Facts of the case

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.

Tribunal's Ruling

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 law.

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.

Nangia's Take

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 [TS-768-ITAT-2016(Mum)-TP]

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