DCIT CIR 7(1), MUMBAI vs. PAN INDIA NETWORK INFRAVEST P. LTD, MUMBAI

The assessee has raised following ground of appeal in A.Y. 2007 - 08: Addition on account of notional interest for Share Application Money paid to AE.

1. The learned CIT (A) erred in law and on facts in upholding addition/adjustment to income being ALP/ notional interest on advance share application money given, even though there is no income from AE to which transfer pricing provisions can be applied. The reasons given by him for doing so are wrong , contrary to the facts of the case and against the provisions of law.

Without prejudice to the above, the Ld. CIT (A) erred in law and facts in not applying LIBOR rate as CUP/ALP of international transactions on advance share application money treated as interest free loan as held in various decisions. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. 4. The appellant craves the leave to add, amend or alter all or any of the grounds of Appeal

It was submitted by the learned AR of the assessee that in the present case, the issue involved is squarely covered in favour of the assessee by the following judicial Pronouncements:- a. DCIT vs. Cadila Healthcare Ltd., 39 Taxman.com 51, P. B. pages 31 to 36. b. Bharti Airtel limited vs. Addl. CIT in dated 11.03.2014, P. B. pages 37 to 45 (Relevant Pages). c. Parle Biscuits Pvt. limited vs. DCIT in ITA No. 9010/Mum/2010 dated 11.04.2014, P. B. pages 46 to 56. d. Allcargo Global Logistics limited vs. ACIT in ITA No. 4909 & 4910/Mum/2012 dated 11.06.2014, P. B. pages 57 to 66. e. Aegis limited vs. Addl. CIT in ITA No. 1213/Mum/2014 dated 27.07.2015, P. B. pages 67 to 72 (Relevant Pages). f. DIT vs. Besix Kier Dabhol SA, 210 Taxman 151, P.B. pages 73 to 74 (Head Note). g. DCIT vs. Vikas Oberoi, 64 SOT 101 (Mum). P. B. pages 75 to 78.

He also submitted that in the case of Bharti Airtel limited vs. Addl. CIT (Supra), the tribunal has duly considered and distinguished both tribunal orders on which, reliance is placed by the A.O. and the facts of the present case are similar to the facts in the case of Bharti Airtel limited vs. Addl. CIT (Supra). He also submitted that eventually, the shares were allotted as per share script copy available on page 12 of the paper book.

As against this, learned DR of the revenue submitted a copy of the tribunal order rendered in the case of M/s PMP Auto Components (P) Ltd. vs. DCIT in & 1506/Mum/2014 dated 22.08.2014. He submitted that in that case, shares were allotted after one year and it was held by the tribunal that it was abnormal delay and therefore, arm’s length interest to be added. He submitted that in the present case, the shares were allotted on 29.03.2010 i.e. after more than 3 and half years from the date of agreement on 01.08.2006 and therefore, this tribunal order should be followed in the facts of the present case. 8. In the rejoinder, it was submitted by the learned AR of the assessee that in Para 18 of that tribunal order relied upon by the learned DR, it is noted that the assessee has failed to bring on record any evidence regarding the terms and conditions of such share application money and allotment of shares but in the present case, the agreement is available on pages 13 to 14 of the paper book and as per the same, the share application money will lie as share application money till the ship is purchased and refurbished/upgraded and if the time line for doing so is not met, the assessee can recall the application money with interest and conversion of share application money into shares is at the discretion of the assessee. He submitted that under these facts, this tribunal order is not applicable in the present case because the same is distinguishable on facts.

We have considered the rival submissions. First we examine the applicability of the tribunal order rendered in the case of M/s PMP Auto Components (P) Ltd. vs. DCIT (Supra). We find that as per the facts of that case, the amount was given to AE as loan without charging any interest and the disputes raised before the tribunal were two only. First dispute was regarding interest rate adopted by the TPO by ignoring LIBOR rate and the second dispute was TP adjustment made on account of notional interest on loan given to subsidiary. Hence, this was not a claim in that case that the amount given to the subsidiary company is on account of share application money but in the present case, this is admitted position that the amount in question was given as share application money. Therefore, this tribunal order is not applicable in the facts of the present case.

Now, we examine the applicability of the tribunal order rendered in the case of Bharti Airtel limited vs. Addl. CIT (Supra). In that case, the money was advanced to AE foreign subsidiaries as share application money as in the present case and shares were allotted after 13 to 16 months as against 42 months in the present case. In Para 47 of this tribunal order, the tribunal has considered this argument also that there is delay in allotment of shares. The tribunal stated that since the TPO has not brought on record anything to show that any unrelated share applicant was to be paid any interest for the period between making the share application money payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits. In the present case also, the TPO has not brought on record anything to show that any unrelated share applicant was to be paid any interest for the period between making the share application money payment and allotment of shares. In fact, in the present case, the TPO has reproduced the submissions of the assessee in Para 4.2 of his order where the assessee submitted that the amounts were provided as equity/quasi equity and subsequently converted into equity shares. Thereafter in very next Para i.e. Para 4.3 of his order, the TPO starts with this observation that the concern of the assessee that conversion of loan into equity precludes the TPO to determine the arm’s length interest on the above interest free loan is covered in favour of the revenue by a tribunal order rendered in the case of Perot Systems TSI Ltd. vs. DCIT, (2010) TIOL – ITAT – Delhi. But there is no such mention in the written submissions of the learned AR of the assessee reproduced by the TPO in Para 4.2 of his order. Hence, the TPO has considered this transaction as a loan transaction by brushing aside the submissions of the learned AR of the assessee that this money was given as share application money and that too without giving any finding or indication any basis to say that this is a loan transaction. As in the case of Bharti Airtel limited vs. Addl. CIT (Supra), in the present case also, the TPO has not brought on record anything to show that any unrelated share applicant was to be paid any interest for the period between making the share application money payment and allotment of shares. Therefore even for this delay in allotment of shares also, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits. Hence, by respectfully following this tribunal order, we hold that the impugned ALP adjustment is devoid of merit and therefore deleted in both years because it was agreed by both sides that facts on this aspect are identical in both years.

In the result, both the appeals of the assessee are allowed.

Regarding the appeal of the revenue, we find that in view of our decision in respect of the appeal of the assessee in above Para as per which, we have held that no ALP adjustment is to be made in the present case, the dispute raised by the revenue that such adjustment should be as per domestic PLR as against LIBOR rate approved by CIT (A) does not survive and therefore, the appeal of the revenue is liable to be rejected. We order accordingly.

In the result, the appeal of the revenue is dismissed.

In the combined result, both the appeals of the assessee are allowed and the appeal of the revenue is dismissed.