Asset Purchase Not a Specified Domestic Transaction Under Income Tax Act (2024)

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Asset Purchase Not a Specified Domestic Transaction Under Income Tax Act (1)

HDFC BANK LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX & ORS.-(High Court)

Asset Purchase Not a Specified Domestic Transaction Under Income Tax Act

This case involves a dispute between a bank (the Petitioner) and the Income Tax Department (the Revenue) over whether certain transactions should be classified as Specified Domestic Transactions (SDTs) under the Income Tax Act. The Bombay High Court ruled in favor of the bank, stating that none of the transactions in question qualified as SDTs.

Case Name:

HDFC Bank Ltd. Vs Assistant Commissioner of Income Tax And Ors.

Key Takeaways:

1. The court clarified the interpretation of "substantial interest" under section 40A(2)(b) of the Income Tax Act.

2. Indirect shareholding cannot be considered for determining substantial interest.

3. The court emphasized the importance of strict interpretation of deeming provisions in tax laws.

4. The judgment highlights the distinction between legal ownership and beneficial ownership of shares.

Issue:

The main issue was whether certain transactions entered into by the Petitioner bank should be classified as Specified Domestic Transactions (SDTs) under section 92BA(i) of the Income Tax Act, 1961, requiring determination of Arm's Length Price (ALP).

Facts:

1. The Petitioner bank entered into three transactions:

a) Purchase of loans worth Rs. 5164 Crores from promoters (HDFC Ltd.) and Rs. 27.72 Crores from subsidiaries.

b) Payment of Rs. 492.50 Crores to HBL Global for services.

c) Payment of interest of Rs. 4.41 Crores to HDB Welfare Trust.

2. The Income Tax Department (Respondent No.1) issued a show cause notice on December 29, 2016, alleging these transactions were SDTs.

3. The Petitioner objected, but Respondent No.1 rejected the objections and referred the matter to the Transfer Pricing Officer (TPO) for determining the ALP.

4. The Petitioner filed a writ petition challenging this order and reference.

Arguments:

Petitioner's arguments:

1. The transactions were not SDTs as defined in the Income Tax Act.

2. HDFC Ltd. didn't have substantial interest (20% shareholding) in the Petitioner as required by section 40A(2)(b).

3. Indirect shareholding through subsidiaries shouldn't be considered for substantial interest.

4. The HDB Welfare Trust transaction doesn't fall under section 40A(2)(b).

Revenue's arguments:

1. HDFC Ltd.'s direct and indirect shareholding should be combined to determine substantial interest.

2. The Karnataka High Court's decision in Commissioner of Income Tax Vs. Amco Power Ltd. supports their interpretation.

3. The transactions should be considered SDTs for determining ALP.

Key Legal Precedents:

1. Bacha F. Guzdar Vs. CIT [(1955) 27 ITR 1 (SC)]

2. Vodafone International Holdings BV Vs. UOI [341 ITR 1 (SC)]

3. BA Mohota Textile Traders Pvt. Ltd. Vs. DCIT [397 ITR 616 (Bom)]

4. CIT Vs Virtual Soft Systems Ltd. [404 ITR 409 (SC)]

5. Commissioner of Income Tax Vs. Amco Power Ltd. [(379 ITR 375) (KARN)]

Judgement:

The Bombay High Court ruled in favor of the Petitioner, concluding that:

1. None of the three transactions fall within the meaning of a Specified Domestic Transaction under section 92BA(i) of the Income Tax Act.

2. The Revenue was incorrect in concluding these transactions were SDTs and requiring their disclosure in Form 3CEB.

3. The reference to the Transfer Pricing Officer for determining the Arm's Length Price was unwarranted.

The court quashed the order dated December 29, 2016, and the subsequent reference to the TPO.

FAQs:

Q1: What is a Specified Domestic Transaction (SDT)?

A1: An SDT is a transaction between related parties as defined under the Income Tax Act, which requires determination of Arm's Length Price.

Q2: Why is the concept of "substantial interest" important in this case?

A2: Substantial interest (20% shareholding) determines whether parties are related for the purpose of SDTs under section 40A(2)(b) of the Income Tax Act.

Q3: Can indirect shareholding be considered for determining substantial interest?

A3: According to this judgment, no. Only direct shareholding should be considered for determining substantial interest under section 40A(2)(b).

Q4: What is the significance of this judgment for other companies?

A4: This judgment clarifies the interpretation of substantial interest and SDTs, potentially affecting how related party transactions are treated for tax purposes.

Q5: Did the court agree with the Revenue's interpretation of the Karnataka High Court judgment?

A5: No, the court found that the Karnataka High Court case dealt with a different section of the Income Tax Act and was not applicable to this situation.

Asset Purchase Not a Specified Domestic Transaction Under Income Tax Act (2)

1. By this Petition, the Petitioner – bank seeks a writ ofcertiorari for quashing the impugned order dated 29th December,2016 (Exh “F”) and the impugned reference dated 29th December,2016. The impugned order dated 29th December, 2016 (Exh “F”)passed by Respondent No.1 holds that certain transactions enteredinto by the Petitioner are “Specified Domestic Transactions” (forshort “SDTs”) as per section 92BA(i) of the Income Tax Act, 1961(for short the “I.T. Act”) and the Arms Length Price (“ALP”) of thesaid transactions are required to be determined by making areference to Respondent No.2. It is pursuant to this order that thereference dated 29th December, 2016 was made to Respondent No.2under section 92CA(1) of the I.T. Act for determination of the ALP inthe Petitioner's case for the Assessment Year (for short “A.Y.”)2014-15. It is the case of the Petitioner that the impugned order aswell as the impugned reference are ex-facie without jurisdiction,illegal, unsustainable, contrary to the principles of natural justiceand contrary to law, and therefore, ought to be quashed and set asideby us in our writ jurisdiction. This is how the present Writ Petitionhas been filed.

2. Before we set out the legal submissions of the respectiveparties, the brief facts of the case and which would be necessary todetermine the controversy before us, are as under:-

(a) The Petitioner is a public limited company registered underthe Companies Act, 1956 and is also registered as a bankingcompany with the Reserve Bank of India (“RBI”). Theprimary business of the Petitioner is banking. ThePetitioner filed its assessment of income for the AssessmentYear (“A.Y.”) 2014-15 on 30th November, 2014 declaring atotal income of Rs.12595,27,63,920/-. The Petitioner, alongwith the return of income, also filed Form 3CEB inter aliadisclosing certain ‘specified domestic transactions’entered into by it during the relevant year. Thereafter, thePetitioner’s case was selected for scrutiny assessment.During the scrutiny, the Petitioner again filed a copy ofForm 3CEB on 11th June, 2016. It is the case of thePetitioner that the SDTs entered into by it and reported inForm 3CEB were similar to the transactions entered into bythe Petitioner in the earlier assessment year, namely, A.Y. 2013-14 and the Transfer Pricing Officer (for short the“TPO”) had accepted that all the transactions entered into by the Petitioner were at an ALP. This was held by the TPO in his order dated 24th October, 2016.

(b) It is in these circ*mstances that the Petitioner has averredthat it was surprised to receive a show cause notice fromRespondent No.1 on 29th December, 2016 at 01.39 a.m., videan e-mail, for the alleged non-reporting of certain relatedparty transactions for the A.Y. 2014-2015 and required thePetitioner to provide the reasons why the same should notbe reported to Respondent No.2 for determination of theALP. This show cause notice was to be replied to by thePetitioner by 11.00 a.m. on the same date i.e. 29th December,2016. According to Respondent No.1 certain transactions(mentioned hereinafter) were entered into by the Petitionerwith related parties as per section 40A(2)(b) which werenot reflected in form 3CEB filed by the Petitioner. Thosetransactions are as under:

i. The Petitioner purchased Loans from HDFC Ltd and itssubsidiaries amounting to Rs.5164 Cr and Rs.27.72 Crrespectively.

ii. The Petitioner has received services from HBL GlobalPrivate Ltd. (for short “HBL Global”) for which the Petitioner paid an amount 492.5 Cr. and the Petitionerwas having beneficial ownership of HBL Global.

iii. The Petitioner has paid interest amount 4.41 Crore to HDBWelfare Trust which was a Trust created by the Petitioner.

(c) Since Respondent No.1 was of the opinion that thesetransactions were entered into with related parties as setout in section 40A(2)(b) of the IT Act, they ought to havefound place in Form 3CEB filed by the Petitioner. Since thiswas not done, the show cause notice was issued.

(d) According to the Petitioner no personal hearing was given tothem by Respondent No.1 in relation to these transactions.Be that as it may, the Petitioner, vide its letter dated 29thDecember, 2016, submitted a reply with respect to each ofthese above mentioned three transactions and gave anexplanation as to why they could not be termed as SDTs.This being the case the Petitioner stated that there was norequirement on their part to disclose the same in Form3CEB and correpondingly there was no question of making areference to the TPO for determining the ALP in relation tothese three transactions.

(e) In a nutshell, it was the Petitioner’s case that the transaction referred to in item (i) above [the purchase of loans from HDFC Ltd], firstly did not relate to A.Y. 2014-2015 but in fact the aforesaid transaction was entered into by the Petitioner in the earlier year and were relating to A.Y. 2013-2014. For A.Y. 2013-14 transfer pricingassessment had already been completed and become final.

