STERLING OIL RESOURCES LTD, MUMBAI V. DCIT 13(2)(2), MUMBAI

ITA 5746/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0362 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2011-2012
• Appeal Filed On: 22-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH DESH
• Keywords: Transfer pricing; Share purchase agreement; International transaction; Retrospective amendment; Wholly owned subsidiary; Notional interest; Commercial expediency
• Section: 92B; 6; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH , JM ITA NO. 5746 / MUM/20 1 5 ( ASSESSMENT YEAR : 2011 - 12 ) M/S. STERLING OIL RESOURCES LTD., 329, SANDESARA HOUSE, JAWAHAR NAGAR, ROAD NO.13, GOREGA ON (W) MUMBAI 400 062 VS. DEPUTY COMMISSIONER OF INCOME TAX 13(2)(2), ROOM NO.146, 1 ST FLOOR, AAYAKAR BHAVAN, MUMBAI 400 020 PAN/GIR NO. AAKCS0055J APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI MADHUR AGARWAL REVENUE BY SHRI SAURABH DESHPANDE DATE OF HEARING 07 / 06 /201 7 DATE OF PRONOUNCEME NT 05 / 07 /201 7 / O R D E R PER R.C.SHARMA (A.M) : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF DRP/AO - II, MUMBAI DATED 23/09/2015 IN THE MATTER OF ORDE R PASSED U/S.143(3) R.W.S.144C OF THE IT ACT. 2. GRIEVANCE OF ASSESSEE REVOLVES AROUND MAKING AN UPWARD TRANSFER PRICING ADJUSTMENT OF RS.30,57,29,022/ - IN RESPECT OF INTERNATIONAL TRANSACTION OF SHARE CAPITAL SUBSCRIPTION INTO ITS ASSOCIATED ENTERPRISE NA MELY STERLING GLOBAL OIL RESOURCES PVT. LTD., 3. FACTS IN BRIEF ARE THAT STERLING OIL RESOURCES LTD, (HEREINAFTER REFERRED TO AS 'SORL' OR THE 'ASSESSEE'), IS A GROUP COMPANY OF SANDESARA GROUP, AN INDIA HEADQUARTERED BUSINESS GROUP, HAVING OPERATIONS IN I NDIA ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 2 AND OTHER PARTS OF THE WORLD THROUGH OVERSEAS SUBSIDIARIES AND JOINT VENTURES. SORL IS PRIMARILY AN INVESTMENT HOLDING COMPANY. SORL HAS INVESTED IN WHOLLY OWNED SUBSIDIARY STERLING GLOBAL OIL RESOURCES PRIVATE LTD (MAURITIUS). INVESTMENTS OF SORL ARE PRIMARILY INTO EXPLORATION AND PRODUCTION OF OIL AND NATURAL GAS. THUS, SORL IS ENGAGED IN THE BUSINESS OF EXPLORATION OF OIL AND GAS THROUGH ITS SUBSIDIARIES. DURING THE AY 2011 - 12, SORL HAD ENTERED INTO INTERNATIONAL TRANSACTION ONLY WITH ONE ASSOCIATED ENTERPRISE (AE) NAMELY, STERLING GLOBAL OIL RESOURCES PVT. LTD. (I.E. SGPL) IN MAURITIUS, WHICH WAS IN THE NATURE OF ADVANCING LOANS TO AE AND EARNING INTEREST THEREON. SORL DETERMINES INTEREST RATE CHARGEABLE TO SGPL AT A RATE WHICH IS HIGHER THAN ITS CO RRESPONDING INTEREST COST. FURTHER, DURING THE YEAR SORL ALSO SUBSCRIBED TO SHARE CAPITAL OF AE SGPL AND REPORTED THE SAME IN FORM 3CEB ALONGWITH SHARE SUBSCRIPTION MADE IN PRIOR YEARS, OUT OF ABUNDANT CAUTION, THOUGH SORL CONTEND THAT SUCH TRANSACTION SHA LL NOT BE COVERED U/S. 92 OF THE ACT. THE LD. TPO MADE AN ADDITION ON ACCOUNT OF INTEREST ON SUCH DEEMED LOAN AT THE RATE OF 16.64%. THE TPO HELD THE VIEW THAT SINCE THE ALLOTMENT OF SHARES HAS BEEN PENDING FOR QUITE A WHILE, THE TRANSACTION WAS THAT OF A LOAN UNDER THE GARB OF SHARE APPLICATION MONEY. BASED ON SUCH RE - CHARACTERIZATION OF THE SHARE SUBSCRIPTION TRANSACTION INTO A DEEMED LOAN TRANSACTION, THE LD. TPO DETERMINED THE ARM'S LENGTH INTEREST THEREON AT THE RATE OF 16.64% P.A. THE LD. TPO STATED T HAT THE TOTAL INTEREST TO BE CHARGED SHALL BE ON THE WHOLE AMOUNT OF SHARE SUBSCRIPTION MONEY OF RS. 4,32,53,78,827 ADVANCED IN FY 2008 - 09 TILL THE ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 3 TIME SHARES