The assessee Redington (India) Ltd filed its return of income for the AY 2009-10 admitting taxable income at Rs.125,57,70,310/-. The return was processed under Section 143(1) of the Act. Subsequently, the case was selected for scrutiny on the ground that the assessee had international transactions exceeding Rs.15 Crores and the case was referred to the Transfer Pricing Officer (TPO) for computation of Arms Length Price (ALP). After hearing the assessee, the draft assessment order was passed proposing the following additions/disallowances:-
Aggrieved by the draft assessment order, the assessee filed their objection, which was forwarded to the Dispute Resolution Panel, Chennai (DRP) by the Assessing Officer. Subsequently the assessee filed rectification application before DRP. The said application was considered and modified directions were issued, by deleting the additions on disallowance of factoring charges and bad debts. Aggrieved by such order, both the assessee and the Revenue preferred appeal to the Tribunal. The Tribunal deleted the disallowance of corporate and bank guarantee charges.
With regard to the disallowance of Long Term Capital Gain (LTCG) adjustment, the Tribunal held that the transfer of shares made by the assessee without consideration was a valid gift and the transfer of shares cannot be regarded as transfer for capital gains taxation as provided in Section 47(iii) of the Act. The Tribunal accepted the contention raised by the assessee that the transfer of shares made by the assessee to its step down subsidiary Redington International (Holdings) Limited, Cayman (RC) is gift eligible for exemption under Section 47(iii) of the Act and no capital gain tax is imputable to the said transfer of shares.
The order of ITAT was challenged by the Revenue Department before the Madras High Court
Revenue’s submission in court-
Revenue submitted that the assessee had transferred without consideration its entire holding in Redington Gulf FZE to RC and within a very short period of less than a week, a private equity fund investment corporation invested USD 65 million in the assessee's overseas step down subsidiary Redington International (Holdings) Limited for 27.17% stake and claimed it as a gift and claimed exemption under Section 47(iii) of the Act. It is submitted that the transfer of shares by the assessee is not a gift falling under Section 47(iii) of the Act for the reason that the assessee transferred the shares only by way of re-structuring the company investment in RGF.
Further, it is stated that the CFO himself admitted that the cross border transaction was structured for business reasons for deriving commercial benefits. Therefore, it is submitted that the transaction is not voluntary, it was done with certain expectations from the receiver and therefore, does not qualify as 'gift'.
It is submitted that the entire transaction of transfer of shares by way of alleged gift is to avoid the capital gain and to erode the tax effect in India, entire transaction has been clearly picturized by the TPO.
The Madras High court said that the Income Tax Appellate Tribunal (ITAT) wrongly held the transfer of shares by the assessee to its wholly-owned subsidiary is to be considered as a Gift.
The division bench of Justice T.S.Sivagnanam and Justice V. Bhavani Subbaroyan held that the transaction is not covered under Section 47(iii), as it is not a transfer of capital asset under a gift.
The court said that Section 47(iii) will not apply, as it is held that the transfer was not a valid gift. The court has pointed out that the transaction is a circular transaction and is a measure adopted to avoid tax.
The ruling will now allow Indian tax authorities to scrutinize investments in the country, including by portfolio investors, from origins such as Mauritius and Singapore with whom India has tax treaties.