Mumbai ITAT removes notional interest

The ITAT removed a transfer pricing addition made by the TPO due to notional interest on the action claim money paid by the assessee to its AEs.

The transaction between the assessee/appellant and his AE was in the nature of payment of money towards application for action and not a loan transaction, the division bench including Narendra Kumar Billaiya (accounting member) And Rahul Chaudhary (judicial member).

Facts of the case:

While assessing the transfer pricing, the TPO found that the assessee had advanced funds to its foreign AE in the guise of share application money. Pursuant to the TPO, due to inordinate delay in allotment of shares, the TPO imposed notional interest on the share application funds received by the AEs.

Observations of the Court:

The Bench observed that the assessee had remitted funds to AE in the form of share application to be used for the establishment of a manufacturing plant in SAIF Zone in Sharjah.

Referring to the assessees’ own cases for AYs 2012-13, 2013-14 and 2014-15, the bench observed that the identical transfer pricing adjustments had been removed, holding that no income had been generated by handing over the money for the action request.

The Bench observed that from the outset, the assessee had contended that the only reason for the delay in allotment of shares was attributable to non-receipt of approval from the SAIF Zonal Authority, even though AE had requested such approval.

The TPO has not brought anything on record to challenge the assessee’s contention that the shares could have been allotted without seeking the approval of the SAIF zonal authority, the bench added.

Since no inquiry was made to the SAIF Zonal Authority for information regarding the delay in allotment of shares to AE, the ITAT concluded that the delay in allotment of shares cannot be assigned to the assessee.

Thus, the ITAT deleted the addition on transfer pricing and allowed the appeal of the assessee.

Counsel for the Appellant/Assessee: Senior Advocate Firoze B. Andhyarujina and Advocate Sandeep Sheth

Counsel for the respondent/revenue: Uodal Raj Singh

Case Title: Aries Agro Limited v Valuation Unit, NFAC

File number: ITA n° 4731/MUM/2023

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