Director holding no share in Company can’t be treated as Associated Enterprise: ITAT

Case Details: DCIT v. Reliance Industrial Holdings (P.) Ltd. - [2022] 144 taxmann.com 180 (Mumbai-Trib.)

Judiciary and Counsel Details

• • Pramod Kumar, Vice President & Sandeep S Karhail, Judicial Member
  • Vatsalaa Jha & Chetam MKacha for the Appellant.
  • Madhur Agarwal, Nimesh Vora & Moksha Mehta for the Respondent.

Facts of the Case

Assessee-company provided guarantee to ICICI Bank Singapore on behalf of Biomatrix Marketing Pvt Ltd. (BMPL). The director of the assessee-company had 91% shareholding in the BMPL on whose behalf guarantee was given by the assessee company.

The Assessing Officer (AO) held that the books of account of assessee revealed that one of its director, who was a ‘Key Managerial Person’ as per books of account, had 91% shareholding in BMPL at the time of deal. Thus, assessee-company and BMPL, become Associated Enterprise (AE) for the purpose of transfer pricing.

Accordingly, he made ALP adjustments for the guarantee provided by the assessee to the Bank. Aggrieved-assessee preferred an appeal to the CIT(A) which upheld the order of AO. Matter reached before the Mumbai Tribunal.

ITAT Held

The Tribunal held that a person can be said to be in control of a company merely because he is a director of the company, or he is described as a ‘key managerial person’ of the said company in its own choice of words in the annual accounts.

To be said to be in control of another company, a person should hold more than 26% of the voting power of the company or such a person appoints 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 visualized by a simplistic notion of ‘key managerial person’. In the instant case, there was no material or substantive indication to the effect that the assessee ‘is controlled by an individual, i.e., the director named as Key Managerial Person.

Unless AO was to give reasons for holding that the assessee-company was controlled by director, Section 92A(2)(j) could not have been invoked.