The Petitioner further submitted that in any event, none ofthe promoters of the Petitioner held more than 20% of theshareholding individually and hence these transactions didnot take place with a person as contemplated under section40A(2)(b) of the IT Act. The other submission withreference to this transaction was that admittedly thistransaction was a transaction of purchase of loans whichcould never be termed as an expenditure, and therefore, thesame did not come within the ambit of section 92BA(i) of theIT Act.

(f) As far as the transaction listed at item (ii) is concerned[payment of Rs.492.50 Cr to HBL Global for servicesrendered], the Petitioner submitted that it did not have anydirect shareholding in HBL Global as that company was asubsidiary of Atlas Documentary Facilitators Co. Pvt. Ltd.(“ADFC Ltd.”) in which the Petitioner has a 29% shareholding. The Petitioner submitted that indirect shareholding is not covered or contemplated under section40A(2)(b) of the Act, and therefore, the transactions withHBL Global was not covered under the said section. Thisbeing the case, the contention of the Petitioner was that thistransaction also could never fall within the ambit of a SDT asunderstood under section 92BA(i). In support of thisargument, the Petitioner submitted that the Petitionercannot be regarded as the beneficial owner of the shares ofHDL Global as the beneficial owner of these shares wasADFC Ltd. and not the Petitioner.

(g) As far as the transaction listed in item (iii) is concerned[payment of interest of Rs.4.41 Cr to HDB Trust], thePetitioner submitted that HDB Welfare Trust was established for providing general welfare measures such as medical relief and educational assistance to the employees of the Petitioner bank. The Petitioner bank further submitted that as the beneficiaries of the HDB Welfare Trust were the employees of the Petitioner and not the Petitioner, the Trust does not come within the ambit of a person/partyas required under section 40A(2)(b) of the Act.

(h) After considering these objections of the Petitioner,Respondent No.1, vide his impugned order dated 29thDecember, 2016, rejected the objections that the aforesaidtransactions were not SDTs, and therefore, held thatdomestic transfer pricing provisions would be applicable. Ina nutshell, Respondent No.1 held that the Petitioner wasinvolved in the transaction of purchase of loan which is abusiness asset of the Petitioner and the purchase of suchasset from a related party falls under section 40A(2)(b) ofthe IT Act. Respondent No.1 further held that theconsolidated holding of the promoters was in excess of 20 %of the shareholding of the Petitioner and hence, thebeneficial ownership clause was applicable. Respondent No.1further went on to hold that since the Petitioner holds 29%shareholding of ADFC Ltd., which in turn holds 98.4% of theshares of HBL Global, the Petitioner had beneficialownership and voting rights of more than 20% of HBL Globaland hence the transaction with HBL Global was with aperson/party as covered by section 40A(2)(b) of the I.T. Act.As far as the Trust was concerned, Respondent No.1 held that the Petitioner possesses more than 20% of the rights inthe said Trust which makes it a related party as per theprovisions of section 40A(2)(b) of the Act. It is in thesecirc*mstances that Respondent No.1 passed the impugnedorder and thereafter, on the very same day (namely, on 29thDecember, 2016) made a reference (in relation to all theabovementioned three transactions) under section 92CA(1)of the Act to Respondent No.2 for determining the ALP.

(i) Once this reference was made, Respondent No.2 issued anotice dated 30th December, 2016 under section 92CA(2) ofthe I.T. Act asking the Petitioner to produce variousinformation in relation to international transactions and/orSDTs referred to by Respondent No.1 vide his letter dated29th December, 2016. This was for A.Y. 2014-2015. To thisletter of Respondent No.2, the Petitioner replied bycontending that certain basic documents which thePetitioner had maintained with respect to the internationaltransactions / SDTs reported by the Petitioner in FormNo.3CEB were already submitted and those transactionswere accepted to be SDTs. It was the case of the Petitionerthat the transactions referred to Respondent No.2 by Respondent No.1 were not SDTs, and therefore, the Petitioner was not obliged in law to submit any documents to Respondent No.2 with reference to these transactions. The Petitioner also alleged that the reference made toRespondent No.2 was not only bad in law, but also appearedto be made in undue haste by Respondent No.1.

(j) It is thereafter, and in these facts and circ*mstances, thatthe present Writ Petition has been filed seeking quashingand setting aside of the impugned order dated 29thDecember, 2016 passed by Respondent No.1 as well as theimpugned reference dated 29th December, 2016 under whichRespondent No.1 made a reference to Respondent No.2 fordetermining the ALP for the above mentioned threetransactions and which, according to Respondent No.1, wereSDTs.

(k) After this Petition was filed on 23rd June, 2017, the DivisionBench of this Court recorded that the matter has debatableissues which require consideration, and therefore, thematter was placed for hearing on 14th July, 2017. TheDivision Bench directed that till then the TPO shall not pass any final order. The Division Bench also recorded that if possible an endeavor shall be made to dispose of this Petition finally at the stage of admission. Thereafter, the matter has been adjourned from time to time and has now come up before us and with the consent of parties we have heard it finally. In these circ*mstances we issue Rule. TheRespondents waive service. By consent, Rule is madereturnable forthwith and heard finally.

3. In this factual backdrop, learned Senior Counsel Mr J.D.Mistri appearing on behalf of the Petitioner, submitted that in thefacts of the present case there were three transactions which theRevenue had alleged, were SDTs. They are - (1) Loans of Rs.5164Crores purchased by the Petitioner from the promoters (HDFC Ltd.)and loans of Rs.27.72 Crores purchased from the subsidiaries; (2)Payment of Rs.492.50 Crores by the Petitioner to HBL Global forrendering services; and (3) payment of interest of Rs.4.41 Crores bythe Petitioner to HDB Welfare Trust. Mr Mistri submitted that it isonly when the aforesaid transactions, or any of them, are a SDT, andwhich are not reported by the assessee, then the A.O. is required toissue a show cause notice to the assessee and pass an order disposingof the objections of the assessee before referring the said SDT to theTPO for determining the ALP. He submitted that to challenge theorder of the A.O. there is no other alternate efficacious remedy and infact this Court in the case of Vodafone India Services Pvt. Ltd. Vs.Union of India [361 ITR 531] has held that such an order passedby the A.O. rejecting the objections of the assessee that thetransactions are not SDTs, can be challenged by way of a WritPetition. Another reason stated by Mr Mistri why the Writ Petitioncame to be filed was that once the transaction is treated as a SDT,penalty under section 271G of the Act (at 2% of the value of thealleged SDT) is leviable, even if the TPO was to come to theconclusion that the transactions were at the ALP. It is in thesecirc*mstances, Mr Mistri submitted that the Petitioner has beenconstrained to approach this Court in its extraordinary, equitableand discretionary jurisdiction under Article 226 of the Constitutionof India.

4. Thereafter, Mr Mistri submitted that neither of the threetransactions are a SDT as wrongly held by Respondent No.1. Hesubmitted that as far as the loans of Rs.5164 Crores purchased bythe Petitioner from the promoters as well as Rs.27.72 Crorespurchased from the subsidiaries is concerned, he stated that theaforesaid transaction is not a transaction relating to the assessment year in question, namely, A.Y. 2014-15. In this regard he relied uponthe annual accounts of the Petitioner annexed at pages 100 & 101 ofthe paper book. According to Mr Mistri, this submission was noteven considered by the A.O. in the impugned order while rejectingthe objections of the Petitioner. Mr Mistri submitted that thistransaction related to A.Y. 2013-14, for which the Transfer PricingAssessment was already completed. This being the case, at theoutset, Mr Mistri submitted that this transaction could never betaken for A.Y. 2014-15 and be treated as a SDT.

5. Thereafter, Mr Mistri submitted that in any event, thistransaction of purchasing loans could never be a SDT. Mr Mistrisubmitted that for a transaction to fall within the meaning of a SDTunder section 92BA(i) of the Act, the transaction has to be one whichis not an international transaction and in which any expenditure inrespect of which payment has been made or is to be made by theassessee to a person referred to in section 40A(2)(b) of the Act. Hesubmitted that section 40A(2)(b) of the Act refers to certainpersons, and the transaction in question, namely, the purchase ofloans from the promoters of the Petitioner (HDFC Ltd.) did not fallwithin any of the persons mentioned in section 40A(2)(b) read withexplanation (a) thereof, and which is appended to section 40A(2)(b) of the Act. In this regard, he brought to our attention section40A(2)(b)(iv) of the Act and contended that the person referred toin the said sub-section has to have a substantial interest in thebusiness or profession of the assessee (in the present case thePetitioner). He submitted that explanation (a) sets out what is themeaning of 'substantial interest' and stipulates that in a case wherethe business or profession is carried on by a company, such personis, at any time during the previous year, the beneficial owner of theshares carrying not less than 20% of the voting power. In the facts ofthe present case, Mr. Mistri submitted that admittedly HDFC Ltd. isthe beneficial owner of only 16.39% of the shares of the Petitionerand hence section 40A(2)(b) was not at all applicable to the presenttransaction. He submitted that the Revenue had grossly erred inclubbing the shareholding of HDFC Ltd. with the shareholding of itssubsidiary, namely, HDFC Investments Ltd. (and which has a 6.25%shareholding in the Petitioner), to cross the threshold of 20%. To putit differently, Mr Mistri submitted that HDFC Ltd. holds 16.39% ofthe shareholding of the Petitioner and HDFC Investments Ltd. holds6.25% of the shares of the Petitioner. To cross the threshold of 20%as required under section 40A(2)(b), the Revenue is seeking to clubboth these shareholdings together. He submitted that in law, this cannever be done. He submitted that in law, the Parent Company (here HDFC Ltd.) can never be said to be the beneficial owner of theproperties of its subsidiary (here HDFC Investments Ltd.). Hesubmitted that the shares held by HDFC Investments Ltd in thePetitioner was nothing but the movable property of HDFCInvestments Ltd. This being the case, Mr. Mistri submitted that theRevenue could never club the two shareholdings together to crossthe threshold of 20% as required by section 40A(2)(b) read withexplanation (a) thereof. In support of this proposition, Mr. Mistriplaced reliance on the following decisions of the Supreme Court:-

(a) Bacha F. Guzdar Vs. CIT [(1955) 27 ITR 1 (SC)];

(b) Vodafone International Holdings BV Vs. UOI [341 ITR1 (SC)]; and

(c) BA Mohota Textile Traders Pvt. Ltd. Vs. DCIT [397ITR 616 (Bom)].

