2016 (5) TMI 1437 - AT - Income Tax

International transaction - ALP adjustment - remittances towards investment in share capital - Held that - There is no dispute that the assessee had remitted 3387182 towards investment in share capital. The shares were allotted to the extent of 2654797 in the same AY. The subsidiary company has treated the balance remittance as interest free unsecured loan and repayable on demand in their financial statement. In the next AY the subsidiary company has allotted the shares on 15/03/2012. In our considered view the amount 732.385 is towards investment in share capital of the subsidiary outside India and the transactions are not in the nature of international transaction referred to section 92-B of the IT Act and transfer pricing provisions are not applicable as there is no income as well as there is no mutual agreement between the companies for such payment of interest. Moreover the subsidiary company also disclosed as interest free In the similar situation with uncontrolled transaction the allottee company in normal course of transaction will not be expected to receive any interest leave away the international transaction. Without any certainty or any agreement on receiving any interest but merely relying on the accounting method and disclosure of the subsidiary in their financial statement cannot lead to this transaction as international transaction which require ALP adjustment. - Decided in favour of assessee

Summary

Issues:
1. Whether the outstanding share application money can be treated as an international transaction and re-characterized as a loan?
2. Whether the arm's length price interest at the Prime Lending Interest rate of 12.5% is justified for outstanding share application money?
3. Whether the transactions qualify for transfer pricing provisions and ALP adjustment?

Analysis:

Issue 1:
The appeal challenged the treatment of outstanding share application money as an international transaction and its re-characterization as a loan. The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to rework the interest based on the number of days from the date of investment to the accounting year-end. The Tribunal held that the remittance towards share capital did not qualify as an international transaction under Section 92-B of the IT Act. Citing a similar case, the Tribunal concluded that the transactions were not subject to transfer pricing provisions, allowing the appeal on this ground.

Issue 2:
The second ground of appeal questioned the application of the Prime Lending Interest (PLI) rate of 12.5% for arm's length price interest on the outstanding share application money. The appellant argued that the TPO was not justified in re-characterizing the share application money as loans and advances. The Tribunal, after considering the submissions and material facts, found that the transactions did not warrant ALP adjustment. As there was no certainty or agreement on receiving interest, relying solely on the subsidiary's accounting method did not make the transaction an international one. The Tribunal allowed this ground of appeal, deeming the PLI rate application inappropriate.

Issue 3:
The final issue revolved around whether the transactions qualified for transfer pricing provisions and ALP adjustment. The Tribunal's analysis concluded that the remittance towards share capital was not an international transaction subject to ALP adjustment. Citing a previous case, the Tribunal emphasized that the transactions were not covered under Section 92-B of the IT Act, leading to the dismissal of the remaining grounds related to the same issue. Consequently, the appeal was partly allowed based on the findings related to the first issue.

In conclusion, the Tribunal's judgment clarified that the remittance towards share capital did not constitute an international transaction, thereby rejecting the re-characterization as a loan and the application of the PLI rate for ALP interest. The decision was based on the absence of mutual agreement for interest payment and the nature of the transactions, leading to the partial allowance of the appellant's appeal.