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

Essar Power Ltd. v. ACIT – [2021] 128 taxmann.com 89 (Mumbai – Trib.)

Short Overview 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.

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.