6. To further substantiate this argument, Mr Mistri alsoplaced reliance on the meaning of the word “beneficial owner” asappearing in the Black’s Law Dictionary as well as Tax Laws Lexicon(2012 Edition). According to Mr Mistri, Black’s Law Dictionarydefined ‘beneficial owner’ as ‘one recognized in equity as the ownerof something because use and title belong to that person, even thoughthe legal title may belong to someone else; especially one from whomproperty is held in Trust’. Similarly, according to Mr Mistri, Tax Laws Lexicon (2012 Edition) defines ‘beneficial owner’ as ‘the person who is not the legal owner but has the right to deal with the property as his own and has a right to enjoy the income.’ Mr. Mistri submitted that even section 89 of the Companies Act, 2013 requires a disclosure to be made to the Company (in the present case the Petitioner) by the owner of the shares if the owner is not the beneficial owner. In the present case no such disclosure is required to be made by HDFC Investments Ltd., and in fact, no such disclosure has been made in terms of section 89, by HDFC Investments Ltd. He therefore submitted that HDFC Ltd. (the parent company of HDFC Investments Ltd.) could never be said to be the beneficial owner of the shares owned by HDFC Investments Ltd. in the Petitioner.

7. Mr Mistri then submitted that it is undisputed that therecannot be more than one beneficial owner of the shares. It cannot bethat two different persons are the beneficial owners of the sameshares. If we were to accept the submission of the Revenue, the samewould lead to a complete absurdity. Mr Mistri submitted that take forexample Company 'A' has a wholly owned subsidiary, Company 'B'.In turn, the shares of Company 'C' are held 90% by Company 'B' and10% by Company 'A'. If one was to give the interpretation as soughtfor by the Revenue, then it would mean that Company ‘A’ beneficially owns 100% of Company 'C' which would lead to an absurd situation that Company 'B'; though owning 90% of the shareholding in Company ‘C’, would not be regarded as having a substantial interest in Company ‘C’ as Company ‘B’ cannot be said to be the beneficial owner of its 90% shareholding in Company ‘C’. Further, if the interpretation of the Revenue was to be held as correct then one will not have to not stop there and then also see the shareholders of Company 'A' as the beneficial owner of the shares of Company 'C'.

This would then lead to absurd results, namely, that then evenCompany ‘A’ also would not have a substantial interest in Company‘C’ and it would be the shareholders of Company 'A' that would havea substantial interest in Company ‘C’. This, according to Mr Mistri,would lead to startling results. He therefore submitted that such aninterpretation has to be avoided at all costs.

8. Mr Mistri further submitted that a Guidance Note issuedby the Institute of Chartered Accountants of India on Report undersection 92E, specifically provides that for the purposes of section40A(2)(b) one has to consider only direct shareholding and notderivative or indirect shareholding. He submitted that though theGuidance Note is not binding on this Court, the Supreme Court in thecase of CIT Vs Virtual Soft Systems Ltd. [404 ITR 409 (SC)] has held that the Guidance Note can be used as an aid to interpret theprovision. In furtherance of this argument, Mr Mistri submitted thatwherever the Legislature intended, they have used the term“directly or indirectly” throughout the Income Tax Act, 1961.Some of the examples given by Mr Mistri were sections 92A(1),92A(2), 285A, 9(1)(i), and explanation 5 to section 9(1), to name afew. Mr Mistri submitted that in fact the term “directly orindirectly” is used more than 40 times in the Act. What is importantto note is that this very term, ‘directly or indirectly’ isconspicuously absent in explanation (a) to section 40A(2)(b) of theAct, was the submission of Mr. Mistri. If the interpretation of theRevenue was to be accepted, the same would tantamount to doingserious violence to the language of the statute by introducing wordsin explanation (a) to section 40A(2)(b) which have not beenprovided by the Legislature. Mr. Mistri submitted that this is more sowhen one takes into consideration that explanation (a) to section40A(2)(b), being a deeming provision, must be interpreted strictly.He, therefore, submitted that the present transaction, namely,purchase of loans by the Petitioner from HDFC Ltd. and its subsidiarycan never be termed as a SDT.

9. In the alternative to the above argument, Mr Mistri submitted that the purchase of these loans can never be an ‘expenditure’ as covered under sections 28 to 37 of the Act. It wasbasically a purchase of an asset and hence not an ‘expenditure’covered under section 92B(A)(i). Mr Mistri submitted that section40A would be applicable when an amount expended or paid isclaimed as a deduction whereas loans purchased by the Petitioner isnot claimed as a deduction and which is reflected as an asset in thebalance-sheet. He submitted that even the A.O. accepts in the impugned order that the transaction of purchase of loans is an assetof the Petitioner. Mr Mistri submitted that section 92BA(i) wouldapply only when an expenditure is incurred for which a payment ismade to a party covered under section 40A(2)(b) of the Act. In thepresent case, the purchase of loans was not an ‘expenditure’ butpayment made for acquiring an asset, and hence, the same couldnever fall within the ambit of section 92BA(i) at all. Mr Mistrisubmitted that it is not possible to purchase an asset without makingpayment but that by itelf, without anything more, would not meanthat such payment is an ‘expenditure’ as understood under the Act.He submitted that for purchasing an asset the purchaser pays a pricefor acquiring the asset and it is referred to as the consideration forthe purchase of that asset and not an ‘expenditure’ for that asset. Hesubmitted that the consideration paid for acquiring the asset can never be said to be in the nature of ‘expenditure’ so as to come withinthe ambit of section 92BA(i) of the Act. Mr Mistri was at pains topoint out that an asset would be reflected in the balance-sheet of thecompany whereas ‘expenditure’ would not find place in the balance-sheet but would be reflected in the Profit & Loss Account. These loans that were purchased by the Petitioner are reflected in thebalance-sheet of the Petitioner bank and not in the Profit & LossAccount. This is another reason why Mr Mistri submitted that thepresent transaction, namely, purchase of loans by the Petitioner,could never fall within the definition of a SDT under section 92BA(i)of the Act.

10. As far as the transaction with HBL Global is concerned,namely, the payment made by the Petitioner of Rs.492.50 Crores toHBL Global for rendering services, Mr Mistri submitted that thePetitioner bank holds 29% shares of a company called AtlasDocumentary Facilitators Co. Pvt. Ltd. (“ADFC Ltd.”) which in turnholds 98.4% shares of HBL Global. He submitted that admittedly thePetitioner does not have any shareholding in HBL Global and hencethe Petitioner does not beneficially own more than 20% of the sharesof the HBL Global Pvt. Ltd. or vice versa, as contemplated undersection 40A(2)(b) of the Act. He, therefore, submitted that thepayment of Rs.492.50 Crores for the services rendered by HBLGlobal to the Petitioner was not a transaction that could fall withinsection 92BA(i) of the Act to be termed as a SDT. Mr. Mistrisubmitted that Respondent No.1 erred in holding that merelybecause the Petitioner holds 29% shares of ADFC Ltd., which in turnholds 98.4 % shares in HBL Global, the Petitioner would be regardedas a beneficial owner of the shares and voting rights of HBL Global.Once again, Mr Mistri submitted that Respondent No.1 hascompletely misconstrued meaning of the word “beneficial owner” ofthe shares. He submitted that the legal and beneficial owner ofshares of HBL Global is only ADFC Ltd. and cannot be said to be anyshareholder of ADFC Ltd. He submitted that it is now well settledthat the shareholders of a company cannot be said to have anybeneficial interest in the assets of that company. He submitted that98.4% shareholding of ADFC Ltd. in HBL Global was an asset /movable property of ADFC Ltd. By no stretch of the imagination,therefore, could the Petitioner be held to be the beneficial owner ofthe shares held by ADFC Ltd in HBL Global. He, therefore, submittedthat this transaction could never be termed as a SDT as understoodunder section 92BA(i) read with section 40A(2)(b) of the Act. MrMistri submitted that if the logic of Respondent No.1 was to be takento its logical conclusion, then it would mean that it is not even thePetitioner who is the beneficial owner of the shares of HBL Global,but it is the shareholders of the Petitioner who were the beneficialowners of the shares of HBL Global. As stated earlier, Mr Mistrisubmitted that this would lead to an absurd situation. He submittedthat this could never been the intention of the Legislature as such aninterpretation would lead to startling results and therefore has to beavoided.

