Share application money to foreign subsidiary is not a loan for transfer pricing when treated as capital investment.

Share application money remitted to a foreign subsidiary was treated as capital investment, not a loan, even though the balance remained pending allotment and was shown as unsecured loan in the subsidiary's accounts. Because shares were allotted substantially in the same year, with the balance allotted the next year, and there was no agreement for interest or other income from the remittance, the amount was not an international transaction under section 92B. The arm's length principle was therefore inapplicable, and no transfer pricing adjustment could be made on re-characterisation of the payment as debt.

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Issues: Whether share application money remitted to a foreign subsidiary, including the amount pending allotment, could be treated as an international transaction under section 92B, and subjected to arm's length price adjustment by re-characterising it as a loan.

Analysis: The remittance was made towards investment in share capital of the subsidiary, and shares were in fact allotted to a substantial extent in the same assessment year, with the balance allotted in the following year. The mere treatment of the pending amount as unsecured loan in the subsidiary's accounts did not alter the essential character of the payment as capital investment. In the absence of any agreement for payment of interest or any income arising from such remittance, the transaction could not be treated as an international transaction for transfer pricing purposes. The arm's length principle was therefore held inapplicable to this share application money.

Conclusion: Ground No. 1 was allowed and the share application money was held not to be an international transaction liable to transfer pricing adjustment. Grounds Nos. 2 and 3 were treated as academic and dismissed.

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