TOPSGRUP ELECTRONICS SYSTEMS LTD, MUMBAI V. ITO WD 8(3)(3), MUMBAI

ITA 2115/MUM/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3893 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2009-2010
• Appeal Filed On: 10-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUKESH KUMAR SHAH
• Assessee Lawyers: S M LALA
• Keywords: Depreciation; Transfer pricing; International transaction; Permanent establishment; Question of law; Cost of acquisition; Wholly owned subsidiary; Fair market value; Valuation report; Notional interest; Capital receipt; Commercial expediency
• Section: 143(3); 92B; 56(2); 10B; 147; 56; 263; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'K' BENCH, MUMBAI BEFORE SHRI JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 2115/MUM/2015 (ASSESSMENT YEAR: 2009-10) M/ S. TOPSGRUP ELECTRONIC SYSTEMS VS. INCOME TAX OFFICER - 8(3)(3) LTD . (PREVISOUSLY TOPS SEQUIPMENT LTD.) 5, ROYAL PALMS GOLF & COUNTRY CLUB AAREY MILK COLONY, GOREGAON (E) MUMBAI 400065 AYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 PAN - AA ACT3291K APPELLANT RESPONDENT APPELLANT BY: SHRI S.M. LALA RESPONDENT BY: SHRI MUKESH KUMAR SHAH DATE OF HEARING: 17.12.2016 DATE OF PRONOUNCEMENT: 19.02.2016 O R D E R PER JASON P. BOAZ, A.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)- 58, MUMBAI DATED 02.01.2015 FOR A.Y. 2009-10. 2. THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER: - 2.1 THE ASSESSEE COMPANY, A WHOLLY OWNED SUBSIDIARY OF THE TOPS SECURITIES LTD. (TSL) IS ENGAGED IN THE BUSINESS O F PROVIDING SECURITY SERVICES. FOR A.Y. 2009-10, THE ASSESSEE FILED ITS RETURN OF INCOME ON 23.09.2009 DECLARING TOTAL INCOME OF RS.3,65,280/-. THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSING OFFICER (AO) MADE A R EFERENCE UNDER SECTION 92CA OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT ) TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRI CE (ALP) OF THE REPORTED INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WITH ITS ASSOCIATED ENTERPRISES (AE), AFTER OBTAINING THE APPROVAL OF THE COMMISSIONER OF INCOME TAX - 8, MUMBAI. THE TPO PASSED AN ORDER UND ER SECTION 92CA OF THE ACT DATED 31.12.2012 PROPOSING AN ADJUSTMENT OF RS.142,80,14,163/- ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 2 TOWARDS THE ALP OF THE INTERNATIONAL TRANSACTIONS T HE ASSESSEE ENTERED INTO WITH ITS AE IN THE PERIOD RELEVANT TO A.Y. 2009-10, WHICH ARE AS UNDER: - I) LOAN TO THBV RS. 1,366/- II) SUBSCRIPTION TO SHARE CAPITAL TO AE RS.1,42,80 ,12,797/- RS.1,42,80,14,163/- THE AO COMPLETED THE ASSESSMENT FOR A.Y. 2009-10 UN DER SECTION 143(3) R.W.S. 144C OF THE ACT VIDE ORDER DATED 09.05.2013. 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT FOR A.Y. 2 009-10 DATED 09.05.2013, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A)-58, MUMBAI. THE LEARNED CIT(A) DISMISSED ASSESSEES APPEAL VIDE ORDER DATED 02.01.2015. 3. AGGRIEVED BY THE ORDER OF THE CIT(A)-58, MUMBAI DAT ED 02.01.2015 FOR A.Y. 2009-10, THE ASSESSEE HAS PREFERRED THIS APPEA L BEFORE THE TRIBUNAL RAISING THE FOLLOWING GROUNDS: - 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN FACTS AND LAW IN NOT HOLDING THE REFERENCE MADE BY THE LE ARNED ASSESSING OFFICER U/S. 92CA(1) AS BEING WITHOUT JUR ISDICTION AND BAD IN LAW, AND AS A CONSEQUENCE OF WHICH THE ORDER PASSED U/S. 143(3) R.W.S. 144C IS ALSO ERRONEOUS, SUFFERS FROM LEGAL INFIRMITY AND IS THUS BAD IN LAW. 2. (A) THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) ERRED IN FACTS AND LAW IN SUSTAINING THE ACTION OF THE LEARNED ASS ESSING OFFICER! TRANSFER PRICING OFFICER IN MAKING AN ADDITION OF R S. 1,366/- BY BENCHMARKING THE INTEREST ON LOAN TO ASSOCIATED ENT ERPRISES AT PRIME LENDING RATE OF 12% PA PLUS 3% MARKUP TOWARDS RISK FACTORS AS AGAINST 13% P.A. OFFERED BY THE APPELLANT. (B) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) ERRED IN FACTS AND LAW IN NOT APPRECIATING THAT THE 13% P.A. OFFER ED ON THE FOREIGN CURRENCY (EURO) LOAN GIVEN TO THE ASSOCIATE D ENTERPRISE, BEING WHOLLY OWNED SUBSIDIARY, IS MORE THAN THE AVE RAGE PRIME LENDING RATE G 12% P.A. AND EVEN THE LIBOR RATE OF 5.54% P.A., PURSUANT TO WHICH NO ADJUSTMENT IN ARM'S LENGTH PRI CE IS WARRANTED. 3.(A) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) ERRED IN FACTS AND LAW IN SUSTAINING THE ACTION OF THE LEARNED ASS ESSING OFFICER/TRANSFER PRICING OFFICER IN MAKING AN ADDIT ION OF RS. 1,24,17,50,258/-, BY WAY OF ADJUSTMENT ON ACCOUNT O F RE- CHARACTERISATION OF THE INVESTMENT IN SHARES ISSUED AT PREMIUM BY WHOLLY OWNED SUBSIDIARY OUTSIDE INDIA AS INTERES T FREE LOAN GIVEN TO THE ASSOCIATED ENTERPRISE. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 3 (B) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) ERRED IN FACTS AND LAW IN NOT APPRECIATING THE COMMERCIAL EXPEDIEN CY OF THE INVESTMENT TRANSACTION AND THAT THERE IS NO CHARGE ON APPLICATION OF FUNDS BY THE APPELLANT. (C) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) ERRED IN FACTS AND LAW IN APPRECIATING THAT NO ADDITION COULD BE M ADE UNDER ANY PROVISIONS OF THE INCOME-TAX ACT, 1961 IN RESPE CT OF INVESTMENTS MADE OUT OF OWN EXPLAINED FUNDS IN ABSE NCE OF ANY SPECIFIC CHARGING PROVISIONS FOR MAKING SUCH AN ADD ITION. (D) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) ERRED IN FACT AND LAW IN APPRECIATING THAT THE NO ADJUSTMENT CAN MADE BY THE TRANSFER PRICING OFFICER BY RE-CHARACTERISING A PAR T OF INVESTMENT INTO LOAN WITHOUT APPLICATION OF ANY OF THE PRESCRI BED METHODS FOR DETERMINATION OF ARMS-LENGTH PRICE AND THAT THE ADJ USTMENT MADE BY THE LEARNED TRANSFER PRICING OFFICER WITHOU T APPLYING ANY OF THE PRESCRIBED METHODS IS THEREFORE BAD-IN-L AW. (E) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) ERRED IN FACT AND LAW IN APPRECIATING THAT THE VALUE OF INVESTMEN T IN THE ASSOCIATED ENTERPRISE, BEING WHOLLY OWNED SUBSIDIAR Y, WAS MADE BASED ON THE VALUE OF UNDERLYING ASSETS TO BE ACQUIRED BY THE SAID ASSOCIATED ENTERPRISE. 4. (A) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) ERRED IN FACTS AND LAW IN APPRECIATING THAT NO NOTIONAL INTEREST C AN BE BROUGHT TO CHARGE BY RE-CHARACTERISATION OF INVESTMENT, BY HOLDING A PART OF IT TO BE LOAN. (B) THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) ERRED IN FACTS AND LAW IN SUSTAINING THE ACTION OF THE LEARNED ASS ESSING OFFICER/ TRANSFER PRICING OFFICER IN MAKING AN ADJU STMENT OF RS. 18,62,62,539 AS NOTIONAL INTEREST INCOME @ 15% P.A. WITHOUT ADOPTING ANY OF THE PRESCRIBED METHOD FOR DERIVING AT ARM'S LENGTH RATE AND NOT APPRECIATING THAT THERE IS NO C HARGING P ROVISION IN THE INCOME-TAX ACT, 1961 TO BRING TO CHARGE SUCH NOTIONAL INTEREST. 5. THE APPELLANT PRAYS THAT:- I. THE REFERENCE MADE U/S.92CA AND CONSEQUENTIALLY THE ORDER PASSED U/S. 143(3) R.W.S 144C BE TREATED AS BEING W ITHOUT JURISDICTION, INVALID AND BAD IN LAW; II. ADDITION OF INTEREST OF RS. 1,366/- BY ADOPTION OF PLR @ 15% P.A. BE DELETED AND THE ADJUSTMENT MADE BY THE APPE LLANT BE UPHELD; III. ADDITION OF RS. I,24,17,50,258/- ON ACCOUNT OF RE- CHARACTERISATION OF SHARE CAPITAL INTO INTEREST-FRE E LOAN BE DELETED; IV. ADDITION OF NOTIONAL INTEREST OF RS. 18,62,62,539/- @ 15% ON CONSTRUING SHARE INVESTMENT AS INTEREST-FREE LOAN B E DELETED; ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 4 V. ANY OTHER RELIEF, AS MAY BE DEEMED FIT IN THE MATTE R, BE GRANTED. 6. THE GROUNDS OF APPEAL RAISED ARE WITHOUT PREJUDICE TO ONE ANOTHER. 7. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OR ALL THE GROUNDS OF APPEAL. 4. GROUNDS AT SR. NOS. 1, 2, 5, 6 AND 7 4.1 AT THE OUTSET, THE LEARNED A.R. FOR THE ASSESSE E SUBMITTED THAT THE GROUNDS AT SR. NOS. 1 AND 2 (FOR SMALLNESS OF THE A MOUNT INVOLVED) ARE NOT BEING PRESSED IN THIS APPEAL. SINCE THESE GROUNDS A RE NOT PRESSED, THEY ARE RENDERED INFRUCTUOUS AND ARE ACCORDINGLY DISMISSED AS INFRUCTUOUS. 4.2 THE GROUNDS AT SR. NOS. 6 AND 7 ARE GENERAL IN NATURE AND THEREFORE NO SEPARATE ADJUDICATION IS CALLED FOR THEREON. 4.3 GROUND NO. 5 IS THE PRAYER OF THE ASSESSEE IN THIS APPEAL. THIS GROUND WILL AUTOMATICALLY GET ADDRESSED WHEN THIS APPEAL I S DISPOSED OFF. GROUNDS AT S.NOS. 3(A) TO (E) AND 4(A) & (B) - TRAN SFER PRICING ISSUES 5. THE FACTS OF THE CASE ON THESE ISSUES AS EMANATE FR OM THE RECORD ARE, BRIEFLY, AS UNDER: - 5.1 THE ASSESSEE, A PART OF THE TOPSGRUP, ENGAGED I N THE BUSINESS OF PROVIDING SECURITY SERVICES WAS INCORPORATED TO MAN UFACTURE SECURITY EQUIPMENT. HOWEVER, SINCE THIS BUSINESS STOPPED, IT IS CARRYING ON THE ACTIVITY OF AN INVESTMENT/HOLDING COMPANY. IN ORDER TO EXPAND ITS SECURITY BUSINESS ON A GLOBAL SCALE, THE TOPSGRUP PROPOSED T O INVEST IN SHIELD GUARDING COMPANY LTD., U.K. (SHIELD), A PRIVATE C OMPANY ENGAGED IN THE BUSINESS OF PROVIDING SECURITY SERVICES. TOWARDS TH IS END, THE ASSESSEES HOLDING COMPANY TSL ENTERED INTO AN AGREEMENT DAT ED 18.07.2007 WITH ITS INVESTORS, VIZ. INDIA ADVANTAGE FUND & INDIVISION WHO JOINTLY INVESTED RS.140 CRORES FOR ACQUISITION OF SHIELD. OUT OF T HIS AMOUNT OF RS.140 CRORES, TSL INVESTED/SUBSCRIBED TO 12,46,010 SHAR ES OF THE ASSESSEE OF FACE VALUE OF RS.10/- PLUS PREMIUM OF RS.990/-; RESULTIN G IN INVESTMENT OF RS.124,60,14,673/-). 5.2 THE MONEY OF RS.124,60,14,673/- RECEIVED BY THE ASSESSEE FROM TSL WAS INVESTED BY ACQUIRING 7200 SHARES @ EURO 2,663. 38 PER SHARE DURING ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 5 THE PERIOD UNDER CONSIDERATION (I.E. A.Y. 2009-10) IN TOPS BV NETHERLANDS, A WHOLLY OWNED SUBSIDIARY, WHICH WAS TO BE AN INTERME DIATE HOLDING COMPANY TO ACQUIRE SHIELD. THE MONEY RECEIVED BY TOPS BV NETHERLANDS WAS FURTHER INVESTED TOWARDS ACQUISITION OF SHIELD. THE STRUC TURE OF THE TOPSGRUP GROUP OF COMPANIES FOR ACQUISITION OF SHIELD IS GIVEN A S UNDER: - - TSL IS THE HOLDING COMPANY; - TESL, THE ASSESSEE, IS A WHOLLY OWNED SUBSIDIARY OF TSL; - TOPS BV IS A 100% SUBSIDIARY OF THE ASSESSEE - TOPS UK IS A 100% SUBSIDIARY OF TOPS BV; - SHIELD IS THE TARGET FOR ACQUISITION. 5.3 IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT WHIL E THE INVESTMENT IN ACQUISITION OF SHARES OF TOPS BV FORMED PART OF T HE NOTES IN FORM 3CEB, THE SAME WAS NOT BENCHMARKED AS THE ASSESSEE WAS OF THE VIEW THAT THE SUBSCRIPTION TO EQUITY CAPITAL DID NOT HAVE ANY BEA RING ON PROFITABILITY, TP REGULATIONS WERE NOT APPLICABLE. IT WAS FURTHER SUB MITTED THAT THE RECHARACTERIZATION OF THIS TRANSACTION AS A LOAN WA S NOT PERMISSIBLE, AS THIS WAS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE AC T. 5.4 IT IS SEEN FROM THE TPOS ORDER UNDER SECTION 9 2CA(3) OF THE ACT, WHERE HE HAS HELD THAT AS PER THE AMENDED PROVISIONS OF S ECTION 92CA(2), TRANSACTIONS OF CAPITAL FINANCING HAVE ALL ALONG BE EN INTERNATIONAL TRANSACTIONS. THE TPO OBSERVED THAT THE AE (VIZ. TO PS BV) GOT THE HUGE PREMIUM DUE TO ITS SPECIAL RELATION WITH THE ASSESS EE AND THE ASSESSEE HAD FAILED TO ESTABLISH THAT THE AE WAS CAPABLE OF RAIS ING FUNDS, EITHER BY WAY OF LOAN OR SHARE CAPITAL, ON A STANDALONE BASIS BY ITS ELF. IN THE ABSENCE OF THIS SHARE PREMIUM, THE AE WOULD HAVE HAD TO TAKE LOANS FROM THE ASSESSEE OR ON OPEN MARKET WHICH WOULD ENTAIL IT TO PAY HUGE IN TEREST COSTS. THE AE THUS GOT THE FUNDS BY WAY OF THE ABOVE TRANSFER BY THE ASSESSEE WITHOUT BEING CHARGED ANY INTEREST THEREON. THUS, ACCORDING TO THE TPO, THE PREMIUM WAS NOTHING BUT A LOAN GIVEN BY THE ASSESSE E TO ITS AE (VIS. TOPS BV) IN THE GARB OF SHARE PREMIUM. THE TPO THEN PROC EEDED TO COMPUTE THE BOOK VALUE PER SHARE ON THE BASIS OF SCHEDULE III O F THE WEALTH TAX ACT, 1957 AND ACCORDINGLY MADE AN ADDITION OF RS. 124,17,50,258/-. IN DOING SO, ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 6 THE TPO CONSIDERED THE NUMBER OF SHARES AT 72000 IN STEAD OF 7200, THE SHARE PREMIUM AT EURO 266.3 AS AGAINST EURO 2663 AN D BOOK VALUE AT EURO 0.428 INSTEAD OF EURO 4.28. THE TPO MADE A FURTHER ADJUSTMENT/ ADDITION OF RS. 18,62,62,539/- BEING NOTIONAL INTEREST COMPUTED @15 % ON THE AFORESAID SUM OF RS. 124,17,50,258/-. 5.5 ON APPEAL BEFORE THE LEARNED CIT(A), THE ASSESS EE PLACED RELIANCE ON THE FOLLOWING JUDICIAL DECISIONS IN SUPPORT OF THE PROPOSITIONS PUT FORTH THAT, (I) TP PROVISIONS WOULD NOT BE APPLICABLE TO CAPITA L TRANSACTIONS DUE TO THE ABSENCE OF THE INCOME ELEMENT THEREIN; AND (II) REC HARACTERISATION OF INVESTMENT INTO LOAN WAS NOT POSSIBLE: - I) VODAFONE INDIA SERVICES PVT. LTD. [368 ITR 001 ( BOM)] II) SHELL INDIA MARKETS PVT. LTD. [269 ITR 516 (BOM )] III) VIJAI ELECTRICALS [60 SOT 77 (HYD)] IV) HILL COUNTRY PROPERTIES LTD. [48 TAXMANN.COM 94 (HYD)]. THE LEARNED CIT(A) WAS OF THE VIEW THAT THE RATIO O F THE HON'BLE BOMBAY HIGH COURT JUDGEMENTS DO NOT APPLY TO THE ASSESSEE IN TH E CASE ON HAND AS THEY PERTAINED TO INBOUND TRANSACTIONS I.E. WHERE THE AS SESSEE RECEIVED THE AMOUNT ON ISSUE OF SHARES, WHEREAS THE TRANSACTION OF THE ASSESSEE IN THE CASE ON HAND PERTAINED TO AN OUTBOUND TRANSACTION. 