Pr. CIT v. Redington (India) (P) Ltd. [T.C.A. Nos.
590 & 591 of 2019, dt. 10-12-2020] : 2020 TaxPub(DT) 5340 (Mad-HC)
Business restructuring as gift by a corporate to offshore
step down subsidiaries -- Tax evasion by layering -- Transfer pricing
adjustments -- Royalty payments to subsidiary by parent whether permissible
Facts:
Assessee Redington India (RI) was a listed company. There
was a Singapore branch of Redington which was owning the brand/trademark of
Redington. Assessee was formed to take over the Singapore branch and thereby
became a listed entity in India.
The assessee had a number of subsidiaries one being a
wholly owned one Redington Gulf FZE (RG FZE) in Dubai Free Trade Zone. Arising
out of business funding considerations, the assessee formed a company called
Redington Mauritius (RM) which in turn floated a down stream company called
Redington Cayman Islands (RC). Subsequently the assessee transferred their
holding in RG FZE to the Cayman Islands entity and claimed this to be outside
the scope of capital gains tax as it was fitting into section 47(iii).
Consequential to this immediately within 4 days of the "gifting" of
shares, one Private Equity investor (PE) Investcorp invested USD 65 million in
the Cayman Islands entity in return for a 27.17% shareholding in RG FZE. The
case of the revenue was that this fell in the scope of section 47(iv) and since
the transferee was not an Indian entity there can be no capital gains
exemption. Besides this the corporate gift to be valid needs to be accepted by
the done and voluntarily and willingly as being an artificial corporate person
and since this was not manifested the reading of gift itself was erroneous.
Arising out of statements given by the CFO of the assessee the TPO also held
that this circuitous layering route was only to evade Income taxes in India.
The assessee if they had transferred the holding in RG FZE directly to the
Private Equity--PE investor Investcorp would have paid capital gains in India
and it is to thwart this they have formed dual layers in the form of Mauritius
and then in Cayman Islands. It was also confirmed by the fact of the dividends
payout made directly by RG FZE to the assessee and those made by RG FZE to post
investment by Investcorp which manifested that the layering was certainly a
mechanism to deprive India of its share of taxes by having it in these tax
havens. Accordingly, the TPO when he was called to value the transfer presuming
it one of not being a gift he held the closest valuation would have been the
price at which the shares exchanged hands from the Cayman Islands entity to
Investcorp the PE entity which was then attributed and TP additions were
sustained under capital gains for Rs. 885 crores in the hands of the assessee.
The plea of the assessee before the ITAT was this was a valid gift made which
was to enable them to strategically develop the RG, FZE Middle East entity and
list it overseas and this was possible only by offshoring and bringing in an
investor and since it fell in the scope of section 47(iii) no capital gains can
be taxed. Besides this the reading of the TPO was perverse as there was no
consideration which accrued to the assessee and thus no capital gains can be
read in an imputed/notional manner especially given that GAAR provisions were
also not in vogue in that year of appeal 2008 plus the provisions of Transfer
pricing cannot be read incongruous to taxing provisions of the entire Income
tax law. The DRP read the valuation of the TPO of the underlying
"transferred gift" but gave a risk discount of 10%. citing that a PE
investment was not that high risky in proposition given that the assessee had
buy back covenants also on the same. On higher appeal the ITAT upheld the views
of the assessee confirming the gift and since it did not fall in the scope of
capital gains and there being no consideration the provisions of transfer
pricing also could not be applied and the additions made by revenue stood
quashed. Aggrieved the revenue went in higher appeal with the plea that the
entire transaction was one entered into with an intent to evade taxes, the gift
being incorrect and thus TP provisions ought to have to be read into the same.
A step aside the assessee had to pay royalty for the use of
the "Redington" trademark to its subsidiary in Singapore. This was
found to be incongruous as a parent paying royalty to its subsidiary especially
on facts that the trademark itself was registered in 2000 with an application
made in 2009 in India in the name of Redington India. The ITAT quashed this
royalty being read as "NIL" by the TPO. On higher appeal by the
revenue --
Held in favour of the revenue that --
(i) The reading of gift by the
ITAT was incomplete in as much as the meaning of gift and its characteristics
were as per the Transfer of Property Act, 1882. The transaction of gifting was
an after thought to evade taxes. The TPO's valuation of the capital gains @ Rs.
885 crores was upheld. The layering pointed clearly to a circuitous route to
deprive India of capital gains taxes. The logic of this being without consideration
and no consideration means no capital gains cannot be read incorrectly
especially given the evading structuring adopted by the assessee. The order of
the ITAT was found to be perverse and deserves quashing.
(ii) The payment of royalty for
use of trademark which was owned by Redington India thereby a parent paying
royalty to a subsidiary was not properly examined by the ITAT. To that extent
the order of the ITAT was erroneous and deserves to be annulled.