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PCIT vs. Aegis Limited (Bombay High Court)

COURT:
CORAM: ,
SECTION(S):
GENRE:
CATCH WORDS: , ,
COUNSEL: ,
DATE: February 28, 2019 (Date of pronouncement)
DATE: February 26, 2019 (Date of publication)
AY: -
FILE: Click here to download the file in pdf format
CITATION:
S. 92C Transfer Pricing: The TPO cannot re-characterize a transaction of subscription to redeemable preferential shares as being equivalent to interest free loans advanced by the assessee to the AE & charge notional interest thereon. The TPO cannot disregard the apparent transaction and substitute the same without any material or exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The TPO cannot question the commercial expediency of the assessee entered into such transaction

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Monday, 28.1.2019
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 1248 OF 2016
Pr. Commissioner of Income Tax-6 …..Appellant
V/s.
M/s. Aegis Limited ….Respondent
****
Mr. Ashok Kotangale I/by. Ms. Padma Divakar, Advocate for
the appellant.
Mr. Nishant Thakkar a/w. Ms. Jasmine Amalsadwala I/by.
PDS Legal, Advocate for the respondent.
CORAM : AKIL KURESHI, &
SANDEEP K. SHINDE, JJ.
Monday, 28th January, 2019.
P.C. :
1. The Revenue has filed this Appeal challenging the
judgment of the Income Tax Appellate Tribunal. The
following questions were pressed before us :
“1. Whether on the facts and circumstances of
the case and in law, the Income Tax Appellate
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Tribunal erred in not considering the fact that the
assessee had actually advanced/lent money to its
AE in the garb of preference shares leading to
attraction of provisions relating to Transfer
Pricing in the ease of the assessee in view of
Section 92B of the Act, without appreciating the
fact that these preferential shares do not carry
any dividend and are beyond scope of any capital
appreciation ?
2. Whether on the facts and circumstances of
the case and in law, the Income Tax Appellate
Tribunal erred in deleting an adjustment made
u/s. 36(1)(iii) towards interest on interest free
loans advanced to the companies under the same
management, relying on the decision of Hon’ble
Bombay High Court decision in the case of M/s.
Reliance Utilities and Power Ltd. ignoring the fact
that the facts of the case are clearly
distinguishable as the Assessing Officer in the
assessment order has clearly brought out that the
interest free funds of the assessee were invested in
share investment and fixed assets and the
assessee failed to prove the utilization of borrowed
funds for its own business ?
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2. Whether on the facts and circumstances of
the case and in law, the Income Tax Appellate
Tribunal erred in not considering the fact that the
rate of corporate guarantee fee was calculated by
the TPO by adopting a scientific approach to
differential in the corresponding credit rating of
assessee and the AE ?”
2. The respondent-assessee is a Company registered
under the Companies Act. For the Assessment Year 2009-
10, the assessee was subjected to transfer pricing regime.
Question no.1 arises out of the action of the Revenue to tax
notional interest in the hands of the assessee through
transfer pricing. The facts are that, during the period
relevant to the assessment year in question, the assessee
had subscribed to redeemable preferential shares of its
Associated Enterprises (“AE” for short) and redeemed some
of its shares at par. The Transfer Pricing Officer (“TPO” for
short) held that the preference shares were equivalent to
interest free loans advanced by the assessee and
accordingly charged the interest on notional basis. The
Tribunal by the impugned judgment, deleted the addition
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observing that the TPO had re-characterised the transaction
of subscription of shares into advancing of unsecured loans.
The Tribunal did not accept such conclusion, inter-alia on
the grounds that the TPO cannot disregard the apparent
transaction and substitute the same without any material of
exceptional circumstances pointing out that the assessee
had tried to conceal the real transaction or that the
transaction in question was sham. The Tribunal observed
that the TPO cannot question the commercial expediency of
the assessee entered into such transaction.
3. We are broadly in agreement with the view of the
Tribunal. The facts on record would suggest that the
assessee had entered into a transaction of purchase and
sale of shares of an AE. Nothing is brought on record by the
Revenue to suggest that the transaction was sham. In
absence of any material on record, the TPO could not have
treated such transaction as a loan and charged interest
thereon on notional basis. No question of law arises.
