TMI Blog2016 (3) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 For the Respondent : Shri Mukesh Kumar Shah ORDER Per Jason P. Boaz, A.M. This appeal by the assessee is directed against the order of the CIT(A)- 58, Mumbai dated 02.01.2015 for A.Y. 2009-10. 2. The facts of the case, briefly, are as under: - 2.1 The assessee company, a wholly owned subsidiary of the Tops Securities Ltd. (TSL) is engaged in the business of providing security services. For A.Y. 2009-10, the assessee filed its return of income on 23.09.2009 declaring total income of ₹ 3,65,280/-. 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 intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in facts and law in sustaining the action of the learned Assessing Officer/Transfer Pricing Officer in making an addition of ₹ 1,24,17,50,258/-, by way of adjustment on account of recharacterisation of the investment in shares issued at premium by wholly owned subsidiary outside India as interest free loan given to the Associated Enterprise. (b) The learned Commissioner of Income Tax (Appeals) erred in facts and law in not appreciating the commercial expediency of the investment transaction 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 can made by the Transfer Pricing Officer by re-characterising a part of investment into loan without application of any of the prescribed methods for determination of arms-length price and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 equipment. However, since this business stopped, it is carrying on the activity of an investment/holding company. In order to expand its security business on a global scale, the Topsgrup proposed to invest in Shield Guarding Company Ltd., U.K. ( Shield ), a private company engaged in the business of providing security services. Towards this end, the assessee s holding company TSL entered into an agreement dated 18.07.2007 with its investors, viz. India Advantage Fund Indivision who jointly invested ₹ 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 &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In doing so, the TPO considered the number of shares at 72000 instead of 7200, the share premium at Euro 266.3 as against Euro 2663 and book value at Euro 0.428 instead of Euro 4.28. The TPO made a further adjustment/ addition of ₹ 18,62,62,539/- being notional interest computed @15% on the aforesaid sum of ₹ 124,17,50,258/-. 5.5 On appeal before the learned CIT(A), the assessee placed reliance on the following judicial 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 the ratio of the Hon'ble Bombay High Court judgements do not apply to the assessee in the case on hand as they pertained to inbound transactions i.e. where the assessee received the amount on issue of shares, whereas the transaction of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inclusive definition. It cannot be disputed that income will not in its normal meaning include capital receipts unless it is so specified, as in Section 2(24)(vi) of the Act. In such a case, Capital Gains chargeable to tax under Section 45 of the Act are, defined to be income. The amounts received on issue of share capital including the premium are undoubtedly on capital account. Share premium have been made taxable by a legal fiction under section 56(2)(viib) or the Act and the same is enumerated as 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 applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chapter X would not apply. .......... iv) S.G. Asia Holdings (India) (P) Ltd. - 229 Taxman 452 (Bom), wherein the Hon'ble Court followed the decision in the case of Vodafone India Services P. Ltd., in 368 ITR 001 (Bom). 6.1.3 Ld. Counsel further submitted that though the aforesaid judgements pertain to inbound transactions, 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 occurrence of income. 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 was submitted that in view of the above, the ratio laid down therein by the Hon'ble Court is applicable to both inbound and out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht 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 independent charging provision. The expression income arising in the opening words of section 92 postulates that income has arisen under the substantive charging provisions of the Act. If by application of the provisions of section 45 read with section 48, which are integrally connected one with the other, income cannot be said to arise, section 92 does not come to the aid of the Revenue even though it is an international transaction. Section 92 obviously is not intended to bring in a new head of income 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 Mum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication money and has been sent through banking channels. It is further contended that it is in the nature of equity in the hands of subsidiary and that there is no provision in the Act empowering 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. CIT [2013] 60 SOT 77/36 taxmann.com 386 (Hyd) wherein it has been held as follows: 10. We have considered the rival submissions, perused the record and have gone through the orders of the authorities as well as decisions cited. In our opinion, the amount representing ₹ 2118.84 crores is towards investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance on the following judicial pronouncements, referring to the relevant portions thereof: - i) Besix Kier Dahbol SA [TS-661-HC-2012 (Bom)] ii) Aegis Limited [TS-342-ITAT-2015 (Mum) -TP] iii) Parle Biscuits Pvt. Ltd. [TS-127-ITAT-2014 (Mum) - TP] iv) Mylan Laboratories Ltd. [TS-399-ITAT-2014 (Hyd) - TP] v) Allcargo Global Logistics Ltd. [150 ITD 651 (Mum)] vi) Prithvi Information Solutions Ltd. [34 ITR(T) 429 (Hyd)] vii) Tooltech Global Engineering Pvt. Ltd. [51 taxmann.com 336 (Pune)] 6.2.2 The learned A.R. for the assessee drew the attention of the Bench to the relevant portions of the decisions cited (supra) which are extracted hereunder: - 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 4 to 8 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent-assessee's appeal. During the course of the proceedings before the Tribunal the revenue contended 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 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 recharactersing any equity into debt or vice versa. 