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Citing Supreme Courts Vodafone order, Bombay HC rejects transfer pricing adjustment
March, 08th 2019

Relying on the Supreme Court’s verdict in the Vodafone case related to transfer pricing adjustment (TPA), the Bombay High Court upheld the Income Tax Appellate Tribunal (ITAT) ruling that had struck down the adjustments made by the taxman on an Indian company for buying shares in a fully-owned Dubai-based subsidiary on its capital account.

The assessee, PMP Auto Components, paid `2.67 crore to its subsidiary for buying shares having fair market value of `8.13 lakh. The I-T department sought to tax this difference — `2.58 crore for assessment year 2010-11.

HC observed that the assessee had purchased the shares on capital account, which renders the transactions arms length pricing moot as it wouldn’t have any bearing on profits of the Indian entity. “The issue arising here stands concluded by the decision of this Court in Vodafone,” the order said. This view taken in Vodafone case was also subsequently accepted by CBDT in 2015.

The department argued that the Vodafone case was different owing to ‘inbound investment’ while this case dealt with ‘inbound investment’. The court, however, said the department had to prove that income was arising from the transaction for taxability to come into picture. “The distinction between inbound and outbound investment is a distinction which does not take the case of revenue any further…” the order said.

Further, ITD argued that there may be reduction of tax liability in future if assessee sold these shares at a loss as they had purchased the same at a much higher price than FMV. The court said: “This submission is in the realm of speculation… No provision of the Act has been shown to us, which would allow Revenue to tax a potential income in the present facts.”

Amit Agarwal, Partner- Transfer Pricing at Nangia Advisors (Andersen Global) said: “What’s intriguing is the revenue department’s insistence on moving the matter to the High Court despite the SC decision in case of Vodafone which unequivocally said that provisions of transfer pricing shall not be applicable, where the transaction does not give rise to any income.”

He added that the ruling reiterated the principle ‘existence of income’ for application of transfer pricing adjustment.

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