Court Explains law on what constitutes Specified Domestic Transactions

Domestic TP : Court Explains law on what constitutes Specified Domestic Transactions

Bombay High Court in matter of HDFC Bank Ltd v/s Assistant Commissioner of Income Tax

In this case the Petitioner purchased loans of HDFC Ltd. of more than Rs. 5,000 Crores, and Tax authorities held that said transaction entered into by Petitioner is “Specified Domestic Transactions” (here after referred as SDT) as per section 92BA(i) of Income Tax Act and Arms Length Price of said transactions is required to be determined.

Court observed that section 92BA(i) read with section 40A(2)(b) clarifies that for transactions to fall within the meaning of a SDT, the assessee has to have a transaction with a person as listed in clauses (i) to (vi) of section 40A(2)(b) and that section 92BA(i) states that any transaction in which any expenditure in respect of which payment has been made or is to be made by the assessee to a person referred to in clause (b) of sub-section 2 of section 40A, would be a SDT.

It was held that HDFC Ltd. does not have a substantial interest in the Petitioner :

1. ) HDFC Ltd. admittedly holds 16.39% of the shareholding in the petitioner and therefore, is not a person as contemplated under section 40A(2)(b)(iv) for the present transaction to fall within the meaning of a SDT as set out in section 92BA (i).

2.) Further, the loans purchased by the Petitioner from HDFC Ltd. were reflected in the balance-sheet and not in the Profit and Loss account. This is not an expenditure at all as contemplated under section 92BA(i), and therefore, the money expended for purchasing these loans can never be termed as an ‘expenditure’ incurred by the Petitioner.

It would, therefore, not fall within the meaning of a SDT as understood under section 92BA(i)

The Extract of Judgement is given below : 

43. Similarly, we find that the reliance placed by Mr Chhotaray on the decision of the Supreme Court in the case of CIT v/s Podar Cement Pvt. Ltd. (supra) is wholly misplaced. In this case, the Supreme Court was called upon to decide whether in law the income derived by the assessee company by letting out flats of a building is taxable under the head 'Income from other Sources' under section 56 of the Act or whether the same was to be taxed as 'Income from House Property' under section 22 of the Act. On carefully going through this judgment, we do not see how this decision in any way supports the contention of Mr Chhotaray. Section 22 of the Act deals with 'Income from House Property' and stipulates that the annual value of property of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purpose of any business of profession carried on by him the profits of which are chargeable to income tax, shall be chargeable to income tax under the head 'Income from House Property'. The owner of house property has also been defined in section 27 and clause (iii) thereof inter alia stipulates that a member of a co-operative society to whom a building or part thereof is allotted or leased under a house building scheme of the society, shall be deemed to be the owner of that building or part thereof. Section 27(iii)(a) and (iii)(b) also set out who shall be deemed to be the owner in certain circumstances. It is whilst interpreting these provisions, the Supreme Court was deciding as to who would be the owner as contemplated under section 22 of the Act. We fail to see that this judgment can be of any assistance to the Revenue in the facts and circumstances of the present case. The Supreme Court was considering completely different sections of Income Tax Act and whose wordings are materially different from the wordings of section 40A(2)(b) of the Act. We therefore find that the reliance placed by Mr Chhotaray on this decision is also wholly misplaced.

44. In view of the foregoing discussion, we find that none of the three transactions that form the subject matter of this Petition fall within the meaning of a SDT as required under section 92BA(i) of the I.T. Act. This being the case, we find that Respondent No.1 was clearly in error in concluding that these transactions were SDTs, and therefore required to be disclosed by the Petitioner by filing Form 3CEB. He therefore could not have referred these transactions to Respondent No.2 for determining the ALP.

45. In these circumstances, and in view of the foregoing discussion, the Writ Petition is allowed in terms of prayer clause (a). Rule is made absolute in the aforesaid terms. However, in the facts and circumstances of the case, there shall be no order as to costs.

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