Dimexon Diamonds Ltd Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that business restructuring entered into by an enterprise with its associated enterprise for eliminating duplicate corporate procedures falls within the ambit of “international transaction” as defined in section 92B of the Income Tax Act.
Facts- The assessee is primarily engaged in diamond manufacturing/distribution. It is a wholly owned subsidiary of Dimexon (India) Holding Pvt. Ltd. (DIHPL), which in turn is wholly owned by Dimexon International Holdings B.V., Netherlands (DIHBV), the ultimate parent company of the Dimexon Group.
During the year under consideration, the assessee entered into a scheme of amalgamation with its holding company DIHPL. The scheme was sanctioned by NCLT. Pursuant to the sanction, the amalgamating company, i.e. DIHPL got merged into the assessee. For the said merger, the assessee paid a total purchase consideration of Rs. 188.35 crore to DIHBV (i.e. the holding company of DIHPL)
Pursuant thereto, the holding company of the assessee was changed from DIHPL to DIHBV in view of the cancellation of existing shares of the assessee held by DIHPL and the issuance of new shares to DIHBV. Since the book value of DIHPL as on 31/03/2016 was Rs. 369,28,18,214 and pursuant to the merger, the total purchase consideration of only Rs. 188.35 crore was paid to DIHBV in the form of equity shares, Compulsory Convertible Debentures (”CCDs”), and cash,
TPO held that the only truth embedded in and resulting from the scheme of merger is that the holding company of the assessee has changed from DIHPL to DIHBV. The TPO further held that the valuation report submitted by the assessee has no scientific basis for arriving at the purchase consideration paid in shares, CCDs, and cash.
Thus, AO treated the cash paid to DIHBV as not an arm’s length transaction and held it to be treated as a loan. As a result, the ALP of the interest paid on issuance of CCDs at Rs. 80,49,383 was treated as Nil using the CUP method. Further the cash of Rs. 100 crore paid to DIHBV was treated as a deemed loan and benchmarked by charging interest at SBI PLR plus 300 basis points on the basis of the CUP method. Accordingly, the TPO made up a total transfer pricing adjustment of Rs. 17,47,49,383, i.e. Rs. 80,49,383 in respect of international transaction pertaining to interest on CCD and Rs. 16,67,00,000 in respect of interest on loan provided to the AE.
Conclusion- Held that the business restructuring is an organisational change amongst the entities of Dimexon Group, i.e. DIHBV, DIHPL, and the assessee, inter-alia, to maintain a simple corporate structure and eliminate duplicate corporate procedures. Therefore, we are of the considered view that the aforesaid transaction between the assessee and DIHBV squarely falls within the ambit of “international transaction” as defined in section 92B of the Act. Further, in the present case, the assessee has issued CCDs to DIHBV which carries interest. As per the TPO/learned DRP, the assessee has paid interest on CCDs, and the same definitely impacts the profit/losses of the assessee. Therefore also it is an “international transaction”.
Once a transaction falls within the ambit of “international transaction”, Chapter-X of the Act provides a mechanism for computation of arm’s length price in relation to such international transaction.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee challenging the impugned final assessment order dated 26/07/2022, passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (“the Act”), pursuant to the directions dated 28/06/2022, issued under section 144C(5) of the Act by the learned Commissioner of Income Tax (DRP–1), Mumbai–1 [―learned DRP‖], for the assessment year 2018–19.
2. In this appeal, the assessee has raised the following grounds:–
“On the facts and in the circumstances of the case and in law, the Learned AO pursuant to direction of the DRP and in conformity with order of Deputy Commissioner of Income Tax, Transfer Princing–1(2)(1) (“learned TPO”) has:
1. Erred in determining the Appellant’s total income (after setting off losses) at INR 18,77,16,715 as against the returned income of INR 17,88,45,251.
2. Erred in proposing transfer pricing adjustment of INR 88,71,465 to the income of the Appellant.
Transfer pricing provisions not applicable in absence of “income”
3. Erred in making a transfer pricing adjustment in respect of the transaction of discharge of purchase consideration by the Appellant pursuant to a scheme of merger approved by the National Company Law Tribunal (NCLT) without appreciating the fact that the said transaction does not give rise to income under the provisions of the Act leading to inapplicability of Chapter X of the Act for the said transaction.
Without prejudice:
Scheme of arrangement approved by NCLT and purchase consideration discharged after approval from Reserve Bank of India (RBI)
4. Erred in disregarding the fact that scheme of merger (including the amount and form of purchase consideration) was duly approved by the NCLT vide its order dated 11 January 2018 where Hon’ble NCLT specifically states that the scheme is fair and reasonable and not in violation of any provisions of law.
