India: The Tribunal Affirmed The Re-Characterization Of The Refunded Share Application Money (Advanced By Taxpayer To Its Associated Enterprise) As Loan Transaction And Subjects The Same For Levy Of Interest
Taurian Iron & Steel Co. Private Limited, ["the
taxpayer'] during previous year relevant to the assessment year
under review, advanced share application money to its wholly owned
subsidiary in South Africa i.e. Taurian CISA [associate enterprise
("AE") of the taxpayer] of USD 0.86mn, to be used by the
later for obtaining mining contract in Africa. As against the total
remittance, 31,120 shares worth USD 0.66mn were allotted to the
taxpayer and balance amount of 0.20mn was refunded.
The Transfer Pricing Officer ("TPO"), during
assessment, referring to and taking cognizance of manifold factors
partake that the color and character of said remittances is in the
nature of loan advanced by the taxpayer to the AE, thereby proceed
to charge interest @ 14% p.a. making an upward TP adjustment of INR
1.58mn. On appeal Commissioner of Income Tax (appeals)
["CIT(A)"] partly confirm the action TPO's by
directing to charge interest on the basis of six month LIBOR plus
150 basis points.
1 On the nature of Share application money refunded
The ITAT is of impression that re-characterization of a
transaction is permissible only where the economic substance of a
transaction differs from its form. Referring to the present
case, it was arbitrated that remittance made by the taxpayer to the
extent of allotment of 31,120 shares is permissible in the eye of
The Tribunal however did not persuaded with the similar
treatment for the refunded amount of 0.20mn. It was pronounced that
factum of advancing the amount and its repayment by the AE would
fall within the ambit of awarding simpliciter advance, which
consequently would render the color and character to transaction
under review, as that of being a 'loan transaction.
Articulating the never so crystallized allotment of shares for
0.20mn as absolutely misconceived, the ITAT set aside the order of
ld. CIT(A) and directed the AO to continue to levy the interest
(based on LIBOR) on the amount of share application money refunded
to the taxpayer.
This ruling may create a trend of charging interest on share
application money advanced by Indian taxpayer to its AE and
subsequently refunded to the taxpayer. This ruling is
different from the earlier rulings of the Tribunal wherein the
ITAT, in many cases has disregarded the traditional view of
re-characterization of share application money as loan by the lower
tax authorities and thereby charge interest on inordinate delay in
share allotment or even no allotment.
Source: Taurian Iron & Steel Co. Pvt. Ltd. Vs. ADCIT
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