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Facts
The revenue appealed against the CIT(A)'s order deleting an adjustment made by the TPO. The adjustment was related to the shortfall in share premium received by the assessee from its AE, which the TPO treated as dividend income and proposed for taxation under Section 115A.
Held
The Tribunal held that the issue is squarely covered by the judgments of the Bombay High Court in Vodafone India Services Pvt. Ltd. and Shell India Markets Pvt. Ltd. These judgments establish that premium on share issuance is a capital account transaction and not taxable income, hence not liable for transfer pricing adjustment. The Tribunal concurred with the CIT(A)'s decision.
Key Issues
Whether the shortfall in share premium received on issue of shares to an AE, treated as dividend by the TPO, is liable for transfer pricing adjustment when it is considered a capital account transaction?
Sections Cited
143(3), 144C(3), 92CA(3), 2(22)(a), 115A, 115-0, 201(1A), 206C(7), 154, 4, 5, 15, 22, 28, 45, 56
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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI ARUN KHODPIA
आदेश / ORDER
PER ARUN KHODPIA, AM:
The present appeal filed by the revenue is directed against the order passed by the Ld.CIT(Appeals)-58, Mumbai, dated 18.12.2024 for the assessment year 2016-17 as per the following grounds of appeal:
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the adjustment made by the TPO by relying upon the decision of the Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (368 ITR 1) and Shell India Markets Pvt. Ltd (369 ITR 516) wherein it has been held that the provision of Chapter X of the Act would apply only if the income is chargeable to tax under the Act ignoring the fact that the TPO had not re-characterized the shortfall in the receipt of share premium as income? 2 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting adjustment made by TPO by relying upon the decision of the Hon’ble Bombay High Court in the case of Vodafone when the TPO had only treated the shortfall in share premium was dividend received by the AE on which the provisions of section 115A of the Income-tax Act should be applicable and Dividend Distribution Tax should have been deducted? 3. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is correct in deleting the adjustment made by TPO without appreciating that the facts of the case were different from the facts in the case of Vodafone India Services Pvt. Ltd (368 ITR 1)?
The brief facts in this case are that the impugned assessment was completed u/s.143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 ( for short ‘the Act’), dated 20.01.2020, wherein income of the assessee has been enhanced by two additions, First addition of Rs.6,39,60,000/- on account of transfer pricing adjustment for short recovery of share capital from AE liable to be subjected to dividend Distribution of tax u/s.115A of the Act in the hands of the assessee. The above referred adjustment was proposed by the TPO vide order u/s.92CA(3) of the Act, dated 28.10.2019 observing that the arms length price of shares allotted to the assessee’s AE should be Rs.12,39,60,000/-, where as the assessee had shown it at Rs.6 crore in its books of account and therefore, difference of Rs.6,39,60,000/- was short booked by the assessee.
3. The second issue is with regard to the addition on account of disallowance of interest u/s.201(1A) or u/s.206C(7) of the Act which pertains to the delayed payment of taxes and therefore, proposed to be disallowed by the A.O.
Both the above referred issues are raised by the assessee before the Ld.CIT(Appeals) who had discussed the matter at length and after deliberation relying on the judgment of the Vodafone India Services Pvt. Ltd. (368 ITR 1) and Shell India Markets Pvt. Ltd (369 ITR 516)and decided the issue in favour of the assessee observing as follows:
“Observations on appellants submission is as follows: 6.1 During FY 2015-16, the Appellant had issued 2.000,000 equity shares to ZT USA at value of 30 per share. The shares were issued basis the valuation report obtained from an independent valuer wherein the value derived basis discounted cashflow method was INR 26.8 per share.