ARE ISSUED BY AE SGPL. THE LD. TPO ALSO CHARGED INTEREST AT THE RATE OF 16.64% ON MONEY REMITTED BY ASSESSEE TO AE SGPL DURING THE FY 2010 - 11 AFTER GIVING A GRACE PERIOD OF 180 DAYS FROM THE DATE REMITTANCES ARE MADE BY SORL. THE LD. TPO ADOPTED THE ALLEGED ALP INTEREST RATE OF 16.64% STATING THAT THIS IS THE INTEREST RATE AT WHICH THE ASSESSEE HAS E FFECTIVELY CHARGED INTEREST TO AE SGPL ON LOANS GRANTED TO IT. THUS LD. TPO MADE AN UPWARD TRANSFER PRICING ADJUSTMENT OF RS. 36,09,13,276/ - ON ACCOUNT OF THIS DEEMED INTERNATIONAL TRANSACTION. 4. BY THE IMPUGNED ORDER, CIT(A) CONFIRMED THE ACTION OF THE A O AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5. AT THE OUTSET, LEARNED AR SHRI. MADHUR AGARWAL PLACED ON RECORD, THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y.2009 - 10, WHEREIN THE VERY SAME ISSUE HAS BEEN DECIDED IN FAVOUR OF TH E ASSESSEE. WE HAD CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE ORDERS OF THE TRIBUNAL DATED 29/02/2016 IN ASSESSEES OWN CASE FOR THE A.Y.2009 - 10, WHERE THE TRIBUNAL HELD AS UNDER: - 3. BRIEFLY STATED, THE RELEVANT MATERIAL FAC TS, AND DEVELOPMENTS LEADING TO THIS DISPUTE BEFORE US, ARE LIKE THIS. THE ASSESSEE COMPANY IS AN INVESTMENT HOLDING COMPANY WHICH HAS INVESTED IN VARIOUS COMPANIES THROUGH ITS WHOLLY OWNED SUBSIDIARY STERLING GLOBAL OIL RESOURCES PVT LTD (SGPL, IN SHORT) BASED IN MAURITIUS. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ONLY ONE ASSOCIATED ENTERPRISE, I.E. SGPL, IN RESPECT OF CONTRIBUTION TO THE SHARE CAPITAL AND IN RESPECT OF REIMBURSEMENT OF EXPENSES. WHE N THIS MATTER CAME UP IN SCRUTINY BEFORE THE TRANSFER PRICING OFFICER, HE MADE ALP ADJUSTMENT IN RESPECT OF BOTH THE TRANSACTIONS. AS FAR AS PAYMENT OF SHARE CAPITAL SUBSCRIPTION WAS CONCERNED, THE TPO REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY AN ARM'S LENGTH PRICE ADJUSTMENT NOT BE MADE, AT THE RATE OF SBI PRIME LENDING RATE PLUS 3% PREMIUM, IN RESPECT OF THE AMOUNTS SHOWN AS SHARE APPLICATION MONEY AGAINST WHICH SHARE ARE NOT ISSUED. IT WAS, INTER ALIA, EXPLAINED BY THE ASSESSEE THAT THE ASSESSEE HAS ISSUED SHARES AT PREMIUM, AND OUT OF THE FUNDS SO RAISED, INVESTED THE MONEY IN THIS SUBSIDIARY. IT WAS SUBMITTED THAT IT ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 4 WAS OBLIGATION OF THE ASSESSEE COMPANY TO PROVIDE CAPITAL TO ITS SUBSIDIARY. IT WAS POINTED OUT THAT IT WAS A CAPITAL ACCOUNT TRANSACT ION WHICH HAS NO IMPACT ON INCOME OR EXPENSE OF THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THE FACT THAT THERE IS A DELAY IN THE ALLOTMENT OF SHARES DOES NOT MEAN THAT INTEREST IS TO BE CHARGED FOR THE PERIOD ON THE AMOUNT SO PAID FOR SHARE SUBSCRIPTION. IT WAS ALSO EXPLAINED THAT THIS TRANSACTION, BY NO STRETCH OF LOGIC, COULD BE TREATED AS A LOAN ON WHICH INTEREST NEEDS TO BE CHARGED. IT WAS ALSO SUBMITTED THAT, IN ANY EVENT AND WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS, THE INTEREST, IF AT ALL APPLICABLE, W ILL BE ON THE BASIS OF LIBOR AND A MINIMUM PERIOD OF 180 DAYS, PERMITTED BY THE RBI FOR ACQUIRING FOREIGN SECURITY TO RECEIVE SHARE CERTIFICATE, SHOULD BE ALLOWED AS GRACE PERIOD. NONE OF THESE SUBMISSIONS, HOWEVER, IMPRESSED THE TRANSFER PRICING OFFICER. AS FOR THE ASSESSEE'S CONTENTION THAT THE TRANSACTION WAS NOT AN INTERNATIONAL TRANSACTION, HE WAS OF THE VIEW THAT IN THE LIGHT OF RETROSPECTIVE AMENDMENT TO SECTION 92B , INTERNATIONAL TRANSACTION INCLU DES 'CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG