TaxTMI 
TaxTMI 
2016 (3) TMI 279
X X X X Extracts X X X X
X X X X Extracts X X X X
....Associated Enterprises ('AE'), after obtaining the approval of the Commissioner of Income Tax - 8, Mumbai. The TPO passed an order under section 92CA of the Act dated 31.12.2012 proposing an adjustment of Rs. 142,80,14,163/- towards the ALP of the international transactions the assessee entered into with its AE in the period relevant to A.Y. 2009-10, which are as under: - i) Loan to THBV Rs. 1,366/- ii) Subscription to Share Capital to AE Rs.1,42,80,12,797/- Rs.1,42,80,14,163/- The AO completed the assessment for A.Y. 2009-10 under section 143(3) r.w.s. 144C of the Act vide order dated 09.05.2013. 2.2 Aggrieved by the order of assessment for A.Y. 2009-10 dated 09.05.2013, the assessee preferred an appeal before the CIT(A)-58, Mumbai. The learned CIT(A) dismissed assessee's appeal vide order dated 02.01.2015. 3. Aggrieved by the order of the CIT(A)-58, Mumbai dated 02.01.2015 for A.Y. 2009-10, the assessee has preferred this appeal before the Tribunal raising the following grounds: - "1. The learned Commissioner of Income Tax (Appeals) erred in facts and law in not holding the reference made by the learned Assessing Officer u/s. 92CA(1) as being without jurisdictio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in appreciating that the value of investment in the Associated Enterprise, being wholly owned subsidiary, was made based on the value of underlying assets to be acquired by the said Associated Enterprise. 4. (a) The learned Commissioner of Income Tax (Appeals) erred in facts and law in appreciating that no notional interest can be brought to charge by re-characterisation of investment, by holding a part of it to be loan. (b) The learned Commissioner of Income Tax (Appeals) erred in facts and law in sustaining the action of the learned Assessing Officer/ Transfer Pricing Officer in making an adjustment of Rs. 18,62,62,539 as notional interest income @ 15% p.a. without adopting any of the prescribed method for deriving at Arm's length rate and not appreciating that there is no charging provision in the Income-tax Act, 1961 to bring to charge such notional interest. 5. The Appellant prays that:- i. The reference made u/s.92CA and consequentially the order passed u/s. 143(3) r.w.s 144C be treated as being without jurisdiction, invalid and bad in law; ii. Addition of interest of Rs. 1,366/- by adoption of PLR @ 15% p.a. be deleted and the adjustment made by the appel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y owned subsidiary, which was to be an intermediate holding company to acquire 'Shield'. The money received by Tops BV Netherlands was further invested towards acquisition of 'Shield'. The structure of the Topsgrup group of companies for acquisition of 'Shield' is given as under: - - TSL is the Holding Company; - TESL, the assessee, is a wholly owned subsidiary of TSL; - Tops BV is a 100% subsidiary of the assessee' - Tops UK is a 100% subsidiary of Tops BV; - 'Shield' is the target for acquisition. 5.3 It has been submitted by the assessee that while the investment in acquisition of shares of 'Tops BV' formed part of the notes in Form 3CEB, the same was not benchmarked as the assessee was of the view that the subscription to equity capital did not have any bearing on profitability, TP regulations were not applicable. It was further submitted that the recharacterization of this transaction as a loan was not permissible, as this was not in accordance with the provisions of the Act. 5.4 It is seen from the TPO's order under section 92CA(3) of the Act, where he has held that as per the amended provisions of section 92CA(2), transactions of capital financing have all along ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a transaction of investment in share capital could not be recharacterized as a loan. 6.1.1 The assessee's first submission is that in the absence of income arising from an international transaction, TP provisions do not apply. It was submitted that the assessee invested /subscribed to 7200 shares of Tops BV @ Euro 2663.38 per share (Euro 10 plus share premium - Euro 2653.38). It was further contended that as is evident from the above transactions, being on capital account, it did not result in any income nor was there any scope of earning any potential income arising out of this transaction. Thus, it was submitted that the aforesaid transaction is beyond TP regulations. Chapter X of the Act, dealing with TP provisions, commences with section 92(1) of the Act which provides that "Any income arising from an international transaction shall be computed having regard to the arms length price". In this regard it was submitted that the income arising from an international transaction is a condition precedent for the benchmarking of an international transaction. Therefore, firstly, there should be income; and secondly, income should arise from the international transaction. In the absenc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 42. .......... As pointed out above, the issue of shares at a premium is on Capital Account and gives rise to no income. The submission on behalf the revenue that the shortfall in ALP as computed for the purposes of Chapter X of the Act gives rise to income is misplaced. The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when income arises in case of an International Transaction between AEs. It does not warrant re-computation of a consideration taken/given on capital account. .......... 