IN THE HIGH COURT OF JUDICATURE AT BOMBAY
\nORDINARY ORIGINAL CIVIL JURISDICTION
\nWRIT PETITION NO. 462 OF 2017<\/p>\n
HDFC Bank Ltd. ]
\nHDFC Bank House, Senapati Bapat Marg ]
\nLower Parel, Mumbai 400 013 ] …Petitioner.<\/p>\n
Vs.<\/p>\n
1) Assistant Commissioner of Income Tax ]
\n2(3)(1), Mumbai, Room No.552, 5th ]
\nFloor, Aayakar Bhavan, Maharshi ]
\nKarve Marg, Mumbai 400 020 ]<\/p>\n
2) Deputy Commissioner of Income Tax ]
\n(Transfer Pricing) 2(2)(2), Room No.1 ]
\n20th Floor, Air India Building, Nariman ]
\nPoint, Mumbai – 400 021 ]<\/p>\n
3) Commissioner of Income Tax -2 ]
\nRoom No.344, 3rd Floor, Aaykar bhavan ]
\nMaharshi Karve Road, Mumbai400020 ]<\/p>\n
4) Union of India, Through the Secretary ]
\nDepartment of Revenue, Ministry of ]
\nFinance, Govt. of India, North Block ]
\nNew Delhi 110 001 ] …Respondents.
\n…..<\/p>\n
Mr J.D. Mistri Sr. Counsel a\/w Mr Madhur Agarwal i\/b Mr Atul
\nKarsandas Jasani for the Petitioner<\/p>\n
Mr P.C. Chhotaray for the Respondents.
\n\u2026\u2026..<\/p>\n
CORAM : S. C. DHARMADHIKARI &
\nB.P.COLABAWALLA, JJ.<\/p>\n
RESERVED ON : 29th August, 2018.<\/p>\n
PRONOUNCED ON : 20th December, 2018<\/p>\n
JUDGMENT [ PER B. P. COLABAWALLA J. ]:<\/p>\n
1. By this Petition, the Petitioner \u2013 bank seeks a writ of
\ncertiorari for quashing the impugned order dated 29th December,
\n2016 (Exh \u201cF\u201d) and the impugned reference dated 29th December,
\n2016. The impugned order dated 29th December, 2016 (Exh \u201cF\u201d)
\npassed by Respondent No.1 holds that certain transactions entered
\ninto by the Petitioner are \u201cSpecified Domestic Transactions\u201d (for
\nshort \u201cSDTs\u201d) as per section 92BA(i) of the Income Tax Act, 1961
\n(for short the \u201cI.T. Act\u201d) and the Arms Length Price (\u201cALP\u201d) of the
\nsaid transactions are required to be determined by making a
\nreference to Respondent No.2. It is pursuant to this order that the
\nreference dated 29th December, 2016 was made to Respondent No.2
\nunder section 92CA(1) of the I.T. Act for determination of the ALP in
\nthe Petitioner’s case for the Assessment Year (for short \u201cA.Y.\u201d)
\n2014-15. It is the case of the Petitioner that the impugned order as
\nwell as the impugned reference are ex-facie without jurisdiction,
\nillegal, unsustainable, contrary to the principles of natural justice
\nand contrary to law, and therefore, ought to be quashed and set aside
\nby us in our writ jurisdiction. This is how the present Writ Petition
\nhas been filed.<\/p>\n
2. Before we set out the legal submissions of the respective
\nparties, the brief facts of the case and which would be necessary to
\ndetermine the controversy before us, are as under:-<\/p>\n
(a) The Petitioner is a public limited company registered under
\nthe Companies Act, 1956 and is also registered as a banking
\ncompany with the Reserve Bank of India (\u201cRBI\u201d). The
\nprimary business of the Petitioner is banking. The
\nPetitioner filed its assessment of income for the Assessment
\nYear (\u201cA.Y.\u201d) 2014-15 on 30th November, 2014 declaring a
\ntotal income of Rs.12595,27,63,920\/-. The Petitioner, along
\nwith the return of income, also filed Form 3CEB inter alia
\ndisclosing certain \u2018specified domestic transactions\u2019
\nentered into by it during the relevant year. Thereafter, the
\nPetitioner\u2019s case was selected for scrutiny assessment.
\nDuring the scrutiny, the Petitioner again filed a copy of
\nForm 3CEB on 11th June, 2016. It is the case of the
\nPetitioner that the SDTs entered into by it and reported in
\nForm 3CEB were similar to the transactions entered into by
\nthe Petitioner in the earlier assessment year, namely, A.Y.
\n2013-14 and the Transfer Pricing Officer (for short the
\n\u201cTPO\u201d) had accepted that all the transactions entered into
\nby the Petitioner were at an ALP. This was held by the TPO
\nin his order dated 24th October, 2016.
\n(b) It is in these circumstances that the Petitioner has averred
\nthat it was surprised to receive a show cause notice from
\nRespondent No.1 on 29th December, 2016 at 01.39 a.m., vide
\nan e-mail, for the alleged non-reporting of certain related
\nparty transactions for the A.Y. 2014-2015 and required the
\nPetitioner to provide the reasons why the same should not
\nbe reported to Respondent No.2 for determination of the
\nALP. This show cause notice was to be replied to by the
\nPetitioner by 11.00 a.m. on the same date i.e. 29th December,
\n2016. According to Respondent No.1 certain transactions
\n(mentioned hereinafter) were entered into by the Petitioner
\nwith related parties as per section 40A(2)(b) which were
\nnot reflected in form 3CEB filed by the Petitioner. Those
\ntransactions are as under:
\ni. The Petitioner purchased Loans from HDFC Ltd and its
\nsubsidiaries amounting to Rs.5164 Cr and Rs.27.72 Cr
\nrespectively.
\nii. The Petitioner has received services from HBL Global
\nPrivate Ltd. (for short \u201cHBL Global\u201d) for which the
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\nPetitioner paid an amount 492.5 Cr. and the Petitioner
\nwas having beneficial ownership of HBL Global.
\niii. The Petitioner has paid interest amount 4.41 Crore to HDB
\nWelfare Trust which was a Trust created by the Petitioner.
\n(c) Since Respondent No.1 was of the opinion that these
\ntransactions were entered into with related parties as set
\nout in section 40A(2)(b) of the IT Act, they ought to have
\nfound place in Form 3CEB filed by the Petitioner. Since this
\nwas not done, the show cause notice was issued.
\n(d) According to the Petitioner no personal hearing was given to
\nthem by Respondent No.1 in relation to these transactions.
\nBe that as it may, the Petitioner, vide its letter dated 29th
\nDecember, 2016, submitted a reply with respect to each of
\nthese above mentioned three transactions and gave an
\nexplanation as to why they could not be termed as SDTs.
\nThis being the case the Petitioner stated that there was no
\nrequirement on their part to disclose the same in Form
\n3CEB and correpondingly there was no question of making a
\nreference to the TPO for determining the ALP in relation to
\nthese three transactions.
\n(e) In a nutshell, it was the Petitioner\u2019s case that the
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\ntransaction referred to in item (i) above [the purchase of
\nloans from HDFC Ltd], firstly did not relate to A.Y. 2014-
\n2015 but in fact the aforesaid transaction was entered into
\nby the Petitioner in the earlier year and were relating to
\nA.Y. 2013-2014. For A.Y. 2013-14 transfer pricing
\nassessment had already been completed and become final.
\nThe Petitioner further submitted that in any event, none of
\nthe promoters of the Petitioner held more than 20% of the
\nshareholding individually and hence these transactions did
\nnot take place with a person as contemplated under section
\n40A(2)(b) of the IT Act. The other submission with
\nreference to this transaction was that admittedly this
\ntransaction was a transaction of purchase of loans which
\ncould never be termed as an expenditure, and therefore, the
\nsame did not come within the ambit of section 92BA(i) of the
\nIT Act.
\n(f) As far as the transaction listed at item (ii) is concerned
\n[payment of Rs.492.50 Cr to HBL Global for services
\nrendered], the Petitioner submitted that it did not have any
\ndirect shareholding in HBL Global as that company was a
\nsubsidiary of Atlas Documentary Facilitators Co. Pvt. Ltd.
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\n(\u201cADFC Ltd.\u201d) in which the Petitioner has a 29%
\nshareholding. The Petitioner submitted that indirect
\nshareholding is not covered or contemplated under section
\n40A(2)(b) of the Act, and therefore, the transactions with
\nHBL Global was not covered under the said section. This
\nbeing the case, the contention of the Petitioner was that this
\ntransaction also could never fall within the ambit of a SDT as
\nunderstood under section 92BA(i). In support of this
\nargument, the Petitioner submitted that the Petitioner
\ncannot be regarded as the beneficial owner of the shares of
\nHDL Global as the beneficial owner of these shares was
\nADFC Ltd. and not the Petitioner.
\n(g) As far as the transaction listed in item (iii) is concerned
\n[payment of interest of Rs.4.41 Cr to HDB Trust], the
\nPetitioner submitted that HDB Welfare Trust was
\nestablished for providing general welfare measures such as
\nmedical relief and educational assistance to the employees
\nof the Petitioner bank. The Petitioner bank further
\nsubmitted that as the beneficiaries of the HDB Welfare Trust
\nwere the employees of the Petitioner and not the Petitioner,
\nthe Trust does not come within the ambit of a person\/party
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\nas required under section 40A(2)(b) of the Act.
\n(h) After considering these objections of the Petitioner,
\nRespondent No.1, vide his impugned order dated 29th
\nDecember, 2016, rejected the objections that the aforesaid
\ntransactions were not SDTs, and therefore, held that
\ndomestic transfer pricing provisions would be applicable. In
\na nutshell, Respondent No.1 held that the Petitioner was
\ninvolved in the transaction of purchase of loan which is a
\nbusiness asset of the Petitioner and the purchase of such
\nasset from a related party falls under section 40A(2)(b) of
\nthe IT Act. Respondent No.1 further held that the
\nconsolidated holding of the promoters was in excess of 20 %
\nof the shareholding of the Petitioner and hence, the
\nbeneficial ownership clause was applicable. Respondent No.1
\nfurther went on to hold that since the Petitioner holds 29%
\nshareholding of ADFC Ltd., which in turn holds 98.4% of the
\nshares of HBL Global, the Petitioner had beneficial
\nownership and voting rights of more than 20% of HBL Global
\nand hence the transaction with HBL Global was with a
\nperson\/party as covered by section 40A(2)(b) of the I.T. Act.
