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2016 (3) TMI 279 - ITAT MUMBAI

2016 (3) TMI 279 - ITAT MUMBAI - [2016] 48 ITR (Trib) 753 - Transfer pricing adjustment - TP provisions applicable to capital transactions due to the absence of the income element therein - recharacterisation of investment into loan - Held that:- In the absence of provisions/Rules for re-characterization of investment in share capital into loan and vice-versa, we are of the considered view that the re-characterization of the impugned capital transaction into a loan as sought for by the Transfer .....

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leged excess consideration paid and (ii) addition on account of notional interest computed @15% on the aforesaid sum sought to be re-characterized as a loan. In this view of the matter, the alternate plea of the assessee to reconsider the LIBOR rate for the purpose of computing the addition on account of notional interest becomes academic. - ITA No. 2115/Mum/2015 - Dated:- 19-2-2016 - Shri Jason P. Boaz, Accountant Member And Shri Amit Shukla, Judicial Member For the Appellant : Shri S. M. Lala .....

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280/-. The case was selected for scrutiny. The Assessing Officer ( AO ) made a reference under section 92CA of the Income Tax Act, 1961 (in short the Act ) to the Transfer Pricing Officer ( TPO ) for determining the arms length price ( ALP ) of the reported international transactions entered into by the assessee with its 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 .....

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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 .....

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factors-as against 13% p.a. offered by the appellant. (b) The learned Commissioner of Income Tax (Appeals) erred in facts and law in not appreciating that the 13% p.a. offered on the foreign currency (Euro) loan given to the Associated Enterprise, being wholly owned subsidiary, is more than the average Prime Lending Rate g 12% p.a. and even the LIBOR rate of 5.54% p.a., pursuant to which no adjustment in Arm's Length Price is warranted. 3. (a) The learned Commissioner of Income Tax (Appeals) .....

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nsaction and that there is no charge on application of funds by the appellant. (c) The learned Commissioner of Income Tax (Appeals) erred in facts and law in appreciating that no addition could be made under any provisions of the Income-tax Act, 1961 in respect of investments made out of own explained funds in absence of any specific charging provisions for making such an addition. (d) The learned Commissioner of Income Tax (Appeals) erred in fact and law in appreciating that the no adjustment c .....

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iary, 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 ad .....

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#8377; 1,366/- by adoption of PLR @ 15% p.a. be deleted and the adjustment made by the appellant be upheld; iii. Addition of Rs. I,24,17,50,258/- on account of recharacterisation of share capital into interest-free loan be deleted; iv. Addition of notional interest of ₹ 18,62,62,539/- @ 15% on construing share investment as interest-free loan be deleted; v. Any other relief, as may be deemed fit in the matter, be granted. 6. The grounds of appeal raised are without prejudice to one another .....

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o separate adjudication is called for thereon. 4.3 Ground No. 5 is the prayer of the assessee in this appeal. This ground will automatically get addressed when this appeal is disposed off. Grounds at S.Nos. 3(a) to (e) and 4(a) & (b) - Transfer Pricing Issues 5. The facts of the case on these issues as emanate from the record are, briefly, as under: - 5.1 The assessee, a part of the Topsgrup, engaged in the business of providing security services was incorporated to manufacture security equi .....

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ested ₹ 140 crores for acquisition of Shield . Out of this amount of ₹ 140 crores, TSL invested/subscribed to 12,46,010 shares of the assessee of face value of ₹ 10/- plus premium of ₹ 990/-; resulting in investment of ₹ 124,60,14,673/-). 5.2 The money of ₹ 124,60,14,673/- received by the assessee from TSL was invested by acquiring 7200 shares @ Euro 2,663.38 per share during the period under consideration (i.e. A.Y. 2009-10) in Tops BV Netherlands, a wholly o .....

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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 fro .....

