9911796707
TMI Blog2016 (2) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... or y point of time, it does not make a difference to the position of the shareholder so far as the subsidiary is wholly owned by a single shareholder- as is the factual position in this case. The nominal value of shares, as long as all the shares are held by the assessee is entirely benefit neutral from a commercial point of view. The very foundation of the adjustment made by the Assessing Officer is, therefore, wholly devoid of legally sustainable merits and factually correct assumptions.
Thus, we hold that the adjustment on account of notional interest on the share application money, which has been recharacterized as loan, is not sustainable in law. We, therefore, direct the Assessing Officer to delete the same. Assessee appeal allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 144C (5) of the Act] grossly erred, in law and in facts, in considering interest free period of only 60 days relying on the MCA Notification dated December 14, 2011 as against the 180 days permissible under FEMA Regulations dealing with overseas investment. Ground No. 6 The Ld AO/Ld, TPO [following the directions of Dispute Resolution Panel - II ('DRP') under section 144C (5) of the Act] grossly erred, in law and in facts, in not allowing the benefit of arm's length range of +/- 5% provided in proviso to sec 92C(2) of the Act for computing the transfer pricing adjustment." 3. Briefly stated, the relevant material facts, and developments leading to this dispute before us, are like this. The assessee company is an investment holding company which has invested in various companies through its wholly owned subsidiary Sterling Global Oil Resources Pvt Ltd (SGPL, in short) based in Mauritius. During the relevant previous year, the assessee has entered into international transactions with only one associated enterprise, i.e. SGPL, in respect of contribution to the share capital and in respect of reimbursement of expenses. When this matter came up in scrutiny ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of interest charged in independent transaction in the market or one undertaken by the assessee with a third party". As regards the assessee's contention that the remittance was made with due approval of the Reserve Bank of India, which has allowed the same as a share application money, the TPO was of the view that characterization of a transaction before the RBI does not decide its true character as required for the transfer pricing purposes. A reference was made to the decision of a coordinate bench, in the case of Perot Systems Vs DCIT [(2010) 5 ITR Trib 106 (Del)], and to Hon'ble Punjab & Haryana High Court decision in the case of Coca Cola Inc Vs CIT [(2009) 309 ITR 194 (P&H)]. A reference was also made to theory of substance over form. He held that "the transaction is in fact a loan and the term 'share application money' a fiction. The TPO thus concluded as follows: 7. Conclusion: In view of the above discussion, it is stated that the assessee's stand regarding the share application money not being liable to interest is not acceptable. Since the assessee has availed a loan @ 12.5% from UCO Bank in March 2009, the same shall be used for the purpose of benchmarking. Added t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of time after the receipt of the share application money. The Ld. TPO has gone at length to demonstrate that the intended advancement of money was not for equity financing. The subsidiary SGPL, having received the money has in turn extended a loan to its subsidiary which is also based in Mauritius. The assessee has not been able to demonstrate that immediately on receipt of money, every effort was made to allot the shares. If it was a case which remained pending for allotment due to extra ordinary or legal circumstances, there could have been some merits in the assessee's argument. At best, it is a case where the money was required by the subsidiary and given. Whether it should be allotted as shares or refunded remained pending for consideration and decision, at the end of which shares were allotted. under these circumstances, the re-characterisation of share application money as loan is not only justified but also warranted. The facts and circumstances of the assessee's case do not suggest that the assessee and its subsidiary had the intention of allotment of shares at all times and therefore the re-characterisation of the transaction of the loan is upheld. 6. Aggrieved b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht from the initial stage towards subscription for shares. While on this issue, we may usefully refer to a co-ordinate bench decision in the case of Bharti Airtel Limited Vs ACIT [(2014) 63 SOT 113 (Del)] which has, inter alia, observed as follows: 47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made. In the case of Perot Systems TSI India Ltd (supra), a coordinate bench of this Tribunal had an occasion to deal with the arm's length price adjustment with regard to interest free advances to the subsidiaries. That was a case in which the assessee, an Indian company, advanced interest-free loans to its 100% foreign subsidiaries. The subsidiaries used those funds to make investments in other step- down subsidiaries. On the question whether notional interest on the said loans could be assessed in the hands of the assessee under the transfer pricing provisions of Chapter X, the assessee argued that the said "loans" were in fact "quasi - equity" and made out of commercial expediency. It was also argued that notional income could not be assessed to tax. However, both of these arguments were rejected by a coordinate bench of this Tribunal. While doing so, the coordinate bench observed that there was no material on record to establish that the loans were in reality not loans but were quasi-capital and that there is also no reason why the loans were not contributed as capital if they were actually meant to be a capital contribution. It was observed that, "It is not the case tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of share application money, as partly in the nature of interest free loans to the AEs, and, accordingly, ALP adjustment based on that hypothesis was indeed devoid of legally sustainable merits. We delete the impugned adjustment of Rs.19,15,45,943. The assessee gets the relief accordingly. As we have decided this ground of appeal on the fundamental issue that the payment of share application money could not be partly treated as interest free loan to AE, we see no need to deal with other aspects of the matter. 9. There is one more aspect of the matter. In the present case, allotment of shares does not make any change to the position of the assessee, as the subsidiary is admittedly a wholly owned subsidiary of the assessee. A delay in allotment of shares by the subsidiary company, as long as the subsidiary is a wholly owned subsidiary, does not prejudice the interests of the assessee. It is, therefore, wrong to even allege that an assessee does not behave in a commercially rationale manner, as expected in an arm's length situation, when the assessee does not ask for payment of interest for the period of delay in allotment of shares. We have noted that the TPO's stand that sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The assessee has behaved in a commercially rational manner inasmuch as whether the new shares are allotted at x point of time or y point of time, it does not make a difference to the position of the shareholder so far as the subsidiary is wholly owned by a single shareholder- as is the factual position in this case. The nominal value of shares, as long as all the shares are held by the assessee is entirely benefit neutral from a commercial point of view. The very foundation of the adjustment made by the Assessing Officer is, therefore, wholly devoid of legally sustainable merits and factually correct assumptions. 10. In view of these discussions, as also bearing in mind entirety of the case, we hold that the adjustment on account of notional interest on the share application money, which has been recharacterized as loan, is not susta ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