\nAs far as the Trust was concerned, Respondent No.1 held
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\nthat the Petitioner possesses more than 20% of the rights in
\nthe said Trust which makes it a related party as per the
\nprovisions of section 40A(2)(b) of the Act. It is in these
\ncircumstances that Respondent No.1 passed the impugned
\norder and thereafter, on the very same day (namely, on 29th
\nDecember, 2016) made a reference (in relation to all the
\nabovementioned three transactions) under section 92CA(1)
\nof the Act to Respondent No.2 for determining the ALP.
\n(i) Once this reference was made, Respondent No.2 issued a
\nnotice dated 30th December, 2016 under section 92CA(2) of
\nthe I.T. Act asking the Petitioner to produce various
\ninformation in relation to international transactions and\/or
\nSDTs referred to by Respondent No.1 vide his letter dated
\n29th December, 2016. This was for A.Y. 2014-2015. To this
\nletter of Respondent No.2, the Petitioner replied by
\ncontending that certain basic documents which the
\nPetitioner had maintained with respect to the international
\ntransactions \/ SDTs reported by the Petitioner in Form
\nNo.3CEB were already submitted and those transactions
\nwere accepted to be SDTs. It was the case of the Petitioner
\nthat the transactions referred to Respondent No.2 by
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\nRespondent No.1 were not SDTs, and therefore, the
\nPetitioner was not obliged in law to submit any documents to
\nRespondent No.2 with reference to these transactions. The
\nPetitioner also alleged that the reference made to
\nRespondent No.2 was not only bad in law, but also appeared
\nto be made in undue haste by Respondent No.1.
\n(j) It is thereafter, and in these facts and circumstances, that
\nthe present Writ Petition has been filed seeking quashing
\nand setting aside of the impugned order dated 29th
\nDecember, 2016 passed by Respondent No.1 as well as the
\nimpugned reference dated 29th December, 2016 under which
\nRespondent No.1 made a reference to Respondent No.2 for
\ndetermining the ALP for the above mentioned three
\ntransactions and which, according to Respondent No.1, were
\nSDTs.
\n(k) After this Petition was filed on 23rd June, 2017, the Division
\nBench of this Court recorded that the matter has debatable
\nissues which require consideration, and therefore, the
\nmatter was placed for hearing on 14th July, 2017. The
\nDivision Bench directed that till then the TPO shall not pass
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\nany final order. The Division Bench also recorded that if
\npossible an endeavor shall be made to dispose of this Petition
\nfinally at the stage of admission. Thereafter, the matter has
\nbeen adjourned from time to time and has now come up
\nbefore us and with the consent of parties we have heard it
\nfinally. In these circumstances we issue Rule. The
\nRespondents waive service. By consent, Rule is made
\nreturnable forthwith and heard finally.
\n3. In this factual backdrop, learned Senior Counsel Mr J.D.
\nMistri appearing on behalf of the Petitioner, submitted that in the
\nfacts of the present case there were three transactions which the
\nRevenue had alleged, were SDTs. They are – (1) Loans of Rs.5164
\nCrores purchased by the Petitioner from the promoters (HDFC Ltd.)
\nand loans of Rs.27.72 Crores purchased from the subsidiaries; (2)
\nPayment of Rs.492.50 Crores by the Petitioner to HBL Global for
\nrendering services; and (3) payment of interest of Rs.4.41 Crores by
\nthe Petitioner to HDB Welfare Trust. Mr Mistri submitted that it is
\nonly when the aforesaid transactions, or any of them, are a SDT, and
\nwhich are not reported by the assessee, then the A.O. is required to
\nissue a show cause notice to the assessee and pass an order disposing
\nof the objections of the assessee before referring the said SDT to the
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\nTPO for determining the ALP. He submitted that to challenge the
\norder of the A.O. there is no other alternate efficacious remedy and in
\nfact this Court in the case of Vodafone India Services Pvt. Ltd. Vs.
\nUnion of India [361 ITR 531] has held that such an order passed
\nby the A.O. rejecting the objections of the assessee that the
\ntransactions are not SDTs, can be challenged by way of a Writ
\nPetition. Another reason stated by Mr Mistri why the Writ Petition
\ncame to be filed was that once the transaction is treated as a SDT,
\npenalty under section 271G of the Act (at 2% of the value of the
\nalleged SDT) is leviable, even if the TPO was to come to the
\nconclusion that the transactions were at the ALP. It is in these
\ncircumstances, Mr Mistri submitted that the Petitioner has been
\nconstrained to approach this Court in its extraordinary, equitable
\nand discretionary jurisdiction under Article 226 of the Constitution
\nof India.
\n4. Thereafter, Mr Mistri submitted that neither of the three
\ntransactions are a SDT as wrongly held by Respondent No.1. He
\nsubmitted that as far as the loans of Rs.5164 Crores purchased by
\nthe Petitioner from the promoters as well as Rs.27.72 Crores
\npurchased from the subsidiaries is concerned, he stated that the
\naforesaid transaction is not a transaction relating to the assessment
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\nyear in question, namely, A.Y. 2014-15. In this regard he relied upon
\nthe annual accounts of the Petitioner annexed at pages 100 & 101 of
\nthe paper book. According to Mr Mistri, this submission was not
\neven considered by the A.O. in the impugned order while rejecting
\nthe objections of the Petitioner. Mr Mistri submitted that this
\ntransaction related to A.Y. 2013-14, for which the Transfer Pricing
\nAssessment was already completed. This being the case, at the
\noutset, Mr Mistri submitted that this transaction could never be
\ntaken for A.Y. 2014-15 and be treated as a SDT.
\n5. Thereafter, Mr Mistri submitted that in any event, this
\ntransaction of purchasing loans could never be a SDT. Mr Mistri
\nsubmitted that for a transaction to fall within the meaning of a SDT
\nunder section 92BA(i) of the Act, the transaction has to be one which
\nis not an international transaction and in which any expenditure in
\nrespect of which payment has been made or is to be made by the
\nassessee to a person referred to in section 40A(2)(b) of the Act. He
\nsubmitted that section 40A(2)(b) of the Act refers to certain
\npersons, and the transaction in question, namely, the purchase of
\nloans from the promoters of the Petitioner (HDFC Ltd.) did not fall
\nwithin any of the persons mentioned in section 40A(2)(b) read with
\nexplanation (a) thereof, and which is appended to section 40A(2)(b)
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\nof the Act. In this regard, he brought to our attention section
\n40A(2)(b)(iv) of the Act and contended that the person referred to
\nin the said sub-section has to have a substantial interest in the
\nbusiness or profession of the assessee (in the present case the
\nPetitioner). He submitted that explanation (a) sets out what is the
\nmeaning of ‘substantial interest’ and stipulates that in a case where
\nthe business or profession is carried on by a company, such person
\nis, at any time during the previous year, the beneficial owner of the
\nshares carrying not less than 20% of the voting power. In the facts of
\nthe present case, Mr. Mistri submitted that admittedly HDFC Ltd. is
\nthe beneficial owner of only 16.39% of the shares of the Petitioner
\nand hence section 40A(2)(b) was not at all applicable to the present
\ntransaction. He submitted that the Revenue had grossly erred in
\nclubbing the shareholding of HDFC Ltd. with the shareholding of its
\nsubsidiary, namely, HDFC Investments Ltd. (and which has a 6.25%
\nshareholding in the Petitioner), to cross the threshold of 20%. To put
\nit differently, Mr Mistri submitted that HDFC Ltd. holds 16.39% of
\nthe shareholding of the Petitioner and HDFC Investments Ltd. holds
\n6.25% of the shares of the Petitioner. To cross the threshold of 20%
\nas required under section 40A(2)(b), the Revenue is seeking to club
\nboth these shareholdings together. He submitted that in law, this can
\nnever be done. He submitted that in law, the Parent Company (here
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\nHDFC Ltd.) can never be said to be the beneficial owner of the
\nproperties of its subsidiary (here HDFC Investments Ltd.). He
\nsubmitted that the shares held by HDFC Investments Ltd in the
\nPetitioner was nothing but the movable property of HDFC
\nInvestments Ltd. This being the case, Mr. Mistri submitted that the
\nRevenue could never club the two shareholdings together to cross
\nthe threshold of 20% as required by section 40A(2)(b) read with
\nexplanation (a) thereof. In support of this proposition, Mr. Mistri
\nplaced reliance on the following decisions of the Supreme Court:-
\n(a) Bacha F. Guzdar Vs. CIT [(1955) 27 ITR 1 (SC)];
\n(b) Vodafone International Holdings BV Vs. UOI [341 ITR
\n1 (SC)]; and
\n(c) BA Mohota Textile Traders Pvt. Ltd. Vs. DCIT [397
\nITR 616 (Bom)].
\n6. To further substantiate this argument, Mr Mistri also
\nplaced reliance on the meaning of the word \u201cbeneficial owner\u201d as
\nappearing in the Black\u2019s Law Dictionary as well as Tax Laws Lexicon
\n(2012 Edition). According to Mr Mistri, Black\u2019s Law Dictionary
\ndefined \u2018beneficial owner\u2019 as \u2018one recognized in equity as the owner
\nof something because use and title belong to that person, even though
\nthe legal title may belong to someone else; especially one from whom
\nproperty is held in Trust\u2019 . Similarly, according to Mr Mistri, Tax
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\nLaws Lexicon (2012 Edition) defines \u2018beneficial owner\u2019 as \u2018the
\nperson who is not the legal owner but has the right to deal with the
\nproperty as his own and has a right to enjoy the income.\u2019 Mr. Mistri
\nsubmitted that even section 89 of the Companies Act, 2013 requires
\na disclosure to be made to the Company (in the present case the
\nPetitioner) by the owner of the shares if the owner is not the
\nbeneficial owner. In the present case no such disclosure is required
\nto be made by HDFC Investments Ltd., and in fact, no such disclosure
\nhas been made in terms of section 89, by HDFC Investments Ltd. He
\ntherefore submitted that HDFC Ltd. (the parent company of HDFC
\nInvestments Ltd.) could never be said to be the beneficial owner of
\nthe shares owned by HDFC Investments Ltd. in the Petitioner.