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4. Question no.2 relates to the act of the assessee of
making interest free advances to an AE. The Tribunal came
to the conclusion that the assessee had sufficient interest
free loans out of which subject advances are made. The
Tribunal referred to and relied upon the decision of this
Court in the case of Commissioner of Income-tax V/s.
Reliance Utilities and Power Ltd. reported in [2009]
313 ITR 340 (Bom) and deleted the disallowances. In
subject judgments, this Court had held and observed as
under :
“9. The Revenue being aggrieved by the
order preferred an appeal to the Tribunal.
Before the Tribunal, it was sought to be
contended that the shareholders funds of
Rs.172,10,88,000 were utilised for the
purchase of fixed assets shown in schedule D
in terms of the balance-sheet as on March
31, 1999. It was submitted that the assessee
had not reserve or own funds for making the
investments in the sister concern and,
therefore, borrowed funds had been utilised
and interest on these investments are for
non-business purposes and hence rightly
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disallowed by the Assessing Officer.
10. On the other hand on behalf of the
assessee the learned counsel relied on the
order of the Commissioner of Income-tax
(Appeals) and submitted that the assessee
had total interest-free fund of Rs.398
crores.”
5. No question of law in this respect arises.
6. Question no.3 arises out of the additions made by
the TPO in connection with the corporate guarantee given
by the assessee in favour of its AE. The Tribunal restricted
subject addition to 1% guarantee commission relying upon
other decisions of the Tribunal along similar lines. The TPO
had, however, added 5% by way of commission.
7. The learned Counsel for the assesseee drew our
attention to a judgment of this Court in the case of
Commissioner of Income-tax, Mumbai v. Everest Kento
Cylinders Ltd. Reported in [2015] 58 taxmann.com 254
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and submitted that there is a substantial difference between
a bank guarantee and a corporate guarantee. He pointed
out, that this Court in the said judgment in the case of
Everest Kento Cylinders Ltd. (supra) has recognised that in
view of inherent differences between the two lines of
guarantee, rate of commission to be charged in each cases
would be different. We may reproduce the relevant portion
of the judgment of this Court :
“10. Having considered submissions of Mr.
Malhotra for the revenue and Mr. Pardiwalla
for the assessee, we are of the view that the
order of the Tribunal as regards disallowance
under section 14A and restricting the same to
Rs.1 lac was justified in view of the material
before the Tribunal. Furthermore, having
considered the fact that a sum of
Rs.4,47,649/- was not conceded in the return
but was adhoc acceptance during the course
of assessment, the assessee could not be
bound by it. The Tribunal as the second fact
finding authority had gone into factual
aspects in great detail and therefore having
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interpreted the law as it stood on the relevant
date the order passed cannot be faulted. In
the matter of guarantee commission, the
adjustment made by the TPO were based on
instances restricted to the commercial banks
providing guarantees and did not contemplate
the issue of a Corporate Guarantee. No doubt
these are contracts of guarantee, however,
when they are Commercial banks that issue
bank guarantees which are treated as the
blood of commerce being easily encashable in
the event of default, and if the bank guarantee
had to be obtained from Commercial Banks,
the higher commission could have been
justified. In the present case, it is assessee
company that is issuing Corporate Guarantee
to the effect that if the subsidiary AE does not
repay loan availed of it from ICICI, then in
such event, the assessee would make good the
amount and repay the loan. The
considerations which applied for issuance of a
Corporate guarantee are distinct and
separate from that of bank guarantee and
accordingly we are of the view that
commission charged cannot be called in
question, in the manner TPO has done. In our
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view the comparison is not as between like
transactions but the comparisons are between
guarantees issued by the commercial banks
as against a Corporate Guarantee issued by
holding company for the benefit of its AE, a
subsidiary company. In view of the above
discussion we are of the view that the appeal
does not raise any substantial question of law
and it is dismissed. There will be no order as
to costs.”
8. It can thus be seen that, the Tribunal applied a
lower percentage of commission in the present case
considering that, what the assessee had provided was a
corporate guarantee and not a bank guarantee. No question
of law arises.
9. The Income Tax Appeal is therefore dismissed.
(SANDEEP K. SHINDE, J) (AKIL KURESHI, J)
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