11. Principal CIT vs.
PMP Auto Components Pvt. Ltd.; [2019] 416 ITR 435 (Bom.) Date of order: 20th
February, 2019 A.Y.: 2010-11
International
transactions – Arm’s length price – Section 92B of ITA, 1961 – Acquisition of
shares of 100% subsidiary at premium – Alleged shortfall between fair market
price of shares and issue price – That assessee would sell shares at a loss in future
thereby reducing tax liability, a mere surmise – Cannot be basis for taxation –
Difference cannot be treated as income of assessee
For the A.Y. 2010-11, in respect of the
international transactions made by the assessee, the Transfer Pricing Officer
(TPO) made transfer pricing adjustments on account of premium money paid to its
associated enterprise for acquiring its shares and the interest chargeable on
the purported loan transaction. The AO passed a draft assessment order u/s
143(3) read with section 144C(13) of the Income-tax Act, 1961. The Dispute
Resolution Panel (DRP) held that the premium paid on account of acquiring the
shares by the associated enterprise was taxable as held by the AO and deleted
the interest chargeable on the additional capital investment made to purchase
such shares on the ground that this adjustment done by the TPO was a secondary
transfer pricing adjustment. Accordingly, the AO passed the final order.
Both the assessee and the Department filed appeals before the Tribunal.
The Tribunal allowed the appeal filed by the assessee and held that no income
arose to the assessee on account of purchase of shares from its associated
enterprise as it was on capital account.
On appeal by the Revenue, the Bombay High Court upheld the decision of
the Tribunal and held as under:
‘(i) Section 92 of the Act
requires income to arise from an international transaction while determining
the arm’s length price. Therefore, the sine qua non is that income must
first arise on account of the international transaction.
(ii) The amount paid by the
assessee to acquire equity shares of its associated enterprise could not be
considered to be a loan to the associated enterprise. The shares which had been
purchased by the assessee were on capital account. The Department had brought
the difference between the actual investment and the fair market value of the
shares (investment) to tax without being able to specify under which
substantive provision such income arose. The distinction which was sought to be
made by the Department on the basis of this being an inbound investment and not
an outbound investment was a distinction of no significance. The Legislature
had made no distinction while it provided for determination of any income on
adjustments to arrive at an arm’s length price that arose from an international
transaction.
(iii) The submission of the
Department that the assessee might sell those shares at a loss as it had
purchased them at a much higher price than their fair market value, which would
give rise to a reduction of its tax liability in future, was in the realm of
speculation and hypothetical. The Department had not shown any provision of the
Act which allowed it to tax a potential income in the present facts.
(iv) The Tribunal was correct in
deleting the transfer pricing adjustment made on account of excess money paid
by the assessee to its associated enterprise for acquisition of shares. No
question of law arose.’
