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Facts
The Revenue Department appealed an order that deleted an addition made by the Assessing Officer concerning arm's length interest on share application money. The Assessing Officer had proposed an adjustment of Rs. 12,80,91,108/- at a 14% interest rate on share application money given to non-resident entities, treating it as a loan due to delays in allotment.
Held
The Tribunal held that share application money is a capital account transaction and falls outside the purview of Section 92 of the Income Tax Act. Transfer pricing adjustments cannot be made on capital account transactions, following the jurisdictional High Court's decision in Vodafone India Service Pvt. Ltd.
Key Issues
Whether interest on share application money is taxable as income arising from an international transaction and subject to transfer pricing adjustments.
Sections Cited
Section 92, Section 92B, Section 92F, Section 250, Section 4, Section 5, Section 15, Section 22, Section 28, Section 45, Section 56
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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI OMKARESHWAR CHIDARA
Per : Narender Kumar Choudhry, Judicial Member:
This appeal has been preferred by the Revenue Department against the order dated 29.03.2024, impugned herein, passed by the Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) under section 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2011-12.
In the instant case, a reference u/s 92CA(1) of the Act was made to the Transfer Pricing Officer (TPO) i.e. ACIT 11(1), Mumbai on 06.08.2012 for computation of Arms Length Price (ALP) qua international transactions. The Ld. TPO vide order dated 07.01.2015 considered various issues including share application money given by the Assessee to I.G. Interactive Environment Ltd., UK closing balance of which was Rs.43,77,05,494/- and UTV Games Ltd. closing balance of which was Rs.34,81,70,043/-. The Assessee was show caused as to why the ALP interest should not be charged on the outstanding amount, in response to which the Assessee made the following contentions. “9.1 Assessee's contention –
Share application money being capital account transaction does not lend itself to accrual of any income and hence outside the purview of the provisions of section 92 of the Act.
Sec 92 reads as under: "Any income arising from an international transaction shall be computed having regard to the arm's length price."
Sec 92B reads as under: “Any income arising from an international transaction shall be computed having regard to the arm's length price."
"international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property; or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises
As no income can arise or is intended to arise out of share application money, being a capital account transaction and also as there is no transaction between two AE's which is specifically covered by section 92, but an investment by one company into another company, share application money is outside the purview of Section 92 in the first place.
The assessee further states that no interest should be levied on Share application money. The assessee places reliance viz Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court) wherein it was discussed that,
"A plain reading of Section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act.
The word income for the purpose of the Act has a well understood meaning as defined in s. 2(24) of the Act....."
".....absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income (Cadell Weaving Mill Co. vs. CIT249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed);
Therefore, there can be no income or a ALP worked out on a notional interest basis on share application money.
In the case of the assessee an amount of Rs. 43,77,05,494/- and Rs.34,81,70,043/- is the year end balance in the share application money account, given to IG Interactive Entertainment Limited(UK) and UTV Games Limited respectively.
In the immediately preceding year, you had made an addition by levying interest and treating the share application amount as a temporary funding, once it has exceeded 60 days for the period so exceeded. The assessee strongly objects to levying of interest on capital account transaction, where the money will either be allotted or refunded. Given the fact that the INR-USD exchange ratio has only gone up, any refund will automatically result in an exchange gain to the assessee, hence also no interest is warranted.
However without prejudice to our above submission and without accepting the proposed interest addition to share application money, we give herein below a working for interest on share application money for the period over and above the base period of 60 days as specifically required by you. The ageing of the outstanding share application money of Rs.785,875,536 as at 31st March, 2011 and interest thereon, without prejudice to our contention, is as in Annexure 7. The difference works out to Rs.3,35,38,265.
We, therefore, submit that no further addition should be made as regards interest on share application money.”
The Ld. TPO though considered the contention of the Assessee, however, not being impressed, made the proposed adjustment of Rs.12,80,91,108/- by determining the arm’s length interest @ 14% on the share application money, by holding as under:
“The assessee did not receive any interest on such share application money pending allotment. However, at arm's length, independent parties would expect to earn interest, if allotment is delayed beyond reasonable period of time.
