The transfer of shares of an Indian company by a holding Company to another holding Company results in disallowance of brought forward losses

Case Law Citation:-

Yum Restaurants (India) Pvt. Ltd vs. ITO (Delhi High Court); ITA Nos. 349 and 388 of 2015; Date of pronouncement: January 13, 2016; AY 2009-10

Brief of the Case:-

The transfer of shares of an Indian company by a holding Co (Yum Asia) to another holding Co (Yum Singapore) results in change of “beneficial ownership” of shares and results in disallowance of b/fd losses even though the ultimate beneficial owner remains Yum USA. The corporate veil cannot be pierced to regard the ultimate holding Co as the beneficial owner

Case Summary:-

1.  The Assessee, Yum Restaurants (India) Private Limited (‘Yum India’), is part of the Yum Restaurants Group with its ultimate holding company being Yum! Brands Inc. USA (Yum USA). 99.99% of shares of Yum India were initially held by Yum Restaurants Asia Private Limited (‘Yum Asia’).

2.  It is stated that the group decided to hold shares in Yum India through Yum Singapore and, therefore, the entire share holding in Yum India was transferred from one holding company, viz., Yum Asia to another immediate holding company, Yum Singapore, although the ultimate beneficial owner of the share holding in Yum India remained the holding company viz., Yum USA.

3.  The ITAT referred to the change in immediate share holding of Yum India from Yum Asia to Yum Singapore and held that by virtue of Section 79 of the Act, since there had been a change of more than 51% of the share holding pattern of the voting powers of shares beneficially held in AY 2008-09 of Yum India, the carry forward and setting off of business losses could not be allowed.

4.  As regards the issue concerning the disallowance of carry forward of accumulated business losses of the past years and set off under Section 79 of the Act, the AO did not accept the contention of Yum India that since the ultimate holding company remained Yum USA, it was the beneficial owner of the shares, notwithstanding that the shares in Yum India were held through a series of intermediary companies.

5.  The AO observed that the requirement of Section 79 was that the shares should be beneficially held by the company carrying 51% of voting power at the close of the financial year in which the loss was suffered.

6.  The parent company of Yum India on 31st March 2008 was the equitable owner of the shares but not as on 31st March 2009. Accordingly, Yum India was not permitted to set off the carry forward business losses incurred till 31st March 2008.

7.  In the present case, there was a change of 100% of the shareholding of Yum India and consequently there was a change of the beneficial ownership of shares since the predecessor company (Yum Asia) and the successor company (Yum Singapore) was distinct entities.

8.  The fact that they were subsidiaries of the ultimate holding company, Yum USA, did not mean that there was no change in the beneficial ownership.

9.  Unless the Assessee was able to show that notwithstanding shares having been registered in the name of Yum Asia or Yum Singapore, the beneficial owner was Yum USA, there could not be a presumption in that behalf.

10.  Although they might be AEs of Yum USA, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of 'piercing the veil' at the instance of Yum India does not arise. In the circumstances, it was rightly concluded by the ITAT that in terms of Section 79 of the Act, Yum India cannot be permitted to set off the carry forward accumulated business losses of the earlier years.

11.  Consequently, the Court declines to frame a question at the instance of the Assessee Yum India on the issue of carry forward and set off of the business losses under Section 79 of the Act.