TERM OR SHORT TERM BORROWING, LENDING OR GUARANTEE, PURCHASE OR SALE OF MARKETABLE SECURITIES OR ANY TYPE OF ADVANCE PAYMENT OR DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS'. HE WAS ALSO OF THE VIEW THAT SINCE, IN THIS CASE, SHARES ARE ALLOTTED ONLY IN OCTOBER 2010, AND AS THE SUBSIDIARY HAS USED THESE MONIES, RECEIVED FROM THE ASSESSEE AS SHARE APPLICATION MONEY, FOR ADVANCING LOANS TO STEP DOWN SUBSIDIARY, 'THE TR ANSACTION IS THAT OF A LOAN UNDER THE GARB OF SHARE APPLICATION MONEY'. ON THIS BASIS, TPO CONCLUDED THAT 'THE BENCHMARKING WILL BE DONE AS A LOAN, WHERE CUP WILL BE USED BY TAKING RATE OF INTEREST CHARGED IN INDEPENDENT TRANSACTION IN THE MARKET OR ONE UN DERTAKEN BY THE ASSESSEE WITH A THIRD PARTY'. AS REGARDS THE ASSESSEE'S CONTENTION THAT THE REMITTANCE WAS MADE WITH DUE APPROVAL OF THE RESERVE BANK OF INDIA, WHICH HAS ALLOWED THE SAME AS A SHARE APPLICATION MONEY, THE TPO WAS OF THE VIEW THAT CHARACTERI ZATION OF A TRANSACTION BEFORE THE RBI DOES NOT DECIDE ITS TRUE CHARACTER AS REQUIRED FOR THE TRANSFER PRICING PURPOSES. A REFERENCE WAS MADE TO THE DECISION OF A COORDINATE BENCH, IN THE CASE OF PEROT SYSTEMS VS DCIT [(2010) 5 ITR TRIB 106 (DEL)], AND TO HON'BLE PUNJAB & HARYANA HIGH COURT DECISION IN THE CASE OF COCA COLA INC VS CIT [(2009) 309 ITR 194 (P&H)]. A REFERENCE WAS ALSO MADE TO THEORY OF SUBSTANCE OVER FORM. HE HELD THAT 'THE TRANSACTION IS IN FACT A LOAN AND THE TERM 'SHARE APPLICATION MONEY' A FICTION. THE TPO THUS CONCLUDED AS FOLLOWS: 7. CONCLUSION: IN VIEW OF THE ABOVE DISCUSSION, IT IS STATED THAT THE ASSESSEE'S STAND REGARDING THE SHARE APPLICATION MONEY NOT BEING LIABLE TO INTEREST IS NOT ACCEPTABLE. SINCE THE ASSESSEE HAS AVAILED A LOAN @ 12.5% FROM UCO BANK IN MARCH 2009, THE SAME SHALL BE USED FOR THE PURPOSE OF BENCHMARKING. ADDED TO THIS WILL BE RISK PREMIUM OF 3% SINCE THE ASSESSEE HAS EXPOSED ITSELF TO A RISK IN LEAVING ITS MONEY WITH THE SUBSIDIARY WHICH FUNDS THE STEP DOWN COMPAN IES WHICH FINALLY INVEST IN THE BUSINESS OF DIGGING FOR OIL IN NIGERIA, WHICH IS HIGH RISK FACING POLITICAL, GEOLOGICAL AND PRICE RISKS, AMONGST OTHERS. IT ALSO FACES A 'SINGLE CUSTOMER RISK' APART FROM CURRENCY RISK. AS DISCUSSED EARLIER, THE ASSESSEE WI LL BE GIVEN BENEFIT OF 60 DAYS AFTER REMITTANCE, WHERE NO INTEREST WILL BE CHARGED. 4. THE TPO ALSO NOTED THAT THE ASSESSEE HAD CERTAIN OUTSTANDING RECEIVABLES, IN RESPECT OF REIMBURSEMENT OF EXPENSES, ON WHICH NO INTEREST WAS CHARGED. IT WAS NOTED THAT TH ESE AMOUNTS AGGREGATED TO ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 5 RS 3,42,37,697. THE TPO MADE AN ARM'S LENGTH PRICE ADJUSTMENT, IN RESPECT OF NOTIONAL INTEREST ON THESE RECEIVABLES, @ 15.5%. 5. IT WAS IN THIS BACKDROP, AND AGGRIEVED BY THE ASSESSING OFFICER PROPOSING TO MAKE THIS ARM'S LENGTH P RICE ADJUSTMENT IN RESPECT OF INTEREST ON SO FAR AS THE ADJUSTMENT IN RESPECT OF THE INTEREST ON RECEIVABLES WAS CONCERNED, THE DRP DELETED THE ADJUSTMENT BY NOTING THAT 'THE SGPL HAS NOT ACCEPTED THESE LIABILITIES FOR VARIOUS REASONS, INCLUDING THE REASON THAT SOME OF THE EXPENSES PERTAINED TO PERIOD PRIOR TO INCORPORATION OF SGPL' AND THAT 'INTEREST DOES NOT ACCRUE WHEN THE RECEIVABLE ITSELF HAS GONE BAD'. THE DRP CONCLUDED THAT 'IT IS A PECULIAR FACT SITUATION WHERE THE ASSESSEE HAS MADE CERTAIN CLAIMS O N SUBSIDIARIES WHICH ARE NOT ACCEPTED' AND 'THAT BEING THE CASE, THERE IS NO POSSIBILITY OF THE REVIVAL OF CLAIM IN FUTURE'. IT WAS THUS HELD THAT 'THE CHARGING