Case Law Analysis - PMP Auto Components - Bombay HC

Pr. CIT V/s. PMP Auto Components (P) Ltd. (ITA 1685/2016), Bombay High Court. (Date of order 20th Feb 2019)

AKIL KURESHI, M.S.SANKLECHA

Grounds by the Department

1. Adjustment w.r.t acquisition of shares.
2. Interest Chargeable on deemed loan transactions, based on above adjustment.

Ground 1.

PMP Auto had invested an amount of Rs.2.67 Crores to acquire shares of its AE, having a fair market value of Rs.8.19 lakhs. Excess payment of Rs.2.58 Crores, the Revenue had brought to tax under the transfer pricing provisions under Chapter X of the Act.

The ITAT, Mumbai had rejected the contention of the revenue based on judgement of Vodafone India Services Private Limited, where it was held that investment in shares is on capital account and would not give rise to any income triggering the provisions of Chapter X of the Act.

The Revenue held the following key contentions,

a. The Vodafone case is not applicable since this is a case of out bound investment (whereas the Vodafone was a case of Inbound Investment i.e. into India) 
[Here the High Court held that "The distinction between inbound and outbound investment is a distinction which does not take the case of revenue any further, as the Legislature has made no such distinction while providing for determination of any income on adjustments to arrive at ALP arising from an international transaction."]

b. When the investment made in current year, if sold in subsequent years, would give rise to huge potential loss, when the investor sells the shares which have been purchased at a price much higher than its fair market value. Hence the current difference between the purchase price and the market value should also be bought to tax sold in 

The High Court held the following

"Section 92 of the Act requires income to arise from an international transaction while determining the ALP. Therefore the sin qua non is that income must first arise on account of the international transaction."

"if this court has held that Chapter X of the Act ...and can only be invoked to bring to tax any income arising from an international transaction, then, it is necessary for the revenue to show that income as defined in the Act does arise from the international transaction."

it also held that 

"...gives rise to reduction of its tax liability in future. This submission is in the realm of speculation. At this stage, it is hypothetical. The issue has to be examined on the basis of law and facts as existing before the authorities in the subject assessment year. No provision of the Act has been shown to us, which would allow the Revenue to tax a potential income in the present facts."

The HC also analysed the applicability of section 56(2)(viib), which came w.e.f. 01.04.2013, but the current issue arises before the said date. Here the HC held that no Substantial Question of Law arises.