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re premium, the AE would have had to take loans from the assessee or on open market which would entail it to pay huge interest costs. The AE thus got the funds by way of the above transfer by the assessee without being charged any interest thereon. Thus, according to the TPO, the premium was nothing but a loan given by the assessee to its AE (vis. Tops BV) in the garb of share premium. The TPO then proceeded to compute the book value per share on the basis of Schedule III of the Wealth Tax Act, .....

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l decisions in support of the propositions put forth that, (i) TP provisions would not be applicable to capital transactions due to the absence of the income element therein; and (ii) recharacterisation of investment into loan was not possible: - i) Vodafone India Services Pvt. Ltd. [368 ITR 001 (Bom)] ii) Shell India Markets Pvt. Ltd. [269 ITR 516 (Bom)] iii) Vijai Electricals [60 SOT 77 (Hyd)] iv) Hill Country Properties Ltd. [48 taxmann.com 94 (Hyd)]. The learned CIT(A) was of the view that t .....

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an international transaction, TP provisions do not apply; and ii) That 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 .....

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tted 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 absence of these two conditions, the TP provisions do not apply. 6.1.2 The subject matter of dispute is with regard to the investment by the assessee in acquiring the shares in Tops VB, Netherlands. It was submitted by the assessee that .....

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ITR 001 (Bom), particular reference was drawn to the findings in the order at the following paragraphs:- 24. A plain reading of section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act ...... 25. .......... The word income for the purpose of the Act has a full understood meaning as defined in Section 2(24) of the Act. This even when the definition in Section 2(24) of the Act is an inclus .....

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Income in Section 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. This is settled by the decis .....

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ered 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 occ .....

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rivate Limited in Writ Petition number 871 of 2014 dated 10th October 2014. .......... Therefore, such capital account transaction not falling within a statutory exception cannot be brought to tax. Even income arising from international Transaction between AE must satisfy the test of income under the Act and must find its home in one of the above heads i.e. charging provisions. There is no charging section in Chapter X of the act. Only if there is income which is chargeable to tax under the norm .....

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tions, i.e. receipt of share capital and share premium on account of issue of shares, but they are applicable in the instant case of the assessee also which is for an outbound investment in the equity share capital of its subsidiary. It was argued by him that in the decision of Vodafone India Services P. Ltd. (supra), at para 42 thereof, the Hon'ble Bombay High Court laid down the ratio that the ALP in transaction between AEs is to be determined under TP provisions only in the event of occur .....

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2)(viib) of the Act do not bring to tax transactions such as payment of excess premium or shortfall in receipt of share premium. It was argued that the case of the assessee does not fall under section 56(2)(viia) as the consideration 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 A .....

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t 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 under consideration, the assessee had invested certain amounts in its subsidi .....

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apital of subsidiaries outside India and was the view that since these transactions were not in the nature of transactions referred to under section 92B of the Act, TP provisions were not applicable. The relevant portions of the Tribunal s order, brought to the notice of the Bench, at paras 8 to 10 thereof is extracted hereunder: - 8. The learned counsel relied upon the decision in the case of Dana Corporation RE, 321 ITR 178 (AAR) wherein it has been held as follows: Section 92 is not an indepe .....

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me or to charge tax on income which is not otherwise chargeable under the Act. 9. The learned counsel also relied upon the decision in the case of Amiantit International Holding Ltd., 322 ITR 678 (AAR) wherein it was held that in a case where income was not chargeable at all transfer pricing provisions of section 92-B(i) of the IT Act would not apply. 9.1 The learned DR, on the other hand relied upon the decision ITAT Mumbai Bench B in the case of Board of Control for Cricket in India Vs. DIT (E .....

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inciple 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 err .....

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ndia as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pricing provisions are not applicable as there is no income. Accordingly, we set aside the order passed by the CIT u/s 263 and that of the AO is restored and the grounds raised by the assessee in this regard are allowed. The learned A.R. for the assessee also drew the attention of the Bench to the findings of the ITAT, Hyderabad Bench in the case of Hill Country Properties Ltd. .....

