|CORAM:||C. M. Garg (JM), R. S. Syal (AM)|
|SECTION(S):||56(2)(viib), 92, 92B|
|CATCH WORDS:||ALP, share application money, share premium, Transfer Pricing|
|COUNSEL:||H. P. Agarwal|
|DATE:||June 4, 2015 (Date of pronouncement)|
|DATE:||August 18, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Transfer Pricing: The allotment of shares/ receipt of share application money by the assessee from the AE for a price less than the book value of the shares cannot be regarded as a “deemed loan” by the assessee to the AE and notional interest cannot be imputed thereon|
The assessee, a 100% Indian subsidiary of BHW Holding AG (BHW Germany), received Rs. 53,30,96,400 towards “Receipt of share application money”. On a reference made by the Assessing Officer (AO) to the TPO, the latter observed that the assessee demonstrated the international transaction of `Receipt of share application’ at ALP by following the Comparable Uncontrolled Price (CUP) method as the most appropriate method. The TPO observed that the book value of each share of the assessee company at the beginning of the year stood at Rs. 11.98. The assessee was found to have received share application money against such shares from its AEs at the rate of Rs. 10 per share, equal to the face value, in full and final settlement of the issue of shares. Since the book value of the share was higher than the issued price, the TPO held it as a transaction of `transfer of assets of the company’ to its AEs in the guise of issue of share capital. 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. He held that the assessee ought to have been compensated for such deemed loan with suitable interest. The TPO determined the arm’s length value of shares issued by the assessee company on the basis of its Annual report at Rs. 11.98 per share. Applying this benchmark as arm’s length price of the share capital, the TPO treated the differential amount of Rs.10,55,53,087/- as deemed loan given by the assessee to its AEs. It was thereafter noticed that the assessee ought to have charged interest on such loan of Rs. 10.55 crore from its AEs. By applying the benchmark interest rate of 17.26% 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 came to be affirmed in the first appeal. On appeal by the assessee to the Tribunal HELD allowing the appeal:
(i) 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. Section 92B gives meaning to `International transaction’. Sub-section (1) of this section provides that: `For the purposes of this section and sections 92, 92C, 92D and 92E, “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. As the issue of shares by a company has direct bearing, inter alia, on its assets in terms of receipt of consideration, such transaction cannot be held to be anything other than an international transaction. 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 is an international transaction. Once there is an international transaction, the mandate of section 92C is triggered, which talks of computation of its arm’s length price.
(ii) The moot question which arises for our consideration is 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 with income 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 a transaction on capital account, which does not affect the computation of total income of a company.
(iii) Here it is important to mention that the Finance Act, 2012 w.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:……….’. The above provision makes it explicit that where a company, not being a one in which public are substantially interested, receives consideration for issue of shares exceeding the fair market value of the shares, then the consideration received for such shares as exceeds the fair market value of the shares is considered as income under the head “Income from other sources”. To put it simply, if a share with the face value of Rs.10 is issued for Rs.50 and the fair market value of such share is Rs.15, then the excess premium received amounting to Rs.35 (Rs.50 minus Rs. 15) shall be treated as the income of the company chargeable under this provision. It is further relevant to note that this provision is attracted only when the share capital is issued to any person being a resident. Au contraire, if the shareholder is a non-resident then the mandate of this provision does not apply. 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 our considered opinion, this provision has no application on the instant assessee for two reasons. First, we are dealing with the assessment year 2008-09 and it is obvious that section 56(2)(viib) has been inserted w.e.f. 1.4.2013 and further there is nothing to indicate that it has a retrospective operation. Second, 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. On the other hand, we are confronted with a converse situation, in which the assessee company, as per the opinion of the authorities below, has received share application equal to the face value of share in full and final settlement at a price less than the fair market value. Once neither the amount of face value of the shares issued nor the expected share premium leads to the accrual of an income chargeable to tax in the hands of the issuing company, there can be no question of substituting the transacted value of the international transaction with its ALP.
(iv) Though the international transaction on capital account itself would not lead to generation of any income because of the transfer pricing adjustment, but the international transaction on capital account, which impacts income, such as, under reporting of interest or over reporting of interest paid or claiming of depreciation etc. is required to be adjusted to the ALP price, which is not a tax on the capital receipts. The effect of the judgment in Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax, (2014) 368 ITR 1 (Bom.) on a holistic basis is that though the international transaction on capital account per se cannot call for any addition on account of transfer pricing adjustment because of the absence of any provision under the Act charging income from such transactions, but the transactions flowing out of such original transaction on capital account, having impact on the profitability of the assessee, would be required to pass the mandate of Chapter-X of the Act. In other words, if such offshoot transactions of the original transaction on capital account, such as, interest or depreciation are not at arm’s length price, then it is mandatory to determine their ALP and make addition, if any, on account of transfer pricing adjustment. It can be understood with the help of a simple example. Suppose an Indian company purchases some asset from its AE at a consideration of Rs.300 (the arm’s length price of which is Rs.100), on which it claims depreciation of Rs.30 at the rate of 10% on such purchase consideration. Now the TPO can rightly determine the ALP of the international transaction of purchase of asset at Rs.100. Since the transaction of purchase of asset is on capital account, there can be no addition of Rs.200 (Rs.300 minus Rs.100), being the difference between the ALP and transacted value. However this international transaction of purchase of asset on capital account having impact on the income of the assessee by means of transaction of claim of depreciation is to be adjusted to the ALP price. Consequently, the TPO will be within his jurisdiction to determine the ALP of the transaction of claim of depreciation by reducing it to Rs.10 on the basis of the ALP of the international transaction on capital account, for which no addition of Rs.200 is maintainable. Similar is the position as regards the under reporting of interest on an international transaction on a capital account (Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax, (2014) 368 ITR 1 (Bom.) and Shell India Markets Pvt. Ltd. Vs. ACIT and Others, (2014) 369 ITR 516 (Bom.) followed)