\n7. Mr Mistri then submitted that it is undisputed that there
\ncannot be more than one beneficial owner of the shares. It cannot be
\nthat two different persons are the beneficial owners of the same
\nshares. If we were to accept the submission of the Revenue, the same
\nwould lead to a complete absurdity. Mr Mistri submitted that take for
\nexample Company ‘A’ has a wholly owned subsidiary, Company ‘B’.
\nIn turn, the shares of Company ‘C’ are held 90% by Company ‘B’ and
\n10% by Company ‘A’. If one was to give the interpretation as sought
\nfor by the Revenue, then it would mean that Company \u2018A\u2019
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\nbeneficially owns 100% of Company ‘C’ which would lead to an absurd
\nsituation that Company ‘B’; though owning 90% of the shareholding
\nin Company \u2018C\u2019, would not be regarded as having a substantial
\ninterest in Company \u2018C\u2019 as Company \u2018B\u2019 cannot be said to be the
\nbeneficial owner of its 90% shareholding in Company \u2018C\u2019. Further, if
\nthe interpretation of the Revenue was to be held as correct then one
\nwill not have to not stop there and then also see the shareholders of
\nCompany ‘A’ as the beneficial owner of the shares of Company ‘C’.
\nThis would then lead to absurd results, namely, that then even
\nCompany \u2018A\u2019 also would not have a substantial interest in Company
\n\u2018C\u2019 and it would be the shareholders of Company ‘A’ that would have
\na substantial interest in Company \u2018C\u2019. This, according to Mr Mistri,
\nwould lead to startling results. He therefore submitted that such an
\ninterpretation has to be avoided at all costs.
\n8. Mr Mistri further submitted that a Guidance Note issued
\nby the Institute of Chartered Accountants of India on Report under
\nsection 92E, specifically provides that for the purposes of section
\n40A(2)(b) one has to consider only direct shareholding and not
\nderivative or indirect shareholding. He submitted that though the
\nGuidance Note is not binding on this Court, the Supreme Court in the
\ncase of CIT Vs Virtual Soft Systems Ltd. [404 ITR 409 (SC)] has
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\nheld that the Guidance Note can be used as an aid to interpret the
\nprovision. In furtherance of this argument, Mr Mistri submitted that
\nwherever the Legislature intended, they have used the term
\n\u201cdirectly or indirectly\u201d throughout the Income Tax Act, 1961.
\nSome of the examples given by Mr Mistri were sections 92A(1),
\n92A(2), 285A, 9(1)(i), and explanation 5 to section 9(1), to name a
\nfew. Mr Mistri submitted that in fact the term \u201cdirectly or
\nindirectly\u201d is used more than 40 times in the Act. What is important
\nto note is that this very term, \u2018directly or indirectly\u2019 is
\nconspicuously absent in explanation (a) to section 40A(2)(b) of the
\nAct, was the submission of Mr. Mistri. If the interpretation of the
\nRevenue was to be accepted, the same would tantamount to doing
\nserious violence to the language of the statute by introducing words
\nin explanation (a) to section 40A(2)(b) which have not been
\nprovided by the Legislature. Mr. Mistri submitted that this is more so
\nwhen one takes into consideration that explanation (a) to section
\n40A(2)(b), being a deeming provision, must be interpreted strictly.
\nHe, therefore, submitted that the present transaction, namely,
\npurchase of loans by the Petitioner from HDFC Ltd. and its subsidiary
\ncan never be termed as a SDT.
\n9. In the alternative to the above argument, Mr Mistri
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\nsubmitted that the purchase of these loans can never be an
\n\u2018expenditure\u2019 as covered under sections 28 to 37 of the Act. It was
\nbasically a purchase of an asset and hence not an \u2018expenditure\u2019
\ncovered under section 92B(A)(i). Mr Mistri submitted that section
\n40A would be applicable when an amount expended or paid is
\nclaimed as a deduction whereas loans purchased by the Petitioner is
\nnot claimed as a deduction and which is reflected as an asset in the
\nbalance-sheet. He submitted that even the A.O. accepts in the
\nimpugned order that the transaction of purchase of loans is an asset
\nof the Petitioner. Mr Mistri submitted that section 92BA(i) would
\napply only when an expenditure is incurred for which a payment is
\nmade to a party covered under section 40A(2)(b) of the Act. In the
\npresent case, the purchase of loans was not an \u2018expenditure\u2019 but
\npayment made for acquiring an asset, and hence, the same could
\nnever fall within the ambit of section 92BA(i) at all. Mr Mistri
\nsubmitted that it is not possible to purchase an asset without making
\npayment but that by itelf, without anything more, would not mean
\nthat such payment is an \u2018expenditure\u2019 as understood under the Act.
\nHe submitted that for purchasing an asset the purchaser pays a price
\nfor acquiring the asset and it is referred to as the consideration for
\nthe purchase of that asset and not an \u2018expenditure\u2019 for that asset. He
\nsubmitted that the consideration paid for acquiring the asset can
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\nnever be said to be in the nature of \u2018expenditure\u2019 so as to come within
\nthe ambit of section 92BA(i) of the Act. Mr Mistri was at pains to
\npoint out that an asset would be reflected in the balance-sheet of the
\ncompany whereas \u2018expenditure\u2019 would not find place in the balancesheet
\nbut would be reflected in the Profit & Loss Account. These
\nloans that were purchased by the Petitioner are reflected in the
\nbalance-sheet of the Petitioner bank and not in the Profit & Loss
\nAccount. This is another reason why Mr Mistri submitted that the
\npresent transaction, namely, purchase of loans by the Petitioner,
\ncould never fall within the definition of a SDT under section 92BA(i)
\nof the Act.
\n10. As far as the transaction with HBL Global is concerned,
\nnamely, the payment made by the Petitioner of Rs.492.50 Crores to
\nHBL Global for rendering services, Mr Mistri submitted that the
\nPetitioner bank holds 29% shares of a company called Atlas
\nDocumentary Facilitators Co. Pvt. Ltd. (\u201cADFC Ltd.\u201d) which in turn
\nholds 98.4% shares of HBL Global. He submitted that admittedly the
\nPetitioner does not have any shareholding in HBL Global and hence
\nthe Petitioner does not beneficially own more than 20% of the shares
\nof the HBL Global Pvt. Ltd. or vice versa, as contemplated under
\nsection 40A(2)(b) of the Act. He, therefore, submitted that the
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\npayment of Rs.492.50 Crores for the services rendered by HBL
\nGlobal to the Petitioner was not a transaction that could fall within
\nsection 92BA(i) of the Act to be termed as a SDT. Mr. Mistri
\nsubmitted that Respondent No.1 erred in holding that merely
\nbecause the Petitioner holds 29% shares of ADFC Ltd., which in turn
\nholds 98.4 % shares in HBL Global, the Petitioner would be regarded
\nas a beneficial owner of the shares and voting rights of HBL Global.
\nOnce again, Mr Mistri submitted that Respondent No.1 has
\ncompletely misconstrued meaning of the word \u201cbeneficial owner\u201d of
\nthe shares. He submitted that the legal and beneficial owner of
\nshares of HBL Global is only ADFC Ltd. and cannot be said to be any
\nshareholder of ADFC Ltd. He submitted that it is now well settled
\nthat the shareholders of a company cannot be said to have any
\nbeneficial interest in the assets of that company. He submitted that
\n98.4% shareholding of ADFC Ltd. in HBL Global was an asset \/
\nmovable property of ADFC Ltd. By no stretch of the imagination,
\ntherefore, could the Petitioner be held to be the beneficial owner of
\nthe shares held by ADFC Ltd in HBL Global. He, therefore, submitted
\nthat this transaction could never be termed as a SDT as understood
\nunder section 92BA(i) read with section 40A(2)(b) of the Act. Mr
\nMistri submitted that if the logic of Respondent No.1 was to be taken
\nto its logical conclusion, then it would mean that it is not even the
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\nPetitioner who is the beneficial owner of the shares of HBL Global,
\nbut it is the shareholders of the Petitioner who were the beneficial
\nowners of the shares of HBL Global. As stated earlier, Mr Mistri
\nsubmitted that this would lead to an absurd situation. He submitted
\nthat this could never been the intention of the Legislature as such an
\ninterpretation would lead to startling results and therefore has to be
\navoided.
\n11. As far as the transaction of payment of interest of
\nRs.4.41 Crores to HDB Welfare Trust is concerned, Mr Mistri
\nsubmitted that the beneficiaries of the said Trust are the employees
\nof the Petitioner and not the Petitioner. He, therefore, submitted
\nthat the Trust does not come within the ambit of section 40A(2)(b) of
\nthe Act as explanation (b) to section 40A(2)(b) clearly provides that
\nthe Petitioner must be beneficially entitled to 20% of the profits in
\nthe said Trust. He submitted that in the facts of the present case this
\ntransaction did not fall within explanation (a) of section 40A(2)(b),
\nbut explanation (b) to the said section. He submitted that
\nRespondent No.1 had proceeded on a factually wrong assumption
\nthat the Petitioner possesses more than 20% of the rights in the said
\nTrust which makes it a related party as per the provisions of section
\n40A(2)(b) of the Act. He, therefore, submitted that even this
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\ntransaction could never fall within the ambit and scope of a SDT as
\ncontemplated under section 92BA(i) of the Act.
\n12. Mr Mistri then submitted that the whole premise of the
\nimpugned order that these transactions are referred to as related
\nparty transactions in form 3CD, was factually incorrect. This fact,
\naccording to Mr Mistri, has been accepted by Respondent No.1 in an
\naffidavit-in-reply filed on behalf of the Revenue (page 356). He,
\nthereafter submitted that the impugned order is contrary to the
\nprinciples of natural justice and needs to be set aside on this ground
\nalone. He submitted that the notice issued to the Petitioner before
\npassing the impugned order was served on the Petitioner on 29th
\nDecember, 2016 at 01.29 a.m. asking the Petitioner to show cause by
\n11.00 a.m. of the same date. The Petitioner was given no personal
\nhearing and though the Petitioner filed its submissions in the
\nafternoon of 29th December, 2016, Respondent No.1 passed the
\nimpugned order on the very same day. He submitted that even the
\napproval from the CIT was granted on the same day and thereafter
\nthe reference in relation to these three transactions was made to TPO
\nalso on the very same day. He submitted that looking to these facts it
\nwas clear that the principles of natural justice had been clearly
\nviolated as no effective opportunity was given to the Petitioner for
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\nshowing cause to the notice issued by Respondent No.1. No personal
\nhearing was also granted to the Petitioner before passing the
\nimpugned order, was the submission of Mr Mistri. He, therefore,
\nsubmitted that all this clearly goes to show that the impugned order
\nand the impugned reference are clearly illegal and bad in law, and
\ntherefore, ought to be set aside by us in our extraordinary, equitable
\nand discretionary jurisdiction under Article 226 of the Constitution
\nof India.