OF INTEREST IS NOT WARRANTED AND THE AO IS DIRECTED NOT TO CHARGE THE NOTIONAL INTEREST THEREON '. AS REGARDS TPO'S TREATING THE SHARE APPLICATION MONEY AS AN UNSECURED LOAN, THE DRP UPHELD THE ACTION OF THE ASSESSEE, IN PRINCIPLE, BY OBSERVING AS FOLLOWS: THE PANEL HAS CAREFULLY CONSIDERED THE DRAFT ASSESSMENT ORDER, SUBMISSION OF THE ASSESSEE AND M ATERIAL ON RECORD. FROM THE SUBMISSION MADE BY THE ASSESSEE, IT IS APPARENT THAT THE MONEY HAS BEEN RECEIVED AS SHARE APPLICATION MONEY AND THE ALLOTMENT HAS BEEN UNDULY DELAYED. UNDER THESE CIRCUMSTANCES, WHETHER THE INTENTION OF THE ASSESSEE WAS TO ULTIM ATELY ALLOT THE SHARES AND NOT USE THE MONEY AS LOAN, CAN ONLY BE KNOWN BY THE CIRCUMSTANCES OF ALLOTMENT. USUALLY THE SHARES ARE ALLOTTED TO THE PROSPECTIVE SHARE HOLDERS WITHIN A SHORT SPAN OF TIME AFTER THE RECEIPT OF THE SHARE APPLICATION MONEY. THE LD . TPO HAS GONE AT LENGTH TO DEMONSTRATE THAT THE INTENDED ADVANCEMENT OF MONEY WAS NOT FOR EQUITY FINANCING. THE SUBSIDIARY SGPL, HAVING RECEIVED THE MONEY HAS IN TURN EXTENDED A LOAN TO ITS SUBSIDIARY WHICH IS ALSO BASED IN MAURITIUS. THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THAT IMMEDIATELY ON RECEIPT OF MONEY, EVERY EFFORT WAS MADE TO ALLOT THE SHARES. IF IT WAS A CASE WHICH REMAINED PENDING FOR ALLOTMENT DUE TO EXTRA ORDINARY OR LEGAL CIRCUMSTANCES, THERE COULD HAVE BEEN SOME MERITS IN THE ASSESSEE 'S ARGUMENT. AT BEST, IT IS A CASE WHERE THE MONEY WAS REQUIRED BY THE SUBSIDIARY AND GIVEN. WHETHER IT SHOULD BE ALLOTTED AS SHARES OR REFUNDED REMAINED PENDING FOR CONSIDERATION AND DECISION, AT THE END OF WHICH SHARES WERE ALLOTTED. UNDER THESE CIRCUMST ANCES, THE RE - CHARACTERISATION OF SHARE APPLICATION MONEY AS LOAN IS NOT ONLY JUSTIFIED BUT ALSO WARRANTED. THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CASE DO NOT SUGGEST THAT THE ASSESSEE AND ITS SUBSIDIARY HAD THE INTENTION OF ALLOTMENT OF SHARES AT A LL TIMES AND THEREFORE THE RE - CHARACTERISATION OF THE TRANSACTION OF THE LOAN IS UPHELD. 6. AGGRIEVED BY THE STAND SO TAKEN BY THE DRP, BOTH THE PARTIES ARE IN APPEAL BEFORE US. WHILE THE ASSESSING OFFICER IS AGGRIEVED OF THE DRP DELETING ALP ADJUSTMENT IN RESPECT OF INTEREST ON RECEIVABLES, THE ASSESSEE IS IN APPEAL AGAINST THE DRP CONFIRMING, INTER ALIA, RECHARACTERIZATION OF THE AMOUNT GIVEN TO THE SUBSIDIARY AS SHARE APPLICATION MONEY. 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECO RD, AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 6 8. SO FAR AS THE APPEAL OF THE ASSESSING OFFICER IS CONCERNED, WE FIND THAT IT IS UNDISPUTED POSITION THAT THE AMOUNTS SHOWN AS RECOVERABLE FROM THE SUBSIDIARY ARE NO LONGER RECOVERABLE FROM THE ASSOCIATED ENTERPRISES AND THAT THE ASSESSEE DOES NOT HAVE ANY LEGAL RIGHTS TO RECOVER THE MONIES SPENT ON BEHALF OF THE COMPANY PRIOR TO ITS INCORPORATION. SUCH BEING THE FACTUAL POSITION, THERE IS NO BASIS OF MAKING ANY ARM'S LENGTH PRICE ADJUSTMENT IN RESPECT OF INTEREST ON RECEIVABLES. IN ANY CASE, THE EXPENSES SO INCURRED BY THE ASSESSEE FOR THE SUBSIDIARY UNDER INCORPORATION WERE IN THE NATURE OF EXPENSES ON PERFORMING SHAREHOLDER SERVICES AND NO INTEREST CAN ACCRUE IN RESP ECT OF THE SAME. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND, WE APPROVE THE STAND OF THE DRP ON THIS POINT AND DECLINE TO INTERFERE IN THE MATTER. AS REGARDS THE APPEAL FILED BY THE ASSESSEE AGAINST RECHARACTERIZATION OF SHARE APPLICATION MONEY AS LOAN TO THE SUBSIDIARY, WE FIND THAT THERE IS NO DISPUTE THAT THE SHARES WERE ACTUALLY ISSUED TO THE ASSESSEE IN OCTOBER 2010 AND THE ENTIRE PAYMENT SO MADE BY THE ASSESSEE WAS ON ACCOUNT OF THE SHARE SO ALLOTTED. THE RECHARCTERIZATION HAS BEEN DONE ONL Y ON ACCOUNT OF DELAY IN ALLOTMENT OF SHARES. WE HAVE ALSO NOTED THAT THE RBI APPROVAL FOR THE REMITTANCE OF THE AMOUNTS IN QUESTION WAS ALSO ADMITTEDLY AS FOR CAPITAL CONTRIBUTION, AND, EVEN AT THE TIME OF MAKING THE PAYMENTS IN QUESTION, THE SUBSCRIPTION OF THE CAPITAL WAS DULY APPROVED AS SUCH BY THE BOARD OF DIRECTORS. THERE IS NO DIFFERENCE IN THE FORM AND SUBSTANCE, AND YET THE AMOUNT IS TREATED AS AN INTEREST BEARING LOAN BECAUSE THERE HAS BEEN A DELAY IN ALLOTMENT OF SHARES. AS REGARDS REVENUE'S REL IANCE ON PEROT SYSTEM'S CASE (SUPRA), IT IS WHOLLY MISPLACED INASMUCH AS IT WAS A CASE OF LOAN WHICH WAS STATED TO BE IN THE NATURE OF QUASI CAPITAL, WHEREAS IN THE PRESENT CASE THE PAYMENT WAS RIGHT FROM THE INITIAL STAGE TOWARDS SUBSCRIPTION FOR SHARES. WHILE ON THIS ISSUE, WE MAY USEFULLY REFER TO A CO - ORDINATE BENCH DECISION IN THE CASE OF BHARTI AIRTEL LIMITED VS ACIT [(2014) 63 SOT 113 (DEL)] WHICH HAS, INTER ALIA, OBSERVED AS FOLLOWS: 47. WE FIND THAT IN THE PRESENT CASE THE TPO HAS NOT DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAYMENTS FOR SHARE APPLICATION MONEY, AND THUS, OF CAPITAL CONTRIBUTIONS. THE TPO HAS NOT MADE ANY ADJUSTMENT WITH REGARD TO THE ALP OF THE CAPITAL CONTRIBUTION. HE HAS, HOWEVER, TREATED THESE TRANSACTIONS P ARTLY AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN THE DATES OF PAYMENT TILL THE DATE ON WHICH SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITAL CONTRIBUTION, I.E. AFTER THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIARIES IN WHICH CAPITAL CON TRIBUTIONS WERE MADE. NO DOUBT, IF THESE TRANSACTIONS ARE TREATED AS IN THE NATURE OF LENDING OR BORROWING, 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 FICTION IS ENVISAGED UNDER THE SCHEME OF THE TRANSFER PRICING LEGISLATION OR ON THE FACTS OF THIS CASE. WE DONOT FIND SO. WE DONOT FIND ANY PROVISION IN LAW ENABLING SUCH DEEMING FICTION. WHAT IS BEF ORE US IS A TRANSACTION OF CAPITAL SUBSCRIPTION, ITS CHARACTER AS SUCH IS NOT IN DISPUTE AND YET IT HAS BEEN TREATED AS PARTLY OF THE NATURE OF INTEREST FREE LOAN ON THE GROUND THAT THERE HAS BEEN A DELAY IN ALLOTMENT OF SHARES. ON FACTS OF THIS CASE ALSO, THERE IS NO FINDING ABOUT WHAT IS THE REASONABLE AND PERMISSIBLE TIME PERIOD FOR ALLOTMENT OF SHARES, AND EVEN IF ONE WAS TO ASSUME THAT THERE WAS AN UNREASONABLE DELAY IN ALLOTMENT OF SHARES, THE CAPITAL CONTRIBUTION COULD HAVE, AT BEST, BEEN TREATED AS AN INTEREST ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 7 FREE LOAN FOR SUCH A PERIOD OF ' INORDINATE DELAY' AND NOT THE ENTIRE PERIOD BETWEEN THE DATE OF MAKING THE PAYMENT AND DATE OF ALLOTMENT OF SHARES. EVEN IF ALP DETERMINATION WAS TO BE DONE IN RESPECT OF SUCH DEEMED INTEREST FREE LOAN ON ALLOTM ENT OF SHARES UNDER THE CUP METHOD, AS HAS BEEN CLAIMED TO HAVE BEEN DONE IN THIS CASE, IT WAS TO BE DONE ON THE BASIS AS TO WHAT WOULD HAVE BEEN INTEREST PAYABLE TO AN UNRELATED SHARE APPLICANT IF, DESPITE HAVING MADE THE PAYMENT OF SHARE APPLICATION MONE Y, THE APPLICANT IS NOT ALLOTTED THE SHARES. THAT ASPECT OF THE MATTER IS DETERMINED BY THE RELEVANT STATUTE. THIS SITUATION IS NOT IN PARI MATERIA WITH AN INTEREST FREE LOAN ON COMMERCIAL BASIS BETWEEN THE SHARE APPLICANT AND THE COMPANY TO WHICH CAPITAL CONTRIBUTION IS BEING MADE. ON THESE FACTS, IT WAS UNREASONABLE AND INAPPROPRIATE TO TREAT THE TRANSACTION AS PARTLY IN THE NATURE OF INTEREST FREE LOAN TO THE AE. SINCE THE TPO HAS NOT BROUGHT ON RECORD ANYTHING TO SHOW THAT AN UNRELATED SHARE APPLICANT W AS TO BE PAID ANY INTEREST FOR THE PERIOD BETWEEN MAKING THE SHARE APPLICATION PAYMENT AND ALLOTMENT OF SHARES, THE VERY FOUNDATION OF IMPUGNED ALP ADJUSTMENT IS DEVOID OF LEGALLY SUSTAINABLE MERITS. 