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g the TPO to re-characterize an investment in the form of equity as a debt. DRP held that this contention cannot be accepted and the TPO has already considered all the objections at Para-8 of the TP order. .......... 70.2 ........... ........... 70.5 ............ 71. ........... 72. We have heard both the parties, perused the record and have gone through the orders of the authorities below. Similar issue came up for consideration before this Tribunal in the case of Vijai Electricals Ltd. v. Addl .....

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re not applicable as there is no income. Accordingly, we set aside the order passed by the CIT u/s 263 and that of the AO is restored and the grounds raised by the assessee in this regard are allowed. 72.1 In view of the above, in our opinion impugned transaction cannot be considered u/s 92CA of the I.T. Act and accordingly, this ground is allowed. The learned A.R. for the assessee submits that in view of the findings rendered by the ITAT, Hyderabad Bench in the aforesaid cases (supra) on simila .....

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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 .....

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efrom which was not earned by the assessee. It was argued that the Act does not permit re-characterisation of equity into loan or for that matter loan to equity. It was also contended that the TPO cannot question the commercial expediency of the transaction. In support of the above proposition put forth, the learned A.R. for the assessee placed reliance on the following judicial pronouncements, referring to the relevant portions thereof: - i) Besix Kier Dahbol SA [TS-661-HC-2012 (Bom)] ii) Aegis .....

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- i) Besix Kier Dahbol SA [TS-661-HC-2012 (Bom)]: In this case the question before the court was: - i) Whether on the facts and circumstances of the case and in law the Tribunal was right in holding that in the absence of any specific thin capitalization rules in India, the Assessing Officer cannot disallow the interest payment on debt capital after having observed the abnormal thin capitalization ratio of 248:1? In this regard it was submitted that the Hon'ble Court held as under at paras .....

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nvestment) Limited of U.K. The respondent assessee also borrowed from its shareholders in the same ratio as the equity share holding amount of ₹ 57.09 crores from N.A. Basix SA and ₹ 37.01 crores from Kier International Investment Limited. In the circumstances, the respondent had equity capital of ₹ 38.00 lacs and debt capital of ₹ 9410 lacs. Thus, debt equity ratio worked out is to 248:1. 5) The respondent assessee paid interest of ₹ 5.73 crores on the aforesaid bo .....

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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 to the branches was not allowable as a deduction. 6) In appeal, the Commissioner of Income Tax (Appeals) by an order dated 29/3/2007 upheld the order of the Assessing officer and disallowed the deduction on account of interest of ₹ 5.73 crores paid to Joint Venture Partners. The Commissioner of Income Tax (Appeals) he .....

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d that the borrowings on which the interest has been claimed as a deduction are in fact capital of the assessee and brought only under the nomenclature of loan for tax consideration. It was the case of the appellant-revenue before the Tribunal that debt capital is required to be re-characterized as equity capital. However, the Tribunal held that in India as the law stands there were no rules with regard to thin capitalization so as to consider debt as an equity. It is only in the proposed Direct .....

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iew of the above, the question (i) raises no substantial question of law and is therefore, dismissed. ii) Aegis Limited [TS-342-ITAT-2015 (Mum) -TP]: It is submitted that the relevant findings in this case at para 27 is as under: - 27. We have heard the rival submissions and also perused the relevant findings in this regard in the impugned orders. The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. Th .....

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n 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 canno .....

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nd by various other decisions, as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer. Thus, ground no. 14 is treated as allowed. iii) Parle Biscuits Pvt. Ltd. [TS-127-ITAT-2014 (Mum) - TP]: It is submitted that the relevant findings a .....

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unal in the case of Bharati Airtel Ltd. Vs. ACIT rendered vide its order dated 11-3-2014 passed in ITA No. 5816/Del/2012 wherein a similar issue has been decided by the Tribunal in favour of the assessee vide para 47 which reads as under:- 47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capit .....

