Mumbai ITAT Ruling – Section 92 of the Act is not an independent charging section to bring in a new head of income or to charge tax on income which is otherwise not chargeable under the Act. Accordingly, the ITAT held that, if no income accrues or arises or is received by the assessee under section 5, no notional income can be brought to tax under section 92 of the Act.
Facts of the case:
Shilpa Shetty (the assessee), an individual, is a resident in India and is mainly engaged in the profession of film acting and also functions as a brand ambassador for various products.
For the financial year 2009-10, the assessee was a party to a share purchase agreement (SPA) signed by the existing shareholders of a Mauritius based company, EM Sporting Holding Limited (EMSHL) for transfer of a portion of shareholding of that company to Kuki Investments Ltd. (Kuki), represented by Raj Kundra (relative of the assessee or RK).
Kuki was also to subscribe to additional shares to be issued by EMSHL, under the same SPA. The terms of the SPA provided that:
– the assessee shall undertake brand ambassadorship services to Jaipur IPL Cricket Pvt. Ltd. (JICPL), a 100 percent subsidiary of EMSHL, in relation to promotional activities of Rajasthan Royals (an IPL Cricket team owned by JICPL) and
– such services should be provided without any charge by the assessee.
The Assessing Officer (AO) treated the assessee and EMSHL as associated enterprises (AEs) and held that the brand ambassadorship services rendered by the assessee to JICPL by virtue of the SPA constituted an international transaction and arm‟s length price (ALP) had to be computed for the said services. Aggrieved by the same, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) [CIT(A)], who dismissed the appeal of the assessee and held that there existed a deemed international transaction under section 92B(2) of the Income-tax Act, 1961 (the Act) between the assessee and JICPL, due to the prior agreement, i.e. SPA.
The assessee aggrieved by the order of CIT(A), filed the appeal before the Income-tax Appellate Tribunal (ITAT).
Decision of the ITAT:
Jurisdictional requirement to record satisfaction
– The ITAT accepted the contention of assessee that there is a jurisdictional requirement to “record satisfaction” whether there is an income or potential of an income, in case where the assessee has not filed the report under section 92E of the Act, but an international transaction comes to the notice of the AO. The AO in the instant case had recorded satisfaction on the assessee‟s potential income on the basis of AE relationship between the assessee and EMSHL. However, the CIT(A) substituted the satisfaction by holding that the AE relationship existed between the assessee and Kuki and not EMSHL.
The ITAT held that although the powers of CIT(A) being wider than that of any other appellate authorities or Court, the CIT(A) cannot cure a jurisdictional defect, which the AO derives only by recording a satisfaction. The said principle has been laid in the decision of Hon‟ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd.1
Section 92A(2)(j) of the Act
– Section 92A(2)(j) deems the two „enterprises‟ as AE, when one of the enterprise is controlled by an individual and the other „enterprise‟ is also controlled by such individual or his relatives. In the instant case, while the relative of the assessee, that is RK controls Kuki, neither RK nor Kuki can be said to have controlled the other enterprise, that is, the assessee.
– The ITAT thus, held that without satisfying the second limb of the section, that is, the individual or his relative also controlling the other enterprise/ person, section 92A(2)(j) cannot be applied.
Deemed international transaction
– The ITAT held that section 92B(2) of the Act cannot be applied to hold that the transaction between the assessee and JICPL was an „international transaction‟, as neither any of the parties to the SPA were an AE of the assesse, nor JICPL entered into a prior agreement with the AE of the assessee (as JICPL was not a party to the SPA). Further, the pre-requisite of a prior agreement between a non-AE with the AE of an assessee is also not fulfilled.
Section 92 is not a charging section
– Kuki had made certain deposit of money to EMSHL as association fees. The same was subsequently adjusted against the consideration payable on subscription of shares to EMSHL. In case of the assessee, the deposit of money by Kuki was the price paid for shares to be issued by EMSHL. The assessee obtained a right to appear against a reciprocal obligation to appear as and when matches were held. The deposit of money was not consideration for the right to appear.
– The ITAT distinguished the various judgments‟ relied on by the departmental representative like BMW India Pvt. Ltd.2 , etc., that ALP could be substituted for the price not charged by the assesse for rendering the brand ambassadorship services. The ITAT held that no income has arisen in the assessee‟s case, when there is provision of brand ambassadorship services by the assessee for no consideration to JICPL.
– The ITAT further held that Chapter X of the Act pre-supposes the existence of „income‟. Chapter X lays down the machinery provision to compute ALP of such income, if it arises from an “International transaction‟. Section 92 is not an independent charging section to bring in a new head of income or to charge tax on income which is otherwise not chargeable under the Act. The ITAT thus held that, since no income had accrued to or received by the assessee under section 5, no notional income can be brought to tax under section 92 of the Act.
The Mumbai ITAT, considering the facts, that the assessee did not charge any fee for the brand ambassadorship services, again reiterated the principle that section 92 of the Act is not a charging section. Thus, section 92 cannot bring within its ambit a transaction where there is no consideration/ income received, and thus such transaction is not chargeable to tax under sections 4 and 5 of the Act.
Further, the ITAT‟s observations on interpretation of section 92A(2)(j) of the Act, that control should be manifest for application of the said section, is also important.
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