11. As far as the transaction of payment of interest ofRs.4.41 Crores to HDB Welfare Trust is concerned, Mr Mistrisubmitted that the beneficiaries of the said Trust are the employeesof the Petitioner and not the Petitioner. He, therefore, submittedthat the Trust does not come within the ambit of section 40A(2)(b) ofthe Act as explanation (b) to section 40A(2)(b) clearly provides thatthe Petitioner must be beneficially entitled to 20% of the profits inthe said Trust. He submitted that in the facts of the present case thistransaction did not fall within explanation (a) of section 40A(2)(b),but explanation (b) to the said section. He submitted thatRespondent No.1 had proceeded on a factually wrong assumptionthat the Petitioner possesses more than 20% of the rights in the saidTrust which makes it a related party as per the provisions of section40A(2)(b) of the Act. He, therefore, submitted that even this transaction could never fall within the ambit and scope of a SDT ascontemplated under section 92BA(i) of the Act.

12. Mr Mistri then submitted that the whole premise of theimpugned order that these transactions are referred to as relatedparty transactions in form 3CD, was factually incorrect. This fact,according to Mr Mistri, has been accepted by Respondent No.1 in anaffidavit-in-reply filed on behalf of the Revenue (page 356). He,thereafter submitted that the impugned order is contrary to theprinciples of natural justice and needs to be set aside on this groundalone. He submitted that the notice issued to the Petitioner beforepassing the impugned order was served on the Petitioner on 29thDecember, 2016 at 01.29 a.m. asking the Petitioner to show cause by11.00 a.m. of the same date. The Petitioner was given no personalhearing and though the Petitioner filed its submissions in theafternoon of 29th December, 2016, Respondent No.1 passed theimpugned order on the very same day. He submitted that even theapproval from the CIT was granted on the same day and thereafterthe reference in relation to these three transactions was made to TPOalso on the very same day. He submitted that looking to these facts itwas clear that the principles of natural justice had been clearlyviolated as no effective opportunity was given to the Petitioner forshowing cause to the notice issued by Respondent No.1. No personalhearing was also granted to the Petitioner before passing theimpugned order, was the submission of Mr Mistri. He, therefore,submitted that all this clearly goes to show that the impugned orderand the impugned reference are clearly illegal and bad in law, andtherefore, ought to be set aside by us in our extraordinary, equitableand discretionary jurisdiction under Article 226 of the Constitutionof India.

13. On the other hand, Mr Chhotaray, learned advocateappearing on behalf of the Revenue, submitted that for a specifieddomestic transaction there are two types of pricing. First is theArms Length Price and the second is the Transfer Price. The ALP isthe price between unrelated parties. This price is determined by themarket forces. Transfer Price, on the other hand, is the price of thetransaction fixed between two related parties. Since these relatedparties are subject to common control, the price of inter setransactions amongst the related parties can be manipulated totransfer profit from one party to another in order to evade tax. It isfor this very reason that the Transfer Pricing provisions werebrought into force by the Legislature so as to determine the ALP of atransaction between related parties. He submitted that this was done in order to evade tax. If the Transfer Price was different from the ALP the Taxing Officer could make adjustments after following the provisions as set out in Chapter X of the Income Tax Act, 1961.

14. As far as the transaction of purchase of loans by thePetitioner from HDFC Ltd. is concerned, Mr Chhotaray submittedthat it was wrong on the part of the Petitioner to claim that thepurchase of these loans is not an ‘expenditure’ since it is not debitedto the Profit and Loss Account. He submitted that the Petitioner is abank involved in banking business. In the normal course of itsbusiness it indulges in the activity of purchasing and selling of loans.These transactions, being a part of the business activity of thePetitioner warrant to be treated as a business asset and stock. Hesubmitted that in the annual report of the Petitioner, the Petitionerreported these related party transactions as purchases. Hesubmitted that the purchase of any asset / services cannot be madewithout incurring an expenditure. For any asset, irrespective ofwhether it is a current investment or a long term investment, anexpenditure has to be incurred. Such an expenditure constitutes thecost of the asset. Moreover, the loan purchase transactions involveexpenditure every year by way of interest on such loans which is aRevenue expenditure. Even when a capital asset is purchased, cost isincurred and such cost is then capitalized and becomes a part of thebalance-sheet. Nevertheless, the nature is ‘expenditure’ only. MrChhotaray submitted that an expenditure is an outgo. The Petitionerhad incurred the expenditure for purchasing the loans and madepayment. This being the case it was clear that the currenttransaction would clearly be a SDT as contemplated under section92BA(i) of the Act.

15. Mr Chhotaray submitted that the argument of Mr Mistrithat HDFC Ltd. is not a person covered under section 40A(2)(b)(iv)is incorrect. Mr Chhotaray submitted that under explanation (a) tosection 40A(2)(b) a person has substantial interest in the assessee ifit is the beneficial owner of the shares carrying not less than 20% ofthe voting power. In the facts of the present case, Mr Chhotaraysubmitted that HDFC Ltd. (holding 16.39 % shares in the Petitioner)and it’s wholly owned subsidiary, HDFC Investments Pvt. Ltd.(holding 6.25% of the shareholding in the Petitioner company),together hold 22.64 % of the shares of the Petitioner. Mr Chhotaraysubmitted that what is important to note is the voting power and notthe shareholding so as to fall within explanation (a). According toMr Chhotaray this issue is squarely covered by a decision ofKarnataka High Court in the case of Commissioner of Income TaxVs. Amco Power Ltd. [(379 ITR 375) (KARN)]. He submittedthat this decision clearly holds that for the purpose of computingvoting power of the company in another company, the shareholdingof its wholly owned subsidiary has to be clubbed with its own shareholding. In the facts before Karnataka High Court, Mr Chhotaraysubmitted that the shareholding of the company was only 6%whereas its wholly owned subsidiary had a 45% share holding. Inthese circ*mstances, it was held that taking into consideration theshareholding of 45% of the wholly owned subsidiary, the votingpower of the company was 51% (i.e. 6% + 45%). Mr Chhotaraysubmitted that in the facts of the present case, the situation isidentical. He submitted that taking into consideration theshareholding of 6.25% of HDFC Investments Ltd. (and which is awholly owned subsidiary of HDFC Ltd.) in the Petitioner alongwiththe shareholding of 16.39% of HDFC Ltd. in the Petitioner, the totalvoting power HDFC Ltd. had in the Petitioner was 22.64%. This wasclearly above 20% as required under explanation (a) to section40A(2)(b) of the Act. Mr Chhotaray submitted that the word“beneficial” appearing in explanation (a) is totally misconstrued bythe Petitioner. Mr Chhotaray submitted that if the Petitioner'ssubmissions are accepted, the word 'beneficial' would become totallyredundant. In support of this proposition, Mr Chhotaray relied uponthe decision of the Supreme Court in the case of CIT v/s PodarCement Pvt. Ltd. [1997 (226) ITR 625 (SC)]. Over and abovethis, he submitted that even the CBDT circular No.6/b dated 6th July,1968 while explaining the newly introduced provision of section40A(2)(b) refers to holding substantial interest “directly orindirectly”.

16. In addition to this, Mr Chhotaray submitted that evenbefore the US regulatory authorities, HDFC Ltd. had represented thatit was the beneficial owner of 22.64 % of the equity shares of thePetitioner and exercised substantial influence over board decisions,which could result in HDFC Ltd. making decisions or foregoingopportunities to benefit HDFC Ltd that restrict their growth andharm their financial condition. He submitted that HDFC Ltd., in itsannual report declared that it had ownership interest of 22.64 % inthe Petitioner – HDFC Bank Ltd. Looking to all these facts, MrChhotaray submitted that it is too late in the day for the Petitioner tocontend that HDFC Ltd. was a beneficial owner of only 16.39% of theshares in the Petitioner and not having more than 20% voting power.He therefore submitted that the purchase of loans by the Petitionerfrom HDFC Ltd. would clearly fall within ambit of section 92BA(i) tomean a SDT.

17. As far as the second transaction is concerned, namely,the payment made by the Petitioner to HBL Global for the servicesrendered, Mr Chhotaray submitted that the Petitioner receivedservices worth Rs.492.50 Crores from HBL Global. He submittedthat admittedly the Petitioner owns 29% of the shareholding in ADFCLtd. In turn, ADFC Ltd. holds 98.4% of the shareholding in itssubsidiary HDFC Global. Accordingly, the Petitioner had asubstantial interest, albeit indirectly, in HBL Global, was thesubmission of Mr Chhotaray. In this regard Mr Chhotaray reliedupon provisions of section 40A(2)(b)(vi)(B) of the Act. Here also MrChhotaray relied upon the CBDT circular dated 6th July, 1968 tocontend that even indirect shareholding would be covered. Thisbeing the case, Mr Chhotaray submitted that even this transactionwith HBL Global would squarely fall within the meaning of a SDT ascontemplated under section 92BA(i) of the Act as it was atransaction between two related parties.

