Pr. Commissioner Of Income Tax, Central 3 v. Kss Limited (Formerly Known As K Serasera Productions Ltd

(Private Secretary) IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. INCOME TAX APPEAL (IT) NO.476 OF 2016 Pr. Commissioner of Income Tax, Central 3 ..Appellant Versus KSS Limited (formerly known as K SeraSera Productions Ltd.)..Respondent ................... Mr. N.C. Mohanty a/w Ms. Padma Divakar for the Appellant Mr. N.C. Mohanty a/w Ms. Padma Divakar for the Appellant •Mr. Satish Mody a/w Ms. Aasifa Khan for the Respondent Mr. Satish Mody a/w Ms. Aasifa Khan for the Respondent ................... CORAM : AKIL KURESHI & M.S. SANKLECHA, JJ. DATE : NOVEMBER 26, 2018. P.C.: 1.This appeal is filed by the Revenue challenging thejudgment of the Income Tax Appellate Tribunal, Mumbai(“the Tribunal” for short) dated 10.6.2015. 2.Mr. Mohanty, the learned counsel for the Revenue, focussed on following questions presented in the Appeal:- 6.1Whether on the facts and in the circumstances of the case andin law, the Tribunal was correct in holding that there was nointernational transaction between the assessee company and its AEon account of back to back agreements between the assesseecompany and its AE and in turn between its AE and a third party M/s Citi Gate Trade FZE, even though the agreements were made forprocurement of film rights and payment of advance for the same,which falls within the definition of International Taxation in theexplanation given in Section 92B of the Act? 6.2 Whether on the facts and in the circumstances of the case andin Law, the Tribunal was correct in holding that the provisions ofChapter X were not attracted even though the assessee has interestbearing borrowed funds in its books and had given advance to AE,and further that foreign exchange gain or loss was likely to arise inthe transaction to the assessee company, since advance was givenin foreign currency, which would have a bearing on the profits,income, losses and assets of the assessee company? 3.The appeal relates to the Assessment Year 2009-10.The Revenu's objection to the order of the Tribunal is that theTribunal erroneously came to the conclusion that in relationto the transaction entered into by the respondent – assesseewith its associated enterprise (“AE” for short) machineryunder Chapter X of the Income Tax Act (“the Act” for short)could not be invoked. 4.Briefly stated the case of the assessee is as under:- 4.1The respondent – assessee is a registered company andis engaged in the business of production and distribution offilms. The assessee desired to acquire rights for distributionof three Hollywood films in India. For such purpose, the assessee contacted M/s. Citi Gate Trade FZE (“Citi Gate” forshort). According to the assessee, Citi Gate would not dealwith the assessee directly and required a foreign basedentity. In order to formalize this arrangement of acquisitionand distribution rights of the films, the assessee, therefore,used a UAE based company, its associated enterprise, as aconduit. The assessee first entered into an agreement withthe said AE which envisaged the AE acquiring distributionrights for the assessee from Citi Gate. On the very next day,the AE entered into an agreement with Citi Gate. Tooperationalize said arrangement, the assessee advancedcertain amounts to the AE. The AE, in turn, immediately paidup such amounts to Citi Gate. However, eventually, thearrangement did not work out. Citi Gate, thereupon,refunded the advance to the assessee through its AE. In theprocess, however, some time was consumed and therepayment was made over a period of time. 4.2The Revenue contends that by making interest freeadvances to the AE, the assessee has transferred its profitand therefore, the transfer price regime would apply. 4.2The Revenue contends that by making interest freeadvances to the AE, the assessee has transferred its profitand therefore, the transfer price regime would apply. 5.Learned counsel for the Revenue vehementlycontended that the Tribunal has committed serious error inholding that the present is not a case giving rise to transferpricing mechanism. He submitted that the assessee hadmade interest free advances to AE. Such amount wasretained by AE for long time. The advances were made bythe assessee out of its borrowed funds on which theassessee was paying considerable interest. The assessingofÏcer, therefore, correctly invoked the transfer pricingmechanism. In this context, learned counsel drew ourattention to the explanation to Section 92B of the Act. 6.On the other hand, learned counsel Mr. Mody for theassessee opposed the appeal contending that the entiretransaction has to be seen as a whole. The Revenue cannotbifurcate different events for isolated consideration. Hesubmitted that the genuineness of the transaction has neverbeen in doubt. The assessee had paid the money to the AEonly for the purpose of acquiring distributorship rights. Whensuch arrangement did not work out, the money was repaid to the assessee through the AE. At no point of time, the AE hadretained such amounts for its own use or purpose. 7.The Tribunal, in the impugned order, has examined theentire transaction threadbare. Different clauses of theagreement have been taken into consideration. In theprocess, the Tribunal noted that the assesses had enteredinto an agreement with its AE specifically for the purpose ofacquisition of distributorship rights of three films from CitiGate. For such purpose, the AE was authorized to negotiatethe price and other terms of the agreement with Citi Gate.Upon acquisition of such rights, the AE would transfer thesame to the assessee at the price at which it had acquiredsuch rights from Citi Gate. 8.The Tribunal noted that the AE had entered into back toback contracts with the assessee and Citi Gate whichenvisaged inter alia that Citi Gate would grant, sale, assignand transfer to the AE as well as to the assessee all rights forsale, absolute and exclusive rights of distributorship. TheTribunal, therefore, was of the opinion that there was no ambiguity over the scope of such agreements. Under thearrangement, the AE of the assessee was under obligation totransfer the rights to the assessee. The assessee had,therefore, established that the transaction of giving advanceto the AE was for no other purpose except for acquiring therights in respect of the said Hollywood films. 