8) We find no fault with the above observations of the Tribunal. There were at the relevant time and even today no thin capitalization rules in force. Consequently, the interest payment on debt capital cannot be disallowed. In view of the above, the question (i) raises no substantial question of law and is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the relevant findings at para 11 thereof are as under: - 11. At the time of hearing before us, the contention raised by the ld. Counsel for the assessee is that the clear transactions involving payment of share application money cannot be treated as international transactions of loans given by the assessee company to its AE merely because there was a delay in allotment of shares. It is observed that this contention of the ld. Counsel for the assessee is duly supported by the latest decision of Delhi Bench of this Tribunal 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 capital contribution. He has, however r, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 till the date of issue of shares. iv) Mylan Laboratories Ltd. [TS-399-ITAT-2014 (Hyd) - TP]: It is submitted that the relevant findings at para 6.2 thereof are as under: - 6.2 The co-ordinate Bench in the case of Prithvi Information Solutions Ltd., Vs. ACIT [34 ITR (Trib) 429 (ITAT, Hyd)] (supra), has considered similar issue wherein assessee also made investments towards equity and shares have been allotted. The facts are similar to assessee's case Vide para 12, the co-ordinate Bench considering 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of share application money . The aforesaid amount of share application money is outstanding as the investee company has not issued shares to the assessee till the close of the previous year under consideration. The nature of the aforesaid transaction is share application money, and clearly it is not in the nature of a lending or borrowing. The TPO has treated such transaction in the 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 out the transfer pricing proceedings. There is no provision of law which enables the TPO to change the character of a transaction while subjecting it to the process of determination of arm's length price. The TPO was required to benchmark such transactions against a similarly placed transaction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 how the alleged excess consideration of ₹ 124,17,50,250/-, which was in the nature of a capital payment, could be considered as income in the hands of the assessee as has done by the TPO (at page 7 of his order). The learned D.R. was unable to explain/justify the basis of the TPO s action as to how the principal amount of Capital Investment/loan could be taxed under the provisions of the Act. 6.3.1 The learned D.R., however, referring to the decision of the Hon'ble Bombay High Court in 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the transaction of investment in the share capital of its subsidiary, Tops BV, Netherlands, did not require benchmarking as no income arose from the transaction. Neither the AO nor the learned CIT(A) held that TP regulations were 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 III, the findings therein were dealt with by the subsequent decision of the Hon'ble Bombay High Court in Vodafone India Services vs. Addl. CIT (2014) 368 ITR 001 (Bom), i.e. Vodafone IV), wherein it was held that: - 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income arising out of an international transaction was clarified to mean a potential impact of income arising out of the international transaction which was the subject matter of dispute and not a future independent transaction which was completely unrelated. In respect of this contention, the Bench pointed out to the learned D.R. for Revenue that the potential income envisaged in his arguments (supra) arose out of a possible subsequent transaction and not from the transaction which was the subject matter of dispute or that the TP provisions cover or provide such a charge of tax. The learned D.R. was unable to justify his contention. 