Share premium and CUP benchmarking: ITAT Mumbai rejected deemed interest and deleted transfer pricing adjustments.

ITAT Mumbai held that issue of shares at a premium to a non-resident holding company does not, by itself, constitute an international transaction, so Chapter X could not be invoked to impute deemed loan or notional interest. On the import transactions, the Tribunal accepted the assessee's nearest-date CUP benchmarking and found that the transfer pricing authorities had relied on unsuitable comparables and dates, selectively ignored accepted data, and overemphasised unsupported volume differences. The transfer pricing adjustments were therefore deleted and the assessee's appeal was allowed.

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Issues: (i) Whether the issue of shares at a premium gave rise to any international transaction so as to attract Chapter X and a deemed loan or notional interest; (ii) Whether the transfer pricing adjustments made by rejecting the assessee's CUP benchmarking and by selecting less appropriate comparables and dates for six import transactions were sustainable.

Issue (i): Whether the issue of shares at a premium gave rise to any international transaction so as to attract Chapter X and a deemed loan or notional interest.

Analysis: The shares were issued at a premium to the non-resident holding company. Relying on the jurisdictional High Court decision, the Tribunal held that such issue of shares does not create an international transaction and, therefore, the machinery of Chapter X cannot be invoked to impute a deemed loan or notional interest.

Conclusion: Decided in favour of the assessee.

Issue (ii): Whether the transfer pricing adjustments made by rejecting the assessee's CUP benchmarking and by selecting less appropriate comparables and dates for six import transactions were sustainable.

Analysis: For the import transactions, the Tribunal found that the assessee had adopted a reasonable nearest-date CUP approach and, in appropriate cases, an arithmetic mean of comparable prices. It held that the TPO and DRP had selectively chosen lower or otherwise unsuitable data, including by ignoring accepted comparables, by overemphasising volume without support, and by relying on wrong comparables in one case. The Tribunal treated the assessee's benchmarking as justified on the facts and deleted the adjustments.

Conclusion: Decided in favour of the assessee.

Final Conclusion: The transfer pricing additions and the notional interest adjustment were deleted, leaving the assessee's appeal allowed and the Revenue's appeal dismissed.

Ratio Decidendi: Issue of share capital at premium to a non-resident does not, by itself, constitute an international transaction, and transfer pricing adjustments must be based on a proper CUP comparison without arbitrary cherry-picking of comparables or dates.

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