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First Blue Home Finance Ltd Versus Deputy Commissioner of Income Tax, Circle- 10 (1) , New Delhi

2015 (9) TMI 1041 - ITAT DELHI

Transfer pricing adjustment - addition on interest on the deemed loan resulting from the receipt of share application money equal to face value in full and final settlement of consideration, at value lower than the fair value estimated by the Transfer Pricing Officer (TPO) - whether any addition towards transfer pricing adjustment on account of interest on deemed loan can be made under the circumstances as are obtaining in the instant case? - Held that:- Though the international transaction on c .....

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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.

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 .....

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o 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 ALP of interest on deemed loan consequent upon issue of shares by an Indian company to its non-resident AE at lower price than its fair market value. Respectfully following the precedent, we hold that the addition of ₹ 15.18 .....

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relation to the assessment year 2008-09. 2. The only issue raised in this appeal is against the sustenance of addition towards transfer pricing adjustment on account of interest on the deemed loan resulting from the receipt of share application money equal to face value in full and final settlement of consideration, at value lower than the fair value estimated by the Transfer Pricing Officer (TPO). 3. Briefly stated the facts of the case are that the assessee is a 100% Indian subsidiary of BHW .....

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ccepted 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 ₹ 11.98. The assessee was found to have received sh .....

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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 wa .....

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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 under the circumstances as are obtaining in the instant case. Section 92(1) of Income-tax Act, 1961 (hereinafter also called as the Act ) provides that : Any income arising from an international transac .....

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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 the transaction of issue of share capital by a company to its AEs being characterized as non-international transaction. Section 92B gives meaning to International transaction . Sub-section (1) of this section provides that : For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction&qu .....

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hares 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 sh .....

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ce 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), being, such other method as may be .....

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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 transaction between two or more Associated Enterprises. It has further been held that this Chapter does not change the character of the receipt but only permits re-quantification of income uni .....

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ng 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 re .....

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blic 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 .....

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our considered opinion, this provision has no application on the instant assessee for two reasons. First, we are dealing with the assessment year 2008-09 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-resident AEs and section 56(2)(viib) applies only when a shareholder is resident. Moreover, this provision operates only when the compa .....

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e 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, was chargeable by the Indian enterprise. Since lower amo .....

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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 transfe .....

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tion 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 I .....

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g 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 transaction on capital account itself would not lead to gene .....

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nsfer 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 are not at arm s length price, then it is mandatory to d .....

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ce 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 jurisdiction to determine the ALP of the transaction of claim .....

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