\n13. On the other hand, Mr Chhotaray, learned advocate
\nappearing on behalf of the Revenue, submitted that for a specified
\ndomestic transaction there are two types of pricing. First is the
\nArms Length Price and the second is the Transfer Price. The ALP is
\nthe price between unrelated parties. This price is determined by the
\nmarket forces. Transfer Price, on the other hand, is the price of the
\ntransaction fixed between two related parties. Since these related
\nparties are subject to common control, the price of inter se
\ntransactions amongst the related parties can be manipulated to
\ntransfer profit from one party to another in order to evade tax. It is
\nfor this very reason that the Transfer Pricing provisions were
\nbrought into force by the Legislature so as to determine the ALP of a
\ntransaction between related parties. He submitted that this was
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\ndone in order to evade tax. If the Transfer Price was different from
\nthe ALP the Taxing Officer could make adjustments after following
\nthe provisions as set out in Chapter X of the Income Tax Act, 1961.
\n14. As far as the transaction of purchase of loans by the
\nPetitioner from HDFC Ltd. is concerned, Mr Chhotaray submitted
\nthat it was wrong on the part of the Petitioner to claim that the
\npurchase of these loans is not an \u2018expenditure\u2019 since it is not debited
\nto the Profit and Loss Account. He submitted that the Petitioner is a
\nbank involved in banking business. In the normal course of its
\nbusiness it indulges in the activity of purchasing and selling of loans.
\nThese transactions, being a part of the business activity of the
\nPetitioner warrant to be treated as a business asset and stock. He
\nsubmitted that in the annual report of the Petitioner, the Petitioner
\nreported these related party transactions as purchases. He
\nsubmitted that the purchase of any asset \/ services cannot be made
\nwithout incurring an expenditure. For any asset, irrespective of
\nwhether it is a current investment or a long term investment, an
\nexpenditure has to be incurred. Such an expenditure constitutes the
\ncost of the asset. Moreover, the loan purchase transactions involve
\nexpenditure every year by way of interest on such loans which is a
\nRevenue expenditure. Even when a capital asset is purchased, cost is
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\nincurred and such cost is then capitalized and becomes a part of the
\nbalance-sheet. Nevertheless, the nature is \u2018expenditure\u2019 only. Mr
\nChhotaray submitted that an expenditure is an outgo. The Petitioner
\nhad incurred the expenditure for purchasing the loans and made
\npayment. This being the case it was clear that the current
\ntransaction would clearly be a SDT as contemplated under section
\n92BA(i) of the Act.
\n15. Mr Chhotaray submitted that the argument of Mr Mistri
\nthat HDFC Ltd. is not a person covered under section 40A(2)(b)(iv)
\nis incorrect. Mr Chhotaray submitted that under explanation (a) to
\nsection 40A(2)(b) a person has substantial interest in the assessee if
\nit is the beneficial owner of the shares carrying not less than 20% of
\nthe voting power. In the facts of the present case, Mr Chhotaray
\nsubmitted that HDFC Ltd. (holding 16.39 % shares in the Petitioner)
\nand it\u2019s wholly owned subsidiary, HDFC Investments Pvt. Ltd.
\n(holding 6.25% of the shareholding in the Petitioner company),
\ntogether hold 22.64 % of the shares of the Petitioner. Mr Chhotaray
\nsubmitted that what is important to note is the voting power and not
\nthe shareholding so as to fall within explanation (a). According to
\nMr Chhotaray this issue is squarely covered by a decision of
\nKarnataka High Court in the case of Commissioner of Income Tax
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\nVs. Amco Power Ltd. [(379 ITR 375) (KARN)]. He submitted
\nthat this decision clearly holds that for the purpose of computing
\nvoting power of the company in another company, the shareholding
\nof its wholly owned subsidiary has to be clubbed with its own share
\nholding. In the facts before Karnataka High Court, Mr Chhotaray
\nsubmitted that the shareholding of the company was only 6%
\nwhereas its wholly owned subsidiary had a 45% share holding. In
\nthese circumstances, it was held that taking into consideration the
\nshareholding of 45% of the wholly owned subsidiary, the voting
\npower of the company was 51% (i.e. 6% + 45%). Mr Chhotaray
\nsubmitted that in the facts of the present case, the situation is
\nidentical. He submitted that taking into consideration the
\nshareholding of 6.25% of HDFC Investments Ltd. (and which is a
\nwholly owned subsidiary of HDFC Ltd.) in the Petitioner alongwith
\nthe shareholding of 16.39% of HDFC Ltd. in the Petitioner, the total
\nvoting power HDFC Ltd. had in the Petitioner was 22.64%. This was
\nclearly above 20% as required under explanation (a) to section
\n40A(2)(b) of the Act. Mr Chhotaray submitted that the word
\n\u201cbeneficial\u201d appearing in explanation (a) is totally misconstrued by
\nthe Petitioner. Mr Chhotaray submitted that if the Petitioner’s
\nsubmissions are accepted, the word ‘beneficial’ would become totally
\nredundant. In support of this proposition, Mr Chhotaray relied upon
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\nthe decision of the Supreme Court in the case of CIT v\/s Podar
\nCement Pvt. Ltd. [1997 (226) ITR 625 (SC)]. Over and above
\nthis, he submitted that even the CBDT circular No.6\/b dated 6th July,
\n1968 while explaining the newly introduced provision of section
\n40A(2)(b) refers to holding substantial interest \u201cdirectly or
\nindirectly\u201d.
\n16. In addition to this, Mr Chhotaray submitted that even
\nbefore the US regulatory authorities, HDFC Ltd. had represented that
\nit was the beneficial owner of 22.64 % of the equity shares of the
\nPetitioner and exercised substantial influence over board decisions,
\nwhich could result in HDFC Ltd. making decisions or foregoing
\nopportunities to benefit HDFC Ltd that restrict their growth and
\nharm their financial condition. He submitted that HDFC Ltd., in its
\nannual report declared that it had ownership interest of 22.64 % in
\nthe Petitioner \u2013 HDFC Bank Ltd. Looking to all these facts, Mr
\nChhotaray submitted that it is too late in the day for the Petitioner to
\ncontend that HDFC Ltd. was a beneficial owner of only 16.39% of the
\nshares in the Petitioner and not having more than 20% voting power.
\nHe therefore submitted that the purchase of loans by the Petitioner
\nfrom HDFC Ltd. would clearly fall within ambit of section 92BA(i) to
\nmean a SDT.
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\n17. As far as the second transaction is concerned, namely,
\nthe payment made by the Petitioner to HBL Global for the services
\nrendered, Mr Chhotaray submitted that the Petitioner received
\nservices worth Rs.492.50 Crores from HBL Global. He submitted
\nthat admittedly the Petitioner owns 29% of the shareholding in ADFC
\nLtd. In turn, ADFC Ltd. holds 98.4% of the shareholding in its
\nsubsidiary HDFC Global. Accordingly, the Petitioner had a
\nsubstantial interest, albeit indirectly, in HBL Global, was the
\nsubmission of Mr Chhotaray. In this regard Mr Chhotaray relied
\nupon provisions of section 40A(2)(b)(vi)(B) of the Act. Here also Mr
\nChhotaray relied upon the CBDT circular dated 6th July, 1968 to
\ncontend that even indirect shareholding would be covered. This
\nbeing the case, Mr Chhotaray submitted that even this transaction
\nwith HBL Global would squarely fall within the meaning of a SDT as
\ncontemplated under section 92BA(i) of the Act as it was a
\ntransaction between two related parties.
\n18. As far as the third transaction is concerned, namely, the
\npayment of interest of Rs.4.41 Crores to HDB Trust is concerned, Mr
\nChhotaray submitted that the Petitioner has a deposit of Rs. 45.12
\nCrores from HDB Welfare Trust and has paid interest of Rs.4.41
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\nCrores. He submitted that the Petitioner has a substantial interest in
\nterms of explanation (b) to section 40A(2)(b) of the Act. He
\nsubmitted that this issue has been discussed in detail by the Revenue
\nin its affidavit at page 355 to 358 of the paper book. Mr Chhotaray
\nsubmitted that section 92(2)(A) specifically mentions interest as an
\nitem for determination of ALP. He submitted that the Petitioner is
\nthe founder member of this Trust and the Trust held shares in the
\nPetitioner till 2006. The benefits enjoyed by the Trust when it was a
\nshareholder continues even now. The Petitioner has included the
\nreserves of HDB Welfare Trust of Rs.60.03 Crores in its reserve while
\npreparing a consolidated financial statement. The activities of the
\nEmployees Welfare Trust have been included as other business
\nactivities in the annual report of the Petitioner. He submitted that in
\nany case the payment of interest is an expenditure and it needs
\nexamination whether the rate of interest was proper. He submitted
\nthat for all these reasons even this transaction would be a SDT as
\ncontemplated under section 92BA(i) of the Act. For all the aforesaid
\nreasons, Mr Chhotaray submitted that there was no merit in this
\nWrit Petition and the same ought to be dismissed with costs.
\n19. We have carefully gone through the papers and
\nproceedings in the present Writ Petition as well as the impugned
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\norder dated 29th December, 2016 and the impugned Reference dated
\n29th December, 2016. We have also given our anxious consideration
\nto the arguments advanced by the Petitioner as well as on behalf of
\nthe Revenue. We find that the entire controversy in the present Writ
\nPetition basically revolves around the interpretation of section
\n92BA(i) read with section 40A(2)(b) of the I. T. Act. As mentioned
\nearlier, it is the case of the Revenue that the three transactions
\nmentioned hereinabove fall within the meaning of a Specified
\nDomestic Transaction (SDT), as set out in section 92BA(i) of the I. T.
