TMI Blog2024 (2) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit, income, losses, or assets of such enterprises. In this regard, the observations in Instrumentarium Corporation Ltd. [ 2016 (7) TMI 760 - ITAT KOLKATA] also becomes relevant, wherein it was held that while a notional interest income cannot indeed be brought to tax in general, the arm s length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. Therefore, we find no merits in the aforesaid plea of the assessee and 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. We find that the Hon ble NCLT took into consideration the report of the Regional Director, wherein it was stated that the tax implications if any arising out of the scheme is subject to the final decision of the Income Tax authorities - we find that before the Hon ble NCLT, the counsel for the Petitioner companies also undertook to comply with all applicable provisions of the Act and agreed that all tax issues arising out of the scheme would be met and answered in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction. At this stage, it is also pertinent to reiterate the findings in the valuation report dated 30/12/2016 that the management has decided to give a cash consideration to the ultimate shareholder, considering the fact that excess cash is available with the assessee, which has not been fully utilised. Therefore, in view of the above, we find no infirmity in the findings of the lower authorities that issuance of CCDs and payment of cash of Rs. 100 crore represents excessive payment. Since the findings of the lower authorities in treating payment of cash to DIHBV as a deemed loan has been upheld, we direct the TPO/AO to compute the interest on the same in conformity with the observations of the Hon ble jurisdictional High Court in Tata Autocomp Systems Ltd [ 2015 (4) TMI 681 - BOMBAY HIGH COURT] To this extent, the benchmarking by the TPO/AO is modified. As regards the disallowance of interest paid on CCDs is concerned, in view of the aforesaid findings the benchmarking by the TPO/AO is upheld. Decided against assessee. - Shri Amarjit Singh, Accountant Member And Shri Sandeep Singh Karhail, Judicial Member For the Assessee : Shri Rajesh Simhan For the Revenue : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 100,00,00,000 7. Therefore, pursuant to the aforesaid merger, 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, the assessee claimed that it has paid a lesser amount to DIHBV than the book value of the shares of DIHPL. The diagrammatic representation of the corporate structure of the Dimexon Group, pre-merger and post-merger of DIHPL with the assessee, is as under:- 8. The TPO vide order dated 31/07/2021 passed under section 92CA(3) of the Act did not agree with the submissions of the assessee and 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books of the assessee for the sole purpose of shifting profits outside India. The TPO also held that it is not the case of re-characterisation but in the present case pursuant to the scheme of amalgamation, the entire character of the original equity was changed into equity, CCDs, and cash based on an unscientific valuation report prepared solely on management s guidance without any independent application of the mind by the valuer. Accordingly, the 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. 9. The AO vide draft assessment order passed under section 143(3) read with section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lieu of the purchase consideration and the same is not at arm s length. Allowing the alternative plea of the assessee, the learned DRP directed that interest on excessive payment of cash, re-characterised as deemed loan, should be charged from the date of actual payment of cash instead of the complete year. 11. In conformity with the directions issued by the learned DRP, the AO vide impugned final assessment order dated 26/07/2022 passed under section 143(3) read with section 144C(13) of the Act computed the total transfer pricing adjustment of Rs. 88,71,465 and added the same to the total income of the assessee. Being aggrieved, the assessee is in appeal before us. 12. During the hearing, the learned Authorised Representative ( learned AR ) submitted that the payment of merger consideration is on the capital account and does not result in any income. It was further submitted that as per section 92 of the Act the relevant international transaction must result in income and in alternative the provision will also be applicable to any allowance of any expense or interest arising from the international transaction, which is not so in the present case. The learned AR further submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per valuation reports submitted by the assessee cannot be relied upon as in the said valuation reports it has been specifically stated that the purchase consideration has been determined by the management. 