18. As far as the third transaction is concerned, namely, thepayment of interest of Rs.4.41 Crores to HDB Trust is concerned, MrChhotaray submitted that the Petitioner has a deposit of Rs. 45.12Crores from HDB Welfare Trust and has paid interest of Rs.4.41 Crores. He submitted that the Petitioner has a substantial interest interms of explanation (b) to section 40A(2)(b) of the Act. Hesubmitted that this issue has been discussed in detail by the Revenuein its affidavit at page 355 to 358 of the paper book. Mr Chhotaraysubmitted that section 92(2)(A) specifically mentions interest as anitem for determination of ALP. He submitted that the Petitioner isthe founder member of this Trust and the Trust held shares in thePetitioner till 2006. The benefits enjoyed by the Trust when it was ashareholder continues even now. The Petitioner has included thereserves of HDB Welfare Trust of Rs.60.03 Crores in its reserve whilepreparing a consolidated financial statement. The activities of theEmployees Welfare Trust have been included as other businessactivities in the annual report of the Petitioner. He submitted that inany case the payment of interest is an expenditure and it needsexamination whether the rate of interest was proper. He submittedthat for all these reasons even this transaction would be a SDT ascontemplated under section 92BA(i) of the Act. For all the aforesaidreasons, Mr Chhotaray submitted that there was no merit in thisWrit Petition and the same ought to be dismissed with costs.

19. We have carefully gone through the papers and proceedings in the present Writ Petition as well as the impugned order dated 29th December, 2016 and the impugned Reference dated 29th December, 2016. We have also given our anxious consideration to the arguments advanced by the Petitioner as well as on behalf of the Revenue. We find that the entire controversy in the present Writ Petition basically revolves around the interpretation of section 92BA(i) read with section 40A(2)(b) of the I. T. Act. As mentioned earlier, it is the case of the Revenue that the three transactions mentioned hereinabove fall within the meaning of a Specified Domestic Transaction (SDT), as set out in section 92BA(i) of the I. T.Act. Section 92BA as it stood then, reads thus:-

“92-BA. Meaning of specified domestic transaction.— For thepurposes of this section and Sections 92, 92-C, 92-D and 92-E,“specified domestic transaction” in case of an assesseemeans any of the following transactions, not being aninternational transaction, namely—

(i) any expenditure in respect of which payment has beenmade or is to be made to a person referred to in clause(b) of sub-section (2) of Section 40-A;

(ii) any transaction referred to in Section 80-A;

(iii) any transfer of goods or services referred to in sub-section (8) of Section 80-IA;

(iv) any business transacted between the assessee andother person as referred to in sub-section (10) of Section80-IA;

(v) any transaction, referred to in any other section underChapter VI-A or Section 10-AA, to which provisions ofsub-section (8) or sub-section (10) of Section 80-IA areapplicable; or

(vi) any other transaction as may be prescribed,and where the aggregate of such transactions entered into bythe assessee in the previous year exceeds a sum of five crorerupees.”20. Section 92BA of the I. T. Act sets out the meaning of aSDT and stipulates that for the purposes of this section and sections92, 92C, 92D and 92E “Specified Domestic Transactions” in the caseof an assessee inter alia means the transactions set out thereunderfrom clauses (i) to (vi). As far as the above three transactions areconcerned, it is common ground before us that if they were to fallwithin the term of a SDT, they would be covered under clause (i) ofsection 92BA which provides that it should be a transaction betweenthe assessee and a person referred to in section 40A(2)(b) for anexpenditure in respect of which payment has been made or is to bemade to such person. In other words, if a transaction is withreference to an expenditure in respect of which payment has beenmade or is to be made by the assessee to a person referred to insection 40A(2)(b), only then would the same be a SDT. For thispurpose it would therefore also be necessary to reproduce section40A, to the extent it is relevant to decide the present controversy.Section 40A deals with expenses or payments not deductible incertain circ*mstances and the relevant portion thereof reads thus:“40-A. Expenses or payment not deductible in certaincirc*mstances.— (1) The provisions of this section shall have effectnotwithstanding anything to the contrary contained in any otherprovision of this Act relating to the computation of income under thehead “Profits and gains of business or profession”.(2) (a) Where the assessee incurs any expenditure in respect ofwhich payment has been or is to be made to any person referred toin clause (b) of this sub-section, and the Assessing Officer is ofopinion that such expenditure is excessive or unreasonable havingregard to the fair market value of the goods, services or facilities forwhich the payment is made or the legitimate needs of the businessor profession of the assessee or the benefit derived by or accruingto him therefrom so much of the expenditure as is so considered byhim to be excessive or unreasonable shall not be allowed as adeduction;

Provided that no disallowance, on account of any expenditure beingexcessive or unreasonable having regard to the fair market value,shall be made in respect of a specified domestic transaction referredto in Section 92-BA, if such transaction is at arm's length price asdefined in clause (ii) of Section 92-F.

(b) The persons referred to in clause (a) are the following, namely:—

(i) where the assessee is an individual any relative of the assessee

(ii) where the assessee is a company, any director of the company,firm, association of persons or partner of the firm, memberHindu undived family of the association or family, orany relative of such director, partner or member,

(iii) any individual who has a substantial interest in the businessor profession of the assessee, or any relative of suchindividual;

(iv) a company, firm, association of persons or Hindu undividedfamily having a substantial interest in the business orprofession of the assessee or any director, partner or memberof such company, firm, association or family, or any relative ofsuch director, partner or member or any other companycarrying on business or profession in which the firstmentioned company has substantial interest;

(v) a company, firm, association of persons or Hindu undividedfamily of which a director, partner or member, as the case maybe, has a substantial interest in the business or profession ofthe assessee; or any director, partner or member of suchcompany, firm, association or family or any relative of suchdirector, partner or member;

(vi) any person who carries on a business or profession,—

(A) where the assessee being an individual, or any relative ofsuch assessee, has a substantial interest in the businessor profession of that person; or

(B) where the assessee being a company, firm, association ofpersons or Hindu undivided family, or any director of suchcompany, partner of such firm or member of the association or family, or any relative of such director, partner, or member, has a substantial interest in the business or profession of that person.Explanation.—For the purposes of this sub-section, a personshall be deemed to have a substantial interest in a business orprofession, if,—

(a) in a case where the business or profession is carried on by acompany, such person is, at any time during the previous year,the beneficial owner of shares (not being shares entitled to afixed rate of dividend whether with or without a right toparticipate in profit) carrying not less than twenty per cent of thevoting power; and

(b) in any other case, such person is, at any time during the previousyear, beneficially entitled to not less than twenty per cent of theprofits of such business or profession.”

21. Since the other sub-sections of section 40A are notrelevant, they have not been reproduced. Section 40A(2)(a)stipulates that where the assessee incurs any expenditure in respectof which payment has been made or is to be made to any personreferred to in clause (b) of this sub-section, and the A.O. is of theopinion that such expenditure is excessive or unreasonable havingregard to the fair market value of the goods, services or facilities forwhich the payment is made or the legitimate needs of the business orprofession of the assessee, or the benefit derived by or accruing tohim therefrom, so much of the expenditure as is so considered byhim to be excessive or unreasonable, shall not be allowed as adeduction. The proviso to sub-section 2(a) stipulates that nodisallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be madein respect of a SDT referred to in section 92BA, if such transaction isat the ALP as defined in clause (ii) of section 92F.

22. Then comes clause (b) of section 40A(2) and refers tocertain entities. In the present case, reliance has been placed by theRevenue on clauses (iv) & (vi)(B) of section 40A(2)(b) to contendthat the transactions which form the subject matter of this Petitionwould fall within the meaning of a SDT. What section 40A(2)(a) readwith section 40A(2)(b)(iv) provides is that where the assesseeincurs any expenditure in respect of which payment has been or is tobe made to any company, firm, association of persons or Hinduundivided family having a substantial interest in the business orprofession of the assessee, or any director, partner or member ofsuch company, firm, association or family or any relative of suchdirector, partner or member or any other company carrying onbusiness or profession in which the first mentioned company has asubstantial interest, and the A.O. is of the opinion that suchexpenditure is excessive or unreasonable, then he can disallow suchexpenditure as a deduction. What is the meaning of ‘substantialinterest’ has then been set out by the Legislature in the explanations(a) and (b) to section 40A(2)(b). Explanation (a) clearly sets that inthe case where a business or profession is carried on by a company,such person is, at any time during the previous year, the beneficialowner of shares (not being shares entitled to a fixed rate of dividendwhether with or without a right to participate in profits), carryingnot less than 20% of the voting power, would be deemed to have asubstantial interest. Explanation (b) stipulates that in any othercase, such person is, at any time during the previous year,beneficially entitled to not less than 20% of the profits of suchbusiness or profession.

23. On a conjoint reading of section 92BA(i) read with section40A(2)(b), in the facts of the present case, what becomes clear isthat for the transactions referred to earlier to fall within themeaning of a SDT, the assessee has to have a transaction (not beingan international transaction) with a person as listed in clauses (i) to(vi) of section 40A(2)(b).