49. .......... Thus no, occasion to apply Chapter X of the Act can arise in such a case." ii) Shell India Markets (P) Ltd. - 369 ITR 516 (Bom) wherein it was held at para 12 thereof that ".......... the jurisdiction to apply Chapter X of the Act would occasion only when income arises out of International Transaction and such income is chargeable to tax under the Act. .........." iii) Equinox Business Parks (P) Ltd. vs. Union of India - 320 Taxman 191 (Bom) wherein at para 8 thereof it was observed that: - "8. .......... 3.4. We find that the issue under consideration of applying Transfer Prici....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... paid for the shares is alleged to be excessive as compared to the fair market value which is the opposite scenario of what section 56(2)(viia) envisages. It is argued that the same also does not fall within the ambit of the provisions of section 56(2)(viib) of the Act as this section covers the issue of shares, whereas the assessee has made an investment in shares. It is contended that in the above circumstances, Indian TP provisions are not applicable either to Vodafone India Services P. Ltd. or to the assessee. 6.1.5 The learned A.R. for the assessee further submits that without prejudice to the assessee's above submissions, the ITAT, Hyderabad Bench in the following cases, covering the issue of outbound investment in equity shares of an AE, has held that since no income arises from investment in equity share capital, the said transactions are beyond the scope of Indian TP provisions: - i) Vijay Electrical Ltd. vs. Addl. CIT (60 SOT 77) (Hyd) ii) Hill Country Properties Ltd. vs. Addl. CIT 48 taxmann.com 94 (Hyd). In respect of the decision in the case of Vijay Electricals Ltd. (supra), the learned A.R. for the assessee submits that the CIT noticed that during the year unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....factual and legal aspects of the case. An order may be rendered erroneous due to error in approach, error in computation, error in applying the relevant law or facts or error in selecting a principle which would not govern the fact situation. Likewise, arbitrary exercise of quasi-judicial power without due consideration of the relevant aspects of the case would also render the resultant order erroneous within the meaning of 7 ITA NO. 842/Hyd/2012 M/s Vijai Electricals Ltd. section 263. In this view of the matter, the submissions of the assessee that the order passed by the AO u/s 195(2) was not erroneous within the meaning of section 263 could not be upheld. The said order was an erroneous order capable of being revised u/s 195(2) provided other conditions of section 263 were also fulfilled.' The learned DR also relied upon in the case of CIT Vs. Sri Mahasastha Pictures, [2003] 263 ITR 304/127 Taxman 162 (Mad.). 10. We have considered the rival submissions, perused the record and have gone through the orders of the authorities below as well as decisions cited. In our opinion, the amount representing 2118.84 is towards investment in share capital of the subsidiaries outside India....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee submits that in view of the findings rendered by the ITAT, Hyderabad Bench in the aforesaid cases (supra) on similar facts as those in the case on hand, as the international transactions of investing/subscribing in the equity capital of a foreign subsidiary does not result in any income, the same is outside the purview of Indian T.P. regulations. 6.2 The assessee's second line of argument is that a transaction of investment in share capital cannot be re-characterised as a loan. The learned A.R. for the assessee submits that the Balance Sheet of the assessee for this relevant period (placed at pages 29 and 34 of the Paper Book) clearly shows that the investment made was in equity shares of the subsidiary, which is correspondingly reflected in the Balance Sheet of the subsidiary investee company (at pages 292 and 296 of the Paper Book). It is further submitted that the details of investment in equity shares were submitted and duly approved by the RBI. Even the agreement entered into between TSL (Holding company) and its investors clearly provides for the proposed structure for the acquisition of the Target company whereby the assessee was to set up a wholly owned subsidiary....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ers N V Besix SA, Belgium and Kier International (Investment) Limited of U.K. The respondent assessee also borrowed from its shareholders in the same ratio as the equity share holding amount of Rs. 57.09 crores from N.A. Basix SA and Rs. 37.01 crores from Kier International Investment Limited. In the circumstances, the respondent had equity capital of Rs. 38.00 lacs and debt capital of Rs. 9410 lacs. Thus, debt equity ratio worked out is to 248:1. 5) The respondent assessee paid interest of Rs. 5.73 crores on the aforesaid borrowing of Rs. 57.09 crores and Rs. 37.01 crores from NV Basix SA and Kier International (Investments) Limited respectively. However, the Assessing Officer disallowed the payment of interest in view of the Reserve Bank of India's approval letter dated 3/11/1998 granting approval to the assessee to do business in India. The approval letter dated 03/11/1998 specifically provided that India Branch Office will not borrow or lend from/to any person in India without specific permission of the Reserve bank of India. The Assessing officer further observed that in view of India Belgium Double Taxation Avoidance Agreement interest on monies paid by the Head Office....
