TMI Blog2016 (4) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... ry company belonged to the assessee in any situation. For example, if the funds available for dividend distribution for this year were say ₹ 1,00,000 and the assessee had 100 shares before new allotment of shares and 1000 shares after the allotment, the assessee would be entitled to ₹ 1,00,000 only the either way- whether as ₹ 1,000 per share for 100 in pre new allotment situation or whether as ₹ 100 per share for 1,000 shares in post new allotment situation. In absolute terms, the dividends remain the same. Whether the assessee is allotted more shares or not is wholly academic as the assessee is a single shareholder of the subsidiary company and the face value of shares does not affect the actual benefits of the assessee, the percentage of ownership is the only material factor- which remains at 100% pre new allotment as also post new allotment. The assessee has behaved in a commercially rational manner inasmuch as whether the new shares are allotted at x point of time or y point of time, it does not make a difference to the position of the shareholder so far as the subsidiary is wholly owned by a single shareholder- as is the factual position in this ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with section 92CA(3) of the Act. Ground No. 2: The Ld. AO/Ld. TPO [following the directions of Dispute Resolution Panel-II ('DRP') under section 144C (5) of the Act] grossly erred, in law and in facts, in making an upward transfer pricing adjustment of ₹ 8,41,67,965/- in respect of Appellant's international transactional of share capital subscription into its associated enterprise ('AE') Sterling Global Oil Resources Pvt. Ltd. ('SGPL'). Ground No. 3: The Ld. AO/Ld. TPO [following the directions of Dispute Resolution Panel - II ('DRP') under section 144C (5) of the Act] grossly erred, in law and in facts, by re-characterizing a share subscription transaction as a transaction of advancing of loan and thereby, holding that the appellant's international transaction is not at arm's length. Ground No. 4: The Ld. AO/Ld. TPO [following the directions of Dispute Resolution Panel - II ('DRP') under section 144C (5) of the Act] grossly erred, in law and in facts, in adopting 12.25% interest rate being SBI PLR rate for Indian rupee loans as arm's length interest rate for benchmarking such deemed outbound fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, by no stretch of logic, could be treated as a loan on which interest needs to be charged. It was also submitted that, in any event and without prejudice to the above arguments, the interest, if at all applicable, will be on the basis of LIBOR and a minimum period of 180 days, permitted by the RBI for acquiring foreign security to receive share certificate, should be allowed as grace period. None of these submissions, however, impressed the Transfer Pricing Officer. As for the assessee's contention that the transaction was not an international transaction, he was of the view that in the light of retrospective amendment to Section 92B, international transaction includes 'capital financing, including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance payment or deferred payment or receivable or any other debt arising during the course of business'. He was also of the view that since, in this case, shares are allotted only in October 2010, and as the subsidiary has used these monies, received from the assessee as share application money, for advancing loans to step down subsidiary, the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment in respect of interest on. So far as the adjustment in respect of the interest on receivables was concerned, the DRP deleted the adjustment by noting that the SGPL has not accepted these liabilities for various reasons, including the reason that some of the expenses pertained to period prior to incorporation of SGPL and that interest does not accrue when the receivable itself has gone bad . The DRP concluded that it is a peculiar fact situation where the assessee has made certain claims on subsidiaries which are not accepted and that being the case, there is no possibility of the revival of claim in future . It was thus held that the charging of interest is not warranted and the AO is directed not to charge the notional interest thereon . As regards TPO's treating the share application money as an unsecured loan, the DRP upheld the action of the assessee, in principle, by observing as follows: The Panel has carefully considered the draft assessment order, submission of the assessee and material on record. From the submission made by the assessee, it is apparent that the money has been received as share application money and the allotment has been unduly de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g any arm's length price adjustment in respect of interest on receivables. In any case, the expenses so incurred by the assessee for the subsidiary under incorporation were in the nature of expenses on performing shareholder services and no interest can accrue in respect of the same. In view of these discussions, as also bearing in mind, we approve the stand of the DRP on this point and decline to interfere in the matter. As regards the appeal filed by the assessee against recharacterization of share application money as loan to the subsidiary, we find that there is no dispute that the shares were actually issued to the assessee in October 2010 and the entire payment so made by the assessee was on account of the share so allotted. The recharcterization has been done only on account of delay in allotment of shares. We have also noted that the RBI approval for the remittance of the amounts in question was also admittedly as for capital contribution, and, even at the time of making the payments in question, the subscription of the capital was duly approved as such by the Board of Directors. There is no difference in the form and substance, and yet the amount is treated as an inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 not in pari materia with an interest free loan on commercial basis between the share applicant and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE. Since the TPO has not brought on record anything to show that an unrelated share applicant was to be paid any interest for the period between making the share application payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits. 48. Let us also deal with two judicial precedents which have been heavily relied upon by the TPO, as also by the learned Departmental Representative, on which their case rests. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a significant factor for commercial expediency. However, as we have seen in the earlier discussions, such commercial expediency of granting interest free loans is wholly irrelevant because it is the impact of this interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital contribution was deemed to be partly an interest free loan (i.e. for the period till the shares were actually allotted) and partly as capital contribution (i.e. when the subscribed shares were allotted by the subsidiary). Revenue, therefore, does not derive any advantage from these judicial precedents either. 49. In any event, it is not open to the revenue authorities to recharacterize the transaction unless it is found to be a sham or bogus transaction. While there are no specific powers vested in the TPO to recharacterize the transaction, even under the judge made law, such rechracterization can be done by the revenue authorities when the transactions are found to be substantially at variance with the stated form. In the present case, there cannot even a suggestion to hold that this is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the assets of the company. Non allotment of these shares, during the period of payment of share application money till the actual date of allotment, did not, therefore, prejudice assessee's position anyway. All the earnings of the subsidiary company belonged to the assessee in any situation. For example, if the funds available for dividend distribution for this year were say ₹ 1,00,000 and the assessee had 100 shares before new allotment of shares and 1000 shares after the allotment, the assessee would be entitled to ₹ 1,00,000 only the either way- whether as ₹ 1,000 per share for 100 in pre new allotment situation or whether as ₹ 100 per share for 1,000 shares in post new allotment situation. In absolute terms, the dividends remain the same. Whether the assessee is allotted more shares or not is wholly academic as the assessee is a single shareholder of the subsidiary company and the face value of shares does not affect the actual benefits of the assessee, the percentage of ownership is the only material factor- which remains at 100% pre new allotment as also post new allotment. In the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