5. Erred in not appreciating the principle of law that once the scheme is approved by NCLT the same is binding on all parties concerned, especially when the scheme is approved after giving due opportunity to all parties concerned.
6. Erred in not appreciating the fact that the purchase consideration discharged by the Appellant pursuant to the scheme of merger was in accordance with the Foreign Exchange Management Act Regulations and was discharged after obtaining due approval from the RBI.
7. Erred in substituting its judgment over that of the NCLT in respect of the manner of discharge of purchase consideration once it had held that the economic interest held by the shareholder of the amalgamating company in the amalgamating company is commensurate to its economic interest in the Assessee.
Purchase consideration discharged by the Appellant at arm’s length
8. Erred in concluding that the payment of INR 100 crores and book value of Compulsory Convertible Debentures (CCDs) of INR 85 crores represented excess consideration despite holding that the economic interest held by the shareholder of the amalgamating company in the amalgamating company translated into an equivalent economic interest in the Assessee and failing to recognize that the issuance of fresh equity shares, CCDs and payment of INR 100 crores was only a method of discharging the purchase consideration.
9. Erred in concluding that the payment of INR 100 crores and book value of CCDs of INR 85 crores in the purchase consideration was excessive and thereby, making a transfer pricing adjustment for notional interest on the payment of INR 100 Crores and disallowance of interest paid on CCDs.
10. Without prejudice, erred in not appreciating that CCDs issued by the Appellant are quasi-equity in nature and should be treated on a similar footing to the fresh equity shares issued by the Appellant and thereby, the payment for subscribing to the CCDs cannot be considered as an excessive payment.
Economic analysis
11. Erred in recharacterizing the payment of INR 100 Crores as deemed loan and imputing notional interest thereon.
12. Erred in rejecting the economic analysis undertaken by the Appellant, without pointing out any defects in the same as well as not appreciating that the Appellant had adhered to all the conditions laid out in Section 92C(3) of the Act.
13. Without prejudice, failed in adopting a scientific approach in conformity with the Act and the Income Tax Rules, 1962 for identifying a comparable interest rate for the alleged excessive payment of INR 100 Crores and CCDs.
14. Without prejudice, erred in not following/ incorrectly following any of the methods prescribed under Section 92C(1) of the Act for benchmarking the impugned excessive payment of INR 100 Crores.
15. Without prejudice, erred in not following/ incorrectly following any of the methods prescribed under Section 92C(1) of the Act for benchmarking the interest rate for the CCDs issued.
16. Without prejudice, failed to appreciate that if at all adjustment for interest is to be made, the same should be based on international rates (such as LIBOR) and not SBI PLR.
Short grant of credit of Advance tax and Taxes deducted at Source (“TDS”)
17. Erred in not granting advance tax credit of INR 20,93,675.
18. Erred in not granting TDS credit of INR 8,60,996 claimed by the Appellant in the return of income of AY 2018-19.
Incorrect levy of interest under Section 234C of the Act
19. Erred in levying additional interest amounting to INR 1,52,106 under Section 234C of the Act.
Initiation of penalty proceedings under Section 270A of the Act
20. Erred in initiating penalty proceedings under Section 270A of the Act.
The Appellant craves leave to add, delete, alter, vary, omit, substitute or amend any of the above grounds at any time before or during hearing before the Hon’ble Tribunal to decide the appeal according to law.”
3. Grounds no. 1 and 2 are general in nature and therefore, need no separate adjudication.
4. The issue arising in grounds no. 3-16, raised in assessee’s appeal, pertains to transfer pricing adjustment on account of consideration paid by the assessee to the associated enterprise pursuant to the merger of the holding company (i.e. subsidiary of associated enterprise) with the assessee (i.e. step down subsidiary of the associated enterprise).
5. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is primarily engaged in the diamond manufacturing/distribution business with operations spread across the globe. The assessee was established in 1995 and became a wholly owned subsidiary of Dimexon (India) Holding Pvt. Ltd. (“DIHPL”) during the year 2006-07, which in turn is wholly owned by Dimexon International Holdings B.V., Netherlands (“DIHBV”), the ultimate parent company of the Dimexon Group. For the year under consideration, the assessee e-filed its return of income on 29/11/2018 declaring a total income of Rs. 17,88,45,250. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. The Assessing Officer (“AO”) made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (“TPO”) for the determination of the arm’s length price (“ALP”) of the international transactions reported by the assessee in Form No. 3CEB. During the year under consideration, the assessee entered into the following international transactions with its AE:-