Regarding the reasonable period of time for allotment, MCA Notification dated December 14, 2011 was perused. Through MCA Notification dated December 14, 2011, Ministry of Corporate Affairs has amended the Unlisted Public Companies (Preferential Allotment) Rules, 2003. As per the amendment, any allotment of securities shall be completed within 60 days from the receipt of application money and in case the company is not able to allot the securities within the said period of 60 days, it shall repay the application money within fifteen days thereafter, failing which it will be required to be re-paid with interest at the rate of twelve percent per annum. As per Section 92F transaction includes an arrangement, understanding or action in concert---- Whether or not such arrangement understanding or action is formal or in writing or ------ Thus as per Section 92 F any arrangement, understanding, action, formal, informal, written, unwritten is an international transaction. Therefore share application money pending allotment is an International Transactions. On perusal of the chart submitted by the assessee it is observed that there is repayment of share application money by AE to the assessee. This shows that it is not share application money but it is a loan. The assessee has given share application money which ought to have been allotted within atleast 60 days. As the amount is outstanding for period beyond 60 days as in the chart submitted by the assessee, it is in my view in the nature of temporary funding till allotted or repaid. Hence, interest is chargeable on ALP on the same. A mark up is required to cover up the various kinds of risks including foreign currency risk. The assessee has worked out above interest at the rate of 11% by benchmarking the interest rate at average cost of borrowing. However in my view, arm's length interest will be 11% +3% mark up i.e. 14%. Therefore the working of arm's length interest is as in Appendix 1 is enclosed. Therefore as the assessee has not taken any addition on this ground for arm's length interest on share application money, therefore an adjustment of Rs.12,80,91,108/- is proposed.”
The Assessing Officer (AO) vide final assessment order dated 29.04.2015 ultimately made the addition of Rs.16,62,89,208/- on account of transfer pricing adjustments including adjustment of Rs.12,80,91,108/- as proposed as arms length interest mark up on share application money.
The Assessee challenged the said addition along with other additions made by the AO vide assessment order dated 29.04.2015, before the Ld. Commissioner by filing first appeal who vide order dated 22.11.2019 though decided other grounds/additions raised/challenged by the Assessee, however, failed to adjudicate the ground relating to benchmarking of interest on the share application money.
The Assessee during the pendency of the appeal filed by the Department before the Hon’ble Tribunal against the order dated 29.11.2019 passed by the then Ld. CIT(A), challenged the aforesaid addition by filing cross objection before the Hon’ble Tribunal.
The Hon’ble Tribunal in and CO No.127/M/2021 decided on 15.11.2021 remanded the main ground related to the benchmarking of interest on share application money to the file of the Ld. Commissioner for fresh adjudication.
Consequently the Ld. Commissioner vide impugned order dated 29.03.2024 in the remand back proceedings, adjudicated the ground related to benchmarking of interest on share application money and ultimately deleted such addition , by following the decision of Hon’ble Tribunal in the Assessee’s own case for the AY 2010-11 (ITA 6292/M/2019 decided on 31-08-2021), wherein it was held as under:
“17. The issue raised in grounds no.3 to 3.8, relates to charging of interest on share application money.
The Transfer Pricing Officer held that since the shares are not allotted within a reasonable period, the share application money is in the nature of temporary funding till the allotment is made. The Transfer Pricing Officer proposed interest rate @ 14% and calculated the adjustment of ` 3,47,57,513. The Assessing Officer followed the directions of the Transfer Pricing Officer.
The learned CIT(A) held that the transfer pricing adjustment cannot be made on such capital account transactions in view of the decision of the Hon'ble Jurisdictional High Court in Vodafone India Services Pvt. Ltd. v/s Union Of India, of 2014, judgment dated 10th October 2014.
The learned Departmental Representative relied upon the order of the Transfer Pricing Officer and the Assessing Officer.
The learned Counsel for the assessee while supporting the observations of the learned CIT(A) relied upon the following decisions:- i) ACIT v/s Reliance Life Science Pvt. Ltd., & 6434/ Mum./2018, order dated 16.02.2021; ii) PCIT v/s Sterling Oil Resources Ltd., ITA no.341 of 2017, order dated 01.07.2019; iii) M/s. Allcargo Global Logistics Ltd. v/s ACIT, ITA no.4909/ Mum./2012, order dated 11.06.2014; iv) Voltas Ltd. v/s ACIT, ITA no.6612/Mum./2018, etc., order dated 30.06.2020; and v) PCIT v/s Concentrix Services India P. Ltd., ITA no.303 of 2016, order dated 04.09.2018.) 22. We have considered the rival submissions and perused the material on record in the light of the decisions relied upon. We find that the issue for our adjudication is squarely covered by the decision of the Hon'ble Jurisdictional High Court in Vodafone India Service Pvt. Ltd. (supra), wherein identical issue has been decided in favour of the assessee and against the Revenue. For better appreciation of facts, we reproduced the relevant findings of the Hon'ble Jurisdictional High Court as under:- "Findings:
It was contended by the revenue that income becomes 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 though 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 contract 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 right to receive an income becomes vested in the assessee. However, the issue under consideration is different viz: whether the amount said to accrue, arise or receive is at all income. The issue of shares to the holding company is a capital account transaction, therefore, has nothing to do with income. We, thus do not find substance in the above submission.
