TaxTMI 
TaxTMI 
2025 (3) TMI 2000
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....ent made by the assessee as the investment in foreign companies which has not generated the exempt income, whereas the assessee itself has accepted before the CIT(A) that investment were also made to generating the exempt income to the tune of Rs. 1.38 millions which should be considered while making the disallowance u/s 14A r.w.r. 8D(2)(iii)? (Tax Effect: Rs. 2,345/-) TP issues: Grounds of appeal on the issue of excess share premium paid by assessee: 2.1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in directing the AO to delete the adjustment without discussing the facts of the case or deciding the issue on the merits of the case? 2.2. Whether on the facts and circumstances of the case and in law, the CIT(A) is correct in relying on Hon'ble Bombay High Court's decision in the case of Vodafone India Services Pvt. Ltd. for AY 2009-10 (WP No. 871/2014) when facts of the instant case are different? In the Vodafone case, capital was inbound whereas in the instant case capital is outbound in the form of share premium being paid to purchase shares of foreign. AE at excessive valuation. ....
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....th the addition / disallowance and the revenue is in appeal against the order of CIT(A) before the Tribunal. Disallowance under section 14A - Ground No.1.1 & 1.2 3. The AO during the course of assessment noticed that the assessee has earned dividend income of Rs. 6,54,354 and has claimed the same as exempt. In this regard the AO issued a show notice to the assessee as to why the disallowance under section 14A r.w.r 8D cannot be made. The assessee submitted that the investment of the assessee is with the Foreign AEs and since the income earned from the said investments are taxable in India section 14A cannot be applied. The assessee further submitted that the dividend income earned is from the investment in Reliance Equity Fund out of own funds. Therefore the assessee submitted that Rule 8D is not applicable to assessee's case. The AO did not accept the submissions of the assessee and disallowed 0.5% of the average investments amounting to Rs. 14,02,674/-. The CIT(A) deleted the addition stating that the dividend foreign companies are not exempt under the Act and hence provisions of section 14A cannot be invoked. 4. We heard the parties and perused the material on recor....
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....axmann.com 300 (Bom) and deleted the TP adjustment. 6. The ld DR vehemently argued that the CIT(A) is not correct in relying on he decision of the jurisdictional High Court in the case of Vodafone Services (P) Ltd (supra) for the reason that the in that case the shares of Indian Company was bought by the AE whereas in assessee's case it is the reverse where the assessee has acquired the shares of the AE for a premium. Accordingly the ld DR supported the order of the TPO. 7. The ld. AR on the other hand submitted that the Hon'ble Bombay High Court in the case Vodafone has held that the premium on shares is a capital transaction which does not give rise to any income and therefore no TP adjustment can be made. The ld AR further submitted that the TPO is not correct in recharacterising the share transaction entered into by the assessee as loan and in this regard relied on the decision of the coordinate bench in the case of Aegis Limited v/s ACIT (ITA No.1213/Mum/2014 dated 27.07.2015). The ld. AR brought to our attention the decision of coordinate bench in the above case is upheld by the Hon'ble Bombay High Court where it has been held that - "2. The respond....
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....e TP adjustment. 9. We heard the parties and perused the material on record. The TPO in AY 2010-11 has re-characterised assessee's equity transaction of purchasing shares of its AE as a loan to the extent of alleged excess premium. The TPO had made TP adjustment towards interest on the said recharacterised loan transaction in AY 2010-11. The TPO during the year under consideration followed the decision of his predecessor and made TP adjustment towards interest on the amount treated as loan. The primary argument of the assessee is that the TPO cannot re-characterise the transaction of purchase of shares entered into by the assessee as loan. With regard to the contention that the TPO cannot re-characterise the transaction we notice that the Hon'ble High Court in the case of Aegis Ltd (supra) while considering the issue of TP adjustment made by re-characterising a capital transaction as loan has upheld the decision of the coordinate bench (refer relevant observations of the Hon'ble High Court extracted in earlier part of this order). It is also relevant to take note of the following observations of the coordinate bench in the case Aegis Ltd (supra) - "27. We ha....