X X X X Extracts X X X X
X X X X Extracts X X X X
....haracterized the said transaction of subscription of shares into advancing of unsecured loan by terming it as an exceptional circumstance and has charged/imputed interest, on the reasoning that in an uncontrolled third party situation, interest would have been charged. We are unable to appreciate such an approach of TPO and under what circumstances, leave above any exceptional circumstances, a transaction of subscription of shares can be re-characterized as Loan transaction. The TPO /Assessing Officer cannot disregarded any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed. The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now, whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterize as loan. If not....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under the scheme of the transfer pricing legislation or on the facts of this case. We do not find so. We do not find any provision in law enabling such deeming fiction. What is before us is a transaction of capital 9 ITA 9010/M/10 subscription, its character as such is not in dispute and yet it has been treated as partly of the nature of interest free loan on the ground that there has been a delay in allotment of shares. On facts of this case also, there is no finding about what is the reasonable and permissible time period for allotment 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 sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ranted. We direct the same to be deleted. Ground is allowed." v) Allcargo Global Logistics Ltd. [150 ITD 651 (Mum)]: It was submitted that in this case the company had paid a certain sum to its AE as share application money which remained unutilized for a certain period. TP adjustment was made in the hands of the assessee on account of interest chargeable on amount of share application money, treating the same as loan due to non-allotment of shares. At para 7 thereof it was held as under: - "7. As the issue involved in ground No. 2 of the present appeals as well as all the material facts relevant thereto are similar to the case of Bharti Airtel Limited (supra) decided by the Tribunal, we respectfully follow the said decision of the co-ordinate Bench of this Tribunal and delete the addition made by the A.O./TPO and sustained by the ld. CIT(A) by way of TP adjustment on account of interest chargeable on the amount of share application money paid by the assessee and lying unutilized with its AE treating the same as the transaction of loan. Ground No. 2 of the assessee's appeals for both the years under consideration is accordingly allowed." vi) Prithvi Information Solutions Ltd.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... being a transaction of lending or borrowing. Therefore, in our view, the TPO was not justified in treating the aforesaid transaction as being an interestfree lending transaction entered with the associated enterprise. Moreover, it is also not the case of the TPO that in a comparable transaction of share application money amongst unrelated parties, the transaction would have entailed charging of interest for ITA No.273/PN/2014 A.Y. : 2009-10 8 the period between payment of share application and the date of allotment of shares. Therefore, in our considered opinion, the approach of the authorities below in the context of the aforesaid amount of Rs. 9,91,39,000/- by treating it to be a transaction in the nature of interest-free lending transaction per se, and subjecting it to an arm's length price adjustment is erroneous and unwarranted. Accordingly, we direct the Assessing Officer to delete the addition to the said extent." 