SAC FINANCE COMANY LTD,HONG KONG vs. ACIT, CIRCLE INTERNATIONAL TAXATION 3(1)(2), NEW DELHI

O R D E R PER KUL BHARAT, JM:

This appeal, by the assessee, is directed against the order dated 27.07.2022, passed by the ACIT, Circle International Tax 3(1)(2), New Delhi u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961, pertaining to the assessment year 2017-18. The assessee has raised following grounds of appeal:

“General “1. On the facts and circumstances of the case and in law, the final assessment order passed by the Ld. AO under section 143(3) read with 144C (13) of the Act is erroneous and bad in law and passed in violation of natural justice.

2. On the facts and circumstances of the case and in law, the Ld.AO has erred in assessing the income of the Appellant at INR. 16.69,27,557 as against loss of INR 4,69,740 returned by the Appellant.

3. On the facts and circumstances of the case and in law, a) the Ld. AO erred in exceeding jurisdiction in not following the order dated January 30, 2021 passed by Learned Assistant Commissioner of Income-tax, Transfer Pricing, DC/ ACIT TP Delhi 3(1)(2) ("Ld. TPO") under section 92CA of the Act, and thereby contravening the provisions of section 92CA (4) of the Act and available judicial precedents. b) the learned Dispute Resolution Panel ("Ld. DRP") erred in stating that the Ld. AO is not precluded from re-examining/ re-evaluating the international transactions wherein certain facts have not been brought to the notice of Ld. TPO during the course of transfer pricing proceedings without pointing out/ substantiating the facts which were not available with the Ld. TPO and ignoring that information/ facts relied upon by the Ld. AO pertains to the subsequent year.

4. On the facts and circumstances of the case and in law, the Ld. AO erred in not abiding by the following binding directions of Ld. DRP and not undertaking any independent verification: a) to independently verify the claim of the Appellant that the entire value of Wormhole Technology (Singapore) Private Limited (Wormhole') is not driving from the investments in Orbgen Technologies Private Limited (Orbgen"); b) to compute capital gains income in accordance with the provisions of section 48 of the Act and c) allowing reasonable opportunity of being heard to the Appellant.

5. On the facts and circumstances of the case and in law, the Ld. AO grossly erred in rejecting the financials of Wormhole for the period ended March 31, 2018, suo-moto submitted by the Appellant post-DRP directions, and passing the final assessment order, on account of the following:

FY 2017-18 and thereby determining the alleged sale consideration of Orbgen for the FY 2016- 17 during the course of assessment proceedings; and b) without appreciating the fact that the financial statement of Wormhole for the period ending March 31, 2018 covering the period beginning from October 25, 2016 till March 31, 2018 and thus includes the financial results both for FY 2016-17 and FY 2017-18.

6. Without prejudice to the above and on the facts and circumstances of the case and in law, the Ld. AO erred in a) substituting the actual sale price of Equity Shares & Compulsorily Convertible Preference Shares (CCPS) of Orbgen sold to Wormhole, without even pointing out the provisions/ section of the Act that permits such substitution: b) arbitrarily increasing the actual sale consideration of Equity Shares & CCPS of Orbgen sold by the Appellant during the subject year without appreciating that such sale price was duly supported by valuation report obtained from a Chartered Accountant and Arm's length character of such transaction was duly accepted by the Ld. TPO vide its order dated January 30, 2021: c) arbitrarily applying a methodology to compute the sale consideration of such shares without appreciating the fact that such shares were acquired/ purchased within close proximity of 3 months and the purchase value has been duly accepted by the Ld. DRP; and d) without excluding the value of assets situated outside India aggregating to USD 29,93,060 held by Wormhole for the purpose of computing the value of shares of Orbgen.

