The High Court allowed the TP assessment proceedings to carry on further despite keeping the debate open on analyzing shareholding pattern of the directors and their relatives for examining the applicability of Domestic TP provisions
Facts of the case
DB Corp Ltd ("the taxpayer") is a company registered under the Companies Act. During the course of scrutiny assessment for assessment year ("AY") 13-14, the Assessment Office ("the AO") referred the case to Transfer Pricing Officer ("TPO") under section 92CA (1) of the Income Tax Act ("the Act") to determine the arm's length price ("ALP") of specified domestic transactions of the taxpayer. The taxpayer raised objections against the reference made to TPO and subsequent notice issued by the TPO in this respect. The AO made a report to Principal Commissioner of Income Tax ("Principal CIT") stating why such objections are not valid. Upon considering AO's report, the taxpayer's objections against reference to TPO as well as further objections were rejected by Principal CIT. Following which, the taxpayer challenged before Gujarat High Court ("HC"), the reference made by AO to TPO and notice issued by the TPO. He also challenged the orders rejecting taxpayer's objections against TPO reference.
Proceedings before the HC
The issue before the court was to examine the applicability of domestic Transfer Pricing ("TP") provisions in the taxpayer's case.
During the assessment year under review, the taxpayer incurred expenditure pertaining to advertisement, rent and purchase of investment (exceeding INR 5 crore), for which payment was made to the entity, viz. Writers & Publishers Pvt. Ltd ("WPPL"). The Taxpayer's directors and their relatives held 25.98% of the shareholding of WPPL, but their individual holding was less than 5%.
The tax authorities was of the view that since the aggregate holding of Directors and their relatives of the taxpayer was more than 20%, therefore, the entity would qualify as a specified person defined under Section 40A(2)(b) in terms of clause (vi)(B) of the Act.
The taxpayer was of the contrary view and relied on the ratio drawn from the case of Octave Apparels vs. Commissioner of Income Tax-1, Ludhiana [(2014) 45 Taxmann.com 370], where it was held that when shareholding of each partner of the firm was less than 10% though their cumulative shareholding was more than 10%, Section 2(22)(e) of the Act would not apply. Accordingly, the taxpayer contended that since none of the directors and their relatives held more than 20% of the holding WPPL, hence, the provisions of clause (vi) of Section 40A (2)(b) of the Act will not be applicable in the instant case. It was further claimed that aggregate holding of the directors (including their relatives) could not be taken into consideration for examining the applicability of domestic TP provisions provided in Section 92BA read with Section 40A(2)(b) of the Act. With this, the taxpayer emphasized upon the fact that for the purpose of Section 40A(2)(b) of the Act, the reference of holding director must be understood in its normal grammatical meaning i.e. holding of an individual director, without resorting to aggregation of the holding of the directors.
Adjudicating in favour of the Revenue, the HC dismissed the taxpayer's petition. The HC noted observations from Veer Gems vs. Assistant Commissioner of Income Tax [TS-670-HC-2011(GUJ)-TP] and stated that the AO must be completely satisfied that it is expedient to make reference to the TPO and such opinion of the AO must be backed by the Commissioner's approval. The HC further observed that requisite evidences suggesting that directors (including their relatives) of the taxpayer, in aggregate held more than 20% of the shares in WPPL; and also since the aggregate expenditure incurred by the taxpayer to WPPL exceeded INR 5 crores, therefore, the HC would allow TP procedure to carry on further without disrupting it at intermediary stage.
With reference to appealing before the HC, the HC mentioned that the taxpayer would have one more opportunity to contest (i.e. AO's reference to the TPO) before the Dispute Resolution Panel under Section 144C of the Act who would have the powers to nullify the variations arising out of the order of the TPO, had it been concluded that the reference to the TPO was invalid.
The HC, however, kept open the legal issues regarding the question whether Clause (vi) of Section 40A(2)(b) of the Act would cover only the holding of the director(s) on individual or on aggregated basis (i.e. by considering the holdings of their relatives).
As the first year of TP audit of transactions covered in Indian DTP provisions has embarked on, it is expected that the same will navigate the Indian TP regime towards new set of challenges with significant TP additions. In the instant ruling, the HC has kept the debate open for one of crucial aspects of examining the shareholding pattern (i.e. individual vs. aggregated) to analyze the applicability of DTP provisions. It would be interesting to see the construction of the appellate authorities (later during the course of proceedings) while analyzing provisions of Clause (vi) of Section 40A(2)(b) of the Act.
D B Corp Ltd. Vs DCIT
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