HDFC Bank Ltd. Vs ACIT (Bombay High Court)
Conclusion: Transaction of purchase of loan from HDFC ltd. would not cover within the meaning of Specified Domestic Transactions (SDTs) as the shareholding of HDFC Ltd. of 16.39% could not be clubbed with the shareholding of the HDFC Investments Ltd. of 6.25% to cross the threshold limit of substantial interest of 20%. Also, payment by assessee to HBL Global for rendering services would not fall under SDT as assessee was not directly beneficial owner of the shares of HBD Global. Further, transaction of payment of interest by assessee to HDB Welfare Trust would not be SDT as trust had been set up exclusively for the welfare of its employees and there was no question of assessee being entitled to 20% of the profits of such Trust. None of the three transactions would fall within the meaning of a SDT as required under section 92BA(i).
Held: In the present case, there were three transactions which Revenue had alleged, were Specified Domestic Transactions (“SDTs”). They were (1) Loans of Rs.5164 Crores purchased by assessee from the promoters (HDFC Ltd.) and loans of Rs.27.72 Crores purchased from the subsidiaries; (2) Payment of Rs.492.50 Crores by assessee to HBL Global for rendering services; and (3) payment of interest of Rs.4.41 Crores by assessee to HDB Welfare Trust. Looking to the first transaction, it was undisputed that assessee purchased the loans of HDFC Ltd. of more than Rs. 5,000 Crores. HDFC Ltd. admittedly holds 16.39% of the shareholding in the assessee. On a plain reading of section 40A(2)(b)(iv) read with explanation (a) thereof, HDFC Ltd. would not be a person who would have a substantial interest in assessee. This was simply because explanation (a) clearly stipulates that for one to have a substantial interest; it should be the beneficial owner of shares carrying not less than 20% of the voting power. However, Revenue clubbed the shareholding of HDFC Ltd. of 16.39% with the shareholding of the HDFC Investments Ltd. of 6.25% (and which was a wholly owned subsidiary of HDFC Ltd.) for crossing the threshold of 20%. It was held HDFC Ltd. could not be said to be the beneficial owner of the shares that HDFC Investments Ltd. held in the assessee because the shares that HDFC Investments Ltd. held in the assessee was its asset, and HDFC Ltd., though being a 100% shareholder of HDFC Investments Ltd., could not be termed as the owner (beneficial or otherwise) of the assets and properties of HDFC Investments Ltd. Therefore, the shareholding of HDFC Ltd. and HDFC Investments Ltd. could not be clubbed together to cross the threshold of 20% as required under explanation (a). Therefore, this transaction of purchase of loans by assessee from HDFC Ltd. would not fall within the meaning of a SDT. Looking to the second transaction, it was held assessee could never be said to be beneficial owner of the shares in HBL Global for the simple reason that it held absolutely no shares in HBD Global. It held shares in a company called ADFC Ltd., which in turn held 98.4% shares in HBL Global. This would not mean that either directly or indirectly assessee was the beneficial owner of the shares of HBD Global. Looking to the third transaction, it was held trust had been set up exclusively for the welfare of its employees and there was no question of assessee being entitled to 20% of the profits of such Trust. Thus, this transaction also clearly would not fall within section 40A(2)(b) read with explanation (b) thereof to be a SDT as understood and covered by section 92BA(i). None of the three transactions that form the subject matter of this Petition fall within the meaning of a SDT as required under section 92BA(i).