6. BEFORE US, THE LEARNED A.R. FOR THE ASSESSEE PUT F ORTH SUBMISSIONS, ARGUMENTS AND CONTENTIONS ON THIS ISSUE ON TWO PROP OSITIONS AS UNDER: - I) THAT IN THE ABSENCE OF INCOME ARISING OUT OF AN INT ERNATIONAL TRANSACTION, TP PROVISIONS DO NOT APPLY; AND II) THAT A TRANSACTION OF INVESTMENT IN SHARE CAPITAL C OULD NOT BE RE- CHARACTERIZED AS A LOAN. 6.1.1 THE ASSESSEES FIRST SUBMISSION IS THAT IN TH E ABSENCE OF INCOME ARISING FROM AN INTERNATIONAL TRANSACTION, TP PROVI SIONS DO NOT APPLY . IT WAS SUBMITTED THAT THE ASSESSEE INVESTED /SUBSCRIBED TO 7200 SHARES OF TOPS BV @ EURO 2663.38 PER SHARE (EURO 10 PLUS SHARE PREMIU M - EURO 2653.38). IT WAS FURTHER CONTENDED THAT AS IS EVIDENT FROM THE A BOVE TRANSACTIONS, BEING ON CAPITAL ACCOUNT, IT DID NOT RESULT IN ANY INCOM E NOR WAS THERE ANY SCOPE ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 7 OF EARNING ANY POTENTIAL INCOME ARISING OUT OF THIS TRANSACTION. THUS, IT WAS SUBMITTED THAT THE AFORESAID TRANSACTION IS BEYOND TP REGULATIONS. CHAPTER X OF THE ACT, DEALING WITH TP PROVISIONS, COMMENCES WITH SECTION 92(1) OF THE ACT WHICH PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTIO N SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE . IN THIS REGARD IT WAS SUBMITTED THAT THE INCOME ARISING FROM AN INTER NATIONAL TRANSACTION IS A CONDITION PRECEDENT FOR THE BENCHMARKING OF AN INTE RNATIONAL TRANSACTION. THEREFORE, FIRSTLY, THERE SHOULD BE INCOME; AND SEC ONDLY, INCOME SHOULD ARISE FROM THE INTERNATIONAL TRANSACTION. IN THE AB SENCE OF THESE TWO CONDITIONS, THE TP PROVISIONS DO NOT APPLY. 6.1.2 THE SUBJECT MATTER OF DISPUTE IS WITH REGARD TO THE INVESTMENT BY THE ASSESSEE IN ACQUIRING THE SHARES IN TOPS VB, NETHER LANDS. IT WAS SUBMITTED BY THE ASSESSEE THAT WHILE THIS TRANSACTION IS ADMI TTEDLY AN INTERNATIONAL TRANSACTION UNDER SECTION 92B OF THE ACT, HOWEVER N O INCOME HAS ARISEN OUT OF THIS TRANSACTION. THEREFORE, THE LEARNED A.R. FO R THE ASSESSEE SUBMITTED THAT IN THE ABSENCE OF INCOME, THIS TRANSACTION IS NOT REQUIRED TO BE BENCHMARKED AND THE SAME IS BEYOND THE SCOPE OF TP PROVISIONS IN INDIA. IN THIS CONTEXT, THE LEARNED A.R. FOR THE ASSESSEE PLA CED RELIANCE ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: - I) VODAFONE INDIA SERVICES P. LTD. IN 368 ITR 001 ( BOM), PARTICULAR REFERENCE WAS DRAWN TO THE FINDINGS IN THE ORDER AT THE FOLLOWING PARAGRAPHS:- 24. A PLAIN READING OF SECTION 92(1) OF THE ACT VER Y CLEARLY BRINGS OUT THAT INCOME ARISING FROM A INTERNATIONAL TRANSA CTION IS A CONDITION PRECEDENT FOR APPLICATION OF CHAPTER X OF THE ACT . ..... 25. .......... THE WORD INCOME FOR THE PURPOSE OF T HE ACT HAS A FULL UNDERSTOOD MEANING AS DEFINED IN SECTION 2(24) OF T HE ACT. THIS EVEN WHEN THE DEFINITION IN SECTION 2(24) OF THE ACT IS AN INCLUSIVE DEFINITION. IT CANNOT BE DISPUTED THAT INCOME WILL NOT IN ITS N ORMAL MEANING INCLUDE CAPITAL RECEIPTS UNLESS IT IS SO SPECIFIED, AS IN S ECTION 2(24)(VI) OF THE ACT. IN SUCH A CASE, CAPITAL GAINS CHARGEABLE TO TAX UND ER SECTION 45 OF THE ACT ARE, DEFINED TO BE INCOME. THE AMOUNTS RECEIVED ON ISSUE OF SHARE CAPITAL INCLUDING THE PREMIUM ARE UNDOUBTEDLY ON CA PITAL ACCOUNT. SHARE PREMIUM HAVE BEEN MADE TAXABLE BY A LEGAL FICTION U NDER SECTION 56(2)(VIIB) OR THE ACT AND THE SAME IS ENUMERATED A S INCOME IN SECTION 2(24)(XVI) OF THE ACT. HOWEVER, WHAT IS BOUGHT INTO THE AMBIT OF INCOME IS ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 8 THE PREMIUM RECEIVED FROM A RESIDENT IN EXCESS OF T HE FAIR MARKET VALUE OF THE SHARES. IN THIS CASE WHAT IS BEING SOUGHT TO BE TAXED IS CAPITAL NOT RECEIVED FROM A NON-RESIDENT I.E. PREMIUM ALLEGEDLY NOT RECEIVED ON APPLICATION OF ALP. THEREFORE ABSENT EXPRESS LEGISL ATION, NO AMOUNT RECEIVED, ACCRUED OR ARISING ON CAPITAL ACCOUNT TRA NSACTION CAN BE SUBJECTED TO TAX AS INCOME. THIS IS SETTLED BY THE DECISION OF THIS COURT IN CADELL WEAVING MILL CO. VS. CIT 249 ITR 265 WAS UPHELD BY THE APEX COURT IN CIT VS. D.P. SANDU BROS, CHEMBER (P) LTD. 273 ITR 1 . .......... 42. .......... AS POINTED OUT ABOVE, THE ISSUE OF S HARES AT A PREMIUM IS ON CAPITAL ACCOUNT AND GIVES RISE TO NO INCOME. THE SU BMISSION ON BEHALF THE REVENUE THAT THE SHORTFALL IN ALP AS COMPUTED F OR THE PURPOSES OF CHAPTER X OF THE ACT GIVES RISE TO INCOME IS MISPLA CED. THE ALP IS MEANT TO DETERMINE THE REAL VALUE OF THE TRANSACTION ENTE RED INTO BETWEEN AES. IT IS A RE-COMPUTATION EXERCISE TO BE CARRIED OUT O NLY WHEN INCOME ARISES IN CASE OF AN INTERNATIONAL TRANSACTION BETWEEN AES . IT DOES NOT WARRANT RE-COMPUTATION OF A CONSIDERATION TAKEN/GIV EN ON CAPITAL ACCOUNT. .......... 49. .......... THUS NO, OCCASION TO APPLY CHAPTER X OF THE ACT CAN ARISE IN SUCH A CASE. II) SHELL INDIA MARKETS (P) LTD. - 369 ITR 516 (BOM ) WHEREIN IT WAS HELD AT PARA 12 THEREOF THAT .......... THE JURISDICTION TO APPLY CHAPTER X OF THE ACT WOULD OCCASION ONLY WHEN INCOME ARISES OUT OF INTER NATIONAL TRANSACTION AND SUCH INCOME IS CHARGEABLE TO TAX UNDER THE ACT . .......... III) EQUINOX BUSINESS PARKS (P) LTD. VS. UNION OF I NDIA - 320 TAXMAN 191 (BOM) WHEREIN AT PARA 8 THEREOF IT WAS OBSERVED THA T: - 8. .......... 3.4. WE FIND THAT THE ISSUE UNDER CONSIDERATION OF APPLYING TRANSFER PRICING PROVISIONS ON ISSUE OF SHARES HAS BEEN DE CIDED IN FAVOUR OF THE ASSESSEE BY THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF M/S VODAFONE INDIA SERVICES PRIVATE LIMITED IN WRIT PET ITION NUMBER 871 OF 2014 DATED 10 TH OCTOBER 2014. .......... THEREFORE, SUCH CAPITAL ACCOUNT TRANSACTION NOT FAL LING WITHIN A STATUTORY EXCEPTION CANNOT BE BROUGHT TO TAX. EVEN INCOME ARI SING FROM INTERNATIONAL TRANSACTION BETWEEN AE MUST SATISFY T HE TEST OF INCOME UNDER THE ACT AND MUST FIND ITS HOME IN ONE OF THE ABOVE HEADS I.E. CHARGING PROVISIONS. THERE IS NO CHARGING SECTION I N CHAPTER X OF THE ACT. ONLY IF THERE IS INCOME WHICH IS CHARGEABLE TO TAX UNDER THE NORMAL PROVISIONS OF THE ACT, THEN ALONE CHAPTER X OF THE ACT COULD BE INVOKED. FURTHER, SINCE THERE IS NO INCOME ARISING FROM THE TRANSACTION OF ISSUE OF SHARES, THE PROVISIONS OF CHAPTER X WOULD NOT APPLY . .......... ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 9 IV) S.G. ASIA HOLDINGS (INDIA) (P) LTD. - 229 TAXMA N 452 (BOM), WHEREIN THE HON'BLE COURT FOLLOWED THE DECISION IN THE CASE OF VODAFONE INDIA SERVICES P. LTD., IN 368 ITR 001 (BOM). 6.1.3 LD. COUNSEL FURTHER SUBMITTED THAT THOUGH THE AFORESAID JUDGEMENTS PERTAIN TO INBOUND TRANSACTIONS, I.E. RECEIPT OF SH ARE CAPITAL AND SHARE PREMIUM ON ACCOUNT OF ISSUE OF SHARES, BUT THEY ARE APPLICABLE IN THE INSTANT CASE OF THE ASSESSEE ALSO WHICH IS FOR AN O UTBOUND INVESTMENT IN THE EQUITY SHARE CAPITAL OF ITS SUBSIDIARY. IT WAS ARGU ED BY HIM THAT IN THE DECISION OF VODAFONE INDIA SERVICES P. LTD. (SUPRA) , AT PARA 42 THEREOF, THE HON'BLE BOMBAY HIGH COURT LAID DOWN THE RATIO THAT THE ALP IN TRANSACTION BETWEEN AES IS TO BE DETERMINED UNDER TP PROVISIONS ONLY IN THE EVENT OF OCCURRENCE OF INCOME. IT IS A RE-COMPUTATION EXERCI SE TO BE CARRIED OUT ONLY WHEN INCOME ARISES IN CASE OF AN INTERNATIONAL TRAN SACTION BETWEEN AES. IT DOES NOT WARRANT RE-COMPUTATION OF A CONSIDERATION RECEIVED/GIVEN ON CAPITAL ACCOUNT. IT WAS SUBMITTED THAT IN VIEW OF T HE ABOVE, THE RATIO LAID DOWN THEREIN BY THE HON'BLE COURT IS APPLICABLE TO BOTH INBOUND AND OUTBOUND TRANSACTIONS. 6.1.4 THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT IN ANY EVENT THE PROVISIONS OF SECTION 56(2)(VIIA) AND 56(2)(VIIB) O F THE ACT DO NOT BRING TO TAX TRANSACTIONS SUCH AS PAYMENT OF EXCESS PREMIUM OR S HORTFALL IN RECEIPT OF SHARE PREMIUM. IT WAS ARGUED THAT THE CASE OF THE A SSESSEE DOES NOT FALL UNDER SECTION 56(2)(VIIA) AS THE CONSIDERATION PAID FOR THE SHARES IS ALLEGED TO BE EXCESSIVE AS COMPARED TO THE FAIR MARKET VALU E WHICH IS THE OPPOSITE SCENARIO OF WHAT SECTION 56(2)(VIIA) ENVISAGES. IT IS ARGUED THAT THE SAME ALSO DOES NOT FALL WITHIN THE AMBIT OF THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT AS THIS SECTION COVERS THE ISSUE OF SHARES, WHE REAS THE ASSESSEE HAS MADE AN INVESTMENT IN SHARES. IT IS CONTENDED THAT IN THE ABOVE CIRCUMSTANCES, INDIAN TP PROVISIONS ARE NOT APPLICA BLE EITHER TO VODAFONE INDIA SERVICES P. LTD. OR TO THE ASSESSEE. 6.1.5 THE LEARNED A.R. FOR THE ASSESSEE FURTHER SUB MITS THAT WITHOUT PREJUDICE TO THE ASSESSEES ABOVE SUBMISSIONS, THE ITAT, HYDE RABAD BENCH IN THE FOLLOWING CASES, COVERING THE ISSUE OF OUTBOUND INV ESTMENT IN EQUITY SHARES OF ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 10 AN AE, HAS HELD THAT SINCE NO INCOME ARISES FROM IN VESTMENT IN EQUITY SHARE CAPITAL, THE SAID TRANSACTIONS ARE BEYOND THE SCOPE OF INDIAN TP PROVISIONS: - I) VIJAY ELECTRICAL LTD. VS. ADDL. CIT (60 SOT 77) (HYD) II) HILL COUNTRY PROPERTIES LTD. VS. ADDL. CIT 48 T AXMANN.COM 94 (HYD). IN RESPECT OF THE DECISION IN THE CASE OF VIJAY ELE CTRICALS LTD. (SUPRA), THE LEARNED A.R. FOR THE ASSESSEE SUBMITS THAT THE CIT NOTICED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD INVESTED CERTAIN AMOUNTS IN ITS SUBSIDIARIES OUTSIDE INDIA. THE LEARNED CIT IN REVI SION PROCEEDINGS UNDER SECTION 263 OF THE ACT WAS OF THE VIEW THAT THESE A RE INTERNATIONAL TRANSACTIONS AS PER SECTION 92B OF THE ACT. SINCE T HE AO HAD COMPLETED THE ASSESSMENT WITHOUT REFERRING THOSE TRANSACTIONS TO THE TPO FOR DETERMINATION OF THE ALP THEREOF, THE CIT PASSED AN ORDER UNDER SECTION 263 SETTING ASIDE THE ASSESSMENT. IT IS SUBMITTED THAT THE TRIBUNAL OBSERVED FROM THE RECORDS THAT THE ASSESSEE COMPANY HAD INVE STED AMOUNTS IN THE SHARE CAPITAL OF SUBSIDIARIES OUTSIDE INDIA AND WAS THE VIEW THAT SINCE THESE TRANSACTIONS WERE NOT IN THE NATURE OF TRANSACTIONS REFERRED TO UNDER SECTION 92B OF THE ACT, TP PROVISIONS WERE NOT APPLICABLE. THE RELEVANT PORTIONS OF THE TRIBUNALS ORDER, BROUGHT TO THE NOTICE OF THE BENCH, AT PARAS 8 TO 10 THEREOF IS EXTRACTED HEREUNDER: - 8. THE LEARNED COUNSEL RELIED UPON THE DECISION IN THE CASE OF DANA CORPORATION RE, 321 ITR 178 (AAR) WHEREIN IT HAS BE EN HELD AS FOLLOWS: SECTION 92 IS NOT AN INDEPENDENT CHARGING PROVISIO N. THE EXPRESSION INCOME ARISING IN THE OPENING WORDS OF SECTION 92 POSTULATES THAT INCOME HAS ARISEN UNDER THE SUBSTANTIVE CHARGING PR OVISIONS OF THE ACT. IF BY APPLICATION OF THE PROVISIONS OF SECTION 45 R EAD WITH SECTION 48, WHICH ARE INTEGRALLY CONNECTED ONE WITH THE OTHER, INCOME CANNOT BE SAID TO ARISE, SECTION 92 DOES NOT COME TO THE AID OF THE REVENUE EVEN THOUGH IT IS AN INTERNATIONAL TRANSACTION. SECTION 92 OBVIOUSLY IS NOT INTENDED TO BRING IN A NEW HEAD OF INCOME OR TO CHA RGE TAX ON INCOME WHICH IS NOT OTHERWISE CHARGEABLE UNDER THE ACT. 9. THE LEARNED COUNSEL ALSO RELIED UPON THE DECISIO N IN THE CASE OF AMIANTIT INTERNATIONAL HOLDING LTD., 322 ITR 678 (A AR) WHEREIN IT WAS HELD THAT IN A CASE WHERE INCOME WAS NOT CHARGEABLE AT ALL TRANSFER PRICING PROVISIONS OF SECTION 92-B(I) OF THE IT ACT WOULD NOT APPLY. 9.1 THE LEARNED DR, ON THE OTHER HAND RELIED UPON T HE DECISION ITAT MUMBAI BENCH B IN THE CASE OF BOARD OF CONTROL FO R CRICKET IN INDIA VS. DIT (EXEMPTION), [2005] 96 ITD 263 (MUM) WHEREI N IT WAS HELD THAT ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 11 THE SAID ORDER DID NOT SHOW THAT THE AO HAD CONSID ERED OR APPLIED HIS MIND TO THE FACTUAL AND LEGAL ASPECTS OF THE CASE. IT WAS A STEREOTYPED ORDER WHICH SIMPLY ACCEPTED WHAT THE ASSESSEE STATE D IN ITS APPLICATION WITHOUT PROPER EXAMINATION OF THE FACTUAL AND LEGAL ASPECTS OF THE CASE. AN ORDER MAY BE RENDERED ERRONEOUS DUE TO ERROR IN APPROACH, ERROR IN COMPUTATION, ERROR IN APPLYING THE RELEVANT LAW OR FACTS OR ERROR IN SELECTING A PRINCIPLE WHICH WOULD NOT GOVERN THE FA CT SITUATION. LIKEWISE, ARBITRARY EXERCISE OF QUASI-JUDICIAL POWER WITHOUT DUE CONSIDERATION OF THE RELEVANT ASPECTS OF THE CASE WOULD ALSO RENDER THE RESULTANT ORDER ERRONEOUS WITHIN THE MEANING OF 7 ITA NO. 842/HYD/2 012 M/S VIJAI ELECTRICALS LTD. SECTION 263. IN THIS VIEW OF THE M ATTER, THE SUBMISSIONS OF THE ASSESSEE THAT THE ORDER PASSED BY THE AO U/S 195(2) WAS NOT ERRONEOUS WITHIN THE MEANING OF SECTION 263 COULD N OT BE UPHELD. THE SAID ORDER WAS AN ERRONEOUS ORDER CAPABLE OF BEING REVISED U/S 195(2) PROVIDED OTHER CONDITIONS OF SECTION 263 WERE ALSO FULFILLED. THE LEARNED DR ALSO RELIED UPON IN THE CASE OF CIT VS. SRI MAHA SASTHA PICTURES, [2003] 263 ITR 304/127 TAXMAN 162 (MAD.). 