Share Transfer At Cost To Parent Company Not A Sham

IN THE ITAT MUMBAI BENCH ‘E’

Euro RSCG Advertising (P.) Ltd.

V/s.

Assistant Commissioner of Income-tax, Circle-6(2)

IT Appeal NO. 4306 (MUM.) of 2011

[ASSESSMENT YEAR 2007-08]

JULY 11, 2012

ORDER

Amit Shukla, Judicial Member

This appeal has been filed by the assessee against order dated 25-3-2011, passed by the CIT(A)-12, Mumbai for the quantum of assessment passed under Section 143(3) for the assessment year 2007-08.

2. The assessee has raised two grounds of appeal with various sub grounds. In ground No. 1, the assessee has challenged the disallowance of Rs. 81,39,000/- on account of service tax and interest paid, which was disallowed on the ground that liability on account of service tax has not crystallized during the year under consideration. In ground No. 2, the assessee has challenged the computation of short term and long term capital gain as done by the Assessing Officer on the ground that cost of acquisition has been reduced substantially and the sale price has been taken as average sales price.

3. Brief facts for adjudication of ground No.1 are that the assessee in the profit loss account had shown a debit of Rs. 81.30 lakhs on account of services tax of Rs. 55.06 lacs paid along with the interest of Rs. 25.12 lacs. The background for such a payment is that the assessee company which is engaged in rendering range of communications services including advertising, sales promotion, direct marketing, corporate communications and public relations. It undertakes advertising and media planning for its clients and composite bills are raised for the services and expenses involved in the assignment. It receives creative fee for the creation of advertisement and commission for placement of advertisement in media from customers and has got registered itself for payment of service tax under the category “advertising agency services”. It had paid service tax only on the income from creation of advertisement and commission received from customers for placement of advertisements in media. However, it had not paid service tax on the renegotiated prices and also on discounts/incentives received as the assessee was of the belief that these incomes are not liable for service tax. A survey was carried out by the service tax authorities on 11-8-2006 and in pursuance of which a show cause notice was issued to the assessee on 19-10-2006, firstly, as to why the service tax was not paid on a difference and liabilities written back under “advertisement agency services” and secondly, on annual volume discount under “business auxiliary services” categories and why outstanding service tax liability along with interest and penalty should not be levied. After carrying out various discussions with the service tax authorities, the assessee decided to pay the service tax liability along with interest to avoid further litigation and to buy peace of mind. The assessee deposited service tax liability along with the interest for the financial year 2001-2002, 2002-2003, 2003-2004, 2005-2006 and 2006-2007. In the tax audit report, the payment was duly reported and was claimed as a revenue deduction under section 37(1). The Assessing Officer held that the amount of service tax and interest paid was a liability which was not crystallized during the year as there was no formal written order, but was paid in response to show cause notice only and further that whole matter was in dispute. He, therefore, held that same cannot be allowed as deduction in the current year either under section 37 or under section 43B.

4. In the first appeal, learned counsel submitted a copy of the show cause notice issued by the service tax authorities and also copies of challans which records the payments made by the assessee. It was also submitted that the payment was made to buy peace of mind and to avoid litigation. Learned CIT(A) also did not agree with the assessee’s contention that same is allowable under Section 43B in this year and agreed with the reasoning given by the Assessing Officer that the liability was still under dispute and a disputed liability always crystallizes on the passing of a formal order by the authorities concerned. Mere payment on the basis of show cause notice does not mean that there was a liability to pay in this year. He, therefore, held that the payment can be termed as an advance deposited with the service tax authorities, till the pendency of the proceedings and can be allowed only in the year when the litigated contingent liability crystallizes and is paid. He, therefore, confirmed the findings of the Assessing Officer.

5. The learned AR appearing on behalf of the assessee submitted that the payment of service tax was a statutory liability and there was no element of any penalty or fine. Since it is a statutory liability which have been paid during this year, the same is allowable under Section 43B. In support of his contention, he has relied upon the following case laws :-

(i)  CIT v. C.L. Gupta & Sons [2003] 259 ITR 513 (All.);

(ii)  CIT v. Dharampal Satyapal Sons Pvt. Ltd. [2011] 50 DTR 287 (Delhi);

(iii)  Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. [2007] 110 TTJ 183 (Chd.)(SB);

(iv)  Commercial Motors v. Dy. CIT [2007] 110 TTJ 596 (Delhi); and

(v)  ACIT v. Claridges Investment & Finances (P.) Ltd. [2007] 18 SOT 390 (Mum.).