6.5 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. It was contended that the assessee, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted by the TPO, i.e. the net asset value or book value of shares based on historic 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 A.R. for the assessee submitted, without prejudice to the contention that TP regulations are not applicable to the capital transaction of investment in purchase of shares in its subsidiary Tops BV, Netherlands, TP provisions seek to determine the ALP, defined under section 92F(ii) of the Act to mean a price which is applied or sought to be applied in a transaction between persons other than AEs in uncontrolled condition, viz. the fair market value. It is contended that under no circumstances can the net asset value of an unquoted share computed on the basis of its book value be considered as its fair mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The validity of the agreements entered into by the assessee and the valuation report in this regard have not been disputed. The learned CIT(A)/TPO have merely relied on the valuation as per Wealth Tax Act to conclude that the investment made by the assessee in the shares of Tops BV, Netherlands was excessive and was therefore in the nature of a loan. It is contended that the entire valuation as per Wealth Tax Act fails due to its not being applicable to equity shares and therefore the very 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 of the discussion of the Hon'ble Bombay High Court in the case of Besix Kier Dabhol SA [TS-661- HC-2012 (Bom)] re-characterization of equity into debt and vice versa is not permissible. 6.5.5 With re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in share capital of the subsidiaries outside India as there is no income arising from the said transaction. The DR contended that the said judgement was not applicable to the case of the assessee it dealt with section 263 of the Act and did not deal with the proposition that in the absence of income, transfer pricing provisions would not apply. The contention of the DR is misplaced 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. Addl. CIT 48 taxmann.com 94 (Hyd). Amount representing investment in share capital of subsidiaries outside India was not in the nature of transaction referred to in Section 92B and thus transfer pricing provisions were not applicable to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 the TPO, could not be subject to ALP adjustment under the plea of it being a transaction of lending of borrowing 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. Further in the case of Allcargo Global Logistics, the DR contended that it was a case of reopening of assessment under section 147 of the Act and therefore inapplicable. 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 case of loan). In the assessee s case the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation 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 Services and therefore the same holds good for all of the decisions 11 Shell India Markets Pvt. Ltd. v ACIT - [269 ITR 516 (Bom)] 12 Equinox Business Parks (P) Ltd. vs. UOI - 320 Taxman 191 (Bom) 13 S.G. Asia Holdings (India) (P) Ltd. - 229 Taxman 452 (Bom) The learned A.R. for the assessee submitted that in the case of PMP Auto Components relied on by the learned D.R., the Coordinate Bench did not have the benefit of the judgements 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 far fetched. 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 Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, 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 of Vodafone India Services Pvt. Ltd. (368 ITR 1)(Bom) (extracted supra) by way of instances such as interest on loan given or received or depreciation, etc. 7.1.3 Further, a plain reading of section 92(1) of the Act which specifies that any income arising from an international transaction shall be computed having regard to the 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction 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)]; 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 those transactions, it was held that the same would not fall within the ambit of Indian Transfer Pricing provisions. In the case of Vijay Electricals Ltd. (supra), the Tribunal in an appeal against order passed under section 263 of the Act held that Transfer Pricing provisions are not applicable to the transactions of investment in share capital since no income arises therefrom. Though in the case of Hill Country Properties Ltd., (supra), the transaction was of share application money, the Tribunal followed the decision rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of 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 the enterprises entering into such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 loan. Therefore, in any event, the addition of ₹ 124 crores being part of the investment in equity share capital, re-characterized as loan, stands deleted. The only issue for our consideration that now survives is as to what the quantum of addition on account of notional interest if such recharacterization is permissible. Before answering this, it would be required to consider the question of whether re-characterization of investment in equity share capital into loan is permissible under the Act. 8.2.1 The Ld. Departmental Representative contended that the impugned transaction of investment in equity share capital was a bundled transaction, comprising of both investment in share capital alongwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 (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. During the course of the proceedings before the Tribunal the revenue contended that the borrowing on which the interest has been claimed as a deduction are in fact capital of the assessee and br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action 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, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon ble jurisdictional High Court in the case of Dexiskier Dhboal SA, ITA No. 776 of 2011 order dated 30th August, 2012 and by various other decisions, as cited by him. The Coordinate 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. 8.3.5 In the light of the above decisions ( ..... 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