Case: Hdfc Bank Limited Vs. Assistant Commissioner of Income Tax &amp; Others

2. Before we set out the legal submissions of the respective parties, the brief facts of the case and which would be necessary to determine the controversy before us, are asThe Petitioner is a public limited company registered under the Companies Act, 1956 and is also registered as a banking company with the Reserve Bank of India (RBI). The primary business of the Petitioner is banking. The Petitioner filed its assessment of income for the Assessment Year (A.Y.) 2014-15 on 30th November, 2014 declaring a total income of Rs.12595,27,63,920/-. The Petitioner, along with the return of income, also filed Form 3CEB inter alia disclosing certain ‘specified domestic transactions entered into by it during the relevant year. Thereafter, the Petitioners case was selected for scrutiny assessment. During the scrutiny, the Petitioner again filed a copy of Form 3CEB on 11th June, 2016. It is the case of the Petitioner that the SDTs entered into by it and reported in Form 3CEB were similar to the transactions entered into by the 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 circumstances that the Petitioner has averred that it was surprised to receive a show cause notice from Respondent No.1 on 29th December, 2016 at 01.39 a.m., vide an e-mail, for the alleged non-reporting of certain related party transactions for the A.Y. 2014-2015 and required the Petitioner to provide the reasons why the same should not be reported to Respondent No.2 for determination of the ALP. This show cause notice was to be replied to by the Petitioner 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 Petitioner with related parties as per section 40A(2)(b) which were not reflected in form 3CEB filed by the Petitioner. Those transactions are as under:i. The Petitioner purchased Loans from HDFC Ltd and its subsidiaries amounting to Rs.5164 Cr and Rs.27.72 Cr respectively.ii. The Petitioner has received services from HBL Global Private Ltd. (for short HBL Global) for which the Petitioner paid an amount 492.5 Cr. and the Petitioner was having beneficial ownership of HBL Global.iii. The Petitioner has paid interest amount 4.41 Crore to HDB Welfare Trust which was a Trust created by the Petitioner.(c) Since Respondent No.1 was of the opinion that these transactions were entered into with related parties as set out in section 40A(2)(b) of the IT Act, they ought to have found place in Form 3CEB filed by the Petitioner. Since this was not done, the show cause notice was issued.(d) According to the Petitioner no personal hearing was given to them by Respondent No.1 in relation to these transactions. Be that as it may, the Petitioner, vide its letter dated 29th December, 2016, submitted a reply with respect to each of these above mentioned three transactions and gave an explanation as to why they could not be termed as SDTs. This being the case the Petitioner stated that there was no requirement on their part to disclose the same in Form 3CEB and correpondingly there was no question of making a reference to the TPO for determining the ALP in relation to these three transactions.(e) In a nutshell, it was the Petitioners 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 pricing assessment had already been completed and become final. The Petitioner further submitted that in any event, none of the promoters of the Petitioner held more than 20% of the shareholding individually and hence these transactions did not take place with a person as contemplated under section 40A(2)(b) of the IT Act. The other submission with reference to this transaction was that admittedly this transaction was a transaction of purchase of loans which could never be termed as an expenditure, and therefore, the same did not come within the ambit of section 92BA(i) of the IT Act.(f) As far as the transaction listed at item (ii) is concerned [payment of Rs.492.50 Cr to HBL Global for services rendered], the Petitioner submitted that it did not have any direct shareholding in HBL Global as that company was a subsidiary 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 section 40A(2)(b) of the Act, and therefore, the transactions with HBL Global was not covered under the said section. This being the case, the contention of the Petitioner was that this transaction also could never fall within the ambit of a SDT as understood under section 92BA(i). In support of this argument, the Petitioner submitted that the Petitioner cannot be regarded as the beneficial owner of the shares of HDL Global as the beneficial owner of these shares was ADFC 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], the Petitioner 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/party as 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 29th December, 2016, rejected the objections that the aforesaid transactions were not SDTs, and therefore, held that domestic transfer pricing provisions would be applicable. In a nutshell, Respondent No.1 held that the Petitioner was involved in the transaction of purchase of loan which is a business asset of the Petitioner and the purchase of such asset from a related party falls under section 40A(2)(b) of the IT Act. Respondent No.1 further held that the consolidated holding of the promoters was in excess of 20 % of the shareholding of the Petitioner and hence, the beneficial ownership clause was applicable. Respondent No.1 further went on to hold that since the Petitioner holds 29% shareholding of ADFC Ltd., which in turn holds 98.4% of the shares of HBL Global, the Petitioner had beneficial ownership and voting rights of more than 20% of HBL Global and hence the transaction with HBL Global was with a person/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 in the said Trust which makes it a related party as per the provisions of section 40A(2)(b) of the Act. It is in these circumstances that Respondent No.1 passed the impugned order and thereafter, on the very same day (namely, on 29th December, 2016) made a reference (in relation to all the abovementioned 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 a notice dated 30th December, 2016 under section 92CA(2) of the I.T. Act asking the Petitioner to produce various information in relation to international transactions and/or SDTs referred to by Respondent No.1 vide his letter dated 29th December, 2016. This was for A.Y. 2014-2015. To this letter of Respondent No.2, the Petitioner replied by contending that certain basic documents which the Petitioner had maintained with respect to the international transactions / SDTs reported by the Petitioner in Form No.3CEB were already submitted and those transactions were accepted to be SDTs. It was the case of the Petitioner that 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 to Respondent No.2 was not only bad in law, but also appeared to be made in undue haste by Respondent No.1.(j) It is thereafter, and in these facts and circumstances, that the present Writ Petition has been filed seeking quashing and setting aside of the impugned order dated 29th December, 2016 passed by Respondent No.1 as well as the impugned reference dated 29th December, 2016 under which Respondent No.1 made a reference to Respondent No.2 for determining the ALP for the above mentioned three transactions and which, according to Respondent No.1, were SDTs.(k) After this Petition was filed on 23rd June, 2017, the Division Bench of this Court recorded that the matter has debatable issues which require consideration, and therefore, the matter was placed for hearing on 14th July, 2017. The Division 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 circumstances we issue Rule. The Respondents waive service. By consent, Rule is made returnable forthwith and heard finally.

