2025 (11) TMI 1894 - AT - Income Tax

Protective share premium addition under s.56(2)(vii)(b) and SDT TP adjustment under s.92BA/80IA(10) held both unsustainable

ITAT Ahmedabad dismissed the Revenue's appeal on both issues. On the addition of Rs. 50 crores under s.56(2)(vii)(b), the Tribunal held that since the ... Addition made u/s 56(2)(vii)(b) - method adopted for determination of FMV of the equity share by the assessee is not as per the method prescribed under Rule 110A of the IT Rules - CIT(A) deleted addition - HELD THAT:- The said share application money was received in lieu of 1,25,00,000 shares issued in subsequent year at a premium of Rs. 40/- per share. The AO found the assessee to have not justified the premium received and accordingly invoked the provisions of Section 56(2)(vii)(b) of the Act for making addition of excess amount received in comparison to the Fair Market Value (‘FMV’) of the shares, to the income of the assessee. However, noting that the shares were issued only in the subsequent year, he held that the substantive addition is to be made in the succeeding year and made protective addition in the impugned year. CIT(A) noted that in the succeeding year the ITAT had deleted the addition made on substantive basis on merits itself and accordingly, he found no case for confirming the addition made on protective basis in the impugned year. Before us, Ld. DR was unable to point out as to why the addition made in the impugned year on protective basis was sustainable in the light of the fact as noted above that the addition made on substantive basis itself was deleted on merits by the ITAT in the subsequent years. He fairly admitted that the Revenue had no case on the issue in the light of the admitted facts as above. We find no merit in the ground raised by the Revenue seeking confirmation of the addition of Rs. 50 Crores made in the hands of the assessee on protective basis u/s. 56(2)(vii)(b) of the Act. Ground of appeal, therefore, is dismissed. TP adjustment made to Specified Domestic Transaction (‘SDT’) entered into by the assessee with its Associate Enterprise - Reimbursement of expenses to AE - assessee has not demonstrated that these expenses are wholly and exclusively for the purpose of business of the assessee - contention of the assessee is that the impugned transaction does not qualify as SDT, since, it is not an expense which qualifies u/s.40A(2)(b) of the Act nor is it any transaction of the nature relating to Section 80IA of the Act as specified under the said Section - case of the Revenue, however, is that the assessee itself had reported the transaction as qualifying u/s.80IA(10) of the Act referred to in Sub-Section (4) of 92BA - HELD THAT:- A bare perusal of the above would reveal that where the AO finds that owing to close connection between the two entities the transaction is so arranged so as to increase the profit of the entity claiming deduction u/s.80IA of the Act, he is empowered to make adjustment to the value of the transaction bringing it at Arm’s Length Price (‘ALP’). The clinching factor for invoking 80IA(10) of the Act is that the transaction should be so arranged so as to result in more than ordinary profits to the entity claiming deduction u/s. 80IA of the Act. In the present case, the assessee is entitled to deduction u/s.80IA of the Act, though, has not claimed the same in the impugned year. The transaction entered into by the assessee pertains to claim of expenditure [though capitalized) to the extent of Rs. 2.38 Crores. AO, however, has contended that the fair value of the transaction is Nil. Clearly the case of the AO is not that of the assessee having transacted its business with the AE in such a manner so as to result in more than ordinary profits. In fact, the case of the AO is to the contrary that by claiming such expenses the assessee has reduced its profit and, therefore, he has computed the fair value of the transaction to be Nil as opposed to the assessee having claimed the expense to be to the tune of Rs. 2.38 Crores. As per the Revenue’s own case we find that the impugned transaction does not qualify u/s.80IA(10) of the Act, on the basis of which, the AO/TPO has identified the transaction to be a specified domestic transaction. Since, the impugned transaction, we have noted does not qualify as an SDT as per Revenue’s case itself, there was no requirement for benchmarking the same at all. The adjustment, therefore, made by the TPO, we agree with the Ld. CIT(A), has wrongly been made by treating it as SDT. The order of the Ld. CIT(A), therefore, is confirmed directing the deletion of addition made to the income of the assessee. Ground of appeal raised by the Revenue is, therefore, dismissed 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether a protective addition under section 56(2)(vii)(b) of the Income Tax Act, 1961 could be sustained in a year where the corresponding substantive addition made in a subsequent year had been deleted on merits by the Tribunal. 1.2 Whether reimbursement of expenses to an associated enterprise, which was capitalised as capital work-in-progress, constituted a 'specified domestic transaction' under section 92BA, so as to warrant transfer pricing benchmarking and adjustment, particularly under section 80IA(10). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Protective addition under section 56(2)(vii)(b) Interpretation and reasoning 2.1 The assessee had received share application money in the impugned year, against which shares were actually issued in the subsequent year at a premium. The Assessing Officer treated the excess over fair market value as income under section 56(2)(vii)(b), but, since the shares were issued in the subsequent year, made a protective addition in the impugned year and a substantive addition in the subsequent year. 2.2 The Commissioner (Appeals) noted that the Tribunal, in the subsequent year, had deleted the substantive addition on merits. Relying on this, the Commissioner (Appeals) held that no protective addition could survive in the present year. 2.3 Before the Tribunal, the Departmental Representative could not demonstrate how the protective addition could be sustained when the substantive addition on the same issue and transaction had already been deleted on merits. It was fairly conceded that, in view of these facts, the Revenue had no case. Conclusions 2.4 Once the substantive addition in the relevant subsequent year had been deleted on merits by the Tribunal, there was no justification to sustain the protective addition for the impugned year under section 56(2)(vii)(b). The protective addition of Rs. 50 crores was held unsustainable and the Revenue's ground was dismissed. Issue 2: Characterisation of reimbursement of expenses as specified domestic transaction and validity of transfer pricing adjustment Legal framework (as discussed) 2.5 The Tribunal reproduced and considered section 92BA, defining 'specified domestic transaction', particularly clauses (ii) to (v) and (vi), and referred to section 80IA(10), including its proviso linking specified domestic transactions to arm's length pricing. 