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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 ..... alue of Rs. 128,11,95,000/-. We are not concerned with the other international transaction of "Provision of services", which has been accepted by the authorities at arm's length price (ALP). On a reference made by the Assessing Officer (AO) to the TPO, the latter observed that the assessee demonstrated the international transaction of `Issue of share capital' at ALP by following the Comparable Uncontrolled Price (CUP) method as the most appropriate method. The TPO observed that the book value of each share of the assessee company at the beginning of the year stood at Rs. 13.70. The assessee was found to have issued shares to its AEs at the rate of Rs. 10 per share. Since the book value of the shares was higher than the issued price, the TPO held it as a transaction of `transfer of assets of the company' to its AEs in the guise of issue of share capital. It was opined that such under-charging of the price of shares was in the nature of a deemed loan given by the assessee to its AEs without any consideration. He held that the assessee ought to have been compensated for such deemed loan with suitable interest. After entertaining objections from the assessee, the TPO determined the arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bearing on the profits, income, losses or assets of such enterprises........'. It is apparent from the definition of `international transaction' that it encompasses a transaction between two associated enterprises which, inter alia, has a bearing on assets of such enterprises. As the issue of shares by a company has direct bearing, inter alia, on its assets in terms of receipt of consideration, such transaction cannot be held to be a non-international transaction. The legislature has clarified this position beyond any doubt by inserting clause (c) to the Explanation at the end of section 92B through the Finance Act, 2012, w.r.e.f. 1.4.2002, providing that the international transaction shall include : `(c) capital financing, including any type of long-term or shortterm borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;'. This shows that the issue of share capital is an international transaction. Once there is an international transaction, the mandate of section 92C is triggered, which talks of computation of arm's length price of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. Here it is important to mention that the Finance Act, 2012 w.e.f. 01.04.2013 has inserted clause (viib) to section 56(2) of the Act, the relevant part of which provides as under: `(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:..........'. 6. The above provision makes it explicit that where a company, not being a one in which public are substantially interested, receives consideration for issue of shares exceeding the fair market value of the shares, then the consideration received for such shares as exceeds the fair market value of the shares is considered as income under the head "Income from other sources". To put it simply, if a share with the face value of Rs. 10 is issued for Rs. 50 and the fair market value of such share is Rs. 15, then the excess premium received amounting to Rs. 35 (Rs.50 minus Rs. 15) shall be treated as the income of the company chargeable under this p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of equity shares to its non-resident holding company nor shortfall between the fair market price of the equity shares and the issue price of equity shares can be considered as income within the meaning of the expression as defined under the Act. Respectfully following the precedent, we hold that there can be no question of treating the alleged uncharged share premium by the assessee company leading to an addition on account of transfer pricing adjustment. The TPO has rightly not made any addition on account of the lesser share premium charged by the assessee, which amount was worked out by him at Rs. 47.40 crore. Rather, this amount has been treated as a deemed loan on which addition towards transfer pricing adjustment of interest has been made amounting to Rs. 6.63 crore. Now the question is about the legality or otherwise of such addition. 8. The Hon'ble Bombay High Court in Vodafone (supra), having held that no addition on account of transfer pricing adjustment is contemplated in respect of less share premium received by the assessee from its AE, proceeded further to examine the effect of the transactions on capital accounts on the total income. The relevant observations have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an company purchases some asset from its AE at a consideration of Rs. 300 (the arm's length price of which is Rs. 100), on which it claims depreciation of Rs. 30 at the rate of 10% on such purchase consideration. Now the TPO can rightly determine the ALP of the international transaction of purchase of asset at Rs. 100. Since the transaction of purchase of asset is on capital account, there can be no addition of Rs. 200 (Rs.300 minus Rs. 100), being the difference between the ALP and transacted value. However this international transaction of purchase of asset on capital account having impact on the income of the assessee by means of transaction of claim of depreciation is to be adjusted to the ALP price. Consequently, the TPO will be within his jurisdiction to determine the ALP of the transaction of claim of depreciation by reducing it to Rs. 10 on the basis of the ALP of the international transaction on capital account, for which no addition of Rs. 200 is maintainable. Similar is the position as regards the under reporting of interest on an international transaction on a capital account. 10. The Hon'ble Bombay High Court in Shell India Markets Pvt. Ltd. Vs. ACIT and Others, (2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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