The Income Tax Appellate Tribunal, Kolkata bench recently ruled that transaction of purchase of shares of AE cannot be regarded as international transaction and cannot be subject matter of investigation under Section 92 of the Income Tax Act.
Both this appeal filed by assessee were heard together as some common issues arise for consideration and passed a common order.
The issue related to the revenue was purchase of shares by the assessee of three of its associated enterprises was an international transaction and income from such international transaction has to be computed having regard to Arm’s Length Price (ALP) as laid down in Sec.92 of the Act.
According to revenue purchasing price of shares was enormous and the price paid to the extent of that amount was in excess of the value of the shares determined on the basis of Net Asset Value (NAV) Method had to be regarded as loan by the Assessee to its AE.
The revenue determined notional interest on such deemed loan and added the same to the total income of the Assessee as an Adjustment to the ALP under Section 92 of the Act.
The assessee, Life Sciences Private Limited (formerly TCG Life sciences Limited), is a company carries on the business of providing Contract Research & Development Service and Drug Discovery.
The assessee relied upon the valuation report which adopted Discounted Cash Flow Method (DCFM) for arriving at the valuation of the shares that were purchased by the Assessee.
The AO referred to the Transfer Pricing Officer (TPO) for determination of ALP of the international transaction of purchase of shares as per the provisions of Sec.92CA (1) of the Act instead of adopting Discounted Cash Flow Method (DCFM) for arriving at the valuation of the shares.
The TPO pointed out that DCFM was not the appropriate method of valuation and that the appropriate method would only be the Net Asset Valuation method (NAV). The assessee concluded that a sum of Rs.11, 78, 64,440/- was to be added to the total income of the Assessee on account of adjustment to ALP of international transaction of providing loan to its AE.
The assessee filed his objection before dispute resolution panel (DRP) and the Assessee raised an objection that since the subscription/purchase of shares being on capital account and therefore does not give raise to any “income” and hence the provisions of Sec.92 of the Act would not be applicable.
The DRP didn’t satisfied with the objection made by assessee and held that section 92 of the act is applicable here and upheld the quantum of addition and the rate of interest determined by the TPO.
Aggrieved, assessee filed its appeal before the tribunal and the ITAT found that Assessee’s own case in AY 2010-11 and the ITAT in ITA No.1053/Kol/2017 and ITA No.966/Kol/2017 for AY 2010-11 dated 22.9.2017 held that the transaction of purchase of shares of AE cannot be regarded as international transaction and cannot be subject matter of investigation u/s.92 of the Act.
Finally the Tribunal following the decision of aforesaid case hold that the determination of ALP in the present case cannot be sustained as the transaction in question is on capital account and determination of ALP in respect of such transactions is outside the purview of Chapter X of the Act.
The ITAT bench comprising of Judicial Member N.V.Vasudevan and Accountant Member Waseem Ahmed declared that the addition made in this regard need to be deleted Since the preliminary ground on the issue of jurisdiction is held in favour of the Assessee, the other grounds with regard to the quantification of ALP does not arise for consideration and are dismissed as infructuous.
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