24. In the facts before us, it is common ground that thetransactions which form the subject matter of the present WritPetition, if were to be construed as a SDT, then the same would haveto fall within section 92BA(i) which states that any transaction inwhich any expenditure in respect of which payment has been made or is to be made by the assessee to a person referred to in clause (b)of sub-section 2 of section 40A, would be a SDT. This being the case,we shall now examine whether each of these transactions fall withinthe meaning of a SDT.

TRANSACTION-1

LOANS PURCHASED BY THE PETITIONER FROM HDFC LIMITED:-

25. It is undisputed that the Petitioner purchased the loans ofHDFC Ltd. of more than Rs. 5,000 Crores. HDFC Ltd. admittedlyholds 16.39% of the shareholding in the Petitioner. If one were to gomerely by this figure of 16.39%, then, on a plain reading of section40A(2)(b)(iv) read with explanation (a) thereof, HDFC Ltd. wouldnot be a person who would have a substantial interest in thePetitioner. This is simply because explanation (a) clearly stipulatesthat for one to have a substantial interest, it should be the beneficialowner of shares carrying not less than 20% of the voting power.

26. However, the Revenue contends that the requirement ofexplanation (a) of having more than of 20% of the voting power isclearly established in this case because HDFC Ltd. holds 100% of theshareholding in another company called HDFC Investment Ltd.,which in turn, holds 6.25% shareholding in the Petitioner. Whenone clubs the shareholding of HDFC Ltd. of 16.39% with theshareholding of the HDFC Investments Ltd. of 6.25% (and which is awholly owned subsidiary of HDFC Ltd.), the threshold of 20% asrequired under explanation (a) to section 40A(2)(b), is clearlycrossed. This being the case, it is the Revenue's contention thatHDFC Ltd. clearly has a substantial interest in the Petitioner, andtherefore, the transaction of purchasing loans by the Petitioner fromHDFC Ltd. would fall within the meaning of a SDT, in which case, forthis transaction, the ALP has to be determined by the TPO.

27. On a plain reading of the aforesaid provisions, we areunable to agree with the submissions of the Revenue. Whatexplanation (a) to section 40A(2)(b) clearly stipulates is that aperson shall be deemed to have a substantial interest in a business orprofession in a case where the business or profession is carried on bya company, such person is, at any time during the previous year, thebeneficial owner of shares carrying not less than 20% of the votingpower. In other words, explanation (a) when broken down, requirestwo conditions that need to be fulfilled. The first condition is that,that the person should be the beneficial owner of shares (not beingshares entitled to a fixed rate of dividend whether with or without aright to participate in profits); and second that these shares (ofwhich the person is the beneficial owner) are carrying not less than20% of the voting power. In the facts of the present case, admittedlyHDFC Ltd., on its own, is not the beneficial owner of shares carryingat least 20% of the voting power as required under explanation (a) tosection 40A (2) (b) of the I. T. Act. The shareholding that HDFC Ltd.has in the Petitioner is only 16.39%.

28. We cannot, and the law does not permit us, to hold thatHDFC Ltd. is the beneficial owner of 22.64% of the shares in thePetitioner by clubbing the share holding of HDFC Investments Ltd.with the shareholding of HDFC Ltd. If we were to do this, we wouldbe effectively holding that HDFC Ltd., being a shareholder of HDFCInvestments Ltd., is the beneficial owner of the shares which HDFCInvestments Ltd. holds in the Petitioner. This, in law, is clearlyimpermissible because a shareholder of a company can never haveany beneficial interest in the assets (movable or immovable) of thatcompany. In the present case, if we were to accept the contention ofthe Revenue, it would mean that HDFC Ltd. is the beneficial owner ofthe shares which HDFC Investments Ltd. holds in the Petitioner. Thiswould be contrary to all canons of Company Law. It is well settledthat a shareholder of a company can never be construed either thelegal or beneficial owner of the properties and assets of the companyin which it holds the shares. This being the position in law, we findthat the Revenue is incorrect in trying to club the shareholding ofHDFC Investments Ltd. in the Petitioner along with the shareholdingof HDFC Ltd. in the Petitioner, to cross the threshold of 20% asrequired in explanation (a) to section 40A(2)(b). We are supportedin the view that we take by a decision of the Supreme Court in thecase of Bacha F. Guzdar Vs. Commissioner of Income Tax [(1955)27 ITR 1]. The relevant portion of this decision reads thus:-

“7. It was argued by Mr Kolah on the strength of an observationmade by Lord Anderson in Commissioners of InlandRevenue v. Forrest [8 Tax Cases, p 704 at 710] that an investor buysin the first place a share of the assets of the industrial concernproportionate to the number of shares he has purchased and alsobuys the right to participate in any profits which the company maymake in the future. That a shareholder acquires a right to participatein the profits of the company may be readily conceded but it is notpossible to accept the contention that the shareholder acquires anyinterest in the assets of the company. The use of the word ‘assets’ inthe passage quoted above cannot be exploited to warrant theinference that a shareholder, on investing money in the purchase ofshares, becomes entitled to the assets of the company and has anyshare in the property of the company. A shareholder has got nointerest in the property of the company though he has undoubtedly aright to participate in the profits if and when the company decides todivide them. The interest of a shareholder vis-a-vis the company wasexplained in the Sholapur Mills Case[(1950) SCR 869, 904] . Thatjudgment negatives the position taken up on behalf of the appellantthat a shareholder has got a right in the property of the company. Itis true that the shareholders of the company have the, soledetermining voice in administering the affairs of the company andare entitled, as provided by the Articles of Association to declarethat dividends should be distributed out of the profits of the companyto the shareholders but the interest of the shareholder eitherindividually or collectively does not amount to more than a right toparticipate in the profits of the company. The company is a juristicperson and is distinct from the shareholders. It is the company whichowns the property and not the shareholders. The dividend is a shareof the profits declared by the company as liable to be distributedamong the shareholders. Reliance is placed on behalf of theappellant on a passage in Buckley's Companies Act (12th Edn.), p.894 where the etymological meaning of dividend is given asdividendum, the total divisible sum but in its ordinary sense it meansthe sum paid and received as the quotient forming the share of thedivisible sum payable to the recipient. This statement does not justifythe contention that shareholders are owners of a divisible sum orthat they are owners of the property of the company. The properapproach to the solution of the Question 1s to concentrate on theplain words of the definition of agricultural income which connectsin no uncertain language revenue with the land from which itdirectly springs and a stray observation in a case which has nobearing upon the present question does not advance the solution ofthe question. There is nothing in the Indian law to warrant theassumption that a shareholder who buys shares buys any interest inthe property of the company which is a juristic person entirelydistinct from the shareholders. The true position of a shareholder isthat on buying shares an investor becomes entitled to participate inthe profits of the company in which he holds the shares if and whenthe company declares, subject to the Articles of Association, that theprofits or any portion thereof should be distributed by way ofdividends among the shareholders. He has undoubtedly a furtherright to participate in the assets of the company which would be leftover after winding up but not in the assets as a whole as LordAnderson puts it.(emphasis supplied)

29. This proposition has again been reiterated by theSupreme Court in Vodafone International Holdings BV v. Union ofIndia [(2012) 6 SCC 613]. Paragraphs 256 to 258 of this decisionread thus:-

“256. Subsidiary companies are, therefore, the integral part ofcorporate structure. Activities of the companies over the years havegrown enormously of its incorporation and outside and theirstructures have become more complex. Multinational companieshaving large volume of business nationally or internationally willhave to depend upon their subsidiary companies in the national andinternational level for better returns for the investors and for thegrowth of the company. When a holding company owns all of thevoting stock of another company, the company is said to be a WOSof the parent company. Holding companies and their subsidiaries cancreate pyramids, whereby a subsidiary owns a controlling interest inanother company, thus becoming its parent company.

257. The legal relationship between a holding company and WOS isthat they are two distinct legal persons and the holding companydoes not own the assets of the subsidiary and, in law, themanagement of the business of the subsidiary also vests in its Boardof Directors. In Bacha F. Guzdar v. CIT [AIR 1955 SC 74] , thisCourt held that shareholders' only right is to get dividend if and whenthe company declares it, to participate in the liquidation proceedsand to vote at the shareholders' meeting. Refer also to Carew andCo. Ltd. v. Union of India [(1975) 2 SCC 791] and CarrascoInvestments Ltd. v. Directorate of Enforcement [(1994) 79 CompCas 631 (Del)] .

