18.
CIT-6 vs. Aegis Limited [Income tax Appeal no 1248 of 2016 , Dated: 28th
January, 2019 (Bombay High Court)].
[Aegis Limited vs. ACIT-5(1); dated
27/07/2015; ITA. No 1213/Mum/2014, AY: 2009-10; Bench : K, Mum. ITAT ]
Section 92C: Transfer pricing – Notional
interest on Redemption of preference shares
money paid to Associated enterprises- transfer pricing adjustments by
re-characterising was held to be not legal
Corporate guarantee commission – No
comparison can be made between guarantees issued by commercial banks as against
a corporate guarantee issued by a holding company for benefit of its AE
The assessee subscribed to redeemable
preference shares of its AE and also redeemed some of these shares at par. The
assessee’s case had been that subscription of preference shares does not impact
profit & loss account or taxable income or any corresponding expense
resulting into deduction in the hands of the assessee. Redemption of preference
shares at par represents an uncontrolled price for shares, based on a
comparison with such uncontrolled transaction price and, therefore, such
redemption of preference share should be considered at arms length from Indian
transfer pricing prospective.
During the course of transfer pricing
proceedings, the TPO observed that the preference shares are equivalent to
interest free loan and in an uncontrolled third party scenario, interest would
be charged on such an amount, as these are not in the nature of business
advances. After making reference to FINMMDA guidelines and conducting enquires
from CRISIL u/s. 133(6), he assumed the credit ratings of the AE to be BBB(-)
and on the basis of bond rate information obtained from CRISIL, he determined
the rate of interest at 15.41% and computed the adjustment of Rs. 59,90,19,794/.
The DRP agreed that the TPO’s re-characterisations approach into loan and
charging of interest thereon is correct. However, they did not agree with the
TPO’s approach of imputing the interest using credit rating and Indian bond
yield. They instead directed the Assessing Officer to charge interest rate as
charged by the assessee which was at 13.78% and thereby also directed to add
markup of 1.65%, for risks. They directed the adjustment to made
accordingly.
Being aggrieved
with the DRP order, the assessee filed an appeal to the ITAT. The Tribunal find
that the TPO /Assessing Officer cannot disregarded any apparent transaction and
substitute it, without any material of exception circumstance highlighting that
assessee has tried to conceal the real transaction or some sham transaction has
been unearthed. The TPO cannot question the commercial expediency of the
transaction entered into by the assessee unless there are evidence and
circumstances to doubt. Here it is a case of investment in shares and it cannot
be given different colour so as to expand the scope of transfer pricing
adjustments by re-characterising it as interest free loan. Now, whether in a
third party scenario, if an independent enterprise subscribes to a share, can
it be characterise as loan. If not, then this transaction also cannot be
inferred as loan. The Co-ordinate Benches of the Tribunal have been
consistently holding that subscription of shares cannot be characterises as
loan and therefore no interest should be imputed by treating it as a loan.
Accordingly, the adjustment of interest made by the A.O was deleted.
Being aggrieved
with the ITAT order, the revenue filed an appeal to the High Court. The Court
observed that, 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. Accordingly this ground was
dismissed. Next Ground is adjustment made by 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. Being aggrieved with
the ITAT order, the revenue filed an appeal to the High Court. The Court relied
on the judgment of this Court in the case of Commissioner of Income-tax,
Mumbai v. Everest Kento Cylinders Ltd. [2015] 58 taxmann.com 254 wherein it
has been held that there is a
substantial difference between a bank guarantee and a corporate guarantee.
The ITAT
observed 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. The
Revenue appeal was dismissed. 
