AEGIS LIMITED, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-6(1)(1), MUMBAI

ITA 125/MUM/2019

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 7132 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2014-2015
• Appeal Filed On: 10-01-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI N.K. PRADHAN , ACCOUNTANT MEMBER ITA NO. 125 / MUM . /2019 ( ASSESSMENT YEAR : 20 14 15 ) AEGIS LIMITED ESSAR HOUSE, 11, K.K. MARG MAHALAXMI, MUMBAI 400 034 PAN AAACE8354Q . APPELLANT V/S DY. COMMISSIONER OF INCOME TAX CIRCLE 6(1)(1), MUMBAI . RESPONDENT ASSESS EE BY : SHRI R AJAN R. VORA REVENUE BY : SHRI ANAND MOHAN DATE OF HEARING 2 4 .0 4 .201 9 DATE OF ORDER 30.04.2019 O R D E R PER SAKTIJIT DEY. J.M. T HE AFORESAID APPEAL HA S BEEN FILED BY THE ASSESSEE CHALLENGING THE FINAL ASSESSMENT ORDER DATED 31 ST OCTOBER 2018, PASSED UNDER SECTION 143(3) R/W SECTION 144C(13) OF THE INCOME - TAX ACT, 1961 (FOR SHORT 'THE ACT') FOR THE ASSESSMENT YEAR 2014 15 , IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL 1 (DR P ), MUMBAI. 2 AEGIS LIMITED 2 . GROUNDS NO.1 AND 2 BEING GENERAL IN NATURE DO NOT REQUIRE SPECIFIC ADJUDICATION. 3 . IN GROUNDS NO.3 TO 6, THE ASSESSEE HAS CHALLENGED THE ADDITION MADE OF ` 21,63,45,308, ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT BY RE CHARACTERIZING THE CLOSING BALANCE OF PREFERENTIAL SHARES HELD BY THE ASSESSEE AS INTEREST FREE LOAN T O THE ASSOCIATED EN TERPRISES (A E). 4 . BRIEF FACTS ARE, THE ASSESSEE , AN INDIAN COMPANY , IS ENGAGED IN PROVIDING CUSTOMER INTERACTION, BACK OFFICE, RECOVERY AND COLLECTION SERVICE IN THE SECTOR OF TELECOM, RETAIL, FINANCIAL SERVICE, ENERGY, EDUCATION AND LOGISTIC. IT PROVIDES C ALL CENTRE SERVICE S THROUGH VARIOUS CENT R E S IN INDIA. IN THE COURSE OF PROCEEDINGS BEFORE HIM, THE TRANSFER PRICING OFFICER NOTICED THAT IN THE AUDIT REPORT, THE ASSESSEE HAS SHOWN CLOSING BALANCE OF PREFERENTIAL SHARES WITH ITS A.E., ESSAR SERVICES (MAURI TIUS), WORTH ` 587,41,59,862. HE OB SERVED THAT THE NATURE OF SHARES IS ZERO PERCENT NON CONVERTIBLE PREFERENTIAL REDEEMABLE AT PAR. HE ALSO NOTICED THAT THE AE WAS NOT LIABLE TO PAY ANY CONSIDERATION WITH THESE SHARES. THEREFORE, THE TRANSFER PRICING OFFIC ER WAS OF THE VIEW THAT THE TRANSACTION RELATING TO SUBSCR IPTION IN PREFERENTIAL SHARES IS INTERNATIONAL TRANSACTION COVERED BY EXPLANATION 1(C) TO SECTION 92B OF THE ACT. HE W AS OF THE VIEW THAT THE UNDERLYING INTENTION FOR INVESTMENT IN PREFERENTIAL SHAR ES IS TO GRANT INTEREST FREE LOAN TO THE 3 AEGIS LIMITED A E. ACCORDINGLY, HE CALLED UPON THE ASSESSEE TO EXPLAIN WHY ARM'S LENGTH PRICE OF INTEREST CHARGEABLE ON THE CLOSING BALANCE OF PREFERENTIAL SHARES SHOULD NOT BE DETE RMINED. THOUGH, THE ASSESSEE OBJECTED TO THE PROP OSED ADJUSTMENT, HOWEVER, THE TRANSFER PRICING OFFICER REJECTING THE OBJECTION O F THE ASSESSEE RE CHARACTERIZED THE CLOSING BALANCE OF PREFERENTIAL SHARES AS INTEREST FREE LOAN AND COMPUTED ARM'S LENGTH PRICE OF THE INTEREST BY APPLYING THE RATE OF 11.91%. THIS RESULTED IN AN ADJUSTMENT OF ` 69,96,12,440. THE AFORESAID TRANSFER PRICING ADJUSTMENT WAS ADDED BACK TO THE INCOME OF THE ASSESSEE IN THE DRAFT ASSESSMENT ORDER. 