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUS ED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BEL OW AS WELL AS DECISIONS CITED. IN OUR OPINION, THE AMOUNT REPRESE NTING 2118.84 IS TOWARDS INVESTMENT IN SHARE CAPITAL OF THE SUBSIDIA RIES OUTSIDE INDIA AS THE TRANSACTIONS ARE NOT IN THE NATURE OF TRANSACTI ONS REFERRED TO SECTION 92-B OF THE IT ACT AND THE TRANSFER PRICING PROVISI ONS ARE NOT APPLICABLE AS THERE IS NO INCOME. ACCORDINGLY, WE SET ASIDE TH E ORDER PASSED BY THE CIT U/S 263 AND THAT OF THE AO IS RESTORED AND THE GROUNDS RAISED BY THE ASSESSEE IN THIS REGARD ARE ALLOWED. THE LEARNED A.R. FOR THE ASSESSEE ALSO DREW THE ATT ENTION OF THE BENCH TO THE FINDINGS OF THE ITAT, HYDERABAD BENCH IN THE CASE O F HILL COUNTRY PROPERTIES LTD. (SUPRA) WHEREIN AT PARAS 70.1, 72 AND 72.1 IT WAS HELD AS UNDER: - 70.1 ASSESSEE OBJECTING TO THE PROPOSED ADDITION B EFORE DRP CONTENDED THAT THE INVESTMENT OF THE SAID AMOUNT WA S BY WAY OF SHARE APPLICATION MONEY AND IS NOT AN INTERNATIONAL TRANS ACTION AND HAS THE APPROVAL OF THE RBI AS BEING SHARE APPLICATION MONE Y AND HAS BEEN SENT THROUGH BANKING CHANNELS. IT IS FURTHER CONTENDED T HAT IT IS IN THE NATURE OF EQUITY IN THE HANDS OF SUBSIDIARY AND THAT THERE IS NO PROVISION IN THE ACT EMPOWERING THE TPO TO RE-CHARACTERIZE AN INVEST MENT IN THE FORM OF EQUITY AS A DEBT. DRP HELD THAT THIS CONTENTION CAN NOT BE ACCEPTED AND THE TPO HAS ALREADY CONSIDERED ALL THE OBJECTIONS A T PARA-8 OF THE TP ORDER. .......... 70.2 ........... ........... 70.5 ............ 71. ........... ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 12 72. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. SIMILA R ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF V IJAI ELECTRICALS LTD. V. ADDL. CIT [2013] 60 SOT 77/36 TAXMANN.COM 386 (HYD) WHEREIN IT HAS BEEN HELD AS FOLLOWS: 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERU SED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES AS WELL AS DECISIONS CITED. IN OUR OPINION, THE AMOUNT REPRESENTING RS.2 118.84 CRORES IS TOWARDS INVESTMENT IN SHARE CAPITAL OF THE SUBSIDIA RIES OUTSIDE INDIA AS THE TRANSACTIONS ARE NOT IN THE NATURE OF TRANSACTI ONS REFERRED TO SECTION 92-B OF THE IT ACT AND THE TRANSFER PRICING PROVISI ONS ARE NOT APPLICABLE AS THERE IS NO INCOME. ACCORDINGLY, WE SET ASIDE TH E ORDER PASSED BY THE CIT U/S 263 AND THAT OF THE AO IS RESTORED AND THE GROUNDS RAISED BY THE ASSESSEE IN THIS REGARD ARE ALLOWED. 72.1 IN VIEW OF THE ABOVE, IN OUR OPINION IMPUGNED TRANSACTION CANNOT BE CONSIDERED U/S 92CA OF THE I.T. ACT AND ACCORDIN GLY, THIS GROUND IS ALLOWED. THE LEARNED A.R. FOR THE ASSESSEE SUBMITS THAT IN V IEW OF THE FINDINGS RENDERED BY THE ITAT, HYDERABAD BENCH IN THE AFORES AID CASES (SUPRA) ON SIMILAR FACTS AS THOSE IN THE CASE ON HAND, AS THE INTERNATIONAL TRANSACTIONS OF INVESTING/SUBSCRIBING IN THE EQUITY CAPITAL OF A FOREIGN SUBSIDIARY DOES NOT RESULT IN ANY INCOME, THE SAME IS OUTSIDE THE P URVIEW OF INDIAN T.P. REGULATIONS. 6.2 THE ASSESSEES SECOND LINE OF ARGUMENT IS THAT A TRANSACTION OF INVESTMENT IN SHARE CAPITAL CANNOT BE RE-CHARACTERI SED AS A LOAN . THE LEARNED A.R. FOR THE ASSESSEE SUBMITS THAT THE BALA NCE SHEET OF THE ASSESSEE FOR THIS RELEVANT PERIOD (PLACED AT PAGES 29 AND 34 OF THE PAPER BOOK) CLEARLY SHOWS THAT THE INVESTMENT MADE WAS IN EQUITY SHARES OF THE SUBSIDIARY, WHICH IS CORRESPONDINGLY REFLECTED IN THE BALANCE S HEET OF THE SUBSIDIARY INVESTEE COMPANY (AT PAGES 292 AND 296 OF THE PAPER BOOK). IT IS FURTHER SUBMITTED THAT THE DETAILS OF INVESTMENT IN EQUITY SHARES WERE SUBMITTED AND DULY APPROVED BY THE RBI. EVEN THE AGREEMENT EN TERED INTO BETWEEN TSL (HOLDING COMPANY) AND ITS INVESTORS CLEARLY PRO VIDES FOR THE PROPOSED STRUCTURE FOR THE ACQUISITION OF THE TARGET COMPANY WHEREBY THE ASSESSEE WAS TO SET UP A WHOLLY OWNED SUBSIDIARY IN THE NETH ERLANDS AS AN INTERMEDIARY COMPANY. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 13 6.2.1 ALTERNATIVELY, WITHOUT PREJUDICE TO THE ABOVE CONTENTIONS, THE LEARNED A.R. FOR THE ASSESSEE SUBMITS THAT THE TPO/CIT(A) I S NOT EMPOWERED TO RE- CHARACTERISE THE INVESTMENT MADE BY THE ASSESSEE IN TOPS BV, NETHERLANDS INTO AN INTEREST FREE LOAN AND CONSEQUENT THERETO T O MAKE AN ADDITION OF THE SAID ALLEGED LOAN AND MAKE A FURTHER ADDITION OF NO TIONAL INTEREST INCOME THEREFROM WHICH WAS NOT EARNED BY THE ASSESSEE. IT WAS ARGUED THAT THE ACT DOES NOT PERMIT RE-CHARACTERISATION OF EQUITY INTO LOAN OR FOR THAT MATTER LOAN TO EQUITY. IT WAS ALSO CONTENDED THAT THE TPO CANNOT QUESTION THE COMMERCIAL EXPEDIENCY OF THE TRANSACTION. IN SUPPOR T OF THE ABOVE PROPOSITION PUT FORTH, THE LEARNED A.R. FOR THE ASS ESSEE PLACED RELIANCE ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS, REFERRING TO THE RELEVANT PORTIONS THEREOF: - I) BESIX KIER DAHBOL SA [TS-661-HC-2012 (BOM)] II) AEGIS LIMITED [TS-342-ITAT-2015 (MUM) -TP] III) PARLE BISCUITS PVT. LTD. [TS-127-ITAT-2014 (MU M) - TP] IV) MYLAN LABORATORIES LTD. [TS-399-ITAT-2014 (HYD) - TP] V) ALLCARGO GLOBAL LOGISTICS LTD. [150 ITD 651 (MUM )] VI) PRITHVI INFORMATION SOLUTIONS LTD. [34 ITR(T) 4 29 (HYD)] VII) TOOLTECH GLOBAL ENGINEERING PVT. LTD. [51 TAXM ANN.COM 336 (PUNE)] 6.2.2 THE LEARNED A.R. FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE RELEVANT PORTIONS OF THE DECISIONS CITED (SUPRA ) WHICH ARE EXTRACTED HEREUNDER: - I) BESIX KIER DAHBOL SA [TS-661-HC-2012 (BOM)]: IN THIS CASE THE QUESTION BEFORE THE COURT WAS: - I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS RIGHT IN HOLDING THAT IN THE ABSENCE O F ANY SPECIFIC THIN CAPITALIZATION RULES IN INDIA, THE ASSESSING OFFICE R CANNOT DISALLOW THE INTEREST PAYMENT ON DEBT CAPITAL AFTER HAVING OBSER VED THE ABNORMAL THIN CAPITALIZATION RATIO OF 248:1? IN THIS REGARD IT WAS SUBMITTED THAT THE HON'BLE CO URT HELD AS UNDER AT PARAS 4 TO 8 OF ITS ORDER: - 4) THE RESPONDENT-ASSESSEE IS A COMPANY INCORPORA TED UNDER THE LAWS OF BELGIUM. THE SOLE BUSINESS OF THE RESPONDEN T-ASSESSEE IS TO CARRY OUT THE PROJECT OF CONSTRUCTION OF FUEL JETTY NEAR DABHOL IN INDIA. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 14 THE RESPONDENT-ASSESSEE HAD FULLY PAID CAPITAL OF 2 5.00 LACS (BELGIUM FRANCS) DIVIDED INTO 2500 SHARES OF 1000 BELGIUM FR ANCS EACH. THIS EQUITY CAPITAL WAS DIVIDED IN THE RATIO OF 60:40 BE TWEEN THE TWO JOINT VENTURE PARTNERS N V BESIX SA, BELGIUM AND KIER INT ERNATIONAL (INVESTMENT) LIMITED OF U.K. THE RESPONDENT ASSESSE E ALSO BORROWED FROM ITS SHAREHOLDERS IN THE SAME RATIO AS THE EQUI TY SHARE HOLDING AMOUNT OF RS.57.09 CRORES FROM N.A. BASIX SA AND RS .37.01 CRORES FROM KIER INTERNATIONAL INVESTMENT LIMITED. IN THE CIRCU MSTANCES, THE RESPONDENT HAD EQUITY CAPITAL OF RS. 38.00 LACS AND DEBT CAPITAL OF RS.9410 LACS. THUS, DEBT EQUITY RATIO WORKED OUT IS TO 248:1. 5) THE RESPONDENT ASSESSEE PAID INTEREST OF RS. 5.7 3 CRORES ON THE AFORESAID BORROWING OF RS.57.09 CRORES AND RS.37.01 CRORES FROM NV BASIX SA AND KIER INTERNATIONAL (INVESTMENTS) LIMIT ED RESPECTIVELY. HOWEVER, THE ASSESSING OFFICER DISALLOWED THE PAYME NT OF INTEREST IN VIEW OF THE RESERVE BANK OF INDIA'S APPROVAL LETTER DATED 3/11/1998 GRANTING APPROVAL TO THE ASSESSEE TO DO BUSINESS IN INDIA. THE APPROVAL LETTER DATED 03/11/1998 SPECIFICALLY PROVIDED THAT INDIA BRANCH OFFICE WILL NOT BORROW OR LEND FROM/TO ANY PERSON IN INDIA WITHOUT SPECIFIC PERMISSION OF THE RESERVE BANK OF INDIA. THE ASSESS ING OFFICER FURTHER OBSERVED THAT IN VIEW OF INDIA BELGIUM DOUBLE TAXAT ION AVOIDANCE AGREEMENT INTEREST ON MONIES PAID BY THE HEAD OFFIC E TO THE BRANCHES WAS NOT ALLOWABLE AS A DEDUCTION. 6) IN APPEAL, THE COMMISSIONER OF INCOME TAX (APPEA LS) BY AN ORDER DATED 29/3/2007 UPHELD THE ORDER OF THE ASSESSING O FFICER AND DISALLOWED THE DEDUCTION ON ACCOUNT OF INTEREST OF RS.5.73 CRORES PAID TO JOINT VENTURE PARTNERS. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT ARTICLE 7(3)(B) OF THE DOUBLE TAXATION AVOIDAN CE AGREEMENT FORBIDS ALLOWANCE OF ANY INTEREST PAID TO THE HEAD OFFICE B Y PERMANENT ESTABLISHMENT IN INDIA AS A DEDUCTION. FURTHER, THE PAYMENT OF INTEREST ALSO DIRECTLY VIOLATES THE CONDITIONS IMPOSED BY RB I IN ITS LETTER DATED 3/11/1998. THEREFORE, THE ORDER OF THE ASSESSING OF FICER WAS UPHELD. 7) HOWEVER, THE TRIBUNAL ALLOWED THE RESPONDENT-ASS ESSEE'S APPEAL. DURING THE COURSE OF THE PROCEEDINGS BEFORE THE TRI BUNAL THE REVENUE CONTENDED THAT THE BORROWINGS ON WHICH THE INTEREST HAS BEEN CLAIMED AS A DEDUCTION ARE IN FACT CAPITAL OF THE ASSESSEE AND BROUGHT ONLY UNDER THE NOMENCLATURE OF LOAN FOR TAX CONSIDERATIO N. IT WAS THE CASE OF THE APPELLANT-REVENUE BEFORE THE TRIBUNAL THAT DEBT CAPITAL IS REQUIRED TO BE RE-CHARACTERIZED AS EQUITY CAPITAL. HOWEVER, THE TRIBUNAL HELD THAT IN INDIA AS THE LAW STANDS THERE WERE NO RULES WITH RE GARD TO THIN CAPITALIZATION SO AS TO CONSIDER DEBT AS AN EQUITY. IT IS ONLY IN THE PROPOSED DIRECT TAX CODE BILL OF 2010 THAT AS A PAR T OF THE GENERAL ANTI AVOIDANCE RULES IT IS PROPOSED TO INTRODUCE A PROVI SION BY WHICH A ARRANGEMENT MAY BE DECLARED AS AN IMPERMISSIBLE AVO IDANCE ARRANGEMENT AND MAY BE DETERMINED BY RECHARACTERSIN G ANY EQUITY INTO DEBT OR VICE VERSA. 8) WE FIND NO FAULT WITH THE ABOVE OBSERVATIONS OF THE TRIBUNAL. THERE WERE AT THE RELEVANT TIME AND EVEN TODAY NO THIN CA PITALIZATION RULES IN ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 15 FORCE. CONSEQUENTLY, THE INTEREST PAYMENT ON DEBT C APITAL CANNOT BE DISALLOWED. IN VIEW OF THE ABOVE, THE QUESTION (I) RAISES NO SUBSTANTIAL QUESTION OF LAW AND IS THEREFORE, DISMISSED. II) AEGIS LIMITED [TS-342-ITAT-2015 (MUM) -TP]: IT IS SUBMITTED THAT THE RELEVANT FINDINGS IN THIS CASE AT PARA 27 IS AS UND ER: - 27. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO P ERUSED THE RELEVANT FINDINGS IN THIS REGARD IN THE IMPUGNED OR DERS. THE ASSESSEE HAS SUBSCRIBED TO REDEEMABLE PREFERENCE SHARES OF I TS AE, ESSAR SERVICES, MAURITIUS AND HAS ALSO REDEEMED SOME OF T HESE SHARES AT PAR. THE TPO HAS REDEEMED SOME OF THESE SHARES AT PAR. T HE TPO HAS RE- CHARACTERIZED THE SAID TRANSACTION OF SUBSCRIPTION OF SHARES INTO ADVANCING OF UNSECURED LOAN BY TERMING IT AS AN EXC EPTIONAL CIRCUMSTANCE AND HAS CHARGED/IMPUTED INTEREST, ON T HE REASONING THAT IN AN UNCONTROLLED THIRD PARTY SITUATION, INTEREST WOULD HAVE BEEN CHARGED. WE ARE UNABLE TO APPRECIATE SUCH AN APPROA CH OF TPO AND UNDER WHAT CIRCUMSTANCES, LEAVE ABOVE ANY EXCEPTION AL CIRCUMSTANCES, A TRANSACTION OF SUBSCRIPTION OF SHARES CAN BE RE-C HARACTERIZED AS LOAN TRANSACTION. THE TPO /ASSESSING OFFICER CANNOT DISR EGARDED ANY APPARENT TRANSACTION AND SUBSTITUTE IT, WITHOUT ANY MATERIAL OF EXCEPTION CIRCUMSTANCE HIGHLIGHTING THAT ASSESSEE HAS TRIED T O CONCEAL THE REAL TRANSACTION OR SOME SHAM TRANSACTION HAS BEEN UNEAR THED. THE TPO CANNOT QUESTION THE COMMERCIAL EXPEDIENCY OF THE TR ANSACTION ENTERED INTO BY THE ASSESSEE UNLESS THERE ARE EVIDENCE AND CIRCUMSTANCES TO DOUBT. HERE IT IS A CASE OF INVESTMENT IN SHARES AN D IT CANNOT BE GIVEN DIFFERENT COLOUR SO AS TO EXPAND THE SCOPE OF TRANS FER PRICING ADJUSTMENTS BY RE-CHARACTERIZING IT AS INTEREST FRE E LOAN. NOW, WHETHER IN A THIRD PARTY SCENARIO, IF AN INDEPENDENT ENTERP RISE SUBSCRIBES TO A SHARE, CAN IT BE CHARACTERIZE AS LOAN. IF NOT, THEN THIS TRANSACTION ALSO CANNOT BE INFERRED AS LOAN. THE CONTENTION OF THE L D. COUNSEL IS ALSO SUPPORTED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DEXISKIER DHBOAL SA, ITA NO. 776 OF 2011 ORDER DATE D 30 TH AUGUST, 2012 AND BY VARIOUS OTHER DECISIONS, AS CITED BY HIM. TH E CO-ORDINATE BENCHES OF THE TRIBUNAL HAVE BEEN CONSISTENTLY HOLD ING THAT SUBSCRIPTION OF SHARES CANNOT BE CHARACTERIZES AS LOAN AND THERE FORE NO INTEREST SHOULD BE IMPUTED BY TREATING IT AS A LOAN. ACCORDI NGLY, ON THIS GROUND ALONE, WE DELETE THE ADJUSTMENT OF INTEREST MADE BY THE ASSESSING OFFICER. THUS, GROUND NO. 14 IS TREATED AS ALLOWED. III) PARLE BISCUITS PVT. LTD. [TS-127-ITAT-2014 (MU M) - TP]: IT IS SUBMITTED THAT THE RELEVANT FINDINGS AT PARA 11 THE REOF ARE AS UNDER: - 11. AT THE TIME OF HEARING BEFORE US, THE CONTENTI ON RAISED BY THE LD. COUNSEL FOR THE ASSESSEE IS THAT THE CLEAR TRANSACT IONS INVOLVING PAYMENT OF SHARE APPLICATION MONEY CANNOT BE TREATE D AS INTERNATIONAL TRANSACTIONS OF LOANS GIVEN BY THE ASSESSEE COMPANY TO ITS AE MERELY BECAUSE THERE WAS A DELAY IN ALLOTMENT OF SHARES. I T IS OBSERVED THAT THIS CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE IS DULY SUPPORTED BY ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 16 THE LATEST DECISION OF DELHI BENCH OF THIS TRIBUNAL IN THE CASE OF BHARATI AIRTEL LTD. VS. ACIT RENDERED VIDE ITS ORDER DATED 11-3-2014 PASSED IN ITA NO. 5816/DEL/2012 WHEREIN A SIMILAR ISSUE HAS B EEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE VIDE PARA 47 WHICH READS AS UNDER:- 47. WE FIND THAT IN