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
1. By this Petition, the Petitioner – bank seeks a writ of certiorari for quashing the impugned order dated 29th December, 2016 (Exh “F”) and the impugned reference dated 29th December, The impugned order dated 29th December, 2016 (Exh “F”) passed by Respondent No.1 holds that certain transactions entered into by the Petitioner are “Specified Domestic Transactions” (for short “SDTs”) as per section 92BA(i) of the Income Tax Act, 1961 (for short the “I.T. Act”) and the Arms Length Price (“ALP”) of the said transactions are required to be determined by making a reference to Respondent No.2. It is pursuant to this order that the reference dated 29th December, 2016 was made to Respondent No.2 under section 92CA(1) of the I.T. Act for determination of the ALP in the Petitioner’s case for the Assessment Year (for short “A.Y.”) 2014-15. It is the case of the Petitioner that the impugned order as well as the impugned reference are ex-facie without jurisdiction, illegal, unsustainable, contrary to the principles of natural justice and contrary to law, and therefore, ought to be quashed and set aside by us in our writ jurisdiction. This is how the present Writ Petition has been filed.
2. Before we set out the legal submissions of the respective parties, the brief facts of the case and which would be necessary to determine the controversy before us, are as under:-
(a) The Petitioner is a public limited company registered under the Companies Act, 1956 and is also registered as a banking company with the Reserve Bank of India (“RBI”). The primary business of the Petitioner is banking. The Petitioner filed its assessment of income for the Assessment Year (“A.Y.”) 2014-15 on 30th November, 2014 declaring a total income of Rs.12595,27,63,920/-. The Petitioner, along with the return of income, also filed Form 3CEB inter alia disclosing certain ‘specified domestic transactions’ entered into by it during the relevant year. Thereafter, the Petitioner’s case was selected for scrutiny assessment. During the scrutiny, the Petitioner again filed a copy of Form 3CEB on 11th June, 2016. It is the case of the Petitioner that the SDTs entered into by it and reported in Form 3CEB were similar to the transactions entered into by the Petitioner in the earlier assessment year, namely, A.Y. 2013-14 and the Transfer Pricing Officer (for short the “TPO”) had accepted that all the transactions entered into by the Petitioner were at an ALP. This was held by the TPO in his order dated 24th October, 2016.
(b) It is in these circumstances that the Petitioner has averred that it was surprised to receive a show cause notice from Respondent No.1 on 29th December, 2016 at 01.39 a.m., vide an e-mail, for the alleged non-reporting of certain related party transactions for the A.Y. 2014-2015 and required the Petitioner to provide the reasons why the same should not be reported to Respondent No.2 for determination of the ALP. This show cause notice was to be replied to by the Petitioner by 11.00 a.m. on the same date i.e. 29th December, 2016. According to Respondent No.1 certain transactions (mentioned hereinafter) were entered into by the Petitioner with related parties as per section 40A(2)(b) which were not reflected in form 3CEB filed by the Petitioner. Those transactions are as under:
i. The Petitioner purchased Loans from HDFC Ltd and its subsidiaries amounting to Rs.5164 Cr and Rs.27.72 Cr respectively.
ii. The Petitioner has received services from HBL Global Private Ltd. (for short “HBL Global”) for which the Petitioner paid an amount 492.5 Cr. and the Petitioner was having beneficial ownership of HBL Global.
iii. The Petitioner has paid interest amount 4.41 Crore to HDB Welfare Trust which was a Trust created by the Petitioner.
(c) Since Respondent No.1 was of the opinion that these transactions were entered into with related parties as set out in section 40A(2)(b) of the IT Act, they ought to have found place in Form 3CEB filed by the Petitioner. Since this was not done, the show cause notice was issued.
(d) According to the Petitioner no personal hearing was given to them by Respondent No.1 in relation to these transactions. Be that as it may, the Petitioner, vide its letter dated 29th December, 2016, submitted a reply with respect to each of these above mentioned three transactions and gave an explanation as to why they could not be termed as SDTs. This being the case the Petitioner stated that there was no requirement on their part to disclose the same in Form 3CEB and correpondingly there was no question of making a reference to the TPO for determining the ALP in relation to these three transactions.
