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2016 (4) TMI 163 - ITAT MUMBAI

2016 (4) TMI 163 - ITAT MUMBAI - TMI - Interest charged on receivable deleted - recharacterization of a transaction - arm's length price adjustment at the rate of SBI prime lending rate plus 3% premium, in respect of the amounts shown as share application money against which share are not issued - Held that:- What the TPO and DRP have overlooked is that since the assessee was only shareholder of the subsidiary company, the fruits of this investment belong to the assessee only and in entirety. On .....

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l 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 .....

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nt.

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 case. The nominal value of shares, as long as all the shares are held by the assessee is entirely benefit neutral from a commercial point of view. The very foundation of th .....

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e assessee's appeal are rendered academic. - Decided in favour of assessee - IT APPEAL NO. 1791(MUM.) OF 2014 - Dated:- 29-2-2016 - Pramod Kumar, Accountant Member And Pawan Singh, Judicial Member For the Appellant : Mahesh Shah For the Respondent : P.J. Pardiwala ORDER Pramod Kumar, Accountant Member - These cross appeals call into question correctness of the directions dated 18th December 2013 issued by the Dispute Resolution Panel, in the matter of assessment under section 143(3) r.w.s. 144C( .....

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was justified in deleting the interest charged on receivable without appreciating the fact that this transaction is clearly hit by the provision of section 92(2) of the I.T. Act 1961? Grievances raised by the assessee: Ground No. 1 The order of the Learned Assessing Officer ('Ld. AO')/Learned Transfer Pricing Officer ('Ld. TPO') is bad in law as it has been passed without complying with the mandatory conditions of Section 92CA(3) read with Section 92C(3) of the Income-tax Act, 1 .....

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ernational 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 transactio .....

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DRP') under section 144C (5) of the Act] grossly erred, in law and in facts, in considering interest free period of only 60 days relying on the MCA Notification dated December 14, 2011 as against the 180 days permissible under FEMA Regulations dealing with overseas investment. Ground No. 6 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 not allowing the benefit of arm's .....

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into international transactions with only one associated enterprise, i.e. SGPL, in respect of contribution to the share capital and in respect of reimbursement of expenses. When this matter came up in scrutiny before the Transfer Pricing Officer, he made ALP adjustment in respect of both the transactions. As far as payment of share capital subscription was concerned, the TPO required the assessee to show cause as to why an arm's length price adjustment not be made, at the rate of SBI prime .....

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assessee. It was also submitted that the fact that there is a delay in the allotment of shares does not mean that interest is to be charged for the period on the amount so paid for share subscription. It was also explained that this transaction, 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 mini .....

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rrowing, 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 transaction is that of a loan under the garb of share .....

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ion before the RBI does not decide its true character as required for the transfer pricing purposes. A reference was made to the decision of a coordinate bench, in the case of Perot Systems TSI (India) Ltd. v. Dy. CIT[2010] 37 SOT 358 (Delhi)], and to Hon'ble Punjab & Haryana High Court decision in the case of Coca Cola Inc. v. CIT [2009] 309 ITR 194/177 Taxman 103]. A reference was also made to theory of substance over form. He held that "the transaction is in fact a loan and the t .....

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s money with the subsidiary which funds the step down companies which finally invest in the business of digging for oil in Nigeria, which is high risk facing political, geological and price risks, amongst others. It also faces a 'single customer risk' apart from currency risk. As discussed earlier, the assessee will be given benefit of 60 days after remittance, where no interest will be charged." 4. The TPO also noted that the assessee had certain outstanding receivables, in respect .....

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djustment 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 re .....

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it is apparent that the money has been received as share application money and the allotment has been unduly delayed. Under these circumstances, whether the intention of the assessee was to ultimately allot the shares and not use the money as loan, can only be known by the circumstances of allotment. Usually the shares are allotted to the prospective share holders within a short span of time after the receipt of the share application money. The Ld. TPO has gone at length to demonstrate that the .....

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e where the money was required by the subsidiary and given. Whether it should be allotted as shares or refunded remained pending for consideration and decision, at the end of which shares were allotted. under these circumstances, the re-characterisation of share application money as loan is not only justified but also warranted. The facts and circumstances of the assessee's case do not suggest that the assessee and its subsidiary had the intention of allotment of shares at all times and ther .....

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ord, and duly considered facts of the case in the light of the applicable legal position. 8. So far as the appeal of the Assessing Officer is concerned, we find that it is undisputed position that the amounts shown as recoverable from the subsidiary are no longer recoverable from the associated enterprises and that the assessee does not have any legal rights to recover the monies spent on behalf of the company prior to its incorporation. Such being the factual position, there is no basis of maki .....

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n 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 t .....

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ight from the initial stage towards subscription for shares. While on this issue, we may usefully refer to a co-ordinate bench decision in the case of Bharti Airtel Ltd. v. Addl. CIT [2014] 63 SOT 113/43 taxmannn.com 150 (Delhi - Trib.)which has, inter alia, observed as follows: "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 .....

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ected to ALP adjustments, and the ALP so computed 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 donot find so. We donot find any provision in law enabling such deeming fiction. What is before us is a transaction of capital subscription, its character as such is not in dispute and yet it has been treated as part .....

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e of making the payment and date of allotment 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 .....

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ayment 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. None of these decisions, however, deal with the core issue before us i.e. whether a capital contribution can be deemed to be partly an interest free loan, for the period till the shares were actually all .....

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ose funds to make investments in other step- down subsidiaries. On the question whether notional interest on the said loans could be assessed in the hands of the assessee under the transfer pricing provisions of Chapter X, the assessee argued that the said "loans" were in fact "quasi - equity" and made out of commercial expediency. It was also argued that notional income could not be assessed to tax. However, both of these arguments were rejected by a coordinate bench of this .....

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ution". The argument of loan being in the nature of quasi capital was thus rejected on facts. It was not even a case of quasi capital, and, therefore, this case has no bearing on the question before us i.e. whether ALP adjustments can be made in respect of payments towards share application money in a situation in which the shares have been issued several months after the payments for share application money have been made. Similarly, in VVF's case (supra), the transaction was admittedl .....

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ntrol, 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 re .....

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ed been allotted to the assessee. The transaction is thus accepted to be genuine in effect. 50. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the authorities below were in error in treating the payment of share application money, as partly in the nature of interest free loans to the AEs, and, accordingly, ALP adjustment based on that hypothesis was indeed devoid of legally sustainable merits. We delete the impugned adjustment of &# .....

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ssessee. A delay in allotment of shares by the subsidiary company, as long as the subsidiary is a wholly owned subsidiary, does not prejudice the interests of the assessee. It is, therefore, wrong to even allege that an assessee does not behave in a commercially rationale manner, as expected in an arm's length situation, when the assessee does not ask for payment of interest for the period of delay in allotment of shares. We have noted that the TPO's stand that since the assessee was not .....

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f this money by the subsidiary, the assessee, in its capacity as sole owner of the subsidiary, is beneficiary of all the gains of the subsidiary company. Whether the assessee was allotted these shares or not, the assessee was the only shareholder of the subsidiary company and beneficial owner of all the earnings and all 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 .....

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re 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 .....

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