THE PRESENT CASE THE TPO HAS N OT DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAYMENT S FOR SHARE APPLICATION MONEY, AND THUS, OF CAPITAL CONTRIBUTIO NS. THE TPO HAS NOT MADE ANY ADJUSTMENT WITH REGARD TO THE ALP OF THE C APITAL CONTRIBUTION. HE HAS, HOWEVER R, TREATED THESE TRANSACTIONS PARTL Y AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN THE DATES OF PAYM ENT TILL THE DATE ON WHICH SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITAL CONTRIBUTION, I.E. AFTER THE SUBSCRIBED SHARES WERE ALLOTTED BY T HE SUBSIDIARIES IN WHICH CAPITAL CONTRIBUTIONS WERE MADE. NO DOUBT, IF THESE TRANSACTIONS ARE TREATED AS IN THE NATURE OF LENDING OR BORROWIN G, THE TRANSACTIONS CAN BE SUBJECTED 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 FICT ION IS ENVISAGED UNDER THE SCHEME OF THE TRANSFER PRICING LEGISLATIO N OR ON THE FACTS OF THIS CASE. WE DO NOT FIND SO. WE DO NOT FIND ANY PROVISI ON IN LAW ENABLING SUCH DEEMING FICTION. WHAT IS BEFORE US IS A TRANSA CTION OF CAPITAL 9 ITA 9010/M/10 SUBSCRIPTION, ITS CHARACTER AS SUCH IS NO T IN DISPUTE AND YET IT HAS BEEN TREATED AS PARTLY OF THE NATURE OF INTE REST 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 T HE REASONABLE AND PERMISSIBLE TIME PERIOD FOR ALLOTMENT OF SHARES, AN D EVEN IF ONE WAS TO ASSUME THAT THERE WAS AN UNREASONABLE DELAY IN ALLO TMENT OF SHARES, THE CAPITAL CONTRIBUTION COULD HAVE, AT BEST, BEEN TREATED AS AN INTEREST FREE LOAN FOR SUCH A PERIOD OF INORDINATE DELAY A ND NOT THE ENTIRE PERIOD BETWEEN THE DATE 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 UN DER 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 PA YABLE TO AN UNRELATED SHARE APPLICANT IF, DESPITE HAVING MADE T HE PAYMENT OF SHARE APPLICATION MONEY, THE APPLICANT IS NOT ALLOTTED TH E SHARES. THAT ASPECT OF THE MATTER IS DETERMINED BY THE RELEVANT STATUTE . THIS SITUATION IS NOT IN PARI MATERIA WITH AN INTEREST FREE LOAN ON COMME RCIAL BASIS BETWEEN THE SHARE APPLICANT AND THE COMPANY TO WHICH CAPITA L CONTRIBUTION IS BEING MADE. ON THESE FACTS, IT WAS UNREASONABLE AND INAPPROPRIATE TO TREAT THE TRANSACTION AS PARTLY IN THE NATURE OF IN TEREST FREE LOAN TO THE AE. SINCE THE TPO HAS NOT BROUGHT ON RECORD ANYTHIN G TO SHOW THAT AN UNRELATED SHARE APPLICANT WAS TO BE PAID ANY INTERE ST FOR THE PERIOD BETWEEN MAKING THE SHARE APPLICATION PAYMENT AND AL LOTMENT OF SHARES, THE VERY FOUNDATION OF IMPUGNED ALP ADJUSTMENT IS D EVOID OF LEGALLY SUSTAINABLE MERITS. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF BHARATI AIRTEL (SUPRA) ON A SIMILAR ISSUE, WE DELETE THE AD DITION MADE BY THE ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 17 A.O./TPO AND SUSTAINED BY THE LD. CIT(A) ON ACCOUNT OF T.P. ADJUSTMENT TO THE EXTENT IT IS IN RELATION TO THE TRANSACTIONS INVOLVING SHARE APPLICATION MONEY GIVEN BY THE ASSESSEE COMPANY TO ITS AE WHICH WAS TREATED AS IN THE NATURE OF LOANS GIVEN BY THE ASSE SSEE TO ITS AE TILL THE DATE OF ISSUE OF SHARES. IV) MYLAN LABORATORIES LTD. [TS-399-ITAT-2014 (HYD) - TP]: IT IS SUBMITTED THAT THE RELEVANT FINDINGS AT PARA 6.2 THEREOF ARE AS UNDER: - 6.2 THE CO-ORDINATE BENCH IN THE CASE OF PRITHVI I NFORMATION SOLUTIONS LTD., VS. ACIT [34 ITR (TRIB) 429 (ITAT, HYD)] (SUP RA), HAS CONSIDERED SIMILAR ISSUE WHEREIN ASSESSEE ALSO MADE INVESTMENT S TOWARDS EQUITY AND SHARES HAVE BEEN ALLOTTED. THE FACTS ARE SIMILA R TO ASSESSEE'S CASE VIDE PARA 12, THE CO-ORDINATE BENCH CONSIDERING VAR IOUS ORDERS PASSED BY THE CO-ORDINATE BENCHES REFERRED TO IN THE ORDER HELD THAT THE INVESTMENTS ARE IN THE NATURE OF EQUITY THEN, THEY CANNOT BE TREATED AS 'LOANS AND ADVANCES'. SINCE IN THIS CASE, THE INVES TMENTS ARE IN THE NATURE OF EQUITY AND SHARES HAVE BEEN ALLOTTED AFTE R A PERIOD OF FOUR MONTHS, WE ARE OF THE OPINION THAT TPO CANNOT RECLS SIFY THE AMOUNT AS 'LOANS AND ADVANCES'. MOREOVER, WE HAVE CONSIDERED THE APPEAL IN AY. 2008-09 VIDE ORDERS DT. 10-01-2014, WHEREIN IT IS N OTICED THAT TPO HAS NOT MADE ANY ADJUSTMENT FROM 1ST APRIL 2007 TO THE PERIOD OF ALLOTMENT. THEREFORE, KEEPING THAT FACTOR ALSO IN MIND, WE ARE OF THE OPINION THAT ADJUSTMENT PROPOSED BY THE TPO AS CONFIRMED BY THE DRP IS NOT WARRANTED. WE DIRECT THE SAME TO BE DELETED. GROUND IS ALLOWED. V) ALLCARGO GLOBAL LOGISTICS LTD. [150 ITD 651 (MUM )]: IT WAS SUBMITTED THAT IN THIS CASE THE COMPANY HAD PAID A CERTAIN SU M TO ITS AE AS SHARE APPLICATION MONEY WHICH REMAINED UNUTILIZED FOR A C ERTAIN PERIOD. TP ADJUSTMENT WAS MADE IN THE HANDS OF THE ASSESSEE ON ACCOUNT OF INTEREST CHARGEABLE ON AMOUNT OF SHARE APPLICATION MONEY, TR EATING THE SAME AS LOAN DUE TO NON-ALLOTMENT OF SHARES. AT PARA 7 THEREOF I T WAS HELD AS UNDER: - 7. AS THE ISSUE INVOLVED IN GROUND NO. 2 OF THE PR ESENT APPEALS AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THE CASE OF BHARTI AIRTEL LIMITED (SUPRA) DECIDED BY THE TRIBUN AL, WE RESPECTFULLY FOLLOW THE SAID DECISION OF THE CO-ORDINATE BENCH O F THIS TRIBUNAL AND DELETE THE ADDITION MADE BY THE A.O./TPO AND SUSTAI NED BY THE LD. CIT(A) BY WAY OF TP ADJUSTMENT ON ACCOUNT OF INTERE ST CHARGEABLE ON THE AMOUNT OF SHARE APPLICATION MONEY PAID BY THE ASSES SEE AND LYING UNUTILIZED WITH ITS AE TREATING THE SAME AS THE TRA NSACTION OF LOAN. GROUND NO. 2 OF THE ASSESSEES APPEALS FOR BOTH THE YEARS UNDER CONSIDERATION IS ACCORDINGLY ALLOWED. VI) PRITHVI INFORMATION SOLUTIONS LTD. [34 ITR(T) 4 29 (HYD)]: THE LEARNED A.R. FOR THE ASSESSEE SUBMITS THAT IN THIS CASE, IT WAS HELD THAT INVESTMENTS IN THE NATURE OF EQUITY CANNOT BE TREATED AS LOANS AND ADVANCES AND HENCE ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 18 CANNOT BE BROUGHT WITHIN THE PURVIEW OF INTERNATIO NAL TRANSACTIONS AS DEFINED IN SECTION 92B OF THE ACT. VII) TOOLTECH GLOBAL ENGINEERING PVT. LTD. [51 TAXM ANN.COM 336 (PUNE)]: IT IS SUBMITTED BY THE LEARNED A.R. FOR THE ASSESSEE T HAT IN THIS CASE AT PARA 12 OF THE ORDER IT HAS BEEN HELD AS UNDER: - 12. IN SO FAR AS THE AMOUNT OF RS.9,91,39,000/- (I .E. RS.66,87,000/- + RS.9,24,52,000/-) ADVANCED DURING THE YEAR IS CONCE RNED, THE TREATMENT GIVEN BY THE ASSESSEE IS IN THE NATURE OF SHARE AP PLICATION MONEY. THE AFORESAID AMOUNT OF SHARE APPLICATION MONEY IS OUTS TANDING AS THE INVESTEE COMPANY HAS NOT ISSUED SHARES TO THE ASSES SEE TILL THE CLOSE OF THE PREVIOUS YEAR UNDER CONSIDERATION. THE NATURE O F THE AFORESAID TRANSACTION IS SHARE APPLICATION MONEY, AND CLEARLY IT IS NOT IN THE NATURE OF A LENDING OR BORROWING. THE TPO HAS TREATED SUCH TRANSACTION IN THE NATURE OF INTEREST-FREE LOAN PRIMARILY FOR THE REAS ON THAT TILL THE CLOSE OF THE PREVIOUS YEAR UNDER CONSIDERATION NO SHARES HAV E BEEN ACTUALLY ALLOTTED TO THE ASSESSEE. ACCORDINGLY, ARM'S LENGTH PRICE ADJUSTMENT HAS BEEN MADE ON ACCOUNT OF INTEREST ELEMENT ON SUCH AM OUNT. IN OUR CONSIDERED OPINION, THE ACTION OF THE TPO IN CHANGI NG THE CHARACTERISTIC OF THE TRANSACTION OF PAYMENT OF SHARE APPLICATION MONEY AS AN INTEREST- FREE LOAN IS UNWARRANTED AND BEYOND HIS JURISDICTIO N WHICH CARRYING OUT THE TRANSFER PRICING PROCEEDINGS. THERE IS NO PROVI SION OF LAW WHICH ENABLES THE TPO TO CHANGE THE CHARACTER OF A TRANSA CTION WHILE SUBJECTING IT TO THE PROCESS OF DETERMINATION OF AR M'S LENGTH PRICE. THE TPO WAS REQUIRED TO BENCHMARK SUCH TRANSACTIONS AGA INST A SIMILARLY PLACED TRANSACTION AND NOT DEEM THE TRANSACTION TO BE A LENDING OR BORROWING TRANSACTION. NO DOUBT, A TRANSACTION OF A DVANCING LOANS IS WITHIN THE PURVIEW OF TRANSFER PRICING MECHANISM AN D THE ARM'S LENGTH PRICE COMPUTED THEREOF IS INCLUDIBLE IN THE ASSESSA BLE INCOME OF THE ASSESSEE. SO HOWEVER, WHERE THE CHARACTER OF PAYMEN T IS TOWARDS SHARE APPLICATION MONEY, THEREBY REFLECTING A CAPITAL INV ESTMENT, AND THE SAME NOT HAVING BEEN DISPUTED BY THE TPO, SUCH A TRANSAC TION CANNOT BE SUBJECT TO AN ARM'S LENGTH PRICE ADJUSTMENT UNDER T HE PLEA OF IT BEING A TRANSACTION OF LENDING OR BORROWING. THEREFORE, IN OUR VIEW, THE TPO WAS NOT JUSTIFIED IN TREATING THE AFORESAID TRANSACTION AS BEING AN INTEREST- FREE LENDING TRANSACTION ENTERED WITH THE ASSOCIATE D ENTERPRISE. MOREOVER, IT IS ALSO NOT THE CASE OF THE TPO THAT I N A COMPARABLE TRANSACTION OF SHARE APPLICATION MONEY AMONGST UNRE LATED PARTIES, THE TRANSACTION WOULD HAVE ENTAILED CHARGING OF INTERES T FOR ITA NO.273/PN/2014 A.Y. : 2009-10 8 THE PERIOD BETWEEN PAYMENT OF SHARE APPLICATION AND THE DATE OF ALLOTMENT OF SHARES. TH EREFORE, IN OUR CONSIDERED OPINION, THE APPROACH OF THE AUTHORITIES BELOW IN THE CONTEXT OF THE AFORESAID AMOUNT OF RS.9,91,39,000/- BY TREA TING IT TO BE A TRANSACTION IN THE NATURE OF INTEREST-FREE LENDING TRANSACTION PER SE, AND SUBJECTING IT TO AN ARM'S LENGTH PRICE ADJUSTMENT I S ERRONEOUS AND UNWARRANTED. ACCORDINGLY, WE DIRECT THE ASSESSING O FFICER TO DELETE THE ADDITION TO THE SAID EXTENT. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 19 6.2.3 IN THE LIGHT OF THE ABOVE SUBMISSIONS, THE LE ARNED A.R. FOR THE ASSESSEE CONTENDED THAT THE FOLLOWING CONCLUSIONS ARE REQUIR ED TO BE DRAWN: - I) THAT THE TPO/CIT(A) CANNOT RE-CHARACTERIZE THE I NVESTMENT IN EQUITY SHARES IN TOPS BV, NETHERLANDS INTO A LOAN AND THER EFORE THE ADDITION OF LOANS AND NOTIONAL INTEREST THEREON CANNOT BE MADE. II) WITHOUT PREJUDICE TO THE ABOVE, EVEN IF THE SAI D TRANSACTION WAS TO BE CHARACTERIZED AS A LOAN, THE TPO COULD NOT HAVE CON SIDERED THE PRINCIPAL PART OF THE LOAN SO RE-CHARACTERIZED AMOUNTING TO RS. 124,17,50,258/- AS INCOME OF THE ASSESSEE. THIS WAS A CAPITAL OUTFLOW OF THE ASSESSEE AND COULD NOT BE CONSIDERED AS INCOME UNDER ANY PROVISIONS OF THE ACT. III) ALTERNATIVELY AND WITHOUT PREJUDICE TO THE ABO VE, IT IS SUBMITTED THAT IN ANY EVENT SINCE THE INTERNATIONAL TRANSACTION HA S TAKEN PLACE IN FOREIGN EXCHANGE, THE RATE FOR COMPUTING NOTIONAL INTEREST CANNOT EXCEED THE LIBOR OF 5.514% (PAGE 45 OF THE PAPER BOOK). 6.3 THE LEARNED D.R. FOR REVENUE WAS HEARD IN THIS MATTER. IN RESPECT OF THE ALLEGED EXCESS CONSIDERATION PAID OVER AND ABOV E THE WEALTH TAX VALUE ADOPTED BY THE TPO BEING RE-CHARACTERIZED AS A LOAN , THE LEARNED D.R. WAS NOT ABLE TO EXPLAIN AS TO HOW THE ALLEGED EXCESS CO NSIDERATION OF RS. 124,17,50,250/-, WHICH WAS IN THE NATURE OF A CAPIT AL PAYMENT, COULD BE CONSIDERED AS INCOME IN THE HANDS OF THE ASSESSEE A S HAS DONE BY THE TPO (AT PAGE 7 OF HIS ORDER). THE LEARNED D.R. WAS UNAB LE TO EXPLAIN/JUSTIFY THE BASIS OF THE TPOS ACTION AS TO HOW THE PRINCIPAL A MOUNT OF CAPITAL INVESTMENT/LOAN COULD BE TAXED UNDER THE PROVISIONS OF THE ACT. 6.3.1 THE LEARNED D.R., HOWEVER, REFERRING TO THE D ECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SER VICES LTD. (2014) 361 ITR 531 (BOM) (VODAFONE III), CONTENDED THAT THE TE RM INCOME INCLUDES POTENTIAL INCOME AND IN THIS REGARD REFERRED TO PAR A 32 THEREOF. IT WAS CONTENDED THAT POTENTIAL INCOME COULD ARISE/BE AFFE CTED BY THE INVESTMENT MADE BY THE ASSESSEE IN THE SHARE CAPITAL OF TOPS B V, NETHERLANDS, I.E. THE SUBSIDIARY, IN THE EVENT OF FUTURE SALE OF SHARES U NDER THE HEAD INCOME FROM CAPITAL GAINS. THE CONTENTION OF THE LEARNED D.R. WAS THAT THE ASSESSEE ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 20 MAY SELL THE SHARES IT HOLDS IN TOPS BV, AT A FUTUR E DATE FOR A PRICE LOWER THAN THE COST AT WHICH THEY HAD BEEN ACQUIRED RESUL TING IN LONG TERM/SHORT TERM CAPITAL LOSS, THEREBY IMPACTING THE INCOME OF THE ASSESSEE IN SUBSEQUENT YEARS. IT WAS ALSO CONTENDED BY THE LEAR NED D.R. THAT THE ASSESSEE COULD ENTER INTO A FUTURE TRANSACTION FOR SALE OF THE SAID SHARES IT HELD IN TOPS BV, NETHERLANDS TO A NON-AE AS A RESUL T OF WHICH THE SALE OF SHARES WOULD NOT COME WITHIN THE PURVIEW OF TP REGU LATIONS AND THEREBY DEFEATING THE PURPOSE OF CHAPTER X OF THE ACT. THE LEARNED D.R. PLACED RELIANCE ON THE CASE OF PMP AUTO COMPONENTS (2014) 50 TAXMAN.COM 272 ON THE GROUNDS THAT PAYMENT TOWARDS SHARE APPLICATION MONEY WAS TO BE BENCHMARKED TO DETERMINE THE ALP OF THE TRANSACTION BY CONSIDERING THE APPLICATION MONEY AS A LOAN AND THE DELAY IN ALLOTM ENT OF SHARES AS THE PERIOD OF LOAN. 6.4 IN REJOINDER TO THE SUBMISSIONS OF THE LEARNED D.R., THE LEARNED A.R. FOR THE ASSESSEE ARGUED THAT AS PER THE DECISION OF THE SPECIAL BENCH OF THE ITAT, MUMBAI IN THE CASE OF MAHINDRA & MAHINDRA LTD . (2009) 22 DTR (MUM) 361, THE LEARNED D.R. CANNOT RAISE ANY POINT OTHER THAN THOSE CONSIDERED BY THE AO AND THE LEARNED CIT(A) AND IN THIS CONTEXT DREW THE ATTENTION OF THE BENCH TO PARA 19.6 OF THE ORDER OF THE SPECIAL BENCH WHEREIN IT WAS HELD: - 19.6 .......... THE DEPARTMENTAL REPRESENTATIVE HA S NO JURISDICTION TO GO BEYOND THE ORDER PASSED BY THE AO. HE CANNOT RAISE ANY POINT DIFFERENT FROM THAT CONSIDERED BY THE AO OR CIT(A). HIS SCOPE OF ARGUMENTS IS CONFINED TO SUPPORTING OR DEFENDING THE IMPUGNED OR DER. HE CANNOT SET UP AN ALTOGETHER DIFFERENT CASE. IF THE DEPARTMENTA L REPRESENTATIVE IS ALLOWED TO TAKE UP A NEW CONTENTION DE HORS THE VIE W TAKEN BY THE AO THAT WOULD MEAN THE DEPARTMENT REPRESENTATIVE (SIX - DEPARTMENTAL REPRESENTATIVE) STEPPING INTO THE SHOES OF THE CIT EXERCISING JURISDICTION UNDER S. 263. WE, THEREFORE, DO NOT PERMIT THE LEAR NED DEPARTMENTAL REPRESENTATIVE TO TRANSGRESS THE BOUNDARIES OF HIS ARGUMENTS. ........... 