, ` '
INCOME TAX APPELLATE TRIBUNAL,MUMBAI "K" BENCH
. ., , ,
Before S/Sh. A.D. Jain,Judicial Member & Rajendra,Accountant Member
/.ITA No.558/Mum/2015, /Assessment Year-2010-11
ACIT-16(1) M/s. Endemol India Pvt. Ltd.
Room No.439, 4 Floor, 501, Samartha Vaibhav, Oshiwara,
Aayakar Bhavan, M.K. Road Vs Andheri(E),Mumbai.
Mumbai-400 020. PAN: AABCE 5452 G
( /Appellant) ( / Respondent)
/Assessee by : Shri Alok Bairagra
/ Revenue by : Shri N.K. Chand-CIT
/ Date of Hearing
: 20 -07-2015
/ Date of Pronouncement : 20 -07-2015
Order u/s.254(1)of the Inco me-tax Act,1961(Act)
PER RAJENDRA, AM-
Challenging the order dated 26.11.204 of the DRP-I, Mumbai,the Assessing Officer(AO) has
raised following Grounds of Appeal:
"1.Whether on facts and in the circumstances of the case as well as in law, the Hon'ble DRP-1,
`Mumbai was justified in deleting the upward transfer pricing adjustment of Rs.23,94,15,794/- on
account of determination of ALP of infusion of equity share capital by AE treating the same as
2. The appellant craves leave to amend or alter or add a new ground which may be necessary.
3. The appellant prays that the direction of the dispute resolution Panel-I, Mumbai on the above
grounds be set aside and that of the Assessing Officer be restored."
Assessee-company,engaged in the business of creating,producing and acquiring contents for
Television Broadcasting,filed its return of income on 25.09.2010 declaring income of Rs.12.77
Crores.The AO completed the assessment u/s.143(3)r.w.s.144C(13)of the Act on 26.12.2014
determining the income of the assessee at Rs.12,77,61,900/-.
2.Effective ground of appeal is about deleting the upward transfer pricing adjustment of Rs.23,
94,15,794/- on account of determination of ALP of infusion of equity share capital by AE.
During the assessment proceedings the AO found that the assessee had Arms length transaction
covered by the provisions of section 92 of the Act.He made a reference to the Transfer Pricing
Officer(TPO),who made an adjustment of Rs.23.94 Crores in respect of international transaction.
The AO,accordingly passed the draft assessment order that was challenged by the assessee
before the Dispute Resolution Panel(DRP).Following the judgment of the Hon'ble Bombay High
Court delivered in the case of Vodafone India Services Pvt.Ltd.(871 of 2014 dated 10.10.
2014)the DRP directed the AO to delete the adjustment proposed by the TPO.
3.Aggrieved by the order of the DRP,the AO has preferred the present appeal before us.During
the course of hearing before us,representatives of both the sides agreed that the issue is settled in
favour of the assessee,as the department has accepted the judgment of the Hon'ble jurisdictional
high Court.We find that the issue has been decided by the court as under:
The word "income" for the purpose of the Income-tax Act, 1961 has a well understood meaning as
defined in section 2(24) of the Act. Even though the definition in section 2(24) of the Act is an inclusive
definition, income will not in its normal meaning include capital receipts unless it is so specified, as in
section 2(24)(vi) of the Act. Amounts received on issue of share capital including the premium are
undoubtedly on capital account. Absent express legislation, no amount received, accrued or arising on
capital account transaction can be subjected to tax as income. .....Section 56 of the Act does provide that
income of every kind which is not excluded from the total income is chargeable under the head income
from other sources. However, before section 56 of the Act can be applied, there must be income which
Chapter X of the Act is a machinery provision to arrive at the arm's length price of a transaction between
associated enterprises. The substantive charging provisions are found in sections 4 , 5 , 15 (Salaries), 22
(Income from house property), 28 (Profits and gains of business), 45 (Capital gain) and 56 (Income from
other sources). Even income arising from international transaction between associated enterprise must
satisfy the test of income under the Act and must find its home in one of the above heads, i.e., charging
provisions. There is no charging provision to tax a capital account transaction in respect of issue of
shares at a premium. Computation provisions cannot replace the charging provisions.
A charge to tax must be found specifically mentioned in the Act. In the absence of there being a charging
section in Chapter X of the Act, it is not possible to read a charging provision into Chapter X of the Act.
So far as Chapter X is concerned, the charge is on income as understood in the Act and where income
arises from an international transaction, the measure is to be found on application of the arm's length
price. Arriving at the transactional value/consideration on the basis of the arm's length price does not
convert non-income into income. The tax can be charged only on income and in the absence of any
income arising, the question of applying the measure of the arm's length price to the transactional value
or consideration itself does not arise. The ingredient is not satisfied, i.e., subject of tax is income which is
chargeable to tax.