6.2.3 In the light of the above submissions, the learned A.R. for the assessee contended that the following conclusions are required to be drawn: - i) That the TPO/CIT(A) cannot re-characterize the investment in equity shares in Tops BV, Netherlands into a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es would not come within the purview of TP regulations and thereby defeating the purpose of Chapter X of the Act. The learned D.R. placed reliance on the case of PMP Auto Components (2014) 50 taxman.com 272 on the grounds that payment towards share application money was to be benchmarked to determine the ALP of the transaction by considering the application money as a loan and the delay in allotment of shares as the period of loan. 6.4 In rejoinder to the submissions of the learned D.R., the learned A.R. for the assessee argued that as per the decision of the Special Bench of the ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. (2009) 22 DTR (Mum) 361, the learned D.R. cannot raise any point other than those considered by the AO and the learned CIT(A) and in this context drew the attention of the Bench to para 19.6 of the order of the Special Bench wherein it was held: - "19.6 .......... The Departmental Representative has no jurisdiction to go beyond the order passed by the AO. He cannot raise any point different from that considered by the AO or CIT(A). His scope of arguments is confined to supporting or defending the impugned order. He cannot set up an altogether differen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....LP price. It is only a tax on capital receipts. This aspect appears to have been completed lost sight of the impugned order. 42. It was contended by the Revenue that in any event the charge would be found in Section 56(1) of the Act. Section 56 of the Act does provide that income of every kind which is not excluded from the total income is chargeable under the head income from other sources. However, before Section 56 of the Act can be applied, there must be income which arises. As pointed out above, the issue of shares at a premium is on Capital Account and gives rise to no income. The submission on behalf of the revenue that the shortfall in the ALP as computed for the purposes of Chapter X of the Act give rise to income is misplaced. The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when income arises in case of an International transaction between AEs. It does not warrant re-computation of a consideration received/given on capital account. It permits recomputation of Income arising out of a Capital Account Transaction, such as interest paid/received on loans taken/given, depreciati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble, placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. (2012) 24 taxmann.com 199 (Del) and Article 9 of the OECD guidelines drawing the attention of the Bench to para 16 of the order: - "16. ........................................................................................................... "1.36 ..................................................................................................... 1.37 ............................. The first circumstance arises where the economic substance of a transaction differs from its form. .......... The second circumstance arises where, while the form and substance of the transaction are the same, the 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 and the actual structure practically impedes the tax administration from determining an appropriate transfer price.............." iv) that there was no proof that the investment made by the assessee in Tops BV, Netherlands, was actually in the nature of investment in share capi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion, Shields Guarding Company, UK, which was carried out by a SEBI registered company on the basis of Discounted Cash Flow Method and Earning's Multiple Method, which are widely accepted methods for valuation of shares of unlisted companies, and in this context cited the decision of the Chennai ITAT in the case of Ascendas (India) Pvt. Ltd. (2013) 33 taxmann.com 295 (Chennai - Trib) wherein it was held that fixing of the enterprise value on discounted value of future projects or cash flow method was a method used worldwide for the purpose of determining the fair market value of shares. It is submitted that the target, Shields Guarding Company, U.K., was actively engaged and fully operational in providing security services, which was not a capital intensive business and therefore the net asset value was not a suitable method for valuing the said company as mentioned in the valuation report. It is also submitted that the authorities below have not rendered any adverse finding in respect of the valuation report. 6.5.3 The learned A.R. for the assessee also drew the attention of the Bench to the fact that during the financial year ending 31.03.2014, the assessee had sold a part of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Paper Book). Therefore, the learned A.R. for the assessee contends that, the fact that the investment was in the nature of investment in share capital of Tops BV is clearly supported by the financials of the assessee and the investee company, i.e. Tops BV, Netherlands. It was also submitted that the assessee has observed the relevant compliances with RBI for the reporting of this investment in equity shares. 6.5.6 The learned D.R.'s response to the judicial pronouncements relied on by the assessee alongwith the assessee's rebuttal is briefly summarized hereunder: - S. No. Case Law Proposition relied on by the assessee Response by DR Rebuttal by assessee 1 Basix Kier Dahbol SA [TS- 661-HC-2012 (Bom)] Investment in shares cannot be given a different colour so as to expand the scope of Transfer Pricing adjustments by recharacterising it as in interest free loan The DR did not deal with these four judgements relied on by the assessee. Not applicable as the DR did not deal with the judgements in his arguments. 