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Subscription of shares cannot be recharacterised as a transaction of
loan without any material exceptional circumstance highlighting that the
real transaction has been concealed.
Facts
The
Taxpayer, an Indian Company, was engaged in the business of providing IT
enabled business processing outsourcing services to its associated
enterprises (AE) for the third party contracts and in-house receivable
management services.
The Taxpayer subscribed to the redeemable
preference shares of its subsidiary outside India. Subsequently,
Taxpayer redeemed some of the preference shares at par.
The Tax
Authority observed that preference shares issued by subsidiary were
non-cumulative and redeemable at par without any dividend. Thus. the Tax
Authority recharacterized the transaction of subscription of preference
shares into a transaction of advancing of unsecured loan and imputed
interest thereon.
The Taxpayer contended that subscription of
preference shares represents an investment transaction for acquiring
participation interest in subsidiaries and hence, it should not be
characterised as a transaction of loan.
Held
The Tax
Authority is incorrect in recharacterising the transaction of
subscription of shares into a transaction of loan. One cannot disregard
any apparent transaction and substitute it, without any material of
exceptional circumstance highlighting that the real transaction has been
concealed or the transaction was a sham.
In absence of
evidences and circumstances to doubt facts of the case, The Tax
Authority cannot question the commercial expediency of any transaction
entered into by a Taxpayer. Thus, the transaction of investment in
shares cannot be given different colour so as to expand the scope of
transfer pricing adjustments by recharacterising it as interest-free
loan.
Since recharacterisation of share subscription into loan
cannot be done even in case of an independent enterprise, such
recharacterisation is not warranted even in the facts of the case.
Therefore, no interest should be imputed on such transaction. Reliance
in this regard was placed on Mumbai HC decision in the case of Dexiskier
Dhboal SA (ITA No. 776 of 2011).
