Section 40A(2)(b) and 92BA – Specified domestic transactions – Determination of arm’s length price – Meaning of “specified domestic transactions” – Section 92BA applies to transactions between assessee and a person referred to in section 40A(2)(b) – Assessee having substantial interest in company with whom it has transactions – Beneficial ownership of shares does not include indirect shareholding – Amount paid to acquire asset – Not an expenditure covered by section 40A(2)(b)

Section
40A(2)(b) and 92BA – Specified domestic transactions – Determination of arm’s
length price – Meaning of “specified domestic transactions” – Section 92BA
applies to transactions between assessee and a person referred to in section
40A(2)(b) – Assessee having substantial interest in company with whom it has
transactions – Beneficial ownership of shares does not include indirect
shareholding – Amount paid to acquire asset – Not an expenditure covered by
section 40A(2)(b)

By an
order dated 29/12/2016, the Assessing Officer held that three transactions were
specific domestic transactions and referred the case to the Transfer Pricing
Officer for determining arms length price. The three transactions were, loans
of Rs. 5,164 crore purchased by the assessee from the promoters (HDFC) and
loans of Rs. 27.72 crore purchased from the subsidiaries, payment of Rs. 492.50
crore by the assessee to HBL for rendering services and payment of interest of
Rs. 4.41 crore by the assessee to HDB trust. The assessee filed a writ petition
and challenged the order.

The Bombay
High Court allowed the writ petition and held as under:

“i)   The assessee purchased the
loans of HDFC of more than Rs. 5,000 crore. HDFC admittedly held 16.39% of the
shareholdings in the assessee. If one were to go merely by  this figure of 16.39% then, on a plain
reading of section 40A(2)(b)(iv) read with Explanation (a) thereto, HDFC would
not be a person who would have a substantial interest in the assessee. However,
the Revenue contended that the requirement of Explanation (a) of having more
than 20% of voting power is clearly established in the case because HDFC held
100% of the shareholding  in another
company which in turn held 6.25% of shareholding in the assesee. When one
clubbed the shareholding of HDFC of 16.39% with the shareholding of the other
company of 6.25%( and which was a wholly owned subsidiary of HDFC) the
threshold of 20% as required under Explanation (a) to section 40A(2)(b) was
clearly crossed.

ii)   HDFC on its own was not the
beneficial owner of shares carrying at least 20% of the voting power as
required under Explanation (a) to section 40A(2)(b). The Revenue was incorrect
in trying to club the shareholding of the subsidiary with the shareholding of
HDFC, in the assessee, to cross the threshold of 20% as required in Explanation
(a) to section 40A(2)(b). HDFC did not have a substantial interest in the
assesee, and therefore, was not a person contemplated u/s. 40A(2)(b)(iv) for
the present transaction to fall within the meaning of a specified domestic
transaction as set out in section 92BA(i).

iii)   Moreover the assessee had
purchased the loans of HDFC. This was  a
purchase of an asset.  This transaction
of purchase of loans by the assessee from HDFC would not fall within the
meaning of a specified domestic transaction.

iv)  As far as the second
transaction was concerned, the assessee held 29% of the shares in ADFC. In
turn, ADFC held 94% of the shares in HBL. The assessee held no shares in HBL.
The assessee could not be regarded as having a substantial interest in HBL.

v)   It was not the case of the
Revenue that the assessee was entitled to at least 20% of the profits of the
trust. The trust had been set up exclusively for the welfare of its employees
and there was no question of the assessee being entitled to 20% of the profits
of such trust. This being the case, this transaction clearly would not fall
within 40A(2)(b) read with Explanation (b) thereto to be a specific domestic
transaction as understood and covered by section 92BA(i).

vi)  None of the three
transactions that formed the subject matter of this petition fell within the
meaning of a specified domestic transaction as required u/s. 92BA(i) of the
Income-tax Act. This being the case, the Assessing Officer was clearly in error
in concluding that these transactions were specified domestic transactions and
therefore required to be disclosed by the assessee by filing form 3CEB. He
therefore could not have referred these transactions to the Transfer Pricing
Officer for determining the arms length price.”