48. LET US ALSO DEAL WITH TWO JUDICIAL PRECEDENTS WHICH HAVE BEEN HEAVILY RELIED UPON BY THE TPO, AS ALSO BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON WHICH THEIR CASE RESTS. NONE OF THESE DECISIONS, HOWEVER, DEAL WITH THE CORE ISSUE BEFORE US I.E. WHETHER A CAPITAL CONTRIBUTION CAN BE DEEMED TO BE PARTLY AN INTEREST FREE LOAN, FOR THE PERIOD TILL THE SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITAL CONTRIBUTION, AFTER THE SUBSCRIBED SHARES WERE ISSUED BY THE SUBSIDIARY IN WHICH CAPITAL CONTRIBUTION WAS MADE. IN THE CASE OF PEROT SYSTEMS TSI INDIA LTD (SUP RA), A COORDINATE BENCH OF THIS TRIBUNAL HAD AN OCCASION TO DEAL WITH THE ARM'S LENGTH PRICE ADJUSTMENT WITH REGARD TO INTEREST FREE ADVANCES TO THE SUBSIDIARIES. THAT WAS A CASE IN WHICH THE ASSESSEE, AN INDIAN COMPANY, ADVANCED INTEREST - FREE LOANS TO ITS 100% FOREIGN SUBSIDIARIES. THE SUBSIDIARIES USED THOSE FUNDS TO MAKE INVESTMENTS IN OTHER STEP - DOWN SUBSIDIARIES. ON THE QUESTION WHETHER NOTIONAL INTEREST ON THE SAID LOANS COULD BE ASSESSED IN THE HANDS OF THE ASSESSEE UNDER THE TRANSFER PRICING PROVIS IONS OF CHAPTER X, THE ASSESSEE ARGUED THAT THE SAID 'LOANS' WERE IN FACT 'QUASI - EQUITY' AND MADE OUT OF COMMERCIAL EXPEDIENCY. IT WAS ALSO ARGUED THAT NOTIONAL INCOME COULD NOT BE ASSESSED TO TAX. HOWEVER, BOTH OF THESE ARGUMENTS WERE REJECTED BY A COOR DINATE BENCH OF THIS TRIBUNAL. WHILE DOING SO, THE COORDINATE BENCH OBSERVED THAT THERE WAS NO MATERIAL ON RECORD TO ESTABLISH THAT THE LOANS WERE IN REALITY NOT LOANS BUT WERE QUASI - CAPITAL AND THAT THERE IS ALSO NO REASON WHY THE LOANS WERE NOT CONTRIBUT ED AS CAPITAL IF THEY WERE ACTUALLY MEANT TO BE A CAPITAL CONTRIBUTION. IT WAS OBSERVED THAT, 'IT IS NOT THE CASE THAT THERE WAS ANY TECHNICAL PROBLEM THAT THE LOAN COULD NOT HAVE BEEN CONTRIBUTED AS CAPITAL ORIGINALLY, IF IT WAS MEANT TO BE A CAPITAL CONT RIBUTION'. THE ARGUMENT OF LOAN BEING IN THE NATURE OF QUASI CAPITAL WAS THUS REJECTED ON FACTS. IT WAS NOT EVEN A CASE OF QUASI CAPITAL, AND, THEREFORE, THIS CASE HAS NO BEARING ON THE QUESTION BEFORE US I.E. WHETHER ALP ADJUSTMENTS CAN BE MADE IN RESPECT OF PAYMENTS TOWARDS SHARE APPLICATION MONEY IN A SITUATION IN WHICH THE SHARES HAVE BEEN ISSUED SEVERAL MONTHS AFTER THE PAYMENTS FOR SHARE APPLICATION MONEY HAVE BEEN MADE. SIMILARLY, IN VVF'S CASE (SUPRA), THE TRANSACTION WAS ADMITTEDLY IN THE NATURE OF INTEREST FREE LOAN BETWEEN AES AND THE COMMERCIAL EXPEDIENCY IN ADVANCING INTEREST ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 8 FREE LOANS WAS ON ACCOUNT OF OWNERSHIP AND CONTROL OF SUBSIDIARY BEING IN THE HANDS OF THE ASSESSEE, WHICH WAS RECOGNIZED AS A SIGNIFICANT FACTOR FOR COMMERCIAL EXPEDIENCY. HOWEVER, AS WE HAVE SEEN IN THE EARLIER DISCUSSIONS, SUCH COMMERCIAL EXPEDIENCY OF GRANTING INTEREST FREE LOANS IS WHOLLY IRRELEVANT BECAUSE IT IS THE IMPACT OF THIS INTERRELATIONSHIP, ON ACCOUNT OF MANAGEMENT, CAPITAL AND CONTROL, WHICH IS SOUGHT TO BE N EUTRALIZED BY ARM'S LENGTH PRICE ADJUSTMENTS. THIS WAS ALSO NOT A CASE IN WHICH A CAPITAL CONTRIBUTION WAS DEEMED TO BE PARTLY AN INTEREST FREE LOAN (I.E. FOR THE PERIOD TILL THE SHARES WERE ACTUALLY ALLOTTED) AND PARTLY AS CAPITAL CONTRIBUTION (I.E. WHEN THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIARY). REVENUE, THEREFORE, DOES NOT DERIVE ANY ADVANTAGE FROM THESE JUDICIAL PRECEDENTS EITHER. 