6.2 The Ld. TPO during the transfer pricing proceedings asked the Appellant to furnish the actual numbers and replace the same with projected numbers mentioned in the valuation report. Basis the same, the Ld TPO arrived at a revised value of share as INR 61.98 per share. 6.3 The learned TPO, then proposed an adjustment to the AO on account of shortfall in receipt of premium by the Appellant as dividend paid by Appetent to its AE as per section 2(22)(a) of the Act and should be subjected to DDT in the hands of the Appellant in terms of the provisions of section 115A read with section 115-0 of the Act 6.4 Based on the transfer pricing order, the Id AO passed the assessment order under Section 143(3) of the Act on 20 January 2020 making adjustment of INR 6,39,60,000 considering the short recovery of premium as dividend paid by Appellant to its AE as per section 2(22)(a) of the Act and should be subjected to DDT in the hands of the Appellant in terms of the provisions of section 115A read with section 115- 0 of the Act 6.5 Without prejudice to filing of this appeal. the Appellant on 28 February 2020 filed a rectification application before the Ld.AO that while computing the tax on the disputed additions of INR 6,39.60.000 being in the nature of short recovery of share capital from AE, the learned AO applied the effective corporate tax rate of 33 06 per cent instead of DDT rate of 20.36 per cent. 6.6 In response thereto, the learned AO passed the rectification order dated 21 October 2021 wherein it rejected the ask of the Appellant to rectify the inadvertent levy of the effective corporate tax at 33.06 per cent instead of DDT rate of 20.36 per cent on the disputed additions of INR 6,39,60,000. 6.7 The rationale provided by the learned AO while rejecting the rectification application of the Appellant was that "Addition has been made u/s. 2(22)(e), being deemed dividend and rightly taxed at 33.06%. Therefore, order u/s. 154 of the Act is being passed rejecting the assessee's claim." 6.8 While going through the facts of the case, it is understood the main issue under consideration is in relation to short recovery of premium on issue of equity shares by the Appellant.
6.9 The Appellant has submitted that its issue is squarely covered by Jurisdictional Bombay High Court in the cases of Vodafone India Services Pvt. Ltd. (368 ITR 1) and Shell India Markets Pvt. Ltd. (369 ITR 516) wherein it has been held that the provision of Chapter X of the Act would apply only if the income is chargeable to tax under the Act. In the said rulings, the Hon'ble High Court has further observed that transfer pricing provisions laid out in the Act are in the nature of machinery or computational provisions and that income arising from international transactions between associated enterprises must be income under the Act and that such income must be chargeable under the charging provisions (i.e. Sections 4, 5, 15, 22, 28, 45 and 56) of the Act. While holding so, the Bombay HC held as under — It was next submitted that the machinery Section of the Mt cannot be road de-hors charging Section. The Act has to be read as an integrated who. On the aforesaid submission also. there can be 110 dispute However, as observed by the Supreme Court in CIT v/s. B.C. Srinivasa Shetti 128 ITR 294, ''there is a qualitative difference between the charging provisions and computation provisions and ordinarily the operation of the charging provisions cannot be affected by the construction of computation provisions " In the present case, there is no charging provision to tax capital account transaction in respect of issue of shares at a premium. Computation provisions cannot replace/substitute the charging provisions. In fact, in B.C. Srinivasa Shetti (supra), there was charging provision but the computation provision failed and in such a case the Court held that the transaction cannel be brought to tax. The present facts are on a higher pedestal as there is no charging provision to tax issue of shares at premium to a non-resident, then the occasion to invoke the computation provisions does not arise. We, therefore, find no substance in the aforesaid submission made on behalf of the Revenue. As in the present case, the TPO in those cases had made a transfer pricing adjustment by computing a shortfall in share premium received by the Assessee upon issuance of shares to the foreign AE. 6.10 The Appellant additionally also submitted the CBDT instruction letter to 2/2015 regarding acceptance by the revenue department of the judgment passed by Bombay HC in case of Vodafone India Services Pvt. Ltd. for AY 2009-10 (WP No.871/2014). Further, the Appellant also submitted that press release issued by Government of India for acceptance of order passed in case of Vodafone India Services Pvt. Ltd. for AY 2009-10 (WP No.871 /2014).
7. Decision: 7.1 Ground Nos.1 & 2 - Both grounds relates to addition on account of adjustment of Arms-length Price in relation to international transaction with Associated Enterprises ('AEs') amounting to Rs. 6,39,60,000 From the above facts, it is clear that the matter under consideration is arising out of short recovery of share premium on account of issue to equity shares. I have gone through the submission of Appellant and the case laws mentioned by the Appellant. The issue is squarely covered by Jurisdictional Bombay High Court in the cases of Vodafone India Services Pvt. Ltd. (368 ITR 1) and Shell India Markets Pvt. Ltd (369 ITR 516) and accordingly relying on the same the adjustment made on account of short recovery of share premium of INR 6,39,60,000 is deleted. Accordingly, the consequential grounds taken by the Appellant in relation to deemed dividend does not require adjudication.”
