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PCIT vs. PMP Auto Components Pvt. Ltd (Bombay High Court)

COURT:
CORAM: ,
SECTION(S): , ,
GENRE:
CATCH WORDS: ,
COUNSEL:
DATE: February 20, 2019 (Date of pronouncement)
DATE: February 26, 2019 (Date of publication)
AY: 2010-11
FILE: Click here to download the file in pdf format
CITATION:
S. 92C: Taxability under Transfer Pricing provisions of shares purchased at value in excess of FMV: As the transaction of purchase of equity shares is a capital transaction and does not give rise to any income, the transfer pricing provisions do not apply. Chapter X is a machinery provision. It can only be invoked to bring to tax any income arising from an international transaction. It is necessary for the revenue to show that income does arise from the international transaction. S. 2(24)(xvi) & 56(2)(viib) are prospective

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.1685 of 2016
Pr. Commissioner of Income Tax-7 .. Appellant
Versus
M/s. PMP Auto Components Pvt. Ltd. .. Respondents
Mr. Suresh Kumar for appellant
Mr. Atul Jasani for respondents.
CORAM : AKIL KURESHI &
M.S.SANKLECHA, JJ.
DATE : 20th February 2019.
P.C.
This appeal under section 260A of the Income Tax Act
(Act for short) challenges the order dated 13th January 2016 passed
by the Income Tax Appellate Tribunal (Tribunal for short). The
appeal relates to the assessment year 2010-2011.
2] The Revenue has urged following two questions of law
for our consideration _
(A) Whether on the facts and
circumstances of the case and in law, was the Tribunal
correct in deleting the adjustment of Rs.2,58,94,765/- on
account of excess money paid to PMP Bakony (AE) for
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acquiring share?
(B) Whether on the facts and
circumstances of the case and in law was the Tribunal
correct in upholding the deletion of the adjustment of
Rs.2,50,95,228/- being interest chargeable on deemed
loan transaction with PMP Bakony (AE)?
3] The common facts leading to the aforesaid two
questions are as under:-
(a) On 14th October 2010, the respondent filed its return of
income declaring income at Rs.2.56 Crores. As the respondent had
shown some international transactions, the Assessing Officer
referred the same to the Transfer Pricing Officer (TPO) for
determining the Arms length Price (ALP) of such international
transactions. The TPO by an order dated 20th September 2013,
inter alia made following two adjustments :-
(i) Adjustment on account of excess
money paid to PMP Bakony (AE)
for acquiring its share Rs.2,58,94,765/-
(ii) Interest chargeable on loan
transaction with PMP Bakony (AE) Rs.2,50,95,228/-
The above order dated 20th September 2013 of the TPO led to
a draft assessment order dated 14th February 2014 by Assessing
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Officer.
(B) Being aggrieved by the draft assessment order
dated 14th February 2014, the respondent filed its objections to the
draft assessment order with the Dispute Resolution Panel (DRP).
By its directions dated 26th September 2015, the DRP disposed of
the respondent’s objections by inter alia holding as under:-
(i) The excess payment made for acquiring shares of its
100% subsidiary (AE) is taxable as held by the A.O. Thus rejected
the objections of respondent assessee; and
(ii) the interest chargeable on the additional capital
investment made to purchase shares of the 100 % subsidiary was
directed to be deleted. This on the ground that this adjustment done
by the TPO is a secondary transfer pricing adjustment.
(C) Consequent upon the above directions, the Assessing
Officer passed final assessment order dated 27th November 2014
under section 143(3) read with section 144C(13) of the Act.
(D) Being aggrieved with the assessment order dated 27th
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November 2014, the respondent filed an appeal in respect of
adjustments made on account of exces money paid to acquire
shares of its 100% subsidiary to the Tribunal. While the appellant –
Revenue filed an appeal in respect of non-adjustment on account of
interest payable on additional amounts paid to acquire shares as a
loan to the Tribunal.
(E) In appeal, the tribunal allowed respondentassess’s
appeal on the issue of question No.1 raised herein holding
that no income arises on account of purchase of shares as it was on
capital account. This, it held was an issue covered by the decision
of this Court in Vodafone Services Pvt. Ltd. Vs. Union of India
reported in 268 ITR page 1 , in favour of the respondent.
(F) So far as the appellant – revenue’s appeal on the
issue raised in question No.2 herein is concerned, the impugned
order held that the same does not survive. This in view of the
question No.1 being allowed in favour of respondent assessee.
Thus, dismissed the appellant – revenue’s appeal.
3] We shall now deal with individual question raised for our
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consideration.
4] Regarding Question No.A,
(a) The issue raised in this question is with regard to
respondent investing an amount of Rs.2.67 Crores to acquire shares
of its AE (subsidiary company), which had a fair market value of
Rs.8.19 lakhs. It is this excess payment of Rs.2.58 Crores, when
compared to fair market value of the shares which is sought by the
Revenue to be brought to tax under the transfer pricing provisions
under Chapter X of the Act.
(b) The impugned order of tribunal rejected the
contention of revenue on the ground that this issue stands
concluded by the decision of the jurisdictional high court in the case
of Vodafone (supra). In the above case this court held that
investment in shares is on capital account and does not give rise to
any income to trigger the provisions of Chapter X of the Act.
