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TMI Blog2016 (2) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... saction is clearly hit by the provision of section 92(2) of the I.T. Act 1961? Grievances raised by the assessee: Ground No. 1 The order of the Learned Assessing Officer ('Ld. AO')/Learned Transfer Pricing Officer ('Ld. TPO') is bad in law as it has been passed without complying with the mandatory conditions of Section 92CA(3) read with Section 92C(3) of the Income-tax Act, 1961 ('the Act') for the reason that Ld. TPO did not serve upon the Appellant any written show cause notice as required and mandated in terms of proviso to Section 92C (3) read with Section 92CA(3) of the Act. Ground No. 2: 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 making an upward transfer pricing adjustment of Rs. 8,41,67,965/- in respect of Appellant's international transactional of share capital subscription into its associated enterprise ('AE') Sterling Global Oil Resources Pvt. Ltd. ('SGPL'). Ground No. 3: The Ld. AO/Ld. TPO [following the directions of Dispute Resolution Panel - II ('DRP') under section 144C (5) of the Act] gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares at premium, and out of the funds so raised, invested the money in this subsidiary. It was submitted that it was obligation of the assessee company to provide capital to its subsidiary. It was pointed out that it was a capital account transaction which has no impact on income or expense of the assessee. It was also submitted that the fact that there is a delay in the allotment of shares does not mean that interest is to be charged for the period on the amount so paid for share subscription. It was also explained that this transaction, by no stretch of logic, could be treated as a loan on which interest needs to be charged. It was also submitted that, in any event and without prejudice to the above arguments, the interest, if at all applicable, will be on the basis of LIBOR and a minimum period of 180 days, permitted by the RBI for acquiring foreign security to receive share certificate, should be allowed as grace period. None of these submissions, however, impressed the Transfer Pricing Officer. As for the assessee's contention that the transaction was not an international transaction, he was of the view that in the light of retrospective amendment to Section 92B, internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged. 4. The TPO also noted that the assessee had certain outstanding receivables, in respect of reimbursement of expenses, on which no interest was charged. It was noted that these amounts aggregated to Rs 3,42,37,697. The TPO made an arm's length price adjustment, in respect of notional interest on these receivables, @ 15.5%. 5. It was in this backdrop, and aggrieved by the Assessing Officer proposing to make this arm's length price adjustment in respect of interest on So far as the adjustment in respect of the interest on receivables was concerned, the DRP deleted the adjustment by noting that "the SGPL has not accepted these liabilities for various reasons, including the reason that some of the expenses pertained to period prior to incorporation of SGPL" and that "interest does not accrue when the receivable itself has gone bad". The DRP concluded that "it is a peculiar fact situation where the assessee has made certain claims on subsidiaries which are not accepted" and "that being the case, there is no possibility of the revival of claim in future". It was thus held that "the charging of interest is not warranted and the AO is directed not to charge the notional interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al position. 8. So far as the appeal of the Assessing Officer is concerned, we find that it is undisputed position that the amounts shown as recoverable from the subsidiary are no longer recoverable from the associated enterprises and that the assessee does not have any legal rights to recover the monies spent on behalf of the company prior to its incorporation. Such being the factual position, there is no basis of making any arm's length price adjustment in respect of interest on receivables. In any case, the expenses so incurred by the assessee for the subsidiary under incorporation were in the nature of expenses on performing shareholder services and no interest can accrue in respect of the same. In view of these discussions, as also bearing in mind, we approve the stand of the DRP on this point and decline to interfere in the matter. As regards the appeal filed by the assessee against recharacterization of share application money as loan to the subsidiary, we find that there is no dispute that the shares were actually issued to the assessee in October 2010 and the entire payment so made by the assessee was on account of the share so allotted. The recharcterization has been don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of shares, and even if one was to assume that there was an unreasonable delay 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 pari 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued several months after the payments for share application money have been made. Similarly, in VVF's case (supra), the transaction was admittedly in the nature of interest free loan between AEs and the commercial expediency in advancing interest free loans was on account of ownership and control of subsidiary being in the hands of the assessee, which was recognized as a significant factor for commercial expediency. However, as we have seen in the earlier discussions, such commercial expediency of granting interest free loans is wholly irrelevant because it is the impact of this interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital contribution was deemed to be partly an interest free loan (i.e. for the period till the shares were actually allotted) and partly as capital contribution (i.e. when the subscribed shares were allotted by the subsidiary). Revenue, therefore, does not derive any advantage from these judicial precedents either. 49. In any event, it is not open to the revenue authorities to recharacterize the transaction unless it is found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the subsidiary and on use of this money by the subsidiary, the assessee, in its capacity as sole owner of the subsidiary, is beneficiary of all the gains of the subsidiary company. Whether the assessee was allotted these shares or not, the assessee was the only shareholder of the subsidiary company and beneficial owner of all the earnings and all the assets of the company. Non allotment of these shares, during the period of payment of share application money till the actual date of allotment, did not, therefore, prejudice assessee's position anyway. All the earnings of the subsidiary company belonged to the assessee in any situation. For example, if the funds available for dividend distribution for this year were say Rs 1,00,000 and the assessee had 100 shares before new allotment of shares and 1000 shares after the allotment, the assessee would be entitled to Rs 1,00,000 only the either way- whether as Rs 1,000 per share for 100 in pre new allotment situation or whether as Rs 100 per share for 1,000 shares in post new allotment situation. In absolute terms, the dividends remain the same. Whether the assessee is allotted more shares or not is wholly academic as the assessee is a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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