2.6 Section 92BA enumerates categories of domestic transactions (including those covered by sections 80A, 80IA(8), 80IA(10), and certain Chapter VI-A and section 10AA situations) which, if they exceed the prescribed monetary threshold, are treated as specified domestic transactions for transfer pricing purposes. 2.7 Section 80IA(10) empowers the Assessing Officer, where due to close connection and business arrangements the eligible business earns 'more than the ordinary profits', to recompute profits for the purpose of deduction; and, where such arrangement involves a specified domestic transaction, the profits must be determined having regard to the arm's length price. Interpretation and reasoning 2.8 The assessee had reported a reimbursement of expenses to its related party as a specified domestic transaction in Form 3CEB, benchmarking it under the CUP method. The expenditure reimbursed (professional fees and salaries allocated by the related entity) was capitalised as capital work-in-progress and not debited to the profit and loss account. 2.9 The assessee contended that the transaction was capital in nature, not covered by section 40A(2)(b), and did not fall within the scope of section 92BA read with section 80IA, and therefore did not constitute a specified domestic transaction. It was stated that disclosure in Form 3CEB was out of abundant caution. 2.10 The Assessing Officer/TPO treated the transaction as a specified domestic transaction by invoking section 80IA(10) read with section 92BA, on the basis that the assessee had itself reported it as such. The TPO rejected the allocation key (project capacity in MW) on the ground that the assessee had allegedly derived no demonstrable benefit, and benchmarked the arm's length price of the reimbursement at Nil, resulting in a transfer pricing adjustment. 2.11 The Commissioner (Appeals) found that the TPO had not pointed out any defect in the computation of total cost or the basis of allocation between the special purpose vehicles. The assessee had furnished details and explanations of the nature of expenses and allocation method. In the absence of any identified error in the nature of expenditure or its apportionment, the Commissioner (Appeals) held that the TPO could not simply disregard the expenditure and determine the arm's length price as Nil solely on the ground that no benefit was received. The fact that the expenditure was capitalised and not charged to the profit and loss account was also noted. 2.12 The Tribunal first recorded the undisputed facts: the transaction involved reimbursement of expenses to an associated entity; the amount was capitalised as capital work-in-progress; and it had been treated by the Assessing Officer/TPO as a specified domestic transaction. 2.13 The Tribunal then analysed section 92BA and section 80IA(10). It emphasised that the 'clinching factor' for invoking section 80IA(10) is that the business between related parties is so arranged as to produce to the eligible business 'more than the ordinary profits'. Only in such a case does section 80IA(10) permit adjustment, and where a specified domestic transaction is involved, such adjustment must be by reference to arm's length price. 2.14 Applying this framework, the Tribunal noted that the assessee was entitled to deduction under section 80IA (though it had not claimed the deduction in the impugned year), and that the impugned transaction was a claim of expenditure (albeit capitalised) of Rs. 2.38 crores. The Assessing Officer's position was that the fair value of the transaction was Nil and that, by claiming such expenditure, the assessee had reduced its profits. 2.15 The Tribunal held that the Assessing Officer's own case was inconsistent with section 80IA(10), because that provision addresses situations where, due to business arrangements with related parties, the assessee earns more than ordinary profits, not less. Here, the Revenue's case was that profits had been depressed by the claimed expenditure, not inflated. Therefore, on the Revenue's own factual premise, the condition for invoking section 80IA(10) was not satisfied. 2.16 Since the Department had treated the transaction as a specified domestic transaction solely via section 80IA(10), and the substantive condition of more than ordinary profits was absent, the Tribunal concluded that the impugned reimbursement did not constitute a specified domestic transaction in terms of section 92BA. 2.17 Consequently, there was no legal requirement to benchmark the transaction or to make any transfer pricing adjustment. The adjustment made by treating the reimbursement as a specified domestic transaction was, therefore, without authority. Conclusions 2.18 The reimbursement of expenses capitalised as capital work-in-progress did not satisfy the conditions of section 80IA(10) and, therefore, could not be regarded as a specified domestic transaction under section 92BA on the basis adopted by the Assessing Officer/TPO. 2.19 In the absence of a valid specified domestic transaction, no transfer pricing benchmarking or adjustment was required or permissible. The transfer pricing adjustment of Rs. 2.83 crores (rounded in discussion as Rs. 2.38 crores in parts of the reasoning) was rightly deleted by the Commissioner (Appeals). 2.20 The Tribunal affirmed the order of the Commissioner (Appeals) directing deletion of the transfer pricing adjustment on reimbursement of expenses, and dismissed the Revenue's grounds on this issue.