The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) deleted the notional interest in absence of proof to treat share application money in hands of overseas Associated Enterprises ( AE ) as ‘loan’.
It was held that when no income had accrued from the transaction of remittance of share application money by assessee to its overseas AE, then such transaction cannot be subjected to the transfer pricing provisions
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During transfer pricing assessment, the TPO found that assessee, Aries Agro Limited had advanced funds to its overseas AE under the garb of share application money. As per the TPO, since there was inordinate delay in allotment of shares, the TPO imposed notional interest on the share application money received by AEs.
The Appellant is a company engaged in the business of manufacturing and marketing of micronutrients, fertilizers and food Additives. The Appellant filed return of income which was processed and intimation order was issued under Section 143(1) of the Act computing the taxable income of the Appellant at INR 90,77,64,640/- as against the return of income of INR 21,96,41,290/-.
Associated Enterprises [AE] during the relevant previous year and therefore, a reference was made to the Transfer Pricing Officer [TPO] for the computation of Arm’s Length Price [ALP] in relation to the aforesaid international transactions.
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According to the TPO, the Appellant had advance funds to its AE [i.e. Golden Harvest Middle East (FZC)] under the grab of share application money and there was inordinate delay in allotment of shares. Therefore, treating the share application money as interest free loan/advance to AE, the TPO proposed transfer pricing adjustments of interest of INR 1,03,26,939/- computed @ 5.10% on the share application money of INR 20,24,89,000/- remitted by the Appellant to AE.
The Assessing Officer incorporated the aforesaid transfer pricing adjustment in the Draft Assessment Order, dated 15/12/2022, passed under Section 144C of the Act taking the income computed under Section 143(1) of the Act as the basis. The Appellant filed an objection before DRP against the Draft Assessment Order on 13/01/2023 challenging the additions made in the intimation issued under Section 143(1) of the Act and the proposed transfer pricing adjustments on account of interest on share application money.
The Bench observed that the assessee had remitted funds to AE as share application money to be utilized for setting up a manufacturing plant in SAIF Zone at Sharjah. It was found that identical transfer pricing adjustments were deleted holding that no income had accrued from remittance of share application money.
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It was viewed that the assessee had contended that the sole reason for delay in allotment of shares was attributable to non-receipt of approval from SAIF Zone Authority, even though an application was made by AE for seeking such approval.
The Division Bench comprising Narendra Kumar Billaiya (Accountant Member) and Rahul Chaudhary (Judicial Member) observed that the TPO did not bring anything on record to dispute the contention of assessee that shares could have been allotted without seeking approval from the SAIF Zone Authority, added the Bench.The ITAT Accepted that the transaction between assessee/ Appellant and its AE was in the nature of remittance towards share application money and not in the nature of a loan transaction.
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Since no inquiry was conducted seeking any information regarding delay in allotment of shares to AE, from the SAIF Zone Authority, the ITAT concluded that delay in allotment of shares cannot be attributed to assessee and deleted the transfer pricing addition.
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