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TMI Blog2015 (6) TMI 492X X X X Extracts X X X X X X X X Extracts X X X X ..... capital account, for which no addition of ₹ 200 is maintainable. Similar is the position as regards the under reporting of interest on an international transaction on a capital account. The Hon’ble High Court in Shell India Markets Pvt. Ltd. Vs. ACIT [2014 (11) TMI 897 - BOMBAY HIGH COURT] following the judgment in Vodafone India Services Pvt. Ltd. (2014 (10) TMI 278 - BOMBAY HIGH COURT) held that there can be no addition by applying the provision under Chapter-X on account of less share premium received and also the consequential interest on the resultant deemed loan. The learned DR has not drawn our attention towards any contrary judgment not mandating the determination of ALP of interest on deemed loan consequent upon issue of shares by an Indian company to its non-resident AE at lower price than its fair market value. Respectfully following the precedent, we hold that the addition of ₹ 6.63 crore on account of interest on the deemed loan due to under-receipt of share premium, upheld by the learned CIT(A), cannot be sustained. Accordingly, the addition is deleted - Decided in favour of assessee. - ITA No. 5460/Del/2011 - - - Dated:- 5-6-2015 - Shri R.S. Syal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,40,42,150/- as deemed loan given by the assessee to its AEs. It was thereafter held that the assessee ought to have charged interest on such loan of ₹ 47.40 crore from its AEs. By applying the benchmark interest rate of 14% on such deemed loan, the TPO worked out the arm s length value of interest received at ₹ 6,63,65,901/-. Since no interest was charged by the assessee on such deemed loan, the TPO proposed transfer pricing adjustment of equal amount at ₹ 6.63 crore. The Assessing Officer made this addition, which came to be affirmed in the first appeal. The assessee is aggrieved against the sustenance of this addition. 4. We have heard the rival submissions and perused the relevant material on record. The short question is whether any addition towards transfer pricing adjustment on account of interest on deemed loan can be made under the circumstances as are obtaining in the instant case. Section 92(1) of Income-tax Act, 1961 (hereinafter also called as the Act ) provides that : Any income arising from an international transaction shall be computed having regard to the arm s length price . A bare perusal of this provision divulges that, firstly, there shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe . . Then five specific methods have been provided and lastly, there is a general method as per clause (f), being, `such other method as may be prescribed by the Board. Second condition for invoking the provisions of Chapter-X of the Act is that some income should arise from an international transaction. It is only when some income chargeable to tax arises from an international transaction, that the income so arising is substituted with the income determined on the basis of the ALP of the transaction. Thus, it is apparent that if an international transaction with its determined ALP does not lead to the generation of any income chargeable to tax, then the provisions of section 92(1) are not magnetized. The Hon ble Bombay High Court in Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax, (2014) 368 ITR 1 (Bom.) has held that Chapter-X of the Act does not contain any charging provision but is a machinery provision to ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lder is a non-resident then the mandate of this provision does not apply. The position which ergo follows is that prior to the insertion w.e.f. 01.04.2013 there was no provision under the Act providing for charging excess share premium to tax. In our considered opinion, this provision has no application on the instant assessee for two reasons. First, we are dealing with the assessment year 2007-08 and it is obvious that section 56(2)(viib) has been inserted w.e.f. 1.4.2013 and further there is nothing to indicate that it has a retrospective operation. Second, the assessee company issued shares to its non-resident AEs and section 56(2)(viib) applies only when a shareholder is resident. Moreover, this provision activates only when a company issues shares at a price above the fair market value and not vice versa. On the other hand, we are confronted with a converse situation, in which the assessee company, as per the opinion of the authorities below, has issued shares at a price less than the fair market value. Once neither the amount of face value of the shares issued nor the expected share premium leads to the accrual of income chargeable to tax in the hands of the issuing company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (c) and (e) of Explanation (i) to Section 92B of the Act to conclude that Income has to be given a broader meaning to include notional income, as otherwise Chapter X of the Act would be rendered otiose is farfetched. The issue of shares at a premium does not exhaust the universe of applicability of Chapter X of the Act. There are transactions which would otherwise qualify to be covered by the definition of International Transaction. The transaction on capital account or on account of restructuring would become taxable to the extent it impacts income i.e. under reporting of interest or over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to the ALP price. It is not a tax on the capital receipts. This aspect appears to have been completely lost sight of in the impugned order. 9. On going through the above extracted observations of the Hon ble Bombay High Court, the overall ratio of the entire judgment can be culled out that though the international transaction on capital account itself would not lead to generation of any income because of the transfer pricing adjustment, but the international transaction on capital acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent AEs at face value. The TPO enhanced the value of shares from the face value of ₹ 10 to ₹ 183.44 per share and computed the ALP of this transaction accordingly. Apart from making the resultant addition on account of such transaction on capital account, he also held that interest on the deemed loan due to short receipt of the consideration resulting in transfer pricing adjustment, was also to be made. Such interest was also benchmarked and addition was made. The Hon ble High Court, following the judgment in Vodafone India Services Pvt. Ltd. (supra) held that there can be no addition by applying the provision under Chapter-X on account of less share premium received and also the consequential interest on the resultant deemed loan. The learned DR has not drawn our attention towards any contrary judgment not mandating the determination of ALP of interest on deemed loan consequent upon issue of shares by an Indian company to its non-resident AE at lower price than its fair market value. Respectfully following the precedent, we hold that the addition of ₹ 6.63 crore on account of interest on the deemed loan due to under-receipt of share premium, upheld by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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