TP adjustment for controlling premium upheld; transfer of shares as per SEBI Regulation can’t be deemed to be at ALP

TP adjustment for control premium upheld as it is only the seller who can demand control premium in case he is selling the controlling stake. Even price charged for transfer of shares is as per SEBI Regulations, it can't be deemed to be at ALP

In the instant case the assessee belonged to Lanxess (‘L’) Group which was engaged in the chemical business globally. It held 50.97% shares of L in which RA Group also held 18.33%. The assessee sold its entire shareholding in L group to the INEOS ABS at a negotiated price of Rs. 196.36 per share, whereas the RA group had been paid at Rs. 201 per share. The INEOS ABS was a joint venture of L group and INEOS group in which the holding company of the assessee had 49% share shareholding. Since assessee had not been paid anything towards control premium though it had sold the controlling stake in the company, the TPO proposed adjustment on account of control premium at 25% of share value. The AO made adjustment consequent to order passed by TPO.

The Tribunal held as under:

1) The TPO referred to the report of Phillip Sounders Jr. PHD ('Phillip') (who gave a finding that control premium varied from 30% to 50% of the public unquoted price) to estimate the control premium;

2) The TPO/AO had compared price paid to the assessee with the price paid to RA Group who held only 18.83% share which was not a controlling stake. The RA Group was a good internal CUP as both the assessee and RA Group had sold the shares of the same company and buyer was also the same. Therefore, the transaction was identical except the fact that the assessee had sold the controlling stake;

3) Thus, only what was required to be considered was adjustment on account of controlling stake transferred by the assessee by estimating the price for the controlling stake. The report by Phillip which was based on research undertaken in respect of several public quoted companies could be used as reliable material. Considering this the adjustment of 25% of the share value made by AO/TPO on account of controlling premium was justified;

4) The argument of the learned AR that the assessee was selling the business and, therefore, could not expect control premium, had no merit. In fact, it was only the seller who could demand control premium in case he or she was selling the control stake;

5) The ld. AR for the assessee had also argued that the general public shareholders had also been paid at the rate of Rs. 201 per share as per SEBI Regulation no. 20(4). But the SEBI regulations does not in any way state that price negotiated by the assessee with the buyer is at arm's length price. Thus, order of AO was to be upheld - LANXESS INDIA (P.) LTD. V. ACIT (2013) 36 taxmann.com 350 (Mumbai - Trib.)

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Transfer Pricing: Law on adjustment for notional interest on interest-free loan & excess credit period to AE explained

Micro Inks Ltd vs. ACIT (ITAT Ahmedabad)

Transfer Pricing: Law on adjustment for notional interest on interest-free loan & excess credit period to AE explained

The assessee advanced an interest-free loan to its wholly owned subsidiary called Micro USA. It claimed that the said loan was in the form of equity capital and was advanced to meet the business needs of the subsidiary and that no interest was required to be computed thereon. The assessee also extended credit of 165 days to the said subsidiary in respect of the goods supplied by it which it claimed to be in the normal course of business. The TPO held that the assessee ought to have charged interest on the loans advanced by it and that the credit period should not have exceeded 120 days. He computed notional interest at the rate of 11% on the loan and excess credit period and made an adjustment. The CIT(A) upheld the adjustment in principle though he reduced the interest to LIBOR. On cross appeals, HELD by the Tribunal:

(i) The question which really needs to be adjudicated is whether, in the context of s. 92A, but for the management, capital or control being in the same hands, the AE would have entered into the transaction on the same terms. In other words, whether there is such a commercial justification for the values at which transactions have been entered or not, so as not to attract the adjustment in the arm’s length price, has to essentially depend on factors other than the factors regarding management, capital or control. In still other words, merely because the entity receiving interest free funds is a subsidiary wholly owned by the assessee cannot be reason enough to justify such loans or advances being interest free and not warranting an arm’s length price adjustment, so far as transfer pricing provisions are concerned;

(ii) On facts, the assessee’s claim that the loans were in the nature of “quasi capital” deserves to be accepted. Under the RBI’s guidelines, while a loan from the EEFC account could be given without permission, the subscription to the equity capital required permission. The assessee applied for the permission and on receipt of it converted the loan into equity capital;

(iii) Further, the entity receiving the interest-free advance was not only a wholly owned subsidiary of the assessee company but also played a very significant role in its sale and distribution chain. Micro USA was a significant part of the marketing apparatus of the assessee and there was a significant commercial relationship between the two. The relationship between the assessee and Micro USA was not that of a lender and borrower simplicitor;

(iv) Further, in applying the CUP method, an adjustment has to be made under Rule 10B(1) “to account for differences …. which could materially affect the price in the open market”. There are significant differences between a typical transaction of loan of money and this transaction. LIBOR cannot be adopted in this situation because (a) the transaction is not a simplictor financing transaction but is a transaction of investing in a subsidiary as quasi capital pending formal approval of the RBI and (b) it is not a case of granting advance to a business concern without significant and decisive commercial considerations. The monies were given for strengthening the assessee’s marketing apparatus in the USA and to keep alive its biggest exports customer. The comparable uncontrolled price for interest on such a transaction in which advances are made pending capital subscription in a company which plays strategically significant commercial role in assessee’s business would be nil;

(v) As regards the excess credit period allowed to Micro USA, no adjustment can be made because it was part of the arrangement that specified credit period was allowed. The cost of funds blocked in the credit period was inbuilt in the sale price. Also, the question of excess credit period arises only when the goods are sold to third parties and the credit period allowed to the AE is more than the credit period allowed to others. Here, as similar products are not sold to any other concern, the question does not arise (Perot Systems 130 TTJ 685 (Del) distinguished; VVF Ltd (Mum) followed).

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