2016 (3) TMI 279 - AT - Income Tax

Transfer pricing adjustment - TP provisions applicable to capital transactions due to the absence of the income element therein - recharacterisation of investment into loan - Held that - In the absence of provisions/Rules for re-characterization of investment in share capital into loan and vice-versa, we are of the considered view that the re-characterization of the impugned capital transaction into a loan as sought for by the Transfer Pricing Officer/CIT(A) is not tenable in law in view of the decision of the Hon ble Bombay High Court in the case of Besix Kier Dabhol SA (2012 (10) TMI 817 - BOMBAY HIGH COURT ), which was followed by the Co-ordinate Bench of this Tribunal in the case of Aegis Ltd.,(2015 (7) TMI 1051 - ITAT MUMBAI) to which one of us is party. In the light of the facts and circumstances of the case as discussed above, we delete (i) the addition made by the Transfer Pricing Officer/CIT(A) on account for alleged excess consideration paid and (ii) addition on account of notional interest computed @15% on the aforesaid sum sought to be re-characterized as a loan. In this view of the matter, the alternate plea of the assessee to reconsider the LIBOR rate for the purpose of computing the addition on account of notional interest becomes academic.

Issues Involved:
1. Jurisdiction of the reference made under section 92CA(1).
2. Addition of interest on loan to Associated Enterprises (AE).
3. Recharacterization of investment in share capital as an interest-free loan.
4. Addition of notional interest income on recharacterized investment.

Issue-wise Detailed Analysis:

1. Jurisdiction of the reference made under section 92CA(1):
The assessee contended that the reference made by the Assessing Officer (AO) under section 92CA(1) for determining the Arm's Length Price (ALP) was without jurisdiction and thus invalid. However, this ground was not pressed by the assessee during the appeal, and it was rendered infructuous and dismissed accordingly.

2. Addition of interest on loan to Associated Enterprises (AE):
The AO made an addition of Rs. 1,366/- by benchmarking the interest on a loan to AE at the Prime Lending Rate (PLR) of 12% plus a 3% markup for risk factors, against the 13% offered by the appellant. The assessee argued that the 13% offered was more than the average PLR of 12% and the LIBOR rate of 5.54%, thus no adjustment in ALP was warranted. However, this ground was also not pressed by the assessee and was dismissed as infructuous.

3. Recharacterization of investment in share capital as an interest-free loan:
The AO, based on the Transfer Pricing Officer (TPO)'s order, recharacterized the investment in shares issued at a premium by the wholly-owned subsidiary outside India as an interest-free loan and made an addition of Rs. 1,24,17,50,258/-. The TPO argued that the AE received a huge premium due to its special relationship with the assessee and that the AE would have had to take loans from the assessee or the open market, incurring interest costs. The assessee contended that the investment was commercially expedient and that there was no charge on the application of funds. The Tribunal held that the transaction of investment in share capital could not be recharacterized as a loan and that no income arose from the transaction, thus the provisions of Chapter X of the Act were not applicable. The Tribunal relied on various judicial pronouncements, including Vodafone India Services Pvt. Ltd. and Shell India Markets Pvt. Ltd., which held that in the absence of income arising from an international transaction, TP provisions do not apply.

4. Addition of notional interest income on recharacterized investment:
The AO made an adjustment of Rs. 18,62,62,539/- as notional interest income at 15% on the recharacterized investment. The assessee argued that no notional interest could be brought to charge by recharacterizing the investment as a loan. The Tribunal held that the recharacterization of investment in share capital into a loan was not permissible under the Act, and consequently, the addition of notional interest was not tenable. The Tribunal deleted the addition of Rs. 18,62,62,539/- on account of notional interest.

Conclusion:
The Tribunal allowed the assessee's appeal, deleting the additions made on account of recharacterization of share capital into an interest-free loan and the notional interest computed thereon. The Tribunal held that the impugned transaction did not fall within the purview of Indian Transfer Pricing provisions as no income arose from the transaction. The Tribunal also dismissed the Stay Application filed by the assessee as infructuous.

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