Reasoning:
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.On a plain reading of the aforesaid provisions, we are unable to agree with the submissions of the Revenue. What explanation (a) to section 40A(2)(b) clearly stipulates is that a person shall be deemed to have a substantial interest in a business or profession in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares carrying not less than 20% of the voting power. In other words, explanation (a) when broken down, requires two conditions that need to be fulfilled. The first condition is that, that the person should be the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits); and second that these shares (of which the person is the beneficial owner) are carrying not less than 20% of the voting power. In the facts of the present case, admittedly HDFC Ltd., on its own, is not the beneficial owner of shares carrying at least 20% of the voting power as required under explanation (a) to section 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 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 ITRthese circumstances, therefore, the shareholding of HDFC Ltd. and HDFC Investments Ltd. cannot be clubbed together to cross the threshold of 20% as required under explanation (a). This being the position, we have no hesitation in holding that the HDFC Ltd. does not have a substantial interest in the Petitioner, and therefore, is not a person as contemplated under section 40A(2)(b)(iv) for the present transaction to fall within the meaning of a SDT as set out in section 92BA (i) of the I. T. Act.Act.32. There is yet another reason that we find that the present transaction (purchase of loans by the Petitioner from the HDFC Ltd.) could never be termed as a SDT. Section 92BA (i) contemplates a transaction in which any expenditure is incurred in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section 2 of section 40A of the I. T. Act. What we find in the facts of the present case is that the Petitioner had purchased the loans of HDFC Limited. This was a purchase of an asset. As correctly submitted by Mr. Mistri, when the purchaser pays the price for acquiring an asset it is referred to as a consideration for purchase of that asset and not an ‘expenditure for that asset. Acquisition of an asset, therefore, cannot be said to be in the nature of an expenditure so as to come within the ambit of section 92BA (i) of the Act. It is true that consideration has to be paid for purchasing an asset but that would not mean that it is an ‘expenditure. Mr. Mistri is correct when he submits that an asset would be reflected in the balance-sheet of the company whereas an expenditure would be reflected in the Profit and Loss account. In fact, in the facts of the present case, the loans purchased by the Petitioner from HDFC Ltd. were reflected in the balance-sheet and not in the Profit and Loss account. This being the case, we find that this is not an expenditure at all as contemplated under section 92BA(i), and therefore, the money expended for purchasing these loans can never be termed as an ‘expenditure incurred by the Petitioner. It would, therefore, not fall within the meaning of a SDT as understood under section 92BA(i) of the Act.For all the aforesaid reasons, we therefore have no hesitation in holding that this transaction of purchase of loans by the Petitioner from HDFC Ltd. would not fall within the meaning of a SDT. This being the case, there was no question of Respondent No.1 treating it so and thereafter referring the same to the TPO under section 92CA(1) for determining the ALP.As far as this transaction is concerned, we find that the Petitioner 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 the Petitioner holds no shares of HBL Global. Merely because the Petitioner holds 29% of the shares of ADFC Ltd., which in turn holds 98.4% shares in HBL Global, the Petitioner cannot be regarded as having a substantial interest in HBL Global. For us to hold that the Petitioner would have a substantial interest in HBL Global, we would have to hold that the Petitioner, because it holds 29% of the shareholding in ADFC Ltd., is the beneficial owner of 98.4% of the shares of HBL Global which are held by ADFC Ltd. This in law, and as discussed in detail earlier, we cannot do because the Petitioner, being a shareholder of ADFC Ltd., does not have any interest (beneficial or otherwise) in the properties/assets of ADFC Ltd. (which in this case would be the shareholding that ADFC Ltd. has in HBL Global). This being the case, we find that even this transaction is not entered into with 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 if the plea of the Revenue is taken to its logical conclusion, then, it would mean that it is not the Petitioner which is the beneficial owner of the shares of HBL Global but it would be the shareholders of the Petitioner who are the beneficial owner of the shares of HBL Global. This could never have been the intention of theare unable to agree with the submissions of Mr. Chhotaray. There is no question in the facts of the present case to refer to or consider any indirect shareholding. As mentioned earlier, on a plain reading of explanation (a) to section 40A(2)(b), for there to be a substantial interest, the person has to be the