It was also contended that Chapter X of the Act is a complete code by itself and not merely a machinery provision to compute the ALP. It is a hidden benefit of the transaction which is being charged to tax and the charging Section is inherent in Chapter X of the Act. It is well settled position in law that a charge to tax must be found specifically mentioned in the Act. In the absence of there being a charging Section in Chapter X of the Act, it is not possible to read a charging provision into Chapter X of the Act. We can do no better than refer to the following observations of the five Member Bench of the Apex Court in CIT v. Vatika Township (P.) Ltd. [2011] 49 taxmann.com 249:--
'Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax. In Billings v. U. S, the Supreme Court clearly acknowledged this basic and long-standing rule of statutory construction:
Tax Statutes .... should be construed, and, if any ambiguity be found to exist, it must be resolved in favour of the citizen. Eidman v. Martinez 184 U.S. 578, 583; ...
Again in Unites States v. Merriam, the Supreme Court clearly stated at pages 187-88:
"On behalf of the Government it is urged that taxation is a practical matter and concerns itself with the substance of the thing upon which the tax is imposed, rather than with legal forms or expressions. But, in statutes levying taxes, the literal meaning of the words employed is most important, for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the Government and in favour of the taxpayer. Gould v. Gould 245 U.S. 151, 153."
As Lord Cairns said many years ago in Partington v. Attorney- General: As I understand the principle of all fiscal legislation it is this: If the person sought to be taxed comes within the letter of the law he must be taxed, however, great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.'
In this case, we are not in the zone of uncertainty referred to above. There is no charge express or implied, in letter or in spirit to tax issue of shares at a premium as income.
Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between AEs. The substantive charging provisions are found in Sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and gains of business), 45 (Capital gain) and 56 (Income from other Sources). Even Income arising from International Transaction between A.E. must satisfy the test of Income under the Act and must find its home in one of the above heads i.e. charging provisions. This the revenue has not been able to show.
It was next submitted that the machinery Section of the Act cannot be read de-hors charging Section. The Act has to be read as an integrated whole. On the aforesaid submission also, there can be no dispute. However, as observed by the Supreme Court in CIT v. B.C. Srinivasa Shetti [1981] 128 ITR 294/5 taxmann. com 1, "there is a qualitative difference between the charging provisions and computation provisions and ordinarily the operation of the charging provisions cannot be affected by the construction of computation provisions." In the present case, there is no charging provision to tax capital account transaction in respect of issue of shares at a premium. Computation provisions cannot replace/ substitute the charging provisions. In fact, in B.C. Srinivasa Shetti (supra), there
was charging provision but the computation provision failed and in such a case the Court held that the transaction cannot be brought to tax. The present facts are on a higher pedestal as there is no charging provision to tax issue of shares at premium to a non-resident, then the occasion to invoke the computation provisions does not arise. We, therefore, find no substance in the aforesaid submission made on behalf of the Revenue."
In view of the above, we are of the opinion that share application money being capital account transaction is outside the purview of section 92 of the Act and the transfer pricing adjustment cannot be made on capital account transactions as per the decision of the Hon'ble Jurisdictional High Court in Vodafone India Service Pvt. Ltd. (supra). Since the issue for our adjudication is squarely covered by the aforesaid decision of the Hon'ble Jurisdictional High Court cited supra, wherein the issue has been decided in favour of the assessee and against the Revenue for the reasons stated therein, respectfully following the same, we do not find any reason much less cogent reason warranting interference in the order of the learned CIT(A) in granting relief to the assessee. Accordingly, upholding the order of the learned CIT(A), grounds no.3 to 3.8, raised by the Revenue is dismissed.
The Revenue Department, being aggrieved, is in appeal before us.
We have heard the parties and perused the material available on record. Admittedly, the issue/addition regarding the levy of interest @ 14 % on the share application money, has been dealt with by the co-ordinate Bench of the Tribunal in the Assessee’s own case for the A.Y. 2011-12 referred to above and deleted the addition related thereto, by following the judgment rendered by the Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. vs. Union of India (ITA No.871 of 2014). Therefore, in our considered view, the Ld. Commissioner correctly deleted the addition of Rs.12,80,91,108/- made by the AO as mark up qua arms length interest on share application money and thus the impugned order does not require any interference, consequently, the same is upheld.
In the result, the appeal filed by the Revenue Department stands dismissed.
Order pronounced in the open court on 20.09.2024.