First Blue Home Finance Ltd vs. DCIT (ITAT Delhi)
| COURT: | ITAT Delhi |
| CORAM: | C. M. Garg (JM), R. S. Syal (AM) |
| SECTION(S): | 56(2)(viib), 92, 92B |
| GENRE: | Transfer Pricing |
| 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) |
| AY: | 2008-09 |
| FILE: | Click here to download the file in pdf format |
| CITATION: | |
| 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)
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 | First Blue Home Finance Ltd vs. DCIT (ITAT Delhi)by editor |
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
editor | August 18, 2015 at 3:24 pm | Categories: All Judgements, Tribunal | URL: http://itatonline.org/archives/?p=11178
| Comment | See all comments |
CIT vs. Meghalaya Steels Ltd (Supreme Court)
| COURT: | Supreme Court |
| CORAM: | A.K. Sikri J., Rohinton Fali Nariman J. |
| SECTION(S): | 260A |
| GENRE: | Domestic Tax |
| CATCH WORDS: | power to review |
| COUNSEL: | Gopal Subramanium |
| DATE: | August 5, 2015 (Date of pronouncement) |
| DATE: | August 18, 2015 (Date of publication) |
| AY: | - |
| FILE: | Click here to download the file in pdf format |
| CITATION: | |
| S. 260A: High Courts, being Courts of Record under Article 215, have the inherent power of review. There is nothing in s. 260A(7) to restrict the applicability of the provisions of the CPC to s. 260A appeals | |
In an appeal under s. 260A, the Guwahati passed an order (332 ITR 91) in which it held that transport subsidies and other incentives were not eligible for relief u/s 80-IB. The assessee filed a review petition (358 ITR 551) in which it contended that the High Court had gone on to answer the questions without first framing substantial questions of law. The High Court allowed the review petition and recalled the judgement. Thereafter, it passed a judgement (CIT v. Meghalaya Steels Ltd. [2013] 356 ITR 235) in which it held that the said transport subsidies and other incentives were eligible for relief u/s 80-IB. The department argued before the Supreme Court that under section 260A (7), only those provisions of the Civil Procedure Code could be looked into for the purposes of Section 260A as were relevant to the disposal of appeals, and since the review provision contained in the Code of Civil Procedure is not so referred to, the High Court would have no jurisdiction under Section 260A to review such judgment. HELD by the Supreme Court dismissing the appeal:
High Courts being Courts of Record under Art. 215 of the Constitution of India, the power of review would in fact inhere in them. This was in fact so decided in a slightly different context while dealing with the power of review of writ petitions filed under Art.226 by a judgment reported in AIR 1963 SC 1909 5 (Shivdeo Singh & Ors. Vs. State of Punjab and Ors.). It is also clear that on a cursory reading of Section 260A (7), the said Section does not purport in any manner to curtail or restrict the application of the provisions of the Code of Civil Procedure. Section 260A(7) only states that all the provisions that would apply qua appeals in the Code of Civil Procedure would apply to appeals under Section 260A. That does not in any manner suggest either that the other provisions of the Code of Civil Procedure are necessarily excluded or that the High Court's inherent jurisdiction is in any manner affected.
Note: This reverses CIT Vs. West Coast Paper Mills Limited 319 ITR 390 (Bom), Automobile Corporation of Goa Ltd 206 Taxman 640 (Bom) and Deepak Kumar Garg vs. CIT 327 ITR 448 (MP) where it was held that the High Court has no power of review u/s 260A and affirms D. N. Singh vs. CIT 325 ITR 349 (Patna)(FB)
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| | CIT vs. Meghalaya Steels Ltd (Supreme Court)by editor |
High Courts being Courts of Record under Art. 215 of the Constitution of India, the power of review would in fact inhere in them. Section 260A(7) only states that all the provisions that would apply qua appeals in the Code of Civil Procedure would apply to appeals under Section 260A. That does not in any manner suggest either that the other provisions of the Code of Civil Procedure are necessarily excluded or that the High Court's inherent jurisdiction is in any manner affected
editor | August 18, 2015 at 3:25 pm | Categories: All Judgements, Supreme Court | URL: http://itatonline.org/archives/?p=11183
| Comment | See all comments |
Dismisses FTIL plea to peruse Govt-FMC communication on proposed merger with NSEL
HC dismisses Financial Technologies (India) Ltd.'s (FTIL) application seeking internal communications/memoranda exchanged between MCA and Forward Markets Commission & Ministry of Law & Justice's opinions on its proposed amalgamation with NSEL; Holds that since Govt has passed only a draft order of proposed amalgamation, it would be premature to consider any contention relating to prejudice caused to FTIL/public interest; Observes that only when such opinions/documents sought are relied on and an adverse final order is passed by Central Govt, can petitioner seek such documents; Accepts Central Govt's contention that merely because certain documents are referred does not mean that they were going to be relied on to pass an adverse order & opinions/notings did not partake the character of binding order passed by Govt; Also notes that FTIL had filed writ petition challenging powers of Central Govt to order such amalgamation u/s 396 of Cos Act, 1956 whereby HC without deciding the legal question, had permitted Central Govt to pass final order, in light of such order, holds "we do not see any reason for the relief of the present nature being granted.":Bombay HC
The order was passed by Justice S. C. Dharmadhikari and Justice G. S. Kulkarni.
Senior Advocates Ravi Kadam, Vineet Naik, Janak Dwarkadas alongwith Advocates Tushad Cooper, Shaheen Parikh, Nooruddin Dhilla, Priyanka Vora, Amit Vyas, Zal Andhyarujina, Saloni Kulkarni argued on behalf of Petitioner. Senior Advocates Darius Khambata, alongwith Advocates Aditya Mehta, Parag Vyas, D. P. Singh and Dr. G. R. Sharma argued on behalf of respondent.
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