Protective share premium addition and domestic transfer pricing adjustment fail where statutory conditions are not independently established.

Protective addition for alleged excess share premium under section 56(2)(vii)(b) could not survive where the corresponding substantive addition on the same transaction had already been deleted on merits and no independent basis supported the protective disallowance. Transfer pricing adjustment on reimbursement of expenses also failed because the arrangement did not satisfy the statutory trigger for a specified domestic transaction under section 92BA read with section 80IA(10); the expenses were explained and allocated on a project-capacity basis, and the Revenue did not establish the statutory condition of excess profits in an eligible business. Both additions were therefore unsustainable.

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Issues: (i) whether the protective addition made under section 56(2)(vii)(b) on account of alleged excess share premium could be sustained; (ii) whether the transfer pricing adjustment on reimbursement of expenses could be upheld as a specified domestic transaction under section 92BA read with section 80IA(10).

Issue (i): whether the protective addition made under section 56(2)(vii)(b) on account of alleged excess share premium could be sustained.

Analysis: The addition was made only on a protective basis in the year of receipt of share application money, while the substantive addition on the same transaction had already been deleted on merits in the subsequent year. In the absence of any material showing that the protective addition had an independent basis, and in view of the deletion of the substantive addition, no separate justification survived for sustaining the impugned addition in the relevant year.

Conclusion: The protective addition was not sustainable and was rightly deleted, in favour of the assessee.

Issue (ii): whether the transfer pricing adjustment on reimbursement of expenses could be upheld as a specified domestic transaction under section 92BA read with section 80IA(10).

Analysis: The adjustment proceeded on the premise that the reimbursement had no benefit and could therefore be benchmarked at nil. However, the expenses had been explained, allocated on a project-capacity basis, and capitalised to capital work in progress rather than charged to the profit and loss account. More importantly, the Revenue's own case was not that the arrangement produced more than ordinary profits for an eligible business, which is the statutory trigger for section 80IA(10). Since the transaction, on the Revenue's case itself, did not satisfy the statutory conditions for a specified domestic transaction under section 92BA, no transfer pricing adjustment could be made on that footing.

Conclusion: The transfer pricing adjustment was unsustainable and the deletion was correct, in favour of the assessee.

Final Conclusion: Both additions failed on merits and on the statutory preconditions invoked by the Revenue, so the Revenue's appeal could not succeed.

Ratio Decidendi: A transfer pricing adjustment under the domestic transaction provisions cannot be sustained unless the transaction satisfies the specific statutory trigger for a specified domestic transaction, and a protective addition cannot stand where the substantive addition on the same issue has already been deleted on merits.

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