9. On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act, mechanically on the additions/ disallowance made.”

2.1 It is pertinent to note here that against the draft assessment order passed by the AO, the assessee filed objections before the learned Dispute Resolution Panel (“DRP”). The DRP in paras 3.4 & 3.5 of its order dated 16.06.2022 disposed of the objections of the assessee by observing as under:

“3.4 As regards sale of shares of Orbgen India by the assessee to Wormhole Singapore derived its value substantially from Orbgen India, was undertaken within a period of 6 months after sale of shares of Orbgen India to Wormhole Singapore and that all the entities involved at such point of time were related parties. The assessee stated that the TPO has already

Orbgen India and has not drawn any adverse inference and that the order of the TPO is binding as per provisions of section 92CA(4) of the Act. Undisputedly, under section 92CA(4), the AO is required to compute the total income of the assessee in conformity with the arm's-length price determined by the TPO. However, in a case where certain facts have not been brought to the notice of the TPO during TP proceedings, the AO is not precluded from proceeding on the basis of such facts to determine the total income of the assessee. 3.5 In the present case, the AO has recorded that the fact of subsequent related party sale by the assessee of shares held in Wormhole Singapore (which as per the AO had 75% shareholding of Orbgen India) at a markedly higher valuation was not brought on record by the assessee in TP proceedings. The AO has computed the full value of consideration based on documents available in the public domain which have not been refuted by the assessee. Given substantial shareholding of Orbgen India, the full value of consideration realised on such sale is clearly attributable to Wormhole Singapore's investments in Orbgen India. Drawing from the principle laid down by the Hon'ble Supreme Court in DIT vs M/S Morgan Stanley & Co. Inc) (Appeal (civil) 2914 of 2007) laid down in the context of attribution of profits to PE, if the transfer pricing analysis does not adequately reflect the functions performed, assets utilised and risks assumed by the enterprise, the AO is not precluded from determining the full and correct value of sale consideration and consequent taxable income based on facts that were not available with the TPO at the time of TP analysis. In view of the above, the assessee's objections in this regard are not tenable. However, the AO shall verify the claim of the assessee that the entire value of Wormhole Singapore is not relatable to its investments in Orbgen India and accordingly such value relating to other investments shall be excluded in the determination of full value of consideration. The capital gain shall be computed in accordance with the provisions of section 48 of the Act. Grounds 4 to 15 are disposed of as above.”

2.2 Thereafter, the AO proceeded to finalize the assessment and computed taxable income of the assessee company at Rs. 16,69,27,557/- by making addition on account of short term capital gain amounting to Rs. Rs. 16,69,27,557/-. The AO, thereby adopting a different sale consideration at Rs. 123,22,34,504/- as against Rs. 106,53,06,947/- declared by the assessee.

3. Apropos to the grounds of appeal, learned counsel for the assessee vehemently argued that the action of the Assessing Authority is illegal against the settled principles of law. He submitted that the AO exceeded his jurisdiction by not following the finding of the TPO as well as the direction of the learned DRP. He contended that the AO interpolated his own figure of sale consideration which is not justified. He further reiterated the submissions as made in the written submissions. For the sake of clarity the written submissions made on behalf of the assessee are reproduced as under:

“1. SAC Finance Company Limited (hereinafter referred as 'SAC' or 'Appellant') is a Hong-Kong- based company.

2. SAC acquired shares of an Indian company, Orbgen Technologies Private Limited ('Orbgen'), through fresh subscription of shares (Equity and CCPS) on January 24, 2017 and purchase from independent third-party shareholders of Orbgen on January 30, 2017, at Fair Market Value ('FMV'). FMV was computed as per DCF methodology was duly supported by a valuation report obtained from an independent chartered accountant (refer Page 90 to 108 of Paperbook). The total equity shares of 888,287 and CCPS 151,525 were acquired/subscribed at the cost of USD 1,56,74,058 (equivalent to INR 103,52,71,530).

4. As the sale was made to Wormhole, which is an Associated Enterprise ('AE'), it was duly reported by the Assessee in Form 3CEB and transfer pricing documentation (refer Page 59 of paper book).

5. SAC duly disclosed the above transaction in the return of Income ("ROI") filed for FY 2016- 17 (AY 2017-18) and reported a capital loss of INR 469, 740 computed due to the stamp duty borne by the Assessee at the time of purchase of shares.