The arm's length price is meant to determine the real value of the transaction entered into between
associated enterprises. It is a recomputation exercise to be carried out only when income arises in case of
an international transaction between associated enterprises. It does not warrant recomputation of a
consideration received or given on capital account. It permits re-computation of income arising out of a
capital account transaction, such as interest paid or received on loans taken or given, depreciation taken
on machinery, etc., in cases of income being affected due to a transaction on capital account. Therefore,
although section 56(1) of the Act would permit including within its head, all income not otherwise
excluded, it does not provide for a charge to tax on capital account transaction of issue of shares as is
specifically provided for in section 45 or section 56(2)(viib) of the Act and included within the definition
of "income" in section 2(24) of the Act.
Chapter X is invoked to ensure that the transaction is charged to tax only on working out the income after
arriving at the arm's length price of the transaction. This is only to ensure that there is no manipulation
of prices/consideration between associated enterprises. The entire consideration received would not be a
subject matter of taxation.
With effect from April 1, 2013, the definition of "income" under section 2(24)(xvi) of the Act includes
within its scope the provisions of section 56(2)(viib) of the Act. This indicates the intent of Parliament to
tax issue of shares to a resident, when the issue price is above its fair market value. Parliament has
consciously not brought to tax amounts received from a non-resident for issue of shares, as it would
discourage capital inflow from abroad.
The issue of shares at a premium is a capital account transaction and not income. ........ that neither the
capital receipts received by the assessee on issue of equity shares to its holding company, a non-resident
entity, nor the alleged short-fall between the so-called fair market price of its equity shares and the issue
price of the equity shares could be considered as income within the meaning of the expression as defined
under the Act. In any case, the entire exercise of charging to tax the amounts allegedly not received as
share premium failed, as no tax was being charged on the amount received as share premium.
(ii) That the order under challenge sought to widen the meaning of the word "income" to include all
incomings. It was not open to the Dispute Resolution Panel to seek aid of the supposed intent of the
Legislature to give a wider meaning to the word "income".
(iii) That reliance upon the definition of "international transaction" in sub-clauses(c)and(e)of
Explanation (i) to section92Bto conclude that income has to be given a broader meaning to include
notional income, as otherwise Chapter X would be rendered otiose, was far fetched. The transaction on
capital account or on account of restructuring would become taxable to the extent it impacts income, i.e.,
under reporting of interest or over reporting of interest paid or claiming of depreciation, etc. It was that
income which was to be adjusted to the arm's length price. It was not a tax on the capital receipts.
(iv) That the entire exercise of determining the arm's length price was only to arrive at the real income
earned, i.e., the correct price of the transaction, shorn of the price arrived at between the parties on
account of their relationship, viz., associated enterprises. The Department had confused the measure with
a charge and called the measure a notional income. There was no charge in the Act to subject issue of
shares at a premium to tax.
(v) That section92(2)of the Act deals with a situation where two or more associated enterprises enter into
an arrangement whereby they are to receive any benefit, service or facility in which case the allocation,
apportionment or contribution towards the cost or expenditure is to be determined in respect of each
associated enterprise having regard to the arm's length price. It would have no application in the present
case, where there was no occasion to allocate, apportion or contribute any cost or expenses between the
assessee and the holding company.
(vi) That ex abundanti cautela, the assessee had submitted Form 3CEB and informed the Department of
the international transaction of issue of share capital, while denying that any income arose from the
international transaction. After accepting the contention of the assessee, the court had, on its writ
petition, concluded that the issue of jurisdiction of income arising, was a condition precedent for
applicability of section92(1)of the Act and directed the Dispute Resolution Panel to examine the issue of
jurisdiction as a preliminary issue. The Department was not entitled to take the contention that because
the assessee itself had filed Form 3CEB for purposes of Chapter X of the Act there was no question of
examining the issue of jurisdiction to apply Chapter X of the Act.
(vii) That the reasoning was that if the arm's length price were received, the assessee would be able to
invest it and earn income, proceeded on a mere surmise/assumption. This could not be the basis of
Respectfully,following the above decision(368ITR1),we decide the effective ground of appeal
against the AO.
As a result,appeal filed by the AO stands dismissed.
Order pronounced in the open court on 20th,July,2015.
(.. /A.D. JAIN) ( / RAJENDRA)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
/Copy of the Order forwarded to :
1.Appellant / 2. Respondent /
3.The concerned CIT(A)/ , 4.The concerned CIT /
5.DR A Bench, ITAT, Mumbai / , ,.. .
/ BY ORDER,
/ Dy./Asst. Registrar
, /ITAT, Mumbai.