9.The Tribunal also examined the bank statements of theassessee as well as its AE. From such statements, theTribunal concluded that the amount in question neverremained with the AE. The same was immediatelytransferred to Citi Gate. Similarly, whenever the amount wasrefunded by the Citi Gate, the same was also routed throughthe AE without any retention time by the AE. 10. On the basis of such findings, the Tribunal came to theconclusion that there was no diversion of income andtherefore, the transfer pricing provisions would have noapplicability. The Tribunal referred to and relied upon theJudgment of this Court in the case of Vodafone ServicesPvt Ltd Vs. Union of India reported in 368 ITR 1 (Bom). 11. The Tribunal concluded that in order to attract theprovisions of Chapter X of the Act, there must be transactionor arrangement between two or more associated enterpriseswhich gives rise to the income or benefit in the hands of atleast one of them. The Tribunal noted that in the presentcase, the advance was not given to the AE but to the thirdparties which was for the purpose of acquisition of rights ofdistributorship. 10. On the basis of such findings, the Tribunal came to theconclusion that there was no diversion of income andtherefore, the transfer pricing provisions would have noapplicability. The Tribunal referred to and relied upon theJudgment of this Court in the case of Vodafone ServicesPvt Ltd Vs. Union of India reported in 368 ITR 1 (Bom). 11. The Tribunal concluded that in order to attract theprovisions of Chapter X of the Act, there must be transactionor arrangement between two or more associated enterpriseswhich gives rise to the income or benefit in the hands of atleast one of them. The Tribunal noted that in the presentcase, the advance was not given to the AE but to the thirdparties which was for the purpose of acquisition of rights ofdistributorship. 12. The findings of the facts of the Tribunal are notseriously in dispute before us. Even otherwise, in absence ofany perversity being pointed out, the said findings are finalat the stage of the Tribunal. 13. The relevant findings of the Tribunal, therefore, are thatthe assessee had released money in favour of the AE with aspecific purpose of acquisition of distributorship of the filmsfrom Citi Gate. Two back to back contracts entered intobetween the assessee and the AE and the AE and the CitiGate duly establish this. Further, the AE never retained any amount either when the assessee released the same forpayment to Citi Gate or when Citi Gate refunded the same tothe assessee through AE. 14. Chapter X of the Act makes special provisions relatingto avoidance of tax. Section 92 deals with computation ofincome from international transaction having regard to arm'slength price. Section 92A pertains to meaning of associatedenterprise. Section 92B pertains to meaning of internationaltransaction. 15. Sub-section 1 of Section 92 provides that any incomearising from an international transaction shall be computedhaving regard to the arm's length price. Sub-section 1 ofSection 92B reads as under:- “ (1) For the purposes of this section and sections 92, 92C, 92D and92E “international transaction” means a transaction between two ormore associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible orintangible property, or provision of services, or lending or borrowingmoney, or any other, transaction having a bearing on the profits,income, losses or assets of such enterprises, and shall include amutual agreement or arrangement between two or more associatedenterprises for the allocation or apportionment of, or any contributionto, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one ormore of such enterprises. 16. Explanation to Section 92B clarifies certain doubts. Asper clause (c) of this explanation, capital financing includingany type of long-term or short-term borrowings, lending orguarantee, purchase or sale of marketable securities or anytype of advance, payments or deferred payment orreceivable or any other debt arising in the course of businesswould be included within the expression “internationaltransaction”. Learned counsel for the Revenue had heavilyrelied on this explanation. However, having regard to thenature of entire arrangement and the different transactions,noted above, in our opinion, the said explanation would notcover the present situation. As noted, the present case is asimple one where the money was routed through the AE bythe assessee for the purpose of acquisition of distributorship.This is not a case of either financing or landing or advancingof any moneys. The back to back agreements, the contentsthereof and most significantly, the fact that neither at thepoint of payment nor at the point of refund of money, the AEretained the same for any significant period of time, in ouropinion, would be crucial. This transaction did not result into diversion of income of the assessee to its AE. The Tribunal,therefore, committed no error. No question of law arises inthis respect. Once we come to the conclusion that thetransaction did not give rise to the international transaction,the rest of the issues would become academic. 17. In the result, the Income Tax Appeal is dismissed. [ M.S. SANKLECHA, J. ] [ AKIL KURESHI, J ]