Case Note & Summary
The petitioner, Times Global Broadcasting Company Ltd, a wholly owned subsidiary of Benett, Coleman and Company Ltd (BCCL), was engaged in distribution of television channels and providing support services. With effect from 1 April 2014, the petitioner demerged one of its business undertakings into BCCL pursuant to a scheme of demerger approved by the Bombay High Court on 16 January 2015. Under the scheme, all assets and liabilities pertaining to the demerged undertaking (including the 'Times Now' channel) were transferred to BCCL at book value as on 31 March 2014, with the difference adjusted against the brought forward profit and loss account balance. No consideration was paid. The Transfer Pricing Officer (TPO) issued a show cause notice proposing to treat the demerger as an international transaction and compute arm's length price, and passed an order under Section 92CA(3) of the Income Tax Act, 1961 making a transfer pricing adjustment of Rs. 1,02,00,00,000. The petitioner challenged this order. The court framed the issue whether the demerger could be treated as an international transaction subject to transfer pricing. The petitioner argued that a demerger is a statutory reorganisation under the Companies Act, not a sale or transfer for consideration, and no income arises. The respondents argued that the demerger involved transfer of assets and liabilities between associated enterprises and should be at arm's length. The court analysed the scheme of demerger, noting that it was approved by the High Court and involved transfer at book value without any consideration. The court held that transfer pricing provisions under Chapter X apply only to international transactions or specified domestic transactions involving income. Since the demerger did not involve any consideration or give rise to income, it could not be treated as an international transaction. The court distinguished the transaction from a slump sale under Section 50B. The TPO's order was quashed as without jurisdiction. The court allowed the writ petition.
Headnote
A) Income Tax - Transfer Pricing - International Transaction - Demerger - Sections 92, 92CA, 92B Income Tax Act, 1961 - The petitioner challenged the TPO's order treating a demerger approved by the High Court as an international transaction and making a transfer pricing adjustment. The court held that a demerger under the Companies Act is not a transaction of sale or transfer for consideration; it is a statutory reorganisation. No income arises from such transfer at book value. The TPO's order was quashed as without jurisdiction. (Paras 1-30) B) Income Tax - Transfer Pricing - Arm's Length Price - Slump Sale - Sections 92, 92B, 50B Income Tax Act, 1961 - The TPO had treated the demerger as a slump sale and computed arm's length price. The court held that a demerger cannot be equated with a slump sale; the scheme of demerger was approved by the High Court and the transfer was at book value without any consideration. The transfer pricing provisions do not apply to such a transaction. (Paras 15-25) C) Income Tax - Transfer Pricing - Jurisdiction of TPO - Section 92CA(3) Income Tax Act, 1961 - The TPO assumed jurisdiction to determine arm's length price of the demerger transaction. The court held that since the transaction was not an international transaction, the TPO had no jurisdiction to pass the order under Section 92CA(3). The order was quashed. (Paras 26-30)
Issue of Consideration
Whether the transfer of assets and liabilities pursuant to a scheme of demerger approved by the High Court can be treated as an international transaction subject to transfer pricing adjustment under Section 92 of the Income Tax Act, 1961.
Final Decision
Writ petition allowed. Order dated 15.10.2018 passed by the Transfer Pricing Officer under Section 92CA(3) of the Income Tax Act, 1961 is quashed and set aside.
Law Points
- Transfer pricing provisions under Chapter X of Income Tax Act
- 1961 apply only to international transactions or specified domestic transactions
- demerger approved by High Court is not an international transaction
- no consideration flows in a demerger
- book value transfer does not give rise to income
- TPO cannot recharacterize a demerger as a slump sale