6.4.1 IT WAS CONTENDED BY THE LEARNED A.R. FOR THE ASSESSEE THAT THE CONCEPT OF POTENTIAL INCOME ARISING OUT OF INTERNATIONAL TR ANSACTION WAS NOT CONSIDERED IN THE ORDERS OF THE TPO/AO OR CIT(A) IN SPITE OF THE ASSESSEES SUBMISSION THAT THE TRANSACTION OF INVESTMENT IN TH E SHARE CAPITAL OF ITS SUBSIDIARY, TOPS BV, NETHERLANDS, DID NOT REQUIRE B ENCHMARKING AS NO ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 21 INCOME AROSE FROM THE TRANSACTION. NEITHER THE AO N OR THE LEARNED CIT(A) HELD THAT TP REGULATIONS WERE APPLICABLE IN VIEW OF THERE BEING A POSSIBILITY OF POTENTIAL INCOME. THE LEARNED A.R. FOR THE ASSES SEE URGED THAT SINCE THE CONTENTIONS OF THE LEARNED D.R. WERE IN ADDITION TO THE FINDINGS OF THE TPO/CIT(A) AND IN THE LIGHT OF THE DECISION OF THE ITAT SPECIAL BENCH IN MAHINDRA & MAHINDRA (SUPRA), THEY CANNOT AND ARE NO T TO BE CONSIDERED. 6.4.2 THE LEARNED A.R. FOR THE ASSESSEE SUBMITS, TH AT WITHOUT PREJUDICE TO THE ABOVE, WITH RESPECT TO THE RELIANCE PLACED BY T HE LEARNED D.R. ON VODAFONE III, THE FINDINGS THEREIN WERE DEALT WITH BY THE SUBSEQUENT DECISION OF THE HON'BLE BOMBAY HIGH COURT IN VODAFONE INDIA SERVICES VS. ADDL. CIT (2014) 368 ITR 001 (BOM), I.E. VODAFONE IV), WHEREI N IT WAS HELD THAT: - 31. SIMILARLY, THE RELIANCE BY THE REVENUE UPON TH E DEFINITION OF INTERNATIONAL TAXATION IN THE SUB CLAUSE (C) AND (E ) OF EXPLANATION (I) TO SECTION 92B OF THE ACT TO CONCLUDE THAT INCOME HAS TO BE GIVEN A BROADER MEANING TO INCLUDE NOTIONAL INCOME, AS OTHERWISE CH APTER X OF THE ACT WOULD BE RENDERED OTIOSE IS FARFETCHED. THE ISSUE O F SHARES AT A PREMIUM DOES NOT EXHAUST THE UNIVERSE OF APPLICABIL ITY OF CHAPTER X OF THE ACT. THERE ARE TRANSACTIONS WHICH WOULD OTHERWI SE QUALIFY TO BE COVERED BY THE DEFINITION OF INTERNATIONAL TRANSACT ION. THE TRANSACTION ON CAPITAL ACCOUNT OR ON ACCOUNT OF RESTRUCTURING W OULD BECOME TAXABLE TO THE EXTENT IT IMPACTS INCOME I.E. UNDER REPORTIN G OF INTEREST OR OVER REPORTING OF INTEREST PAID OR CLAIMING OF DEPRECIAT ION ETC. IT IS THAT INCOME WHICH IS TO BE ADJUSTED TO THE ALP PRICE. IT IS ONL Y A TAX ON CAPITAL RECEIPTS. THIS ASPECT APPEARS TO HAVE BEEN COMPLETE D LOST SIGHT OF THE IMPUGNED ORDER. 42. IT WAS CONTENDED BY THE REVENUE THAT IN ANY EVE NT THE CHARGE WOULD BE FOUND IN SECTION 56(1) OF THE ACT. SECTION 56 OF THE ACT DOES PROVIDE THAT INCOME OF EVERY KIND WHICH IS NOT EXCL UDED FROM THE TOTAL INCOME IS CHARGEABLE UNDER THE HEAD INCOME FROM OTH ER SOURCES. HOWEVER, BEFORE SECTION 56 OF THE ACT CAN BE APPLIE D, THERE MUST BE INCOME WHICH ARISES. AS POINTED OUT ABOVE, THE ISSU E OF SHARES AT A PREMIUM IS ON CAPITAL ACCOUNT AND GIVES RISE TO NO INCOME. THE SUBMISSION ON BEHALF OF THE REVENUE THAT THE SHORTF ALL IN THE ALP AS COMPUTED FOR THE PURPOSES OF CHAPTER X OF THE ACT G IVE RISE TO INCOME IS MISPLACED. THE ALP IS MEANT TO DETERMINE THE REAL V ALUE OF THE TRANSACTION ENTERED INTO BETWEEN AES. IT IS A RE-CO MPUTATION EXERCISE TO BE CARRIED OUT ONLY WHEN INCOME ARISES IN CASE OF A N INTERNATIONAL TRANSACTION BETWEEN AES. IT DOES NOT WARRANT RE-COM PUTATION OF A CONSIDERATION RECEIVED/GIVEN ON CAPITAL ACCOUNT. IT PERMITS RE- COMPUTATION OF INCOME ARISING OUT OF A CAPITAL ACCO UNT TRANSACTION, SUCH AS INTEREST PAID/RECEIVED ON LOANS TAKEN/GIVEN , DEPRECIATION TAKEN ON MACHINERY, ETC. ALL THE ABOVE WOULD BE CASES OF INCOME BEING AFFECTED ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 22 DUE TO A TRANSACTION ON CAPITAL ACCOUNT. THIS IS NO T THE REVENUES CASE HERE. THEREFORE, ALTHOUGH SECTION 56(1) OF THE ACT WOULD PERMIT INCLUDING WITHIN ITS HEAD, ALL INCOME NOT OTHERWISE EXCLUDED, IT DOES NOT PROVIDE FOR A CHARGE TO TAX ON CAPITAL ACCOUNT TRANSACTION OF ISSUE OF SHARES AS IS SPECIFICALLY PROVIDED FOR IN SECTION 45 OR SECTI ON 56(2)(VIIB) OF THE ACT AND INCLUDED WITHIN THE DEFINITION OF INCOME IN SEC TION 2(24) OF THE ACT. 6.4.3 THE LEARNED A.R. FOR THE ASSESSEE ARGUED THAT IT WAS TO BE NOTED THAT THE NATURE OF POTENTIAL INCOME ARISING OUT OF AN IN TERNATIONAL TRANSACTION WAS CLARIFIED TO MEAN A POTENTIAL IMPACT OF INCOME ARISING OUT OF THE INTERNATIONAL TRANSACTION WHICH WAS THE SUBJECT MAT TER OF DISPUTE AND NOT A FUTURE INDEPENDENT TRANSACTION WHICH WAS COMPLETELY UNRELATED. IN RESPECT OF THIS CONTENTION, THE BENCH POINTED OUT TO THE LE ARNED D.R. FOR REVENUE THAT THE POTENTIAL INCOME ENVISAGED IN HIS ARGUMENT S (SUPRA) AROSE OUT OF A POSSIBLE SUBSEQUENT TRANSACTION AND NOT FROM THE TR ANSACTION WHICH WAS THE SUBJECT MATTER OF DISPUTE OR THAT THE TP PROVIS IONS COVER OR PROVIDE SUCH A CHARGE OF TAX. THE LEARNED D.R. WAS UNABLE TO JUS TIFY HIS CONTENTION. 6.5 IN RESPECT OF THE ISSUE OF RE-CHARACTERIZATION OF INVESTMENT IN EQUITY SHARES AS A LOAN, THE LEARNED D.R. FOR REVENUE ADDI TIONALLY RAISED THE FOLLOWING CONTENTIONS: - I) THAT THE ASSESSEE INVESTED IN THE SHARES OF ITS SUBSIDIARY TOPS BV, NETHERLANDS AT A VALUE WHICH WAS ABNORMALLY HIGH WI TH RESPECT TO THE BOOK VALUE OF THE SUBSIDIARY COMPANY DETERMINED AS PER SCHEDULE III OF THE WEALTH TAX ACT, 1957 II) THAT THIS TRANSACTION OF THE ASSESSEE WAS AIMED AT ULTIMATELY BUILDING LOSSES IN THE FUTURE. IT WAS CONTENDED THAT THE ASS ESSEE, IN THE FUTURE, WOULD SELL THE SHARES PURCHASED IN TPOS BV IN THE Y EAR UNDER CONSIDERATION, AT A VALUE SUBSTANTIALLY LOWER THAN THE PURCHASE PRICE AND ACCORDINGLY CLAIM A CAPITAL LOSS UNDER THE HEAD INCOME FROM CAPITAL GAINS III) THAT THE ENTIRE TRANSACTION WAS A MANIPULATION AND NOT BONAFIDE. THE LEARNED DR CONTENDED THAT THE INVESTMENT IN THE SHA RES OF TOPS BV WAS A BUNDLED TRANSACTION ACTUALLY CONSISTING OF TW O PARTS - ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 23 INVESTMENT IN SHARE CAPITAL (INCLUDING PREMIUM) AND A LOAN. IN THIS CONTEXT, THE LEARNED D.R. SUBMITTING THAT THE RE-CH ARACTERIZATION OF INVESTMENT WAS POSSIBLE, PLACED RELIANCE ON THE DEC ISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIAN CES LTD. (2012) 24 TAXMANN.COM 199 (DEL) AND ARTICLE 9 OF THE OECD GUI DELINES DRAWING THE ATTENTION OF THE BENCH TO PARA 16 OF THE ORDER: - 16. .............................................. ................................................... .......... 1.36 ............................................ ................................................... ...... 1.37 ............................. THE FIRST CIRCUM STANCE ARISES WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM IT S FORM. .......... THE SECOND CIRCUMSTANCE ARISES WHERE, WHILE THE FORM AN D SUBSTANCE OF THE TRANSACTION ARE THE SAME, THE ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER AND THE ACTUAL STRUCTURE PRACTICALL Y IMPEDES THE TAX ADMINISTRATION FROM DETERMINING AN APPROPRIATE TRAN SFER PRICE.............. IV) THAT THERE WAS NO PROOF THAT THE INVESTMENT MAD E BY THE ASSESSEE IN TOPS BV, NETHERLANDS, WAS ACTUALLY IN THE NATURE OF INVESTMENT IN SHARE CAPITAL AND NOT ACTUALLY A LOAN IN THE GARB OF SHA RE CAPITAL. 6.5.1 IN REJOINDER TO THE ABOVE CONTENTIONS OF THE LEARNED D.R., THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT THE LEARNED D. R. CANNOT RAISE OR BE PERMITTED TO RAISE ANY POINT DIFFERENT FROM THOSE C ONSIDERED BY THE AO/ CIT(A). IN THIS CONTEXT HE DREW THE ATTENTION OF TH E BENCH TO PARA 2.1 OF THE JUDGEMENT IN THE CASE OF MAHINDRA & MAHINDRA LTD. (2009) 22 DTR (MUM) (SB) 361. 6.5.1 THE LEARNED A.R. FOR THE ASSESSEE CONTENDED T HAT THE LEARNED D.R. WAS WRONG IN CONCLUDING THAT THE VALUATION OF SHARES WA S EXCESSIVE BY RELYING ON THE VALUATION ADOPTED BY THE TPO, I.E. THE NET ASSE T VALUE OR BOOK VALUE OF SHARES BASED ON HISTORIC COSTS, AS PER SCHEDULE III OF THE WEALTH TAX ACT, 1957. THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED T HAT EQUITY SHARES IN A COMPANY ARE NOT COVERED UNDER THE DEPRECIATION OF A SSETS PROVIDED FOR IN ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 24 SECTION 2(EA) OF THE WEALTH TAX ACT W.E.F. 1993. TH E LEARNED A.R. FOR THE ASSESSEE CONTENDS THAT IT IS THEREFORE APPARENT THA T THE PROVISIONS OF WEALTH TAX ACT ARE INAPPLICABLE TO EQUITY SHARES HELD BY A N ASSESSEE AND CONSEQUENTLY, THE VALUATION RULES THEREIN ARE ALSO INAPPLICABLE. 6.5.2 THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED, WITHOUT PREJUDICE TO THE CONTENTION THAT TP REGULATIONS ARE NOT APPLICABLE T O THE CAPITAL TRANSACTION OF INVESTMENT IN PURCHASE OF SHARES IN ITS SUBSIDIA RY TOPS BV, NETHERLANDS, TP PROVISIONS SEEK TO DETERMINE THE ALP, DEFINED UN DER SECTION 92F(II) OF THE ACT TO MEAN A PRICE WHICH IS APPLIED OR SOUGHT TO B E APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCONTROLLED COND ITION, VIZ. THE FAIR MARKET VALUE. IT IS CONTENDED THAT UNDER NO CIRCUMS TANCES CAN THE NET ASSET VALUE OF AN UNQUOTED SHARE COMPUTED ON THE BASIS OF ITS BOOK VALUE BE CONSIDERED AS ITS FAIR MARKET VALUE AS DONE BY THE TPO [I.E. @ EURO 7,704 / 1800 SHARES = 4.28 EURO PER SHARE]. IT IS SUBMITTED THAT THE ASSESSEE AND ITS WHOLLY OWNED SUBSIDIARIES WERE MERE HOLDING COM PANIES, THE ENTIRE AMOUNT OF SHARE CAPITAL AND PREMIUM WOULD BELONG TO THE ASSESSEE AND THEREFORE THE VALUE OF THE INVESTMENT WOULD BE BASE D ON THE VALUE OF THE TARGET COMPANY, I.E. SHIELDS GUARDING COMPANY, UK, WHICH WAS IN THE NATURE OF AN UNDERLYING ASSET WITH RESPECT TO THE V ALUATION OF TOPS BV, NETHERLANDS, THE ASSESSEE SUBMITTED BEFORE THE AUTH ORITIES BELOW THE VALUATION REPORT OF THE ULTIMATE TARGET FOR ACQUISI TION, SHIELDS GUARDING COMPANY, UK, WHICH WAS CARRIED OUT BY A SEBI REGIST ERED COMPANY ON THE BASIS OF DISCOUNTED CASH FLOW METHOD AND EARNINGS MULTIPLE METHOD, WHICH ARE WIDELY ACCEPTED METHODS FOR VALUATION OF SHARES OF UNLISTED COMPANIES, AND IN THIS CONTEXT CITED THE DECISION O F THE CHENNAI ITAT IN THE CASE OF ASCENDAS (INDIA) PVT. LTD. (2013) 33 TAXMAN N.COM 295 (CHENNAI TRIB) WHEREIN IT WAS HELD THAT FIXING OF THE ENTERP RISE VALUE ON DISCOUNTED VALUE OF FUTURE PROJECTS OR CASH FLOW METHOD WAS A METHOD USED WORLDWIDE FOR THE PURPOSE OF DETERMINING THE FAIR MARKET VALU E OF SHARES. IT IS SUBMITTED THAT THE TARGET, SHIELDS GUARDING COMPANY , U.K., WAS ACTIVELY ENGAGED AND FULLY OPERATIONAL IN PROVIDING SECURITY SERVICES, WHICH WAS NOT A ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 25 CAPITAL INTENSIVE BUSINESS AND THEREFORE THE NET AS SET VALUE WAS NOT A SUITABLE METHOD FOR VALUING THE SAID COMPANY AS MEN TIONED IN THE VALUATION REPORT. IT IS ALSO SUBMITTED THAT THE AUTHORITIES B ELOW HAVE NOT RENDERED ANY ADVERSE FINDING IN RESPECT OF THE VALUATION REPORT. 6.5.3 THE LEARNED A.R. FOR THE ASSESSEE ALSO DREW T HE ATTENTION OF THE BENCH TO THE FACT THAT DURING THE FINANCIAL YEAR ENDING 3 1.03.2014, THE ASSESSEE HAD SOLD A PART OF THE SHARES ACQUIRED IN TOPS BV, NETHERLANDS AT A PROFIT OF RS. 4,71,86,529/- AS IS EVIDENT FROM NOTE 13 OF THE FIN ANCIAL STATEMENT FOR THE YEAR ENDED 31.03.2015, PLACED AT PAGE 148(C) OF THE ASSESSEES PAPER BOOK. THIS FACT, THE LEARNED A.R. FOR THE ASSESSEE SUBMIT S, REFUTES THE CONTENTION OF THE LEARNED D.R. THAT THE PURCHASE COST OF SHARE S IN TOPS BV, NETHERLAND WERE INFLATED TO CLAIM LOSSES IN SUBSEQUENT YEARS. 6.5.4 THE LEARNED A.R. FOR THE ASSESSEE SUBMITS THA T THE TPO/LEARNED CIT(A) IN THEIR ORDERS HAVE NOT RENDERED ANY FINDING THAT THE SAID TRANSACTION WAS IN FACT A SHAM TRANSACTION. THE VALIDITY OF THE AGR EEMENTS ENTERED INTO BY THE ASSESSEE AND THE VALUATION REPORT IN THIS REGAR D HAVE NOT BEEN DISPUTED. THE LEARNED CIT(A)/TPO HAVE MERELY RELIED ON THE VA LUATION AS PER WEALTH TAX ACT TO CONCLUDE THAT THE INVESTMENT MADE BY THE ASSESSEE IN THE SHARES OF TOPS BV, NETHERLANDS WAS EXCESSIVE AND WAS THERE FORE IN THE NATURE OF A LOAN. IT IS CONTENDED THAT THE ENTIRE VALUATION AS PER WEALTH TAX ACT FAILS DUE TO ITS NOT BEING APPLICABLE TO EQUITY SHARES AN D THEREFORE THE VERY BASIS (I.E. WEALTH TAX ACT VALUATION) ON WHICH RE-CHARACT ERIZATION OF THE TRANSACTION AS A LOAN WAS DONE WAS FLAWED FROM THE BEGINNING. IT WAS ALSO POINTED OUT THAT THE ASSESSEE DURING THE FINANCIAL YEAR ENDED 31.03.2014 HAS SOLD A PART OF THE SHARES ACQUIRED AT TOPS BV, NETHERLANDS AT A PROFIT/GAIN OF RS. 4,71,86,529/-. CONSEQUENTLY, THE RELIANCE PLACED BY THE LEARNED D.R. ON EKL APPLIANCE LTD. (SUPRA) FAILS. F URTHER, THERE ARE NO THIN CAPITALIZATION RULES IN THE COUNTRY AND IN THE LIGH T OF THE DISCUSSION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF BESIX KIER DABHOL SA [TS-661- HC-2012 (BOM)] RE-CHARACTERIZATION OF EQUITY INTO D EBT AND VICE VERSA IS NOT PERMISSIBLE. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 26 6.5.5 WITH RESPECT TO THE CONTENTION OF THE LEARNED D.R. THAT THERE WAS NO PROOF THAT THE INVESTMENT MADE BY THE ASSESSEE IN T OPS BV, NETHERLANDS WAS ACTUALLY IN THE NATURE OF INVESTMENT IN SHARE C APITAL , THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT THE SAID INVESTMENT HAS BEEN DULY REFLECTED AS INVESTMENT IN SHARES OF TOPS BV IN THE BALANCE SHEET OF THE ASSESSEE FOR THE RELEVANT PERIOD (PLACED AT PAGES 29 & 34 OF ASS ESSEES PAPER BOOK). IT WAS ALSO SUBMITTED THAT THE BALANCE SHEET OF TOPS B V, NETHERLANDS HAS DISCLOSED THE SAID TRANSACTION AS AN INCREASE IN SH ARE CAPITAL AND SHARE PREMIUM (AT PAGES 292 AND 296 OF THE PAPER BOOK). T HEREFORE, THE LEARNED A.R. FOR THE ASSESSEE CONTENDS THAT, THE FACT THAT THE INVESTMENT WAS IN THE NATURE OF INVESTMENT IN SHARE CAPITAL OF TOPS BV IS CLEARLY SUPPORTED BY THE FINANCIALS OF THE ASSESSEE AND THE INVESTEE COMPANY , I.E. TOPS BV, NETHERLANDS. IT WAS ALSO SUBMITTED THAT THE ASSESSE E HAS OBSERVED THE RELEVANT COMPLIANCES WITH RBI FOR THE REPORTING OF THIS INVESTMENT IN EQUITY SHARES. 6.5.6 THE LEARNED D.R.S RESPONSE TO THE JUDICIAL P RONOUNCEMENTS RELIED ON BY THE ASSESSEE ALONGWITH THE ASSESSEES REBUTTAL I S BRIEFLY SUMMARIZED HEREUNDER: - S.NO. CASE LAW PROPOSITION RELIED ON BY THE ASSESSEE RESPONSE BY DR REBUTTAL BY ASSESSEE 1 BASIX KIER DAHBOL SA [TS- 661-HC-2012 (BOM)] INVESTMENT IN SHARES CANNOT BE GIVEN A DIFFERENT COLOUR SO AS TO EXPAND THE SCOPE OF TRANSFER PRICING ADJUSTMENTS BY RE- CHARACTERISING IT AS IN INTEREST FREE LOAN THE DR DID NOT DEAL WITH THESE FOUR JUDGEMENTS RELIED ON BY THE ASSESSEE. NOT APPLICABLE AS THE DR DID NOT DEAL WITH THE JUDGEMENTS IN HIS ARGUMENTS. 2 AEGIS LIMITED [TS-342-ITAT- 2015 (MUM) - TP] 3 PARLE BISCUITS PVT. LTD. [TS- 127-ITAT-2014 (MUM) - TP] 4 MYLAN LABORATORIES LTD. [TS-399- ITAT-2014 (HYD) - TP] 5 VIJAY ELECTRICAL LTD. VS. ADDL. CIT (60 SOT 77) (HYD) TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE TO INVESTMENT IN THE DR CONTENDED THAT THE SAID JUDGEMENT WAS NOT APPLICABLE TO THE THE CONTENTION OF THE DR IS MISPLACED AS THE JUDGEMENT IN PARAS 8 & 9, CONSIDER THE RULINGS OF ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 27 SHARE CAPITAL OF THE SUBSIDIARIES OUTSIDE INDIA AS THERE IS NO INCOME ARISING FROM THE SAID TRANSACTION. CASE OF THE ASSESSEE IT DEALT WITH SECTION 263 OF THE ACT AND DID NOT DEAL WITH THE PROPOSITION THAT IN THE ABSENCE OF INCOME, TRANSFER PRICING PROVISIONS WOULD NOT APPLY. DANA CORPN. IN [2010] 321 ITR 178 /186 TAXMAN 197 (AAR-NEW DELHI), WHICH STATE THAT WITHOUT THE PRESENCE OF INCOME, THE PROVISIONS OF TRANSFER PRICING WOULD NOT APPLY. CONSIDERING THE SAID JUDGEMENTS, THE TRIBUNAL DECIDED THAT TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE TO INVESTMENT IN SHARE CAPITAL OF THE SUBSIDIARIES OUTSIDE INDIA AS THERE IS NO INCOME ARISING FROM THE SAID TRANSACTION. 6 HILL COUNTRY PROPERTIES LTD. VS. ADDL. CIT 48 TAXMANN.COM 94 (HYD). AMOUNT REPRESENTING INVESTMENT IN SHARE CAPITAL OF SUBSIDIARIES OUTSIDE INDIA WAS NOT IN THE NATURE OF TRANSACTION REFERRED TO IN SECTION 92B AND THUS TRANSFER PRICING PROVISIONS WERE NOT APPLICABLE TO SUCH TRANSACTION THE DR CONTENDED THAT THE JUDGEDMENT DEALT WITH SHARE APPLICATION MONEY PAID TO THE OVERSEAS AE AND THEREFORE INAPPLICABLE IN THIS JUDGEMENT RELIANCE WAS PLACED ON VIJAI ELECTRICALS V ADD CIT TO HOLD THAT IN THE ABSENCE OF INCOME, TP PROVI-SIONS DO NOT APPLY FURTHER, SHARE APPLICATION MONEY IS CLOSER TO LOAN THAN SHARE CAPITAL AS PENDING ALLOTMENT THERE IS SCOPE TO REFUND THE SHARE APPLICATION MONEY (AS IN THE CASE OF LOAN). IN THE ASSESSEES CASE, THE INVESTMENT IS IN SHARE CAPITAL WHICH WAS RECORDED SO IN THE BOOKS OF BOTH THE ASSESSEE AND THE INVESTEE COMPANY, THEREFORE MAKING IT NON- REFUNDABLE. IN FACT, THE CASE OF THE ASSESSEE, DEALING WITH SHARE CAPITAL INVESTMENT AS OPPOSED TO SHARE APPLICATION MONEY IS ON A MUCH STRONGER FOOTING. THEREFORE THE CONTENTION OF THE DR FAILS. FURTHER, IT IS PERTINENT TO NOTE THAT THE DR HAS RELIED ON PMP AUTO COMPONENTS V DCIT [2014] 50 TAXMANN.COM 272 (MUM), WHEREIN THE SUBJECT MATTER OF DISPUTE WAS SHARE APPLICATION MONEY AND A DELAY IN PERIOD OF ALLOTMENT. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 28 7 PRITHVI INFORMATION SOLUTIONS LTD. [34 ITR(T) 429 (HYD)] INVESTMENTS IN NATURE OF EQUITY, CANNOT BE TREATED AS LOANS AND ADVANCES AND HENCE CANNOT BE BROUGHT WITHIN PURVIEW OF INTERNATIONAL TRANSACTIONS AS DEFINED UNDER SECTION 92B THE DR CONTENDED THAT THE SAID JUDGMENT WAS NOT APPLICABLE TO THE CASE OF THE ASSESSEE AS IT DEALT WITH WHETHER A DELAY IN SHARE APPLICATION MONEY COULD BE TREATED AS A LOAN IT IS PERTINENT TO NOTE THAT IN THE SAID JUDGEMENT DOES NOT DEAL WITH A DELAY IN ALLOTMENT OF SHARES. THE SHARE APPLICATION WAS INADVERTENTLY REPORTED AS A LOAN BY THE AUDITORS. PRITHVI HAD FILED A REVISED AUDIT REPORT AND FURNISHED THE ALLOTMENT CERTIFICATES TO PROVE THAT IT WAS ACTUALLY INVESTMENT IN SHARE CAPITAL. THIS CAN BE NOTED FROM TRIBUNALS FINDINGS ON PARA 10 OF THE ORDER. [PB/204] SHARE APPLICATION MONEY IS CLOSER TO A LOAN THAN SHARE CAPITAL AS PENDING ALLOTMENT THERE IS SCOPE TO REFUND THE SHARE APPLICATION MONEY (AS IN THE CASE OF LOAN). IN THE ASSESSEES CASE, THE INVESTMENT IS IN SHARE CAPITAL WHICH WAS RECORDED SO IN THE BOOKS OF BOTH THE ASSESSEE AND THE INVESTEE COMPANY, THEREFORE MAKING IT NON- REFUNDABLE. IN FACT, THE CASE OF THE ASSESSEE DEALING WITH SHARE CAPITAL INVESTMENT AS OPPOSED TO SHARE APPLICATION MONEY, IS ON A MUCH STRONGER FOOTING. THEREFORE THE CONTENTION OF THE DR FAILS. FURTHER, IT IS PERTINENT TO NOTE THAT THE DR HAS RELIED ON PMP AUTO COMPONENTS V DCIT [2014] 50 TAXMANN.COM 272 (MUM), WHEREIN THE SUBJECT MATTER OF DISPUTE WAS SHARE APPLICATION MONEY AND A DELAY IN PERIOD OF ALLOTMENT 8 TOOLTECH GLOBAL ENGINEERING PVT. LTD. [51 TAXMANN.COM 336 (PUNE)] PAYMENTS MADE TO ITS AE TOWARDS SHARE APPLICATION MONEY, THEREBY REFLECTING CAPITAL INVESTMENT, WHICH WAS UNDISPUTED BY THE DR CONTENDED THAT THE SAID JUDGMENT WAS NOT APPLICABLE TO THE CASE OF THE ASSESSEE AS IT DEALT WITH WHETHER A DELAY IN SHARE APPLICATION MONEY IS CLOSER TO A LOAN THAN SHARE CAPITAL AS PENDING ALLOTMENT THERE IS SCOPE TO REFUND THE SHARE APPLICATION MONEY (AS IN CASE OF LOAN). IN THE 9 ALLCARGO GLOBAL LOGISTICS LTD. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 29 [150 ITD 651 (MUM)] THE TPO, COULD NOT BE SUBJECT TO ALP ADJUSTMENT UNDER THE PLEA OF IT BEING A TRANSACTION OF LENDING OF BORROWING SHARE APPLICATION MONEY COULD BE TREATED AS A LOAN. FURTHER IN THE CASE OF ALLCARGO GLOBAL LOGISTICS, THE DR CONTENDED THAT IT WAS A CASE OF RE- OPENING OF ASSESSMENT UNDER SECTION 147 OF THE ACT AND THEREFORE INAPPLICABLE. ASSESSEES CASE THE INVESTMENT IS IN SHARE CAPITAL WHICH WAS RECORDED SO IN THE BOOKS OF BOTH THE ASSESSEE AND THE INVESTEE COMPANY, THEREFORE MAKING IT NON- REFUNDABLE. IN FACT, THE CASE OF THE ASSESSEE DEALING WITH SHARE CAPITAL INVESTMENT AS OPPOSED TO SHARE APPLICATION MONEY, IS ON A MUCH STRONGER FOOTING. THEREFORE THE CONTENTION OF THE DR FAILS. THE CONTENTION THAT ALLCARGO IS INAPPLICABLE AS IT WAS A CASE OF RE- OPENING OF ASSESSMENT IS INVALID AS THE TRIBUNAL HAS DEALT WITH THE CASE OF MERITS AND NOT ON WHETHER THE RE-OPENING WAS SUSTAINABLE IN LAW [PB/227] FURTHER, IT IS PERTINENT TO NOTE THAT THE DR HAS RELIED ON PMP AUTO COMPONENTS V DCIT [2014] 50 TAXMANN.COM 272 (MUM), WHEREIN THE SUBJECT MATTER OF DISPUTE WAS SHARE APPLICATION MONEY AND A DELAY IN PERIOD OF ALLOTMENT. 10 VODAFONE INDIA SERVICES P. LTD. V ADD CIT - 368 ITR 001 (BOM) A PLAIN READING OF SECTION 92(1) OF THE ACT VERY CLEARLY BRING OUT THAT INCOME ARISING FROM AN INTERNATIONAL TRANSACTION IS A CONDITION PRECEDENT FOR APPLICATION OF CHAPTER X OF THE ACT I.E. INCOME ARISING FROM AN INTERNATIONAL TRANSACTION BETWEEN AES MUST SATISFY THE TEST OF INCOME UNDER THE ACT AND MUST FIND ITS HOME IN ONE OF THE DR CONTENDED THAT THE JUDGEMENTS OF THE BOMBAY HIGH COURT WERE NOT APPLICABLE TO THE ASSESSEE AS THEY DEALT WITH INBOUND TRANSACTIONS WHICH WAS DIFFERENT AS COMPARED TO THE TRANSACTION OF THE ASSESSEE I.E. OUTBOUND TRANSACTION. THE CONTENTION OF THE DR IS MISPLACED AS THE HIGH COURT HAS CLEARLY STATED IN PARA 42 OF VODAFONE INDIA SERVICES PVT. LTD. V ADD CIT THAT THE CONCEPT OF NO TRANSFER PRICING IN THE EVENT OF NO INCOME APPLIES EQUALLY TO INBOUND AND OUTBOUND TRANSACTIONS. 42. ... IT IS A RE- COMPUTATION EXERCISE TO BE CARRIED OUT ONLY WHEN INCOME ARISES IN CASE OF AN INTERNATIONAL TRANSACTION BETWEEN AES. IT DOES NOT WARRANT RE- COMPUTATION OF A CONSIDERATION RECEIVED/ 11 SHELL INDIA MARKETS PVT. LTD. V ACIT - [269 ITR 516 (BOM)] 12 EQUINOX BUSINESS PARKS (P) LTD. VS. UOI - 320 TAXMAN 191 (BOM) 13 S.G. ASIA HOLDINGS (INDIA) (P) LTD. - 229 TAXMAN 452 (BOM) ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 30 THE HEADS OF INCOME I.E. CHARGING PROVISIONS IN THE ABSENCE OF INCOME ARISING OUT OF THE INTERNATIONAL TRANSACTION, TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE. GIVEN ON CAPITAL ACCOUNT. IT PERMITS RE-COMPUTATION OF INCOME ARISING OUT OF A CAPITAL ACCOUNT TRANSACTION, SUCH AS INTEREST PAID/RECEIVED ON LOANS TAKEN/GIVEN , DEPRECIATION TAKEN ON MACHINERY ETC. ALL THE ABOVE WOULD BE CASE OF INCOME BEING AFFECTED DUE TO A TRANSACTION ON CAPITAL ACCOUNT .... THE REST OF THE DECISIONS RELY ON THE DECISION OF VODAFONE INDIA SERVICES AND THEREFORE THE SAME HOLDS GOOD FOR ALL OF THE DECISIONS. THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT IN THE CASE OF PMP AUTO COMPONENTS RELIED ON BY THE LEARNED D.R., THE COORD INATE BENCH DID NOT HAVE THE BENEFIT OF THE JUDGEMENTS OF THE JURISDICT IONAL HIGH COURT IN THE CASE OF BESIX KIER DABHOL SA [TS-661-HC-2012 (BOM)] , VODAFONE SERVICES PVT. LTD. (368 ITR 1) (BOM), COORDINATE BENCH OF IT AT, MUMBAI JUDGEMENTS IN THE CASE OF AEGIS LIMITED [TS-342-ITAT-2015 (MUM ) -TP], PARLE BISCUITS PVT. LTD. [TS-127-ITAT-2014 (MUM) - TP] AND OF THE ITAT, HYDERABAD BENCH IN THE CASE OF VIJAY ELECTRICAL LTD (60 SOT 77) (H YD) AND HILL COUNTRY PROPERTIES LTD. [48 TAXMANN.COM 94 (HYD)]. IT WAS A LSO CONTENDED THAT THE INVESTMENT OF THE ASSESSEE IN THE CASE ON HAND IN E QUITY SHARE CAPITAL IS ON A STRONGER FOOTING THAN DEALING WITH SHARE APPLICAT ION MONEY, WHICH WAS THE ISSUE IN PMP AUTO COMPONENTS (SUPRA). 7. WE HAVE HEARD THE RIVAL CONTENTIONS PUT FORTH BY BOTH THE LEARNED A.R. FOR THE ASSESSEE AND THE LEARNED D.R. FOR REVENUE A ND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JU DICIAL PRONOUNCEMENTS CITED AND RELIED ON. CHAPTER X BEGINS WITH SECTION 92(I) OF THE ACT WHICH STATES THAT ANY INCOME ARISING FROM AND INTERNATIO NAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. E VIDENTLY, THEREFORE, INCOME ARISING FROM THE INTERNATIONAL TRANSACTION I S A CONDITION PRECEDENT FOR COMPUTING THE ALP AND SUCH INCOME SHOULD BE CHA RGEABLE TO TAX UNDER THE ACT. IN THE ABSENCE OF SUCH INCOME, BENCHMARKIN G OF AN INTERNATIONAL ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 31 TRANSACTION AND COMPUTING ALP THEREOF WOULD NOT BE IN ORDER. CONSEQUENTLY, IF AN INTERNATIONAL TRANSACTION IS ON CAPITAL ACCOUNT AND DOES NOT RESULT IN INCOME AS DEFINED UNDER SECTION 2(24) OF THE ACT, THE PROVISIONS OF CHAPTER X OF THE ACT WOULD NOT BE APPLICABLE TO SUCH TRANSACTION. THIS PROPOSITION FINDS SUPPORT IN A NUMBER OF JUDGEMENTS OF THE HON'BLE BOMBAY HIGH COURT VIZ. VODAFONE INDIA SERVICES (2014) 368 ITR 001 (BOM), I.E. (VODAFONE IV), SHELL INDIA MARKETS (P) LTD. 269 ITR 516 (BOM), EQUINOX BUSINESS PARKS (P) LTD. VS. UNION OF INDIA 320 TAXM AN 191 (BOM) AND DECISIONS OF THE ITAT, HYDERABAD BENCH IN THE CASE OF VIJAY ELECTRICAL LTD (60 SOT 77) (HYD) AND HILL COUNTRY PROPERTIES LTD. [48 TAXMANN.COM 94 (HYD)]. 7.1 BEFORE US, THE LEARNED D.R. WAS NOT ABLE TO EST ABLISH THAT ANY INCOME AROSE OUT OF THE ASSESSEES TRANSACTION, I.E. OF IN VESTMENT IN THE SHARES OF ITS WHOLLY OWNED SUBSIDIARY, TOPS BV, NETHERLANDS. THE LEARNED D.R., HOWEVER, CONTENDED THAT THERE IS A SCOPE FOR EFFECT ON POTEN TIAL INCOME ARISING FROM SUBSEQUENT SALE OF THESE SHARES AND IN THIS REGARD PLACED RELIANCE ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF VODAFONE INDIA SERVICES LTD. (2014) 361 ITR 531 (BOM) (VODAFONE-I II). 