ITAT Ruling in Favor of OYO: Deletion of ₹3,885 Crore Tax Addition
The Income Tax Appellate Tribunal (ITAT) has provided a significant legal win for OYO Hotels and Homes Private Limited by annulling a ₹3,885.51 crore tax addition related to the share premium received from its parent company, Oravel Stays Limited. This decision came in the context of a dispute over the valuation method applied to the issued shares and the subsequent tax levied under the so-called ‘angel tax’ provision.
The tribunal bench, comprising Accountant Member S Rifaur Rahman and Judicial Member Vimal Kumar, concluded that the tax authorities stepped beyond their authority by dismissing the valuation approach OYO adopted and substituting it with their own assessment. The Delhi Bench of ITAT elaborated, “The tax authorities have overstepped their jurisdiction by reevaluating the share value, despite it being assessed by registered valuers or merchant bankers. This area is intricate and technical, and the assessing authorities do not possess the requisite expertise.”
This legal challenge pertains to the fiscal year 2021-22, during which OYO issued Compulsorily Convertible Preference Shares (CCPS) to Oravel Stays Limited following a demerger scheme that separated the Indian hotel operations from Oravel Stays into OYO Hotels and Homes.
The assessing officer raised concerns about the share premium OYO charged, highlighting the company’s negative net worth and ongoing financial losses. The officer also critiqued the valuation’s optimistic projections, which seemingly ignored the pandemic’s profound impact on the hospitality sector. As a result, the officer dismissed the discounted cash flow (DCF) valuation method used by OYO, levying a tax of ₹3,737.99 crore on what was deemed excess share premium under Section 56(2)(viib) of the Income Tax Act. An additional ₹147.52 crore was imposed concerning the conversion of CCPS into equity shares, culminating in the total tax addition of ₹3,885.51 crore.
The Commissioner of Income Tax (Appeals) supported this addition, agreeing with the assessing officer’s observations regarding valuation discrepancies. However, before the ITAT, OYO contended that Section 56(2)(viib) was an anti-abuse provision designed to prevent unaccounted funds’ circulation and was inapplicable to capital infusions from a parent to a subsidiary company. OYO further argued that the DCF method, authorized under Rule 11UA, could not be replaced by the tax department’s preferred net asset value method.
More Read
The tribunal sided with OYO, acknowledging the transaction between a parent company and its subsidiary. It noted that the reduction in Oravel Stays’ holding from 100% to 99.6% occurred solely due to the demerger scheme. Furthermore, the ITAT ruled that foreign fund investments compliant with FEMA regulations could not be mischaracterized as unaccounted money.
Nonetheless, the tribunal remanded a separate issue regarding a ₹9.21 crore management fee addition back to the assessing officer for further verification. The legal team representing OYO included Senior Advocate Ajay Vohra, alongside advocates Manuj Sabharwal, Devvrat Tiwari, and Manish Kumar. Commissioner of Income Tax (Departmental Representative) Mahesh Kumar represented the tax department.
[Read Judgment]
