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TMI Blog2014 (7) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... ne in this case, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant if, despite having made the payment of share application money, the applicant is not allotted the shares - That aspect of the matter is determined by the relevant statute - it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE - the addition made by the AO/TPO and sustained by the CIT(A) is to be set aside by way of TP adjustment on account of interest chargeable on the amount of share application money paid by the assessee and lying unutilized with its AE treating the same as the transaction of loan – Decided in favour of Assessee. - I.T.A. No. 4909/Mum/2012, I.T.A. No. 4910/Mum/2012 - - - Dated:- 11-6-2014 - Shri P. M. Jagtap, AM And Shri Amit Shuka, JM,JJ. For the Appellant : Shri P. J. Pardiwala For the Respondent : Shri Surendra Kumar ORDER Per Bench : These two appeals filed by the assessee are directed against two separate orders passed by the ld. CIT(A)-15, Mumbai dated 22-05-2012 and 24-5-2012 for assessment years 2007-08 and 2008-09 respectively and since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprises. One had to see whether the transaction was at arms length under the transfer pricing provisions; iii). The argument that notional interest income cannot be assessed is not acceptable in the context of transfer pricing. Section 92 (1) of the income tax act provides that any income arising from an international transaction has to be computed having regard to the arms length price. Section 928 (1) of the income tax act defines an international transaction to mean a transaction between two or more associated enterprises.... In the nature of... Lending or borrowing money... In considering the arms length price of a loan, the rate of interest has to be considered and income on account of interest can be attributed. The decision of the ITAT, Delhi, is squarely applicable to the facts of the assessee s case. In view of the ratio laid down by this decision, the amount paid by the assessee as share application money (quasi-capital) should be reckoned as a LOAN for the intermittent period and notional interest needs to be reckoned on the same which lay invested with Allcargo Belgium, NV - the Associated Enterprise - for an unusually long duration of time. An Order u/s. 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitutions. Therefore the parties re-negotiated the deal and agreed for a revised consideration of 10.205 million Euros (instead of 13.4 million Euros) with a condition that before entering into such Amended 101 the Buyer (i,e.,M/s. Allcargo Belgium) shall pay at least 2 million Euros and pay 1.15 million Euros immediately on entering into the Amended 101 to repay the loan of 3.15 million Euros to Fortis/TNG. 11. For depositing the aforesaid 3.15 million Euros by Allcargo Belgium with RMK, Allcargo India, being the Holding Company of Allcargo Belgium, was to provide fund of 3.15 million Euros to Allcargo Belgium by way of share application money for allotment of shares, with understanding that the shares shall be allotted by Allcargo Belgium, only if the deal for purchase of 100% shares of RMI (whereby purchase 50.01% shares of ECUHOLD) materialises. If the transaction doesn t materialise, the subscription money was to be returned back to Allcargo India. 12. Accordingly, Allcargo India remitted 2 million Euros on 1905.2006 arid 1.15 million Euros on 13.06.2006 (aggregating to 3.15 million Euros) to Allcargo Belgium towards the Share Application Money. 13. The considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase of 100% shares of RMI( (whereby purchase 50.01% shares of ECUHOID) materialises. lf the transaction doesn t materialise, the subscription money to be returned back to Allcargo India. 18. At this stage, the total Share Subscription money paid by Allcargo India was 9.938 million Euros (3.15 + 6.305 +0.483). 19, On 20.06.2006 the Agreement for Sale and Purchase of Shares was executed between Allcargo Belgium and the shareholders of RMK NV. As per the said Agreement, there were three Closing Dates as follows; First Closing date June 30, 2006 - payment of 6.05 million Euros to the shareholders of RMK and delivery of 100% shares of RMI( to Allcargo Belgium. Second Closing date May 01. 2007 - Achieving requisite EBITDA by ECUHOLD for the year 2006 and release of 50% of 750,000 Euros to the shareholders of RMK( deposited in Escrow A/c. Third Closing date May 01. 2008 - Achieving requisite EBITOA by ECUHOLD for the year 2007 and release of balance 50% of 750,000 Euros to the shareholders of RMK deposited in Escrow A/c. By May 2007, it was estimated that the requisite EBITOA would be achieved and it was decided to allot shares from Allcargo Belgium to Allcargo India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany to its AE on unutilized share application money lying with the said AE beyond a period of 60 days treating the same as loans to the substantial extent allowing only a part relief on this issue by accepting the alternative contention of the assessee that the rate of interest should be taken at 3% above the Euro based LIBOR of 3.5263% instead of US Dollar based LIBOR of 5.277%. Aggrieved by the orders of the ld. CIT(A) for assessment years 2007-08 and 2008-09, the assessee has preferred these appeals before the Tribunal. 6. We have heard the arguments of both the sides and also perused the relevant material available on record. In ground No. 1 of both the present appeals, the assessee has raised a preliminary issue challenging the validity of assessments made by the A.O. u/s 143(3) r.w.s. 147 of the Act for both the years under consideration while in ground No. 2, the assessee has challenged the addition made by the A.O. and sustained by the ld. CIT(A) by way of TP adjustment on account of interest chargeable on the amount of share application money paid to its AE and lying unutilized for a period beyond 60 days treating the same as loan. As agreed by the ld. Representatives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay in allotment of shares, the capital contribution could have, at best, been treated as an interest free loan for such a period of inordinate delay and not the entire period between the date of making the payment and date of allotment of shares. Even if ALP determination was to be done in respect of such deemed interest free loan on allotment of shares under the CUP method, as has been claimed to have been done in this case, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant if, despite having made the payment of share application money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is not in purl materia with an interest free loan on commercial basis between the share applicant and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE. Since the TPO has not brought on record anything to show that an unrelated share applicant was to be paid any interest for the period between making the share application payment a ..... 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