Relying on these case laws, he submitted that the same is allowable under section 43B.

6. On the other hand, learned CIT DR relying on the findings of the Assessing Officer as well as CIT(A) submitted that mere payment of service tax on the basis of show cause notice cannot be held to be a liability as the same has been paid by the assessee under protest and the matter was subjudiced before the service tax authorities. Until and unless a formal order is passed, it cannot be held that there was a statutory liability for payment of service tax.

7. We have carefully heard the rival submissions and also gone through the findings of the CIT(A) as well as Assessing Officer. It is not disputed that the assessee has paid service tax along with interest in this year which also included the amounts pertaining to the earlier assessment years. The only issue is whether liability can be said to have been crystallized without any formal order being passed by the service tax authorities. Once the payment of service tax has been made during the year, it does not make any difference whether the same is under dispute before the service tax authorities. This issue is no more res integra as the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax, reported in [1971] 82 ITR 363, has decided this very question in the context of provision of Section 43B of the Act. Before the Apex Court the issue related to payment of sales tax as per the demand raised by the sales tax department and the assessee had deposited the liability of sale tax under dispute. The Hon’ble Apex Court held that merely because the assessee was disputing the liability would not mean that the liability had not accrued. Section 43B is non obstante clause which provides that :-

“Certain deductions to be only on actual payment.

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

[(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :”

8. From the plain reading of the above, it is evident that deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess, or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him, irrespective of the previous year in which the liability to pay was incurred on the payment of such sum as per method of accounting regularly employed by the assessee as per section145. For the claim of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant which is to be taken into account. The year in which the assessee incurred the liability to pay such tax, duty etc., has no relevance and cannot be linked in the matter of giving benefit of deduction under Section 43B. The case laws as have been relied by the learned AR also supports this proposition of law specifically judgment of the Hon’ble Allahabad High Court in the case of CIT v. C.L. Gupta & Sons, reported in [2003] 259 ITR 513 (All.). Similar proposition has been held in the case CIT v. Dharampal Satyapal Sons Pvt. Ltd., reported in [2011] 50 DTR 287 (Delhi) and the Special Bench decision in the case of DCIT v. Glaxo Smithkline Consumer Healthcare Ltd., reported in [2007] 110 TTJ 183 (Chd.) (SB). Following the ratio laid down in the above case laws and since no contrary decision has been cited before us, therefore, on the facts and circumstances of the case, we hold that the amount of service tax along with interest paid by the assessee is allowable in view of the provisions of Section 43B. Accordingly disallowance of amount of Rs. 81,39,000/- is deleted and ground No. 1 of assessee is allowed.

9. The facts relevant for adjudication of ground No. 2 are that during the year the assessee had sold 10400 shares of “Euro RSCG Target Media Pvt. Ltd.” to its parent company “M/s Havas International” for sale consideration of Rs. 2.42 crore. The details of capital gain computed of sale of these shares by the assessee are as under :-

(A) SHORT TERM CAPITAL GAINS/(LOSS)

 (B) LONG TERM CAPITAL GAINS/(LOSS)

10. Before the Assessing Officer, it was explained that Euro TM and the assessee company are associated to Havas Group globally. The company had held 2400 shares of Euro TM (acquired in 2002) till December, 2005. The cost of acquisition for the same was Rs. 82,25,295/-. The company decided to transfer its media business to Euro TM for a consideration of 8000 shares of Euro TM valued at Rs. 1,60,00,000/- on 18.1.2006. Thus, after the transfer of media division, the company overall held 10,400 shares (2400+8000) of Euro TM at the cost of acquisition of Rs. 2,42,25,295/-. As a part of global re-structuring process of the Havas Group, a share purchase agreement dated 6th March, 2006 was entered into between Havas Advertising International SA (Havas International), assessee and another shareholder of Euro TM to transfer the shareholding of Euro TM to Havas International at cost of acquisition to the company. In view of the above restructuring process, 10,400 shares were transferred to Havas International at Rs. 2,42,25,295/- being the cost to the company in the year 2006-2007. So far as 8000 shares which were acquired on 18-1-2006, sold on 20-9-2006, was sold at Rs. 1,60,00,000/- i.e. on the same price as per the cost of acquisition in terms of agreement, therefore, the short term capital gain was computed at ‘Nil’. Regarding balance shares of 2400, which were acquired in the year 2002, after availing indexation benefit, long term capital was computed as loss of Rs. 14,85,063/-. In support of this transaction, various documents were filed which have been mentioned at page 8 of the assessment order.