49. IN ANY EVENT, IT IS NOT OPEN TO THE REVENUE AUTHORITIES TO RECHARACTERIZE THE TRANSACTION UNLESS IT IS FOUN D TO BE A SHAM OR BOGUS TRANSACTION. WHILE THERE ARE NO SPECIFIC POWERS VESTED IN THE TPO TO RECHARACTERIZE THE TRANSACTION, EVEN UNDER THE JUDGE MADE LAW, SUCH RECHRACTERIZATION CAN BE DONE BY THE REVENUE AUTHORITIES WHEN THE TRANSACTIONS ARE FOUND TO BE SUBSTANTIALLY AT VARIANCE WITH THE STATED FORM. IN THE PRESENT CASE, THERE CANNOT EVEN A SUGGESTION TO HOLD THAT THIS IS A BOGUS TRANSACTION BECAUSE ADMITTEDLY THE SUBSCRIBED SHARES CAPITAL HAS INDEED BEEN ALLOTTED TO THE ASSESSEE. THE TRANSACTION IS THUS ACCEPTED TO BE GENUINE IN EFFECT. 50. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW WERE IN ERROR IN TREATING THE PAYMENT OF SHARE APPLICATION MONEY, AS PARTLY IN THE NA TURE OF INTEREST FREE LOANS TO THE AES, AND, ACCORDINGLY, ALP ADJUSTMENT BASED ON THAT HYPOTHESIS WAS INDEED DEVOID OF LEGALLY SUSTAINABLE MERITS. WE DELETE THE IMPUGNED ADJUSTMENT OF RS.19,15,45,943. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. AS WE HAVE DE CIDED THIS GROUND OF APPEAL ON THE FUNDAMENTAL ISSUE THAT THE PAYMENT OF SHARE APPLICATION MONEY COULD NOT BE PARTLY TREATED AS INTEREST FREE LOAN TO AE, WE SEE NO NEED TO DEAL WITH OTHER ASPECTS OF THE MATTER. 9. THERE IS ONE MORE ASPECT OF THE MATTER. IN THE PRESENT CASE, ALLOTMENT OF SHARES DOES NOT MAKE ANY CHANGE TO THE POSITION OF THE ASSESSEE, AS THE SUBSIDIARY IS ADMITTEDLY A WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE. A DELAY IN ALLOTMENT OF SHARES BY THE SUBSIDIARY COMPANY, AS LONG AS THE SUBSIDIARY IS A WHOLLY OWNED SUBSIDIARY, DOES NOT PREJUDICE THE INTERESTS OF THE ASSESSEE. IT IS, THEREFORE, WRONG TO EVEN ALLEGE THAT AN ASSESSEE DOES NOT BEHAVE IN A COMMERCIALLY RATIONALE MANNER, AS EXPECTED IN AN ARM'S LENGTH SITUATION, WHEN THE ASSESSEE DOES NOT ASK FOR PAYMENT OF INTEREST FOR THE PERIOD OF DELAY IN ALLOTMENT OF SHARES. WE HAVE NOTED THAT THE TPO'S STAND THAT SINCE THE ASSESSEE WAS NOT ISSUED SHARES DURING THE PERIOD, THE ASSESSEE DID NOT DERIVE ANY BENEFIT FROM THIS INVESTMENT AND, FOR THIS REAS ON, THE ARM'S LENGTH PRICE ADJUSTMENT HAS BEEN MADE FOR NOTIONAL INTEREST FOR THE MONEY WHICH SHOULD BE ASSESSEE'S REWARD FOR THE INVESTMENT. WHAT THE TPO AND DRP HAVE OVERLOOKED IS THAT SINCE THE ASSESSEE WAS ONLY SHAREHOLDER OF THE SUBSIDIARY COMPANY, TH E FRUITS OF THIS INVESTMENT BELONG TO THE ASSESSE ONLY AND IN ENTIRETY. ON GIVING THIS MONEY TO THE SUBSIDIARY AND ON USE OF THIS MONEY BY THE SUBSIDIARY, THE ASSESSEE, IN ITS CAPACITY AS SOLE OWNER OF THE SUBSIDIARY, IS BENEFICIARY OF ALL THE GAINS OF THE SUBSIDIARY COMPANY. WHETHER THE ASSESSEE WAS ALLOTTED THESE SHARES OR NOT, THE ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 9 ASSESSEE WAS THE ONLY SHAREHOLDER OF THE SUBSIDIARY COMPANY AND BENEFICIAL OWNER OF ALL THE EARNINGS AND ALL THE ASSETS OF THE COMPANY. NON ALLOTMENT OF THESE SHARES, DURING TH E PERIOD OF PAYMENT OF SHARE APPLICATION MONEY TILL THE ACTUAL DATE OF ALLOTMENT, DID NOT, THEREFORE, PREJUDICE ASSESSEE'S POSITION ANYWAY. ALL THE EARNINGS OF THE SUBSIDIARY COMPANY BELONGED TO THE ASSESSEE IN ANY