\nAct. Section 92BA as it stood then, reads thus:-
\n\u201c92-BA. Meaning of specified domestic transaction.\u2014 For the
\npurposes of this section and Sections 92, 92-C, 92-D and 92-E,
\n\u201cspecified domestic transaction\u201d in case of an assessee
\nmeans any of the following transactions, not being an
\ninternational transaction, namely\u2014
\n(i) any expenditure in respect of which payment has been
\nmade or is to be made to a person referred to in clause
\n(b) of sub-section (2) of Section 40-A;
\n(ii) any transaction referred to in Section 80-A;
\n(iii) any transfer of goods or services referred to in subsection
\n(8) of Section 80-IA;
\n(iv) any business transacted between the assessee and
\nother person as referred to in sub-section (10) of Section
\n80-IA;
\n(v) any transaction, referred to in any other section under
\nChapter VI-A or Section 10-AA, to which provisions of
\nsub-section (8) or sub-section (10) of Section 80-IA are
\napplicable; or
\n(vi) any other transaction as may be prescribed,
\nand where the aggregate of such transactions entered into by
\nthe assessee in the previous year exceeds a sum of five crore
\nrupees.\u201d
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\n20. Section 92BA of the I. T. Act sets out the meaning of a
\nSDT and stipulates that for the purposes of this section and sections
\n92, 92C, 92D and 92E \u201cSpecified Domestic Transactions\u201d in the case
\nof an assessee inter alia means the transactions set out thereunder
\nfrom clauses (i) to (vi). As far as the above three transactions are
\nconcerned, it is common ground before us that if they were to fall
\nwithin the term of a SDT, they would be covered under clause (i) of
\nsection 92BA which provides that it should be a transaction between
\nthe assessee and a person referred to in section 40A(2)(b) for an
\nexpenditure in respect of which payment has been made or is to be
\nmade to such person. In other words, if a transaction is with
\nreference to an expenditure in respect of which payment has been
\nmade or is to be made by the assessee to a person referred to in
\nsection 40A(2)(b), only then would the same be a SDT. For this
\npurpose it would therefore also be necessary to reproduce section
\n40A, to the extent it is relevant to decide the present controversy.
\nSection 40A deals with expenses or payments not deductible in
\ncertain circumstances and the relevant portion thereof reads thus:
\n\u201c40-A. Expenses or payment not deductible in certain
\ncircumstances.\u2014 (1) The provisions of this section shall have effect
\nnotwithstanding anything to the contrary contained in any other
\nprovision of this Act relating to the computation of income under the
\nhead \u201cProfits and gains of business or profession\u201d.
\n(2) (a) Where the assessee incurs any expenditure in respect of
\nwhich payment has been or is to be made to any person referred to
\nin clause (b) of this sub-section, and the Assessing Officer is of
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\nopinion that such expenditure is excessive or unreasonable having
\nregard to the fair market value of the goods, services or facilities for
\nwhich the payment is made or the legitimate needs of the business
\nor profession of the assessee or the benefit derived by or accruing
\nto him therefrom so much of the expenditure as is so considered by
\nhim to be excessive or unreasonable shall not be allowed as a
\ndeduction;
\nProvided that no disallowance, on account of any expenditure being
\nexcessive or unreasonable having regard to the fair market value,
\nshall be made in respect of a specified domestic transaction referred
\nto in Section 92-BA, if such transaction is at arm’s length price as
\ndefined in clause (ii) of Section 92-F.
\n(b) The persons referred to in clause (a) are the following, namely:\u2014
\n(i) where the assessee is an individual any relative of the assessee
\n(ii) where the assessee is a company, any director of the company,
\nfirm, association of persons or partner of the firm, member
\nHindu undived family of the association or family, or
\nany relative of such director,
\npartner or member,
\n(iii) any individual who has a substantial interest in the business
\nor profession of the assessee, or any relative of such
\nindividual;
\n(iv) a company, firm, association of persons or Hindu undivided
\nfamily having a substantial interest in the business or
\nprofession of the assessee or any director, partner or member
\nof such company, firm, association or family, or any relative of
\nsuch director, partner or member or any other company
\ncarrying on business or profession in which the first
\nmentioned company has substantial interest;
\n(v) a company, firm, association of persons or Hindu undivided
\nfamily of which a director, partner or member, as the case may
\nbe, has a substantial interest in the business or profession of
\nthe assessee; or any director, partner or member of such
\ncompany, firm, association or family or any relative of such
\ndirector, partner or member;
\n(vi) any person who carries on a business or profession,\u2014
\n(A) where the assessee being an individual, or any relative of
\nsuch assessee, has a substantial interest in the business
\nor profession of that person; or
\n(B) where the assessee being a company, firm, association of
\npersons or Hindu undivided family, or any director of such
\ncompany, partner of such firm or member of the
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\nassociation or family, or any relative of such director,
\npartner, or member, has a substantial interest in the
\nbusiness or profession of that person.
\nExplanation.\u2014For the purposes of this sub-section, a person
\nshall be deemed to have a substantial interest in a business or
\nprofession, if,\u2014
\n(a) in a case where the business or profession is carried on by a
\ncompany, such person is, at any time during the previous year,
\nthe beneficial owner of shares (not being shares entitled to a
\nfixed rate of dividend whether with or without a right to
\nparticipate in profit) carrying not less than twenty per cent of the
\nvoting power; and
\n(b) in any other case, such person is, at any time during the previous
\nyear, beneficially entitled to not less than twenty per cent of the
\nprofits of such business or profession.\u201d
\n21. Since the other sub-sections of section 40A are not
\nrelevant, they have not been reproduced. Section 40A(2)(a)
\nstipulates that where the assessee incurs any expenditure in respect
\nof which payment has been made or is to be made to any person
\nreferred to in clause (b) of this sub-section, and the A.O. is of the
\nopinion that such expenditure is excessive or unreasonable having
\nregard to the fair market value of the goods, services or facilities for
\nwhich the payment is made or the legitimate needs of the business or
\nprofession of the assessee, or the benefit derived by or accruing to
\nhim therefrom, so much of the expenditure as is so considered by
\nhim to be excessive or unreasonable, shall not be allowed as a
\ndeduction. The proviso to sub-section 2(a) stipulates that no
\ndisallowance, on account of any expenditure being excessive or
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\nunreasonable having regard to the fair market value, shall be made
\nin respect of a SDT referred to in section 92BA, if such transaction is
\nat the ALP as defined in clause (ii) of section 92F.
\n22. Then comes clause (b) of section 40A(2) and refers to
\ncertain entities. In the present case, reliance has been placed by the
\nRevenue on clauses (iv) & (vi)(B) of section 40A(2)(b) to contend
\nthat the transactions which form the subject matter of this Petition
\nwould fall within the meaning of a SDT. What section 40A(2)(a) read
\nwith section 40A(2)(b)(iv) provides is that where the assessee
\nincurs any expenditure in respect of which payment has been or is to
\nbe made to any company, firm, association of persons or Hindu
\nundivided family having a substantial interest in the business or
\nprofession of the assessee, or any director, partner or member of
\nsuch company, firm, association or family or any relative of such
\ndirector, partner or member or any other company carrying on
\nbusiness or profession in which the first mentioned company has a
\nsubstantial interest, and the A.O. is of the opinion that such
\nexpenditure is excessive or unreasonable, then he can disallow such
\nexpenditure as a deduction. What is the meaning of \u2018substantial
\ninterest\u2019 has then been set out by the Legislature in the explanations
\n(a) and (b) to section 40A(2)(b). Explanation (a) clearly sets that in
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\nthe case where a business or profession is carried on by a company,
\nsuch person is, at any time during the previous year, the beneficial
\nowner of shares (not being shares entitled to a fixed rate of dividend
\nwhether with or without a right to participate in profits), carrying
\nnot less than 20% of the voting power, would be deemed to have a
\nsubstantial interest. Explanation (b) stipulates that in any other
\ncase, such person is, at any time during the previous year,
\nbeneficially entitled to not less than 20% of the profits of such
\nbusiness or profession.
\n23. On a conjoint reading of section 92BA(i) read with section
\n40A(2)(b), in the facts of the present case, what becomes clear is
\nthat for the transactions referred to earlier to fall within the
\nmeaning of a SDT, the assessee has to have a transaction (not being
\nan international transaction) with a person as listed in clauses (i) to
\n(vi) of section 40A(2)(b).
\n24. In the facts before us, it is common ground that the
\ntransactions which form the subject matter of the present Writ
\nPetition, if were to be construed as a SDT, then the same would have
\nto fall within section 92BA(i) which states that any transaction in
\nwhich any expenditure in respect of which payment has been made
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\nor is to be made by the assessee to a person referred to in clause (b)
\nof sub-section 2 of section 40A, would be a SDT. This being the case,
\nwe shall now examine whether each of these transactions fall within
\nthe meaning of a SDT.
\nTRANSACTION-1
\nLOANS PURCHASED BY THE PETITIONER FROM HDFC
\nLIMITED:-
\n25. It is undisputed that the Petitioner purchased the loans of
\nHDFC Ltd. of more than Rs. 5,000 Crores. HDFC Ltd. admittedly
\nholds 16.39% of the shareholding in the Petitioner. If one were to go
\nmerely by this figure of 16.39%, then, on a plain reading of section
\n40A(2)(b)(iv) read with explanation (a) thereof, HDFC Ltd. would
\nnot be a person who would have a substantial interest in the
\nPetitioner. This is simply because explanation (a) clearly stipulates
\nthat for one to have a substantial interest, it should be the beneficial
\nowner of shares carrying not less than 20% of the voting power.
\n26. However, the Revenue contends that the requirement of
\nexplanation (a) of having more than of 20% of the voting power is
\nclearly established in this case because HDFC Ltd. holds 100% of the
\nshareholding in another company called HDFC Investment Ltd.,
\nwhich in turn, holds 6.25% shareholding in the Petitioner. When
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\none clubs the shareholding of HDFC Ltd. of 16.39% with the
\nshareholding of the HDFC Investments Ltd. of 6.25% (and which is a
\nwholly owned subsidiary of HDFC Ltd.), the threshold of 20% as
\nrequired under explanation (a) to section 40A(2)(b), is clearly
\ncrossed. This being the case, it is the Revenue’s contention that
\nHDFC Ltd. clearly has a substantial interest in the Petitioner, and
\ntherefore, the transaction of purchasing loans by the Petitioner from
\nHDFC Ltd. would fall within the meaning of a SDT, in which case, for
\nthis transaction, the ALP has to be determined by the TPO.
