BHS INDIA HOLDINGS, INC.,NEW JERSEY, USA vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE INTERNATIONAL TAXATION 1(1)(2), DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH: ‘D’: NEW DELHI) BEFORE SHRI GS PANNU, VICE PRESIDENT AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No:- 3286/Del/2023 Assessment Year: 2021-22 BHS India Holdings, ACIT, Inc. Vs. Circle International Taxation New Jersey, 1(1)(2), USA Delhi. PAN No: AAFCB8817Q APPELLANT RESPONDENT

SA No:- 432/Del/2023 (Arising out of ITA No.- 3286/Del/2023) Assessment Year: 2021-22 BHS India Holdings, ACIT, Inc. Vs. Circle International Taxation New Jersey, 1(1)(2), USA Delhi. PAN No: AAFCB8817Q APPELLANT RESPONDENT

Assessee by : Shri Ajay Vohra, Sr. Adv. Shri Aditya Vohra, Adv. and Shri Arpit Goel, CA Revenue by : Shri Vizay B. Vasanta, CIT( DR)

Date of Hearing : 25.07.2024 Date of Pronouncement : 26.07.2024

ITA No.-3286/Del/2023 BHS India Holdings Inc. ORDER PER ANUBHAV SHARMA, JM The appeal is filed by the assessee against the Order dated 27 October 2023 passed under section 143(3) read with section 144G(13) of the Income-tax Act, 1961 ['the Act') for Assessment Year ('AY") 2021-22. 2. On hearing rival sides, the following facts and background to the appeal can be appreciated. BHS India Holdings, Inc (hereinafter referred to as the Appellant" or "BHS Inc" or "the Company" or ‘assessee’ ) is a company incorporated in Delaware, USA, and is a part of the Cognizant Group which has claimed to be engaged in the business of software development and rendering related services/solutions. During the financial year ('FY") relevant to the subject AY 2021-22, the Appellant had earned long term capital gains on sale of shares held by it in Medfin India Private Limited (Medfin India) amounting to INR 76,99,23,780/- Accordingly, the Appellant had filed a return of income in India offering the said capital gains to tax after duly remitting the tax payable on the said capital gain amounting to INR 8,40,75,677.

Page 2 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. 4. The AO in the draft order passed for the subject year, has proposed to treat the entire sale consideration received on sale of Medfin India shares as income under the head income from other sources' by holding that the Appellant has not substantiated the legal existence, acquisition, possession and transfer of shares.

Page 3 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. now before the DRP furnished the copies of the TRC for years 2020 and 2021 as additional evidence. The assessee has further filed the certain documents as additional evidence in support of its contentions that it held the share of Medfin India during the subject year. On the allegation that the funds received from alleged sales of share were not used by the assessee rather they appear to have flown back to the other group companies/CTS Corp. the assessee states that it received an amount of USD 9,233,388, on account of sale of shares of Medfin India and the portion of the sale has been used by it for providing intercompany deposits. 4.2.4 The Panel has considered the submissions. The AO after making a series of observations on the basis of the documents produced by the assessee as well as the failure of the assessee to furnish certain documents required by the AO during assessment proceedings concluded that the assessee failed to establish that it was, during the year, tax resident of USA and entitled to treaty benefits, that the source for purchase of shares was not explained by the assessee, that it failed to establish that it acquired any capital asset (being shares of Medfin) & held those shares beneficially and that the funds received from the alleged sale of shares were not used by the assessee, rather flown back to the other group companies/parent/CTS Corporation USA. Consequently, the consideration received was treated as Income from other sources as per Income Tax Act, 1961 and taxed accordingly. 4.2.5 The assessee claims that it is a tax resident of USA. Though, in the submissions of the assessee it has not claimed any treaty benefits and consequently was not required to file TRC, the assessee has filed the same now before the DRP as a part of its submissions vide Form 35A dated 24.01.2023. Though, no separate application under Rule 13 of DRP Rules has been made, the Panel in the interest of justice and in view of the specific observation of the AO that the assessee failed Page 4 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. to produce TRC during assessment proceedings to establish its tax residency, considers it appropriate to take this document on record. The substantial allegation of the AO is that the assessee failed to establish the source of acquisition, possession and transfer of capital assets. In response to this specific observation of the AQ, the assessee placed before the DRI' the following additional documents in addition to the documents already placed before the AO during assessment proceedings. A. Form MGT 7 of Medfin India filed for FY 2019-20 substantiating that the company has beneficially held the shares before the dates of transfer. (Page no. 374 of the Paper book of factual documents.) B. Share certificate issued by Medfin India to BHS Inc substantiating the possession of the shares of Medfin India by BHS Inc. (Page no. 389 of the paper book of factual documents.) C. Share purchase agreement of the shares acquired by BHS Inc. during FY 2013-14 and FY 2018-19. (Page no. 415 of the Paper book of factual documents.) 4.2.6 Though, no specific reason has been furnished as to why these documents could not be produced before AO during assessment proceedings, nor any separate application under Rule 9 of the DRP Rules 2009 has been filed in this regard, the Panel in the interest of justice and in consideration of the fact that the proceedings before the DRP is an extension of assessment proceedings, considers it appropriate to take these documents on record. The Panel directs the AO to verify the factual contentions of the assessee as regards tax residency of the assessee on the basis of TRC filed and its claims regarding acquisition, possession and transfer of the share under consideration. The AO will, on an analysis of the documents placed before the DRP, in conjunction with the other documents brought on record during assessment Page 5 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. proceedings, give a categorical finding as regards acquisition, possession and transfer of the capital assets under consideration which are the key determinants of the taxability of the gains from the alleged transfer of shares claimed as capital gains in the subject assessment year. The AO will also verify the factual claims of the assessee that it had received an amount of USD 9,322,388 on account of sale of share of Medfin India of which certain portion was used for providing intercompany deposits Needless to say, the AO will pass a speaking order in this regard. The Panel hastens to add that the AO is precluded from carrying out any further enquiry and must confine himself to verification and analysis of the documents as mentioned above. Ground numbers 3 to 8 are accordingly disposed of.”