5 . THOUGH, THE ASSESSEE CHALLENGED THE AFORESAID ADDITION BEFORE LEARNED DRP, HOWEVER, LE ARNED DRP, IN SUM AND SUBSTANCE , ENDORSED THE VIEW EXPRESSED BY THE TRANSFER PRICING OFFICER. OF COURSE , LEARNED DRP MODIFIED THE DECISION OF THE TRANSFER PRICING OFFICER IN APPLYING THE RATE OF INTEREST @ 11.91% AND DIRECTED TO CHARGE INTEREST AT LIBOR PLUS 300 BASIS POINTS. IN VIEW OF SUCH DIRECTIONS OF LEARNED DRP, THE ADDITION WAS REDUCED TO ` 21,63,45,308. 6 . SHRI RAJAN VORA, LEAR NED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED , THE ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE IN THE ASSESSMENT YEAR 2009 10 BY HOLDING THAT RE CHARACTERIZATION OF PREFERENTIAL SHARES TO LOAN IS INVALID. HE SUBMITTED , THE A FORESAID DECISION OF THE TRIBUNAL WAS UPHELD BY THE 4 AEGIS LIMITED HON'BLE JURISDICTIONAL HIGH COURT WHILE DISMISSING REVENUES APPEAL IN ASSESSMENT YEAR 2009 10, VIDE JUDGMENT DATED 28 TH JANUARY 2019, IN ITA NO.1248/2016. IN THIS CONTEXT, HE DREW OUR ATTENTION TO THE DE CISIONS OF THE TRIBUNAL AND THE HON'BLE JURISDICTIONAL HIGH COURT. HE SUBMITTED , THE SAME VIEW WAS REITERATED BY THE TRIBUNAL WHILE DECIDING ASSESSEES APPEAL FOR THE ASSESSMENT YEAR S 2010 11, 2011 12, 2012 13 AND 2013 14. THUS, HE SUBMITTED , THE ISSUE STA NDS COVERED BY THE ASSESSEE BY VIRTUE OF THE AFORESAID DECISIONS OF THE TRIBUNAL AND THE HON'BLE JURISDICTIONAL HIGH COURT. 7 . SHRI ANAND MOHAN, LEARNED DEPARTMENTAL REPRESENTATIVE FAIRLY SUBMITTED , IN THE PRECEDING ASSESSMENT YEAR S THIS ISSUE HAS BEEN DECID ED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL AND THE HON'BLE JURISDICTIONAL HIGH COURT. 8 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AS COULD BE SEEN FROM THE FACTS ON RECORD, THE TRANSFER PRICING OFFICER WHILE MAKING THE DISPUTED ADJUSTMENT HAS RE CHARACTERIZED THE INVESTMENT MADE IN PREFERENTIAL SHARES HELD BY T HE ASSESSEE WITH ITS OVERSEAS AE AS INTEREST FREE LOAN AND HAS ACCORDINGLY DETERMINED THE ARM'S LENGTH PRICE OF INTEREST CHARGEABLE ON SUCH LOAN AT 11.91%. NOTABLY, WHILE D OING SO, THE TRANSFER PRICI NG OFFICER, THOUGH, HAS TAKEN NO T E OF THE FACT THAT THE TRIBUNAL WHILE DECIDING ASSESSEES APPEAL IN THE ASSESSMENT YEAR 2009 10 HAS DISAPPROVED SUCH RE 5 AEGIS LIMITED CHARACTERIZATION OF PREFERENTIAL SHARES TO LOAN, HOWEVER, HE DID NOT FOLLOW THE DECISION OF THE TRIBUNAL ON THE REASONING THAT THE APPEAL FILED BY THE REVENUE AGAINST THE SAID ORDER OF THE TRIBUNAL IS PENDING BEFORE THE HON'BLE JURISDICTIONAL HIGH COURT. HOWEVER, AS BROUGHT TO OUR NOTICE BY THE LEARNED AUTHORISED REPRESENTATIVE , I N THE MEANWHILE , THE HON'BLE JURISDICTI ONAL HIGH COURT HAS DISPOSED OF THE APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2009 10, VIDE JUDGMENT DATED 28 TH JANUARY 2019, IN ITA NO.1248/2016, UPHOLDING THE DECISION OF THE TRIBUNAL. FURTHER, WHILE DECID ING IDENTICAL ISSUE IN THE ASSESSMENT YEAR S 2010 11 TO 2013 14, THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN THE ORDERS REFERRED TO HEREIN BELOW: I ) ITA NO.7694/MUM./2014, DATED 08.02.2017, FOR A.Y. 2010 11; II ) ITA NO.962 & 1556/MUM./2016, DATED 12.05.2017, FOR A.Y. 2011 12 AND 2012 13; AND III ) ITA NO.7348/MUM./2017, DATED 06.02.2019, FOR A.Y. 2013 14. 