10.1 In response to the query raised by the Assessing Officer as to why the cost of acquisition of the shares should not be taken as per the market value given in valuation certificate given before RBI, it was submitted that the shares were held by the company as a capital asset and in pursuance to share purchase agreement, it had transferred the shares of Euro TM at cost. It was pointed out that the shares of Euro TM have been transferred at a higher value than the fair market value based on the valuation carried out by the independent certified valuer. Since the transfer of shares was at the cost of acquisition in terms of agreement, hence, there was no profit or gain taxable under the Act. The date and cost of acquisition were given as under :-

Various decision were also relied upon before the Assessing Officer, which have been discussed at page 9 and 10 of the assessment order. The assessee had also relied upon the terms of agreement between the assessee and Euro TM with regard to transfer of media division and specifically referred to clause 9 to 11, which provides that :-

“(9) In consideration of these presents and the transfer of the MPG division as aforesaid, TM shall pay a lump sum price of Rs. 1.60 crores, which at the option of TM, may be paid by adjustment or allotment of 8000 shares of the face value of Rs. 10/- each, which an aggregate premium of Rs. 1,59,20,000/-.

(10) In consideration of the transfer of the depreciable assets of MPG Division, TM shall pay Euro Rs. 8,64,829/-, being the written down value in Euro’s book as on 31st December 2005, as shown in Annexure-3.

(11) The net of receivables and the payables as on 31st December 2005 in the books of accounts of Euro, pertaining to MPG Division alone, is agreed to be as shown in Annexure-4 and 5; and in consideration of this advantage being transferred, Euro shall be paid a consideration of Rs. 1,78,62,240/- representing Rs. 39,00,45,843/- as per Annexure 4, minus Rs. 37,21,83,603/- as per Annexure 5.”

Thus, the assessee had received 8000 shares of Rs. 10/- each (i.e. for Rs. 80,000/-) from Euro TM with a share premium of Rs. 1,59,20,000/-. In the balance sheet also these shares were shown as investment at Rs. 1.60 crores. However, the Assessing Officer observed that as per the valuation report of equity shares of Euro TM as on 31.12.2005, it was reported that NAV of one equity share of Euro TM is Rs. 208 only, based on which the value of total shares of the 8000 was approximately Rs. 16,64,000/-. Further, the Assessing Officer held that since both the buyers and sellers are closely related parties, allotment of the shares on such a high premium was highly unreasonable. He was of the view that the agreement was a self serving document entered into between two closely related parties, therefore, the cost the acquisition is to be determined with respect to the fair market value. After applying the principle of law laid down by the Hon’ble Supreme Court in the case of McDowell and Co. Ltd. v. CTO, reported in 154 ITR 148, he worked out the cost of acquisition of 8000 shares at Rs. 16,00,000/- and cost of acquisition of 2400 shares purchased in the year 2002 at Rs. 82,25,295/-. The sale consideration was taken @ 2330 per share and determined the sale consideration at Rs. 1,86,40,000/- and determined the short term capital gain at Rs. 1,70,40,000/-. However, on the long term capital gain on sale consideration of 2240 shares @ 2330/- per shares, he determined long term capital cost of Rs. 44,91,158/-, as per the working given at page 13 of the assessment order.

11. The CIT(A) confirmed the finding of the Assessing Officer after observing and holding as under :-

“5.6 I have carefully considered he order of the assessing officer and the submission of the appellant. The order of the assessing officer as reproduced above I find carried weight for the reasons stated therein. I find that the appellant has not been able to explain the reason for arriving at the figures of sale and purchase with the parent company which is different from the valuation report of equity shares as on 31/12/2005. The appellant I find has also not been able to address the question of the AO as to why the fair market value on the date of exchange should not be the cost of acquisition. This leads one to agree with the AO wherein he says that as both the buyer and the seller are close related parties and are under the same management, allotting the shares, the agreement made on which the appellant has relied upon can only be termed as a self-serving document to suit their own needs and designed to reduce the tax incidence. I also find that the orders on whose the AO has relied completely apply on the facts of the case. Therefore, agreeing with the observation made by the AO in his order reproduced above for which the appellant has not been able to give a satisfying reply, I find there is no reason to interfere with the action of the AO. The same is upheld and the ground of appeal dismissed.”