2 Aegis Limited [TS-342-ITAT- 2015 (Mum) - TP] 3 Parle Biscuits Pvt. Ltd. [TS- 127-ITAT-2014 (Mum) - TP] 4 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d)] Investments in nature of equity, cannot be treated as loans and advances and hence cannot be brought within purview of international transactions as defined under section 92B The DR contended that the said judgment was not applicable to the case of the assessee as it dealt with whether a delay in share application money could be treated as a loan It is pertinent to note that in the said judgement does not deal with a delay in allotment of shares. The share application was inadvertently reported as a loan by the auditors. Prithvi had filed a revised audit report and furnished the allotment certificates to prove that it was actually investment in share capital. This can be noted from Tribunal's findings on Para 10 of the order. [PB/204] Share application money is closer to a loan than share capital as pending allotment there is scope to refund the share application money (as in the case of loan). In the assessee's case, the investment is in share capital which was recorded so in the books of both the assessee and the investee company, therefore making it nonrefundable. In fact, the case of the assessee dealing with share capital investment as opposed to share application money....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come i.e. charging provisions In the absence of income arising out of the international transaction, Transfer Pricing Provisions are not applicable. The DR contended that the judgements of the Bombay High Court were not applicable to the assessee as they dealt with inbound transactions which was different as compared to the transaction of the assessee i.e. outbound transaction. The contention of the DR is misplaced as the High Court has clearly stated in Para 42 of Vodafone India Services Pvt. Ltd. v Add CIT that the concept of no transfer pricing in the event of no income applies equally to inbound and outbound transactions. "42. ... It is a recomputation exercise to be carried out only when income arises in case of an international transaction between AEs. It does not warrant recomputation of a consideration received/ given on capital account. It permits re-computation of income arising out of a Capital Account transaction, such as interest paid/received on loans taken/given, depreciation taken on machinery etc. All the above would be case of income being affected due to a transaction on capital account ...." The rest of the decisions rely on the decision of Vodafone India Serv....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... India 320 Taxman 191 (Bom) and decisions of the ITAT, Hyderabad Bench in the case of Vijay Electrical Ltd (60 SOT 77) (Hyd) and Hill Country Properties Ltd. [48 taxmann.com 94 (Hyd)]. 7.1 Before us, the learned D.R. was not able to establish that any income arose out of the assessee's transaction, i.e. of investment in the shares of its wholly owned subsidiary, Tops BV, Netherlands. The learned D.R., however, contended that there is a scope for effect on potential income arising from subsequent sale of these shares and in this regard placed reliance on the decision of the Hon'ble Bombay High Court in the case of Vodafone India Services Ltd. (2014) 361 ITR 531 (Bom) ('Vodafone-III'). 7.1.1 The learned A.R. for the assessee pointed out that this averment made by the learned D.R. was a new contention and line of argument that does not emanate from the points considered by the TPO/AO/CIT(A) in their orders and therefore in the light of the decision of the Special Bench of the Mumbai ITAT in the case of Mahindra & Mahindra Ltd. [2009] 22 DTR (Mum) (SB) 361] this new argument/issue is not to be considered. We find force in the argument of the learned A.R. for the assessee for the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it was received. It is submitted that even though the Petitioner did not receive the ALP value/ consideration for the issue of its shares to its holding company, the difference between the ALP and the contract price is an income, as it arises even if not received and the same must be subjected to tax. There can be no dispute with the proposition that income under the Act is taxable when it accrues or arises or is received or when it is deemed to accrue, arise or received. The charge-ability to tax is when right to receive an income becomes vested in the assessee. However, the issue under consideration is different viz. whether the amount said to accrue, arise or receive is at all income. The issue or shares to the holding company is a capital account transaction, therefore, has nothing to do with income. We thus do not find substance in the above submission." As is self evident from the above, potential income arising from a capital transaction may be considered under Transfer Pricing provisions if it arises from out of the impugned transaction. The situations in which a capital transaction may have an impact on potential income are provided in para 31 