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Tax Publishers 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.

Tax Publishers

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.