\n27. On a plain reading of the aforesaid provisions, we are
\nunable to agree with the submissions of the Revenue. What
\nexplanation (a) to section 40A(2)(b) clearly stipulates is that a
\nperson shall be deemed to have a substantial interest in a business or
\nprofession in a case where the business or profession is carried on by
\na company, such person is, at any time during the previous year, the
\nbeneficial owner of shares carrying not less than 20% of the voting
\npower. In other words, explanation (a) when broken down, requires
\ntwo conditions that need to be fulfilled. The first condition is that,
\nthat the person should be the beneficial owner of shares (not being
\nshares entitled to a fixed rate of dividend whether with or without a
\nright to participate in profits); and second that these shares (of
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\nwhich the person is the beneficial owner) are carrying not less than
\n20% of the voting power. In the facts of the present case, admittedly
\nHDFC Ltd., on its own, is not the beneficial owner of shares carrying
\nat least 20% of the voting power as required under explanation (a) to
\nsection 40A (2) (b) of the I. T. Act. The shareholding that HDFC Ltd.
\nhas in the Petitioner is only 16.39%.
\n28. We cannot, and the law does not permit us, to hold that
\nHDFC Ltd. is the beneficial owner of 22.64% of the shares in the
\nPetitioner by clubbing the share holding of HDFC Investments Ltd.
\nwith the shareholding of HDFC Ltd. If we were to do this, we would
\nbe effectively holding that HDFC Ltd., being a shareholder of HDFC
\nInvestments Ltd., is the beneficial owner of the shares which HDFC
\nInvestments Ltd. holds in the Petitioner. This, in law, is clearly
\nimpermissible because a shareholder of a company can never have
\nany beneficial interest in the assets (movable or immovable) of that
\ncompany. In the present case, if we were to accept the contention of
\nthe Revenue, it would mean that HDFC Ltd. is the beneficial owner of
\nthe shares which HDFC Investments Ltd. holds in the Petitioner. This
\nwould be contrary to all canons of Company Law. It is well settled
\nthat a shareholder of a company can never be construed either the
\nlegal or beneficial owner of the properties and assets of the company
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\nin which it holds the shares. This being the position in law, we find
\nthat the Revenue is incorrect in trying to club the shareholding of
\nHDFC Investments Ltd. in the Petitioner along with the shareholding
\nof HDFC Ltd. in the Petitioner, to cross the threshold of 20% as
\nrequired in explanation (a) to section 40A(2)(b). We are supported
\nin the view that we take by a decision of the Supreme Court in the
\ncase of Bacha F. Guzdar Vs. Commissioner of Income Tax [(1955)
\n27 ITR 1]. The relevant portion of this decision reads thus:-
\n\u201c7. It was argued by Mr Kolah on the strength of an observation
\nmade by Lord Anderson in Commissioners of Inland
\nRevenue v. Forrest [8 Tax Cases, p 704 at 710] that an investor buys
\nin the first place a share of the assets of the industrial concern
\nproportionate to the number of shares he has purchased and also
\nbuys the right to participate in any profits which the company may
\nmake in the future. That a shareholder acquires a right to participate
\nin the profits of the company may be readily conceded but it is not
\npossible to accept the contention that the shareholder acquires any
\ninterest in the assets of the company. The use of the word \u2018assets\u2019 in
\nthe passage quoted above cannot be exploited to warrant the
\ninference that a shareholder, on investing money in the purchase of
\nshares, becomes entitled to the assets of the company and has any
\nshare in the property of the company. A shareholder has got no
\ninterest in the property of the company though he has undoubtedly a
\nright to participate in the profits if and when the company decides to
\ndivide them. The interest of a shareholder vis-a-vis the company was
\nexplained in the Sholapur Mills Case[(1950) SCR 869, 904] . That
\njudgment negatives the position taken up on behalf of the appellant
\nthat a shareholder has got a right in the property of the company. It
\nis true that the shareholders of the company have the, sole
\ndetermining voice in administering the affairs of the company and
\nare entitled, as provided by the Articles of Association to declare
\nthat dividends should be distributed out of the profits of the company
\nto the shareholders but the interest of the shareholder either
\nindividually or collectively does not amount to more than a right to
\nparticipate in the profits of the company. The company is a juristic
\nperson and is distinct from the shareholders. It is the company which
\nowns the property and not the shareholders. The dividend is a share
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\nof the profits declared by the company as liable to be distributed
\namong the shareholders. Reliance is placed on behalf of the
\nappellant on a passage in Buckley’s Companies Act (12th Edn.), p.
\n894 where the etymological meaning of dividend is given as
\ndividendum, the total divisible sum but in its ordinary sense it means
\nthe sum paid and received as the quotient forming the share of the
\ndivisible sum payable to the recipient. This statement does not justify
\nthe contention that shareholders are owners of a divisible sum or
\nthat they are owners of the property of the company. The proper
\napproach to the solution of the Question 1s to concentrate on the
\nplain words of the definition of agricultural income which connects
\nin no uncertain language revenue with the land from which it
\ndirectly springs and a stray observation in a case which has no
\nbearing upon the present question does not advance the solution of
\nthe question. There is nothing in the Indian law to warrant the
\nassumption that a shareholder who buys shares buys any interest in
\nthe property of the company which is a juristic person entirely
\ndistinct from the shareholders. The true position of a shareholder is
\nthat on buying shares an investor becomes entitled to participate in
\nthe profits of the company in which he holds the shares if and when
\nthe company declares, subject to the Articles of Association, that the
\nprofits or any portion thereof should be distributed by way of
\ndividends among the shareholders. He has undoubtedly a further
\nright to participate in the assets of the company which would be left
\nover after winding up but not in the assets as a whole as Lord
\nAnderson puts it.
\n(emphasis supplied)
\n29. This proposition has again been reiterated by the
\nSupreme Court in Vodafone International Holdings BV v. Union of
\nIndia [(2012) 6 SCC 613]. Paragraphs 256 to 258 of this decision
\nread thus:-
\n\u201c256. Subsidiary companies are, therefore, the integral part of
\ncorporate structure. Activities of the companies over the years have
\ngrown enormously of its incorporation and outside and their
\nstructures have become more complex. Multinational companies
\nhaving large volume of business nationally or internationally will
\nhave to depend upon their subsidiary companies in the national and
\ninternational level for better returns for the investors and for the
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\ngrowth of the company. When a holding company owns all of the
\nvoting stock of another company, the company is said to be a WOS
\nof the parent company. Holding companies and their subsidiaries can
\ncreate pyramids, whereby a subsidiary owns a controlling interest in
\nanother company, thus becoming its parent company.
\n257. The legal relationship between a holding company and WOS is
\nthat they are two distinct legal persons and the holding company
\ndoes not own the assets of the subsidiary and, in law, the
\nmanagement of the business of the subsidiary also vests in its Board
\nof Directors. In Bacha F. Guzdar v. CIT [AIR 1955 SC 74] , this
\nCourt held that shareholders’ only right is to get dividend if and when
\nthe company declares it, to participate in the liquidation proceeds
\nand to vote at the shareholders’ meeting. Refer also to Carew and
\nCo. Ltd. v. Union of India [(1975) 2 SCC 791] and Carrasco
\nInvestments Ltd. v. Directorate of Enforcement [(1994) 79 Comp
\nCas 631 (Del)] .
\n258. Holding company, of course, if the subsidiary is a WOS, may
\nappoint or remove any Director if it so desires by a resolution in the
\ngeneral body meeting of the subsidiary. Holding companies and
\nsubsidiaries can be considered as single economic entity and
\nconsolidated balance sheet is the accounting relationship between the
\nholding company and subsidiary company, which shows the status of
\nthe entire business enterprises. Shares of stock in the subsidiary
\ncompany are held as assets on the books of the parent company and
\ncan be issued as collateral for additional debt financing. Holding
\ncompany and subsidiary company are, however, considered as
\nseparate legal entities, and subsidiary is allowed decentralised
\nmanagement. Each subsidiary can reform its own management
\npersonnel and holding company may also provide expert, efficient
\nand competent services for the benefit of the subsidiaries.\u201d
\n(emphasis supplied)
\n30. In the facts before us it may be true that HDFC Ltd. may
\nindirectly have 20% of the voting power in the Petitioner because
\nHDFC Investments Ltd. is a wholly owned subsidiary of HDFC Ltd.
\nHowever, that by itself would not mean that HDFC Ltd. has a
\nsubstantial interest in the Petitioner as required and stipulated in
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\nexplanation (a) to section 40A(2)(b). As mentioned earlier, for a
\nperson to have a substantial interest as contemplated under
\nexplanation (a), two conditions have to be fulfilled, namely (i) that
\nthe person has to be the beneficial owner of the shares and (ii) those
\nvery shares have to carry not less than 20% of the voting power. It is
\nonly when these two conditions are fulfilled that explanation (a) can
\nbe pressed into service. In the facts before us, if we were to accept
\nthe submission of the Revenue, then we would have to hold that
\nHDFC Ltd. is the beneficial owner of the 6.25% shareholding that
\nHDFC Investments Ltd. has in the Petitioner. This 6.25%
\nshareholding of HDFC Investments Ltd in the Petitioner is the
\nmovable property and an asset of HDFC Investment Ltd. That would
\nmean that HDFC Ltd., holding 100% shares of HDFC Investments
\nLtd., would have to be construed as the beneficial owner of the
\nproperties\/assets of HDFC Investments Ltd. This can never be the
\ncase because that would be contrary to all canons of company law as
\nwell as the decisions of the Supreme Court in the case of Bacha F.
