framework of law, the treaty shopping through conduit companies is not against law and the lifting of corporate veil is not permissible to deny the benefits of a tax treaty ..." + the Ruling in the case of the JSH Mauritius was upheld by the Bombay High Court, wherein it was held that the AAR on considering the application and the documents and the facts on record had conclusively held that the transaction is not designed for avoidance of income tax. The case in hand, is similar and calls for a similar treatment, as the applicant is the legal and beneficial owner of the shares that have been lawfully and accounting wise correctly invested in 'AB' International, as per legitimate and independent decisions of its Board of Directors; + the applicant was acting as an independent company, taking its own decisions, had made investments out of its own funds through banking channels, signed proper agreements for acquisition of shares, and doing business over a considerable period of time, had its business objective of being an investment holding company, and had invested in other companies as well, namely 'PTN' and 'AB' Philippines on the lines of many of its group companies in the 'S' sector in India and other countries in Asia. Hence, the Revenue's argument that the investment was with an eye on the India – Mauritius Treaty only, is unacceptable, even though this was itself not taboo; + therefore, on this issue, this Authority concluded that unless there are extraordinary and exceptional circumstances, as noticed in the case of 'AB' Mauritius, and as dealt with in AAR 1128 of 2011, no interfere is required with the benefits available to any applicant, under a DTAC between two sovereign states. Hence, in the instant case, the benefit under the India-Mauritius DTAC shall be available to the applicant, in the spirit of Circular no. 789, and on the principle Pacta Sunt Servanda, that the treaty should be honoured in good faith; + since, the investments made by the applicant in 'AB' International were not for tax avoidance, and suffered from no such infirmity as would take away the benefit of the India-Mauritius DTAC, the issue of section 93 becomes academic, in fact inapplicable to the facts of the case. As this Authority has held that the capital gains arising in the hands of the applicant was not chargeable to tax, there is no obligation on the applicant to withhold tax in this case; + as per section 92, any income arising from an international transaction has to be computed having regard to ALP, if the same is between two or more 'associated enterprises'. Hence this transaction of sale of shares in the Indian company should be subjected to and benchmarked as per the TP provisions contained in Chapter X. As against the position in section 195, there is no such requirement in section 92 that the transaction should result in income chargeable to tax under the Act for TP provisions to get attracted. Hence, the transaction in the instant case of sale of shares in 'AB' International will have to be benchmarked as per the TP provisions contained in Chapter X. With regard to applicability of section 115JB on the subject transaction, the applicant as well Revenue agree that the provisions of the said section shall not be applicable to foreign companies, as per the retrospective amendment to section 115JB by Finance Act, 2016, and the clarification issued by the CBDT dated 24 September 2015.This being so, there is no reason to disagree. Application ruled in favour of Applicant HONDA MOTOR COMPANY LTD: AAR (Dated: February 7, 2018) Income Tax - Sections 48, 112(1) & 245Q - India-Japan DTAA - Article 4. Keywords: Bonus shares - Convertible foreign exchange - Computerization fees - Direct allotment - Escrow account - Indian company - Long-term capital asset & 'wholly & exclusively'. The applicant, a tax resident of Japan has its principal office at Tokyo. The applicant is engaged in manufacturing of automobiles and engines. A joint venture company namely, Hero MotoCorpLimited (HHML) was established by the applicant alongwith its Indian partners i.e., Hero Investments Pvt. Ltd. and Bahadur Chand Investments Pvt. Ltd. The applicant acquired shares in HHML(a public listed company). The shares were acquired by direct allotment of shares in the year 1985, right issue of shares in the year 1987 and bonus shares issued in the year 1995 and 1998 resulting in the applicant's holding of 1,03,83,750 equity shares (of Rs. 10 each). Thereafter, each share of HHML was sub-divided into 5 equity shares of Rs. 2 each, which resulted in applicant’s ownership of 5,19,18,750 equity shares (of Rs. 2 each). Again, the applicant had purchased the shares issued under direct allotment as well as right issue in convertible foreign exchange. The applicant entered into shares transfer agreement with the Indian Partners in order to sell its stake in HHML which were for more than 12 months. Therefore, the same were treated as long-term capital asset on the date of the transfer and would be applicable for long-term capital gain tax. Initially the applicant had incurred expenses towards fees for the computerization of share certificates in order to transfer them to the escrow account amounting to USD 10,000 and later an amount of INR 55,150. The said expenses were incurred in terms of the transfer agreement which was provided for dematerialization and execution of escrow account hence, all the expenses so incurred were for the purposes of transferring the shares from the applicant to the buyer. The applicant has sought Advance Ruling on the issue - whether tax payable by the Applicant on the long term capital gains arising on the sale of equity shares of the Hero Honda Motors Limited [now known as Hero MotoCorp Limited], being listed securities, will be 10% (plus surcharge and cess) of the amount of capital gains as per the proviso to section 112(1) of the Act? The AAR held that, Whether a non-resident is also entitled to Sec 112 benefits in connection with transfer of shares and the application of concessional rate of tax on long-term capital gains - YES: AAR Whether the expenses incurred in connection with transfer of such shares is an eligible deduction u/s 48 - YES: AAR + though the Revenue has raised objections to the arguments taken by the applicant in support of its case for a lower rate of tax, the Revenue accepts in its written submissions as well as during the course of these proceedings, that this issue was covered by the case of Cairn UK Holdings Limited. This was a case in which this Authority had, accepting Revenue's plea, ruled that the proviso to section 112(1) was not applicable, and the applicant could not avail the lower rate of 10% on the capital gains derived by it. On a writ filed by the applicant against the order of this Authority before the High Court of Delhi, the ruling was reversed and it decided the matter in favour of applicant and held that the benefit of proviso 112(1) is available to a non-resident on sale of equity shares in question. After considering the rejoinder filed by the applicant to the objections taken by the Revenue, and it is seen that the thrust of its argument hinges largely upon the decision of the High Court of Delhi in the case of Cairn UK; + it is seen that in Cairn UK case, the High Court of Delhi also referred to in detail, and agreed with the case of Timkin France, where this Authority had agreed with the contention of the applicant. In those proceedings the CBDT circular no. 636, dated 31.8.1992 was also considered, wherein the provisions of the Finance Act had been clarified; + in the instant case also the applicant is contesting that the tax payable on the long term capital gains arising on the sale of equity shares of Hero Honda Motors Ltd. will be 10% of the amount of capital gains as per the proviso to section 112(1). In short, that the benefit of the proviso of section 112(1) is applicable in the case of non-resident as well, in spite of section 48. The decision in Cairn UK is squarely applicable. Following the said decision this Authority concluded that the benefit u/s 112(1) could not be denied to the applicant; + this Authority has considered the nature of expenses incurred. A perusal of the provision contained in section 48 shows that the words "wholly and exclusively" do not connote "necessarily". If the expenses have been incurred in connection with the transfer, they are to be allowed. The words "in connection with" are of wide import and if such expenses have an intimate connection with the transfer, they have to be allowed u/s 48. In the instant case, there is no doubt that the expenses are incurred for effecting the transfer only. Even if it was a mutual decision of the two parties for their convenience, that the shares should be dematerialized and an escrow account be opened, as contended by the Revenue, this in no way suggests that the expense were not incurred "wholly and exclusively" in connection with the transfer of shares. During the course of the final hearing, the Revenue has not opposed the applicant’s contentions on the issue. Hence, the same are to be treated as allowable as a deduction u/s 48. Application ruled in favour of Applicant |
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