Share sale transaction between joint venture partners resulting in loss is not a ‘colourable device’

164 views

Published on

Recently, the Delhi High Court (High Court) in the case of Siel Ltd (the taxpayer) held that share sale transaction between Joint Venture (JV) partners resulting in loss is not a ‘colourable device’. The High Court observed that the Ministry of Industry had granted approval for purchase/sale of shares. Further, the Reserve Bank of India (RBI) had given no objection to the transaction permitting JV partners to acquire shares in the JV from the taxpayer. The reliance of the taxpayer on the valuation report was also accepted by the RBI when they granted express permission.

Published in: Education
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
164
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
4
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Share sale transaction between joint venture partners resulting in loss is not a ‘colourable device’

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Share sale transaction between joint venture partners resulting in loss is not a ‘colourable device’ 6 August 2014 Background Recently, the Delhi High Court (High Court) in the case of Siel Ltd 1 (the taxpayer) held that share sale transaction between Joint Venture (JV) partners resulting in loss is not a ‘colourable device’. The High Court observed that the Ministry of Industry had granted approval for purchase/sale of shares. Further, the Reserve Bank of India (RBI) had given no objection to the transaction permitting JV partners to acquire shares in the JV from the taxpayer. The reliance of the taxpayer on the valuation report was also accepted by the RBI when they granted express permission. ______________ 1 CIT v. Siel Ltd (ITA No. 1616/2010 and ITA No. 1619/2010) – Taxsutra.com Facts of the case  The taxpayer had entered into a JV agreement, followed by a first amendatory agreement with Plansee Tizit Aktiengesellschaft (Plansee), an Austrian company. The agreement was entered for setting up and forming the company Siel Tizit Ltd. for carrying on business of manufacture, sale, distribution, export, and other dealings in hard metals.  The two JV partners equally acquired the paid-up equity capital of 15 million equity shares of INR10 each. During the year under consideration, the JV declared rights issue of 6 million equity shares whereby, the taxpayer renounced its entitlement to subscribe 3 million equity shares of INR10 in the rights issue in favour of Plansee. Thereafter, Plansee’s shareholding increased to 58.3 per cent, while the taxpayer’s share holding decreased to 41.7 per cent.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Subsequently, the taxpayer and Plansee had entered into an agreement, whereby Seil Tezit Ltd. had proposed to offer 10 million fresh equity shares for cash at par on rights basis, but the taxpayer due to financial difficulties, was unable to subscribe the shares. Therefore, the taxpayer had decided to renounce the rights in favour of Plansee.  Further, Plansee on request agreed to buy the taxpayer’s 12.7 million shareholding for a consideration of USD 600,000, which on conversion, came to INR2.02 per share of face value of INR10 each. This had resulted in book loss of INR101.2 million or indexed loss of INR136.2 million on capital account.  The Assessing Officer (AO) did not accept the said capital loss challenging that the aforesaid transaction was a colourable device. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the order of the AO. High Court’s ruling  It was not the case of the tax department that the transaction relating to sale of shares was a bogus transaction, and it did not have commercial or business reasons.  The High Court observed that the principle of colourable device as part of a tax evasion plan would not be applicable. The sale transaction was not a cover up, a device and the de facto, or real transaction was different.  Rights issue was made for the purpose of generating and augmenting the capital in the loss making company. The share application money paid became paid-up share capital. The price paid for acquiring rights shares cannot be equated with the price paid to acquire shares from shareholders in the present case.  The taxpayer and Plansee were JV partners, but they were not controlled and under the same management. It was not the case of the tax department that the two parties had common shareholders or common directors.  In the case of sale of this nature, the seller would like to get the best price and the buyer would like to purchase the shares on the depressed or lowest price, specially, when there were losses and further capital had to be inducted. Therefore, it was incorrect to hold that it was not a case of arm’s length transaction as such.  The High Court observed that the Ministry of Industry, Department of Industrial Policy and Promotion, had granted approval for purchase/sale of shares. Further, the RBI has accorded approval to the letter.  The High Court observed that the RBI, Exchange Control Department, had given no objection to the transaction under the Foreign Exchange Regulation Act permitting Plansee to acquire shares in Seil Tizit Ltd. from the taxpayer. The reliance of the taxpayer on the valuation report was accepted by the RBI, Exchange Control Department, when they granted express permission.  It cannot be held that the valuation report was ambiguous. It cannot be held that the consideration declared and paid was a sham and not the correct amount. It was open to the AO to check the books of account and the balance sheet, and if required and necessary, make his own valuation.  There was no secondary or additional evidence to show or corroborate the finding that the sale consideration mentioned was not the genuine or true consideration.  The valuer had specifically stated that it had relied upon the data/information supplied without verification. It was also stated that the valuer did not take into account revaluation of reserves. This means that the valuer had not examined veracity and audited the books of account.  The valuer does not normally undertake the said exercise and valuation are made accepting and on the basis of audited accounts. It was open for the AO to point out and state why and for what reason the figures in the books of account were false and incorrect and, therefore, the data/information was unreliable and should not have been the basis of the valuation.  The valuation was undertaken, and the report made as was required to get requisite approval under the exchange control regulations. In the facts of this case, it cannot be assumed that underhand or undeclared sale consideration was paid. Accordingly, the High Court dismissed the appeal filed by the tax department.
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Our comments This is a welcome ruling by the Delhi High Court where the High Court has observed that the price paid for acquiring rights shares cannot be equated with the price paid to acquire shares subsequently from the shareholders. Therefore, the rights shares issued at a discounted price cannot be disregarded on the grounds of the subsequent share sale transaction, and it cannot be held that the sale of shares does not represent the true and correct price. Further, the Ministry of Industry and the RBI had granted approval for such transaction, therefore, the High Court held that such transaction resulting into loss is not a ‘colourable device’. The newly introduced GAAR provisions under the Act will come into effect from 1 April 2016, which is expected to provide wide powers to the AO. Under this provisions, the AO may treat the transaction as ‘impermissible avoidence arrangement’ if the main purpose of the transaction is to obtain tax benefit. Accordingly, the AO may disregard/combine/re- characterise whole/part of the arrangement.
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

×