of the decision in the case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iven on capital account. It permits re-computation of Income arising out of a Capital Account Transaction, such as interest paid/received on loans taken/given, depreciation taken on machinery etc. All the above would be cases of income being affected due to a transaction on capital account. This is not the revenue's case here. Therefore, although Section 56(1) of the Act would permit including within its head, all income not otherwise excluded, it does not provide for a charge to tax on Capital Account Transaction of issue of shares as is specifically provided for in Section 45 or Section 56(2) (viib) of the Act and included within the definition of income in Section 2(24) of the Act." 7.1.5 In these circumstances, we are of the view that the impugned transaction cannot be brought within the ambit of Indian Transfer Pricing provisions merely on the presumption that it may impact profits arising out of a subsequent transaction which may or may not be an international transaction. In coming to this view, we draw support from the decisions of the ITAT, Hyderabad bench in the case of Vijay Electricals Ltd. [ 60 SOT 77(Hyd)] and Hill Country Properties Ltd. [48 taxmann.com 94(Hyd)]; w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....national transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." Similarly, Rule 10C(1) reads as under:- "10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction [or specified domestic transaction], and which provides the most reliable measure of an arm's length price in relation to the international transaction [or the specified domestic transaction, as the case may be]. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction [or the specified domestic transaction]; (b) the class or classes of associated enterprises entering into the transaction ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....basis that emanate from the Transfer Pricing Rules. 8.1.1 We have already held that the impugned transaction cannot come within the purview of Indian Transfer Pricing provisions since the said transaction is on capital account from which no income/ potential income arises. Another question for consideration is whether Transfer Pricing adjustments can yet to be made if the impugned transaction of investment in equity share capital is re-characterized as a loan transaction and notional interest income is imputed to it and whether such a re-characterization is permissible under the existing legal provisions. 8.1.2 In this regard, it must be stated that even assuming that such a recharacterization of the investment in equity share capital as a loan is permissible, the addition of that part of the equity capital re-characterized as loan would not be possible, as the said loan cannot, by any stretch of imagination, be considered income of the assessee. The Ld. Departmental Representative on being queried was not able to controvert this view. Hence, even if re-characterization is possible, the only addition permissible would that of notional income in respect of the re-characterized loa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....advanced and not an investment in share capital. The only ground taken by the Transfer Pricing Officer for recharacterization of the loan was that the value at which the investment was made was far in excess of the book value as determined under Schedule III of the Wealth Tax Act. In our view, since shares are not covered under the definition of assets, we find no merit in applying the erstwhile Wealth Tax Valuation Rules to determine the Arm's Length Price of equity shares. 8.3.2 In view of the aforesaid discussions, we agree with the contention of the Ld. Representative for the assessee that re-characterization of investment in share capital into loan is not possible under the Transfer Pricing provisions. In coming to this view, we draw support from the discussions of the Hon'ble Bombay High Court in the case of Besix Kier Dabhol SA [ Ts - 661-HC-2012 ] and the orders of the various benches of the Tribunal in the following cases; (i)Aegis Ltd.,[TS -342-ITAT-2015(Mum)- Transfer Pricing]; (ii) Parle Biscuits Pvt. Ltd. [ TS-127-ITAT-2014 (Mum)- Transfer Pricing] (iii) Mylar Laboratories Ltd., [TS-399-ITAT-2015(Hyd)- Transfer Pricing]; (iv) Prithvi Information Solution [34 ITR (....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has recharacterized the said transaction of subscription of shares into advancing of unsecured loan by terming it as an exceptional circumstance and has charged/imputed interest, on the reasoning that in an uncontrolled third party situation, interest would have been charged. We are unable to appreciate such an approach of TPO and under what circumstances, leave above any exceptional circumstances, a transaction of subscription of shares can be re-characterized as Loan transaction. The TPO /Assessing Officer cannot disregarded any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed. The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now,whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterize as loan.....