STERLING OIL RESOURCES LTD, MUMBAI V. ITO 9(3)(2), MUMBAI

ITA 1970/MUM/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3545 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 04-01-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 24-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Assessee Lawyers: P J PARDIWALA
• Keywords: Transfer pricing; Share purchase agreement; International transaction; Wholly owned subsidiary; Notional interest; Commercial expediency
• Section: 92C; 143(3)

Judgement Text

ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI K BENCH, MUMBAI [CORAM : PRAMOD KUMAR AM AND PAWAN SINGH JM] ITA NO. 1791 / MUM /20 1 4 AS SESSMENT Y EAR : 20 09 - 10 INCOME TAX OFFICER , WARD 9(3)(2) , MUMBAI .. ........ .APPELLANT VS. STERLING OIL RE SOURCES PVT. LTD. .......... . RESPONDENT 329, SANDESARA HOUSE, JAWAHAR NAGAR, R OAD NO.13, GOREGAON (W), MUMBAI. [PAN: AA KCS 0055 J ] ITA NO.1 970 /MUM/2014 AS SESSMENT Y EAR : 2009 - 10 STERLING OIL RESOURCES PVT. LTD. ........ .APPELLANT 3 29, SAN DESARA HOUSE, JAWAHAR NAGAR, ROAD NO.13, GOREGAON (W), MUMBAI. [PAN: AAKCS 0055 J] VS. INCOME TAX OFFICER, WARD 9(3)(2), MUMBAI .......... . RESPONDENT APPEARANCES BY: MAHESH SHAH , FOR THE REVENUE P J PARDIWALA, F OR THE ASSESSEE DATE OF CONCLUDING THE HEARING : JANUARY 05 , 201 6 DATE OF PRONOUNCING THE ORDER : FEBRUARY 29 , 201 6 O R D E R PER PRAMOD KUMAR , AM : 1. THESE CROSS APPEALS CALL INTO QUESTION CORRECTNESS OF THE DIRECTIONS DATED 18 TH DECEMBER 2013 ISSUED BY THE DISPUTE RESOLUTION PANEL, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 FOR THE ASSESSMENT YEAR 2009 - 10. AS THESE APPEALS INVOLVE INTERCONNECTED ISSUES AND CHALLENGE THE SAME ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 2 OF 11 ORDER PASSED BY THE DRP, WE ARE DISPOSING OF BOTH OF THESE APPEALS BY WAY OF THIS COMMON ORDER. 2. GRIEVANCE S RAISED BY THE PARTIES , WHICH ARE INTERCONNECTED AND WHICH WE WILL TAKE UP TOGETHER FOR ADJUDICATION, ARE AS FOLLOWS: GRIEVANCE RAISED BY THE ASSESSIN G OFFICER: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, T HE HON BLE DRP WAS JUSTIFIED IN DELETING THE INTEREST CHARG ED ON RECEIVABLE WITHOUT APPRECIATING THE FACT THAT THIS TRANSACTION IS CLEARLY HIT BY T HE PROVISION OF SECTION 9 2(2) OF T HE 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 CONDIT IONS OF SECTION 92CA(3) READ WITH SECTION 92C(3) OF THE INCOME - TAX ACT, 1961 ('THE ACT') FOR THE REASON THAT LD. TPO DID NOT SERVE UPON THE APPELLANT ANY WRITTEN SHOW CAUSE NOTICE AS REQUIRED AND MANDATED IN TERMS OF PROVISO TO SECTION 92C (3) READ WITH SE CTION 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 RS. 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 RES OLUTION 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 N 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 I NDIAN RUPEE LOANS AS ARM'S LENGTH INTEREST RATE FOR BENCHMARKING SUCH DEEMED OUTBOUND FOREIGN CURRENCY LOAN AND NOT THE LIBOR RATE. ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 3 OF 11 GROUND NO. 5: 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 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 LENGTH RANGE OF +/ - 5% PROVIDED IN PROVISO TO SEC 92C(2 ) OF THE ACT FOR COMPUTING THE TRANSFER PRICING ADJUSTMENT. 