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puted can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged 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 intere .....

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llotment 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 share application money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is n .....

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ery foundation of impugned ALP adjustment is devoid of legally sustainable merits. Respectfully following the decision of the Tribunal in the case of Bharati Airtel (supra) on a similar issue, we delete the addition made by the A.O./TPO and sustained by the ld. CIT(A) on account of T.P. adjustment to the extent it is in relation to the transactions involving share application money given by the assessee company to its AE which was treated as in the nature of loans given by the assessee to its AE .....

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dering various orders passed by the co-ordinate Benches referred to in the order held that the investments are in the nature of equity then, they cannot be treated as 'loans and advances'. Since in this case, the investments are in the nature of equity and shares have been allotted after a period of four months, we are of the opinion that TPO cannot reclssify the amount as 'loans and advances'. Moreover, we have considered the appeal in AY. 2008-09 vide orders dt. 10-01-2014, whe .....

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ain 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 o .....

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at in this case, it was held that investments in the nature of equity cannot be treated as loans and advances and hence cannot be brought within the purview of international transactions as defined in section 92B of the Act. vii) Tooltech Global Engineering Pvt. Ltd. [51 taxmann.com 336 (Pune)]: It is submitted by the learned A.R. for the assessee that in this case at para 12 of the order it has been held as under: - 12. In so far as the amount of ₹ 9,91,39,000/- (i.e. ₹ 66,87,000/- .....

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he nature of interest-free loan primarily for the reason that till the close of the previous year under consideration no shares have been actually allotted to the assessee. Accordingly, arm's length price adjustment has been made on account of interest element on such amount. In our considered opinion, the action of the TPO in changing the characteristic of the transaction of payment of share application money as an interestfree loan is unwarranted and beyond his jurisdiction which carrying .....

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puted thereof is includible in the assessable income of the assessee. So however, where the character of payment is towards share application money, thereby reflecting a capital investment, and the same not having been disputed by the TPO, such a transaction cannot be subject to an arm's length price adjustment under the plea of it 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 lend .....

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,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 s .....

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ively and without prejudice to the above, it is submitted that in any event since the international transaction has taken place in foreign exchange, the rate for computing notional interest cannot exceed the LIBOR of 5.514% (page 45 of the Paper Book). 6.3 The learned D.R. for Revenue was heard in this matter. In respect of the alleged excess consideration paid over and above the Wealth Tax value adopted by the TPO being re-characterized as a loan, the learned D.R. was not able to explain as to .....

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the case of Vodafone India Services Ltd. (2014) 361 ITR 531 (Bom) (Vodafone III), contended that the term income includes potential income and in this regard referred to para 32 thereof. It was contended that potential income could arise/be affected by the investment made by the assessee in the share capital of Tops BV, Netherlands, i.e. the subsidiary, in the event of future sale of shares under the head Income from Capital Gains . The contention of the learned D.R. was that the assessee may s .....

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reby 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 .....

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he AO or CIT(A). His scope of arguments is confined to supporting or defending the impugned order. He cannot set up an altogether different case. If the Departmental Representative is allowed to take up a new contention de hors the view taken by the AO that would mean the Department Representative (six - Departmental Representative) stepping into the shoes of the CIT exercising jurisdiction under s. 263. We, therefore, do not permit the learned Departmental Representative to transgress the bound .....

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re applicable in view of there being a possibility of potential income. The learned A.R. for the assessee urged that since the contentions of the learned D.R. were in addition to the findings of the TPO/CIT(A) and in the light of the decision of the ITAT Special Bench in Mahindra & Mahindra (supra), they cannot and are not to be considered. 6.4.2 The learned A.R. for the assessee submits, that without prejudice to the above, with respect to the reliance placed by the learned D.R. on Vodafone .....