258. Holding company, of course, if the subsidiary is a WOS, mayappoint or remove any Director if it so desires by a resolution in thegeneral body meeting of the subsidiary. Holding companies andsubsidiaries can be considered as single economic entity andconsolidated balance sheet is the accounting relationship between theholding company and subsidiary company, which shows the status ofthe entire business enterprises. Shares of stock in the subsidiarycompany are held as assets on the books of the parent company andcan be issued as collateral for additional debt financing. Holdingcompany and subsidiary company are, however, considered asseparate legal entities, and subsidiary is allowed decentralisedmanagement. Each subsidiary can reform its own managementpersonnel and holding company may also provide expert, efficientand competent services for the benefit of the subsidiaries.”(emphasis supplied)

30. In the facts before us it may be true that HDFC Ltd. mayindirectly have 20% of the voting power in the Petitioner becauseHDFC Investments Ltd. is a wholly owned subsidiary of HDFC Ltd.However, that by itself would not mean that HDFC Ltd. has asubstantial interest in the Petitioner as required and stipulated inexplanation (a) to section 40A(2)(b). As mentioned earlier, for aperson to have a substantial interest as contemplated underexplanation (a), two conditions have to be fulfilled, namely (i) thatthe person has to be the beneficial owner of the shares and (ii) thosevery shares have to carry not less than 20% of the voting power. It isonly when these two conditions are fulfilled that explanation (a) canbe pressed into service. In the facts before us, if we were to acceptthe submission of the Revenue, then we would have to hold thatHDFC Ltd. is the beneficial owner of the 6.25% shareholding thatHDFC Investments Ltd. has in the Petitioner. This 6.25%shareholding of HDFC Investments Ltd in the Petitioner is themovable property and an asset of HDFC Investment Ltd. That wouldmean that HDFC Ltd., holding 100% shares of HDFC InvestmentsLtd., would have to be construed as the beneficial owner of theproperties/assets of HDFC Investments Ltd. This can never be thecase because that would be contrary to all canons of company law aswell as the decisions of the Supreme Court in the case of Bacha F.Guzder and Vodafone International Holdings BV (supra). Thisbeing the case, HDFC Ltd., by no stretch of the imagination can besaid to be the beneficial owner of the shares that HDFC InvestmentsLtd. holds in the Petitioner. This is simply because the shares thatHDFC Investments Ltd. holds in the Petitioner is its asset, and HDFCLtd., though being a 100% shareholder of HDFC Investments Ltd.,cannot be termed as the owner (beneficial or otherwise) of the assetsand properties of HDFC Investments Ltd. In these circ*mstances,therefore, the shareholding of HDFC Ltd. and HDFC Investments Ltd.cannot be clubbed together to cross the threshold of 20% as requiredunder explanation (a). This being the position, we have nohesitation in holding that the HDFC Ltd. does not have a substantialinterest in the Petitioner, and therefore, is not a person ascontemplated under section 40A(2)(b)(iv) for the presenttransaction to fall within the meaning of a SDT as set out in section92BA (i) of the I. T. Act.

31. There is another reason for coming to this conclusion. Ifwe were to interpret this provision as is sought to be contended bythe Revenue, it would lead to an absurd situation, as correctlycontended by Mr. Mistri. It is undisputed that there cannot be morethan one beneficial owner of the same shares. If we were to take theexample that was given by Mr. Mistri during arguments, it wouldeffectively lead to a completely absurd result. Take for exampleCompany 'A' has a wholly owned subsidiary Company 'B'. In turn, theshares of Company 'C' are held 90% by Company 'B' and 10% byCompany 'A'. If one was to give the interpretation as sought for by

the Revenue, then it would mean that Company ‘A’ beneficially owns100% of Company 'C' which would lead to an absurd situation thatCompany 'B'; though owning 90% of the shareholding in Company‘C’, would not be regarded as having a substantial interest inCompany ‘C’ as Company ‘B’ cannot be said to be the beneficialowner of its 90% shareholding in Company ‘C’. Further, if theinterpretation of the Revenue was to be held as correct then one willnot have to not stop there and then also see the shareholders ofCompany 'A' as the beneficial owner of the shares of Company 'C'.This would then lead to absurd results, namely, that then evenCompany ‘A’ also would not have a substantial interest in Company‘C’ and it would be the shareholders of Company 'A' that would havea substantial interest in Company ‘C’. This would lead to startlingresults. It is now well settled that whilst interpreting a statutoryprovision, an interpretation which would lead to an absurdity, shouldalways be avoided. This is yet another reason why we are unable toaccept the submission of the Revenue that this particular transactionwould fall within the meaning of a SDT as understood and set out insection 92BA (i) of the I. T. Act.

32. There is yet another reason that we find that the presenttransaction (purchase of loans by the Petitioner from the HDFC Ltd.)could never be termed as a SDT. Section 92BA (i) contemplates atransaction in which any expenditure is incurred in respect of whichpayment has been made or is to be made to a person referred to inclause (b) of sub-section 2 of section 40A of the I. T. Act. What wefind in the facts of the present case is that the Petitioner hadpurchased the loans of HDFC Limited. This was a purchase of anasset. As correctly submitted by Mr. Mistri, when the purchaserpays the price for acquiring an asset it is referred to as aconsideration for purchase of that asset and not an ‘expenditure’ forthat asset. Acquisition of an asset, therefore, cannot be said to be inthe nature of an expenditure so as to come within the ambit ofsection 92BA (i) of the Act. It is true that consideration has to bepaid for purchasing an asset but that would not mean that it is an‘expenditure’. Mr. Mistri is correct when he submits that an assetwould be reflected in the balance-sheet of the company whereas anexpenditure would be reflected in the Profit and Loss account. Infact, in the facts of the present case, the loans purchased by thePetitioner from HDFC Ltd. were reflected in the balance-sheet andnot in the Profit and Loss account. This being the case, we find thatthis is not an expenditure at all as contemplated under section92BA(i), and therefore, the money expended for purchasing theseloans can never be termed as an ‘expenditure’ incurred by the Petitioner. It would, therefore, not fall within the meaning of a SDT asunderstood under section 92BA(i) of the Act.

33. For all the aforesaid reasons, we therefore have nohesitation in holding that this transaction of purchase of loans by thePetitioner from HDFC Ltd. would not fall within the meaning of a SDT.This being the case, there was no question of Respondent No.1treating it so and thereafter referring the same to the TPO undersection 92CA(1) for determining the ALP.

TRANSACTION-2

PAYMENT MADE BY THE PETITIONER TO HBL GLOBALPRIVATE LIMITED FOR RENDERING SERVICES:-

34. As far as this transaction is concerned, it is thecontention of the Revenue that it would be a transaction with aperson falling within section 40A(2)(b)(vi)(B) of the I. T. Act.Section 40A(2)(b)(vi) reads thus:-

“(vi) any person who carries on a business or profession,—

(A) where the assessee being an individual, or any relative ofsuch assessee, has a substantial interest in the businessor profession of that person; or

(B) where the assessee being a company, firm, association ofpersons or Hindu undivided family, or any director of suchcompany, partner of such firm or member of theassociation or family, or any relative of such director,partner, or member, has a substantial interest in thebusiness or profession of that person.”(emphasis supplied)

35. As far as this transaction is concerned, we find that thePetitioner holds 29% of the shares in ADFC Ltd. In turn, ADFC Ltd.holds 98.4% of the shares in HBL Global. It is not in dispute that thePetitioner holds no shares of HBL Global. Merely because thePetitioner holds 29% of the shares of ADFC Ltd., which in turn holds98.4% shares in HBL Global, the Petitioner cannot be regarded ashaving a substantial interest in HBL Global. For us to hold that thePetitioner would have a substantial interest in HBL Global, we wouldhave to hold that the Petitioner, because it holds 29% of theshareholding in ADFC Ltd., is the beneficial owner of 98.4% of theshares of HBL Global which are held by ADFC Ltd. This in law, and asdiscussed in detail earlier, we cannot do because the Petitioner, beinga shareholder of ADFC Ltd., does not have any interest (beneficial orotherwise) in the properties/assets of ADFC Ltd. (which in this casewould be the shareholding that ADFC Ltd. has in HBL Global). Thisbeing the case, we find that even this transaction is not entered intowith a person as mentioned in section 40A(2)(b)(vi)(B) of the I. T.Act. Here also, we find merit in the submission of Mr. Mistri that ifthe plea of the Revenue is taken to its logical conclusion, then, itwould mean that it is not the Petitioner which is the beneficial ownerof the shares of HBL Global but it would be the shareholders of thePetitioner who are the beneficial owner of the shares of HBL Global.This could never have been the intention of the Legislature.

36. To counter this argument, Mr. Chhotaray placed relianceon the Circular dated 6th July, 1968 and stated that the said Circularissued by the CBDT clearly states that for the purposes of section40A(2)(b) direct and indirect shareholding has to be taken intoaccount. We are unable to agree with the submissions of Mr.Chhotaray. There is no question in the facts of the present case torefer to or consider any indirect shareholding. As mentioned earlier,on a plain reading of explanation (a) to section 40A(2)(b), for thereto be a substantial interest, the person has to be the beneficial ownerof shares holding not less than 20% of the voting power. In thistransaction, the Petitioner can never be said to be beneficial owner ofthe shares in HBL Global for the simple reason that it holdsabsolutely no shares in HBD Global. It holds shares in a companycalled ADFC Ltd., which in turn holds 98.4% shares in HBL Global.This would not mean that either directly or indirectly the Petitioneris the beneficial owner of the shares of HBD Global. We, therefore,find no merit in this contention.

