Reliance Industrial Holdings and Biomatrix Not Associated Enterprises, No income Escaped : ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that Reliance Industrial Holdings and Biomatrix were associated enterprises, and, therefore, it could not be said that any income on account of Arm's Length Pricing (ALP) has escaped assessment.

The two-member bench headed by Pramod Kumar (Vice President) and Sandeep S. Karhail (Judicial Member) has quashed the reassessment proceedings and observed that the AO's recorded reasons for reopening the assessment were unsustainable in law.

Section 92 F of the Income Tax Act, 1961 defines ALP as the price applied (proposed to be applied) when two unrelated persons enter into a transaction in uncontrolled conditions.

The assessee company, Reliance Industrial Holdings (which provided a bank guarantee to ICICI Bank, Singapore for the loan sanctioned to M/s. Biometrix), and M/s. Biomatrix was investigated. The books of the assessee company reveal that one Sandeep Tandon (since deceased), who was a director in the assessee company, was a 91% shareholder in Biomatrix at the time of the deal. The audit report of the financial year 2008-09 of the assessee showed that Sandeep Tandon had been identified as the "Key Managerial Person."

The reopening was done on the basis of inputs from the investigation wing about the outstanding put options, in respect of which the assessee company is said to have given the guarantee to ICICI Bank Singapore. The Assessing Office, while recording the reasons for reopening the assessment, formed the view that the assessee and Biomatrix Marketing, on whose behalf the guarantee was said to have been given by the assessee, are associated enterprises.

The assessment was reopened, and the assessment was finally made after an ALP adjustment in respect of the corporate guarantee extended by the assessee to ICICI Bank Singapore in respect of Biomatrix.

The department contended that in the annual report of the assessee company, the late Sandeep Tandon was described as a "key managerial person" of the assessee company, and he also owned 91% of the shares of Biomatrix. The assessee company and Biomtarix were treated as associated enterprises.

The assessee contended that merely because a person is described as a "key managerial person" in the annual accounts of a company, he cannot be said to be controlling the company. It was the only reason given in the reasons recorded for reopening the assessment to come to the conclusion that the assessee and Biomatrix were AEs.

The ITAT observed that being a director in a company or even being stated to be a key managerial person does not imply that the company in question is controlled by the director. It is important to bear in mind the fact that in order to be said to be in control of another company, as stated in Section 92A(2)(b) and (f), either the person should hold more than 26% of the voting power of the company or the person should appoint more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board. The connotations of "control" in the scheme of Section 92A(2) are far more cogent than visualised by a simplistic notion of "key managerial person." A person who appoints less than half of the board of directors cannot be said to be in control of a company. It is futile to even suggest that a person can be said to be in control of a company merely because he is a director of the company, or because he is described as a "key managerial person" of the company in its own choice of words in the annual accounts.

"Nothing recorded in the reasons for reopening even remotely suggests that this person had more than 26% voting rights, or even significant voting rights, in the company, that person had right to nominate less than half the board of directors, or one or more executive directors or the members of the governing body, or that there was anything cogent to signify control over the company. There is no material or substantive indication to the effect that the assessee company "is controlled by an individual", i.e. Sandeep Tandon, as is the necessary precondition for invoking Section 92A(2)(j)," the ITAT stated.

Case Title: Deputy Commissioner of Income Circle 3 (3)(1), Mumbai Versus Reliance Industrial Holdings Pvt Ltd

Citation: ITA Nos. 125 and 126/Mum/2021

Date: 31.10.2022

Counsel For Appellant: Vatsalaa Jha and Chetam MKacha

Counsel For Respondent: Madhur Agarwal along with Nimesh Vora and Moksha Mehta

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