TaxTMI 
TaxTMI 
2015 (9) TMI 1041
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....ed by the assessee in Form No. 3CEB. One transaction is of "Receipt of share application money" with the transacted value of Rs. 53,30,96,400/-. We are not concerned with the other international transactions of "Guarantee commission" and `Reimbursement of expenses received', which have 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 `Receipt of share application' 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. 11.98. The assessee was found to have received share application money against such shares from its AEs at the rate of Rs. 10 per share, equal to the face value, in full and final settlement of the issue of shares. Since the book value of the share 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 ....
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....onal transaction'. Sub-section (1) of this section provides that : `For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or ....... or any other transaction having a 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 anything other than an international transaction. The legislature has clarified this position beyond any pale of 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 short-term borrowing, lending or guarantee, purchase or sal....
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....cter or of a capital nature having been specifically included in the ambit of income under the Act. The definition of income does not specifically include within its purview any capital receipt arising on issue of share capital. Thus it follows that the issue of shares at par or premium is a transaction on capital account, which does not affect the computation of total income of a 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 excee....
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....n enterprise was a deemed loan to the foreign company and as such, the addition on account of transfer pricing adjustment was made on this score. Repelling such a point of view, the Hon'ble High Court held that the provisions of Chapter X are not applicable to the international transaction of issue of equity shares by the resident company to its non-resident holding company at certain value, since neither the capital receipt by the resident company on issue 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. 10.55crore. Rather, this amount has been treated as a deemed loan on which addition towards transfer pricing adjustment of intere....
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....ving impact on the profitability of the assessee, would be required to pass the mandate of Chapter-X of the Act. In other words, 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. It can be understood with the help of a simple example. Suppose an Indian 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....