Wednesday, April 29, 2015

No TP adjustment by treating share application money as loan to AE merely due to delay in issuance of shares


Share application money could not be treated as loan amount merely because there was delay in issuance of shares by subsidiary in name of assessee, particularly when cause for delay was duly explained by assessee

Facts


a)The assessee advanced certain sum to its subsidiaryat Philippines, in the form of share application money. However, shares were not allotted till two subsequent years and subsidiary continued to use those funds.

b)TPO was of the view that the share application money was actually in the nature of loan as there was considerable delay in issuance of shares by subsidiary in name of assesse. Accordingly, TPO made addition to assessee’s income by determining the arm's length interest rate on the said transaction.

c)Commissioner (Appeals)confirmed the addition made by TPO. Aggrieved by the order, assessee filed the instant appeal before the tribunal.

d)On appeal, the assessee submitted that the delay was due to obtaining necessary approval from the Securities and Exchange Commission, Phillipines and finally, the shares were issued as per the share certificate, which had been produced by the assessee as additional evidence before the tribunal.

The tribunal held in favour of assessee as under-

1)Though there was delay in issuance of shares against the share application money given by the assessee to its subsiary, however, the assessee had duly explained the cause of delay and it was not a deliberate delay for using the money by subsidiary in the garb of share application money

2)Since share certificates were not before the authorities below, for limited purpose of considering the said certificates, the issue was remanded to Assessing Officer/TPO to consider the same.

3)As far as the re-characterization of the share application money as loan was concerned, the High Court in the case of DIT, International Taxation v. Besix Kier Dabhol S.A. [2012] 26 taxmann.com 169 (Bom.) had considered an identical issue and held that there were at the relevant time and even on relevant day no thin capitalization rules in force to consider debt as an equity.

4)Accordingly, subject to verification of the share certificates by the Assessing Officer, the share application money could not be treated as loan amount merely because there was a delay in issuance of shares by the subsidiary in the name of the assessee, particularly when cause for delay was duly explained by assessee- ADITYA BIRLA MINACS WORLDWIDE LTD. V. DCIT [2015] 56 taxmann.com 317 (Mumbai - Trib.)
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