(e) In a nutshell, it was the Petitioner’s case that the transaction referred to in item (i) above [the purchase of loans from HDFC Ltd], firstly did not relate to A.Y. 2014-2015 but in fact the aforesaid transaction was entered into by the Petitioner in the earlier year and were relating to A.Y. 2013-2014. For A.Y. 2013-14 transfer pricing assessment had already been completed and become final. The Petitioner further submitted that in any event, none of the promoters of the Petitioner held more than 20% of the shareholding individually and hence these transactions did not take place with a person as contemplated under section 40A(2)(b) of the IT Act. The other submission with reference to this transaction was that admittedly this transaction was a transaction of purchase of loans which could never be termed as an expenditure, and therefore, the same did not come within the ambit of section 92BA(i) of the IT Act.
(f) As far as the transaction listed at item (ii) is concerned [payment of Rs.492.50 Cr to HBL Global for services rendered], the Petitioner submitted that it did not have any direct shareholding in HBL Global as that company was a subsidiary of Atlas Documentary Facilitators Co. Pvt. Ltd. (“ADFC Ltd.”) in which the Petitioner has a 29% shareholding. The Petitioner submitted that indirect shareholding is not covered or contemplated under section 40A(2)(b) of the Act, and therefore, the transactions with HBL Global was not covered under the said section. This being the case, the contention of the Petitioner was that this transaction also could never fall within the ambit of a SDT as understood under section 92BA(i). In support of this argument, the Petitioner submitted that the Petitioner cannot be regarded as the beneficial owner of the shares of HDL Global as the beneficial owner of these shares was ADFC Ltd. and not the Petitioner.
(g) As far as the transaction listed in item (iii) is concerned [payment of interest of Rs.4.41 Cr to HDB Trust], the Petitioner submitted that HDB Welfare Trust was established for providing general welfare measures such as medical relief and educational assistance to the employees of the Petitioner bank. The Petitioner bank further submitted that as the beneficiaries of the HDB Welfare Trust were the employees of the Petitioner and not the Petitioner, the Trust does not come within the ambit of a person/party as required under section 40A(2)(b) of the Act.
(h) After considering these objections of the Petitioner, Respondent No.1, vide his impugned order dated 29th December, 2016, rejected the objections that the aforesaid transactions were not SDTs, and therefore, held that domestic transfer pricing provisions would be applicable. In a nutshell, Respondent No.1 held that the Petitioner was involved in the transaction of purchase of loan which is a business asset of the Petitioner and the purchase of such asset from a related party falls under section 40A(2)(b) of the IT Act. Respondent No.1 further held that the consolidated holding of the promoters was in excess of 20 % of the shareholding of the Petitioner and hence, the beneficial ownership clause was applicable. Respondent No.1 further went on to hold that since the Petitioner holds 29% shareholding of ADFC Ltd., which in turn holds 98.4% of the shares of HBL Global, the Petitioner had beneficial ownership and voting rights of more than 20% of HBL Global and hence the transaction with HBL Global was with a person/party as covered by section 40A(2)(b) of the I.T. Act. As far as the Trust was concerned, Respondent No.1 held that the Petitioner possesses more than 20% of the rights in the said Trust which makes it a related party as per the provisions of section 40A(2)(b) of the Act. It is in these circumstances that Respondent No.1 passed the impugned order and thereafter, on the very same day (namely, on 29th December, 2016) made a reference (in relation to all the abovementioned three transactions) under section 92CA(1) of the Act to Respondent No.2 for determining the ALP.
(i) Once this reference was made, Respondent No.2 issued a notice dated 30th December, 2016 under section 92CA(2) of the I.T. Act asking the Petitioner to produce various information in relation to international transactions and/or SDTs referred to by Respondent No.1 vide his letter dated 29th December, 2016. This was for A.Y. 2014-2015. To this letter of Respondent No.2, the Petitioner replied by contending that certain basic documents which the Petitioner had maintained with respect to the international transactions / SDTs reported by the Petitioner in Form No.3CEB were already submitted and those transactions were accepted to be SDTs. It was the case of the Petitioner that the transactions referred to Respondent No.2 by Respondent No.1 were not SDTs, and therefore, the Petitioner was not obliged in law to submit any documents to Respondent No.2 with reference to these transactions. The Petitioner also alleged that the reference made to Respondent No.2 was not only bad in law, but also appeared to be made in undue haste by Respondent No.1.
