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Income Tax Appellate Tribunal, ‘K‘ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against final assessment order dated 29/07/2022 passed u/s.143(3) r.w.s.144C(13) in pursuance of directions given by the ld. DRP vide order dated 14/06/2022 for the A.Y.2018-19.
In various grounds of appeal; effectively assessee has challenged two additions;
M/s. Aegis Limited firstly, (ground Nos.4-8) adjustment in respect of re- characterization of preference shares as advancing of Interest free loan and imputing interest of Rs.66,66,45,900/-; and secondly, (ground Nos.9-12) disallowance of interest expense under section 36(1)(iii) of the Act of Rs.8,13,71,812/-. The other grounds and various additional grounds raised from time to time have not been pressed; therefore, same are dismissed as not pressed.
The brief facts qua the aforesaid issue are that, Assessee Company is engaged in providing IT enabled business process and outsourcing services to its Associated Enterprises ("AEs) and third parties. As on 01/04/2017, the assessee had an outstanding balance of investment in redeemable preference shares of its AE, Essar Services Mauritius (ESM") amounting to Rs. 5,84,92 51,884/- However, the assessee did not additionally subscribe to or redeem preference shares in ESM during the said year and thus, there was no international transaction reported or benchmarked in TP study for this year.
The TPO following the approach of his predecessor for A.Y.2009-10 (in which year assessee had made subscription and also revealed such preference shares in TPSR and had then benchmarked the same), held that outstanding balance of preference shares should be considered as outstanding loan,
M/s. Aegis Limited upon which notional interest is to be imputed and charged. Before the TPO it was placed on record that, this issue has been decided in favour of the assessee by the Tribunal as well as by the Hon’ble High Court in assessee’s own case for earlier years. However, the TPO merely stated that there is a departmental SLP filed before the Hon’ble Supreme Court which is pending. Accordingly, following earlier years, TPO proceeded to impute interest on the said balance of preference share capital by re- characterizing it as interest free loan. For the purpose of benchmarking, TPO assumed credit rating of AE at BBB (-) and on the basis of bond rate information, he determined the rate of interest at 11.91% (as in earlier year) and proposed an adjustment of INR 69,66,45,900/-.
The ld. DRP agreed with the TPO's approach of re- characterization of preference shares into loan and charging interest thereon. In its directions, the ld. DRP upheld the adjustment in principle and directed the adjustment to be computed in line with directions for AY 2014-15 (i.e., at the rate of London Interbank Offered Rate (LIBOR) plus 300 basis points).
However, AO while passing the final assessment in violation of the direction of ld. DRP u/s 144C(13) for restricting Notional interest on preference share capital at LIBOR plus 300 bps, but passed the order based on the comments received from the TPO in relation to interest of Rs.1.45 Crores accrued at 9% on loans given to foreign AE on which no TP adjustment was made
M/s. Aegis Limited initially, the AO upheld the addition of Rs.66.66 Crores made in the draft order instead of reducing the adjustment as per DRP direction of computing interest at LIBOR+300 bps. It noted that on these very loans disallowance u/s 36(1)(iii) has been made separately.
Before us ld. Counsel submitted that this Tribunal in assessee’s own case A.Y 2009-10 (ITA No 1213/Mum/2014), dated 27/07/2015 has held that subscription and redemption of preference shares cannot be re-characterized as a loan transaction and therefore no interest should be imputed. Recently, the Hon'ble Bombay High Court in appeal filed by Department has not admitted the question of law on the said issue.
After considering the relevant finding during the impugned order as well as the Tribunal order at earlier years we find that this issue was decided by ITAT for first time in A.Y.2009-10 after observing as under:-
“27…. We are unable to appreciate such an approach of TPO and under what circumstances, leave above any exceptional circumstances, a transaction of subscription of shares can be re- characterized as Loan transaction. 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
M/s. Aegis Limited 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-characterizing it as interest free loan. Now whether in a third party scenario, an independent enterprise subscribes to a share, can it be characterize as loan. If not then this transaction also cannot be inferred as loan. The contention of the Ld Counsel is also supported by the Hon'ble jurisdictional High Court in the case of Bexiskier Dhboal SA, of 2011 order dated 30th August 2012 and by various other decisions, as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer. Thus, ground no. 14 is treated as allowed.”
Thereafter, against this order appeal was filed by the Revenue before the Hon’ble High Court, the Hon’ble High Court dismissed the Revenue’s appeal after observing as under:- “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."
10. Thereafter, this issue was followed by the Tribunal in A.Y.2010-11, 2011-12, 2013-14 & 2014-15. In the last order for A.Y.2017-18 again this Tribunal has decided this issue in favour of the assessee after observing as under:-
M/s. Aegis Limited “9. 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 the 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 doing so, the Transfer Pricing Officer, though, has taken note of the fact that the Tribunal while deciding assessee's appeal in the assessment year 2009-10 has disapproved such re- characterization of preferential shares to loan which has also been upheld by Hon'ble High Court, however, he did not follow the decision on the reasoning that the SLP filed by the Revenue against the said order of the High Court is pending before the Hon'ble Supreme Court However, as brought to our notice by the learned Authorised Representative, the said issue has been decided by the Hon'ble Jurisdictional High Court for the assessment year 2009-10 vide judgment dated 28th January 2019, in upholding the decision of the Tribunal. The findings of the Hon'ble High Court are as under
Similarly identical issue has been decided by co-ordinate bench of ITAT in the assessment years 2010-11to 2014-15, in favour of the assessee.
