Voltas Limited vs Assistant Commissioner of Income Tax (ITAT Mumbai, 2020) – Transfer Pricing Case Study

1. Introduction

This case study analyzes the landmark ruling in Voltas Limited vs. Assistant Commissioner of Income Tax (ITAT Mumbai, 2020). The case dealt with the scope of transfer pricing adjustments where the Revenue authorities attempted to impute notional interest on share application money pending allotment from a foreign Associated Enterprise (AE). The Tribunal had to decide whether such delay could be treated as a loan transaction, thereby justifying an arm’s length interest adjustment.

2. Factual Matrix

• Assessee: Voltas Limited, an Indian company engaged in engineering solutions and global projects.
• International Transaction: Voltas subscribed to shares of its foreign AE.
• Dispute:
  • Share subscription money was not received from AE within the “expected reasonable time.”
  • The Transfer Pricing Officer (TPO) alleged that this delay was akin to giving a loan/advance to the AE.
  • Accordingly, the TPO proposed an adjustment by imputing notional interest (arm’s length interest that an independent lender would have charged).
• Assessing Officer (AO): Accepted the TPO’s adjustment.
• Assessee’s Appeal: Challenged before ITAT Mumbai.

3. Core Legal Issues

1. Nature of Transaction – Whether share subscription pending allotment can be characterized as a loan?
2. Transfer Pricing Applicability – Can a notional interest be taxed under section 92C if there is no real income element?
3. Definition of International Transaction – Does delay in allotment/payment fall within section 92B as an “international transaction”?

4. Arguments in Detail

(A) Assessee’s Submissions

• Genuine Capital Transaction: The transaction was purely for equity subscription; not in the nature of lending or borrowing.
• CBDT Instruction: CBDT has clarified that “share application money pending allotment is not in the nature of loan.”
• Judicial Support:
  • Vodafone India Services Pvt. Ltd. (Bom HC): Issue of shares (even at premium) does not give rise to income and cannot be brought under TP.
  • Shell India Markets Pvt. Ltd. (Bom HC): Similar view that capital account transactions fall outside TP adjustments unless they give rise to income.
• No Real Income: Notional/hypothetical income cannot be taxed under transfer pricing.
• Commercial Reality: Delays can occur in allotment due to regulatory, procedural, or compliance issues; these cannot be treated as financing arrangements.

(B) Revenue’s (Department) Contentions

• Substance over Form: Although shown as share subscription, in effect, the assessee allowed its AE to retain funds for long.
• Comparable Arm’s Length Behaviour: Independent parties would not allow indefinite delay without charging interest.
• Financing Arrangement: The delay should be considered as an implicit loan; therefore, arm’s length interest must be imputed.

5. Tribunal’s Observations

1. Nature of Transaction: The transaction was undisputedly share subscription. Once shares are genuinely allotted, the nature remains capital infusion, not debt.
2. On Notional Interest: Transfer Pricing provisions are designed to ensure income is not shifted out of India. They cannot be applied to notional income where no real income arises.
3. CBDT’s Own Position: CBDT’s instruction treating “share application money pending allotment as not a loan” binds the department.
4. Precedents: Relied on Vodafone India Services and Shell India Markets where capital account transactions were held outside TP scope.
5. Commercial Substance: In global investments, delays in allotment are common and do not imply a financing arrangement.

6. Tribunal’s Decision

• Addition Deleted: The notional interest adjustment was held unsustainable.
• Held:
  1. Share application money pending allotment cannot be treated as loan.
  2. No TP adjustment is permissible on hypothetical interest.
  3. Transfer Pricing applies to real income, not capital account transactions with no income element.

7. Legal Principle (Ratio Decidendi)

• Equity ≠ Loan: Capital transactions like share subscription cannot be recharacterized as loans merely due to delay.
• No Notional Income: Transfer Pricing provisions cannot be invoked to tax notional or hypothetical income.
• International Transaction Scope: Only cross-border dealings resulting in real income or expense can be subject to TP adjustments.

8. Significance of the Ruling

1. Relief for Multinationals: Ensures genuine share subscription transactions are not subjected to artificial TP adjustments.
2. Consistency in Law: Reinforces jurisprudence from Vodafone India Services and Shell India Markets.
3. Limits on TPO Powers: TPO cannot overreach by imputing interest without actual lending.
4. Policy Perspective: Aligns with India’s stance that capital transactions are outside TP unless they create taxable income.

9. Comparative Case Law