2015 (9) TMI 1041 - AT - Income Tax

Tribunal allows appeal, deletes Rs. 15.18 lac interest addition on deemed loan.

First Blue Home Finance Ltd Versus Deputy Commissioner of Income Tax, Circle- 10 (1), New Delhi

The Tribunal concluded that the addition of Rs. 15.18 lac on account of interest on the deemed loan due to under-receipt of share premium cannot be ... Transfer pricing adjustment - addition on interest on the deemed loan resulting from the receipt of share application money equal to face value in full and final settlement of consideration, at value lower than the fair value estimated by the Transfer Pricing Officer (TPO) - 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? - Held 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 account, which impacts income, such as, under reporting of interest or over reporting of interest paid or claiming of depreciation etc. is required to be adjusted to the ALP price, which is not a tax on the capital receipts. Thus if such offshoot transactions of the original transaction on capital account, such as, interest or depreciation are not at arm’s length price, then it is mandatory to determine their ALP and make addition, if any, on account of transfer pricing adjustment. The Hon’ble Bombay High Court in Shell India Markets Pvt. Ltd. Vs. ACIT and Others, (2014 (11) TMI 897 - BOMBAY HIGH COURT) has dealt with a case in which equity shares were allotted by an Indian enterprise to its non-resident 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. (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 ₹ 15.18 lac 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. Issues Involved1. Sustenance of Addition Towards Transfer Pricing Adjustment on Account of Interest on Deemed Loan.Detailed Analysis1. Sustenance of Addition Towards Transfer Pricing Adjustment on Account of Interest on Deemed LoanFacts of the Case:The assessee, a 100% Indian subsidiary of BHW Holding AG (Germany), engaged in providing loans for residential properties, reported an international transaction of 'Receipt of share application money' amounting to Rs. 53,30,96,400/-. The Transfer Pricing Officer (TPO) observed that the assessee received share application money at Rs. 10 per share, equal to the face value, while the book value was Rs. 11.98 per share. The TPO treated the differential amount as a deemed loan and proposed a transfer pricing adjustment by calculating interest on this deemed loan.Legal Provisions and Interpretation:Section 92(1) of the Income-tax Act, 1961, mandates that any income arising from an international transaction should be computed at arm's length price (ALP). The definition of 'international transaction' under Section 92B includes transactions affecting the assets of enterprises. The issue of share capital is considered an international transaction as it affects the assets of the company.Key Legal Precedents:The Bombay High Court in Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax (2014) held that Chapter-X of the Act, which deals with transfer pricing, does not contain any charging provision but is a machinery provision to arrive at the ALP of a transaction. It was clarified that the issue of shares does not lead to income generation chargeable to tax; hence, no transfer pricing adjustment is warranted.Assessment Year and Applicability:For the assessment year 2008-09, the Finance Act, 2012, inserted clause (viib) to section 56(2) effective from 01.04.2013, which considers the excess consideration received over the fair market value of shares as income. However, this provision applies only when shares are issued to a resident, and it is not retrospective. Therefore, it does not apply to the assessee's case as the shares were issued to non-resident AEs.Judgment Analysis:The Tribunal held that the issue of shares at a price lower than the fair market value does not lead to income generation chargeable to tax. Consequently, there can be no substitution of the transacted value with its ALP. The precedent set by the Bombay High Court in Vodafone India Services Pvt. Ltd. was followed, which stated that no addition on account of transfer pricing adjustment is warranted for the issue of shares at a lower premium.Conclusion:The Tribunal concluded that the addition of Rs. 15.18 lac on account of interest on the deemed loan due to under-receipt of share premium cannot be sustained. The appeal was allowed, and the addition was deleted.Final Decision:The appeal was allowed, and the decision was pronounced in the open court on 5th June 2015.