J.P. MORGAN SECURITIES INDIA P.LTD, MUMBAI V. ADDL CIT RG 2(2), MUMBAI

ITA 7572/MUM/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9164 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2015
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 22-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 24-12-2012
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Fair market value; Notional interest
• Section: 143(3); 234B; 154; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO , JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ITA NO. 757 2 /MUM/2012 ASSESSMENT YEAR: - 2008 - 09 J.P. MORGAN SECURITIES INDIA PRIVATE LIMITED J.P. MORGAN TOWER, OFF CST ROAD, KALINA SANTACRUZ (EAST), MUMBAI 400098. VS.` ADDITI ONAL COMMISSIONER OF INCOME TAX, RANGE 2(2) ROOM NO. 557, AAYAKAR BHAVAN, MK ROAD, MUMBAI 400 020. APPELLANT / RESPONDEN T ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 30.11.2012 PASSED U/S 143(3) R.W.S 144C(13) OF THE INCOME TAX ACT IN PURSUANT TO THE DIRECTIONS OF DRP DATED 07.09.2012 PASSED U/S 144C(5) OF THE INCOME TAX ACT FOR A.Y. 2008 - 09. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN THIS APPEAL: - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO, AFTER CONSIDERING THE DIRECTIONS ISSUED BY THE HONOURABLE DRP, HAS ERRED IN APPLYING THE PROVISIONS OF THE CHARGING SECTION OF CHAPTER X I.E. SECTION 92(1) OF THE ACT TO THE ISSUE OF EQUITY SHARE CAPITAL BY THE APPELLANT TO ITS HO LDING COMPANY AND ACCORDINGLY, - CONSIDERED THE ISSUE OF EQUITY SHARES AS AN 'INTERNATIONAL TRANSACTION' WITHIN THE MEANING OF SECTION 92B(1) OF THE ACT; ASSESSEE BY SHRI NISHANT THAKKAR REVENUE BY SHRI S .D. SRIVASTAVA DATE OF HEARING 12.02.2015 DATE OF PRONOUNCEMENT 25 .03.2015 J.P. MORGAN SECURITIES INDIA PRIVATE LIMITED 2 | P A G E - COMPUTED THE ARM'S LENGTH PRICE OF THE EQUITY SHARES ISSUED BY THE APPELLANT AT RS 51.74. - TREATED THE DIFFERENCE BETWEEN THE ARM'S LENGTH PRICE OF SHARES AND ACTUAL ISSUE PRICE AS A DEEMED LOAN PROVIDED BY THE APPELLANT TO ITS HOLDING COMPANY; - FAILED TO APPRECIATE THAT TRANSFER PRICING DOES NOT PERMIT SECONDARY ADJUSTMENTS; - COMPUTED THE NOTIONAL INTEREST ON SUCH DEEMED LOAN AND TAXING SUCH NOTIONAL INTEREST IN THE HANDS OF THE APPELLANT; - FAILED TO APPRECIATE THAT THE INCOME TAX BEING A CHARGE OF TAX ON INCOME OF THE APPELLANT, THERE CANNOT BE ANY DEEMING FICTION UNLESS OTHERWISE SPECI FICALLY PROVIDED BY THE STATUTE; 2. THE LEARNED AO ERRED IN NOT GRANTING CREDIT FOR TAX DEDUCTED AT SOURCE AMOUNTING TO RS 14,739,699; AND 3. THE LD. AO ERRED IN LEVYING CONSEQUENTIAL INTEREST UNDER SECTION 234B AND SECTION 234D OF THE ACT. 2. GROUND NO . 1 IS REGARDING TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE ISSUE PRICE OF EQUITY SHARES TO THE HOLDING COMPANY AND ALP COMPUTED BY THE TPO TREATED AS LOAN ADVANCED TO THE AE. THE ASSESSEE ISSUED 9 CRORE EQUITY SHARES OF FACE VALUE OF RS. 10 AT PAR TO ITS HOLDING COMPANY, J.P. MORGAN INTERNATIONAL FINANCE LIMITED. THE TPO DETERMINED THE ARMS LENGTH PRICE OF THE EQUITY SHARES ISSUED AT RS. 51.74 PER SHARE AND TREATED THE DIFFERENCE BETWEEN THE ALP AND ACTUAL PRICE AS A DEEMED LOAN ADVANCE D BY THE ASSESSEE TO ITS HOLDING COMPANY. CONSEQUENTLY, THE TPO ADOPTED THE NOTIONAL INTEREST RATE AT THE RATE OF 14.39% PER ANNUM