2019 (3) TMI 263 - AT - Income Tax

International transaction - TP adjustment - advancement of share application money - HELD THAT - As the assessee had entered into a transaction of purchase of share of shares of an AE, as held that The TPO could not have treated such transactions as a loan and charge interest thereon on notional basis. We set aside the order of the Assessing Officer and delete the addition. See BHARTI AIRTEL LIMITED (BHARTI CRESCENT) VERSUS ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 2, NEW DELHI 2014 (3) TMI 495 - ITAT DELHI - Decided in favour of assessee Disallowing proportionate interest cost on borrowings u/s 36(1)(iii) - borrowed funds were not used to make investment in group entities - commercial expediency - HELD THAT - Issue is covered by the Hon ble Delhi High Court in the case of the assessee itself for assessment year 2010-11 wherein on identical facts, disallowance of interest was deleted. Investment in subsidiaries/ joint venture companies was one of the main objects of the respondent-assessee and hence expenditure in the nature of interest incurred for the purpose of making investments cannot be disallowed under Section 36(1)(iii) - Decided in favour of assessee

Summary

Issues:
1. Treatment of advancement of share application money as an international transaction under transfer pricing provisions.
2. Disallowance of proportionate interest cost on borrowings under section 36(1)(iii) of the Income Tax Act.

Analysis:
1. The first issue in this appeal concerns the treatment of advancement of share application money as an international transaction under transfer pricing provisions. The Assessing Officer had added an amount to the income of the assessee based on the application of internal CUP on the share application money advanced to associated enterprises. The assessee contended that a previous Tribunal order supported their case, emphasizing that the share application money was quasi capital and not a simple debt. The Tribunal referred to relevant case laws and held that the activity of interest-free advances, ultimately to be converted into equity, does not constitute an international transaction. Citing the decision of the Hon'ble Bombay High Court in a similar case, the Tribunal set aside the Assessing Officer's order and deleted the addition made, ruling in favor of the assessee.

2. The second issue raised in the appeal pertains to the disallowance of proportionate interest cost on borrowings under section 36(1)(iii) of the Income Tax Act. The Assessing Officer disallowed a portion of the interest cost, asserting that borrowed funds were used to make investments in group entities. The assessee argued that a previous decision by the Hon'ble Delhi High Court supported their position, where disallowance of interest was deleted in a similar scenario. The Tribunal examined the facts and referred to relevant legal principles, including Supreme Court judgments, to conclude that the expenditure in the nature of interest incurred for making investments cannot be disallowed under section 36(1)(iii) of the Act. Following the precedent set by the Hon'ble Delhi High Court, the Tribunal set aside the Assessing Officer's order, vacated the disallowance of interest expenditure, and ruled in favor of the assessee.

In conclusion, the Tribunal allowed the appeal of the assessee, deleting the additions made by the Assessing Officer in both issues raised, based on the application of relevant legal precedents and interpretations of the Income Tax Act.