AEGIS LTD, MUMBAI V. DCIT CIR 6(1)(1), MUMBAI

ITA 7348/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5059 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2013-2014
• Appeal Filed On: 22-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ABHA KALA CHANDA
• Assessee Lawyers: PRANAY GANDHI ARS
• Keywords: Capital asset; Transfer pricing; Earning of tax free income; Wholly owned subsidiary; Commercial expediency
• Section: 6; 271(1)(c); 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K , MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO. 7348/MUM/2017 ASSESSMENT YEAR : 2013-14 AEGIS LIMITED, EQUINOX BUSINESS PARK, TOWER 2, PENINSULA TECHNO PARK, OFF BKC, LBS MARG, KURLA(W), MUMBAI [PAN : AAACE 8354 Q] VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(1), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAJAN VORA & SHRI PRANAY GANDHI, ARS RESPONDENT BY : S MT. ABHAKALA CHANDA, CIT - DR DATE OF HEARING : 20 - 11 - 2018 DATE OF PRONOUNCEMENT : 06 - 0 2 - 201 9 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER (AO) U/S. 143(3) R.W.S. 144C(13) OF THE ITA NO. 7348/MUM/2017 : 2 : INCOME TAX ACT [ACT] PASSED IN PURSUANCE TO THE DIR ECTIONS OF THE LD. DISPUTE RESOLUTION PANEL(HEREINAFTER CALLED DRP). 2. GROUND NOS. 1 & 2 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 3. THE ISSUE RAISED IN GROUND NOS. 3 TO 6 IS AGAIN ST THE TRANSFER PRICING [TP] ADJUSTMENT OF RS. 7,22,77 ,019/- ON ACCOUNT OF GUARANTEE COMMISSION IN RESPECT OF CORPO RATE GUARANTEE PROVIDED BY THE ASSESSEE TO ITS ASSOCIATE D ENTERPRISES [AES]. 3.1. THE FACTS IN BRIEF ARE THAT - ASSESSEE HAS GI VEN CORPORATE GUARANTEE TO AXIS BANK TO EXTEND FOREIGN CURRENCY LOAN OF USD 19,000,000 TO ITS 100% SUBSIDIARY MAIN STREET 741 (PTY) LTD. THE GUARANTEE GIVEN WAS FOR RS. 1,03,30,00,000/-. SIMILARLY, ASSESSEE HAS GIVEN GU ARANTEES TO EXIM BANK, DEUTSCHE BANK AG, SINGAPORE BRANCH, ING BANK N.V., SINGAPORE BRANCH, MACQUERIE CAPITAL (SINGAPOR E) PTE. LTD., FOR SECURING FOREIGN CURRENCY LOANS TO VARI OUS BODIES AND ENTITIES. THE TRANSFER PRICING OFFICER [TPO] DE TERMINED THE ARMS LENGTH PRICE [ALP] OF GUARANTEE COMMISSION AT 1.75% BASED ON ADHOC CREDIT RATING OF ASSESSEE AND ITS AE AND ITA NO. 7348/MUM/2017 : 3 : DISPUTE RESOLUTION PANEL [DRP] ALSO UPHELD THE ORDE R OF THE TPO IN APPLYING ALP AT 1.75% BUT GIVEN PARTIAL RELI EF BY DIRECTING TO COMPUTE THE GUARANTEE ONLY FOR THE PER IOD OF GUARANTEE AS AGAINST THE ENTIRE YEAR. 3.2. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE OF GUARANTEE COMMISSION IS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF THE C O-ORDINATE BENCHES OF THE TRIBUNAL IN AYS. 2009-10, 2010-11, 2 011-12 & 2012-13, WHEREIN THE CO-ORDINATE BENCHES HAVE HELD THAT GUARANTEE COMMISSION OF 1% OF THE OUTSTANDING GUARA NTEE AMOUNT SHOULD BE CHARGED TO BENCHMARK THE GUARANTEE COMMISSION. 3.3. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE DECISIONS RELIED UPON. SINCE THIS ISSUE HAS ALR EADY BEEN DECIDED BY THE VARIOUS CO-ORDINATE BENCHES IN FAVOU R OF THE ASSESSEE IN THE EARLIER YEARS, WE THEREFORE ,RESPEC TFULLY FOLLOWING THE SAME, DIRECT THE AO/TPO TO APPLY THE GUARANTEE COMMISSION OF 1%. GROUND NOS. 3 TO 6 RAISED BY THE ASSESSEE ARE ALLOWED. ITA NO. 7348/MUM/2017 : 4 : 4. THE ISSUE RAISED IN GROUND NOS. 7 TO 10 IS AGAI NST THE TP ADJUSTMENT OF RS. 20,07,35,929/- IN RESPECT OF SUBSCRIPTION AND REDEMPTION OF PREFERENCE SHARE CAP ITAL. 4.1. THE FACTS IN BRIEF ARE THAT DURING THE YEAR UNDER CONSIDERATION, THERE WAS REDEMPTION OF PREFERENCE S HARES HELD IN ESSAR SERVICES (MAURITIUS) AND THERE WAS NO FRES H SUBSCRIPTION OF PREFERENCE SHARES. TPO RE-CHARACTER IZED THE SAID TRANSACTION AS INTEREST FREE LOAN AND APPLIED INTEREST @ 11.91%, USING THE BOND RATES AND PROPOSED A TRANSFE R PRICING ADJUSTMENT OF RS. 70.13 CRORES. DRP IN PRINCIPLE, UPHELD THE ASSESSMENT MADE BY THE TPO, HOWEVER, THE INTEREST R ATE WAS REDUCED TO LONDON INTER-BANK OFFERED RATE [LIBOR]+3 00 BASIS POINTS, FOLLOWING THE EARLIER ORDER, RESULTING INTO THE REDUCTION IN TRANSFER PRICING ADJUSTMENTS TO RS. 20.07 CRORES . 4.2. LD. AR SUBMITTED BEFORE THE BENCH THAT THE IS SUE INVOLVED IN GROUND NOS. 7 TO 10 HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF THE CO-ORDINATE BE NCHES OF THE TRIBUNAL IN AYS. 2009-10, 2010-11, 2011-12 & 20 12-13, WHEREIN THE CO-ORDINATE BENCHES HAVE HELD THAT THE SUBSCRIPTION AND REDEMPTION OF SHARES CANNOT BE R E- ITA NO. 7348/MUM/2017 : 5 : CHARACTERIZED AS LOAN AND THEREFORE NO INTEREST SHO ULD BE CHARGED ON THE SAID RE-CHARACTERIZED LOAN. LD. AR A LSO SUBMITTED THAT THE CO-ORDINATE BENCHES HAVE HELD TH AT THE COMMERCIAL EXPEDIENCY OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE, CANNOT BE QUESTIONED BY THE T PO, UNLESS THERE ARE EVIDENCES AND CIRCUMSTANCES TO DOUBT AND IT CANNOT BE GIVEN DIFFERENT COLOURS SO AS TO EXPAND THE SCOP E OF TP ADJUSTMENT BY RE-CHARACTERIZING IT AS INTEREST FREE LOAN. 4.3. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE DECISIONS RELIED UPON. SINCE THIS ISSUE HAS ALR EADY BEEN DECIDED BY THE VARIOUS CO-ORDINATE BENCHES IN FAVOU R OF THE ASSESSEE IN THE EARLIER YEARS, WE, THEREFORE, RESPE CTFULLY FOLLOWING THE SAME DIRECT THE AO/TPO TO DO IT ACCO RDINGLY. GROUND NOS. 7 TO 10 RAISED BY THE ASSESSEE ARE ALLO WED. 5. THE ISSUE RAISED IN GROUND NOS. 11 TO 13 IS AGA INST THE DISALLOWANCE OF INTEREST EXPENSES U/S. 36(1)(II I) OF THE ACT AMOUNTING TO RS. 1,25,18,107/-. 5.1. THE FACTS IN BRIEF ARE THAT ASSESSEE HAS AD VANCED MONEY TO SUBSIDIARIES/GROUP CONCERNS WHICH WERE RS. 10.51 CRORES AS ON 31-03-2013. THE ASSESSEE HAS OWN FUNDS OF ITA NO. 7348/MUM/2017 : 6 : RS.22.93 CRORES AS ON THE SAID DATE. THE AO HELD T HAT THE ASSESSEE HAS NOT ESTABLISHED THE COMMERCIAL EXPEDIE NCY FOR ADVANCING INTEREST FREE LOANS TO SISTER CONCERNS/SU BSIDIARIES AND THE DRP HAS CONFIRMED THE ORDER OF AO. 5.2. LD. AR SUBMITTED BEFORE THE BENCH THAT THE IS SUE INVOLVED IN GROUND NOS. 11 TO 13 HAS ALSO BEEN DECI DED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF THE CO-O RDINATE BENCHES OF THE TRIBUNAL IN AYS. 2009-10, 2010-11, 2 011-12 & 2012-13 UNDER SIMILAR FACTS, WHEREIN THE CO-ORDINAT E BENCHES HAVE HELD THAT WHERE THE ASSESSEE HAS SUBSTANTIAL O WN FUNDS, THEN PRESUMPTION IS THAT ASSESSEE HAS GIVEN ADVANCE S TO ITS SISTER CONCERNS FROM ITS OWN FUNDS. THUS, FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASES OF CIT VS. RELIANCE UTILITIES LTD[313 ITR 340 ] (BOMBAY HIGH COURT) AND CIT VS. HDFC BANK LTD., IN ITA NO. 330 OF 2012) (BOMBAY HIGH COURT), DT. 23-07-2014, THE ISSU E HAS BEEN DECIDED IN FAVOUR OF ASSESSEE. 5.3. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE DECISIONS RELIED UPON. SINCE THIS ISSUE IS ALSO SQUARELY COVERED BY THE DECISIONS OF VARIOUS CO-ORDINATE BEN CHES IN ITA NO. 7348/MUM/2017 : 7 : FAVOUR OF THE ASSESSEE IN THE EARLIER YEARS I.E., 2 009-10 TO 2012-13,WE, THEREFORE, RESPECTFULLY FOLLOWING THE S AME DIRECT THE AO/TPO TO DELETE THE DISALLOWANCE. GROUND NOS. 11 TO 13 RAISED BY THE ASSESSEE ARE ALLOWED. 6. THE ISSUE RAISED IN GROUND NOS. 14 TO 16 IS AGA INST THE DISALLOWANCE U/S. 14A OF THE ACT TO THE TUNE OF RS. 1,17,74,975/- COMPUTED @ 0.5% OF AVERAGE VALUE OF INVESTMENTS ON ACCOUNT OF ADMINISTRATIVE EXPENSES. 6.1. THE FACTS IN BRIEF ARE THAT - ASSESSEE HAD MA DE INVESTMENTS OF RS. 235.5 CRORES IN AGC NETWORKS LTD . THE SAID INVESTMENTS WERE MADE IN AY. 2011-12 AND AY. 2 012-13 OUT OF ASSESSEES OWN FUNDS. THE ASSESSEE EARNED D IVIDEND OF RS. 16.01 CRORES FROM THE SAID INVESTMENT FOR THE Y EAR UNDER CONSIDERATION FROM THE SAID INVESTMENTS. AO INVOKED THE PROVISIONS OF SECTION 14A AND MADE A DISALLOWANCE O F RS. 4.42 CRORES AS PER RULE 8D(2)(II) AND 8D(2)(III). THE DRP IN PRINCIPLE UPHELD THE