SITUATION. FOR EXAMPLE, IF THE FUNDS AVAI LABLE FOR DIVIDEND DISTRIBUTION FOR THIS YEAR WERE SAY RS 1,00,000 AND THE ASSESSEE HAD 100 SHARES BEFORE NEW ALLOTMENT OF SHARES AND 1000 SHARES AFTER THE ALLOTMENT, THE ASSESSEE WOULD BE ENTITLED TO RS 1,00,000 ONLY THE EITHER WAY - WHETHER AS RS 1,000 PE R SHARE FOR 100 IN PRE NEW ALLOTMENT SITUATION OR WHETHER AS RS 100 PER SHARE FOR 1,000 SHARES IN POST NEW ALLOTMENT SITUATION. IN ABSOLUTE TERMS, THE DIVIDENDS REMAIN THE SAME. WHETHER THE ASSESSEE IS ALLOTTED MORE SHARES OR NOT IS WHOLLY ACADEMIC AS THE ASSESSEE IS A SINGLE SHAREHOLDER OF THE SUBSIDIARY COMPANY AND THE FACE VALUE OF SHARES DOES NOT AFFECT THE ACTUAL BENEFITS OF THE ASSESSEE, THE PERCENTAGE OF OWNERSHIP IS THE ONLY MATERIAL FACTOR - WHICH REMAINS AT 100% PRE NEW ALLOTMENT AS ALSO POST NEW A LLOTMENT. IN THE CASE OF CIT VS EKL APPLIANCES LIMITED [(2012) 345 ITR 241 (DEL)], HON'BLE DELHI HIGH COURT HAS, THOUGH IN A VERY DIFFERENT CONTEXT AND WHICH IS MATERIALLY DIFFERENT FROM A SITUATION IN WHICH THE PAYMENT IS MADE FOR SUBSCRIPTION OF SHARE CA PITAL - AS IN THIS CASE, HELD THAT RECHARACTERIZATION OF A TRANSACTION IS POSSIBLE IN ONLY TWO SITUATIONS - I.E. (I) WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM AND (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BU T 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. NONE OF THESE CONDITIONS IS SATISFIED IN THE PRESENT CASE. THE FORM AND SUBSTANCE OF THE TRANSACTIONS ARE THE SAME. THE ASSESSEE HAS BEHAVED IN A COMMERCIALLY RATIONAL MANNER INASMUCH AS WHETHER THE NEW SHARES ARE ALLOTTED AT X POINT OF TIME OR Y POINT OF TIME, IT DOES NOT MAKE A DIFFERENCE TO THE POSITION OF THE SHAREHOLDER SO FAR AS THE SUBSIDIARY IS WHOLLY OWNED BY A SINGLE SHAREHOLDER - AS IS THE FACTUAL POSITION IN THIS CASE. THE NOMINAL VALUE OF SHARES, AS LONG AS ALL THE SHARES ARE HELD BY THE ASSESSEE IS ENTIRELY BENEFIT NEUTRAL FROM A COMMERCIAL POINT OF VI EW. THE VERY FOUNDATION OF THE ADJUSTMENT MADE BY THE ASSESSING OFFICER IS, THEREFORE, WHOLLY DEVOID OF LEGALLY SUSTAINABLE MERITS AND FACTUALLY CORRECT ASSUMPTIONS. 10. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE HOLD TH AT THE ADJUSTMENT ON ACCOUNT OF NOTIONAL INTEREST ON THE SHARE APPLICATION MONEY, WHICH HAS BEEN RECHARACTERIZED AS LOAN, IS NOT SUSTAINABLE IN LAW. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETE THE SAME. AS THE RECHARACTERIZATION ITSELF IS HELD TO BE UNSUSTAINABLE IN LAW AND ON FACTS OF THIS CASE, ALL OTHER ISSUES RAISED IN THE ASSESSEE'S APPEAL ARE RENDERED ACADEMIC. WITH THESE OBSERVATIONS, AND IN THESE TERMS, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 6. AS THE FACTS AND CIRCUMSTANCES DURING T HE YEAR UNDER CONSIDERATION ARE EXACTLY SAME, FOLLOWING THE REASONING GIVEN IN THE ORDER OF THE TRIBUNAL, ITA NO. 5746/MUM/2015 M/S. STERLING OIL RESOURCES LTD., 10 WE DELETE THE ADDITION SO MADE BY THE AO. LD. DR ALSO FAIRLY AGREED THAT ISSUE IS COVERED BY THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE. 7. GROU ND NO.1 IS GENERAL IN NATURE AND IN VIEW OF DECISION OF GROUND NO.2,3 & 4 WHICH IS ALLOWED IN FAVOUR OF THE ASSESSEE, GROUND NO. 5 & 6 BECOME INFRUCTUOUS. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN TERMS INDICATED HEREINABOVE. O RDER PRONOUNC ED IN THE OPEN COURT ON THIS 05 / 07 /2017 S D/ - ( AMARJIT SINGH ) S D/ - ( R.C.SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 05 / 07 / 201 7 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//