Brief about case
The assessee was 100% Indian subsidiary of BHW Holding AG (BHW Germany) and was engaged in the business of providing loans to retail customers for the construction or purchase of residential properties in India. There were three international transactions that were reported by the assessee in Form No.3CEB. One such transaction was of “Receipt of share application money” with the transacted value of Rs.53,30,96,400/- being the subject matter of present dispute. On a reference made by the A.O. to the TPO, it was observed that the book value of each share of the assessee company at the beginning of the year stood at Rs.11.98/- whereas the assessee was found to have received share application money against such shares from its Holding company (‘Associated Enterprise’) at the rate of Rs.10/- per share, equal to the face value, in full and final settlement of the issue of shares. It was opined that such under-charging of the price of shares was in the nature of a deemed loan given by the assessee to its AEs without any consideration and the assessee ought to have charged interest on such loan from its AEs. By applying the benchmark interest rate of17.26% on such deemed loan, the TPO worked out the arm’s length value of interest received at Rs. 15,18,205/-. Since no interest was received by the assessee on such deemed loan, the TPO proposed transfer pricing adjustment of equal amount at Rs. 15.18 lac. The Assessing Officer made this addition which was confirmed by the CIT(A). The question that arose before ITAT was “whether any addition towards transfer pricing adjustment on account of interest on deemed loan could be made under the circumstances as were obtaining in the instant case”.
Held by Tribunal
It was held that:
“Section 92(1) of Income-taxAct, 1961 provides that ‘Any income arising from an international transaction shall be computed having regard to the arm’s length price’. A bare perusal of this provision divulges that, firstly, there should be an international transaction and secondly, such international transaction should result into income.”
When both the above conditions are satisfied then the income so arising from an international transaction would be computed having regard to its ALP. The reported international transaction was of the issue of5,33,09,640 number of equity shares by the assessee to its AEs at the rate of Rs.10 per share. There can be no doubt about the transaction of issue of share capital by a company to its AEs being characterized as non-international transaction. Sub-section (1) of section 92B provides that:-
“International transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or ……. or any other transaction having a bearing on the profits, income, losses or assets of such enterprises……..”.
It is apparent from the definition of `international transaction’ that it encompasses a transaction between two associated enterprises which, inter alia, has a bearing on assets of such enterprises. The issue of shares by a company has direct bearing, inter alia, on its assets in terms of receipt of consideration. Further, the legislature has clarified this position beyond any pale of doubt by inserting clause (c) to the Explanation at the end of section 92B through the Finance Act, 2012, w.r.e.f. 1.4.2002, providing that the international transaction shall include :
“(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;”
This shows that the issue of share capital was an international transaction.
Second condition for invoking the provisions of Chapter X of the Act is that some income should arise from an international transaction. Thus, it was apparent that if an international transaction with its determined ALP does not lead to the generation of any income chargeable to tax, then the provisions of section 92(1) are not magnetized. In such circumstances the moot question for consideration was whether the transaction of receipt of share application money leads to generation of any income chargeable to tax in the hands of the assessee company proposing to issue shares, warranting the substitution of such income within come determined on the basis of its ALP.
An income is chargeable to tax, if it is either of a revenue character or of a capital nature, having been specifically included in the ambit of income under the Act. The definition of income does not specifically include within its purview any capital receipt arising on issue of share capital. Thus it follows that the issue of shares at par or premium is at ransaction on capital account, which does not affect the computation of total income of a company. Here Tribunal considered important to mention that the Finance Act, 2012w.e.f. 01.04.2013 has inserted clause (viib) to section 56(2) of the Act, the relevant part of which provides as under:
`(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:……….’
It is further relevant to note that this provision is attracted only when the share capital is issued to any person being a resident. The position which ergo follows is that prior to the insertion w.e.f. 01.04.2013 there was no provision under the Act providing for charging excess share premium to tax. In the considered opinion of Bench, this provision had no application on the instant assessee for two reasons. Firstly, the issue is related to the assessment year 2008-09 and section56(2)(viib) has been inserted w.e.f. 1.4.2013 and further there was nothing to indicate that it has a retrospective operation. Secondly, the assessee company issued shares to its non-resident AEs and section 56(2)(viib) applies only when a shareholder is resident. Moreover, this provision operates only when the company issues shares at a price above the fair market value and not vice versa .Hon’ble Bombay High Court in Vodafone India Services Pvt. Ltd. held that the provisions of Chapter X are not applicable to the international transaction of issue of equity shares by the resident company to its non-resident holding company at certain value, since neither the capital receipt by the resident company on issue of equity shares to its non-resident holding company nor shortfall between the fairmarket price of the equity shares and the issue price of equity shares, can be considered as income within the meaning of the expression as defined under the Act. The Hon’ble Bombay High Court in Shell India Markets Pvt. Ltd. Vs. ACIT and Others, (2014) 369 ITR 516 (Bom.) has dealt with a case in which equity shares were allotted by an Indian enterprise to its non-resident AEs at face value. The TPO enhanced the value of shares from the face value of Rs.10 to Rs.183.44 per share and computed the ALP accordingly. Apart from making the resultant addition on account of such transaction on capital account, he also held that interest on the deemed loan due to short receipt of the consideration resulting in transfer pricing adjustment, was also to be made. The Hon’ble High Court, following the judgment in Vodafone India Services Pvt. Ltd. held that there can be no addition by applying the provision under Chapter-X on account of less share premium received and also the consequential interest on the resultant deemed loan. The Revenue failed to provide any contrary judgment not mandating the determination of ALP of interest on deemed loan consequent upon issue of shares by an Indian company to its non-resident AE at lower price than its fair market value. Respectfully following the precedent, it was held that the addition of Rs. 15.18 lac on account of interest on the deemed loan due to under-receipt of share premium, upheld by the learned CIT(A), cannot be sustained. Accordingly, the addition is deleted and the ground is allowed.