Rane 1\/9 ITXA-1248-2016 (sr.20)
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\nIN THE HIGH COURT OF JUDICATURE AT BOMBAY
\nORDINARY ORIGINAL CIVIL JURISDICTION
\nINCOME TAX APPEAL NO. 1248 OF 2016
\nPr. Commissioner of Income Tax-6 \u2026..Appellant
\nV\/s.
\nM\/s. Aegis Limited \u2026.Respondent
\n****
\nMr. Ashok Kotangale I\/by. Ms. Padma Divakar, Advocate for
\nthe appellant.
\nMr. Nishant Thakkar a\/w. Ms. Jasmine Amalsadwala I\/by.
\nPDS Legal, Advocate for the respondent.
\nCORAM : AKIL KURESHI, &
\nSANDEEP K. SHINDE, JJ.
\nMonday, 28th January, 2019.
\nP.C. :
\n1. The Revenue has filed this Appeal challenging the
\njudgment of the Income Tax Appellate Tribunal. The
\nfollowing questions were pressed before us :
\n\u201c1. Whether on the facts and circumstances of
\nthe case and in law, the Income Tax Appellate
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\nTribunal erred in not considering the fact that the
\nassessee had actually advanced\/lent money to its
\nAE in the garb of preference shares leading to
\nattraction of provisions relating to Transfer
\nPricing in the ease of the assessee in view of
\nSection 92B of the Act, without appreciating the
\nfact that these preferential shares do not carry
\nany dividend and are beyond scope of any capital
\nappreciation ?
\n2. Whether on the facts and circumstances of
\nthe case and in law, the Income Tax Appellate
\nTribunal erred in deleting an adjustment made
\nu\/s. 36(1)(iii) towards interest on interest free
\nloans advanced to the companies under the same
\nmanagement, relying on the decision of Hon’ble
\nBombay High Court decision in the case of M\/s.
\nReliance Utilities and Power Ltd. ignoring the fact
\nthat the facts of the case are clearly
\ndistinguishable as the Assessing Officer in the
\nassessment order has clearly brought out that the
\ninterest free funds of the assessee were invested in
\nshare investment and fixed assets and the
\nassessee failed to prove the utilization of borrowed
\nfunds for its own business ?
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\n2. Whether on the facts and circumstances of
\nthe case and in law, the Income Tax Appellate
\nTribunal erred in not considering the fact that the
\nrate of corporate guarantee fee was calculated by
\nthe TPO by adopting a scientific approach to
\ndifferential in the corresponding credit rating of
\nassessee and the AE ?\u201d
\n2. The respondent-assessee is a Company registered
\nunder the Companies Act. For the Assessment Year 2009-
\n10, the assessee was subjected to transfer pricing regime.
\nQuestion no.1 arises out of the action of the Revenue to tax
\nnotional interest in the hands of the assessee through
\ntransfer pricing. The facts are that, during the period
\nrelevant to the assessment year in question, the assessee
\nhad subscribed to redeemable preferential shares of its
\nAssociated Enterprises (“AE” for short) and redeemed some
\nof its shares at par. The Transfer Pricing Officer (“TPO” for
\nshort) held that the preference shares were equivalent to
\ninterest free loans advanced by the assessee and
\naccordingly charged the interest on notional basis. The
\nTribunal by the impugned judgment, deleted the addition
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\nobserving that the TPO had re-characterised the transaction
\nof subscription of shares into advancing of unsecured loans.
\nThe Tribunal did not accept such conclusion, inter-alia on
\nthe grounds that the TPO cannot disregard the apparent
\ntransaction and substitute the same without any material of
\nexceptional circumstances pointing out that the assessee
\nhad tried to conceal the real transaction or that the
\ntransaction in question was sham. The Tribunal observed
\nthat the TPO cannot question the commercial expediency of
\nthe assessee entered into such transaction.
\n3. We are broadly in agreement with the view of the
\nTribunal. The facts on record would suggest that the
\nassessee had entered into a transaction of purchase and
\nsale of shares of an AE. Nothing is brought on record by the
\nRevenue to suggest that the transaction was sham. In
\nabsence of any material on record, the TPO could not have
\ntreated such transaction as a loan and charged interest
\nthereon on notional basis. No question of law arises.
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\n4. Question no.2 relates to the act of the assessee of
\nmaking interest free advances to an AE. The Tribunal came
\nto the conclusion that the assessee had sufficient interest
\nfree loans out of which subject advances are made. The
\nTribunal referred to and relied upon the decision of this
\nCourt in the case of Commissioner of Income-tax V\/s.