37. We would also like to take note of the Guidance Note onReport under section 92E of I.T. Act issued by Institute of CharteredAccounts of India which states as under:-

“4A.16 As in the case of section 92A(2)(a) and (b) (which defines theterm 'associated enterprise' for the purposes of internationaltransactions) the phrase “directly or indirectly” is not used inSection 40A(2)(b). However, in this regard, reference should bemade to the Central Board of Direct Taxes' Circular number 6-Pdated 6 July 1968 explaining the then newly inserted provisions insection 40A(2). This circular sets out the categories of the persons,payments to whom fall within the purview of section 40A(2). Itmentions that such persons would include inter alia-“(c) persons in whose business or profession the taxpayer has asubstantial interest directly or indirectly”.

“However, Explanation to Section 40A(2) deems a person to havesubstantial interest if such person is 'beneficial owner' of sharescarrying not less than 20% of voting power. The expression“beneficial owner” needs to be construed in contrast to “legalowner” and not in the context of determining indirect ownership ofshares. Hence, the emphasis is on covering the real owner of theshares and not the nominal owner. This proposition is alsosupported by legal jurisprudence which states that in a multi-tierstructure, a parent cannot be regarded as the beneficial owner ofshares in a downstream subsidiary merely because it owns theshares of the intermediate subsidiary companies. It is important torespect the fact that the entities are separate legal entities.Consequently, in a situation where A Ltd. holds 50% in B Ltd. and BLtd. holds 50% in C Ltd., under ordinary circ*mstances, A Ltd.cannot be regarded as having beneficial interest in C Ltd. In otherwords, for purposes of Section 40A(2)(b), it may be appropriate toconsider only direct shareholding and not derivative or indirectshareholding.

4A.17 The coverage of section 40A(2)(b) is very wide and coverspersons related to the assessee under several relationships. Thus theassessee and the accountant should ensure that all relevantexpenditure transactions with all specified persons as mentioned insection 40A(2)(b) should be carefully identified and included intransfer pricing documentation and accountant's report. Withregard to ensuring completeness of such information, the accountantshould obtain a written representation from the assessee detailingthe list of persons specified in section 40A(2)(b) and expendituretransactions with them.”

38. From this Guidance Note what is clear is that the word“beneficial owner” needs to be construed in contrast to “legal owner”and not in the context of determining indirect ownership of shares.Hence, the emphasis is on covering the real owner of the shares andnot the nominal owner. The report further states that thisproposition is also supported by legal jurisprudence which states thatin a multi-tier structure, a parent cannot be regarded as thebeneficial owner of shares in a downstream subsidiary merelybecause it owns the shares of the intermediate subsidiary companies.It is important to respect the fact that the entities are separate legalentities. This Guidance Note also gives an example which clearlyindicates that for the purpose of section 40A(2)(b) it may beappropriate to consider only a direct shareholding and not aderivative or indirect shareholding. In fact, the Supreme Court inthe case of Commissioner of Income Tax v/s Virtual Soft SystemsLimited [(2018) 404 ITR 409 (SC) : (2018) 6 SCC 584)] hascategorically discussed the relevancy of the Guidance Note and forthe purposes of interpretation, the Supreme Court has held that itcan certainly be used as an aid to interpret the provision. Paragraph

18 [of the SCC report] of this decision reads thus:-

“18. Without a doubt, in a catena of cases, this Court has discussedthe relevancy of the Guidance Note. While dealing with one of suchmatters, this Court, in CIT v. Punjab Stainless SteelIndustries [CIT v. Punjab Stainless Steel Industries, (2014) 15 SCC129] held as under: (SCC p. 134, para 17) “17. So as to be more accurate about the word “turnover”, one can either refer to dictionaries or to material which are published by bodies of accountants. The Institute ofChartered Accountants of India (hereinafter referred to as“ICAI”) has published some material under the head“Guidance Note on Tax Audit under Section 44-B of theIncome Tax Act”. The said material has been published soas to guide the members of ICAI. In our opinion, when arecognised body of Accountants, after due deliberation andconsideration publishes certain materials for its members,one can rely upon the same.””

39. For all the aforesaid reasons, we are unable to accept thesubmission of Mr. Chhotaray that the present transaction (namelythe payment made by the Petitioner to HBL Global for servicesrendered) would fall within the meaning of a SDT as understood andcovered under section 92BA(i) of the I.T. Act.

TRANSACTION-3

PAYMENT OF INTEREST OF RS. 4.41 CRORES BY THEPETITIONER TO HDB WELFARE TRUST.

40. As far as this transaction is concerned, it is the case ofthe Revenue that the Petitioner has deposits of Rs.45.12 Crores fromthe HDB Employee Welfare Trust and has paid interest of Rs.4.41Crores. According to the Revenue, the Petitioner has a substantialinterest in terms of explanation (b) to section 40A(2)(b) of the Act.

Explanation (b) stipulates that in any other case [i.e. other than aperson mention in explanation (a)], a person is said to have asubstantial interest if such person is at any time during the previousyear, beneficially entitled to not less than 20% of the profits of suchbusiness or profession.

41. We fail to see how the Revenue can contend that thetransaction of payment of interest to HBD Welfare Trust and whichTrust has been set up for the benefit of its employees, would fallwithin Explanation (b) to section 40A (2)(b) of the I. T. Act. It is noteven the case of the Revenue that the Petitioner is entitled to at least20% of the profits of the said Trust. The Trust has been set upexclusively for the welfare of its employees and there is no questionof the Petitioner being entitled to 20% of the profits of such Trust.This being the case, we find that this transaction also clearly wouldnot fall within section 40A(2)(b) read with explanation (b) thereof tobe a SDT as understood and covered by section 92BA(i) of the I. T.Act.

42. Before parting, it would only be fair to deal with thejudgments relied upon by Mr. Chhotaray. The first decision was ofthe Karnataka High Court and the other was of the Supreme Court.

On carefully going through the decision of the Karnataka High Courtin the case of Commissioner of Income Tax Vs. Amco PowerSystems Ltd. (supra), we find that the reliance thereon by MrChhotaray is wholly misplaced. What the Karnataka High Court wasconsidering in the facts of that case were the provisions of section 79of the I.T. Act and which are materially different from section40A(2)(b) which is being considered by us in the present WritPetition. In fact when one peruses section 79 of the I.T.Act, it is clear that the same deals with carry forward and set off of losses in the case of certain companies. It is on the wording of section 79 of theI.T. Act, that the Karnataka High Court has given a finding that sinceABL was having complete control over APIL and even though theshareholding of ABL was reduced to 6% in the year in question, yetby virtue of being the holding company, owning 100 % shares ofAPIL, the voting power of ABL could not be said to have been reducedto less than 51%. It came to this finding because ABL, together withAPIL were having voting power of 51%. This finding of theKarnataka High Court was given because the wordings of section 79of the I.T. Act are materially different from the wordings of Section40A(2)(b). We, therefore, find that the reliance placed by MrChhotaray on this decision is wholly misconceived.

43. Similarly, we find that the reliance placed by MrChhotaray on the decision of the Supreme Court in the case of CITv/s Podar Cement Pvt. Ltd. (supra) is wholly misplaced. In thiscase, the Supreme Court was called upon to decide whether in law theincome derived by the assessee company by letting out flats of abuilding is taxable under the head 'Income from other Sources' undersection 56 of the Act or whether the same was to be taxed as 'Incomefrom House Property' under section 22 of the Act. On carefully goingthrough this judgment, we do not see how this decision in any waysupports the contention of Mr Chhotaray. Section 22 of the Act dealswith 'Income from House Property' and stipulates that the annualvalue of property of any buildings or lands appurtenant thereto ofwhich the assessee is the owner, other than such portions of suchproperty as he may occupy for the purpose of any business ofprofession carried on by him the profits of which are chargeable toincome tax, shall be chargeable to income tax under the head 'Incomefrom House Property'. The owner of house property has also beendefined in section 27 and clause (iii) thereof inter alia stipulates that a member of a co-operative society to whom a building or partthereof is allotted or leased under a house building scheme of thesociety, shall be deemed to be the owner of that building or partthereof. Section 27(iii)(a) and (iii)(b) also set out who shall bedeemed to be the owner in certain circ*mstances. It is whilstinterpreting these provisions, the Supreme Court was deciding as towho would be the owner as contemplated under section 22 of the Act.We fail to see that this judgment can be of any assistance to theRevenue in the facts and circ*mstances of the present case. TheSupreme Court was considering completely different sections ofIncome Tax Act and whose wordings are materially different fromthe wordings of section 40A(2)(b) of the Act. We therefore find thatthe reliance placed by Mr Chhotaray on this decision is also whollymisplaced.

44. In view of the foregoing discussion, we find that none ofthe three transactions that form the subject matter of this Petitionfall within the meaning of a SDT as required under section 92BA(i) ofthe I.T. Act. This being the case, we find that Respondent No.1 wasclearly in error in concluding that these transactions were SDTs, andtherefore required to be disclosed by the Petitioner by filing Form3CEB. He therefore could not have referred these transactions toRespondent No.2 for determining the ALP.

45. In these circ*mstances, and in view of the foregoingdiscussion, the Writ Petition is allowed in terms of prayer clause (a).Rule is made absolute in the aforesaid terms. However, in the factsand circ*mstances of the case, there shall be no order as to costs.

( B.P.COLABAWALLA J. ) ( S.C.DHARMADHIKARI J. )

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Asset Purchase Not a Specified Domestic Transaction Under Income Tax Act (2024)
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