12. Learned AR on behalf of the assessee submitted that the cost of acquisition of the value of the investment of shares was shown as per the book value in the previous assessment year i.e. for the assessment year 2006-2007, which has been accepted by the Assessing Officer in the order passed under Section 143(3), dated 22.12.2008, wherein the computation and cost of investment have been accepted and the benefit of section 54EC has also been allowed. In support of this, he relied upon the computation of income given at page 39 of the paper book and copy of the assessment order placed in the paper book from pages 56 onwards. The break up of investments as given in the balance sheet of the earlier years i.e. 31-3-2006 has also been referred to and relied upon. He submitted that once the cost of acquisition and the value of the shares have been accepted in the earlier years, the Assessing Officer cannot dispute the cost of acquisition as per the book value in the current assessment year. Regarding valuation report wherein it has been stated the cost of shares as on 31.12.2005 is at Rs. 208, and he submitted that the same was prepared only for the purpose of submission to RBI, which is evident from para 3 of the certificate given at page 72 of the paper book. He submitted that cost of acquisition is fully borne out by the terms of agreement by which the shares was allotted to the assessee at Rs. 1.60 crores for 8000 shares. It is also an admitted fact that the sum was also transferred as per the book value only. Therefore, the cost of acquisition for determining the short term capital gain has to be taken as per the book value which was the actual consideration. Regarding computation of sales price, learned AR submitted that the same is not being disputed seriously.

13. On the other hand, learned CIT DR relied heavily upon the finding given by the CIT(A) and the Assessing Officer and submitted that once the valuation report, evaluating the shares at Rs. 208 was available, the Assessing Officer was fully justified in rejecting the book value shown by the assessee. He submitted that how a share of Rs. 10/- can have such a huge premium of 1.59 crores. Therefore, the entire transaction is colourable device.

14. We have carefully considered the rival submissions and perused the material on record and the findings of the CIT(A) as well as the Assessing Officer. From the facts as have been narrated above, it is quite evident that, so far as the date of acquisition, number of shares and cost of acquisition shown in the books of account as well as in the balance sheet, there seems to be no dispute or discrepancy. It is also not in dispute that cost of acquisition of shares as appearing in the balance sheet of the earlier years i.e. in the assessment year 2006-2007 is at Rs. 2,42,25,295/-, which has been accepted also by the Assessing Officer in the scrutiny proceedings under Section 143(3) in that year. Here in this case, in pursuance of an agreement, the shares of Euro TM were to be transferred to parent company i.e. M/s Havas International, on the book value and the same was done so in this year. Once the cost of acquisition as shown in the books of account on the value which has been accepted earlier by the department and also evidenced by the terms of agreement between the parties specifically clause 9 to 11, as have been reproduced above, it cannot be held that the cost shown by the assessee is fictitious. There was no occasion or any material on record to doubt the book value of the shares by the Assessing Officer. As clarified by the learned counsel, the valuation certificate was only for the purpose of RBI for showing NAV value of the shares. Here in this case, at the time of acquisition of shares, it has been clearly mentioned in the agreement that a premium aggregating to Rs. 1,59,20,000/- was given for the face value of Rs. 10/- each. This agreement cannot be brushed aside, unless there is something on record to prove that it was any kind of make believe arrangement. This is a transactions solely between the parent company and the holding company, the same cannot be treated as a sham transaction as the shares have been transferred purely on the book value disclosed earlier. Apparently it is also not clear, what gain assessee will achieve to enhance the book value of shares in the earlier years. The premium paid on shares in earlier years by Euro TM is clearly evidenced by Clause 9 of the agreement and assessee has duly disclosed the same. The shares has been transferred on same value, thus, there is no gain to the assessee atleast. It is also seen that on one hand, the Assessing Officer has worked out the short term capital gain at a huge amount and at the same time has also increased the long term capital loss, which will be set off in the computation. On these facts we do not find that it is a case of make belief arrangement or colourable device as held by the Assessing Officer, as nothing has been brought on the record that the book value which was shown in the earlier years was fictitious, specifically when the same has been accepted by the department in scrutiny proceedings. In view of this fact, we hold that the addition made on account of short term capital gain by reducing the value of cost of acquisition of shares is uncalled for. Since sales price has not been disputed before us by the Ld. AR, we do not find it proper to adjudicate on this point. In the result, ground No.2 is treated to be allowed in part to the extent that cost of acquisition has to be taken as per book value for the purpose of computation of short term capital gain.

15. In the result, the appeal of the assessee is partly allowed.