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Act would be rendered otiose is farfetched. The issue of shares at a premium does not exhaust the universe of applicability of Chapter X of the Act. There are transactions which would otherwise qualify to be covered by the definition of International Transaction. The transaction on capital account or on account of restructuring would become taxable 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 inco .....

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come 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. I .....

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e 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. 6.4.3 The learned A.R. for the assessee argued that it was to be noted that the nature of potential income arising out of an international transaction was clarified to mean a potential impact of income arising out of the international transacti .....

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5 In respect of the issue of re-characterization of investment in equity shares as a loan, the learned D.R. for Revenue additionally raised the following contentions: - i) that the assessee invested in the shares of its subsidiary Tops BV, Netherlands at a value which was abnormally high with respect to the book value of the subsidiary company determined as per Schedule III of the Wealth Tax Act, 1957 ii) that this transaction of the assessee was aimed at ultimately building losses in the future .....

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g premium) and a loan. In this context, the learned D.R. submitting that the re-characterization of investment was possible, 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 ................ .....

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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 capital and not actually a loan in the garb of share capital. 6.5.1 In rejoinder to the above contentions of the learned D.R., the learned A.R. for the assessee submitted that the learned D.R. canno .....

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c costs, as per Schedule III of the Wealth Tax Act, 1957. The learned A.R. for the assessee submitted that equity shares in a company are not covered under the depreciation of assets provided for in section 2(ea) of the Wealth Tax Act w.e.f. 1993. The learned A.R. for the assessee contends that it is therefore apparent that the provisions of Wealth Tax Act are inapplicable to equity shares held by an assessee and consequently, the valuation rules therein are also inapplicable. 6.5.2 The learned .....

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the net asset value of an unquoted share computed on the basis of its book value be considered as its fair market value as done by the TPO [i.e. @ Euro 7,704 / 1800 shares = 4.28 Euro per share]. It is submitted that the assessee and its wholly owned subsidiaries were mere holding companies, the entire amount of share capital and premium would belong to the assessee and therefore the value of the investment would be based on the value of the Target company, i.e. Shields Guarding Company, UK, wh .....

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nai 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 th .....

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rom Note 13 of the financial statement for the year ended 31.03.2015, placed at page 148(c) of the assessee s Paper Book. This fact, the learned A.R. for the assessee submits, refutes the contention of the learned D.R. that the purchase cost of shares in Tops BV, Netherland were inflated to claim losses in subsequent years. 6.5.4 The learned A.R. for the assessee submits that the TPO/learned CIT(A) in their orders have not rendered any finding that the said transaction was in fact a sham transac .....

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basis (i.e. Wealth Tax Act valuation) on which re-characterization of the transaction as a loan was done was flawed from the beginning. It was also pointed out that the assessee during the financial year ended 31.03.2014 has sold a part of the shares acquired at Tops BV, Netherlands at a profit/gain of ₹ 4,71,86,529/-. Consequently, the reliance placed by the learned D.R. on EKL Appliance Ltd. (supra) fails. Further, there are no thin capitalization rules in the country and in the light o .....

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t in shares of Tops BV in the Balance Sheet of the assessee for the relevant period (placed at pages 29 & 34 of assessee s Paper Book). It was also submitted that the Balance Sheet of Tops BV, Netherlands has disclosed the said transaction as an increase in share capital and share premium (at pages 292 and 296 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 supp .....

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hbol 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 Mylan Laboratories Ltd. [TS-399- ITAT-2014 (Hyd) .....

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splaced as the judgement in Paras 8 & 9, consider the rulings of Dana Corpn. in [2010] 321 ITR 178 /186 Taxman 197 (AAR-New Delhi), which state that without the presence of income, the provisions of transfer pricing would not apply. Considering the said judgements, the Tribunal decided that Transfer Pricing provisions are not applicable to investment in share capital of the subsidiaries outside India as there is no income arising from the said transaction. 6 Hill Country Properties Ltd. vs. .....

