Business Restructuring Amongst Foreign Group Entities To Eliminate Duplicate Corporate Procedure Is 'International Transaction' U/s 92B: Mumbai ITAT

The ITAT also upheld the disallowance of interest on Compulsory Convertible Debentures (CCDs) and treatment of cash payment by assessee to its parent company, pursuant to scheme of amalgamation, as deemed loan.

The Bench comprising Amarjit Singh (Accountant Member) and Sandeep Singh Karhail (Judicial Member) observed that “In the present case, the business restructuring is an organisational change amongst the entities of Dimexon Group, i.e. DIHBV, DIHPL, and the assessee, inter-alia, to maintain a simple corporate structure and eliminate duplicate corporate procedures. Therefore, we are of the considered view that the aforesaid transaction between the assessee and DIHBV squarely falls within the ambit of “international transaction” as defined in section 92B of the Act”. (Para 22)

As per the brief facts of the case, the assessee, engaged in diamond manufacturing/distribution, was a wholly owned subsidiary of Dimexon (India) Holding Pvt. Ltd. (DIHPL), which in turn was wholly owned by Dimexon International Holdings B.V., Netherlands (DIHBV). The assessee entered into scheme of amalgamation with DIHPL, which was sanctioned by NCLT. Accordingly, assessee's holding company became DIHBV, and assessee paid purchase consideration for the merger to DIHBV in the form of equity shares, CCDs and cash. The TPO took the view that assessee's valuation report had no scientific basis, and that fresh equity shares issued to DIHBV represent fair value of assessee's shares post-merger but consideration paid in the form of CCDs and cash is excessive payment and not at arm's length. The TPO thus held that cash of Rs.100 crore paid to DIHBV represents deemed loan and computed interest thereon, and that ALP of interest paid on CCDs should be treated as NIL.

The Bench noted that 'business restructuring' is not defined in the Act, but refers to OECD Guidelines and holds that business restructuring in the present case is an organizational change in the Dimexon Group.

The Bench further noted that “merely because the scheme of amalgamation appears to be fair and reasonable and not violative of any provision of law or contrary to public policy, the same doesn't mean that the consideration paid pursuant to the said scheme is also at arm's length price and if the TPO has proceeded to compute the arm's length price as per the provisions of Chapter-X of the Act the same cannot be construed to be sitting over the judgment of the Court/Tribunal in approving the scheme of amalgamation”.

There is nothing to show that merger consideration was found to be at arm's length by Revenue at the time of approval of the amalgamation scheme, added the Bench.

The Bench agreed with TPO's finding that valuation reports submitted by assessee cannot be considered for benchmarking of payment of merger consideration by adopting “other method” as MAM, since the purchase consideration, though stated to be determined by applying Net Asset Method, is based on management decision.

The Bench also pointed that what has been transferred pursuant to merger is merely an investment company without any erosion in FAR profile of DIHBV requiring additional compensation apart from issuance of shares - entire merger transaction is a mere restatement of accounts of the subsidiary companies without actual transfer of any asset and liability by DIHBV.

Thus, the ITAT upheld the disallowance of interest paid on CCDs as well as treatment of cash payment as deemed loan.

Counsel for Appellant/ Assessee: Rajesh Simhan

Counsel for Respondent/ Revenue: H. M. Bhatt

Case Title: Dimexon Diamonds Ltd vs ACIT

Case Number: ITA. No 2429/Mum/2022

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