No Notional interest to be charged on Share Application Money paid to Associated Enterprises [Transfer Pricing]

Income Tax Appellate Tribunal: In this matter, the assesse Strides Pharma Science Ltd. is engaged in the business of manufacturing and marketing of pharmaceutical products. During the relevant assessment year, the assessee had invested as share application money in two A.Es namely Strides Pharma Asia Pte. Ltd., Singapore, and Strides Pharma International Ltd., Cyprus. The share application money was remitted to its A.Es from time–to–time during the relevant assessment year. In addition to this, during the earlier years, the assesse had invested the share application money in other A.Es which stands outstanding on 31.03.2014.

The Assessing Officer made a reference to the Transfer Pricing Officer (“TPO”) for determination of arm’s length price of international transactions entered into by the assesse. During the proceedings before the TPO, the assessee was asked to show cause as to why there should not be any interest imputation on the share application money. In reply, the assessee submitted that the funds remitted to A.Es for share application money were for the sole purpose of obtaining the shares and it was never intended to be a loan. The assessee further submitted that the A.Es have refunded/ set–off the share application money during the relevant assessment year and there is no outstanding / share application money. The money has been returned by the A.Es since the process for which the funds were received no longer exists or the A.Es have received alternative source of funds. Thus, the repayment of part of share application money by the A.Es is part of the process relating to share allotment. Following the approach adopted in the earlier years, the TPO rejected the contention of the assessee and held that the imputation of interest on share application money is justified as there has been a delay of more than six months between the payment of share application money and the issue of shares by the foreign A.Es for which no interest was charged by the assessee from its A.Es. The TPO further noted that in respect of share application money invested by the assessee during the relevant assessment year interest imputation is not required as either the investment was itself made in March 2015, or the amount was refunded during the same year. However, in respect of share application money investment which was outstanding as on 31.03.2014, the TPO by applying the Bloomberg rate for the respective country made an adjustment of Rs.3,11,09,890, towards notional interest on share application money remitted by the assessee to its A.Es for which shares were allotted after more than six months. The Assessing Officer passed draft assessment order dated 20.12.2018, under section 143(3) r/w section 144C(1) of the Act, inter–alia, on the basis of adjustment proposed by the TPO. The DRP, vide its directions dated 30.09.2019, issued under section 144C(5) of the Act, inter–alia, upheld the order passed by the TPO following its directions issued in preceding assessment years and accordingly rejected the objections filed by the assessee. Being aggrieved by the decision, the assesse filed an appeal before ITAT.

The ITAT in its order relied upon the assessee’s own case in Strides Pharma Science Ltd. v/s DCIT, in ITA no.7370/Mum./2018, for the assessment year 2014–15, vide order dated 07.02.2020 had decided that no national interest to be charged on share application money for delayed allotment of shares.