DISALLOWANCE U/S.14A, HOWEVER, DELETED THE ADDITION PROPOSED AS PER RULE 8D(2)(II) AS THE ASSESSEE HAS SUFFICIENT OWN FUNDS FOR INVESTMENT. ITA NO. 7348/MUM/2017 : 8 : 6.2. LD. AR SUBMITTED BEFORE THE BENCH THAT THE IS SUE OF INVESTMENTS-IN-QUESTION HAS ALSO BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF THE CO-ORDINATE BE NCHES OF THE TRIBUNAL IN AYS. 2011-12 & 2012-13, WHEREIN THE CO- ORDINATE BENCHES HAVE HELD THAT NO DISALLOWANCE WAS MADE BY THE AO IN THE EARLIER TWO YEARS. LD. AR ALSO SUBMI TTED THAT THE AO HAS FAILED TO RECORD ANY SATISFACTION FOR MA KING DISALLOWANCE U/S. 14A OF THE ACT, WHICH IS A PRE-CO NDITION FOR INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT A ND THEREFORE, DISALLOWANCE OF RS. 1.17 CRORES SHOULD B E DELETED. THE LD. COUNSEL FOR THE ASSESSEE WITHOUT PREJUDICE ALSO SUBMITTED THAT IF AT ALL THE DISALLOWANCE IS TO BE MADE, THE SAME SHOULD BE MADE IN PROPORTION OF EXEMPT INCOME TO TOTAL INCOME (I.E., 1.77%) OUT OF MISCELLANEOUS EXPENSES INCURRED BY THE ASSESSEE. IF THE SAME PRINCIPLE IS APPLIED, TH E DISALLOWANCE U/S. 14A WORKS OUT TO RS. 3.89 LAKHS. LD. AR ALSO DREW OUR ATTENTION TO THE WORKING OF THE SAID AMOUNT, ATTACHED IN THE APPENDIX-I. LD. AR IN DEFENSE OF H IS ARGUMENT, ARGUED THAT NO DISALLOWANCE IS TO BE MADE , WHERE THE ASSESSEE HAS NOT INCURRED ANY EXPENSES FOR EARN ING ITA NO. 7348/MUM/2017 : 9 : EXEMPT INCOME AS PER RULES AND RELIED ON THE FOLLOW ING DECISIONS: I. GODREJ & BOYCE MANUFACTURING COMPANY LTD., [394 ITR 449] (SC); II. CIT VS. CENTRAL BANK OF INDIA [264 ITR 522] (BOMBAY HIGH COURT); III. STATE BANK OF INDORE VS. CIT [193 CTR 62] (MADHYA PRADESH HIGH COURT); IV. EICHER LTD., [101 TTJ 369] (DELHI ITAT); V. WIMCO SEEDINGS LIMITED VS. DCIT [107 ITD 267]; 6.2.I. LD. AR ALSO RELIED ON THE FOLLOWING DECISIO NS, ON THE ISSUE OF NON-RECORDING OF SATISFACTION: I. MAXOPP INVESTMENT LIMITED [402 ITR 640] (SC); II. GODREJ & BOYCE MANUFACTURING COMPANY LTD., [394 ITR 449] (SC); III. RELIANCE CAPITAL ASSET MANAGEMENT LTD., (ITA NO. 48 7 OF 2015), DT. 19-09-2017 (BOMBAY HIGH COURT) AFFIRMED BY HON'BLE SC (98 TAXMANN.COM 361) (SC); ITA NO. 7348/MUM/2017 : 10 : IV. ARUN GRUH LTD., [168 ITD 518], DT. 15-12-2017 (MUMBAI TRIBUNAL); V. LEENA KASBEKAR [166 ITD 440], DT. 28-07-2017 (MUMBAI TRIBUNAL); 6.3. LD. DR ON THE OTHER HAND ARGUED THAT THE APPLICATION OF SECTION 14A OF THE ACT IS MANDATORY AND THEREFORE THE PROVISIONS OF SECTION 14A OF THE ACT CANNOT BE SUBSTITUTED BY ANY ARBITRARY CALCULATION, AS BEEN P ROPOSED BY THE LD. AR. 6.4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE DECISIONS RELIED UPON. WE OBSERVE THAT IN THIS CASE, THE ASSESSEE HAS NOT MADE ANY SUO MOTU DISALLOWANCE TOWARDS EXEMPT INCOME, WHICH WAS TO THE TUNE OF RS. 16.01 C RORES DURING THE YEAR SO THERE IS NO REASONS TO GO INTO T HE SATISFACTION BY THE AO BEFORE INVOKING PROVISIONS O F 14A RULE 8D. UNDISPUTEDLY, NO INVESTMENT WAS MADE DURING THE YEAR IN THE SUBSIDIARY COMPANIES. LD. DRP DELETED THE DISAL LOWANCE U/S. 14A R.W. RULE 8D(2)(II) BY RECORDING A FINDING ON FACTS THAT ASSESSEES OWN FUNDS WERE MORE THAN THE INVESTMENT IN THE SUBSIDIARY COMPANIES. THEREFORE, NO DISALLOWANCE U /S. 14A ITA NO. 7348/MUM/2017 : 11 : R.W. RULE 8D(2)(II) IS REQUIRED TO BE MADE BY FOLLO WING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F GODREJ & BOYCE MANUFACTURING COMPANY LTD., [394 ITR 449] (SC ). WHEREAS THE DRP SUSTAINED THE ADDITION OF RS.1,17,7 4,975/- UNDER RULE 8D(2)(III) TOWARDS ADMINISTRATIVE EXPENS ES. IN OUR VIEW, THE RATIO LAID DOWN IN THE DECISION OF HON'BL E SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LIMITED [402 ITR 640] (SC) (SUPRA) IS THAT NO SATISFACTION IS REQUIRED TO BE RECORDED, WHERE NO DISALLOWANCE IS MADE BY ASSESSEE TOWARDS E XEMPT INCOME. WE THEREFORE OF THE VIEW THAT THE PROVISION S OF SECTION 14A R.W. RULE 8D(2)(III) ARE APPLICABLE IN THIS CAS E AND DRP WAS RIGHT IN SUSTAINING THE DISALLOWANCE OF RS. 1,1 7,74,975/-. 7. THE ISSUE RAISED IN GROUND NO. 17 IS QUA NON- GRANT OF FOREIGN TAX CREDIT OF RS. 1,84,04,025/-. 7.1. AFTER HEARING BOTH THE PARTIES AND PERUSING T HE FACTS OF THE CASE, WE OBSERVE THAT THE ASSESSEE FIL ED RECTIFICATION APPLICATION DT. 24-11-2017, THIS IS P ENDING FOR DISPOSAL. SO WE FEEL IT FIT AND PROPER TO DIRECT T HE AO TO DISPOSE THE SAME. ACCORDINGLY THE AO IS HEREBY DIR ECTED TO DECIDE THE RECTIFICATION APPLICATION FILED BY THE A SSESSEE. ITA NO. 7348/MUM/2017 : 12 : 8. THE ISSUES RAISED IN GROUND NOS. 18 & 19 ARE CONSEQUENTIAL IN NATURE, NEEDS NO ADJUDICATION. 9. THE ISSUE RAISED IN GROUND NO. 20 IS REGARDING INITIATING PENALTY PROCEEDINGS U/S. 271(1)(C) OF TH E ACT, WHICH IS PREMATURE, HENCE THE SAME IS DISMISSED. 10. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 06.02.2019 SD/- SD/- (SAKTIJIT DEY) (RAJESH KUMAR) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /MUMBAI; /DATED : 06.02.2019 TNMM COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. DISPUTE RESOLUTION PANEL (DRP), MUMBAI 4. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICING), MUMBAI 5. DR, ITAT, MUMBAI 6. GUARD FILE / BY ORDER, //TRUE COPY// / (ASST. REGISTRAR) , / ITAT, MUMBAI