Transfer pricing provisions apply to merger transactions between associated enterprises despite capital account nature

The ITAT Mumbai held that transfer pricing provisions apply to merger transactions involving associated enterprises, even if they are capital account transactions. The assessee paid Rs. 188.35 crore to its parent company DIHBV during a merger, which the TPO examined as an international transaction under section 92B. The tribunal found that while share issuance represented fair value, the cash payment of Rs. 100 crore and CCDs constituted excessive payment. The cash payment was treated as a deemed loan requiring interest computation, and interest disallowance on CCDs was upheld. The NCLT's merger approval did not waive the tax department's right to examine transfer pricing implications.

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Issues Involved:
1. Transfer pricing adjustment.
2. Short grant of credit of Advance tax and TDS.
3. Incorrect levy of interest under Section 234C of the Act.
4. Initiation of penalty proceedings under Section 270A of the Act.

Summary:

1. Transfer Pricing Adjustment:
The primary issue pertains to the transfer pricing adjustment on account of consideration paid by the assessee to the associated enterprise pursuant to the merger of the holding company with the assessee. The assessee, engaged in the diamond manufacturing/distribution business, entered into a scheme of amalgamation with its holding company, DIHPL, which was sanctioned by the National Company Law Tribunal (NCLT). The assessee paid a total purchase consideration of Rs. 188.35 crore to DIHBV, the ultimate parent company. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) held that the consideration paid in the form of Compulsory Convertible Debentures (CCDs) and cash was excessive and not at arm's length, leading to a transfer pricing adjustment. The Tribunal upheld the findings of the lower authorities, agreeing that the issuance of CCDs and payment of cash represented excessive payment. However, it directed the TPO/AO to compute the interest on the deemed loan in conformity with the jurisdictional High Court's observations.

2. Short Grant of Credit of Advance Tax and TDS:
The assessee raised the issue of short grant of credit of advance tax and TDS. This issue was restored to the file of the Assessing Officer (AO) with the direction to grant credit of advance tax and TDS in accordance with the law after conducting the necessary verification.

3. Incorrect Levy of Interest under Section 234C of the Act:
The issue of incorrect levy of interest under Section 234C of the Act was deemed consequential in nature and required no separate adjudication.

4. Initiation of Penalty Proceedings under Section 270A of the Act:
The initiation of penalty proceedings under Section 270A of the Act was considered premature and therefore dismissed.

Conclusion:
The appeal by the assessee was partly allowed for statistical purposes, with specific directions to the AO regarding the grant of credit for advance tax and TDS and the computation of interest on the deemed loan. The Tribunal upheld the transfer pricing adjustment related to the issuance of CCDs and payment of cash but directed a modification in the benchmarking of interest computation.

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