Bombay High Court Ruling:
HDFC Bank Ltd.
Writ Petition No. 462 of 2017/ [2018-TII-269-HC-MUM-TP]
Facts of the case:
HDFC Bank Ltd (the assessee company or the assessee or the 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. The primary business of the assessee is banking. The assessee, along with its return of income, also filed Form No. 3CEB, inter alia disclosing specified domestic transactions entered into by it, for the financial year 2013-14.
The Assessing Officer (AO) however was of the view that certain transactions were entered into by the assessee with related parties as per section 40A(2)(b) which were not reflected in Form No. 3CEB. The AO thus made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of the below mentioned transactions, which according to him were not reflected in Form no. 3CEB:
The assessee had purchased loans from HDFC Ltd. and its subsidiaries amounting to INR 5164 crores and INR 27.72 crores respectively;
The assessee had received services from HBL Global Private Ltd. (HBL Global) for which the assessee paid an amount of INR 492.5 crores and the assessee was having beneficial ownership of HBL Global;
The assessee had paid interest of INR 4.41 crores to HDB Welfare Trust which was a trust created by the assessee.
The assessee in respect of the above mentioned issues; filed a writ of certiorari for quashing the order of the AO and also quashing the reference made by the AO to the TPO for determining the ALP. The assessee stated that the order as well as the reference of the AO are ex-facie without jurisdiction, illegal, unsustainable, contrary to the principles of natural justice and contrary to law, and therefore, ought to be quashed and set aside.
Observations/ Decision of the Hon’ble Bombay High Court (HC):
Loans purchased by assessee from HDFC Ltd. and its subsidiaries amounting to INR 5164 crores and INR 27.72 crores respectively
The contention of the revenue authorities was that the holdings by both HDFC Ltd and HDFC Investment Ltd of 16.39% and 6.25% respectively in HDFC Bank Ltd, should be clubbed to determine whether HDFC Ltd. has a substantial interest (having more than 20% of the equity capital) in HDFC Bank Ltd., for the purposes of section 40A(2)(b) of the Income-tax Act, 1961 (the Act).
The HC stated that the explanation (a) to section 40A(2)(b) requires two conditions, namely:
the person should be the beneficial owner of shares and
the shares should carry not less than 20% of the voting power.
In the instant case, 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 Act.
The HC held that the law does not permit clubbing of the shareholding of HDFC Investments Ltd. with the shareholding of HDFC Ltd., for determining the above stated threshold of 20%, and thus, HDFC Ltd. did not have substantial interest in HDFC Bank Ltd.
The HC held that in law, a shareholder of a company can never have any beneficial interest in the assets of that company. The HC stated that 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. The HC placed reliance on the decision of the Hon’ble Supreme Court (SC) in the case of Bacha F. Guzdar and the decision of the Hon’ble SC in the case of Vodafone International Holdings BV.
The HC stated that the shareholding of 6.25% of HDFC Investments Ltd. in the assessee company is the movable property and an asset of HDFC Investments Ltd., and to construe, that HDFC Ltd. was the beneficial owner of such shareholding, would be contrary to all the canons of company law as well as ratio laid down by the decisions of the SC (supra).
The HC also stated that, it is well settled that whilst interpreting a statutory provision, an interpretation which would lead to an absurdity, should always be avoided.
The HC held that section 92BA(i) of the Act 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 section 40A(2)(b) of the Act.
In the instant case, the assessee had purchased the loans from HDFC Ltd. and the same were reflected in the balance sheet and not profit and loss account of the assessee company. Thus, it was a transaction of a purchase of an asset. Accordingly, the HC held that the acquisition of an asset 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.
Payment made by the assessee company to HBL Global of INR 492.5 crores for rendering services by HBL Global
The HC held that the person to have a substantial interest, has to be the beneficial owner of shares holding not less than 20% of the voting power, as prescribed under explanation (a) to section 40A(2)(b).
The HC stated that merely because the assessee holds 29% of the shares of ADFC Ltd., which in turn holds 98.4% shares in HBL Global, the assessee company cannot be regarded as having a substantial interest in HBL Global; as such a determination would mean that either directly or indirectly the assessee is the beneficial owner of the shares of HBD Global.
The HC also placed reliance on the Guidance Note on Report under section 92E of the Act issued by the Institute of Chartered Accountants of India:
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 and not the nominal owner;
in a multi-tier structure, a parent cannot be regarded as the beneficial owner of shares in a downstream subsidiary merely because it owns the shares of the intermediate subsidiary companies;
The Guidance Note also gives an example which clearly indicates that for the purpose of section 40A(2)(b) it may be appropriate to consider only a direct shareholding and not a derivative or indirect shareholding
The HC for all the aforesaid reasons, held that the transaction of payment made by the assessee company to HBL Global for the services rendered, would not fall within the meaning of a specified domestic transaction under section 92BA r.w. section 40A(2)(b) of the Act.
Payment of interest of INR 4.41 crores by the assessee company to HDB Employee Welfare Trust
The assessee company had deposits of INR 45.12 crores from HDB Employee Welfare Trust and had paid interest of INR 4.41 crores on such deposits. According to the revenue authorities, the assessee had a substantial interest in the trust, in terms of explanation (b) to section 40A(2)(b) of the Act, and hence such payment of interest by the assessee to the trust was covered under section 92BA(i) of the Act.
The HC held that the trust had been set up for the benefit of the employees of the assessee company and hence there was no question of the assessee company being entitled to 20% of the profits of such trust. The HC thus held, that the said transaction would not fall within explanation (b) to section 40A(2)(b) of the Act and therefore cannot be considered as a specified domestic transaction under section 92BA r.w. section 40A(2)(b) of the Act.
The Hon’ble HC, considering the facts, reiterated the principle that the direct and indirect shareholding cannot be clubbed to establish substantial interest as specified under section 40A(2)(b), and that substantial interest has to be determined on a standalone basis.
The HC reiterated the principle that the word ‘expenditure’ is to be understood as an amount expended on revenue account and hence, the acquisition of an asset cannot be said to be in the nature of expenditure so as to come within the ambit of section 92BA(i) of the Act.
The principles established by the HC for determining ‘substantial interest’, expenditure, etc., would be equally applicable while interpreting section 40A(2) of the Act.