Itxa-1685-16 v. We Shall Now Deal With Individual Question Raised For Our

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1685 of 2016 Pr. Commissioner of Income Tax-7..Appellant VersusM/s. PMP Auto Components Pvt. Ltd...Respondents Mr. Suresh Kumar for appellant Mr. Atul Jasani for respondents. CORAM:AKIL KURESHI &M.S.SANKLECHA, JJ. DATE :20th February 2019. P.C. This appeal under section 260A of the Income Tax Act(Act for short) challenges the order dated 13th January 2016 passed by the Income Tax Appellate Tribunal (Tribunal for short). Theappeal relates to the assessment year 2010-2011. 2]The Revenue has urged following two questions of law for our consideration _ (A)Whetheronthefactsandcircumstances of the case and in law, was the Tribunalcorrect in deleting the adjustment of Rs.2,58,94,765/- onaccount of excess money paid to PMP Bakony (AE) for acquiring share? (B)Whetheronthefactsandcircumstances of the case and in law was the Tribunalcorrect in upholding the deletion of the adjustment ofRs.2,50,95,228/- being interest chargeable on deemedloan transaction with PMP Bakony (AE)? 3]The common facts leading to the aforesaid two questions are as under:- (a)On 14th October 2010, the respondent filed its return ofincome declaring income at Rs.2.56 Crores. As the respondent hadshown some international transactions, the Assessing Officerreferred the same to the Transfer Pricing Officer (TPO) fordetermining the Arms length Price (ALP) of such internationaltransactions. The TPO by an order dated 20th September 2013,inter alia made following two adjustments :- (i)Adjustment on account of excessmoney paid to PMP Bakony (AE)for acquiring its sharemoney paid to PMP Bakony (AE)for acquiring its share Rs.2,58,94,765/- (ii)Interest chargeable on loan transaction with PMP Bakony (AE) Rs.2,50,95,228/-transaction with PMP Bakony (AE) Rs.2,50,95,228/- The above order dated 20[th] September 2013 of the TPO led toa draft assessment order dated 14th February 2014 by Assessing Officer. (B)Being aggrieved by the draft assessment orderdated 14[th] February 2014, the respondent filed its objections to thedraft assessment order with the Dispute Resolution Panel (DRP).By its directions dated 26th September 2015, the DRP disposed ofthe respondent's objections by inter alia holding as under:- (i)The excess payment made for acquiring shares of its100% subsidiary (AE) is taxable as held by the A.O. Thus rejectedthe objections of respondent assessee; and (ii)the interest chargeable on the additional capitalinvestment made to purchase shares of the 100 % subsidiary wasdirected to be deleted. This on the ground that this adjustment doneby the TPO is a secondary transfer pricing adjustment. (C)Consequent upon the above directions, the AssessingOfficer passed final assessment order dated 27th November 2014under section 143(3) read with section 144C(13) of the Act. (D)Being aggrieved with the assessment order dated 27[th] 4 901-itxa-1685-16 November 2014, the respondent filed an appeal in respect ofadjustments made on account of exces money paid to acquireshares of its 100% subsidiary to the Tribunal. While the appellant –Revenue filed an appeal in respect of non-adjustment on account ofinterest payable on additional amounts paid to acquire shares as aloan to the Tribunal. (E)In appeal, the tribunal allowed respondent-assess's appeal on the issue of question No.1 raised herein holdingthat no income arises on account of purchase of shares as it was oncapital account. This, it held was an issue covered by the decisionof this Court in Vodafone Services Pvt. Ltd. Vs. Union of Indiareported in 268 ITR page 1 , in favour of the respondent. (D)Being aggrieved with the assessment order dated 27[th] 4 901-itxa-1685-16 November 2014, the respondent filed an appeal in respect ofadjustments made on account of exces money paid to acquireshares of its 100% subsidiary to the Tribunal. While the appellant –Revenue filed an appeal in respect of non-adjustment on account ofinterest payable on additional amounts paid to acquire shares as aloan to the Tribunal. (E)In appeal, the tribunal allowed respondent-assess's appeal on the issue of question No.1 raised herein holdingthat no income arises on account of purchase of shares as it was oncapital account. This, it held was an issue covered by the decisionof this Court in Vodafone Services Pvt. Ltd. Vs. Union of Indiareported in 268 ITR page 1 , in favour of the respondent. (F)So far as the appellant – revenue's appeal on theissue raised in question No.2 herein is concerned, the impugnedorder held that the same does not survive. This in view of thequestion No.1 being allowed in favour of respondent assessee.Thus, dismissed the appellant – revenue's appeal. We shall now deal with individual question raised for our consideration. 