14. We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the basic facts that DIHBV, the ultimate parent company, held 100% shares of its subsidiary DIHPL, which in turn held 100% shares of the assessee company. It is further evident from the record that the DIHPL held 100% shares of the other two subsidiaries, viz. Dimexon Jewellery Creations Pvt. Ltd. and Dimexon Integrated Business Services Pvt. Ltd. From the perusal of the scheme of amalgamation amongst DIHPL, i.e. the transferor company, and the assessee, i.e. the transferee company, forming part of the paper book from pages 131-149, we find that to maintain simple corporate structure and eliminate duplicate corporate procedures and also to reduce duplication of administrative responsibilities and multiplicity of records and legal and regulation compliances, the Dimexon Group desired to merge and amalgamate DIHPL into the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Issue of CCDs Rs. 85,00,00,000 Cash Rs. 100,00,00,000 Total Rs. 188,35,33,120 17. In its transfer pricing study report, the assessee declared the transaction of payment of purchase consideration pursuant to the scheme of amalgamation as one of the international transactions undertaken by it. The assessee claimed that while the transaction qualifies as an international transaction by virtue of section 92B of the Act, however, such transaction does not require to be benchmarked since the assessee neither generated any income nor incurred any expenditure pursuant to the implementation of such scheme of amalgamation. As per the assessee, as an abundant caution, it benchmarked the aforesaid international transaction considering the report of the third-party valuer by adopting other method as the most appropriate method. By considering the value determined by the third-party valuer as the fair market value, the assessee claimed that the aforesaid international transaction undertaken by the assessee meets the arm s length test from the Indian transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion by the assessee cannot be subjected to transfer pricing provisions. In this regard, the learned AR placed reliance upon the decision of the Hon ble jurisdictional High Court in Vodafone India Services Private Limited v/s Union of India, [2014] 368 ITR 1 (Bom.). From the perusal of the aforesaid decision, we find that the Petitioner challenged the addition made by the Revenue on account of the re-valuation of the equity shares issued by it to a higher price. The Hon ble jurisdictional High Court while allowing the writ petition filed by the taxpayer held that the issue of shares at a premium by the assessee to its non-resident holding company does not give rise to any income from an admitted international transaction and, thus, there is no occasion to apply Chapter-X of the Act in such a case. Similarly, in Shell India Markets (P) Ltd. v/s ACIT, [2014] 369 ITR 516 (Bom.), relied upon by the learned AR, the Hon ble jurisdictional High Court held that on issuance of shares by an Indian entity to its non-resident associated enterprise, no income arises and therefore transfer pricing provisions under Chapter-X of the Act would not be applicable. 22. In the present case, it is wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble NCLT has expressly recognised that the merger is not in violation of public policy and is in the best interest of the assessee and thus the TPO cannot sit over the judgment of an order passed by the Hon ble NCLT. It was also submitted that the merger consideration has been approved by the RBI and no objection was raised by the Income Tax Department during the proceedings before the Hon ble NCLT. 24. As noted above, the Hon ble NCLT vide order dated 07/12/2017 approved the scheme of amalgamation under section 230 to section 232 of the Companies Act, 2013 amongst DIHPL and the assessee. From the perusal of the aforesaid order, forming part of the paper book from pages 121-120, we find that the Hon ble NCLT took into consideration the report of the Regional Director, wherein it was stated that the tax implications if any arising out of the scheme is subject to the final decision of the Income Tax authorities. Further, we find that before the Hon ble NCLT, the counsel for the Petitioner companies also undertook to comply with all applicable provisions of the Act and agreed that all tax issues arising out of the scheme would be met and answered in accordance with the law. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable on record to show that the above exercise was conducted and the merger consideration was found to be at arm s length by the Revenue at the time of approval of the scheme of amalgamation by the Hon ble NCLT. This aspect is further evident from the observations of the Hon ble NCLT in para 8 of its order, wherein the undertaking of the Petitioner companies to comply with the applicable provisions of the Act is recorded. Therefore, we agree with the findings of the learned DRP that the TPO is not questioning the scheme of amalgamation as approved by the Hon ble NCLT, and what is being questioned is whether the payments made to the parent holding company in the guise of payment for amalgamation are consistent with the provisions of transfer pricing as contained in the Act. Accordingly, we do not find any merits in the aforesaid submission of the learned AR and accordingly, the same is rejected. 