With the aforesaid observation, the appeal of the assessee has been partly allowed.
Aggrieved with the aforesaid relief provided by the Ld.CIT(Appeals), the revenue has preferred the appeal before the Tribunal with the contention that the Ld.CIT(Appeals) was not correct in deleting the adjustment made by the TPO, relying on the decisions of the Hon’ble High Court of Bombay (supra).
At the outset, the Ld. Sr. DR representing the revenue reiterated the facts of the case and vehemently supported the order of the A.O.
On the other hand, the Ld. Counsel representing the assessee submitted that the issue is no more res-integra and has been decided by the Hon’ble High Court of Bombay in the cases of Vodafone India Services Pvt. Ltd. (368 ITR 1) and Shell India Markets Pvt. Ltd (369 ITR 516), wherein judgments of the Hon’ble High Court are in favour of the assessee that the premium on share issued was in the nature of capital account transaction therefore does not give rise to taxable income and accordingly the same is not liable to be considered for transfer pricing adjustment. Such contention of the assessee has been further fortified in terms of the CBDT Instruction No.2/2015 dated 29.01.2015, wherein CBDT had categorically admitted this position and have accepted the decisions of the Hon’ble High Court of Bombay, therefore, had directed the authorities concerned to adhere with the ratio decidendi emerged from the Vodaphone Judgment (supra). Such instructions of CBDT (supra) are binding on the revenue authorities, accordingly the transactions qua the share premium on issue of shares by domestic company to its nonresident holding company does notgive rise to any transfer pricing adjustment. The relevant portion of the CBDT Instruction No.2/2015 is culled out as follows:
“Instruction No.2/2015 F No.500/15/2014/APA-I Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Foreign Tax & Tax Research- l Division APA-l Section ***** New Delhi, Dated the 29 th January, 2015 To All Principal CCsIT/DsGlT and CCsIT/DsGlT Madam/Sir Subject Acceptance of the Order of the Hon'ble High Court of Bombay in the case of Vodafone India Services Pvt. Ltd.-reg. In reference to the above cited subject, I am directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone lndia Services Pvt. Ltd. for AY 2009- 10(WP No.871/2014), wherein the Court has held, inter-alia, that the premium on share issue was on account of o capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment. 2. lt is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgment, it is directed that the ratio decidendi of the judgment must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs, and CslT(Appeals).
This issues with the approval of Chairperson CBDT. Sd/- (Anchal Khandelwal) Under Secretary to the Govt. of India It was therefore submitted by the Ld. Counsel that the issue in hand is duly covered by the judgments of the Hon’ble High Court of Bombay in the cases of Vodafone India Services Pvt. Ltd. (368 ITR 1) and Shell India Markets Pvt. Ltd (369 ITR 516). Therefore, the Ld. CIT(Appeals) had rightly allowed the appeal of the assessee by deleting the addition made on account of transfer pricing adjustment for notional premium worked out by the TPO.
Having given a thoughtful consideration of the facts and circumstances, respectfully following the aforesaid judgments of the Hon’ble High Court of Bombay in the cases of Vodafone India Services Pvt. Ltd. (368 ITR 1) and Shell India Markets Pvt. Ltd (369 ITR 516), we concur with the decision of Ld. CIT(Appeals),who had rightly adjudicated the issue, judiciously following principle of law laid down by Hon’ble Jurisdictional High Court and thereafter as per the instruction of CBDT accepting the said judgment. Therefore, the valuation of shares at higher rate by TPO on account of premium on issue of shares by the assessee to its AE at USA namely “ZT Group Int’l Inc., which does not fall within the meaning of taxable income of the assessee, beingthe same constitutes a capital account transaction, consequently, we do not find any infirmity in the order of the Ld.CIT(Appeals) to interfere with, the same therefore stands uphold.
In the result, appeal of the revenue is dismissed as per our aforesaid observations.
Order pronounced in the open court on 19th August, 2025.