3. BRIEFLY STATED, THE RELEVANT MATERIAL FACTS, AND DEVELOPMENTS LEADING TO THIS DISPUTE BEFORE US, ARE LIKE THIS. THE ASSESSEE COMPANY IS AN INVEST MENT HOLDING COMPANY WHICH HAS INVESTED IN VAR IOUS COMPANIES THROUGH ITS WHOLLY OWNED SUBSIDIARY STERLING GLOBAL OIL RESOURCES PVT LTD (SGPL, IN SHORT) BASED IN MAURITIUS. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS ENTERED 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 LENDING RATE PLUS 3% PREMIUM, IN RESPECT OF THE AMOUNTS SHOWN AS SHARE APPLICATION MO NEY AGAINST WHICH SHARE ARE NOT ISSUED. IT WAS, INTER ALIA, EXPLAINED BY THE ASSESSEE THAT THE ASSESSEE HAS ISSUED SHARES AT PREMIUM, AND OUT OF THE FUNDS SO RAISED, INVESTED THE MONEY IN THIS SUBSIDIARY. IT WAS SUBMITTED THAT IT WAS OBLIGATION OF THE ASS ESSEE COMPANY TO PROVIDE CAPITAL TO ITS SUBSIDIARY. IT WAS POINTED OUT THAT IT WAS A CAPITAL ACCOUNT TRANSACTION WHICH HAS NO IMPACT ON INCOME OR EXPENSE OF THE 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 SUB MITTED 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, ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 4 OF 11 PERMITTED BY THE RBI FOR ACQUIRING FOREIGN SECURITY TO RECEIVE SHARE CERTIFICATE, SH OULD 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 A MENDMENT 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 R ECEIVABLE 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 M ONEY, FOR ADVANCING LOANS TO STEP DOWN SUBSIDIARY, THE TRANSACTION IS THAT OF A LOAN UNDER THE GARB OF SHARE APPLICATION MONEY . ON THIS BASIS, TPO CONCLUDED THAT THE BENCHMARKING WILL BE DONE AS A LOAN, WHERE CUP WILL BE USED BY TAKING RATE OF INTEREST CHARGED IN INDEPENDENT TRANSACTION IN THE MARKET OR ONE UNDERTAKEN BY THE ASSESSEE WITH A THIRD PARTY . AS REGARDS THE ASSESSEE S CONTENTION THAT THE REMITTANCE WAS MADE WITH DUE APPROVAL OF THE RESERVE BANK OF INDIA, WHICH HAS ALLOWED THE SAME AS A SHARE APPLICATION MONEY, THE TPO WAS OF THE VIEW THAT CHARACTERIZATION OF A TRANSACTION 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 VS DCIT [(2010) 5 ITR TRIB 106 (DEL)], AND TO HON BLE PUNJAB & HARYANA HIGH COURT DECISION IN THE CASE OF COCA COLA INC VS CIT [(200 9 ) 309 ITR 194 (P&H)]. A REFERENCE WAS ALSO MADE TO THEORY OF SUBSTANCE OVER FORM. HE HELD THAT THE TRANSAC TION IS IN FACT A LOAN AND THE TERM SHARE APPLICATION MONEY A FICTION. THE TPO THUS CONCLUDED AS FOLLOWS: 7. CONCLUSION: IN VIEW OF THE ABOVE DISCUSSION, IT IS STATED THAT THE ASSESSEE S STAND REGARDING THE SHARE APPLICATION MONEY NOT BEING LIABLE TO IN TEREST IS NOT ACCEPTABLE. SINCE THE ASSESSEE HAS AVAILED A LOAN @ 12.5% FROM UCO BANK IN MARCH 2009, THE SAME SHALL BE USED FOR THE PURPOSE OF BENCHMARKING. ADDED TO THIS WILL BE RISK PREMIUM OF 3% SINCE THE ASSESSEE HAS EXPOSED ITSELF TO A RISK IN LEAVING ITS 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. ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 5 OF 11 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 OF REIMBURSEMENT O F EXPENSES, ON WHICH NO INTEREST WAS CHARGED. IT WAS NOTED THAT THESE AMOUNTS AGGREGATED TO RS 3,42,37,697. THE TPO MADE AN ARM S LENGTH PRICE ADJUSTMENT, IN RESPECT OF NOTIONAL INTEREST ON THESE RECEIVABLES, @ 15.5%. 