\nGuzder and Vodafone International Holdings BV (supra). This
\nbeing the case, HDFC Ltd., by no stretch of the imagination can be
\nsaid to be the beneficial owner of the shares that HDFC Investments
\nLtd. holds in the Petitioner. This is simply because the shares that
\nHDFC Investments Ltd. holds in the Petitioner is its asset, and HDFC
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\nLtd., though being a 100% shareholder of HDFC Investments Ltd.,
\ncannot be termed as the owner (beneficial or otherwise) of the assets
\nand properties of HDFC Investments Ltd. In these circumstances,
\ntherefore, the shareholding of HDFC Ltd. and HDFC Investments Ltd.
\ncannot be clubbed together to cross the threshold of 20% as required
\nunder explanation (a). This being the position, we have no
\nhesitation in holding that the HDFC Ltd. does not have a substantial
\ninterest in the Petitioner, and therefore, is not a person as
\ncontemplated under section 40A(2)(b)(iv) for the present
\ntransaction to fall within the meaning of a SDT as set out in section
\n92BA (i) of the I. T. Act.
\n31. There is another reason for coming to this conclusion. If
\nwe were to interpret this provision as is sought to be contended by
\nthe Revenue, it would lead to an absurd situation, as correctly
\ncontended by Mr. Mistri. It is undisputed that there cannot be more
\nthan one beneficial owner of the same shares. If we were to take the
\nexample that was given by Mr. Mistri during arguments, it would
\neffectively lead to a completely absurd result. Take for example
\nCompany ‘A’ has a wholly owned subsidiary Company ‘B’. In turn, the
\nshares of Company ‘C’ are held 90% by Company ‘B’ and 10% by
\nCompany ‘A’. If one was to give the interpretation as sought for by
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\nthe Revenue, then it would mean that Company \u2018A\u2019 beneficially owns
\n100% of Company ‘C’ which would lead to an absurd situation that
\nCompany ‘B’; though owning 90% of the shareholding in Company
\n\u2018C\u2019, would not be regarded as having a substantial interest in
\nCompany \u2018C\u2019 as Company \u2018B\u2019 cannot be said to be the beneficial
\nowner of its 90% shareholding in Company \u2018C\u2019. Further, if the
\ninterpretation of the Revenue was to be held as correct then one will
\nnot have to not stop there and then also see the shareholders of
\nCompany ‘A’ as the beneficial owner of the shares of Company ‘C’.
\nThis would then lead to absurd results, namely, that then even
\nCompany \u2018A\u2019 also would not have a substantial interest in Company
\n\u2018C\u2019 and it would be the shareholders of Company ‘A’ that would have
\na substantial interest in Company \u2018C\u2019. This would lead to startling
\nresults. It is now well settled that whilst interpreting a statutory
\nprovision, an interpretation which would lead to an absurdity, should
\nalways be avoided. This is yet another reason why we are unable to
\naccept the submission of the Revenue that this particular transaction
\nwould fall within the meaning of a SDT as understood and set out in
\nsection 92BA (i) of the I. T. Act.
\n32. There is yet another reason that we find that the present
\ntransaction (purchase of loans by the Petitioner from the HDFC Ltd.)
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\ncould never be termed as a SDT. Section 92BA (i) contemplates a
\ntransaction in which any expenditure is incurred in respect of which
\npayment has been made or is to be made to a person referred to in
\nclause (b) of sub-section 2 of section 40A of the I. T. Act. What we
\nfind in the facts of the present case is that the Petitioner had
\npurchased the loans of HDFC Limited. This was a purchase of an
\nasset. As correctly submitted by Mr. Mistri, when the purchaser
\npays the price for acquiring an asset it is referred to as a
\nconsideration for purchase of that asset and not an \u2018expenditure\u2019 for
\nthat asset. Acquisition of an asset, therefore, cannot be said to be in
\nthe nature of an expenditure so as to come within the ambit of
\nsection 92BA (i) of the Act. It is true that consideration has to be
\npaid for purchasing an asset but that would not mean that it is an
\n\u2018expenditure\u2019. Mr. Mistri is correct when he submits that an asset
\nwould be reflected in the balance-sheet of the company whereas an
\nexpenditure would be reflected in the Profit and Loss account. In
\nfact, in the facts of the present case, the loans purchased by the
\nPetitioner from HDFC Ltd. were reflected in the balance-sheet and
\nnot in the Profit and Loss account. This being the case, we find that
\nthis is not an expenditure at all as contemplated under section
\n92BA(i), and therefore, the money expended for purchasing these
\nloans can never be termed as an \u2018expenditure\u2019 incurred by the
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\nPetitioner. It would, therefore, not fall within the meaning of a SDT as
\nunderstood under section 92BA(i) of the Act.
\n33. For all the aforesaid reasons, we therefore have no
\nhesitation in holding that this transaction of purchase of loans by the
\nPetitioner from HDFC Ltd. would not fall within the meaning of a SDT.
\nThis being the case, there was no question of Respondent No.1
\ntreating it so and thereafter referring the same to the TPO under
\nsection 92CA(1) for determining the ALP.
\nTRANSACTION-2
\nPAYMENT MADE BY THE PETITIONER TO HBL GLOBAL
\nPRIVATE LIMITED FOR RENDERING SERVICES:-
\n34. As far as this transaction is concerned, it is the
\ncontention of the Revenue that it would be a transaction with a
\nperson falling within section 40A(2)(b)(vi)(B) of the I. T. Act.
\nSection 40A(2)(b)(vi) reads thus:-
\n\u201c(vi) any person who carries on a business or profession,\u2014
\n(A) where the assessee being an individual, or any relative of
\nsuch assessee, has a substantial interest in the business
\nor profession of that person; or
\n(B) where the assessee being a company, firm, association of
\npersons or Hindu undivided family, or any director of such
\ncompany, partner of such firm or member of the
\nassociation or family, or any relative of such director,
\npartner, or member, has a substantial interest in the
\nbusiness or profession of that person.\u201d
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\n(emphasis supplied)
\n35. As far as this transaction is concerned, we find that the
\nPetitioner holds 29% of the shares in ADFC Ltd. In turn, ADFC Ltd.
\nholds 98.4% of the shares in HBL Global. It is not in dispute that the
\nPetitioner holds no shares of HBL Global. Merely because the
\nPetitioner holds 29% of the shares of ADFC Ltd., which in turn holds
\n98.4% shares in HBL Global, the Petitioner cannot be regarded as
\nhaving a substantial interest in HBL Global. For us to hold that the
\nPetitioner would have a substantial interest in HBL Global, we would
\nhave to hold that the Petitioner, because it holds 29% of the
\nshareholding in ADFC Ltd., is the beneficial owner of 98.4% of the
\nshares of HBL Global which are held by ADFC Ltd. This in law, and as
\ndiscussed in detail earlier, we cannot do because the Petitioner, being
\na shareholder of ADFC Ltd., does not have any interest (beneficial or
\notherwise) in the properties\/assets of ADFC Ltd. (which in this case
\nwould be the shareholding that ADFC Ltd. has in HBL Global). This
\nbeing the case, we find that even this transaction is not entered into
\nwith a person as mentioned in section 40A(2)(b)(vi)(B) of the I. T.
\nAct. Here also, we find merit in the submission of Mr. Mistri that if
\nthe plea of the Revenue is taken to its logical conclusion, then, it
\nwould mean that it is not the Petitioner which is the beneficial owner
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\nof the shares of HBL Global but it would be the shareholders of the
\nPetitioner who are the beneficial owner of the shares of HBL Global.
\nThis could never have been the intention of the Legislature.
\n36. To counter this argument, Mr. Chhotaray placed reliance
\non the Circular dated 6th July, 1968 and stated that the said Circular
\nissued by the CBDT clearly states that for the purposes of section
\n40A(2)(b) direct and indirect shareholding has to be taken into
\naccount. We are unable to agree with the submissions of Mr.
\nChhotaray. There is no question in the facts of the present case to
\nrefer to or consider any indirect shareholding. As mentioned earlier,
\non a plain reading of explanation (a) to section 40A(2)(b), for there
\nto be a substantial interest, the person has to be the beneficial owner
\nof shares holding not less than 20% of the voting power. In this
\ntransaction, the Petitioner can never be said to be beneficial owner of
\nthe shares in HBL Global for the simple reason that it holds
\nabsolutely no shares in HBD Global. It holds shares in a company
\ncalled ADFC Ltd., which in turn holds 98.4% shares in HBL Global.
\nThis would not mean that either directly or indirectly the Petitioner
\nis the beneficial owner of the shares of HBD Global. We, therefore,
\nfind no merit in this contention.
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\n37. We would also like to take note of the Guidance Note on
\nReport under section 92E of I.T. Act issued by Institute of Chartered
\nAccounts of India which states as under:-
\n\u201c4A.16 As in the case of section 92A(2)(a) and (b) (which defines the
\nterm ‘associated enterprise’ for the purposes of international
\ntransactions) the phrase \u201cdirectly or indirectly\u201d is not used in
\nSection 40A(2)(b). However, in this regard, reference should be
\nmade to the Central Board of Direct Taxes’ Circular number 6-P
\ndated 6 July 1968 explaining the then newly inserted provisions in
\nsection 40A(2). This circular sets out the categories of the persons,
\npayments to whom fall within the purview of section 40A(2). It
\nmentions that such persons would include inter alia-
\n\u201c(c) persons in whose business or profession the taxpayer has a
\nsubstantial interest directly or indirectly\u201d.
\n\u201cHowever, Explanation to Section 40A(2) deems a person to have
\nsubstantial interest if such person is ‘beneficial owner’ of shares
\ncarrying not less than 20% of voting power. The expression
\n\u201cbeneficial owner\u201d needs to be construed in contrast to \u201clegal
\nowner\u201d and not in the context of determining indirect ownership of
\nshares. Hence, the emphasis is on covering the real owner of the
\nshares and not the nominal owner. This proposition is also
\nsupported by legal jurisprudence which states that in a multi-tier
\nstructure, a parent cannot be regarded as the beneficial owner of
\nshares in a downstream subsidiary merely because it owns the
\nshares of the intermediate subsidiary companies. It is important to
\nrespect the fact that the entities are separate legal entities.
\nConsequently, in a situation where A Ltd. holds 50% in B Ltd. and B
\nLtd. holds 50% in C Ltd., under ordinary circumstances, A Ltd.
\ncannot be regarded as having beneficial interest in C Ltd. In other
\nwords, for purposes of Section 40A(2)(b), it may be appropriate to
\nconsider only direct shareholding and not derivative or indirect
\nshareholding.