9 . F ACTS BEING IDENTICAL, FOLLOWING THE CONSISTENT VIEW OF THE TRIBUNAL AND THE HON'BLE JURISDICTIONAL HIGH COURT, WE HOLD THAT R E CHARACTERIZATION OF PREFERENTIAL SHARES AS INTEREST FREE LOAN IS INVALID. ACCORDINGLY, WE DELETE THE ADDITION MADE ON ACCOUNT OF ADJUSTMENT 6 AEGIS LIMITED MADE BY THE TRANSFER PRICING OFFICER ON THIS ACCOUNT. GROUNDS ARE ALLOWED. 10 . IN GROUNDS NO.7 TO 10, THE ASSESSEE HA S CHALLENGED THE DISALLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 36(1)(III) OF THE ACT AMOUNTING TO ` 76,90,218. 11 . BRIEF FACTS ARE, DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS DEBITED INTEREST EXPENDITURE OF ` 2 7,45,52,925, TO THE PROFIT & LOSS ACCOUNT ON ACCOUNT OF INTEREST ON LOAN. FURTHER, HE NOTICED THAT AS PER THE BALANCE SHEET, THE ASSESSEE HAS GIVEN ADV ANCE TO RELATED PARTIES AMOUNTING TO ` 77.64 CRORE AND TO SUBSIDIARY AMOUNTING TO ` 162,67 CRORE. BEING O F THE VIEW THAT A PART OF BORROWED FUND WAS UTILIZED FOR ADVANCING LOANS TO THE RELATED PARTIES AND SUBSIDIARIES, THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO EXPLAIN WHY INTEREST EXPENDITURE SHOULD NOT BE DISALLOWED. THOUGH, THE ASSESSEE OBJECTED TO THE PROPOSED DISALLOWANCE BY STATING THAT BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS , HENCE, THE INTEREST PAID ON SUCH FUNDS ARE ALLOWABLE AS DEDUCTION, HOWEVER, THE ASSESSING OFFICER REJECTING THE EXPLANATION OF THE ASSESSEE HELD THAT INTERE ST EXPENDITURE RELATING TO INTEREST FREE LOAN ADVANCED TO RELATED PARTIES AMOUNTING TO ` 51,56,903, HAS TO BE DISALLOWED. ACCORDINGLY, APPLYING THE INTEREST RATE OF 11.91%, HE DISALLOWED AN AMOUNT OF ` 61,41,187. FURTHER, HE OBSERVED THAT THE ASSESSEE HAD 7 AEGIS LIMITED ADVANCED LOAN TO A FOREIGN SUBSIDIARY AMOUNTING TO ` 162,66,70,442, AT THE INTEREST RATE OF 9%. BEING OF THE VIEW THAT THE RATE OF INTEREST CHARGED AT 9% IS LOWER THAN THE RATE OF INTEREST OF 11.91% WHICH IS APPLICABLE, THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF ` 70,76,031. BEING AGGRIEVED WITH SUCH DISALLOWANCE, THOUGH, THE ASSESSEE RAISED OBJECTION S BEFORE LEARNED DRP, HOWEVER, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS SUSTAINED. 12 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE ASSESSEE HAD ADVANCED INTEREST FREE LOAN TO TWO RELATED DOMESTIC COMPANIES VIZ. AEGIS BPO SER VICES GURGAON LTD. AND GLOBAL VA NTEDGE PVT. LTD., AGGREGATING TO ` 51,56,903. HE SUBMITTED , THE ENTIRE LOAN WAS ADVANCED OUT OF INTEREST FREE SURPLUS F UND AVA ILABLE WITH THE ASSESSEE. IN THIS CONTEXT, HE DREW OUR ATTENTION TO THE FUND FLOW STATEMENT SHOWING THE AVAILABILITY OF SURPLUS FUNDS. THUS, HE SUBMITTED , SINCE THE INTEREST FREE LOAN WAS ADVANCED OUT OF OWN FUND, NO DISALLOWANCE UNDER SECTION 36(1)(III) O F THE ACT CAN BE MADE AS PER THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S RELIANCE UTILITIES AND POWER LTD., [2009] 313 ITR 340 (BOM.). FURTHER, HE SUBMITTED , SIMILAR DISALLOWANCE MADE IN THE ASSESSMENT YEAR 2009 10 BY THE ASSESSING OFF ICER WAS DELETED BY THE TRIBUNAL AND THE SAID DECISION OF THE TRIBUNAL WAS UPHELD BY THE HON'BLE JURISDICTIONAL HIGH COURT. HE SUBMITTED , THE SAME VIEW WAS REITERATED BY THE TRIBUNAL WHILE 8 AEGIS LIMITED DECIDING THE ISSUE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR S 2011 12, 2011 12, 2012 13 AND 2013 14. 