5 . IT WAS IN THIS BACKDROP, AND AGGR IEVED BY THE ASSESSING OFFICER PROPOSING TO MAKE THIS ARM S LENGTH PRICE 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 WARRANT ED 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 DELAYED. UND ER 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 INTENDED ADVANCEMENT OF MONEY WAS NOT FOR EQUITY FINANCING. THE SUBSIDIARY SGPL, HAVING RECEIVED THE MONEY HAS IN TURN EXTENDED A LOAN TO ITS SUBSIDIARY WHICH IS ALSO BASED IN MAURITIUS. THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THAT IMMEDIATELY ON RECEIPT OF MONEY, EVERY EFFORT WAS MADE TO ALLOT THE SHARES. IF IT WAS A CASE WHICH REMAINED PENDING FOR ALLOTMENT DUE TO EXTRA ORD INARY OR LEGAL CIRCUMSTANCES, THERE COULD HAVE BEEN SOME MERITS IN THE ASSESSEE'S ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 6 OF 11 ARGUMENT. AT BEST, IT IS A CASE WHERE THE MONEY WAS REQUIRED BY THE SUBSIDIARY AND GIVEN. WHETHER IT SHOULD BE ALLOTTED AS SHARES OR REFUNDED REMAINED PENDING FOR CONSIDER ATION 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 SUGGES T THAT THE ASSESSEE AND ITS SUBSIDIARY HAD THE INTENTION OF ALLOTMENT OF SHARES AT ALL TIMES AND THEREFORE THE RE - CHARACTERISATION OF THE TRANSACTION OF THE LOAN IS UPHELD. 6 . AG GRIEVED BY THE STAND SO TAKEN BY THE DRP, BOTH THE PARTIES ARE IN APPEAL BEF ORE US. WHILE THE ASSESSING OFFICER IS AGGRIEVED OF THE DRP DELETING ALP ADJUSTMENT IN RESPECT OF INTEREST ON RECEIVABLES, THE ASSESSEE IS IN APPEAL AGAINST THE DRP CONFIRMING, INTER ALIA, RECHARACTERIZATION OF THE AMOUNT GIVEN TO THE SUBSIDIARY AS SHARE A PPLICATION MONEY. 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD, 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 I T 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 MAKING ANY ARM S LENGTH PRICE ADJUSTMENT IN RESPECT OF INTEREST ON RECEIVABLES. IN A NY CASE, THE EXPENSES SO INCURRED BY THE ASSESSEE FOR THE SUBSIDIARY UNDER INCORPORATION WERE IN T HE 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 REG ARDS 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 ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 7 OF 11 REMITTANCE OF THE AMOUNTS IN QUESTION WAS ALSO ADMITTEDLY AS FOR CA PITAL 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 INTERES T BEARING LOAN BECAUSE THERE HAS BEEN A DELAY IN ALLOTMENT OF SHARES. AS REGARDS REVENUE S RELIANCE ON PEROT SYSTEM S CASE (SUPRA), IT IS WHOLLY MISPLACED INASMUCH AS IT WAS A CASE OF LOAN WHICH WAS STATED TO BE IN THE NATURE OF QUASI CAPITAL, WHEREAS IN THE PRESENT CASE THE PAYMENT WAS RIGHT 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 LIMITED VS ACIT [(2014) 63 SOT 113 (DEL)] WHICH HAS, INT ER 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 ADJUSTMENT WITH REGARD TO THE ALP OF THE CAPITAL CONTRIBUTION. HE HAS, HOWEVER, TREATED THESE TRANSACTIONS PARTLY AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN THE DATES OF PAYMENT TILL THE DATE ON WHICH SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITAL CON TRIBUTION, I.E. AFTER THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIARIES IN WHICH CAPITAL CONTRIBUTIONS WERE MADE. NO DOUBT, IF THESE TRANSACTIONS ARE TREATED AS IN THE NATURE OF LENDING OR BORROWING, THE TRANSACTIONS CAN BE SUBJECTED TO ALP ADJUSTMEN TS, 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 CAS E. 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 PARTLY OF THE NATURE OF INTEREST FREE LOAN ON THE GROUND THAT THERE HAS BEEN A DELAY IN ALLOTMENT OF SHARES. ON FACTS OF THIS CASE ALSO, THERE IS NO FINDING ABOUT WHAT IS THE REASONABLE AND PERMISSIBLE TIME PERIOD FOR ALLOTMENT OF SHARES, AND EVEN IF ONE WAS TO ASSUME THAT THERE WAS AN UNREASO NABLE DELAY IN ALLOTMENT OF SHARES, THE CAPITAL CONTRIBUTION COULD HAVE, AT BEST, BEEN TREATED AS AN INTEREST FREE LOAN FOR SUCH A PERIOD OF ' INORDINATE DELAY' AND NOT THE ENTIRE PERIOD BETWEEN THE DATE OF MAKING THE PAYMENT AND DATE OF ALLOTMENT OF SHARE S. 