11. Since the facts being identical following the consistent view of the Tribunal and the Hon'ble Jurisdictional High Court we hold that re-characterization of preferential shares as interest free loan is invalid. Accordingly, we delete the addition made on account of the said adjustment"
Further, following the ITAT order for AY 2009-10, the addition on account of imputing notional interest on account re- characterizing subscription and redemption of preference shares as loan has also been deleted by Hon'ble ITAT in assessee's own cases for following assessment years:-
M/s. Aegis Limited AY 2010-11 in and 1209/Mum/2015 dated 8 February 2017 AY 2011-12 (ITA No 962/Mum/2016) and AY 2012-13 (ITA No 1556/Mum/2016) dated 12 May 2017 AY 2013-14 (ITA No 7438/Mum/2017) dated 6 February, 2019 and AY 2014-15 (ITA No 125/Mum/2019) dated 30 April, 2019.
Since this issue is squarely covered by the earlier decision of the Tribunal and the facts of the case have not changed in the relevant assessment year vis-à-vis last years, hence the above position is accepted. Accordingly, respectfully following the same, the said adjustment on account of re-characterizing of loan and imputing interest of Rs 66,66,45,900/- is deleted.
In the result, grounds Nos.4-8 are allowed.
One of the issue raised before us is that final assessment order has been passed in violation of direction of the ld. DRP and AO was bound to pass the assessment order in confirmation with the direction of the ld. DRP in terms of Section 144C(13) and hence, it is bad in law. Even though we agree that AO was bound to pass the assessment order in conformity with the directions of the ld. DRP and AO was failed to give the partial relief to the assessee as per ld. DRP’s direction, however, since we have already deleted the addition on merits on account of transfer pricing, this issue becomes purely academic.
Coming to the issue of disallowance of interest u/s.36(1)(iii), it was money has been advanced as interest free loans to sister concern / subsidiaries amounting to Rs.8,13,71,812/-.
M/s. Aegis Limited 16. The brief facts of the case are that during the year under consideration, as per financials of assessee, loan and advances amounting to RS. 2,27,64,78,976/- were given to the related parties by the assessee company for the purpose of its business. The details of interest and advances given to the related parties are tabulated as under: Sr.N Particulars Opening Balance Closing Balance as Remarks o as on 1 April 2017 on 31 March 2018 Loans given to Domestic Companies 1 Essar 4.18,47,945.00 4,52,94,616.00 Non-interest Projects bearing India Limited 2 Aegis 4,26,45.989.00 1,58,17,84,659.00 Non-interest Aspire bearing Consultanc y Service Limited 3 Aegis Tech 45,22,49,293.00 45,22,49,293.00 Non-interest Limited bearing 4 Essar Oil - 1,91,95,513.00 Non-interest Exploration bearing & Production Limited 5 AGC 1,31,58,900.00 - Networks Ltd
M/s. Aegis Limited 6 Essar 56,93,451.00 - Projects (I) Ltd (A) 55,55,95,578.00 2,09,85,24,081.00 Loans given to Foreign AE 7 Essar 7,26,53,192.00 17,79,54,895.00 INTEREST Services RECOVERED (Mauritius) AT 9% and (B) ACCEPTED at ALP by TPO (refer TP order at page 111-112 of appeal set) Total (A+B) 62,82,48,770.00 2,27,64,78,976.00
It has been stated that, the sums which were advanced to sister concerns/ subsidiaries were utilised by these companies for payment of tax, salary and other staff welfare expenses. Further, the monies advanced by the assessee to its sister concerns / subsidiaries, have been shown to have been made from its own funds, and no borrowed funds were used in this case.
The assessee has debited the following as interest cost in the profit & loss account for year 2017-18:
M/s. Aegis Limited Sr.No Name of the party Amount in INR Interest disallowed by AO u/s 36(1)(iii) 1 Axis Bank Cash Credit Interest 3,48,79,568 2 Hewlett Packard 95,44.61 1 3 Yes Bank Ltd 1,82,42,339 4 Interest —Others 1 ,87,05,294 Interest disallowed by AO u/s 36(1)(iii) (A) 8, 13, 71, 812 Interest on loan taken for specific purpose 5 Cisco System India Pvt Ltd 1,65,40,476 Interest suo moto disallowed by assessee in ROI* 6 Interest on Service Tax 1 ,33,961 7 Licence of Credit Charges 2,96,624 S Pre-shipment credit in foreign 35,46,791 currency charges 9 Renewal fee for Cash Credit Limit 11,66,668 1O Notional Finance expenses as per 1.02,32,945 Ind-AS — Disallowed in the computation of income 1 1 Ecap Equities Ltd 5,OO,OO,424 Interest not disallowed u/s 36(t)(iii) (B) 8,19,17, 889 Total interest debited to P&L Account 16,32,89,701 (A+B)
M/s. Aegis Limited 19. As regards availability of funds, it has been submitted that Aegis India has substantial own funds to the tune of Rs. 1420.63 Crores, out of which advances have been extended to its sister concerns/subsidiaries.