\n4A.17 The coverage of section 40A(2)(b) is very wide and covers
\npersons related to the assessee under several relationships. Thus the
\nassessee and the accountant should ensure that all relevant
\nexpenditure transactions with all specified persons as mentioned in
\nsection 40A(2)(b) should be carefully identified and included in
\ntransfer pricing documentation and accountant’s report. With
\nregard to ensuring completeness of such information, the accountant
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\nshould obtain a written representation from the assessee detailing
\nthe list of persons specified in section 40A(2)(b) and expenditure
\ntransactions with them.\u201d
\n38. From this Guidance Note what is clear is that the word
\n\u201cbeneficial owner\u201d needs to be construed in contrast to \u201clegal owner\u201d
\nand not in the context of determining indirect ownership of shares.
\nHence, the emphasis is on covering the real owner of the shares and
\nnot the nominal owner. The report further states that this
\nproposition is also supported by legal jurisprudence which states that
\nin a multi-tier structure, a parent cannot be regarded as the
\nbeneficial owner of shares in a downstream subsidiary merely
\nbecause it owns the shares of the intermediate subsidiary companies.
\nIt is important to respect the fact that the entities are separate legal
\nentities. This Guidance Note also gives an example which clearly
\nindicates that for the purpose of section 40A(2)(b) it may be
\nappropriate to consider only a direct shareholding and not a
\nderivative or indirect shareholding. In fact, the Supreme Court in
\nthe case of Commissioner of Income Tax v\/s Virtual Soft Systems
\nLimited [(2018) 404 ITR 409 (SC) : (2018) 6 SCC 584)] has
\ncategorically discussed the relevancy of the Guidance Note and for
\nthe purposes of interpretation, the Supreme Court has held that it
\ncan certainly be used as an aid to interpret the provision. Paragraph
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\n18 [of the SCC report] of this decision reads thus:-
\n\u201c18. Without a doubt, in a catena of cases, this Court has discussed
\nthe relevancy of the Guidance Note. While dealing with one of such
\nmatters, this Court, in CIT v. Punjab Stainless Steel
\nIndustries [CIT v. Punjab Stainless Steel Industries, (2014) 15 SCC
\n129] held as under: (SCC p. 134, para 17)
\n\u201c17. So as to be more accurate about the word \u201cturnover\u201d,
\none can either refer to dictionaries or to material which are
\npublished by bodies of accountants. The Institute of
\nChartered Accountants of India (hereinafter referred to as
\n\u201cICAI\u201d) has published some material under the head
\n\u201cGuidance Note on Tax Audit under Section 44-B of the
\nIncome Tax Act\u201d. The said material has been published so
\nas to guide the members of ICAI. In our opinion, when a
\nrecognised body of Accountants, after due deliberation and
\nconsideration publishes certain materials for its members,
\none can rely upon the same.\u201d\u201d
\n39. For all the aforesaid reasons, we are unable to accept the
\nsubmission of Mr. Chhotaray that the present transaction (namely
\nthe payment made by the Petitioner to HBL Global for services
\nrendered) would fall within the meaning of a SDT as understood and
\ncovered under section 92BA(i) of the I.T. Act.
\nTRANSACTION-3
\nPAYMENT OF INTEREST OF RS. 4.41 CRORES BY THE
\nPETITIONER TO HDB WELFARE TRUST.
\n40. As far as this transaction is concerned, it is the case of
\nthe Revenue that the Petitioner has deposits of Rs.45.12 Crores from
\nthe HDB Employee Welfare Trust and has paid interest of Rs.4.41
\nCrores. According to the Revenue, the Petitioner has a substantial
\ninterest in terms of explanation (b) to section 40A(2)(b) of the Act.
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\nExplanation (b) stipulates that in any other case [i.e. other than a
\nperson mention in explanation (a)], a person is said to have a
\nsubstantial interest if such person is at any time during the previous
\nyear, beneficially entitled to not less than 20% of the profits of such
\nbusiness or profession.
\n41. We fail to see how the Revenue can contend that the
\ntransaction of payment of interest to HBD Welfare Trust and which
\nTrust has been set up for the benefit of its employees, would fall
\nwithin Explanation (b) to section 40A (2)(b) of the I. T. Act. It is not
\neven the case of the Revenue that the Petitioner is entitled to at least
\n20% of the profits of the said Trust. The Trust has been set up
\nexclusively for the welfare of its employees and there is no question
\nof the Petitioner being entitled to 20% of the profits of such Trust.
\nThis being the case, we find that this transaction also clearly would
\nnot fall within section 40A(2)(b) read with explanation (b) thereof to
\nbe a SDT as understood and covered by section 92BA(i) of the I. T.
\nAct.
\n42. Before parting, it would only be fair to deal with the
\njudgments relied upon by Mr. Chhotaray. The first decision was of
\nthe Karnataka High Court and the other was of the Supreme Court.
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\nOn carefully going through the decision of the Karnataka High Court
\nin the case of Commissioner of Income Tax Vs. Amco Power
\nSystems Ltd. (supra), we find that the reliance thereon by Mr
\nChhotaray is wholly misplaced. What the Karnataka High Court was
\nconsidering in the facts of that case were the provisions of section 79
\nof the I.T. Act and which are materially different from section
\n40A(2)(b) which is being considered by us in the present Writ
\nPetition. In fact when one peruses section 79 of the I.T.Act, it is clear
\nthat the same deals with carry forward and set off of losses in the
\ncase of certain companies. It is on the wording of section 79 of the
\nI.T. Act, that the Karnataka High Court has given a finding that since
\nABL was having complete control over APIL and even though the
\nshareholding of ABL was reduced to 6% in the year in question, yet
\nby virtue of being the holding company, owning 100 % shares of
\nAPIL, the voting power of ABL could not be said to have been reduced
\nto less than 51%. It came to this finding because ABL, together with
\nAPIL were having voting power of 51%. This finding of the
\nKarnataka High Court was given because the wordings of section 79
\nof the I.T. Act are materially different from the wordings of Section
\n40A(2)(b). We, therefore, find that the reliance placed by Mr
\nChhotaray on this decision is wholly misconceived.
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\n43. Similarly, we find that the reliance placed by Mr
\nChhotaray on the decision of the Supreme Court in the case of CIT
\nv\/s Podar Cement Pvt. Ltd. (supra) is wholly misplaced. In this
\ncase, the Supreme Court was called upon to decide whether in law the
\nincome derived by the assessee company by letting out flats of a
\nbuilding is taxable under the head ‘Income from other Sources’ under
\nsection 56 of the Act or whether the same was to be taxed as ‘Income
\nfrom House Property’ under section 22 of the Act. On carefully going
\nthrough this judgment, we do not see how this decision in any way
\nsupports the contention of Mr Chhotaray. Section 22 of the Act deals
\nwith ‘Income from House Property’ and stipulates that the annual
\nvalue of property of any buildings or lands appurtenant thereto of
\nwhich the assessee is the owner, other than such portions of such
\nproperty as he may occupy for the purpose of any business of
\nprofession carried on by him the profits of which are chargeable to
\nincome tax, shall be chargeable to income tax under the head ‘Income
\nfrom House Property’. The owner of house property has also been
\ndefined in section 27 and clause (iii) thereof inter alia stipulates that
\na member of a co-operative society to whom a building or part
\nthereof is allotted or leased under a house building scheme of the
\nsociety, shall be deemed to be the owner of that building or part
\nthereof. Section 27(iii)(a) and (iii)(b) also set out who shall be
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\ndeemed to be the owner in certain circumstances. It is whilst
\ninterpreting these provisions, the Supreme Court was deciding as to
\nwho would be the owner as contemplated under section 22 of the Act.
\nWe fail to see that this judgment can be of any assistance to the
\nRevenue in the facts and circumstances of the present case. The
\nSupreme Court was considering completely different sections of
\nIncome Tax Act and whose wordings are materially different from
\nthe wordings of section 40A(2)(b) of the Act. We therefore find that
\nthe reliance placed by Mr Chhotaray on this decision is also wholly
\nmisplaced.
\n44. In view of the foregoing discussion, we find that none of
\nthe three transactions that form the subject matter of this Petition
\nfall within the meaning of a SDT as required under section 92BA(i) of
\nthe I.T. Act. This being the case, we find that Respondent No.1 was
\nclearly in error in concluding that these transactions were SDTs, and
\ntherefore required to be disclosed by the Petitioner by filing Form
\n3CEB. He therefore could not have referred these transactions to
\nRespondent No.2 for determining the ALP.
\n45. In these circumstances, and in view of the foregoing
\ndiscussion, the Writ Petition is allowed in terms of prayer clause (a).<\/p>\n
Rule is made absolute in the aforesaid terms. However, in the facts
\nand circumstances of the case, there shall be no order as to costs.
\n( B.P.COLABAWALLA J. ) ( S.C.DHARMADHIKARI J. )<\/p>\n","protected":false},"excerpt":{"rendered":"
We cannot, and the law does not permit us, to hold that HDFC Ltd. is the beneficial owner of 22.64% of the shares in the Petitioner by clubbing the share holding of HDFC Investments Ltd. with the shareholding of HDFC Ltd. If we were to do this, we would be effectively holding that HDFC Ltd., being a shareholder of HDFC Investments Ltd., is the beneficial owner of the shares which HDFC Investments Ltd. holds in the Petitioner. This, in law, is clearly impermissible because a shareholder of a company can never have any beneficial interest in the assets (movable or immovable) of that company. In the present case, if we were to accept the contention of the Revenue, it would mean that HDFC Ltd. is the beneficial owner of the shares which HDFC Investments Ltd. holds in the Petitioner. This would be contrary to all canons of Company Law. It is well settled that a shareholder of a company can never be construed either the legal or beneficial owner of the properties and assets of the company in which it holds the shares. This being the position in law, we find that the Revenue is incorrect in trying to club the shareholding of HDFC Investments Ltd. in the Petitioner along with the shareholding of HDFC Ltd. in the Petitioner, to cross the threshold of 20% as required in explanation (a) to section 40A(2)(b). We are supported in the view that we take by a decision of the Supreme Court in the case of Bacha F. Guzdar Vs. Commissioner of Income Tax [(1955) 27 ITR 1].<\/p>\n