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 PAY ABLE 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 IN TEREST FREE LOAN ON COMMERCIAL BASIS BETWEEN THE SHARE APPLICANT AND THE COMPANY TO WHICH CAPITAL CONTRIBUTION IS BEING MADE. ON THESE ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 8 OF 11 FACTS, IT WAS UNREASONABLE AND INAPPROPRIATE TO TREAT THE TRANSACTION AS PARTLY IN THE NATURE OF INTEREST FREE LOAN TO TH E 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. NONE OF THESE DECISIONS, HOWEVER, DE AL 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 ALLOTTED, AND PARTLY AS CAPITAL CONTRIBUTION, AFTER THE SUBSCRIBED SHARES WERE ISSUED BY THE SUBSIDIARY IN WHICH CAPITAL CONTRIBUTION WAS MADE. IN THE CASE OF PEROT SYSTEMS TSI INDIA LTD (SUPRA), A COORDINATE BENCH OF THIS TRIBUNAL HAD AN OCCASION TO DEAL WITH THE ARM'S LENGTH PRICE ADJUSTMENT WITH REGARD TO INTEREST FREE ADVANCES TO THE SUBSIDIA RIES. THAT WAS A CASE IN WHICH THE ASSESSEE, AN INDIAN COMPANY, ADVANCED INTEREST - FREE LOANS TO ITS 100% FOREIGN SUBSIDIARIES. THE SUBSIDIARIES USED THOSE 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 NOT IONAL INCOME COULD NOT BE ASSESSED TO TAX. HOWEVER, BOTH OF THESE ARGUMENTS WERE REJECTED BY A COORDINATE BENCH OF THIS TRIBUNAL. WHILE DOING SO, THE COORDINATE BENCH OBSERVED THAT THERE WAS NO MATERIAL ON RECORD TO ESTABLISH THAT THE LOANS WERE IN REALITY NOT LOANS BUT WERE QUASI - CAPITAL AND THAT THERE IS ALSO NO REASON WHY THE LOANS WERE NOT CONTRIBUTED AS CAPITAL IF THEY WERE ACTUALLY MEANT TO BE A CAPITAL CONTRIBUTION. IT WAS OBSERVED THAT, 'IT IS NOT THE CASE THAT THERE WAS ANY TECHNICAL PROBLEM THAT T HE LOAN COULD NOT HAVE BEEN CONTRIBUTED AS CAPITAL ORIGINALLY, IF IT WAS MEANT TO BE A CAPITAL CONTRIBUTION'. 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, THI S 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 MONE Y HAVE BEEN MADE. SIMILARLY, IN VVF'S CASE (SUPRA), THE TRANSACTION WAS ADMITTEDLY IN THE NATURE OF INTEREST FREE LOAN BETWEEN AES AND THE COMMERCIAL EXPEDIENCY IN ADVANCING INTEREST FREE LOANS WAS ON ACCOUNT OF OWNERSHIP AND CONTROL OF SUBSIDIARY BEING IN THE HANDS OF THE ASSESSEE, WHICH WAS RECOGNIZED AS 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 IMPAC T 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 ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 9 OF 11 (I.E. FO R 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 A BOGUS TRANSACTION BECAUSE ADMITTE DLY THE SUBSCRIBED SHARES CAPITAL HAS INDEED 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 AU THORITIES 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 DELET E THE IMPUGNED ADJUSTMENT OF RS.19,15,45,943. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. AS WE HAVE DECIDED THIS GROUND OF APPEAL ON THE FUNDAMENTAL ISSUE THAT THE PAYMENT OF SHARE APPLICATION MONEY COULD NOT BE PARTLY TREATED AS INTEREST FREE LOAN TO AE, W E SEE NO NEED TO DEAL WITH OTHER ASPECTS OF THE MATTER. 