6. The ROI was selected for assessment proceeding and was also referred by the Ld. AO to Transfer Pricing Officer (TPO). TPO accepted the transaction value and passed the order without making any negative inference with respect to arm's length character of transactions (refer para 3.1 to para 5 at page 138 of paper book) 7. Thereafter, in the final order after DRP directions the Ld.AO made the following adjustment to the sale value of shares sold to Wormhole by SAC and computed capital gain of INR 16,69,27,557: (Amount in INR) Particulars As per ROI As per Final Remarks (converted into Order INR)

Sales 103,52,71,530 1,23,22,34,505 a) Assessee determined FMV on DCF consideration method supported by report of CA. b) Ld. AO arbitrarily made calculation on the basis of sale of shares of Wormhole in the next FY (i.e. FY 2017-18). c) DRP directed the Ld. AO to verify that the entire value of Wormhole is not relatable to its investment in Orbgen. (refer para 3,5 at page 178 of paper book). However, the Ld. AO does not follow the aforesaid DRP directions. Cost 103,52,71,530 106,53,06,947 a) The DRP deleted the proposed

Acquisition adjustment in the cost of acquisition proposed by the Ld. AO in the draft order. Expense 469,736 0 a) The Ld.AO has not allowed the cost borne on of stamp duty while computing the purchase capital gain. (Stamp duty) Capital (469,736) 16,69,27,557 Capital gain calculated by the Ld. AO Gain/Loss in the final assessment order (refer page 198 and 199 of paper-book)

3.5..the AO shall verify the claim of the assessee that the entire value of Wormhole Singapore is not relatable to its investments in Orbgen India and accordingly such value relating to other investments shall be excluded in the determination of full value of consideration. The capital gains shall be computed in accordance with the provisions of section 48 of the Act."

4. Ld. AO substituted the value of sale consideration without giving reference to any provision/section of the Act (Ground 6(a) of our appeal). 4.1. During the subject year, the Act embodies no substitution of sale consideration provisions. Section SOCA of the Act which provides power to substitute full value of consideration with the FMV was inserted by Finance Act. 2017 e. 1.4.2018 (AY 2018-19) and has no application to the subject FY 5. Ld. AO erred in not providing relief for expenses of INR 489,969 borne by the Appellant in relation to stamp duty on the acquisition of shares [Ground 7 of our appeal] 5.1. The Appellant's claim of expenses borne at the time of the acquisition of shares was not granted by the Ld.AO while computing capital gains in the final assessment order. As per the principle laid down by various judgments any cost incurred to acquire an asset can be considered as its cost of acquisition.”

T.P. proceedings. There is no quarrel so far cost of acquisition is concerned. The Ld. DRP deleted the proposed adjustment in respect of cost of acquisition. The dispute is with regard to sale consideration. In the impugned assessment order the AO adopted sale consideration at INR 123,22,34,515/- as against fair market value of INR 103,52,71,530/-. Thus, the AO treated INR 16,69,27,557/- as capital gain.

Under these facts, the assessee has raised two fold objections. Firstly, the AO exceeded its jurisdiction by not following the order of TPO passed u/s 92CA(3) of the Act. In support of this contention, ld. AR drew our attention towards provisions of Section 92CA of the Act and placed reliance on various judicial pronouncements. Secondly, the value adopted is erroneous and contrary to settled position of law. It is stated that the fair market value (FMV) was computed as per DCF methodology and was duly supported by a valuation report obtained from an independent Chartered Accountant. The AO substituted the sale consideration on the basis of the sale of shares of Wormhole by the assessee in the next financial year i.e. F.Y. 2017-18. The assessee claimed before the ld. DRP that the total assets of Wormhole also included the assets (situated outside India) other than investment in Orbgen and, therefore, the AO grossly erred in deriving the value of shares of Orbgen on the assumption that 100% value is relatable to its investment in Orbgen. There is no dispute that the ld. TPO did not propose any adjustment. As Section 92CA(4) of the Act, the AO is required to compute the Arm’s Length Price in conformity with the ALP so determined by the TPO. But in the present case, the AO deviated from the order of TPO. Such deviation is not permissible under law in the light of the statutory provisions and judicial pronouncements as relied by the assessee in its written submissions. In this regard reference is made to the decision of the Coordinate Bench in the case of Cushman & Wakefield (P.)

