Deferred shares are akin to ordinary shares, transfer pricing adjustment is upheld: ITAT
Facts:
1. The case involved the redemption of investment in deferred shares of associated enterprise, East Limited, United Kingdom. Fabindia Overseas Pvt. Ltd., the assessee, had redeemed 19,125 deferred shares in East Limited at a book value of Rs. 13,76,235/-. The transaction was reported as an international transaction in Annexure 3 of Form 3CEB, but it was not benchmarked by the assessee.
2. The deferred shares could be converted into ordinary shares under certain circumstances to prevent dilution of the assessee’s shareholding.
3. The Transfer Pricing Officer (TPO) raised concerns about the valuation of these deferred shares, as they were not benchmarked and did not have any method applied to determine their arm’s length price (ALP).
4. The TPO issued a show cause notice to the assessee, requesting a valuation report for the deferred shares. However, the assessee did not respond to the show cause notice and did not provide any valuation report for the deferred shares.
5. In the absence of a valuation report from the assessee, the TPO proceeded to determine the arms length price (ALP) for the redemption of the deferred shares.
6. The TPO calculated the transfer pricing adjustment on the redemption of deferred shares based on the valuation of ordinary shares in East Limited, which was GBP 31.24 per share as per the valuation report submitted by the assessee for other transactions.
7. The main contention of the assessee was that the deferred shares were non-marketable, did not have voting rights, and did not receive dividends. They argued that the deferred shares were redeemed at their par value, which was justified given their limited rights in comparison to ordinary shares.
ITAT Delhi held as below;
1. The deferred shares could be converted into ordinary shares and once converted as ordinary shares they acquire all the benefits and characters attributable to ordinary shares.
2. The deferred shares carried rights as they would automatically be converted into ordinary shares when the holdings of the assessee in East Ltd. falls below 25.1%.
3. Keeping in view, the fact that the deferred shares can be converted into ordinary shares without any encumbrances, the transfer pricing adjustment is upheld.
The copy of the order is as under :
