Assessee prevails in Transfer Pricing dispute over ALP for equity shares and site survey expenditure

The Tribunal ruled in favor of the assessee on the primary issues of Arm's Length Price (ALP) determination for equity shares and the disallowance of site survey expenditure. The adjustments made by the Transfer Pricing Officer regarding the ALP of shares and deemed loan interest were deemed incorrect, and the site survey expenditure was allowed as a deduction. The appeal was partly allowed in favor of the assessee.

---

---

Issues Involved:
1. Determination of Arm's Length Price (ALP) for equity shares issued.
2. Adjustment of transfer pricing for international transactions.
3. Disallowance of site survey expenditure and professional fees.
4. Enhancement of transfer pricing adjustment without notice.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Equity Shares Issued:
The primary issue revolved around the determination of ALP for equity shares issued by the assessee. The assessee issued equity shares at Rs. 100 per share, while the Transfer Pricing Officer (TPO) valued them at Rs. 756 per share, leading to a substantial adjustment. The Dispute Resolution Panel (DRP) later valued the shares at Rs. 784.24 per share. The assessee relied on the Bombay High Court's decision in Vodafone India Services Pvt. Ltd. vs. Union of India, which held that tax is charged only on actual income, not notional income. As per the court, in the absence of a charging provision, the issue of shares at a premium to a non-resident cannot be taxed. The Tribunal agreed with the assessee, stating that the AO erred in making the addition and directed the AO accordingly.

2. Adjustment of Transfer Pricing for International Transactions:
The TPO computed a transfer pricing adjustment of Rs. 4149 crores for various international transactions, including the issuance of equity shares. The DRP directed the AO/TPO to rework the adjustment, resulting in a total adjustment of Rs. 4312.36 crores. The Tribunal, referencing the Bombay High Court's rulings, concluded that the adjustments made by the AO on account of the ALP of shares and deemed loan interest were incorrect and directed the AO to remove these adjustments.

3. Disallowance of Site Survey Expenditure and Professional Fees:
The AO disallowed Rs. 36,17,918/- related to site survey expenditure and professional fees, treating it as capital expenditure. The assessee argued that the expenditure was revenue in nature as it was incurred for business purposes and did not result in any enduring benefit. The Tribunal noted that the expenditure pertained to general site surveys, many of which were abandoned, and no new asset came into existence. The Tribunal held that the expenditure was allowable as a deduction and there was no question of allowing depreciation on it.

4. Enhancement of Transfer Pricing Adjustment Without Notice:
The assessee contended that the DRP erred in enhancing the transfer pricing adjustment without issuing a notice of enhancement as required under section 144C of the Act. However, this issue was deemed academic since the main issue was decided in favor of the assessee.

Conclusion:
The Tribunal ruled in favor of the assessee on the primary issues of ALP determination for equity shares and the disallowance of site survey expenditure. The adjustments made by the AO regarding the ALP of shares and deemed loan interest were found to be incorrect, and the expenditure related to site surveys was deemed allowable as a deduction. The appeal was partly allowed.

---