2015 (4) TMI 89 - AT - Income Tax

Transfer pricing adjustment - whether the issue of equity shares by the assessee to its non resident Associated Enterprise, would attract the provisions of Chapter X of the Act? - Held that - As decided in case of Vodafone India Services P.Ltd. vs. UOI 2014 (10) TMI 278 - BOMBAY HIGH COURT the jurisdiction to apply Chapter X of the Act would occasion only when income arises out of International Transaction and such income is chargeable to tax under the Act. The entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax. Issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction there is no occasion to apply Chapter X of the Act Thus we set aside the assessment order to the extent it seeks to bring to tax the ALP of the share issued by the petitioner to its non resident AE's and also deemed interest which is sought to be brought to tax on the ground of non receipt of the consideration equivalent to the ALP by the petitioner on issue of equity Shares - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the assessment order under Section 143(3) read with Section 144C of the Income Tax Act, 1961.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Treatment of equity shares issued to a non-resident Associated Enterprise (AE) as an international transaction.
4. Applicability of Chapter X of the Income Tax Act to the issuance of equity shares.
5. Re-characterization of transactions by the Transfer Pricing Officer (TPO).
6. Computation methods and valuation of shares by the TPO.
7. Application of interest rates by the TPO.
8. Consideration of transfer pricing study submitted by the assessee.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order passed under Section 143(3) read with Section 144C of the Income Tax Act, 1961, arguing it was erroneous both in law and on facts. The order included an addition of Rs. 6,29,18,492/- based on the TPO's determination of the opportunity cost of deficient funds due to non-payment of share premium by the AE.

2. Determination of Arm's Length Price (ALP):
The TPO determined the ALP for the international transaction involving the issuance of equity shares to the AE, resulting in an addition of Rs. 6,29,18,492/- to the income of the assessee. The assessee contended that the transaction did not result in any income and thus should not attract transfer pricing adjustments.

3. Treatment of Equity Shares Issued to a Non-Resident AE:
The assessee argued that the issuance of equity shares to its non-resident AE did not constitute an international transaction under Section 92B of the Act. The DRP, however, upheld the TPO's view, leading to the addition of Rs. 6,29,18,492/-.

4. Applicability of Chapter X:
The primary issue was whether the issuance of equity shares to a non-resident AE would attract the provisions of Chapter X of the Act. The Tribunal referred to the Bombay High Court's judgment in Vodafone India Services P. Ltd. vs. UOI, which held that the capital receipts from the issuance of equity shares to a non-resident entity, or the shortfall between the fair market price and the issue price, cannot be considered as income under the Act.

5. Re-characterization of Transactions by the TPO:
The assessee contended that the TPO's actions amounted to re-characterization of the transaction, which was not permissible. The Tribunal found that the TPO's approach was incorrect as it treated the issuance of shares as a transfer, which was not the case.

6. Computation Methods and Valuation of Shares:
The assessee challenged the TPO's method of valuing the shares and the discount rate applied. The Tribunal found that the TPO's computation methods were arbitrary and lacked a legal basis. The Tribunal referred to the Bombay High Court's judgment, which emphasized that Chapter X is a machinery provision and cannot substitute the charging provisions of the Act.

7. Application of Interest Rates:
The TPO applied an interest rate of 12.75% based on the PLR of SBI, which the assessee argued was incorrect as the transaction involved a non-resident AE in Japan. The Tribunal found merit in the assessee's argument that the applicable interest rate should be that of the country where the AE is located.

8. Consideration of Transfer Pricing Study:
The assessee argued that the TPO ignored its detailed transfer pricing study, which determined the arm's length price. The Tribunal agreed with the assessee, noting that the TPO's adjustments were not based on any of the prescribed methods under the law.

Conclusion:
The Tribunal, consistent with the Bombay High Court's judgments in Vodafone India Services P. Ltd. and Shell India Markets (P.) Ltd., deleted the transfer pricing adjustment of Rs. 6,29,18,492/-. The appeal of the assessee was allowed, and the assessment order was found to be erroneous in law and on facts.

Order Pronouncement:
The order was pronounced in the Open Court on 20th February, 2015, allowing the appeal of the assessee.