(j) It is thereafter, and in these facts and circumstances, that the present Writ Petition has been filed seeking quashing and setting aside of the impugned order dated 29th December, 2016 passed by Respondent No.1 as well as the impugned reference dated 29th December, 2016 under which Respondent No.1 made a reference to Respondent No.2 for determining the ALP for the above mentioned three transactions and which, according to Respondent No.1, were SDTs.
(k) After this Petition was filed on 23rd June, 2017, the Division Bench of this Court recorded that the matter has debatable issues which require consideration, and therefore, the matter was placed for hearing on 14th July, 2017. The Division Bench directed that till then the TPO shall not pass any final order. The Division Bench also recorded that if possible an endeavor shall be made to dispose of this Petition finally at the stage of admission. Thereafter, the matter has been adjourned from time to time and has now come up before us and with the consent of parties we have heard it finally. In these circumstances we issue Rule. The Respondents waive service. By consent, Rule is made returnable forthwith and heard finally.
3. In this factual backdrop, learned Senior Counsel Mr J.D. Mistri appearing on behalf of the Petitioner, submitted that in the facts of the present case there were three transactions which the Revenue had alleged, were SDTs. They are – (1) Loans of Rs.5164 Crores purchased by the Petitioner from the promoters (HDFC Ltd.) and loans of Rs.27.72 Crores purchased from the subsidiaries; (2) Payment of Rs.492.50 Crores by the Petitioner to HBL Global for rendering services; and (3) payment of interest of Rs.4.41 Crores by the Petitioner to HDB Welfare Trust. Mr Mistri submitted that it is only when the aforesaid transactions, or any of them, are a SDT, and which are not reported by the assessee, then the A.O. is required to issue a show cause notice to the assessee and pass an order disposing of the objections of the assessee before referring the said SDT to the TPO for determining the ALP. He submitted that to challenge the order of the A.O. there is no other alternate efficacious remedy and in fact this Court in the case of Vodafone India Services Pvt. Ltd. Vs. Union of India [361 ITR 531] has held that such an order passed by the A.O. rejecting the objections of the assessee that the transactions are not SDTs, can be challenged by way of a Writ Petition. Another reason stated by Mr Mistri why the Writ Petition came to be filed was that once the transaction is treated as a SDT, penalty under section 271G of the Act (at 2% of the value of the alleged SDT) is leviable, even if the TPO was to come to the conclusion that the transactions were at the ALP. It is in these circumstances, Mr Mistri submitted that the Petitioner has been constrained to approach this Court in its extraordinary, equitable and discretionary jurisdiction under Article 226 of the Constitution of India.
4. Thereafter, Mr Mistri submitted that neither of the three transactions are a SDT as wrongly held by Respondent No.1. He submitted that as far as the loans of Rs.5164 Crores purchased by the Petitioner from the promoters as well as Rs.27.72 Crores purchased from the subsidiaries is concerned, he stated that the aforesaid transaction is not a transaction relating to the assessment year in question, namely, A.Y. 2014-15. In this regard he relied upon the annual accounts of the Petitioner annexed at pages 100 & 101 of the paper book. According to Mr Mistri, this submission was not even considered by the A.O. in the impugned order while rejecting the objections of the Petitioner. Mr Mistri submitted that this transaction related to A.Y. 2013-14, for which the Transfer Pricing Assessment was already completed. This being the case, at the outset, Mr Mistri submitted that this transaction could never be taken for A.Y. 2014-15 and be treated as a SDT.