Ltd. v. ACIT rendered in (order dated 18.11.2011), observing as under:

“38. It is clear from the above explanation that the provisions of transfer pricing are applicable as well to expenses and outgoing in an international transaction. The impugned amount represent the outgo of the assessee or the expense of the assessee for earning income with reference to the real property transactions in the shape of lea16 etc. It cannot be disputed by the revenue that the impugned transaction is international transaction falling within the scope of transfer pricing regulations as the Assessing Officer himself has referred this transaction to the TPO on the ground that it is an international transaction entered into by the assessee with its associate enterprises, the arm's length price of which was to be determined by the TPO, If it is so, then, the post amended provisions of Section 92CA(4) will be applicable and arm's length price determined by the TPO is binding upon the Assessing Officer. It has already been mentioned that all the six transactions entered into by the assessee are referred in the TPO's order and the impugned transaction has been mentioned at SL.No.1 and it has been recorded by the TPO in its order that "regarding transactions 1-4 above no adverse inference is drawn." Therefore, Ld. TPO has accepted the impugned transaction of the assessee at arm's length. According to the provisions of Section 92CA(4), as applicable to the present case, the arm's length price determined by the TPO is binding on Assessing Officer. Once

TPO, the Assessing Officer cannot have the jurisdiction to re- determine the profit or loss arising out of that transaction under the normal provisions of the Act. By bringing this transaction again under the normal provisions of the Act, the Assessing Officer has sought to do an act indirectly which he cannot do directly. Such action of the Assessing Officer is against the well settled proposition of law according to which what cannot be done "per directum" is not permissible to be done "per obliquum" meaning thereby whatever is prohibited by law to be done, cannot legally be effected by an indirect or circuitous contrivance on the principle of "quando aliquid prohibetur, prohibetur at omne per quod devenitur ad illud". Applying the above principle, we hold that after determination of arm's length price by the TPO, Assessing Officer did not have jurisdiction to re-examine the said transaction and by re-examination of the transaction the Assessing Officer has sought to do an act indirectly, which he cannot do directly. Such proposition of law is supported by following judicial pronouncement:- In Jagir " Singh v. Ranbir Singh AIR 1979 SC 381, the Apex Court has observed that an authority cannot be permitted to evade a law by "shift or contrivance". While deciding the said case, the Supreme Court placed reliance on the judgment in Fax v. Bishop of Chester [1824] 2 B & C 635, wherein it has been observed as under (page 384): To carry out effectually the object of a statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined. Law prohibits to do something indirectly which is prohibited to be done directly. Similar view has been reiterated by the Apex Court in M.C. Mehta v. Kamal Nath AIR 2000 SC 1997, wherein it has been held that even the Supreme Court cannot achieve something indirectly which cannot be achieved directly by resorting to the provisions of article 142 of the Constitution, which empowers the court to pass any order in a case in order to do 'complete justice." (pp. 477 and 478 of the report)"

5.1 The aforesaid finding of the Coordinate Bench has been affirmed by the Hon’ble Jurisdictional High Court of Delhi vide order dated 23.05.2014 rendered in IT Appeal no. 475 of 2012 [2014] 46 taxmann.com 317 (Delhi), inter alia, by observing as under:

“In view of the above discussion and analysis of the statutory provisions, two issues on the merits of the AO's assessment assume importance. Firstly, having regard to the TPO's stamp of approval to the fees charged for the stated (though still not proven) referral transactions, the AO was bound to accept that finding, it is, post 2007, binding.” 5.2 Therefore, looking to the facts of the present case, where TPO has not proposed any adjustment and valuation has been adopted by the AO without verifying the true and correct facts qua the assets, we are unable to sustain such erroneous finding both on legality and facts. The grounds raised by the assessee are allowed.

Order pronounced in open court on 22nd November, 2023.