7.1 Aggrieved by the impugned order, the Appellant has preferred this appeal raising the following grounds:

“1. The order of the Assistant Commissioner of Income-lax, Circle International Taxation 1(1)(2). Delhi ('learned AO') dated 27 October 2023 received by the Appellant on 30 October 2023, bearing Document Identification Number ('DIN') ITBA/AST/S/143(3)/2023-24/1057444014(1) passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('the Act') pursuant to the directions issued by the Hon'ble Dispute Resolution Panel, Delhi ('DRP or the Panel') is erroneous, bad in law, prejudicial to the Appellant and contrary to the facts and circumstances of the case. 2. The learned AO has erred in passing the assessment order which deals with the aspects beyond the show cause notice Page 6 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. dated 23 December 2022 and failed to provide an opportunity to rebut the treatment of income under the head 'Income from Other Sources, as such the order suffers from non-compliance with principles of equity and natural Justice. The directions issued by the Hon'ble DRP without valid DIN and the final assessment order passed under section 143(3) read with section 144C(13) of the Act are bad and invalid in law 3 The directions issued by the Hon'ble DRP under section 144C(5) of the Act which is Issued without valid DIN is illegal, bad in law and without jurisdiction, since the same is in direct violation to the Circular No. 19 of 2019 dated 14 August 2019 issued by the Central Board of Direct Taxes ('CBDT') and hence is liable to be quashed. consequential final assessment order under section 143(3) read with section 144C(13) of the Act passed pursuant to the illegal directions issued by the Hon'ble DRP is also illegal and bad in law and is liable to be quashed. 4. The Hon'ble DRP has erred in not issuing any specific directions to the leaned AO on the "categorization of income" as well as "allowability of the cost of acquisition of shares as per the Share Purchase Agreement furnished by the Appellant and has infact set- aside the case which is in direct violation of section 144C(5) and 144C(8) of the Act.

Treatment of the capital gains earned by the Appellant as "Income from other sources

Page 7 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. 6. The learned AO/ Hon'ble DRP have erred in treating the capital gain earned by the Appellant amounting to INR 76,99,23,779 as income under the head "Income from other sources".

7 . The learned AO/ Hon'ble DRP have erred in not following the Circular No. F.No.225/12/2016/ITA.II dated 02 May 2016 Issued by the CBDT wherein the CBOT has instructed the Assessing Officers that any income arising from the transfer of unlisted shares shall be treated as 'Capital gains".

Page 8 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. India Private Limited without appreciating the other materials and documents placed on record before the Hon'ble Panel.

Non-grant of claim of cost of acquisition of shares of Medfin India Private Limited not claimed in the return of income for the subject year

Page 9 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. 8. Now, Ld. Sr. Counsel, Shri Ajay Vohra, has contented before us, that this proposed action of the AO never formed part of the SCN dated 23 December 2022 due to which the Appellant was never provided an opportunity to offer explanations or place its arguments on record its rebuttals/ objections to the same. Hence, the basic tenets of the law and principles of natural justice stands violated in so far as to the aspects not forming part of the SCN.