beneficial owner of shares holding not less than 20% of the voting power. In this transaction, the Petitioner can never be said to be beneficial owner of the shares in HBL Global for the simple reason that it holds absolutely no shares in HBD Global. It holds shares in a company called ADFC Ltd., which in turn holds 98.4% shares in HBL Global. This would not mean that either directly or indirectly the Petitioner is the beneficial owner of the shares of HBD Global. We, therefore, find no merit in this contention.For all the aforesaid reasons, we are unable to accept the submission of Mr. Chhotaray that the present transaction (namely the payment made by the Petitioner to HBL Global for services rendered) would fall within the meaning of a SDT as understood and covered under section 92BA(i) of the I.T. Act.We fail to see how the Revenue can contend that the transaction of payment of interest to HBD Welfare Trust and which Trust has been set up for the benefit of its employees, would fall within Explanation (b) to section 40A (2)(b) of the I. T. Act. It is not even the case of the Revenue that the Petitioner is entitled to at least 20% of the profits of the said Trust. The Trust has been set up exclusively for the welfare of its employees and there is no question of the Petitioner being entitled to 20% of the profits of such Trust. This being the case, we find that this transaction also clearly would not fall within section 40A(2)(b) read with explanation (b) thereof to be 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 the judgments relied upon by Mr. Chhotaray. The first decision was of the Karnataka High Court and the other was of the Supreme Court. On carefully going through the decision of the Karnataka High Court in the case of Commissioner of Income Tax Vs. Amco Power Systems Ltd. (supra), we find that the reliance thereon by Mr Chhotaray is wholly misplaced. What the Karnataka High Court was considering in the facts of that case were the provisions of section 79 of the I.T. Act and which are materially different from section 40A(2)(b) which is being considered by us in the present Writ Petition. 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 the I.T. Act, that the Karnataka High Court has given a finding that since ABL was having complete control over APIL and even though the shareholding of ABL was reduced to 6% in the year in question, yet by virtue of being the holding company, owning 100 % shares of APIL, the voting power of ABL could not be said to have been reduced to less than 51%. It came to this finding because ABL, together with APIL were having voting power of 51%. This finding of the Karnataka High Court was given because the wordings of section 79 of the I.T. Act are materially different from the wordings of Section 40A(2)(b). We, therefore, find that the reliance placed by Mr Chhotaray on this decision is wholly misconceived.43. Similarly, we find that the reliance placed by Mr Chhotaray on the decision of the Supreme Court in the case of CIT v/s Podar Cement Pvt. Ltd. (supra) is wholly misplaced. In this case, the Supreme Court was called upon to decide whether in law the income derived by the assessee company by letting out flats of a building is taxable under the head Income from other Sources under section 56 of the Act or whether the same was to be taxed as Income from House Property under section 22 of the Act. On carefully going through this judgment, we do not see how this decision in any way supports the contention of Mr Chhotaray. Section 22 of the Act deals with Income from House Property and stipulates that the annual value of property of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purpose of any business of profession carried on by him the profits of which are chargeable to income tax, shall be chargeable to income tax under the head Income from House Property. The owner of house property has also been defined in section 27 and clause (iii) thereof inter alia stipulates that a member of a co-operative society to whom a building or part thereof is allotted or leased under a house building scheme of the society, shall be deemed to be the owner of that building or part thereof. Section 27(iii)(a) and (iii)(b) also set out who shall be deemed to be the owner in certain circumstances. It is whilst interpreting these provisions, the Supreme Court was deciding as to who 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 the Revenue in the facts and circumstances of the present case. The Supreme Court was considering completely different sections of Income Tax Act and whose wordings are materially different from the wordings of section 40A(2)(b) of the Act. We therefore find that the reliance placed by Mr Chhotaray on this decision is also wholly misplaced.44. In view of the foregoing discussion, we find that none of the three transactions that form the subject matter of this Petition fall within the meaning of a SDT as required under section 92BA(i) of the I.T. Act. This being the case, we find that Respondent No.1 was clearly in error in concluding that these transactions were SDTs, and therefore required to be disclosed by the Petitioner by filing Form 3CEB. He therefore could not have referred these transactions to Respondent No.2 for determining the ALP.