BEING ANNUALIZED AVERAGE YIELD ON A FIVE YEAR BBB RATED CORPORATE BOND AS DEEMED LOAN. 3. THE DRP MODIFIED THE NOTIONAL INTEREST AND DIRECTED THE AO/TPO TO ADOPT THE DOMESTIC COST OF BORROWING OF THE ASSESSEE PLUS 3% AS AGAINST 14.39% PER ANNUM CONSIDERED BY THE TPO. 4. BEFORE US, THE LD.AR HAS SUBMITTED THAT THIS ISSUE IS NOW COVERED BY THE JUDGMENT OF HONBLE JURISDICTION AL HIGH COURT IN THE CASE OF VODAFONE J.P. MORGAN SECURITIES INDIA PRIVATE LIMITED 3 | P A G E INDIA SERVICES PVT. LTD. VS. UNION OF INDIA AND ORS. 368 ITR 01 . HE HAS FURTHER POINTED OUT THAT THE HONBLE JURISDICTIONAL HIGH COURT HAS AGAINS DECIDED THE IDENTICAL ISSUE IN CASE OF M/S SHELL INDIA MARKETS PVT. LTD . 369 ITR 516 AS WELL AS IN NUMBER OF OTHER CASES WHEREIN THE JUDGMENT IN CASE OF VODAFONE INDIA SERVICES PVT. LTD HAS BEEN FOLLOWED. 5. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDERS OF AUTHORITIES BLOW. 6. HAVING CONSIDERED THE FACTS AND CIRC UMSTANCES OF THE CA SE AS WELL AS RIVAL SUBMISSIONS. A T THE OUTSET, WE NOTE THAT THIS ISSUE REGARDING COMPUTATION OF FAIR MARKET VALUE OF SHARES ISSUED BY THE INDIAN SUBSIDIARY TO ITS HOLDING COMPANY AND SHORTFALL IN PREMIUM WAS TREATED BY THE TPO AS INCOME AS WELL AS LOAN ADVANCE GIVEN TO THE HOLDING COMPANY AND CON SEQUENT ADDITION HAS BEEN CONSIDERED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES PVT. LTD (SUPRA). THE RELEVANT OBSERVATION AND FINDING OF THE HONBLE HIGH COU RT ARE IN PARA 45 TO 49 AS UNDER: - 45. CHAPTER X OF THE ACT IS A MACHINERY PROVISION TO ARRIVE AT THE ALP OF A TRANSACTION BETWEEN AES. THE SUBSTANTIVE CHARGING PROVISIONS ARE FOUND IN SECTIONS 4, 5, 15 (SALARIES), 22 (INCOME FROM HOUSE PROPERTY), 28 (PROFITS AND GAINS OF BUSINESS), 45 (CAPITA L GAIN) AND 56 (INCOME FROM OTHER SOURCES). EVEN INCOME ARISING FROM INTERNATIONAL TRANSACTION BETWEEN A.E. MUST SATISFY THE TEST OF INCOME UNDER THE ACT AND MUST FIND ITS HOME IN ONE OF THE ABOVE HEADS I.E. CHARGING PROVISIONS. THIS THE REVENUE HAS NOT BE EN ABLE TO SHOW. 46. IT WAS NEXT SUBMITTED THAT THE MACHINERY SECTION OF THE ACT CANNOT BE READ DE - HORS CHARGING SECTION. THE ACT HAS TO BE READ AS AN INTEGRATED WHOLE. ON THE AFORESAID SUBMISSION ALSO, THERE CAN BE NO DISPUTE. HOWEVER, AS OBSERVED BY THE SUPREME COURT IN CIT V. B.C. SRINIVASA SHETTI [1981] 128 ITR 294/5 TAXMANN.COM 1 , 'THERE IS A QUALITATIVE DIFFERENCE BETWEEN THE CHARGING PROVISIONS AND COMPUTATION PROVIS IONS AND ORDINARILY THE OPERATION OF THE CHARGING PROVISIONS CANNOT BE AFFECTED BY THE CONSTRUCTION OF COMPUTATION PROVISIONS.' IN THE PRESENT CASE, THERE IS NO CHARGING PROVISION TO TAX CAPITAL ACCOUNT TRANSACTION IN RESPECT OF ISSUE OF SHARES AT A PREMIU M. COMPUTATION PROVISIONS CANNOT REPLACE/ SUBSTITUTE THE CHARGING PROVISIONS. IN FACT, IN B.C. SRINIVASA SHETTI ( SUPRA ), THERE WAS CHARGING PROVISION BUT THE COMPUTATION PROVISION FAILED AND IN SUCH A CASE THE COURT HELD J.P. MORGAN SECURITIES INDIA PRIVATE LIMITED 4 | P A G E THAT THE TRANSACTION CANNOT BE BROU GHT TO TAX. THE PRESENT FACTS ARE ON A HIGHER PEDESTAL AS THERE IS NO CHARGING PROVISION TO TAX ISSUE OF SHARES AT PREMIUM TO A NON - RESIDENT, THEN THE OCCASION TO INVOKE THE COMPUTATION PROVISIONS DOES NOT ARISE. WE, THEREFORE, FIND NO SUBSTANCE IN THE AFO RESAID SUBMISSION MADE ON BEHALF OF THE REVENUE. 