2014 (3) TMI 619 - AT - Income Tax

Deletion on account of reserves and surplus Expenses treated as capital receipt Held that - The amount was received essentially for restoration of the capital structure by recoupment of net worth - The assessee company had incurred accumulated losses and this has resulted in erosion of net worth - The parent company received non-refundable financial assistance of up to Euros 6 lakhs from its shareholder company thus, the CIT(A) was right in his factual findings that the amount was received towards erosion of net worth of the company Relying upon Handicrafts and Handloom Export Corporation of India vs. CIT 1981 (12) TMI 25 - DELHI High Court the order of the FAA is upheld Decided against Revenue. Deletion made u/s 92CA(3) of the Act Transfer Pricing Adjustment Held that - Infomedia India Ltd. is a company which is engaged in the business of printing and publishing which is totally a different line of business vis-a-vis assessee s business of trade fares and exhibitions - the rejection of this comparable by the CIT(A) is upheld - The only other relief given is that the TPO was directed to exclude domestic transactions in computation while computing adjustment based on ALP of international transactions there was no infirmity in the finding as transfer pricing adjustments are to be confined only to international transactions Decided against Revenue.

Summary

Issues:
1. Classification of received amount as capital receipt or revenue receipt.
2. Transfer pricing adjustment based on TPO's order.

Analysis:
1. The appeal involved a dispute regarding the classification of the received amount of Rs.34,511,880 by the assessee company as a capital receipt or a revenue receipt for the AY 2005-06. The AO contended that the receipt was in the revenue field, leading to an addition of Rs.1,10,55,815 as per the TPO's order. The assessee argued that the amount was received for restoration of its capital structure and net worth, crucial for the company's revival. The AO's decision was challenged before the CIT(A), who partially granted relief. The Revenue further appealed, disputing the CIT(A)'s order on the grounds that the addition on account of reserves and surplus was wrongly deleted, and the TPO's order under section 92CA(3) was incorrectly disregarded.

2. The Tribunal analyzed the submissions made by both parties. The Revenue argued that the amount was a revenue receipt as it was used for the company's current business operations. They highlighted documents indicating that the financial assistance was for recoupment of accumulated losses, not erosion of net worth. On the other hand, the assessee contended that the amount was received from the parent company for erosion of net worth, citing relevant case laws and documents. The Tribunal examined the purpose of the financial assistance and the RBI's approval, which confirmed the funds were for "restoration of the erosion in the capital of the company." Relying on the legal position established by the Delhi High Court and Supreme Court in similar cases, the Tribunal upheld the CIT(A)'s findings that the amount constituted a capital receipt.

3. Regarding the transfer pricing adjustment issue, the Tribunal noted that the CIT(A) accepted the TPO's method and comparables, except for one company unrelated to the assessee's business. The Tribunal agreed with the exclusion of this comparable and upheld the direction to exclude domestic transactions while computing adjustments based on the arm's length price of international transactions. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both issues.

In conclusion, the Tribunal upheld the CIT(A)'s findings that the received amount was a capital receipt and supported the adjustments made in the transfer pricing analysis, leading to the dismissal of the Revenue's appeal.