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do not apply Further, share application money is closer to 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 is on a much stronger footing. .....

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e 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 .....

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pplication money, is on a much stronger footing. Therefore the contention of the DR fails. Further, it is pertinent to note that the DR has relied on PMP Auto Components v DCIT [2014] 50 taxmann.com 272 (Mum), wherein the subject matter of dispute was share application money and a delay in period of allotment 8 Tooltech Global Engineering Pvt. Ltd. [51 taxmann.com 336 (Pune)] Payments made to its AE towards share application money, thereby reflecting capital investment, which was undisputed by t .....

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than share capital as pending allotment there is scope to refund the share application money (as in 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, is on a much stronger footing. Therefore the contention of the DR fails. The contention that Allca .....

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v Add CIT - 368 ITR 001 (Bom) A plain reading of Section 92(1) of the Act very clearly bring out that income arising from an international transaction is a condition precedent for application of Chapter X of the Act i.e. income arising from an International Transaction between AEs must satisfy the test of income under the Act and must find its home in one of the heads of income i.e. charging provisions In the absence of income arising out of the international transaction, Transfer Pricing Provis .....

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sactions. 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 .. .....

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ents of the jurisdictional High Court in the case of Besix Kier Dabhol SA [TS-661-HC-2012 (Bom)], Vodafone Services Pvt. Ltd. (368 ITR 1) (Bom), Coordinate Bench of ITAT, Mumbai judgements in the case of Aegis Limited [TS-342-ITAT-2015 (Mum) -TP], Parle Biscuits Pvt. Ltd. [TS-127-ITAT-2014 (Mum) - TP] and 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)]. It was also contended that the investment of the a .....

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from and international transaction shall be computed having regard to the arms length price. Evidently, therefore, income arising from the international transaction is a condition precedent for computing the ALP and such income should be chargeable to tax under the Act. In the absence of such income, benchmarking of an international transaction and computing ALP thereof would not be in order. Consequently, if an international transaction is on capital account and does not result in income as def .....

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(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 c .....

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sidered. We find force in the argument of the learned A.R. for the assessee for the assessee on this issue. 7.1.2 In any case the concept of potential income has been dealt with by the Hon ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (368 ITR 1)(Vodafone IV) at para 31, 32 and 43 of its order 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 co .....

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der reporting of interest over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to teh ALP. It is ......... tax on the capital receipts. This aspect appears to have been completely lost sight of in the impugned order. 32. The other basis in the impugned order is that as a consequence of under valuation of shares, there is an impact on potential income. The reasoning is that if the ALP were received, the Petitioner would be able to invest the s .....

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n between AEs. The entire consideration received would not be a subject-matter of taxation. It appears for the above reason that the learned Solicitor General did not seek to defend the conclusion in the impugned order on the basis of the reasons found therein, but sought to support the conclusion with new reasons". 43. It was contended by the revenue that income becomes taxable no sooner it accrues or arises or when it is deemed to accrue or arise and not only when it was received. It is s .....

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ive 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 f .....

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he Arm's Length Price implies that the potential income, if any, should arise from the impugned international transaction which is before the Transfer Pricing Officer for consideration and not out of a hypothetical international transaction which may or may not take place in future. Before us, except for making a claim in this regard the Ld. Departmental Representative was not able to establish that any income or potential income arose from the impugned transaction of the assessee s investme .....

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ia Services P. Ltd.(368 ITR 1) had observed that it would be applicable to both inbound and outbound transaction at para 42 thereof which is extracted hereunder:- 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 .....

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. It does not warrant re-computation 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 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 other .....

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tion 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)]; which are cases of outbound investments, wherein prices at which the equity shares were acquired could have impacted the profits which may have arisen out of a subsequent transaction of the said shares. However, since no income arose from .....

