IN THE HIGH COURT OF JUDICATURE AT BOMBAY
\nORDINARY ORIGINAL CIVIL JURISDICTION
\nINCOME TAX APPEAL NO.1685 of 2016
\nPr. Commissioner of Income Tax-7 .. Appellant
\nVersus
\nM\/s. PMP Auto Components Pvt. Ltd. .. Respondents
\nMr. Suresh Kumar for appellant
\nMr. Atul Jasani for respondents.
\nCORAM : AKIL KURESHI &
\nM.S.SANKLECHA, JJ.
\nDATE : 20th February 2019.
\nP.C.
\nThis appeal under section 260A of the Income Tax Act
\n(Act for short) challenges the order dated 13th January 2016 passed
\nby the Income Tax Appellate Tribunal (Tribunal for short). The
\nappeal relates to the assessment year 2010-2011.
\n2] The Revenue has urged following two questions of law
\nfor our consideration _
\n(A) Whether on the facts and
\ncircumstances of the case and in law, was the Tribunal
\ncorrect in deleting the adjustment of Rs.2,58,94,765\/- on
\naccount of excess money paid to PMP Bakony (AE) for
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\nacquiring share?
\n(B) Whether on the facts and
\ncircumstances of the case and in law was the Tribunal
\ncorrect in upholding the deletion of the adjustment of
\nRs.2,50,95,228\/- being interest chargeable on deemed
\nloan transaction with PMP Bakony (AE)?
\n3] The common facts leading to the aforesaid two
\nquestions are as under:-
\n(a) On 14th October 2010, the respondent filed its return of
\nincome declaring income at Rs.2.56 Crores. As the respondent had
\nshown some international transactions, the Assessing Officer
\nreferred the same to the Transfer Pricing Officer (TPO) for
\ndetermining the Arms length Price (ALP) of such international
\ntransactions. The TPO by an order dated 20th September 2013,
\ninter alia made following two adjustments :-
\n(i) Adjustment on account of excess
\nmoney paid to PMP Bakony (AE)
\nfor acquiring its share Rs.2,58,94,765\/-
\n(ii) Interest chargeable on loan
\ntransaction with PMP Bakony (AE) Rs.2,50,95,228\/-
\nThe above order dated 20th September 2013 of the TPO led to
\na draft assessment order dated 14th February 2014 by Assessing
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\nOfficer.
\n(B) Being aggrieved by the draft assessment order
\ndated 14th February 2014, the respondent filed its objections to the
\ndraft assessment order with the Dispute Resolution Panel (DRP).
\nBy its directions dated 26th September 2015, the DRP disposed of
\nthe respondent’s objections by inter alia holding as under:-
\n(i) The excess payment made for acquiring shares of its
\n100% subsidiary (AE) is taxable as held by the A.O. Thus rejected
\nthe objections of respondent assessee; and
\n(ii) the interest chargeable on the additional capital
\ninvestment made to purchase shares of the 100 % subsidiary was
\ndirected to be deleted. This on the ground that this adjustment done
\nby the TPO is a secondary transfer pricing adjustment.
\n(C) Consequent upon the above directions, the Assessing
\nOfficer passed final assessment order dated 27th November 2014
\nunder section 143(3) read with section 144C(13) of the Act.
\n(D) Being aggrieved with the assessment order dated 27th
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\nNovember 2014, the respondent filed an appeal in respect of
\nadjustments made on account of exces money paid to acquire
\nshares of its 100% subsidiary to the Tribunal. While the appellant \u2013
\nRevenue filed an appeal in respect of non-adjustment on account of
\ninterest payable on additional amounts paid to acquire shares as a
\nloan to the Tribunal.
\n(E) In appeal, the tribunal allowed respondentassess’s
\nappeal on the issue of question No.1 raised herein holding
\nthat no income arises on account of purchase of shares as it was on
\ncapital account. This, it held was an issue covered by the decision
\nof this Court in Vodafone Services Pvt. Ltd. Vs. Union of India
\nreported in 268 ITR page 1 , in favour of the respondent.
\n(F) So far as the appellant \u2013 revenue’s appeal on the
\nissue raised in question No.2 herein is concerned, the impugned
\norder held that the same does not survive. This in view of the
\nquestion No.1 being allowed in favour of respondent assessee.
\nThus, dismissed the appellant \u2013 revenue’s appeal.
\n3] We shall now deal with individual question raised for our
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\nconsideration.
\n4] Regarding Question No.A,
\n(a) The issue raised in this question is with regard to
\nrespondent investing an amount of Rs.2.67 Crores to acquire shares
\nof its AE (subsidiary company), which had a fair market value of
\nRs.8.19 lakhs. It is this excess payment of Rs.2.58 Crores, when
\ncompared to fair market value of the shares which is sought by the
\nRevenue to be brought to tax under the transfer pricing provisions
\nunder Chapter X of the Act.
\n(b) The impugned order of tribunal rejected the
\ncontention of revenue on the ground that this issue stands
\nconcluded by the decision of the jurisdictional high court in the case
\nof Vodafone (supra). In the above case this court held that
\ninvestment in shares is on capital account and does not give rise to
\nany income to trigger the provisions of Chapter X of the Act.
