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Pre-Arranged Share Acquisition Costs Not A Sham

31 Jul 2012

The Mumbai bench of the Income Tax Appellate Tribunal (Tribunal), in a recent ruling in the case of Euro RSCG Advertising Private Limited (the taxpayer), rejected the claim of the Assessing Officer (Revenue) for the re-computation of cost of acquisition of shares issued to the taxpayer (at a premium). This decision was based on the allegation that the said shares were issued at a price higher than the fair market value. Taxand India investigates the case in more detail, looking closely at the contentions of the two parties.

The taxpayer was engaged in providing a range of marketing services. During the financial year (FY) 2006-07, as a part of group restructuring process, the taxpayer sold 10,400 shares held in Euro RSCG Target Media Pvt Ltd (Euro RSCG) to its parent company, Havas Advertising International SA (Havas International), for a sale consideration of Rs 24.2 million, which was the same price at which the shares in Euro RSCG were earlier acquired by the taxpayer.

Out of 10,400 shares mentioned above, 8,000 shares were acquired by the taxpayer on January 18, 2006, pursuant to a sale of the media business of the taxpayer to Euro RSCG. Therefore, in terms of the agreement for transfer of media division, the taxpayer received 8,000 shares of Rs 10 each with a share premium of Rs 15.92 million. Consequently, the shares were accounted in the balance sheet of the taxpayer at Rs 16 million as "investments".

During the assessment proceedings, the matter in dispute before the Revenue was the amount of "sale consideration" and the "cost of acquisition" of 10400 shares of Euro RSCG in the hands of the taxpayer. However, subsequently, the value of "sale consideration" was not contested by the Revenue in this appeal before the Tribunal.

Taxand India looks closely at the details of capital gains in the case, and the impact of this ruling

Taxand's Take

Laying due emphasis on the documents and facts disclosed by the taxpayer, the Tribunal has rightly rejected the contention of the Revenue for the re-computation of the cost of acquisition of the shares. However, this ruling once again lays emphasis on the importance of adequate documentation at the transaction stage and the minuteness with which the Revenue seems to be scrutinizing such transactions.

Although, there would not be notable implications under the proposed Direct Tax Code regime, this decision would assume significance in the era of the General Anti Avoidance Rules (GAAR) where the Revenue could possibly seek to challenge the cost of acquisition by seeking to apply the GAAR provisions.

Your Taxand contacts for further queries are:
Mukesh Butani
T. +91 124 339 5010

Kalpesh Maroo

Taxand's Take Author