(c) Mr. Suresh Kumar, learned Counsel appearing in
support of the appeal submits as under:-
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(i) The transaction is an international transaction and,
therefore, the transfer pricing adjustment is required to be done in
terms of Chapter X. It is submitted that the additional investment of
capital by respondent in its AE’s shares vis-a-vis its fair market value
is subject to transfer pricing adjustment as done by the TPO and
upheld by DRP;
(ii) The decision of this Court in Vodafone (supra) is in
applicable to the present facts, as it was concerned with inbound
investment and was not in respect of out bound investment, as in
this case; and
(iii) In any case the investment made in shares if sold in
subsequent years, may give rise to potential loss. This when the
respondent sells the shares which have been purchased at a price
much higher than its fair market value. Thus, this difference has to
be brought to tax as sought to be done by the Revenue.
Therefore, it is submitted that the appeal should be
entertained and allowed.
(d) There is no dispute before us that the transaction of purchase
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of shares by the respondent of its subsidiary company i.e. A.E. at a
price much higher than its fair market value would be international
transaction as defined in Section 92(B) of the Act. The only issue
before us as considered by the impugned order of the Tribunal is
whether Chapter X of the Act would at all be applicable in case of
any investment made on capital account. This on the premise that
the transaction of purchase of equity share capital would not give
rise to any income. We note that similar issue was before this
Court in Vodafone (supra) and this court inter alia observed that
Chapter X of the Act is machinery provision to arrive at the arm’s
length price of transaction between associated enterprises.
However, before the provisions can be kicked in, it is necessary that
income must arise under the substantive provisions found in the Act
viz., under the heads of salaries or income from house property or
profits and gains in business or profession or capital gains and/or
income from other sources. Section 92 of the Act requires income
to arise from an international transaction while determing the ALP.
Therefore the sina qua non is that income must first arise on
account of the international transaction.
(e) The view of this Court in Vodafone (supra) has been
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accepted by the Central Board of Direct Taxes (CBDT) by issue of
instruction No.2/2015 dated 29th January 2015.
(f) In this case also, the shares which have been purchased
by the respondent assess are on capital account. The revenue is
seeking to bring the difference between the actual investment of
Rs.2.67 Crores and fair market value of the shares (investment) at
Rs.8.13 lakhs i.e. 2.58 Crores to tax. This without being able to
specify under which substantive provision would income arise.. In
our view, therefore, the issue arising here stands concluded by the
decision of this Court in Vodafone (supra). The distinction which is
sought to be made by the revenue on the basis of this being an
inbound investment and not an outbound investment as in the case
of Vodafone (supra) is a distinction of no significance. On principle,
if this court has held that Chapter X of the Act is machinery
provision and can only be invoked to bring to tax any income arising
from an international transaction, then, it is necessary for the
revenue to show that income as defined in the Act does arise from
the international transaction. The distinction between inbound and
outbound investment is a distinction which does not take the case of
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revenue any further, as the Legislature has made no such distinction
while providing for determination of any income on adjustments to
arrive at ALP arising from an international transaction.
(g) The further submission on behalf of the revenue that in
future the respondent may sell these shares at a loss as they have
purchased the same at much higher price than its fair market value.
Thus gives rise to reduction of its tax liability in future. This
submission is in the realm of speculation. At this stage, it is
hypothetical. The issue has to be examined on the basis of law and
facts as existing before the authorities in the subject assessment
year. No provison of the Act has been shown to us, which would
allow the Revenue to tax a potential income in the present facts.
(h) We note that with effect from 1st April 2013, the definition
of Income as provided under section 2(24) of the Act was amended
to include sub-clause (xvi) therein. It provided as income, any
consideration received for issue of shares, if it exceeds the fair
market value, as falling under clause (viib) of sub-section (2) of
Section 56 of the Act. The amendment/ insertion of section 56(2)
(viib) of the Act was with effect from 1st August 2013 and reads as
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under:-
“56(2)(viib): Where a company, not
being a company in which the public are substantially
interested, receives, in any previous year, from any
person being a resident, any consideration for issue of
shares that exceeds the face value of such shares, the
aggregate consideration received for such shares as
exceeds the fair market value of the shares.”
(i) However, as this provision was made effective only with
effect from 1st April 2013, and it is not even the case of revenue
before the authorities or before us that the said provision would
apply for the subject assessment year 2010-11. In the above view,
there is no occasion to examine the above amendments in the
context of this case. This would be done appropriately in a case
arising post the amendment.
(j) In the above view, the view taken by the Tribunal being
concluded by the decision of this Court in Vodafone (supra) the
question as proposed does not give rise to any substantial question.
Thus not entertained.
5] Regarding Question No.B :-
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(a) The issue arising herein is a consequence of Question No.A
herein. However, as we have not interfered with the decision of the
Tribunal with regard to question No.A, this question becomes
academic in the present facts. This, as no amount paid to acquire
equity shares of the A.E. can be considered to be a loan to the A.E.
(b) As the issue is now academic, it does not give rise to
any substantial question of law. Therefore, it is not entertained.
6] Accordingly, appeal dismissed. No order as to costs.
(M.S.SANKLECHA, J.) (AKIL KURESHI, J)
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