4]Regarding Question No.A, (a)The issue raised in this question is with regard torespondent investing an amount of Rs.2.67 Crores to acquire sharesof its AE (subsidiary company), which had a fair market value ofRs.8.19 lakhs. It is this excess payment of Rs.2.58 Crores, whencompared to fair market value of the shares which is sought by theRevenue to be brought to tax under the transfer pricing provisionsunder Chapter X of the Act. (b)The impugned order of tribunal rejected thecontention of revenue on the ground that this issue standsconcluded by the decision of the jurisdictional high court in the caseof Vodafone (supra). In the above case this court held thatinvestment in shares is on capital account and does not give rise toany income to trigger the provisions of Chapter X of the Act. (c)Mr. Suresh Kumar, learned Counsel appearing insupport of the appeal submits as under:- 6 901-itxa-1685-16 (i)The transaction is an international transaction and,therefore, the transfer pricing adjustment is required to be done in terms of Chapter X. It is submitted that the additional investment ofcapital by respondent in its AE's shares vis-a-vis its fair market valueis subject to transfer pricing adjustment as done by the TPO andupheld by DRP; (ii)The decision of this Court in Vodafone (supra) is inapplicable to the present facts, as it was concerned with inboundinvestment and was not in respect of out bound investment, as inthis case; and (iii)In any case the investment made in shares if sold insubsequent years, may give rise to potential loss. This when therespondent sells the shares which have been purchased at a pricemuch higher than its fair market value. Thus, this difference has tobe brought to tax as sought to be done by the Revenue. Therefore, it is submitted that the appeal should beentertained and allowed. (d)There is no dispute before us that the transaction of purchase (ii)The decision of this Court in Vodafone (supra) is inapplicable to the present facts, as it was concerned with inboundinvestment and was not in respect of out bound investment, as inthis case; and (iii)In any case the investment made in shares if sold insubsequent years, may give rise to potential loss. This when therespondent sells the shares which have been purchased at a pricemuch higher than its fair market value. Thus, this difference has tobe brought to tax as sought to be done by the Revenue. Therefore, it is submitted that the appeal should beentertained and allowed. (d)There is no dispute before us that the transaction of purchase of shares by the respondent of its subsidiary company i.e. A.E. at aprice much higher than its fair market value would be internationaltransaction as defined in Section 92(B) of the Act. The only issuebefore us as considered by the impugned order of the Tribunal iswhether Chapter X of the Act would at all be applicable in case ofany investment made on capital account. This on the premise thatthe transaction of purchase of equity share capital would not giverise to any income. We note that similar issue was before thisCourt in Vodafone (supra) and this court inter alia observed thatChapter X of the Act is machinery provision to arrive at the arm'slength price of transaction between associated enterprises.However, before the provisions can be kicked in, it is necessary thatincome must arise under the substantive provisions found in the Actviz., under the heads of salaries or income from house property orprofits and gains in business or profession or capital gains and/orincome from other sources. Section 92 of the Act requires incometo arise from an international transaction while determing the ALP.Therefore the sina qua non is that income must first arise onaccount of the international transaction. (e)The view of this Court in Vodafone (supra) has been 901-itxa-1685-16 accepted by the Central Board of Direct Taxes (CBDT) by issue ofinstruction No.2/2015 dated 29[th] January 2015. (f)In this case also, the shares which have been purchasedby the respondent assess are on capital account. The revenue isseeking to bring the difference between the actual investment ofRs.2.67 Crores