47. DURING THE COURSE OF HEARING THE LEARNED SOLICITOR GENERAL ALSO MADE SUBMISSIONS WITH REGARD TO TAXING INCOME IN THE HANDS OF THE PETITIONER EVEN THOUGH THE INCOME HAS ALLEGEDLY BEEN EARNED BY THE HOLDIN G COMPANY. NONE OF THE NOTICES ISSUED TO THE PETITIONER ON THE DRAFT ORDER PASSED BY AO ON THE IMPUGNED ORDER PASSED BY DRP EVEN PROPOSES TO ASSESS THE PETITIONER IN ITS REPRESENTATIVE CAPACITY. HENCE, THE PETITIONER HAD NO OCCASION TO CHALLENGE THE JURISD ICTION OF THE REVENUE ON THE ABOVE ASPECT. THEREFORE, WE SEE NO REASON TO EXAMINE THE ISSUE. 48. BEFORE PARTING, WE MAY POINT OUT THAT IN ITS WRITTEN SUBMISSIONS, THE REVENUE HAS RAISED AN ISSUE OF ALTERNATIVE REMEDY WHICH WAS NOT RAISED AT THE HEARING AND CONTENDED THAT THERE IS NO PATENT ILLEGALITY IN THE IMPUGNED ORDER WARRANTING INTERFERENCE BY THIS COURT. HOWEVER, THE VERY FACT THAT AT THE TIME OF ORAL SUBMISSIONS, THE REVENUE SUPPORTED THE CONCLUSIONS IN THE IMPUGNED ORDER ON GROUNDS DIFFERENT FROM TH OSE MENTIONED THEREIN WOULD ITSELF SPEAK VOLUMES OF THE PATENT NON - SUSTAINABILITY OF THE IMPUGNED ORDER. THE PRELIMINARY OBJECTION, NOT RAISED AT THE HEARING, IS, COMPLETELY DEVOID OF ANY SUBSTANCE. 49. FOR ALL THE ABOVE REASONS, WE FIND THAT IN THE PRESEN T FACTS ISSUE OF SHARES AT A PREMIUM BY THE PETITIONER TO ITS NON RESIDENT HOLDING COMPANY DOES NOT GIVE RISE TO ANY INCOME FROM AN ADMITTED INTERNATIONAL TRANSACTION. THUS, NO OCCASION TO APPLY CHAPTER X OF THE ACT CAN ARISE IN SUCH A CASE. 7 . WE FURTHER NOTE THAT IN THE CASE OF M/S SHELL INDIA MARKETS PVT. LTD. (SUPRA), THE HONBLE JURISDICTIONAL HIGH COURT HAS AGAIN DECIDED THE IDENTICAL ISSUE BY FOLLOWING THE JUDGMENT IN CASE OF VODAFONE INDIA SERVICES PVT. LTD. (SUPRA). ACCORDINGLY, FOLLOWING THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF VO DAFONE INDIA SERVICES PVT. LTD. (SUPRA), WE DELETE THE ADDITION MADE BY THE AUTHORITIES BELOW ON ACCOUNT OF SHORTFALL IN PREMIUM FOR ISSUANCE OF EQUITY SHARES BY THE A SSESSEE TO ITS HOLDING COMPANY HAS BEEN TREATED AS DEEMED LOAN. 8. GROUND NO. 2 IS REGARD ING NON GRANTING OF CREDIT OF TDS OF RS. 14,739,699/ - . 9. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT J.P. MORGAN SECURITIES INDIA PRIVATE LIMITED 5 | P A G E THE AO HAS NOT GIVEN THE CREDIT OF TDS OF RS. 14,739,699/ - DE SPITE A PETITION U/S 154 FILED BY THE ASSESSEE. THUS THE LD. AR HAS SUBMITTED THAT THE AO MAY BE DIRECTED TO GR ANT THE CREDIT OF TDS. THE LD. D R HAS POINTED OUT THAT SINCE THE ISSUE HAS NOT BEEN DISCUSSED IN THE IMPUGNED ORDERS, THEREFORE, THE AMOUNT OF T DS IS REQUIRED TO BE VERIFIED. SINCE THE ASSESSEE HAS ALREADY FILED A PETITION U/S 154 FOR GRANT OF CREDIT FOR TAX DEDUCTED AT SOURCE OF RS. 14,739,699/ - . ACCORDINGLY, WE DIRECT AO TO VERIFY THE CLAIM OF ASSESSEE AND THEN PASS THE APPROPRIATE ORDER. 10. G ROUND NO. 3 IS REGARDING LEVY OF INTEREST UNDER SECTION 234 B AND 234D OF THE ACT., IS CONSEQUENTIAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC FINDINGS. 11. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUCNED IN THE OPEN COURT ON THIS 2 5 TH DAY OF MARCH 2015 SD/ - SD/ - ( D. KARUNAKARA RAO ) (VIJAY PAL RAO) ( ACCOUNTANT MEMBER ) (JUDICIAL MEMBER) MUMBAI DATED 25 .03.2015 SKS SR. P.S, COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI