TMI Blog2015 (9) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 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 on the basis of its Annual report at ₹ 11.98 per share. Applying this benchmark as arm s length price of the share capital, the TPO treated the differential amount of ₹ 10,55,53,087/- as deemed loan given by the assessee to its AEs. It was thereafter noticed that the assessee ought to have charged interest on such loan of ₹ 10.55 crore from its AEs. By applying the benchmark interest rate of 17.26% on such deemed loan, the TPO worked out the arm s length value of interest received at ₹ 15,18,205/-. Since no interest was received by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; . This shows that the issue of share capital is an international transaction. Once there is an international transaction, the mandate of section 92C is triggered, which talks of computation of its arm's length price. 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 may prescribe . . Then five specific methods have been provided and the lastly there is a general method as per clause (f), bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ₹ 50 and the fair market value of such share is ₹ 15, then the excess premium received amounting to ₹ 35 (Rs.50 minus ₹ 15) shall be treated as the income of the company chargeable under this provision. It is further relevant to note that this provision is attracted only when the share capital is issued to any person being a resident. Au contraire, if the shareholder is a non-resident then the mandate of this provision does not apply. The position which ergo follows is that 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 ₹ 10.55crore. Rather, this amount has been treated as a deemed loan on which addition towards transfer pricing adjustment of interest has been made amounting to ₹ 15.18 lac. Now the question is about the legality or otherwise of such addition. 8. The Hon ble Bombay 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 Explanation (i) to Section 92B of the Act to conclude that Income has to be given a broader meaning to include notional income, as otherwise Chapter X of the Act would be rendered otiose is farfetched. The issue of shares at a pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 jurisdiction to determine the ALP of the transaction of claim of depreciation by reducing 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. 10. The Hon ble Bombay High Court in Shell India Markets Pvt. Ltd. Vs. ACIT and Others, (2014) 369 ITR 516 (Bom.) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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