Page 10 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. which is in direct violation of section 144C(5) and 144C(8) of the Act. It is also submitted that AO has erred in passing the final order under section 143(3) read with section 144C(13) of the Act without following the specific directions of the DRP that the documents placed before the DRP shall be analyzed and a categorical finding with regards to the acquisition, possession and transfer of the shares of Medfin India Private Limited shall be made by the AO by way of speaking order, whereas, the AO has passed an adverse order "for want of bank statements" which is against the specific directions of the Hon'ble DRP. It was submitted that as per section 144C(10) of the Act, every direction issued by the DRP is binding on the Assessing Officer. Reliance was also placed on section 144C(13) of the Act to submit that the directions of the DRP are binding on the AO. Ld. Sr. Counsel has drawn attention to following judicial precedents, wherein it has been held that the order passed by the Assessing Officer which was not in conformity with the directions issued by the DRP is liable to be quashed.  The Hon'ble Karnataka High Court in the case of PCIT v. Flextronics Technologies (India) (P.) Ltd. [2023] 148 taxmann.com 123  M/s. AZZ WSI B.V. Vs. DCIT (ITA No. 7833/Mum/2019) (2023)  Software Paradigms infotech (P) Ltd. V. ACIT 89 taxmann.com 339 (2018)

Page 11 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc.  IAR. System Aktiebolag v. DCIT (ITA NO 598 & 1850/MUM/2022) (2023) 11. As with regard to treatment of the capital gains earned by the Appellant as "Income from other sources". Ld. Sr. Counsel has relied the provisions of section 45 of the Act to submit that same makes it very clear that income arising from transfer of a capital asset during any previous year shall be chargeable to income-tax only under the head ‘capital gains’. Reliance was placed on the definition of the term ‘capital asset’ as per section 2(14) of the Act, to be “property of any kind held by an assessee whether or not connected with his business or profession". It was thus submitted that AO and DRP have erred in not following the Circular No. F.No. 225/12/2016/ITALI dated 02 May 2016 issued by the CBDT wherein the CBDT has instructed the Assessing Officers that any income arising from the transfer of unlisted shares shall be treated as "Capital gains. The relevant extracts of the CBDT circular has been provided below for further reference: "Similarly, for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income, It has, accordingly, been decided that the income arising from transfer of unlisted shares would be considered under the head 'Capital Gain'.

Page 12 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.” 12. Ld. Sr. Counsel has submitted that in the instant case, the shares of Medfin India are “unlisted equity shares” and held as “capital asset “by the Appellant. Thus the tax authorities were bound to follow the instruction of the CBDT. 13. Further, it was submitted that that where share transaction has been entered into with intention of investment and with an objective of capital appreciation, then income arising on the transfer of the shares shall be taxable only under the head "Capital gains”. Reliance in this regard is placed on the following judicial precedents which have upheld the above principles.

 CIT, Kolkata v Mertin Holding P Ltd 105 taxmann.com 37) (Calcutta High Court)  CIT v Devasan Investment P Lid (48 taxmann.com 18) (Delhi HC) 14. Ld. DR has relied upon the order of the Assessing Officer and pointed out that the assessee had made a fresh claim before the DRP. He submitted that a scrutiny notice was issued, and the assessee cannot reinstate this income. 15. After giving thoughtful consideration to the matter on record, it comes up before us that on page no. 326 of PB, the assessee has brought a copy of TRC, showing the assessee to be the resident of US for the purpose of taxation. Then at page 7 to Page 13 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. 54 of PB, a copy of agreement dated 01.03.2014 for the purchase of 9434 shares by the assessee is filed. The assessee company had purchased, namely 5240 shares from IcelliDyan Tharpe, 4194 shares from Ian Andrew Myen and 1047 shares from Ian Andrew Myen, under this agreement. Further, as per the agreement dated 11.4.2018, a copy of which is available at page no. 55-69, of PB, 1047 shares were purchased from Ian Andrew Myen. It comes up that these persons were legal and beneficial owners of 100% of the paid share capital of Medfin India Pvt. Ltd. The agreement dated 01.03.2014 mentioned that it is an agreement for the sale of 9435 equity shares of Medfin India for “consideration”, which is also disclosed in the agreement in para 3.1 as follows:

“In consideration for the transfer of the Sale Shares by the Sellers to the Buyer (in the allocation between the Majority Buyer and Minority Buyer specified in Schedule 2) at Closing, as provided in this Agreement, the Buyer must pay the Sellers on the Closing Date, an aggregate amount of USD 1,000,000 ("Base Purchase Consideration"), pro rata between the Majority Buyer and the Minority Buyer in accordance with each such parties' respective portion of the purchase of the Sale Shares in accordance with Schedule 2, subject to the adjustments specified under clause 3.2 (“Purchase Consideration”). 16. Similarly, in the agreement dated 5.3.2018 the purchase price of share is mentioned to be as follows:

