2017 (1) TMI 891 - AT - Income Tax

Adjustment arrived by TPO in respect of notional interest - buyback of shares - Held that - The investment by the assessee in the equity shares of the subsidiary was undertaken in the past @ US 20.35 per share and during the year under consideration the subsidiary has undertaken buy-back at the same rate i.e. uS 20.35 per shares. The nature of the said transaction has been disbelieved by the Transfer Pricing Officer, who has recharacterized it as provision of loan/fund by the assessee to its subsidiary on interest-free basis in the garb of investment in equity of the subsidiary. It is a trite law that the transfer pricing proceedings do not envisage empowering of the Transfer Pricing Officer to re-characterize the transactions on the basis of his own whims and fancies. In the present case, the CIT(A) has correctly brought out that the transactions of investment and buy-back of shares has been spread over more than one year and that there was no material to suggest that the stated transactions were unreal. Even with regard to the value at which the buy-back of shares has been undertaken by the investee subsidiary company, the CIT(A) noted that the valuation of shares has not been disputed by the Transfer Pricing Officer during the proceedings before him. In fact, the CIT(A) has categorically observed that the Transfer Pricing Officer in his order has observed the per share price of the shares as reflected in the Balance Sheet of the assessee for the various years. On this point, we also note that before the Transfer Pricing Officer, assessee had given justification of the buy-back price by pointing-up the NAV of the investee company on the date of buy-back, which was much lower than buyback price. We find nothing adverse on such assertions of the assessee. Therefore, under these circumstances, in our view, the CIT(A) has made no mistake in deleting the addition. Whether the Transfer Pricing Officer is competent to re-characterize a tested transaction - Held that - The ratio of the reasoning approved by the Hon ble Bombay High Court in the case of Besix Kier Dabhol SA (2012 (10) TMI 817 - BOMBAY HIGH COURT ) clearly militates against the action of the Transfer Pricing Officer in re-characterizing the transaction of investment in the equity shares of the subsidiary as a loan transaction in the instant case. There was no provision under the Act by which equity could be re-characterized into debt and vice-versa. Also noted that at the relevant point of time there were no rules with regard to thin capitalization so as to consider the debt as equity and that such a proposal was only part of Direct Taxes Code Bill of 2010 as a part of General Anti Avoidance Rules (GAAR) and that in the absence of any such statutory provision the stand of the Revenue could not be upheld. - Decided against revenue

Summary

Issues:
Transfer pricing adjustment on notional interest

Analysis:
The appeal concerns a transfer pricing adjustment made by the Assessing Officer on account of notional interest, which the CIT(A) later held as unjustifiable. The respondent company, engaged in civil contracting projects, received funds from its subsidiary for buy-back of shares. The Transfer Pricing Officer recharacterized the transaction as an interest-free loan, proposing an adjustment of ?78,48,476. The CIT(A) disagreed, noting the investment in shares was spread over years, with no dispute on share valuation. The Revenue challenged the deletion of the addition.

The Tribunal found the Transfer Pricing Officer's recharacterization improper, citing the absence of statutory provisions allowing such actions. The Tribunal referenced the Besix Kier Dabhol SA case, where recharacterization of equity into debt was disallowed. The CIT(A) rightly deleted the addition as the investment and buy-back transactions were genuine, with no valuation dispute. The Tribunal rejected the Revenue's plea for revaluation using the DCF method, as the original valuation was detailed and undisputed.

Ultimately, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the notional interest adjustment. The judgment emphasizes the importance of genuine transactions and adherence to transfer pricing regulations, rejecting unfounded recharacterizations and unnecessary prolonging of litigation.