Advance for share application money can’t be treated as loan just because shares were allotted after delay of 6 months: ITAT

Case details: Essar Power Ltd. v. ACIT - [2021] 128 taxmann.com 89 (Mumbai - Trib.)

Judiciary and Counsel Details

• • R.C. Sharma | Accountant Member and Pawan Singh | Judicial Member
  • Anuj Kisnadwala, (AR) for the Appellant.
  • Akhtar Hussain Ansari, (DR) for the Respondent.

Facts of the Case

Assessee was a company primarily engaged in the generation of power. It filed return of income (ITR) declaring loss. Along with ITR, the assessee also filed Report in Form 3CEB reporting the particulars of its international transactions with its Associate Enterprises (AEs).

During the year, assessee had advanced Rs. 399.69 crores towards share application money on 29-01-2014 to Essar Power Overseas Limited (EOPL) for issue of shares. The shares were allotted to the assessee on 25-07-2014. The TPO held that since the shares were allotted after a delay of six months, interest ought to have been charged on the advance given towards share application money.

The assessee submitted ODI forms filed before RBI wherein the purpose for remittance had been stated to be for enhancement of investment in existing company. From the record, it was found that the share application money was paid on 29/01/2014, and shares were allotted on 25/07/2014 i.e. within six months. It was the contention of the assessee before the TPO that the amounts so advanced for shares were in the nature of equity investment in the group concern and no interest could be attributed to the amount. It was also argued that the TPO had no power to re-characterize the transaction in absence of any documentary evidence.

ITAT Held

The Mumbai Tribunal, following a similar issue considered by the Coordinate Bench, held that TPO cannot disregard any apparent transaction and substitute it, without any material of exception circumstance highlighting that assessee has tried to conceal the real transaction or some sham transaction has been unearthed.

TPO can’t question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it was a case of investment in shares and it couldn’t be given different color to expand the scope of transfer pricing adjustments by re-characterizing it as interest-free loan.

The Coordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterized as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, the adjustment of interest made by the TPO was to be deleted.

Case Review

• • Essar Power Ltd. v. Asstt. CIT [2019] 105 taxmann.com 296 (Mum.) (para 6) followed.
  • Aegis Ltd. v. Addl. CIT ITA No. 1213 (Mum) of 2014, dated 27-7-2015 (para 22)
  • ITO v. Sterling Oil Resources (P.) Ltd. [2016] 67 taxmann.com 2 (Mum.)
  • Essar Steel Orissa Ltd. v. Asstt. CIT [2016] 74 taxmann.com 70 (Mum.)
  • Allcargo Global Logistics Ltd. v. Asstt. CIT [2014] 47 taxmann.com 188/150 ITD 651 (Mum.) followed (para 26)

List of Cases Referred to

• • Essar Power Ltd. v. Asstt. CIT [2019] 105 taxmann.com 296 (Mum.) (para 5)
  • Pr. CIT v. Rivian International (P.) Ltd. [IT Appeal No. 693 of 2015, dated 21-11-2017] (para 12)
  • Aegis Ltd. v. Addl. CIT [IT Appeal No. 1213 (Mum.) of 2014, dated 27-7-2015] (para 20)
  • Bharti Airtel Ltd. v. Addl. CIT [2014] 43 taxmann.com 150/63 SOT 113 (Delhi – Trib) (URO)(para 20)
  • DIT v. Besix Kier Dabhol SA [2012] 26 taxmann.com 169/210 Taxman 151 (Bom.) (para 20)
  • Pan India Network Infravest (P.) Ltd. v. Addl. CIT [IT Appeal No. 7026 (Mum.) of 2013, dated 4-12-2015] (para 20)
  • Parle Biscuits (P.) Ltd. v. Dy. CIT [2014] 46 taxmann.com 11 (Mum.) (para 20)
  • Allcargo Global Logistics Ltd. v. Asstt. CIT [2014] 47 taxmann.com 188/150 ITD 651 (Mum.) (para 20)
  • ITO v. Sterling Oil Resources (P.) Ltd. [2016] 67 taxmann.com 2 (Mum.) (para 23)
  • Dy. CIT v. JSW Ltd. [2020] 116 taxmann.com 565/183 ITD 148 (Mum. – Trib.) (para 28)