\n(c) Mr. Suresh Kumar, learned Counsel appearing in
\nsupport of the appeal submits as under:-
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\n(i) The transaction is an international transaction and,
\ntherefore, the transfer pricing adjustment is required to be done in
\nterms of Chapter X. It is submitted that the additional investment of
\ncapital by respondent in its AE’s shares vis-a-vis its fair market value
\nis subject to transfer pricing adjustment as done by the TPO and
\nupheld by DRP;
\n(ii) The decision of this Court in Vodafone (supra) is in
\napplicable to the present facts, as it was concerned with inbound
\ninvestment and was not in respect of out bound investment, as in
\nthis case; and
\n(iii) In any case the investment made in shares if sold in
\nsubsequent years, may give rise to potential loss. This when the
\nrespondent sells the shares which have been purchased at a price
\nmuch higher than its fair market value. Thus, this difference has to
\nbe brought to tax as sought to be done by the Revenue.
\nTherefore, it is submitted that the appeal should be
\nentertained and allowed.
\n(d) There is no dispute before us that the transaction of purchase
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\nof shares by the respondent of its subsidiary company i.e. A.E. at a
\nprice much higher than its fair market value would be international
\ntransaction as defined in Section 92(B) of the Act. The only issue
\nbefore us as considered by the impugned order of the Tribunal is
\nwhether Chapter X of the Act would at all be applicable in case of
\nany investment made on capital account. This on the premise that
\nthe transaction of purchase of equity share capital would not give
\nrise to any income. We note that similar issue was before this
\nCourt in Vodafone (supra) and this court inter alia observed that
\nChapter X of the Act is machinery provision to arrive at the arm’s
\nlength price of transaction between associated enterprises.
\nHowever, before the provisions can be kicked in, it is necessary that
\nincome must arise under the substantive provisions found in the Act
\nviz., under the heads of salaries or income from house property or
\nprofits and gains in business or profession or capital gains and\/or
\nincome from other sources. Section 92 of the Act requires income
\nto arise from an international transaction while determing the ALP.
\nTherefore the sina qua non is that income must first arise on
\naccount of the international transaction.
\n(e) The view of this Court in Vodafone (supra) has been
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\naccepted by the Central Board of Direct Taxes (CBDT) by issue of
\ninstruction No.2\/2015 dated 29th January 2015.
\n(f) In this case also, the shares which have been purchased
\nby the respondent assess are on capital account. The revenue is
\nseeking to bring the difference between the actual investment of
\nRs.2.67 Crores and fair market value of the shares (investment) at
\nRs.8.13 lakhs i.e. 2.58 Crores to tax. This without being able to
\nspecify under which substantive provision would income arise.. In
\nour view, therefore, the issue arising here stands concluded by the
\ndecision of this Court in Vodafone (supra). The distinction which is
\nsought to be made by the revenue on the basis of this being an
\ninbound investment and not an outbound investment as in the case
\nof Vodafone (supra) is a distinction of no significance. On principle,
\nif this court has held that Chapter X of the Act is machinery
\nprovision and can only be invoked to bring to tax any income arising
\nfrom an international transaction, then, it is necessary for the
\nrevenue to show that income as defined in the Act does arise from
\nthe international transaction. The distinction between inbound and
\noutbound investment is a distinction which does not take the case of
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\nrevenue any further, as the Legislature has made no such distinction
\nwhile providing for determination of any income on adjustments to
\narrive at ALP arising from an international transaction.
\n(g) The further submission on behalf of the revenue that in
\nfuture the respondent may sell these shares at a loss as they have
\npurchased the same at much higher price than its fair market value.
\nThus gives rise to reduction of its tax liability in future. This
\nsubmission is in the realm of speculation. At this stage, it is
\nhypothetical. The issue has to be examined on the basis of law and
\nfacts as existing before the authorities in the subject assessment
\nyear. No provison of the Act has been shown to us, which would
\nallow the Revenue to tax a potential income in the present facts.
\n(h) We note that with effect from 1st April 2013, the definition
\nof Income as provided under section 2(24) of the Act was amended
\nto include sub-clause (xvi) therein. It provided as income, any
\nconsideration received for issue of shares, if it exceeds the fair
\nmarket value, as falling under clause (viib) of sub-section (2) of
\nSection 56 of the Act. The amendment\/ insertion of section 56(2)
\n(viib) of the Act was with effect from 1st August 2013 and reads as
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\nunder:-
\n\u201c56(2)(viib): Where a company, not
\nbeing a company in which the public are substantially
\ninterested, receives, in any previous year, from any
\nperson being a resident, any consideration for issue of
\nshares that exceeds the face value of such shares, the
\naggregate consideration received for such shares as
\nexceeds the fair market value of the shares.\u201d
\n(i) However, as this provision was made effective only with
\neffect from 1st April 2013, and it is not even the case of revenue
\nbefore the authorities or before us that the said provision would
\napply for the subject assessment year 2010-11. In the above view,
\nthere is no occasion to examine the above amendments in the
\ncontext of this case. This would be done appropriately in a case
\narising post the amendment.
\n(j) In the above view, the view taken by the Tribunal being
\nconcluded by the decision of this Court in Vodafone (supra) the
\nquestion as proposed does not give rise to any substantial question.
\nThus not entertained.
\n5] Regarding Question No.B :-
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\n(a) The issue arising herein is a consequence of Question No.A
\nherein. However, as we have not interfered with the decision of the
\nTribunal with regard to question No.A, this question becomes
\nacademic in the present facts. This, as no amount paid to acquire
\nequity shares of the A.E. can be considered to be a loan to the A.E.
\n(b) As the issue is now academic, it does not give rise to
\nany substantial question of law. Therefore, it is not entertained.
\n6] Accordingly, appeal dismissed. No order as to costs.
\n(M.S.SANKLECHA, J.) (AKIL KURESHI, J)
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There is no dispute before us that the transaction of purchase 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 268 ITR 1 and this court inter alia observed that Chapter X of the Act is machinery provision to arrive at the arm\u2019s length price of transaction between associated enterprises<\/p>\n