9 . THERE IS ONE MORE ASPECT OF THE MATTER. IN THE PRESENT CASE, ALLOTMENT OF SHARES DOES NOT MAKE ANY CHANGE TO THE POSITION OF THE ASSESSEE, AS THE SUBSIDIARY IS ADMITTEDLY A WHOLLY OWNED SUBSIDIA RY OF THE ASSESSEE. 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 ISSUED SHARES DURING THE PERIOD, THE ASSESSEE DID NOT DERIVE ANY BENEFIT FROM THIS INVESTMENT AND, FOR THIS REASON, THE ARM S LENGTH PRICE ADJUSTMENT HAS BEEN MADE FOR NOTIONAL INTEREST FOR THE MONEY WHICH SHOULD BE ASSESSEE S REWARD FOR THE INVESTMENT. WHAT THE TPO AND DR P HAVE OVERLOOKED IS THAT SINCE THE ASSESSEE WAS ONLY SHAREHOLDER OF THE SUBSIDIARY COMPANY, THE FRUITS OF THIS INVESTMENT BELONG TO THE ASSESSE ONLY AND IN ENTIRETY. ON GIVING THIS MONEY TO THE SUBSIDIARY AND ON USE OF THIS ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 10 OF 11 MONEY BY THE SUBSIDI ARY, 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 BENEFI CIAL 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 ASSESSEE S POSITION ANYWAY. ALL THE E ARNINGS 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 RS 1,00,000 AND THE ASSESSEE HAD 100 SHARES BEFORE NEW ALLOTMENT OF SHARES AND 10 00 SHARES AFT ER THE ALLOTMENT, THE ASSESSEE WOULD BE ENTITLED TO RS 1,00,000 ONLY THE EITHER WAY - WHETHER AS RS 1,000 PER SHARE FOR 100 IN PRE NEW ALLOTMENT SITUATION OR WHETHER AS RS 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 P ERCENTAGE OF OWNERSHIP IS THE ONLY MATERIAL FACTOR - WHICH REMAINS AT 100% PRE NEW ALLOTMENT AS ALSO POST NEW ALLOTMENT. IN THE CASE OF CIT VS EKL APPLIANCES LIMITED [(2012) 345 ITR 241 (DEL)], HON BLE DELHI HIGH COURT HAS, THOUGH IN A VERY DIFFERENT CONTE XT AND WHICH IS MATERIALLY DIFFERENT FROM A SITUATION IN WHICH THE PAYMENT IS MADE FOR SUBSCRIPTION OF SHARE CAPITAL - AS IN THIS CASE, HELD THAT RECHARACTERIZATION OF A TRANSACTION IS POSSIBLE IN ONLY TWO SITUATIONS I.E. (I) WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM AND (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENT ERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER. NONE OF THESE CONDITIONS IS SATISFIED IN THE PRESENT CASE. THE FORM AND SUBSTANCE OF THE TRANSACTIONS ARE THE SAME. THE ASSESSEE HAS BEHAVED IN A COMMERCIALLY RATIONAL MANNER INASMUCH AS W HETHER 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 SHA RES, 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 THE ADJUSTMENT MADE BY THE ASSESSING OFFICER IS, THEREFORE, WHOLLY DEVOID OF LEGALLY SUSTAINABLE MERITS AND FACTUAL LY CORRECT ASSUMPTIONS. ITA NO S . 1 791 & 1970 / MUM /20 1 4 ASSESSMEN T Y EAR: 20 09 - 10 PAGE 11 OF 11 10. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE HOLD THAT THE ADJUSTMENT ON ACCOUNT OF NOTIONAL INTEREST ON THE SHARE APPLICATION MON EY, WHICH HAS BEEN RECHARACTERI Z ED AS LOAN, IS NOT SUSTAINABLE IN LAW. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETE THE SAME. AS THE RECHARACTERIZATION ITSELF IS HELD TO BE UNSUSTAINABLE IN LAW AND ON FACTS OF THIS CASE, ALL OTHER ISSUES RAISED IN THE ASSESSEE S APPEAL ARE RENDERED ACADEMIC. WITH THESE OBS ERVATIONS, AND IN THESE TERMS, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSING OFFICER IS DISMISSED AND THE APPEAL OF THE ASSESSEE I S ALLOWED. PRONOUNCED IN THE OPEN COURT TODAY ON 2 9 TH DAY OF FEBRUARY, 2016. SD/ - SD/ - PAWAN SINGH PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: THE 29 TH DAY OF FEBRUARY , 2016 . COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI B ENCHES, MUMBAI