Transfer pricing cannot tax share premium as income where equity share premium remains a capital receipt outside Chapter X.

Share premium received on issue of equity shares to an associated enterprise could not be brought to tax through a transfer pricing adjustment under Chapter X. The Tribunal applied the jurisdictional High Court view that income arising from an international transaction is a precondition for section 92(1), and held that share capital and share premium are capital receipts outside section 2(24). In the absence of express legislation, such capital receipts cannot be taxed by applying transfer pricing provisions. The alleged undercharged premium and the consequential interest adjustment were therefore held to fall outside Chapter X and were deleted.

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Issues: Whether the share premium received on issue of equity shares to an associated enterprise could be brought to tax by making a transfer pricing adjustment under Chapter X of the Income-tax Act.

Analysis: The adjustment was made on the footing that the premium charged on issue of equity shares was below its arm's length value and that the differential premium, and consequential interest on the alleged shortfall, represented income from an international transaction. The Tribunal followed the jurisdictional High Court ruling that income arising from an international transaction is a condition precedent for the application of section 92(1). It further held that share capital and share premium are capital receipts and do not constitute income within section 2(24), and that absent express legislation such capital receipts cannot be subjected to tax by applying transfer pricing provisions. The Tribunal therefore held that the alleged undercharged premium and the related interest adjustment fell outside the scope of Chapter X.

Conclusion: The transfer pricing adjustment on account of share premium, and the consequential interest adjustment, was not sustainable and was deleted.

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