“4.1 Purchase: The Holder and Purchaser agree, on the date hereof, that the Holder shall sell, and the Purchaser shall purchase, all of the Page 14 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. Securities for a cash amount equal to the fiar market value portion of the net proceeds from the Merger attributed to the Securities, as determined by a national valuation firm (the “Purchase Price”).” 17. Now, these shares held by the assessee have been sold by an agreement dated 1.9.2020 to CTS for a purchase prise which is mentioned in clause 1.2 as follows: “The total consideration for the sale of the Shares shall be USD ............ determined by applying the conversion rate [RBIB of 2 days prior to purchase date + 1 paisa] to convert INR 76,99,23,779 (the "Purchase Price"), which amount equals the fair market value of the Shares at the Purchase Date based on certificate of fair value of such Shares obtained from a chartered accountant in India as per Indian exchange control regulations.” 18. As per the matter on record, and specially the calculation of the capital gains on the sale of Medfin India shares made available at page 106 of the Paper Book. We find that the value per shares has been taken as 7439, and the total sale consideration has been submitted for capital gains taxed at 10.9%. 19. The aforesaid firmly establishes that the assessee has purchased and sold shares based upon commercial prudence and investment strategy, and without claiming any benefit of DTAA, paid the taxes on capital gains. 20. The AO has concluded that as the assessee had failed to establish the acquisition, possession and transfer of capital asset shares, the consideration received is treated as income from other sources. In this context, the assessee has filed before us the copy of returns filed under the Companies Act, 1956, made available at

Page 15 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. pages 70 to 99 of the Paper Book, showing the annual return filed by Medfin India for F.Y. 2013-14 substantiating the transfer of 9434 shares to the assessee and the annual return filed by Medfin India for F. Y. 2019-20 substantiating that the assessee had 10480 shares of Medfin India as on 31.03.2020. 21. Then before the DRP, also these documents were filed and same were admitted by the DRP as relevant evidences, and the AO was directed in para 4.2.6 as reproduced above by us in para 6, to verify the factual contention of the assessee regarding the tax residency of assessee on the basis of TRC filed and its claim regarding the acquisition, possession, and transfer of share under consideration. We find that the only direction to the AO was to verify this set of evidences which is mentioned in para 4.2.5 of the order of DRP and reproduced by us in para 6 above. The AO was specifically directed not to carry out any further inquiry and to restrict the verification to the analysis of the documents as mentioned above. However, at a time of passing the final order, the AO, after taking into consideration the documentary evidences filed before the DRP, and which he has supposedly analysed, without drawing any inference from this set of documentary evidences, created a new case beyond the direction of the DRP as follows. “10. The Assessing officer has been directed by the Hon'ble Dispute Resolution Panel to verify the factual contentions of the assessee as regards tax residency of the assessee on the basis of TRC filed and its claims regarding acquisition, possession and transfer of the share under consideration considering the documents during DRP proceedings. During the assessment proceedings, assessee couldn't Page 16 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc. establish the nature and source of purchase of shares even after affording adequate opportunity nor claimed TRC benefits. However, the assessee has filed TRC for the Tax Year 12/31/2019 & 12/31/2020 before the Honble DRP which in view of the directions issued u/s 144C(5) of the Act, has been considered. Furthermore assessee to claim acquisition, possession and transfer of the share, has filed Form MGT 7 of Med fin India filed for FY 2019-20 substantiating that the company has beneficially held the shares before the dates of transfer. (Page no. 374 of the Paper book of factual documents.), Share certificate issued by Medfin India to BHS Inc substantiating the possession of the shares of Medfin India by BHS Inc. (Page no. 389 of the paper book of factual documents.), Share purchase agreement of the shares acquired by BHS Inc. during FY 2013-14 and FY 2018-19 (Раgе по. 415 of the Paper book of factual documents.) before the Hon'ble DRP. The above submissions on perusal shows that assesee has failed to furnish other ‘documentary evidences like bank statements etc. in respect of purchase of shares. Therefore, source & nature of purchase of share still remains unexplained. As multiple opportunities were already provided during draft assessment proceedings but assessee never provided any of these documents. It is also being pointed out that many of these documents were already available to assessee since 2019 and 2020 like TRC certificate but were never shared during draft assessment proceedings even after several reminders and questionnaires to submit the same. At this stage of assessment after DRP proceedings no further opportunity can be provided to assessee for further enquiry & verification documents/evidence submitted. Hence, in absence of bank statements & other related documents, the purchase cannot be substantiated and hence, the submissions of assessee are not found tenable. Since assessee failed to establish acquisition, possession and transfer of the share, the sale consideration on sale of shares amounting to Rs. 76,99,23,779/- is treated as Income from other sources as per the provisions of Income Tax Act, 1961.

ITA No.-3286/Del/2023 BHS India Holdings Inc. proposed to be initiated under section 270A of the Income Tax Act, 1961.”

Sd/- Sd/- (GS PANNU) (ANUBHAV SHARMA) VICE PRESIDENT JUDICIAL MEMBER Dated: 26/07/2024.

Pooja/-

Page 18 of 20

ITA No.-3286/Del/2023 BHS India Holdings Inc.