5. Thereafter, Mr Mistri submitted that in any event, this transaction of purchasing loans could never be a SDT. Mr Mistri submitted that for a transaction to fall within the meaning of a SDT under section 92BA(i) of the Act, the transaction has to be one which is not an international transaction and in which any expenditure in respect of which payment has been made or is to be made by the assessee to a person referred to in section 40A(2)(b) of the Act. He submitted that section 40A(2)(b) of the Act refers to certain persons, and the transaction in question, namely, the purchase of loans from the promoters of the Petitioner (HDFC Ltd.) did not fall within any of the persons mentioned in section 40A(2)(b) read with explanation (a) thereof, and which is appended to section 40A(2)(b) of the Act. In this regard, he brought to our attention section 40A(2)(b)(iv) of the Act and contended that the person referred to in the said sub-section has to have a substantial interest in the business or profession of the assessee (in the present case the Petitioner). He submitted that explanation (a) sets out what is the meaning of ‘substantial interest’ and stipulates that in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of the shares carrying not less than 20% of the voting power. In the facts of the present case, Mr. Mistri submitted that admittedly HDFC Ltd. is the beneficial owner of only 16.39% of the shares of the Petitioner and hence section 40A(2)(b) was not at all applicable to the present transaction. He submitted that the Revenue had grossly erred in clubbing the shareholding of HDFC Ltd. with the shareholding of its subsidiary, namely, HDFC Investments Ltd. (and which has a 6.25% shareholding in the Petitioner), to cross the threshold of 20%. To put it differently, Mr Mistri submitted that HDFC Ltd. holds 16.39% of the shareholding of the Petitioner and HDFC Investments Ltd. holds 6.25% of the shares of the Petitioner. To cross the threshold of 20% as required under section 40A(2)(b), the Revenue is seeking to club both these shareholdings together. He submitted that in law, this can never be done. He submitted that in law, the Parent Company (here HDFC Ltd.) can never be said to be the beneficial owner of the properties of its subsidiary (here HDFC Investments Ltd.). He submitted that the shares held by HDFC Investments Ltd in the Petitioner was nothing but the movable property of HDFC Investments Ltd. This being the case, Mr. Mistri submitted that the Revenue could never club the two shareholdings together to cross the threshold of 20% as required by section 40A(2)(b) read with explanation (a) thereof. In support of this proposition, Mr. Mistri placed reliance on the following decisions of the Supreme Court:-
(a) Bacha F. Guzdar Vs. CIT [(1955) 27 ITR 1 (SC)];
(b) Vodafone International Holdings BV Vs. UOI [341 ITR 1 (SC)]; and
(c) BA Mohota Textile Traders Pvt. Ltd. Vs. DCIT [397 ITR 616 (Bom)].
6. To further substantiate this argument, Mr Mistri also placed reliance on the meaning of the word “beneficial owner” as appearing in the Black’s Law Dictionary as well as Tax Laws Lexicon (2012 Edition). According to Mr Mistri, Black’s Law Dictionary defined ‘beneficial owner’ as ‘one recognized in equity as the owner of something because use and title belong to that person, even though the legal title may belong to someone else; especially one from whom property is held in Trust’. Similarly, according to Mr Mistri, Tax Laws Lexicon (2012 Edition) defines ‘beneficial owner’ as ‘the person who is not the legal owner but has the right to deal with the property as his own and has a right to enjoy the income.’ Mr. Mistri submitted that even section 89 of the Companies Act, 2013 requires a disclosure to be made to the Company (in the present case the Petitioner) by the owner of the shares if the owner is not the beneficial owner. In the present case no such disclosure is required to be made by HDFC Investments Ltd., and in fact, no such disclosure has been made in terms of section 89, by HDFC Investments Ltd. He therefore submitted that HDFC Ltd. (the parent company of HDFC Investments Ltd.) could never be said to be the beneficial owner of the shares owned by HDFC Investments Ltd. in the Petitioner.
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