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unal followed the decision rendered in the case of Vijay Electricals Ltd. (supra). 7.1.6 The differentiation sought to be made by the Revenue between inbound investment in shares and outbound investment in shares for applicability of T.P provisions does not, in our considered view, find any support therein. It would also be appropriate in this regard to refer to Rules 10B and 10C of the Income Tax Rules, 1962 ( in short the Rules ). Rule 10B(2) reads as under:- (2) For the purposes of sub-rule ( .....

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which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or r .....

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e 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 ma .....

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data necessary for application of the method; (d) the degree of comparability existing between the international transaction [or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between t .....

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cluding the geographical location and the size of the markets, the laws and the Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition are all material and relevant aspects. If we keep the aforesaid aspects in mind, it would be delusive to accept and agree that Transfer Pricing provisions/Rules can be different for inbound and outbound investment in shares. Such reasoning is not what Chapter X of the Act and Rules mandate or .....

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pplied cannot be different for outbound investment and inbound investments. Therefore, in our view, the argument that different parameters would apply for inbound and outbound investments does not have any 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 .....

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rt 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 loan. Therefore, in any event, the addition of ₹ 124 crores being part of the investment in e .....

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ment in equity share capital was a bundled transaction, comprising of both investment in share capital alongwith a loan and was therefore, to be treated as a loan to the extent that the amount of investment exceeded the book value of investment computed as per Schedule III of the wealth Tax Act. The Ld. Departmental Representative contended that the transaction was in fact a manipulation wherein the assessee would take care of the inflated cost at the time of future sale. It was alleged that the .....

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tablish the bona-fide of the impugned transaction. The assessee s balance sheet reflects the investment made as investment in equity shares which is also correspondingly reflected in the balance sheet of the investee company, Top BV Netherlands. The details of investment in equity shares were informed and submitted to the Reserve Bank of India. Further, even the agreement entered into between TSL ( the holding company) and its investors provides for the proposed structure for acquisition of the .....

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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 Tr .....

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ITR (T) 429 (Hyd)]and (v) Tooltech Global Engineering Pvt. Ltd. [51 taxmann.com.336(Pune)] 8.3.3 In the case of Besix Kier Dabhol SA(supra), the Hon ble Bombay High Court upheld the decision of the Co-ordinate bench wherein, it was held that in the absence of thin capitalization rules, debt capital could not be recharacterized as equity capital and vice-versa. The relevant portion at para- 7 and 8, thereof is extracted hereunder:- 7. However, the Tribunal allowed the respondent-assessee s appeal .....

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ization so as to consider debt as an equity. It is only in proposed Direct Tax Code Bill of 2010 that as a part of the General Anti Avoidance Rules it is proposed to introduce a provision by which a arrangement may be declared as an impermissible avoidance arrangement and may be determined by re-characterizing any equity into debt or vice versa. 8. We find no fault with the above observations of the Tribunal. There were at relevant time and even today no thin capitalization rules in force. Conse .....

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ra 27 of this order of the Co-ordinate bench is extracted hereunder:- 27. We have heard the rival submissions and also perused the relevant findings in this regard in the impugned orders. The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. The TPO has redeemed some of these shares at par. The TPO has recharacterized the said transaction of subscription of shares into advancing of unsecured loan by ter .....

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tion 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 .....

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erizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer. Thus, ground no. 14 is treated as allowed. 8.3.5 In the light of the above decisions (supra), we do not find merit in the contentions of the Ld. Departmental Representative in respect of recharacterizing of the investment in acquisition of equity shares undertaken by the assessee in Tops BV, Netherlands as a lo .....

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finding that there is no income/potential income arising to the assessee out of the impugned international transaction of investment in acquiring shares in its subsidiary TOPs BV, Netherlands, the same would not fall within the purview of Indian Transfer Pricing provisions. In coming to this view we drew support from the ratio laid down in the following judicial pronouncements:- (i) Vodafone India Services Pvt. Ltd. (368 ITR 1(Bom)(Vodafone IV), wherein at para 42 it is mentioned that the ratio .....

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