26. As is evident from the record, the assessee benchmarked the transaction of payment of merger consideration by adopting other method as the most appropriate method. Rule 10AB of the Income Tax Rules, 1962, deals with other method for computation of arm s length price and the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, it has also been mentioned that the management has decided to give cash consideration to DIHBV as excess cash is available with the assessee, which has not been fully utilised. Further, the valuer also came to the conclusion that the purchase consideration determined is not detrimental to the shareholders since the merger is within the same group and the ultimate owner continues to be DIHBV. We find that similar purchase consideration is mentioned in the valuation report dated 05/01/2017 prepared by M/s V.R.Pandya Co., forming part of the paper book from pages 161-168. It is pertinent to note that in both valuation reports the purchase consideration of Rs. 188,35,33,120 is stated to have been determined by the management of the Companies. Therefore, it is sufficiently evident that the valuation reports are not prepared on any scientific basis, however, the purchase consideration was predetermined by the management of the Companies. Thus, we agree with the findings of the TPO that valuation reports submitted by the assessee cannot be considered for benchmarking of payment of merger consideration by adopting other method as the most appropriate method, as the purchase conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30. It is further the submission of the assessee that as part of the merger transaction, the assessee had to provide a consideration of Rs. 369,28,18,214, which represented the adjusted book value of the amalgamating company, i.e. DIHPL, to the shareholders of the amalgamating company, i.e. DIHBV. Therefore, the assessee did the same by way of giving equity shares and CCDs of the assessee, which represented a total value of Rs. 269,28,90,977, computed as under:- Instrument Value (in Rs. ) 33,53,312 equity shares of face value Rs. 10 each 3,35,33,120 85,00,000 CCDs of face value Rs. 100 each 85,00,00,000 Other equity 180,93,57,857 Total 269,28,90,977 31. It is further the submission of the assessee that additionally it gave consideration of Rs. 100 crore which represents the difference in the value of DIHPL (pre-merger) and the book value of the assessee (post-merger). Accordingly, it is the submission of the assessee that there is no excess considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther find that DIHPL holds corporate deposits of Rs. 30,69,72,037 with its subsidiary company from which it earned interest of Rs. 1,19,82,097. Therefore, from the above, it is evident that apart from holding investments in subsidiaries, DIHPL does not have any other business or assets. 34. In the present case, it is the claim of the assessee that DIHBV has transferred its subsidiary, i.e. DIHPL, having a book value of Rs. 369,28,18,214 to the assessee pursuant to the merger transaction, and therefore is entitled to receive a consideration of Rs. 369,28,18,214, which it has received by way of the shareholding of the entity, i.e. the assessee, having a total value of Rs. 269,28,90,977 (post-merger) and Rs. 100 crore in cash. At the outset, it is unfathomable that in an arm s length scenario, a company can be transferred at its book value. Be that as it may, it is evident from the record that merger consideration is paid to the ultimate holding company upon an amalgamation of the subsidiary company with the step-down subsidiary, wherein the ultimate holding company, i.e. DIHBV is not transferring any of its underlying interest in shares in DIHPL, which after the merger still rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present case, the cash paid to DIHBV is treated as a deemed loan, therefore the interest computed by applying SBI PLR plus 300 basis points spread risk is not in conformity with the aforesaid decision of the Hon ble jurisdictional High Court. Since the findings of the lower authorities in treating payment of cash to DIHBV as a deemed loan has been upheld, we direct the TPO/AO to compute the interest on the same in conformity with the observations of the Hon ble jurisdictional High Court in Tata Autocomp Systems Ltd. (supra). To this extent, the benchmarking by the TPO/AO is modified. As regards the disallowance of interest paid on CCDs is concerned, in view of the aforesaid findings the benchmarking by the TPO/AO is upheld. 36. As regards the reliance placed by the learned AR on the decision of the Hon ble Delhi High Court in CIT v/s EKL Appliances Ltd, (2012) 345 ITR 241 (Delhi), we agree with the findings of the learned DRP on page 40 of its directions that the exceptions as laid down by the Hon ble High Court in para 18 of its decision are clearly applicable in the present case. Further, we are of the view that the exceptions as noted by the Hon ble jurisdictional High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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