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First Blue Home Finance Ltd. Versus Asstt. Commissioner of Income Tax, Circle-10 (1)

Transfer pricing adjustment - addition on account of interest on the deemed loan, determined as a result of the issue of shares at value lower than their fair value estimated by the Transfer Pricing Officer (TPO) - whether the transaction of issue of share capital leads to generation of any income chargeable to tax in the hands of a company issuing shares, warranting the substitution of such income with income determined on the basis of its ALP?

Held that:- Since the transaction of p .....

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ucing it to ₹ 10 on the basis of the ALP of the international transaction on capital account, for which no addition of ₹ 200 is maintainable. Similar is the position as regards the under reporting of interest on an international transaction on a capital account.

The Hon’ble High Court in Shell India Markets Pvt. Ltd. Vs. ACIT [2014 (11)897 - BOMBAY HIGH COURT] following the judgment in Vodafone India Services Pvt. Ltd. (2014 (10)278 - BOMBAY HIGH COURT) held that there can .....

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.63 crore 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. - ITA No. 5460/Del/2011 - Dated:- 5-6-2015 - Shri R.S. Syal, and Shri C.M. Garg,JJ. For the Petitioner : Sh. H.P. Agarwal, CA For the Respondent : Sh. Gaurav Dudeja, Sr. DR ORDER PER R.S. SYAL, A.M.: This appeal by the assessee is directed against the order passed by the CIT(A) on 28.10. .....

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s for the construction or purchase of residential properties in India. Two international transactions were reported by the assessee in Form No. 3CEB. The first transaction is of Issue of share capital with the transacted value of ₹ 128,11,95,000/-. We are not concerned with the other international transaction of Provision of services , which has 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 th .....

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action 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 of shares was in the nature of a deemed loan given by the assessee to its AEs without any consideration. He held that the assessee ought to have been compensated for such deemed loan with suitable interest. After entertaining objections from the assessee, the TPO determined the arm s length value of shares issued by the assessee company at ₹ 13. .....

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arged by the assessee on such deemed loan, the TPO proposed transfer pricing adjustment of equal amount at ₹ 6.63 crore. The Assessing Officer made this addition, which came to be affirmed in the first appeal. The assessee is aggrieved against the sustenance of this addition. 4. We have heard the rival submissions and perused the relevant material on record. The short question is whether any addition towards transfer pricing adjustment on account of interest on deemed loan can be made unde .....

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the income so arising from an international transaction is computed having regard to its ALP. The reported international transaction is of the issue of 12,81,19,500 number of equity shares by the assessee to its AEs at the rate of ₹ 10 per share. This transaction of issue of shares was rightly considered by the assessee as an international transaction. There can be no doubt about such transaction being characterized as anything other than an international transaction. Section 92B gives me .....

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national 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 a non-international transaction. The legislature has clarified this position beyond any doubt by inserting clause (c) to the Explanation at the end of section 92B through the Finance Act, .....

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C is triggered, which talks of computation of arm's length price of an international transaction. Sub-section (1) of section 92C provides that : The arm's length price in relation to an international transaction ….. shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board .....

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is of the ALP of the transaction. Thus, it is apparent that if an international transaction with its determined ALP does not lead to the generation of any income chargeable to tax, then the provisions of section 92(1) are not magnetized. The Hon ble Bombay High Court in Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax, (2014) 368 ITR 1 (Bom.) has held that Chapter-X of the Act does not contain any charging provision but is a machinery provision to arrive at ALP of a tr .....

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determined on the basis of its ALP. An income is chargeable to tax, if it is either of a revenue character 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 any capital receipt arising on issue of share capital within its purview. 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 .....

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ue 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 exceeds the fair market value of the shares is considered as income under the head Income from other sources . To put it simply, if a share with the face value of ₹ 10 is issued for & .....

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t prior to the insertion w.e.f. 01.04.2013 there was no provision under the Act providing for charging excess share premium to tax. In our considered opinion, this provision has no application on the instant assessee for two reasons. First, we are dealing with the assessment year 2007-08 and it is obvious that section 56(2)(viib) has been inserted w.e.f. 1.4.2013 and further there is nothing to indicate that it has a retrospective operation. Second, the assessee company issued shares to its non- .....

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m leads to the accrual of income chargeable to tax in the hands of the issuing company, there can be no question of substituting the transacted value of the international transaction with its ALP. 7. The Hon ble Bombay High Court in Vodafone India Services Pvt. Ltd. (supra) had an occasion to consider a case in which the Indian company issued shares to its non-resident holding company at a premium which was held by the TPO to be inadequate. A higher amount of premium, in the opinion of the TPO, .....

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ts 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 assess .....

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High Court in Vodafone (supra), having held that no addition on account of transfer pricing adjustment is contemplated in respect of less share premium received by the assessee from its AE, proceeded further to examine the effect of the transactions on capital accounts on the total income. The relevant observations have made in para 31 of the judgment, which are as under: 31 Similarly, the reliance by the revenue upon the definition of International Taxation in the sub clause (c) and (e) of Exp .....

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xable to the extent it impacts income i.e. under reporting of interest or over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to the ALP price. It is not a tax on the capital receipts. This aspect appears to have been completely lost sight of in the impugned order. 9. On going through the above extracted observations of the Hon ble Bombay High Court, the overall ratio of the entire judgment can be culled out that though the international tra .....

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unt per se cannot call for any addition on account of transfer pricing adjustment because of the absence of any provision under the Act charging income from such transactions, but the transactions flowing out of such original transaction on capital account, having 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 .....

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onal transaction of purchase of asset at ₹ 100. Since the transaction of purchase of asset is on capital account, there can be no addition of ₹ 200 (Rs.300 minus ₹ 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 within his juri .....

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