13 . AS REGARDS THE LOAN ADVANCED TO THE OVERSEAS AE , THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE ASSESSEE HAS CHARGED INTEREST @ 9% ON SUCH LOANS AND THE TRANSFER PR ICING OFFICER IN THE PROCEEDING UNDER SECTION 92CA OF THE ACT HAS ACCEPTED SUCH INTEREST PAYMENT TO BE AT ARM'S LENGTH. THEREFORE, HE SUBMITTED , THE ASSESSING OFFICER CANNOT MAKE ADDITION BY APPLYING THE INTEREST RATE OF 11.91%. 14 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE O BSERVATIONS OF THE ASSESSING OFFICER AND LEARNED DRP. 15 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AS REGARDS THE INTEREST FREE LOANS ADVANCED TO THE R ELATED PARTIES IN INDIA AMOUNTING TO ` 51,56,903, IT IS SEEN FROM THE MATERIAL O N RECORD THAT THE ASSESSEE HAD HUGE SURPLUS FUND AVAILABLE WITH IT AMOUNTING TO ` 1844,95,00,000. THEREFORE, IT IS MANIFEST , OWN FUNDS AVAILABLE WITH THE ASSESSEE WAS FAR IN EXCES S TO THE INTEREST FREE LOANS AD VANCED TO THE RELATED PARTIES. THAT BEING THE CASE, NO DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT CAN BE MADE OUT OF THE INTEREST EXPENDITURE IN VIEW OF THE RATIO LAID DOWN IN THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN RELIANCE UTILITIES AND POWER LTD. (SUPRA). NOTABLY, SIMILAR DIS ALLOWANCE WAS MADE BY THE ASSESSING 9 AEGIS LIMITED OFFICER IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2009 10. THE TRIBUNAL HAVING FOUND THAT THE ASSESSEE HAD SUFFICIENT FUND AVAILABLE WITH IT TO ADVANCE INTEREST FREE LOAN , DELETED THE DISALLOWANCE MADE BY THE ASSESSING O FFICER. THE HON'BLE JURISDICTIONAL HIGH COURT WHILE DECIDING REVENUES APPEAL ON THE ISSUE IN ITA NO.1248/2016, JUDGMENT DATED 28 TH JANUARY 2019, HAS UPHELD THE DECISION OF THE TRIBUNAL. THE SAME VIEW HAS BEEN EXPRESSED BY THE TRIBUNAL WHILE DECIDING ASSESSEES APPEAL S FOR THE ASSESSMENT YEAR S 2010 11 TO 2013 14, AS REFERRED TO ABOVE. IN VIEW OF THE AFORESAID, WE HOLD THAT DISALLOWANC E OF INTEREST EXPENDITURE CAN NOT BE MADE ON ACCOUNT OF INTEREST FREE LOAN ADVANCED TO THE RELATED PARTIES IN INDIA. 16 . AS REGARDS THE LOAN ADVANCED TO THE OVERSEAS A.E., UNDISPUTEDLY, THE ASSESSEE HAS CHARGED INTEREST @ 9% ON SUCH LOAN. IT IS ALSO A FACT ON RECORD THAT THE TRANSFER PRICING OFFICER IN THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT HAS ACCEPTED THE INTEREST CHARGED @ 9 % ON THE LOAN ADVANCED TO THE AE TO BE AT ARM'S LENGTH. THAT BEING THE CASE, THE ASSESSING OFFICER COULD NOT HAVE DISALLOWED ANY INTEREST EXPENDITURE BY APPLYING THE INTEREST RATE OF 11.91% ON AD HOC BASIS. IN VIEW OF THE AFORESAID, WE DO NOT FIND ANY JUSTIFICATION IN THE DISALLOWANCE MADE U /S 36(1)(III). ACCORDINGLY, WE DELETE THE ADDITION OF ` 76,90,218. THESE GROUNDS ARE ALL OWED. 10 AEGIS LIMITED 17 . GROUND NO.11 BEING CONSEQUENTIAL DOES NOT REQUIRE ADJUDICATION, HENCE, DISMISSED. 18 . GROUND NO.12, BEING PREMATURE AT THIS STAGE, DOES NOT REQUIRE ADJUDICATION, HENCE, DISMISSED. 19 . IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN C OURT ON 30.04.2019 SD/ - N.K. PRADHAN ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 30.04. 2 0 19 COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (SR. PRIVATE SECRETARY) ITAT, MUMBAI