No TP adjustments on share purchase at high premium as it doesn’t amount to revenue receipt

Bombay High Court in the case of Principal Commissioner of Income Tax-7 V. PMP Auto Components (P.) Ltd.

Facts of the case:

  • The assessee company had filled its return of income showing some international transactions.
  • The assessing officer (AO) referred the return to Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP) on such international transactions.
  • The TPO identified investment being made for Rs. 2.67 crores from its 100% subsidiary while face value of the shares was Rs. 8.19, hence made addition of Rs. 2.59 crores to the income of the assessee on account of adjustment of excess money paid.
  • On appeal, the Dispute Resolution panel (DRP) upheld the additions made by AO.
  • On further appeal, Tribunal reversed the order of DRP. Aggrieved by he same, revenue made an appeal to Bombay HC.

Hon’ble High Court held that:

  • The primary basis for determination of ALP on an international transaction is that such transaction should give rise to income as per the provisions of the Income Tax Act, 1961 (“the Act”) however share purchase is a capital account transaction.
  • Further, the insertion of Section56(2)(viib) of the Act is applicable w.e.f. 01.08.2013 and cannot be made applicable retrospectively for AY 2010-11 in the current case.
  • Thus, it was held that since the transaction of share purchase at a value higher than the fair value is a capital account transaction and also, revenue could not explain the basis of income being arose on the same, such transactions cannot be brought into the ambit of ALP for charging tax on the same. (In favour of the assessee).

Source:  [2019] 103 taxmann.com 284 (Bombay)