2015 (7) TMI 659 - AT - Income Tax

Addition of opportunity cost of the deficient funds received by the assessee for nonpayment of share premium by the associate enterprise - Transfer pricing adjustment - Held that - In view of decision of Vodafone India Services Pvt. Ltd. Vs. Union of India 2014 (10) TMI 278 - BOMBAY HIGH COURT and order of the Tribunal in assessee own case for AY 2009-10 (2015 (4) TMI 89 - ITAT DELHI) we are of the considered view that there is no charging provision to tax capital account transaction in respect of issue of shares at a premium, therefore, transfer pricing adjustment made by the AO and upheld by the DRP amounting to ₹ 21,42,19,918/- does not survive and we direct the AO to delete the same. - Decided in favour of assessee.

Summary

Issues:
Appeal against assessment order u/s 143(3) r.w.s.144C of the Income Tax Act, 1961 for AY 2010-11. Dispute regarding adjustment in the arm's length price (ALP) in respect of international transactions. Challenge to the addition of notional premium on share capital to the parent holding company of the assessee.

Analysis:
The appeal was filed by the assessee against the assessment order for AY 2010-11, challenging the addition proposed by the Assessing Officer on account of adjustment in the arm's length price (ALP) for international transactions. The issue arose from the assessee issuing shares to its parent holding company, resulting in an alleged shortfall in share premium. The Transfer Pricing Officer (TPO) computed the value of shares and made an adjustment based on an interest rate of 12.75% per annum. The assessee contended that the issue of share capital to the parent company did not constitute an international transaction, hence no adjustment should be made. The Dispute Resolution Panel (DRP) confirmed the addition, leading to the appeal before the Tribunal.

The Tribunal considered the arguments presented by both sides, including the order of the Tribunal for AY 2009-10 in the assessee's own case. The Tribunal noted that a similar issue had been decided in favor of the assessee in the previous year, citing the judgment of the Hon'ble Bombay High Court in a related case. The High Court had held that the capital receipts from issuing shares to a holding company cannot be considered income under the Income Tax Act. The Tribunal emphasized that Chapter X of the Act pertains to determining the arm's length price of transactions between associated enterprises and does not apply to capital account transactions like issuing shares at a premium.

Referring to another case where the Bombay High Court set aside a tax assessment based on similar principles, the Tribunal concluded that there was no charging provision to tax capital account transactions involving the issue of shares at a premium. Therefore, the transfer pricing adjustment made by the Assessing Officer was deemed invalid, and the Tribunal directed the AO to delete the addition. Consequently, the main ground of the assessee was allowed, and the appeal was upheld in favor of the assessee.

In light of the decision on the appeal, the stay application filed by the assessee was deemed infructuous and dismissed. The Tribunal pronounced its decision on 10th July 2015, setting aside the addition made by the AO and directing the deletion of the same.