2015 (2) TMI 1118 - AT - Income Tax

Transfer pricing adjustment - upward adjustment holding international transactions relating to the issuance of equity shares entered into by the assessee with its Associated Enterprises (AE) were not at Arm s Length - Held that - Considering the undisputed issue of the capital nature of the transaction in question we are of the opinion that the adjustments made by the TPO are outside the scope of the TP provisions. We accordingly allow the issue raised by the assessee in its favour

Summary

Issues:
- Appeal against upward adjustment of international transaction relating to issuance of equity shares not at Arm's Length.

Analysis:
1. The appellant challenged the upward adjustment made by the Assessing Officer/Dispute Resolution Panel/Transfer Pricing Officer for the AY 2009-2010 regarding the issuance of equity shares to its Associated Enterprises. The adjustment amounted to Rs. 18,66,46,818 due to the determination of the Arm's Length Price (ALP) of the premium segment at Rs. 9,163 per share.

2. The appellant argued that the issue was covered in their favor by the judgment of the Bombay High Court in the case of Vodafone India Services (P) Ltd vs. Union of India. They emphasized that the share premium and interest charge on undercharged premium should not be adjusted under Transfer Pricing provisions as they are capital receipts, not income. The Coordinate Bench of the Tribunal also decided a similar issue in favor of the appellant in a previous case.

3. The Revenue Authorities, however, relied on their orders. After hearing both parties and examining relevant judgments, the Tribunal found that the adjustments made by the Transfer Pricing Officer were outside the scope of Transfer Pricing provisions. The Tribunal held that the capital nature of the transaction in question meant that the adjustments were not applicable. Consequently, the grounds raised by the appellant were allowed, and the appeal was decided in their favor.

4. The Tribunal's decision was based on the principle that income arising from an International Transaction is a condition precedent for the application of Chapter X of the Income Tax Act. The Tribunal cited the judgment in the Vodafone India Services case, emphasizing that capital receipts, such as share premium, should not be considered income unless specified by law. The Tribunal concluded that the adjustments made on account of share premium and interest charged on undercharged premium were not valid under the Transfer Pricing provisions. Thus, the Tribunal allowed the appellant's appeal.