Case Law Details
Advocate Akhilesh Kumar Sah
Shilpa Shetty Vs ACIT (ITAT Mumbai) : Recording of ‘satisfaction’ about the existence of an international transaction was only within the jurisdiction of the AO and CIT(A) could not substitute his satisfaction for that of the AO.
Recently, in Shilpa Shetty vs. ACIT[I.T.A. No. 2445/Mum/2014, AY 2010-11, decided on 21/08/2018], the brief facts of the case were that the assessee being an individual and resident in India mainly engaged in the profession of film acting had also functioned as a brand ambassador for various products during the period relevant to AY 2010-11 had earned income from business and profession, capital gains and other sources. She filed her return of income on 20.09.2010 declaring a total income of Rs.82,73,481. The return was selected for scrutiny and the assessment order was passed on 31.3.2012 assessing the total income at Rs. 4,25,59,195. The facts relevant to the addition to the returned income by the AO by way of a transfer pricing adjustment of Rs. 3,42,85,714 are that during the period under consideration the assessee was a party to a Share Purchase Agreement (SPA) signed by the existing shareholders of a Mauritius based company, namely EM Sporting Holding Limited (EMSHL) for the transfer of a portion of the shareholding of that company to Kuki Investments Ltd. (incorporated in Bahamas) (‘Kuki’)represented by Shri Raj Kundra (‘RK’) and under the same SPA, Kuki was also to subscribe to additional shares to be issued by the company EMSHL. After giving effect to the SPA, the shares of the said EMSHL, Mauritius came to be held by Kuki Investments Limited, Bahamas (11.7%), Blue Water Estates Limited, Hong Kong (11.74%), Tresco International Limited, British Islands (44.15%) and Emerging Media IPL Limited, UK (32.41%). The assessee herself was neither a buyer nor a seller of shares of EMSHL in the SPA. However, under the SPA the assessee undertook to provide brand ambassadorship services to Jaipur IPL Cricket Private Limited (JICPL), an Indian Company that was a 100% subsidiary of EMSHL, in relation to promotional activities of ‘Rajasthan Royals’, an IPL cricket team owned by JICPL. The SPA also provided that such services were to be provided by the assessee completely without charge or fee to the assessee or any other person. The AO in the assessment order treated the assessee and EMSHL as Associated Enterprises (AEs) and held that the services rendered by the assessee to JICPL by virtue of the SPA involving the shareholders of EMSHL constituted an international transaction and therefore the Arms Length Price (ALP) had to be computed for such services rendered by the assessee free of charge. The AO thereafter, based on another contemporaneous brand ambassadorship agreement of the assessee with Hindustan Unilever Limited (HUL), computed an amount of Rs. 3,42,85,714 as the ALP in respect of the services provided by her free of charge to JICPL. As the assessee had not charged anything for the services provided, the entire quantum of the ALP so computed was adopted by the AO as the transfer pricing adjustment to the returned income of the assessee. Against such modification to the return income by the AO, the assessee filed appeal before CIT(A) and the CIT(A) considering the case of both the parties, dismissed the appeal filed by the assessee. While doing so, the CIT(A) held that the Assessee and Kuki were AEs in view of section 92A(1) of the Income tax Act, 1961(for short ‘the Act’). It was also observed that the Assessee’s professional activities, which were controlled by her, constituted an ‘enterprise’ (distinct from Assessee herself as ‘enterprise’) in view of the term ‘enterprise’ as defined in section 92F(iii), thereby, held that the Assessee and Kuki were AEs in view of section 92A(2)(j), as RK controls Kuki and also controls the profession of assessee through assessee, RK‟s relative. Apart from that CIT(A) further applied sec. 92B(2) to hold that there was a deemed ‘international transaction’ between the Assessee and JICPL due to the prior agreement, i.e. SPA. CIT(A) also held that Kuki had benefitted in terms of share purchase consideration to the extent of monetary value of the (brand promotion) services provided by the Assessee to EMSHL and its the then existing shareholders on behalf of Kuki. He then made adjustment to Assessee’s income on the basis of ALP. Against the order of CIT(A), the assessee filed the appeal before ITAT, Mumbai.
The AR appearing on behalf of the assessee while challenging the jurisdiction of CIT(A) to substitute its satisfaction to that of ACIT(AO), submitted that it is a jurisdictional requirement to record a satisfaction by the AO that there was an income or potential of an income in case where the assessee had not filed the report under section 92E, but international transaction came to the notice of the AO. In this regard, AR relied upon:
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