7.1.1 THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT THIS AVERMENT MADE BY THE LEARNED D.R. WAS A NEW CONTENTION AND LINE O F ARGUMENT THAT DOES NOT EMANATE FROM THE POINTS CONSIDERED BY THE TPO/A O/CIT(A) IN THEIR ORDERS AND THEREFORE IN THE LIGHT OF THE DECISION O F THE SPECIAL BENCH OF THE MUMBAI ITAT IN THE CASE OF MAHINDRA & MAHINDRA LTD. [2009] 22 DTR (MUM) (SB) 361] THIS NEW ARGUMENT/ISSUE IS NOT TO B E CONSIDERED. WE FIND FORCE IN THE ARGUMENT OF THE LEARNED A.R. FOR THE A SSESSEE FOR THE ASSESSEE ON THIS ISSUE. 7.1.2 IN ANY CASE THE CONCEPT OF POTENTIAL INCOME H AS BEEN DEALT WITH BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES PVT. LTD. (368 ITR 1)(VODAFONE IV) AT PARA 31, 32 AND 43 OF I TS ORDER AS UNDER:- 31. SIMILARLY, THE RELIANCE BY THE REVENUE UPON TH E DEFINITION OF INTERNATIONAL TAXATION IN THE SUB-CLAUSE (C) AND (E) OF EXPLANATI ON (I) TO SECTION 92B OF THE ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 32 ACT TO CONCLUDE THAT INCOME HAS TO BE GIVEN A BROAD ER MEANING TO INCLUDE NOTIONAL INCOME, AS OTHERWISE CHAPTER X OF THE ACT WOULD BE RENDERED OTIOSE IS FAR FETCHED. THE ISSUE OF SHARES AT A PREMIUM D OES NOT EXHAUST THE UNIVERSE OF APPLICABILITY OF CHAPTER X OF THE ACT. THERE ARE TRANSACTIONS WHICH WOULD OTHERWISE QUALIFY TO BE COVERED BY THE DEFINI TION OF INTERNATIONAL TRANSACTION. THE TRANSACTION ON CAPITAL ACCOUNT OR ON ACCOUNT OF RESTRICTING WOULD BECOME TAXABLE TO THE EXTENT IT IMPACTS INCOM E I.E. UNDER REPORTING OF INTEREST OVER REPORTING OF INTEREST PAID OR CLAIMIN G OF DEPRECIATION ETC. IT IS THAT INCOME WHICH IS TO BE ADJUSTED TO TEH ALP. IT IS . ........ TAX ON THE CAPITAL RECEIPTS. THIS ASPECT APPEARS TO HAVE BEEN COMPLET ELY LOST SIGHT OF IN THE IMPUGNED ORDER. 32. THE OTHER BASIS IN THE IMPUGNED ORDER IS THAT AS A CONSEQUENCE OF UNDER VALUATION OF SHARES, THERE IS AN IMPACT ON PO TENTIAL INCOME. THE REASONING IS THAT IF THE ALP WERE RECEIVED, THE PET ITIONER WOULD BE ABLE TO INVEST THE SAME AND EARN INCOME, PROCEEDS ON A MERE SURMISE/ASSUMPTION. THIS CANNOT BE THE BASIS OF TAXATION. IN ANY CASE, THE ENTIRE EXERCISE OF CHARGING TO TAX THE AMOUNTS ALLEGEDLY NOT RECEIVED AS SHARE PREMIUM FAILS, AS NO TAX IS BEING CHARGED ON THE AMOUNT RECEIVED AS S HARE PREMIUM. CHAPTER X IS INVOKED TO ENSURE THAT THE TRANSACTION IS CHARGE D TO TAX ONLY ON WORKING OUT THE INCOME AFTER ARRIVING AT THE ALP OF THE TRANSAC TION. THIS IS ONLY TO ENSURE THAT THERE IS NO MANIPULATION OF PRICES/ CONSIDERAT ION BETWEEN AES. THE ENTIRE CONSIDERATION RECEIVED WOULD NOT BE A SUBJECT-MATTE R OF TAXATION. IT APPEARS FOR THE ABOVE REASON THAT THE LEARNED SOLICITOR GENERAL DID NOT SEEK TO DEFEND THE CONCLUSION IN THE IMPUGNED ORDER ON THE BASIS OF TH E REASONS FOUND THEREIN, BUT SOUGHT TO SUPPORT THE CONCLUSION WITH NEW REASO NS'. 43. IT WAS CONTENDED BY THE REVENUE THAT INCOME BE COMES TAXABLE NO SOONER IT ACCRUES OR ARISES OR WHEN IT IS DEEMED TO ACCRUE OR ARISE AND NOT ONLY WHEN IT WAS RECEIVED. IT IS SUBMITTED THAT EVEN THO UGH THE PETITIONER DID NOT RECEIVE THE ALP VALUE/ CONSIDERATION FOR THE ISSUE OF ITS SHARES TO ITS HOLDING COMPANY, THE DIFFERENCE BETWEEN THE ALP AND THE CON TRACT PRICE IS AN INCOME, AS IT ARISES EVEN IF NOT RECEIVED AND THE SAME MUST BE SUBJECTED TO TAX. THERE CAN BE NO DISPUTE WITH THE PROPOSITION THAT INCOME UNDER THE ACT IS TAXABLE WHEN IT ACCRUES OR ARISES OR IS RECEIVED OR WHEN IT IS DEEMED TO ACCRUE, ARISE OR RECEIVED. THE CHARGE-ABILITY TO TAX IS WHEN RIGH T TO RECEIVE AN INCOME BECOMES VESTED IN THE ASSESSEE. HOWEVER, THE ISSUE UNDER CONSIDERATION IS DIFFERENT VIZ. WHETHER THE AMOUNT SAID TO ACCRUE, A RISE OR RECEIVE IS AT ALL INCOME. THE ISSUE OR SHARES TO THE HOLDING COMPANY IS A CAPITAL ACCOUNT TRANSACTION, THEREFORE, HAS NOTHING TO DO WITH INCO ME. WE THUS DO NOT FIND SUBSTANCE IN THE ABOVE SUBMISSION. AS IS SELF EVIDENT FROM THE ABOVE, POTENTIAL INCOME ARISING FROM A CAPITAL TRANSACTION MAY BE CONSIDERED UNDER TRANSFER PRICIN G PROVISIONS IF IT ARISES FROM OUT OF THE IMPUGNED TRANSACTION. THE SITUATIO NS IN WHICH A CAPITAL TRANSACTION MAY HAVE AN IMPACT ON POTENTIAL INCOME ARE PROVIDED IN PARA 31 OF THE DECISION IN THE CASE OF VODAFONE INDIA S ERVICES PVT. LTD. (368 ITR ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 33 1)(BOM) (EXTRACTED SUPRA) BY WAY OF INSTANCES SUCH AS INTEREST ON LOAN GIVEN OR RECEIVED OR DEPRECIATION, ETC. 7.1.3 FURTHER, A PLAIN READING OF SECTION 92(1) OF THE ACT WHICH SPECIFIES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTI ON SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE IMPLIES TH AT THE POTENTIAL INCOME, IF ANY, SHOULD ARISE FROM THE IMPUGNED INTERNATIONA L TRANSACTION WHICH IS BEFORE THE TRANSFER PRICING OFFICER FOR CONSIDERATI ON AND NOT OUT OF A HYPOTHETICAL INTERNATIONAL TRANSACTION WHICH MAY OR MAY NOT TAKE PLACE IN FUTURE. BEFORE US, EXCEPT FOR MAKING A CLAIM IN TH IS REGARD THE LD. DEPARTMENTAL REPRESENTATIVE WAS NOT ABLE TO ESTABL ISH THAT ANY INCOME OR POTENTIAL INCOME AROSE FROM THE IMPUGNED TRANSACTIO N OF THE ASSESSEES INVESTMENT IN ACQUIRING THE SHARE CAPITAL OF ITS WH OLLY OWNED SUBSIDIARY, TOPS BV, NETHERLANDS. 7.1.4 IN RESPECT OF THE CONTENTION OF THE LD. DEPAR TMENTAL REPRESENTATIVE THAT THE DECISION OF VODAFONE INDIA SERVICES PVT. LTD. (368 ITR 1)(BOM) WAS NOT APPLICABLE TO THE ASSESSEE IN THE CASE ON HAND AS IT DEALT WITH AN INBOUND TRANSACTION AND NOT AN OUTBOUND TRANSACTION , THE LD. REPRESENTATIVE FOR THE ASSESSEE FOR THE ASSESSEE S UBMITTED THAT THE DECISION OF THE HONBLE HIGH COURT IN THE CASE OF VODAFONE I NDIA SERVICES P. LTD.(368 ITR 1) HAD OBSERVED THAT IT WOULD BE APPLICABLE TO BOTH INBOUND AND OUTBOUND TRANSACTION AT PARA 42 THEREOF WHICH IS EX TRACTED HEREUNDER:- 42. IT WAS CONTENDED BY THE REVENUE THAT IN ANY E VENT THE CHARGE WOULD BE FOUND IN SECTION 56(1) OF THE ACT. SECTION 56 OF T HE ACT DOES PROVIDE THAT INCOME OF EVERY KIND WHICH IS NOT EXCLUDED FROM THE TOTAL INCOME IS CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER, BEFORE SECTION 56 OF THE ACT CAN BE APPLIED, THERE MUST BE INCOME WHICH ARIS ES. AS POINTED OUT ABOVE, THE ISSUE OF SHARES AT A PREMIUM IS ON CAPITAL ACCO UNT AND GIVES RISE TO NO INCOME. THE SUBMISSION ON BEHALF OF THE REVENUE TH AT THE SHORTFALL IN THE ALP AS COMPUTED FOR THE PURPOSE OF CHAPTER X OF THE ACT GIVEN RISE TO INCOME IS MISPLACED. THE ALP IS MEANT TO DETERMINE THE REAL VALUE OF THE TRANSACTION ENTERED INTO BETWEEN AES. IT IS A RE-COMPUTATION E XERCISE TO BE CARRIED OUT ONLY WHEN INCOME ARISES IN CASE OF AN INTERNATIONAL TRANSACTION BETWEEN AES. IT DOES NOT WARRANT RE-COMPUTATION OF A CONSIDERATI ON RECEIVED/GIVEN ON CAPITAL ACCOUNT. IT PERMITS RE-COMPUTATION OF INCO ME ARISING OUT OF A CAPITAL ACCOUNT TRANSACTION, SUCH AS INTEREST PAID/RECEIVED ON LOANS TAKEN/GIVEN, DEPRECIATION TAKEN ON MACHINERY ETC. ALL THE ABOV E WOULD BE CASES OF INCOME BEING AFFECTED DUE TO A TRANSACTION ON CAPITAL ACCO UNT. THIS IS NOT THE ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 34 REVENUES CASE HERE. THEREFORE, ALTHOUGH SECTION 5 6(1) OF THE ACT WOULD PERMIT INCLUDING WITHIN ITS HEAD, ALL INCOME NOT OTHERWISE EXCLUDED, IT DOES NOT PROVIDE FOR A CHARGE TO TAX ON CAPITAL ACCOUNT TRAN SACTION OF ISSUE OF SHARES AS IS SPECIFICALLY PROVIDED FOR IN SECTION 45 OR SE CTION 56(2) (VIIB) OF THE ACT AND INCLUDED WITHIN THE DEFINITION OF INCOME IN SECTION 2(24) OF THE ACT. 7.1.5 IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW TH AT THE IMPUGNED TRANSACTION CANNOT BE BROUGHT WITHIN THE AMBIT OF I NDIAN TRANSFER PRICING PROVISIONS MERELY ON THE PRESUMPTION THAT IT MAY IM PACT PROFITS ARISING OUT OF A SUBSEQUENT TRANSACTION WHICH MAY OR MAY NOT BE AN INTERNATIONAL TRANSACTION. IN COMING TO THIS VIEW, WE DRAW SUPPO RT FROM THE DECISIONS OF THE ITAT, HYDERABAD BENCH IN THE CASE OF VIJAY ELEC TRICALS LTD. [ 60 SOT 77(HYD)] AND HILL COUNTRY PROPERTIES LTD. [48 TAXMA NN.COM 94(HYD)]; WHICH ARE CASES OF OUTBOUND INVESTMENTS, WHEREIN PRICES A T WHICH THE EQUITY SHARES WERE ACQUIRED COULD HAVE IMPACTED THE PROFIT S WHICH MAY HAVE ARISEN OUT OF A SUBSEQUENT TRANSACTION OF THE SAID SHARES. HOWEVER, SINCE NO INCOME AROSE FROM THOSE TRANSACTIONS, IT WAS HELD T HAT THE SAME WOULD NOT FALL WITHIN THE AMBIT OF INDIAN TRANSFER PRICING PR OVISIONS. IN THE CASE OF VIJAY ELECTRICALS LTD. (SUPRA), THE TRIBUNAL IN AN APPEAL AGAINST ORDER PASSED UNDER SECTION 263 OF THE ACT HELD THAT TRANSFER PRI CING PROVISIONS ARE NOT APPLICABLE TO THE TRANSACTIONS OF INVESTMENT IN SHA RE CAPITAL SINCE NO INCOME ARISES THEREFROM. THOUGH IN THE CASE OF HILL COUNT RY PROPERTIES LTD., (SUPRA), THE TRANSACTION WAS OF SHARE APPLICATION M ONEY, THE TRIBUNAL FOLLOWED THE DECISION RENDERED IN THE CASE OF VIJAY ELECTRICALS LTD. (SUPRA). 7.1.6 THE DIFFERENTIATION SOUGHT TO BE MADE BY THE REVENUE BETWEEN INBOUND INVESTMENT IN SHARES AND OUTBOUND INVESTMEN T IN SHARES FOR APPLICABILITY OF T.P PROVISIONS DOES NOT, IN OUR CO NSIDERED VIEW, FIND ANY SUPPORT THEREIN. IT WOULD ALSO BE APPROPRIATE IN T HIS REGARD TO REFER TO RULES 10B AND 10C OF THE INCOME TAX RULES, 1962 ( IN SHOR T THE RULES). RULE 10B(2) READS AS UNDER:- (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARAB ILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 35 (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RES PECTIVE PARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NO T SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPL ICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENE FITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANS ACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL . EQUALLY IMPORTANT IS SUB-RULE (3) TO RULE 10B, WHI CH READS AS UNDER:- (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARAB LE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. SIMILARLY, RULE 10C(1) READS AS UNDER:- 10C. (1) FOR THE PURPOSES OF SUB-SECTION (1) OF SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BES T SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR INTERNAT IONAL TRANSACTION [ OR SPECIFIED DOMESTIC TRANSACTION ] , AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION [ OR THE SPECIFIED DOMESTIC TRANSACTION, AS THE CASE MAY BE ] . (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPE CIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY: (A ) THE NATURE AND CLASS OF THE INTERNATIONAL TRANSACTI ON [ OR THE SPECIFIED DOMESTIC TRANSACTION ] ; (B ) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTE RING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAK ING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C ) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD; (D ) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE IN TERNATIONAL TRANSACTION [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 36 UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS; (E ) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMEN TS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN TH E INTERNATIONAL TRANSACTION [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F ) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS R EQUIRED TO BE MADE IN APPLICATION OF A METHOD 7.1.7 THE AFORESAID RULES INDICATE FACTORS THAT OUG HT TO BE TAKEN INTO ACCOUNT FOR SELECTION OF THE COMPARABLES, WHICH NEC ESSARILY INCLUDE THE CONTRACTUAL TERMS OF THE TRANSACTION AND HOW THE RI SKS, BENEFITS AND RESPONSIBILITIES ARE TO BE DECIDED. THE CONDITIONS PREVAILING IN THE MARKET IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OP ERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND THE SIZE OF THE MARKETS, THE LAWS AND THE GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAP ITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON ARE ALL MATERIAL AND RELEVANT ASPECTS. IF WE KEEP THE AFORESAID ASPECTS IN MIND, IT WOULD BE DELUSIVE TO ACCEPT AND AGREE THAT TRANSFER PRICING PROVISIONS/RULES CAN BE DIFFERENT FOR INBOUND AND OUTBOUND INVESTMENT IN SH ARES. SUCH REASONING IS NOT WHAT CHAPTER X OF THE ACT AND RULES MANDATE OR PRESCRIBE. THE AFORESAID PROVISIONS, IN OUR VIEW, DO NOT MAKE ANY SUCH DISTINCTION. 7.1.8 THEREFORE, WHETHER THE TRANSACTION UNDER COMP ARABILITY IS INBOUND SHARE INVESTMENT OR OUTBOUND SHARE INVESTMENT, THE COMPARISON HAS TO BE WITH COMPARABLES AND NOT WITH WHAT OPTIONS OR CHOIC ES WERE AVAILABLE TO THE ASSESSEE FOR EARNING INCOME OR MAXIMIZING RETURNS. THUS, WHAT IS MADE APPLICABLE FOR INBOUND SHARE INVESTMENT WOULD BE E QUALLY APPLICABLE TO OUTBOUND SHARE INVESTMENTS ALSO. THE PARAMETERS TO BE APPLIED CANNOT BE DIFFERENT FOR OUTBOUND INVESTMENT AND INBOUND INVES TMENTS. THEREFORE, IN OUR VIEW, THE ARGUMENT THAT DIFFERENT PARAMETERS WO ULD APPLY FOR INBOUND AND OUTBOUND INVESTMENTS DOES NOT HAVE ANY BASIS TH AT EMANATE FROM THE TRANSFER PRICING RULES. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 37 8.1.1 WE HAVE ALREADY HELD THAT THE IMPUGNED TRANSA CTION CANNOT COME WITHIN THE PURVIEW OF INDIAN TRANSFER PRICING PROVI SIONS SINCE THE SAID TRANSACTION IS ON CAPITAL ACCOUNT FROM WHICH NO INC OME/ POTENTIAL INCOME ARISES. ANOTHER QUESTION FOR CONSIDERATION IS WHET HER TRANSFER PRICING ADJUSTMENTS CAN YET TO BE MADE IF THE IMPUGNED TRA NSACTION OF INVESTMENT IN EQUITY SHARE CAPITAL IS RE-CHARACTERIZED AS A LO AN TRANSACTION AND NOTIONAL INTEREST INCOME IS IMPUTED TO IT AND WHETHER SUCH A RE-CHARACTERIZATION IS PERMISSIBLE UNDER THE EXISTING LEGAL PROVISIONS. 8.1.2 IN THIS REGARD, IT MUST BE STATED THAT EVEN A SSUMING THAT SUCH A RE- CHARACTERIZATION OF THE INVESTMENT IN EQUITY SHARE CAPITAL AS A LOAN IS PERMISSIBLE, THE ADDITION OF THAT PART OF THE EQUIT Y CAPITAL RE-CHARACTERIZED AS LOAN WOULD NOT BE POSSIBLE, AS THE SAID LOAN CAN NOT, BY ANY STRETCH OF IMAGINATION, BE CONSIDERED INCOME OF THE ASSESSEE. THE LD. DEPARTMENTAL REPRESENTATIVE ON BEING QUERIED WAS NOT ABLE TO C ONTROVERT THIS VIEW. HENCE, EVEN IF RE-CHARACTERIZATION IS POSSIBLE, TH E ONLY ADDITION PERMISSIBLE WOULD THAT OF NOTIONAL INCOME IN RESPECT OF THE RE -CHARACTERIZED LOAN. THEREFORE, IN ANY EVENT, THE ADDITION OF RS.124 CRO RES BEING PART OF THE INVESTMENT IN EQUITY SHARE CAPITAL, RE-CHARACTERIZE D AS LOAN, STANDS DELETED. THE ONLY ISSUE FOR OUR CONSIDERATION THAT NOW SURVI VES IS AS TO WHAT THE QUANTUM OF ADDITION ON ACCOUNT OF NOTIONAL INTEREST IF SUCH RE- CHARACTERIZATION IS PERMISSIBLE. BEFORE ANSWERING THIS, IT WOULD BE REQUIRED TO CONSIDER THE QUESTION OF WHETHER RE-CHARACTERIZA TION OF INVESTMENT IN EQUITY SHARE CAPITAL INTO LOAN IS PERMISSIBLE UNDER THE ACT. 8.2.1 THE LD. DEPARTMENTAL REPRESENTATIVE CONTENDE D THAT THE IMPUGNED TRANSACTION OF INVESTMENT IN EQUITY SHARE CAPITAL W AS A BUNDLED TRANSACTION, COMPRISING OF BOTH INVESTMENT IN SHAR E CAPITAL ALONGWITH A LOAN AND WAS THEREFORE, TO BE TREATED AS A LOAN TO THE EXTENT THAT THE AMOUNT OF INVESTMENT EXCEEDED THE BOOK VALUE OF INVESTMENT COMPUTED AS PER SCHEDULE III OF THE WEALTH TAX ACT. THE LD. DEPAR TMENTAL REPRESENTATIVE CONTENDED THAT THE TRANSACTION WAS IN FACT A MANIP ULATION WHEREIN THE ASSESSEE WOULD TAKE CARE OF THE INFLATED COST AT T HE TIME OF FUTURE SALE. IT ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 38 WAS ALLEGED THAT THE IMPUGNED TRANSACTION WAS BASED ON ABNORMALLY HIGH PREMIUM RESULTING IN A FLIGHT OF CAPITAL FROM THE COUNTRY WHICH WAS TO BE CURTAILED. RELYING ON THE DECISION IN THE CASE OF EKL APPLIANCES LTD. [2012] 24 TAXMAN.COM 199 (DEL) AND ARTICLE -9 OF THE OECD GUIDELINES, THE LD. DEPARTMENTAL REPRESENTATIVE CONTENDS THAT THE RE-C HARACTERIZATION OF THE IMPUGNED INVESTMENT IN SHARE CAPITAL WAS POSSIBLE. 8.3.1 FROM THE DETAILS ON RECORD WE FIND THAT THE A SSESSEE HAS PLACED MATERIAL EVIDENCE ON RECORD TO ESTABLISH THE BONA-F IDE OF THE IMPUGNED TRANSACTION. THE ASSESSEES BALANCE SHEET REFLECTS THE INVESTMENT MADE AS INVESTMENT IN EQUITY SHARES WHICH IS ALSO CORRESPO NDINGLY REFLECTED IN THE BALANCE SHEET OF THE INVESTEE COMPANY, TOP BV NET HERLANDS. THE DETAILS OF INVESTMENT IN EQUITY SHARES WERE INFORMED AND SUBMI TTED TO THE RESERVE BANK OF INDIA. FURTHER, EVEN THE AGREEMENT ENTERED INTO BETWEEN TSL ( THE HOLDING COMPANY) AND ITS INVESTORS PROVIDES FOR THE PROPOSED STRUCTURE FOR ACQUISITION OF THE TARGET COMPANY I.E. SHIELDS GUAR DING COMPANY, UK, WHEREIN THE ASSESSEE WAS TO INCORPORATE A WHOLLY OW NED SUBSIDIARY IN THE NETHERLANDS AS AN INTERMEDIATE HOLDING COMPANY. T HEREFORE, EVEN ON THE MERITS OF THE CASE, WE FIND NO REASON TO HOLD THAT THE IMPUGNED TRANSACTION WAS IN FACT IN THE NATURE OF A LOAN ADVANCED AND NO T AN INVESTMENT IN SHARE CAPITAL. THE ONLY GROUND TAKEN BY THE TRANSFER PRI CING OFFICER FOR RE- CHARACTERIZATION OF THE LOAN WAS THAT THE VALUE AT WHICH THE INVESTMENT WAS MADE WAS FAR IN EXCESS OF THE BOOK VALUE AS DETERM INED UNDER SCHEDULE III OF THE WEALTH TAX ACT. IN OUR VIEW, SINCE SHARES A RE NOT COVERED UNDER THE DEFINITION OF ASSETS, WE FIND NO MERIT IN APPLYING THE ERSTWHILE WEALTH TAX VALUATION RULES TO DETERMINE THE ARM'S LENGTH PRICE OF EQUITY SHARES. 8.3.2 IN VIEW OF THE AFORESAID DISCUSSIONS, WE AGRE E WITH THE CONTENTION OF THE LD. REPRESENTATIVE FOR THE ASSESSEE THAT RE-CH ARACTERIZATION OF INVESTMENT IN SHARE CAPITAL INTO LOAN IS NOT POSSIB LE UNDER THE TRANSFER PRICING PROVISIONS. IN COMING TO THIS VIEW, WE DRA W SUPPORT FROM THE DISCUSSIONS OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF BESIX KIER DABHOL SA [ TS 661-HC-2012 ] AND THE ORDERS OF TH E VARIOUS BENCHES OF ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 39 THE TRIBUNAL IN THE FOLLOWING CASES; (I)AEGIS LTD., [TS -342-ITAT-2015(MUM)- TRANSFER PRICING]; (II) PARLE BISCUITS PVT. LTD. [ TS-127-ITAT-2014 (MUM)- TRANSFER PRICING] (III) MYLAR LABORATORIES LTD., [T S-399-ITAT-2015(HYD)- TRANSFER PRICING]; (IV) PRITHVI INFORMATION SOLUTIO N [34 ITR (T) 429 (HYD)]AND (V) TOOLTECH GLOBAL ENGINEERING PVT. LTD. [51 TAXM ANN.COM.336(PUNE)] 8.3.3 IN THE CASE OF BESIX KIER DABHOL SA(SUPRA), T HE HONBLE BOMBAY HIGH COURT UPHELD THE DECISION OF THE CO-ORDINATE BENCH WHEREIN, IT WAS HELD THAT IN THE ABSENCE OF THIN CAPITALIZATION RULES, DEBT CAPITAL COULD NOT BE RE- CHARACTERIZED AS EQUITY CAPITAL AND VICE-VERSA. TH E RELEVANT PORTION AT PARA- 7 AND 8, THEREOF IS EXTRACTED HEREUNDER:- 7. HOWEVER, THE TRIBUNAL ALLOWED THE RESPONDENT-AS SESSEES APPEAL. DURING THE COURSE OF THE PROCEEDINGS BEFORE THE TRIBUNAL T HE REVENUE CONTENDED THAT THE BORROWING ON WHICH THE INTEREST HAS BEEN CLAIME D AS A DEDUCTION ARE IN FACT CAPITAL OF THE ASSESSEE AND BROUGHT ONLY UNDER THE NOMENCLATURE OF LOAN FOR TAX CONSIDERATION. IT WAS THE CASE OF THE APPE LLANT-REVENUE BEFORE THE TRIBUNAL THAT DEBT CAPITAL IS REQUIRED TO BE RE-CHA RACTERIZED AS EQUITY CAPITAL. HOWEVER, THE TRIBUNAL HELD THAT IN INDIA AS THE LAW STANDS THERE WERE NO RULES WITH REGARD TO THIN CAPITALIZATION SO AS TO CONSIDER DEBT AS AN EQUITY. IT IS ONLY IN PROPOSED DIRECT TAX CODE BILL OF 2010 TH AT AS A PART OF THE GENERAL ANTI AVOIDANCE RULES IT IS PROPOSED TO INTRODUCE A PROVISION BY WHICH A ARRANGEMENT MAY BE DECLARED AS AN IMPERMISSIBLE AVO IDANCE ARRANGEMENT AND MAY BE DETERMINED BY RE-CHARACTERIZING ANY EQU ITY INTO DEBT OR VICE VERSA. 8.WE FIND NO FAULT WITH THE ABOVE OBSERVATIONS OF T HE TRIBUNAL. THERE WERE AT RELEVANT TIME AND EVEN TODAY NO THIN CAPITALIZATION RULES IN FORCE. CONSEQUENTLY, THE INTEREST PAYMENT ON DEBT CAPITAL CANNOT BE DISALLOWED. IN VIEW OF THE ABOVE, THE QUESTION (I) RAISES NO SUBST ANTIAL QUESTION OF LAW AND IS THEREFORE, DISMISSED. 8.3.4 FURTHER, IN AEGIS LTD.(SUPRA) TO WHICH ONE OF US IS PARTY, THE CO- ORDINATE BENCH RELYING ON THE AFORESAID DECISION OF THE HONBLE BOMBAY HIGH COURT IN BESIX KIER DABHOL SA(SUPRA) AT PARA 27 THE REOF HELD THAT THE RE- CHARACTERIZATION OF EQUITY INTO LOAN AS CARRIED OUT BY THE TRANSFER PRICING OFFICER WAS NOT PERMISSIBLE. PARA 27 OF THIS ORDER OF THE CO-ORDINATE BENCH IS EXTRACTED HEREUNDER:- 27. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDINGS IN THIS REGARD IN THE IMPUGNED OR DERS. THE ASSESSEE HAS SUBSCRIBED TO REDEEMABLE PREFERENCE SHARES OF I TS AE, ESSAR SERVICES, MAURITIUS AND HAS ALSO REDEEMED SOME OF T HESE SHARES AT PAR. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 40 THE TPO HAS REDEEMED SOME OF THESE SHARES AT PAR. T HE TPO HAS RE- CHARACTERIZED THE SAID TRANSACTION OF SUBSCRIPTION OF SHARES INTO ADVANCING OF UNSECURED LOAN BY TERMING IT AS AN EXC EPTIONAL CIRCUMSTANCE AND HAS CHARGED/IMPUTED INTEREST, ON T HE REASONING THAT IN AN UNCONTROLLED THIRD PARTY SITUATION, INTEREST WOULD HAVE BEEN CHARGED. WE ARE UNABLE TO APPRECIATE SUCH AN APPROA CH OF TPO AND UNDER WHAT CIRCUMSTANCES, LEAVE ABOVE ANY EXCEPTION AL CIRCUMSTANCES, A TRANSACTION OF SUBSCRIPTION OF SHARES CAN BE RE-C HARACTERIZED AS LOAN TRANSACTION. THE TPO /ASSESSING OFFICER CANNOT DISR EGARDED ANY APPARENT TRANSACTION AND SUBSTITUTE IT, WITHOUT ANY MATERIAL OF EXCEPTION CIRCUMSTANCE HIGHLIGHTING THAT ASSESSEE H AS TRIED TO CONCEAL THE REAL TRANSACTION OR SOME SHAM TRANSACTION HAS B EEN UNEARTHED. THE TPO CANNOT QUESTION THE COMMERCIAL EXPEDIENCY OF TH E TRANSACTION ENTERED INTO BY THE ASSESSEE UNLESS THERE ARE EVIDE NCE AND CIRCUMSTANCES TO DOUBT. HERE IT IS A CASE OF INVEST MENT IN SHARES AND IT CANNOT BE GIVEN DIFFERENT COLOUR SO AS TO EXPAND TH E SCOPE OF TRANSFER PRICING ADJUSTMENTS BY RE-CHARACTERIZING IT AS INTE REST FREE LOAN. NOW,WHETHER IN A THIRD PARTY SCENARIO, IF AN INDEPE NDENT ENTERPRISE SUBSCRIBES TO A SHARE, CAN IT BE CHARACTERIZE AS LO AN. IF NOT, THEN THIS TRANSACTION ALSO CANNOT BE INFERRED AS LOAN. THE CO NTENTION OF THE LD. COUNSEL IS ALSO SUPPORTED BY THE HONBLE JURISDICTI ONAL HIGH COURT IN THE CASE OF DEXISKIER DHBOAL SA, ITA NO. 776 OF 2011 OR DER DATED 30TH AUGUST, 2012 AND BY VARIOUS OTHER DECISIONS, AS CIT ED BY HIM. THE CO- ORDINATE BENCHES OF THE TRIBUNAL HAVE BEEN CONSISTE NTLY HOLDING THAT SUBSCRIPTION OF SHARES CANNOT BE CHARACTERIZES AS L OAN AND THEREFORE NO INTEREST SHOULD BE IMPUTED BY TREATING IT AS A LOAN . ACCORDINGLY, ON THIS GROUND ALONE, WE DELETE THE ADJUSTMENT OF INTEREST MADE BY THE ASSESSING OFFICER. THUS, GROUND NO. 14 IS TREATED A S ALLOWED. 8.3.5 IN THE LIGHT OF THE ABOVE DECISIONS (SUPRA), WE DO NOT FIND MERIT IN THE CONTENTIONS OF THE LD. DEPARTMENTAL REPRESENTATIVE IN RESPECT OF RE- CHARACTERIZING OF THE INVESTMENT IN ACQUISITION OF EQUITY SHARES UNDERTAKEN BY THE ASSESSEE IN TOPS BV, NETHERLANDS AS A LOAN. IN THIS VIEW OF THE MATTER, WE HOLD THAT THE ADDITION OF NOTIONAL INTE REST ON THE SHARE CAPITAL RE-CHARACTERIZED AS LOAN IS NOT TENABLE. CONSEQUEN TLY, WE DO NOT CONSIDER IT NECESSARY TO DEAL WITH THE ALTERNATE CONTENTION OF THE ASSESSEE THAT IN CASE THERE IS TO BE ADDITION OF NOTIONAL INTEREST, IF A NY, IT SHOULD BE BASED IN LIBOR RATES. WE, THEREFORE, ACCORDINGLY DELETE THE ADDITION OF RS.18,65,62,539/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF NOTIONAL INTEREST. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 41 9.1.1 IN VIEW OF OUR FINDING THAT THERE IS NO INCOM E/POTENTIAL INCOME ARISING TO THE ASSESSEE OUT OF THE IMPUGNED INTERNATIONAL T RANSACTION OF INVESTMENT IN ACQUIRING SHARES IN ITS SUBSIDIARY TOPS BV, NETH ERLANDS, THE SAME WOULD NOT FALL WITHIN THE PURVIEW OF INDIAN TRANSFER PRI CING PROVISIONS. IN COMING TO THIS VIEW WE DREW SUPPORT FROM THE RATIO LAID DO WN IN THE FOLLOWING JUDICIAL PRONOUNCEMENTS:- (I) VODAFONE INDIA SERVICES PVT. LTD. (368 ITR 1(BO M)(VODAFONE IV), WHEREIN AT PARA 42 IT IS MENTIONED THAT THE RATIO A PPLIES EQUALLY TO INBOUND AND OUTBOUND CAPITAL TRANSACTIONS; (II) SHELL INDIA MARKETS PVT. LTD. (269 ITR 516)(B OM) (III) EQUINOX BUSINESS PARKS PVT. LTD. [230 TAXMAN 191(BOM)] (IV) VIJAY ELECTRICALS LTD., [60 SOT (HYD)] (V) HILL COUNTRY PRODUCTS LTD. [48 TAXMAN.COM 94 (H YD)] 9.1.2 IN THE ABSENCE OF PROVISIONS/RULES FOR RE-CHA RACTERIZATION OF INVESTMENT IN SHARE CAPITAL INTO LOAN AND VICE-VERS A, WE ARE OF THE CONSIDERED VIEW THAT THE RE-CHARACTERIZATION OF THE IMPUGNED CAPITAL TRANSACTION INTO A LOAN AS SOUGHT FOR BY THE TRANSF ER PRICING OFFICER/CIT(A) IS NOT TENABLE IN LAW IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BESIX KIER DABHOL SA(SUPRA), W HICH WAS FOLLOWED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF A EGIS LTD.,(SUPRA) TO WHICH ONE OF US IS PARTY. 9.1.3 IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES O F THE CASE AS DISCUSSED ABOVE, WE DELETE (I) THE ADDITION OF RS.124,17,50, 258/- MADE BY THE TRANSFER PRICING OFFICER/CIT(A) ON ACCOUNT FO ALLEG ED EXCESS CONSIDERATION PAID AND (II) ADDITION OF RS.18,62,62,539/- ON ACCO UNT OF NOTIONAL INTEREST COMPUTED @15% ON THE AFORESAID SUM OF RS.124,17,50, 258/- SOUGHT TO BE RE-CHARACTERIZED AS A LOAN. IN THIS VIEW OF THE MA TTER, THE ALTERNATE PLEA OF THE ASSESSEE TO RECONSIDER THE LIBOR RATE FOR THE P URPOSE OF COMPUTING THE ADDITION ON ACCOUNT OF NOTIONAL INTEREST BECOMES AC ADEMIC. ITA NO. 2115/MUM/2015 M/S. TOPSGRUP ELECTRONIC SYSTEMS LTD. 42 10. IN THE RESULT, THE ASSESSEES APPEAL FOR ASSES SMENT YEAR 2009-10 IS ALLOWED AS INDICATED ABOVE. SINCE THE ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2009-10 STANDS DISPOSED BY THIS ORDER, THE STA Y APPLICATION FILED BY THE ASSESSEE IN S.A.NO.288/MUM/2015 IS RENDERED INFRUCT UOUS AND IS ACCORDINGLY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH FEBRUARY, 2016. SD/ - SD/ - (AMIT SHUKLA) (JASON P. BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 19 TH FEBRUARY, 2016 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 58, MUMBAI 4. THE CIT - 11, MUMBAI 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.