2014 (11) TMI 881 - HC - Income Tax

Application of Chapter X - Transfer pricing adjustments - International Transaction or not - Validity of SCN without jurisdiction Additions towards shortfall in value of equity shares - TPO further held that this difference between the ALP and the issue price (including premium) was required to be treated as deemed loan given by the Petitioner to its holding company and deemed interest on such deemed loan at ₹ 88.35 Crores was also treated as interest income. - Held that - Issue of shares at premium by the Petitioner to its non-resident holding company does not give rise to income in an International Transaction. The application of Chapter X of the Act to such transaction is without jurisdiction - the sine qua non to apply Chapter X of the Act would be arising of Income under the Act out of an International Transaction - This income should be chargeable under the Act, before Chapter X can be applied - The definition of income does not include within its scope capital receipts arising out of capital account transaction unless so specified in Section 2(24) of the Act as income - There is no charge in the Act to tax amounts received and/or arising on account of issue of shares by an Indian entity to a nonresident entity in Sections 4,5,15,22,28,45 and 56 of the Act. This is as it arises out of Capital Accounts transaction and, therefore, is not income - Chapter X of the Act does not contain any charging provision but is a machinery provision to arrive at ALP of a transaction between Associated Enterprises and Chapter X of the Act does not change the character of the receipts but only permits re-quantification of income uninfluenced by the relationship between the Associated Enterprises - The order of reference made by AO to TPO is set aside to the Show Cause Notice dated 17 January 2014 issued by the TPO - and the order dated 29 January 2014 passed by the TPO under Section 92CA(3) of the Act Decided in favour of assessee.

Summary

Issues:
Challenge to Show Cause Notice and order by Transfer Pricing Officer under Section 92CA(3) of the Income Tax Act, 1961.

Analysis:
1. Challenge to Show Cause Notice and Order: The petitioner challenged a Show Cause Notice dated 17 January 2014 and an order dated 30 January 2014 issued by the Transfer Pricing Officer (TPO) under Section 92CA(3) of the Income Tax Act, 1961. The petitioner, a subsidiary of a Mauritian entity, issued equity shares to its holding company at a premium. The TPO issued a notice to adjust the transfer price of the shares based on the Arms Length Price (ALP) determination. The petitioner objected to the jurisdiction of the department to initiate proceedings under Chapter X of the Act. The TPO made adjustments totaling Rs. 34,345,203,658, which the petitioner challenged in the High Court.

2. Jurisdiction Issue: The High Court analyzed the jurisdictional aspect of applying Chapter X of the Act to the issuance of shares at a premium to a non-resident holding company. It was established that income arising from international transactions should be chargeable under the Act for Chapter X to be applicable. The Court clarified that capital receipts from capital account transactions are not considered income unless specified. It was emphasized that Chapter X is a machinery provision to determine the ALP and does not change the character of receipts arising from associated enterprises.

3. Judicial Precedent: The Court referred to a previous judgment where it was held that issuing shares at a premium to a non-resident holding company does not generate income in an international transaction. Consequently, the application of Chapter X to such transactions was deemed without jurisdiction. The Court quashed the order of reference to the TPO, the TPO's order, the Draft Assessment Order, and the Dispute Resolution Panel's decision in favor of the Revenue.

4. Outcome: In light of the earlier judgment, the High Court allowed the writ petition, setting aside the TPO's order under Section 92CA(3) of the Act. The Court clarified that the issue of equity shares at a premium to a non-resident holding company and determining its ALP would not be relevant in this case. However, the Assessing Officer was permitted to proceed with the Assessment Order under Section 143(3) of the Act in accordance with the law. The rule was made absolute with no order as to costs.