and fair market value of the shares (investment) atRs.8.13 lakhs i.e. 2.58 Crores to tax. This without being able tospecify under which substantive provision would income arise.. Inour view, therefore, the issue arising here stands concluded by thedecision of this Court in Vodafone (supra). The distinction which issought to be made by the revenue on the basis of this being aninbound investment and not an outbound investment as in the caseof Vodafone (supra) is a distinction of no significance. On principle,if this court has held that Chapter X of the Act is machineryprovision and can only be invoked to bring to tax any income arisingfrom an international transaction, then, it is necessary for therevenue to show that income as defined in the Act does arise fromthe international transaction. The distinction between inbound andoutbound investment is a distinction which does not take the case of 9 901-itxa-1685-16 revenue any further, as the Legislature has made no such distinctionwhile providing for determination of any income on adjustments toarrive at ALP arising from an international transaction. (g)The further submission on behalf of the revenue that infuture the respondent may sell these shares at a loss as they havepurchased the same at much higher price than its fair market value.Thus gives rise to reduction of its tax liability in future. Thissubmission is in the realm of speculation. At this stage, it ishypothetical. The issue has to be examined on the basis of law andfacts as existing before the authorities in the subject assessmentyear. No provison of the Act has been shown to us, which wouldallow the Revenue to tax a potential income in the present facts. 9 901-itxa-1685-16 revenue any further, as the Legislature has made no such distinctionwhile providing for determination of any income on adjustments toarrive at ALP arising from an international transaction. (g)The further submission on behalf of the revenue that infuture the respondent may sell these shares at a loss as they havepurchased the same at much higher price than its fair market value.Thus gives rise to reduction of its tax liability in future. Thissubmission is in the realm of speculation. At this stage, it ishypothetical. The issue has to be examined on the basis of law andfacts as existing before the authorities in the subject assessmentyear. No provison of the Act has been shown to us, which wouldallow the Revenue to tax a potential income in the present facts. (h)We note that with effect from 1st April 2013, the definitionof Income as provided under section 2(24) of the Act was amendedto include sub-clause (xvi) therein. It provided as income, anyconsideration received for issue of shares, if it exceeds the fairmarket value, as falling under clause (viib) of sub-section (2) ofSection 56 of the Act. The amendment/ insertion of section 56(2)(viib) of the Act was with effect from 1[st] August 2013 and reads as under:- “56(2)(viib):Where a company, notbeing a company in which the public are substantiallyinterested, receives, in any previous year, from anyperson being a resident, any consideration for issue ofshares that exceeds the face value of such shares, theaggregate consideration received for such shares asexceeds the fair market value of the shares.” (i)However, as this provision was made effective only witheffect from 1st April 2013, and it is not even the case of revenuebefore the authorities or before us that the said provision wouldapply for the subject assessment year 2010-11. In the above view,there is no occasion to examine the above amendments in thecontext of this case. This would be done appropriately in a casearising post the amendment. (j)In the above view, the view taken by the Tribunal beingconcluded by the decision of this Court in Vodafone (supra) thequestion as proposed does not give rise to any substantial question.Thus not entertained. 5] Regarding Question No.B:- 901-itxa-1685-16 (a)The issue arising herein is a consequence of Question No.Aherein. However, as we have not interfered with the decision of theTribunal with regard to question No.A, this question becomesacademic in the present facts. This, as no amount paid to acquireequity shares of the A.E. can be considered to be a loan to the A.E. (b)As the issue is now academic, it does not give rise toany substantial question of law. Therefore, it is not entertained. 6]Accordingly, appeal dismissed. No order as to costs. (M.S.SANKLECHA, J.) (AKIL KURESHI, J)