The Mumbai bench Income Tax Appellate Tribunal ( ITAT ) upheld that transfer pricing adjustment made on purchase consideration paid under the scheme of amalgamation entered with the holding company.
The Assessee Dimexon Diamonds Ltd. engaged in the diamond manufacturing/distribution business with operations spread across the globe. The assessee was established in 1995 and became a wholly owned subsidiary of Dimexon ( India ) Holding Pvt. Ltd.
For the year under consideration, the assessee e-filed its return of income by declaring a total income of Rs. 17,88,45,250. The return filed by the assessee was selected for scrutiny.
The Assessing Officer made reference under section 92CA(1) of the Income Tax Act to the Transfer Pricing Officer for the determination of the arm’s length price of the international transactions reported by the assessee.
The assessee entered into a scheme of amalgamation with its holding company DIHPL, which in turn is a wholly owned subsidiary of DIHBV. The aforesaid scheme of amalgamation was sanctioned by the National Company Law Tribunal.
Pursuant to the sanction, the amalgamating company, i.e. DIHPL got merged into the assessee. For the said merger, the assessee paid a total purchase consideration of Rs. 188.35 crore to DIHBV.
After considering the submission related to the amalgamation of assessee the TPO passed the order and rejected the contention of the assessee that as the scheme of merger has been approved by NCLT the said transaction is at arm’s length on the basis that the only authority of the law to determine the ALP of the international transaction is the TPO.
Accordingly, the TPO made up a total transfer pricing adjustment of Rs. 17,47,49,383, i.e. Rs. 80,49,383 in respect of international transactions pertaining to interest on CCD and Rs. 16,67,00,000 in respect of interest on loan provided to the AE. Thereafter the AO draft assessment order . The aggrieved assessee filed detailed objections before the DRP.
DRP rejected the objections raised by the assessee on this issue and held that in the present case, there has been an organizational change within the group by way of a merger between two group entities and therefore such a transaction will amount to an international transaction within the meaning of section 92B of the Income Tax Act.
Therefore aggrieved by the assessee filed appeal before the tribunal.
During the adjudication Rajesh Simhan, the counsel for assessee argued that payment of merger consideration is on the capital account and does not result in any income. Hence the TPO has ordinary characterizing the merger transaction as a loan transaction and imputed interest and denied the allowance of interest on the CCDs
H. M. Bhatt, Department representatives argued that there is no change in the actual assets owned by the holding company, i.e. DIHBV, before and after the merger. The transaction involved is the sale of investment by DIHBV and the payment in return.
The sale of investment has an impact on the income/expense of the assessee. Accordingly, it was submitted that this is a capital transaction that has an impact on the income/expense based on a payment mechanism-interest on CCDs and the interest-free loan.
The tribunal observed that the claim of the assessee that DIHBV has transferred its subsidiary, i.e. DIHPL, having a book value of Rs. 369,28,18,214 to the assessee pursuant to the merger transaction, and therefore is entitled to receive a consideration of Rs. 369,28,18,214, which it has received by way of the shareholding of the entity, i.e. the assessee, having a total value of Rs. 269,28,90,977 ( post-merger ) and Rs. 100 crore in cash.
Therefore the bench observed that the merger transaction, in the present case, is merely a case of business reorganization without any change in functions performed, assets used, and risks assumed between the parties.
Thus, what has been transferred pursuant to the merger is merely an investment company without any erosion in function, asset, and risk profile of DIHBV requiring additional compensation apart from issuance of shares of the assessee.
Accordingly the entire merger transaction is a mere restatement of accounts of the subsidiary companies without the actual transfer of any asset and liability by DIHBV. Hence the lower authorities have rightly held that shares of the assessee now held by DIHBV represent the fair value of the aforesaid merger transaction.
After analyzing the submission of both parties, the bench comprising Amarjit Singh, ( Judicial Member ) & Sandeep Singh Karhail, ( Accountant Member ) upheld that transfer pricing adjustment made on purchase consideration paid under the scheme of amalgamation entered with the holding company.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
