2015 (3) TMI 1359 - AT - Income Tax

Shortfall in premium for issuance of equity shares by the assessee to its holding company - deemed loan - computation of fair market value of shares issued by the Indian subsidiary to its holding company and shortfall in premium - HELD THAT - In the case of M/s Shell India Markets Pvt. Ltd. 2014 (11) TMI 897 - BOMBAY HIGH COURT has again decided the identical issue by following the Judgment in case of Vodafone India Services Pvt. Ltd. 2014 (11) TMI 897 - BOMBAY HIGH COURT . Accordingly, following the Judgment of Hon ble Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. (supra), we delete the addition made by the authorities below on account of shortfall in premium for issuance of equity shares by the assessee to its holding company has been treated as deemed loan. Credit of TDS - assessee has already filed a petition u/s 154 for grant of credit for tax deducted at source - HELD THAT - Since the assessee has already filed a petition u/s 154 for grant of credit for tax deducted at source accordingly, we direct AO to verify the claim of assessed and then pass the appropriate order. Revision u/s 263 - HELD THAT - The assessee objected to the proposed enhancement u/s 263 by the Commissioner. Commissioner passed the impugned order holding that the AO failed to make the adjustment towards the benefit of loan advanced by the assessee to its holding company as income in the hands of the assessee and the order passed by the AO is erroneous and prejudicial to the interest of revenue. Commissioner set aside the assessment order and directed the AO to frame the assessment as per the the directions given in the impugned revision order. AR as well as Ld. DR and considered the relevant material on record. The issue is directly covered by the Judgment of Hon ble Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd 2014 (10) TMI 278 - BOMBAY HIGH COURT the relevant finding of the Hon ble High Court has been produced in the foregoing paras of this order. Accordingly, following the Judgment of Hon ble Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. (Supra), we set aside/quash the impugned revision order passed u/s 263 of the Act.

Issues Involved:
1. Treatment of equity share issuance as an international transaction under Section 92B(1) of the Income Tax Act.
2. Computation of arm's length price (ALP) and deemed loan adjustments.
3. Adoption of domestic cost of borrowing rate.
4. Credit for tax deducted at source (TDS).
5. Levy of additional interest under Sections 234B and 234C.
6. Jurisdiction and validity of revision order under Section 263.

Issue-wise Detailed Analysis:

1. Treatment of Equity Share Issuance as an International Transaction:
The assessee contested the assessment order where the AO, following the DRP's directions, applied Chapter X provisions, treating the issuance of equity shares to its holding company as an international transaction under Section 92B(1). The AO computed the ALP of the shares at Rs. 26.90 each, treating the difference between the ALP and the actual issue price as a deemed loan, and taxed the notional interest on this deemed loan. The assessee argued that transfer pricing provisions do not permit secondary adjustments and that there is no statutory provision deeming such income.

2. Computation of ALP and Deemed Loan Adjustments:
The TPO determined the ALP at Rs. 26.90 per share, treating the shortfall as a deemed loan and applying a notional interest rate of 14.39%. The DRP directed the AO/TPO to consider the domestic cost of borrowing plus 3%, resulting in a rate of 10.14%. The Tribunal noted that the issue was covered by the jurisdictional High Court's judgment in Vodafone India Services Pvt. Ltd., which held that Chapter X provisions are machinery provisions and there is no charging provision to tax capital account transactions like share issuance at a premium. Consequently, the Tribunal deleted the addition made by the authorities.

3. Adoption of Domestic Cost of Borrowing Rate:
The assessee argued against the adoption of a 10.14% rate, stating there were no borrowings availed. The Tribunal, following the High Court's precedent, found that the computation of notional interest on deemed loans was not sustainable, thus rendering this adjustment moot.

4. Credit for Tax Deducted at Source (TDS):
The assessee claimed that the AO did not grant credit for TDS amounting to Rs. 221,837 despite a rectification petition under Section 154. The Tribunal directed the AO to verify the TDS claim and grant appropriate credit.

5. Levy of Additional Interest under Sections 234B and 234C:
The assessee contested the levy of additional interest under Sections 234B and 234C. The Tribunal noted that this issue was consequential and did not require specific findings.

6. Jurisdiction and Validity of Revision Order under Section 263:
The assessee challenged the CIT's revision order, which treated the AO's failure to make adjustments for the shortfall in share premium as erroneous and prejudicial to revenue interests. The Tribunal, referencing the Vodafone India Services Pvt. Ltd. judgment, found that there was no charging provision to tax the share premium shortfall, thus quashing the revision order under Section 263.

Conclusion:
The Tribunal allowed both appeals of the assessee, deleting the additions related to the deemed loan and notional interest, directing verification and credit for TDS, and setting aside the revision order under Section 263. The judgments were pronounced on March 25, 2015.

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