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....h are applicable to assessee's case also. Accordingly we hold that the TP adjustment made by the TPO is not sustainable. 11. The alternate arguments of the assessee is that the impugned transaction of alleged excess share premium on acquisition of shares is a capital transaction not giving rise to any income and therefore not liable for TP adjustment as has been held in the case of Vodafone Services (P) Ltd (supra). With regard to the contention of the ld DR that the decision of Vodofone Services (P) Ltd, is not applicable to assessee's case we notice that the coordinate bench in the case of Topsgrup Electronic Systems Ltd (supra) while deciding the similar issue where the Indian Company has subscribed to the shares of foreign AE i.e. the transaction identical to assessee's case has held that - "7. We have heard the rival contentions put forth by both the learned A.R. for the assessee and the learned DR for Revenue and perused and carefully considered the material on record, including the judicial pronouncements cited and relied on. Chapter X begins with section 92) of the Act which states that income arising from and international transaction shall be compu....
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....hat income has to be given a broader meaning to include notional income, as otherwise Chapter X of the Act would be rendered otiose is far fetched. The issue of shares at a premium does not exhaust the universe of applicability of Chapter X of the Act. There are transactions which would otherwise qualify to be covered by the definition of International Transaction. The transaction on capital account or on account of restricting would become taxable to the extent a impacts income le under reporting of interest over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to the ALP. It is...... tax on the Capital receipts. This aspect appears to have been completely lost sight of in the impugned order." 32. The other basis in the impugned order is that as a consequence of under valuation of shares there is an impact on potential income. The reasoning is that if the ALP were received, the Petitioner would be able to invest the same and earn income, proceeds on a mere surmise/assumption. This cannot be the basis of taxation. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fail....
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....d international transaction which is before the Transfer Pricing Officer for consideration and not out of a hypothetical international transaction which may or may not take place in future. Before us, except for making a claim in this regard the Ed. Departmental Representative was and able to establish that any income or potential income arose from the impugned transaction of the assessee's investment in acquiring the share capital of us wholly owned subsidiary, Tops BV, Netherlands. 7.1.4 In respect of the contention of the Ld. Departmental Representative that the decision of Vodafone India Services (P) Ltd. (supra) was not applicable to the assessee in the case on hand as it dealt with an inbound transaction and not an outbound transaction, the Ld. Representative for the assessee for the assessee submitted that the decision of the Hon'ble High Court in the case of Vodafone India Services P. Ltd. (supra) had observed that it would be applicable to both inbound and outbound transaction at para 42 thereof which extracted hereunder:- "42. It was contended by the Revenue that in any event the charge would be found in Section 5441) of the Act. Section 56 of th....
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....section 263 of the Act held that Transfer Pricing provisions are not applicable to the transactions of investment in share capital since no income arises therefrom. Though in the case of Hill Country Properties Ltd., (supra), the transaction seas of share application money, the Tribunal followed the decision rendered in the case of Vijay Electricals Ltd (supra) 7.1.6 The differentiation sought to be made by the Revenue between inbound investment in shares and outbound investment in shares for applicability of TP provisions does not, in our considered view, find any support therein. I would also be appropriate in this regard to refer to Rules 108 and 10C of the house Ta Rules, 1962 (in short the Rules') Rule 10B(2) reads as under- "(2) For the purposes of sub-rule (1), the comparability of an international transaction with in uncontrolled transaction shall be judged with reference to the following, namely: (a) the specific characteristics of the property transferred or services provided in either transaction (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to th....
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....trolled transaction and between the enterprises entering into such transactions; (e) The extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction for the specified domestic transaction) and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) The nature, extent and reliability of assumptions required to be made in application of a method" 7.1.7. The aforesaid Roles indicate factors that ought to be taken auto account for selection of the comparables, which necessarily include the contractual terms of the transaction and how the risks, benefits and responsibilities are to be decided. The conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and the size of the markets, the laws and the Come orders in force, costs of labour and capital in the markets, overall economic development and world competition are all material and relevant aspects If we keep the aforesaid aspects in mind, it would be delusive to accept and agree that Transfer Pricing provisions....