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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI PAWAN SINGH
सुनवाई की तायीख / Date of Hearing : 15.10.2015 घोषणा की तायीख /Date of Pronouncement : 28.10.2015 आदेश / O R D E R
PER D. KARUNAKARA RAO, AM:
This appeal filed by the assessee on 30.1.2013 is against the order of the CIT (A)-15, Mumbai dated 9.11.2012 for the assessment year 2008-2009. In this appeal, assessee raised the following grounds which read as under: “1. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in confirming the addition of Rs. 6,73,17,036/- on account of transfer pricing adjustment made by the AO in respect of share capital issued at premium by your appellant company to its parent holding company.
2. The Ld CIT (A) failed to appreciate and overlook that the issue of transfer pricing cannot arise, since, this is not a trading transaction or a transaction where profit motive or comparison can be attributed as it does not affect revenue at all. 3. the Ld CIT (A), TPO and AO failed to appreciate and overlooked that the issue of shares toward the capital is not a trading transaction and hence, the premium thereon cannot be attributed to trading profit liable to tax and hence entire addition made by the TPO is outside the scope of section 92 of the Act.
4. The Ld CIT (A) and TPO erred by not considering the latest available audited balance sheet as on 31.3.2006 on the date of issue of shares that was prescribed under CCI guidelines and submitted to Reserve Bank of India.”
2. Briefly stated relevant facts of the case are that the assessee is engaged in the business of cutting and polishing of rough diamonds and Fabula Holdings, Mauritius (AE) has subscribed to 9,41,497 shares of the assessee at a premium of Rs. 95 each share with a face value of Rs.
The TPO benchmarked these transactions and held that the fair value per share is Rs. 176.50 paisa against Rs. 105/- (ie Rs. 95 + Rs. 10). Accordingly, TPO suggested adjustments to the tune of Rs. 6.73 Crs (rounded of). On appeal, CIT (A) confirmed the same and therefore, the assessee is in appeal before us.
During the proceedings before us, at the outset, Ld Counsel for the assessee brought our attention to the above grounds and mentioned that the core issue involved in the grounds, which is the subject matter of the appeal, relates to “the validity of the TP adjustments made to the share capital issued at premium” and the other issues raised in this appeal are argumentative in nature. In connection with the said main issue of the appeal, Ld Counsel for the assessee submitted that this is a legal issue and the same stands covered in favour of the assessee by the ratio of the Hon‟ble jurisdictional High Court in the case of Vodafone India Services (P.) Ltd vs. Union of India [2014] (368 ITR 1); Vodafone India Services (P.) Ltd vs. Union of India [2015] (369 ITR 511) and Shell India Markets (P.) Ltd vs. ACIT (2014) 51 taxmann.com 519 (Bombay). The said judgments are relevant the legal proposition that “no income can be benchmarked as per the TP studies that will arise out the share premium transactions which actually falls in the capital field. However, it will be otherwise open to the AO to pass assessment order u/s 143(3) of the Act in accordance with law”. It was also brought to our notice that the CBDT issues Instruction No.2/2015 stating that the Board has accepted the said judgment of the jurisdictional High Court. Consequently, the above ratio of the judgement must be adhered by the Department where similar issue is involved.
On the other hand, Ld DR for the Revenue relied on the orders of the Revenue Authorities.
We have heard both the parties on the legal issue and perused the orders of the Revenue Authorities as well as the relevant material placed on record. On hearing both the parties, we find there is no dispute on the fact that the amount received by the assessee relates to the share premium received from the Fabula Holdings, Mauritius (supra) in connection with subscription of share capital issued by the assessee. We have also perused the said binding judgment of the hon‟ble jurisdictional High Court in the case of Vodafone India Services Pvt Ltd (supa) and find the same is relevant for the proposition that “the issue of share premium by the assessee to its AE does not give rise to any income from an admitted international transaction and, thus, there is no occasion to apply Chapter X in such case” (Vodafone India Services P Ltd 368 ITR 1, dated 10.10.2014). We have perused the judgment in the case of Vodafone India Services (P) Ltd, 369 ITR 511, dated 13.10.2014, which is relevant for the identical proposition basing on the following reasons: “8. In the aforesaid judgment, we have inter alia, held that:- (i) 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. (ii) The definition of „income‟ does not include within its scope capital receipts arising out capital account transaction unless so specified in section 2(24) of the Act as income; (iii) There is no change in the Act to tax amounts received and / or arising on account of issue of shares by an Indian entity to a non-resident 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; (iv) 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 (v) 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 above extract provides logical reasoning in support of the ratio that such share premium transactions do not give rise to income in an international transaction, which can be benchmarked under the provisions of Chapter X of the Act.
Similar view was taken by the Hon‟ble High Court in the case of Shell India Markets (P) Ltd (supra) which is relevant for the proposition that “on issuance of shares by an Indian entity to its non-resident AEs, no income arises; hence, transfer pricing provisions under Chapter X would not be applicable”.
Further, we have also perused the CBDT Instruction No.2/2015, dated 29th January, 2015 and the following is the direction of the Board to the Officers of the Revenue. “It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition (WP No.871/2014). 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 the cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CsIT (Appeals).”