ASST CIT 16(1), MUMBAI V. ENDEMOL INDIA P.LTD, MUMBAI

ITA 558/MUM/2015

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0717 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 27-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: ALOK BAIRAGRA
• Keywords: Depreciation; Transfer pricing; International transaction; Fair market value; Capital receipt
• Section: 56; 92

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI K BENCH . . , , , BEFORE S/SH. A.D. JAIN ,JUDICIAL MEMBER & RAJ ENDRA,ACCOUNTANT MEMBER /. ITA NO. 558 /MUM/201 5 , / ASSESSMENT YEAR - 20 10 - 11 A CIT - 1 6 ( 1 ) ROOM NO.43 9 , 4 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD MUMBAI - 400 020. VS M/S. ENDEMOL INDIA PVT. LTD. 501, SAMARTHA VAIBHAV, OSHIWARA, ANDHER I(E) , MUMBAI. PAN: AA BCE 5452 G ( / APPELLANT ) ( / RESPONDENT ) /ASSESSEE BY : SHRI ALOK BAIRAGRA / REVENUE BY : S HRI N.K. CHAND - CIT / DATE OF HEARING : 20 - 0 7 - 2015 / DATE OF PRONOUNCEMENT : 20 - 0 7 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - 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. WHETH ER ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE HONBLE 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 A E TREATING THE SAME AS INCOME U/S.92CA. 2. THE APPELL ANT 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 TH AT 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 AS SESSMENT 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 O F 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 MA DE 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 HONBLE 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.DURIN G THE COURSE OF HEARING BEFORE US,REPRESENTATIVES OF BOTH THE SIDES AGREED THAT THE ISSUE IS SETTLED IN ITA/ 558 /MUM/201 5 ,AY. 10 - 11 - ENDEMOL INDIA 2 FAVOUR OF THE ASSESSEE ,AS THE DEPARTMENT HAS ACCEPTED THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT.WE FIND THAT THE ISSUE HAS BEEN DECIDED BY T HE 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 IT S 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, AC CRUED 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 ARISES. CHAPTER X OF THE ACT IS A MACHINERY PROVISION TO ARRIVE AT THE ARMS LENGTH PRICE OF A TRANSACTION BETWEEN ASSOCIATED ENTERPRISES. THE SUBSTANTIVE CHARGING PROVISIONS ARE FOUN D 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 TH E 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 REPLAC E 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 CHAP TER 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 ARMS LENGTH PRICE. ARRIVING AT THE TRANSACTIONAL VALUE/CONSIDERATION ON THE BA SIS OF THE ARMS 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 ARMS LENGTH PRICE TO THE TRANSACTIONAL VALUE OR CONSIDERATIO N 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 RECOMP UTATION 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 INCOM E 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) O F 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 A ND 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 ARMS LENGTH PRICE OF THE TRANSACTION. THIS IS ONLY TO EN SURE 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 ASSE SSEE 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 ITA/ 558 /MUM/201 5 ,AY. 10 - 11 - ENDEMOL INDIA 3 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 CHAL LENGE 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 TH E 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 T RANSACTION 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 ADJ USTED TO THE ARMS LENGTH PRICE. IT WAS NOT A TAX ON THE CAPITAL RECEIPTS. (IV) THAT THE ENTIRE EXERCISE OF DETERMINING THE ARMS LENGTH PRICE WAS ONLY TO ARRIVE AT THE REAL INCOME EARNED, I.E., THE CORRECT PRICE OF THE TRANSACTION, SHORN OF THE PRICE ARRI VED 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 PREMIU M 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 TOW ARDS THE COST OR EXPENDITURE IS TO BE DETERMINED IN RESPECT OF EACH ASSOCIATED ENTERPRISE HAVING REGARD TO THE ARMS LENGTH PRICE. IT WOULD HAVE NO APPLICATION IN THE PRESENT CASE, WHERE THERE WAS NO OCCASION TO ALLOCATE, APPORTION OR CONTRIBUTE ANY COST O R 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 T HE 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 DIRECTE D 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 QUESTI ON OF EXAMINING THE ISSUE OF JURISDICTION TO APPLY CHAPTER X OF THE ACT. (VII) THAT THE REASONING WAS THAT IF THE ARMS 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 TAXATION. RESPEC T FULLY,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 20 TH , JU LY ,2015. 20 , 2015 SD/ - SD/ - ( . . / A.D. JAIN ) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 20 . 0 7. 2015 . . . JV. SR.PS. ITA/ 558 /MUM/201 5 ,AY. 10 - 11 - ENDEMOL INDIA 4 / 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 / , , . . . 6. GUARD FILE/ //TRU E COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.