\nReliance Utilities and Power Ltd. reported in [2009]
\n313 ITR 340 (Bom) and deleted the disallowances. In
\nsubject judgments, this Court had held and observed as
\nunder :
\n\u201c9. The Revenue being aggrieved by the
\norder preferred an appeal to the Tribunal.
\nBefore the Tribunal, it was sought to be
\ncontended that the shareholders funds of
\nRs.172,10,88,000 were utilised for the
\npurchase of fixed assets shown in schedule D
\nin terms of the balance-sheet as on March
\n31, 1999. It was submitted that the assessee
\nhad not reserve or own funds for making the
\ninvestments in the sister concern and,
\ntherefore, borrowed funds had been utilised
\nand interest on these investments are for
\nnon-business purposes and hence rightly
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\ndisallowed by the Assessing Officer.
\n10. On the other hand on behalf of the
\nassessee the learned counsel relied on the
\norder of the Commissioner of Income-tax
\n(Appeals) and submitted that the assessee
\nhad total interest-free fund of Rs.398
\ncrores.\u201d
\n5. No question of law in this respect arises.
\n6. Question no.3 arises out of the additions made by
\nthe TPO in connection with the corporate guarantee given
\nby the assessee in favour of its AE. The Tribunal restricted
\nsubject addition to 1% guarantee commission relying upon
\nother decisions of the Tribunal along similar lines. The TPO
\nhad, however, added 5% by way of commission.
\n7. The learned Counsel for the assesseee drew our
\nattention to a judgment of this Court in the case of
\nCommissioner of Income-tax, Mumbai v. Everest Kento
\nCylinders Ltd. Reported in [2015] 58 taxmann.com 254
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\nand submitted that there is a substantial difference between
\na bank guarantee and a corporate guarantee. He pointed
\nout, that this Court in the said judgment in the case of
\nEverest Kento Cylinders Ltd. (supra) has recognised that in
\nview of inherent differences between the two lines of
\nguarantee, rate of commission to be charged in each cases
\nwould be different. We may reproduce the relevant portion
\nof the judgment of this Court :
\n\u201c10. Having considered submissions of Mr.
\nMalhotra for the revenue and Mr. Pardiwalla
\nfor the assessee, we are of the view that the
\norder of the Tribunal as regards disallowance
\nunder section 14A and restricting the same to
\nRs.1 lac was justified in view of the material
\nbefore the Tribunal. Furthermore, having
\nconsidered the fact that a sum of
\nRs.4,47,649\/- was not conceded in the return
\nbut was adhoc acceptance during the course
\nof assessment, the assessee could not be
\nbound by it. The Tribunal as the second fact
\nfinding authority had gone into factual
\naspects in great detail and therefore having
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\ninterpreted the law as it stood on the relevant
\ndate the order passed cannot be faulted. In
\nthe matter of guarantee commission, the
\nadjustment made by the TPO were based on
\ninstances restricted to the commercial banks
\nproviding guarantees and did not contemplate
\nthe issue of a Corporate Guarantee. No doubt
\nthese are contracts of guarantee, however,
\nwhen they are Commercial banks that issue
\nbank guarantees which are treated as the
\nblood of commerce being easily encashable in
\nthe event of default, and if the bank guarantee
\nhad to be obtained from Commercial Banks,
\nthe higher commission could have been
\njustified. In the present case, it is assessee
\ncompany that is issuing Corporate Guarantee
\nto the effect that if the subsidiary AE does not
\nrepay loan availed of it from ICICI, then in
\nsuch event, the assessee would make good the
\namount and repay the loan. The
\nconsiderations which applied for issuance of a
\nCorporate guarantee are distinct and
\nseparate from that of bank guarantee and
\naccordingly we are of the view that
\ncommission charged cannot be called in
\nquestion, in the manner TPO has done. In our
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\nview the comparison is not as between like
\ntransactions but the comparisons are between
\nguarantees issued by the commercial banks
\nas against a Corporate Guarantee issued by
\nholding company for the benefit of its AE, a
\nsubsidiary company. In view of the above
\ndiscussion we are of the view that the appeal
\ndoes not raise any substantial question of law
\nand it is dismissed. There will be no order as
\nto costs.\u201d
\n8. It can thus be seen that, the Tribunal applied a
\nlower percentage of commission in the present case
\nconsidering that, what the assessee had provided was a
\ncorporate guarantee and not a bank guarantee. No question
\nof law arises.
\n9. The Income Tax Appeal is therefore dismissed.
\n(SANDEEP K. SHINDE, J) (AKIL KURESHI, J)
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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<\/p>\n