20. The AO held that advances given to sister concerns were made out of borrowed funds and since no commercial expediency was established, the proportionate interest on borrowed funds is disallowed i.e. Rs. 8,13,71,812 by applying interest rate calculated by TPO (11.91 %). The disallowance was computed by AO as under: Domestic Foreign AE Companies A Total Amount of Loan to 2,09,85,24,081 17,79,54,895 related concerns at lower rate/ without interest B Total Interest Debited to P&L 16,32,89,701 C Rate at which interest is to be 11.91% disallowed D Interest disallowable u/s 24,99,34,218 2,09,63,497 36(1)(iii) (A*C) E Less: Interest recovered and - 1,57,85,010 offered to tax Net Interest disallowed u/s 24,99,34,218 51,78,487 36(1)(iii) Total Notional Interest 25,51,12,705 disallowable u/s 36(1)(iii)
M/s. Aegis Limited Interest Debited to P&L A/c 16,32,89,701 Interest suo-moto disallowed in 8,19,17,889 Computation or interest on loans for specific purposes Interest disallowed u/s 36{1 ){iii) 8,13,71,812 of the Act
18. Before the DRP it was contended that: • No disallowance of interest u/s 36(1)(iii) of the Act is warranted as the assessee has sufficient own funds • Once a transaction has been upheld to be at arm's length by TPO, same cannot be subjected to adjustment under section 36(1)(iii) of the Act. However, the ld. DRP upheld the disallowance under section 36(1)(iii)of the Act of Rs. 8,13,71,812.
Before us, ld. Counsel submitted that assessee had sufficient own funds, then the loans/advances to sister concerns cannot be assumed to be made out of borrowed funds. He submitted that the assessee has own funds to the tune of Rs 1420.5 crores out of which amount has been lent to sister concern s/subsidiaries. We find that the material on record factually demonstrates that the assessee was directly in possession of own cash funds for onward lending to sister concerns/ subsidiaries. Summary of which as submitted before us is as under:
M/s. Aegis Limited Particulars March 31, 2018 March 31, 2017 (A) (B) Source of Funds Share Capital 2,82,73,44,510 2,82,73,44,510 Other Equity Retained Earnings 3,19,26,48,904 2,81,88,92,792 Other Reserves 8,18,63,58,543 8,18,66,58,542 Net worth - Own Fund 14,20,63,51,956 13,83,28,95,844 Application of Fund Investments [Current & 10,36,13,70,625 9,36,84,08,640 Non Current] Loans and Advances to 2,27,64,78,976 62,82,48,770 Group Concern (Refer note 1) Funds Available 1,56,85,02,355 3,83,62,38,435 Note 1: Details of Loans & Advances given to Group Concern Name of the party March 31, March 31, 2018 2017 (A) (B) Essar Services (Mauritius) 17,79,54,895 7,26,53,192 Essar Projects India Limited 4,52.94,616 4,18,47,945 Aegis Tech Limited 45,22,49,293 45,22,49,293 Aegis Aspire Consultancy Servs 1,58,17,84,659 4,26,45,989 Ltd
M/s. Aegis Limited Essar Oil & Exploration & 1,91,95,513 - Production Ltd AGC Networks Ltd - 1,31,58,900 Essar Projects (I) Limited. - 56,93,451 Total 2,27,64,78,976 62,82,48,770
The interest-bearing funds available to the assessee from various banks and / or financial institutions were for specific purposes like capital expenditure, acquisition of fixed assets, leasing of assets etc.
Further, it has been pointed out that the Tribunal in assessee’s own case for A.Y.2009-10 has held that no disallowance u/s.36(1)(iii) is warranted, no disallowance in the case of the assessee as it has sufficient own funds for lending to sister. Thereafter, this issue was raised by the Revenue before the Hon’ble Bombay High Court in the appeal filed by the department which is has not admitted the question of law and thus, this issue had attained finality.
After considering the relevant finding given in the impugned order as well as the aforesaid submissions, we find that there is no dispute that assessee had huge surplus funds which were interest free which is evident from the table incorporated above and therefore, no disallowance u/s.36(1)(iii) can be made on account of interest and this view is now settled by various
M/s. Aegis Limited judgments that wherein assessee has borrowed and own funds which shall be assumed that investments have been made with assessee’s own funds and not with borrowed funds. Few of such decisions are as under:- Reliance Industries Ltd [ 2019] 410 ITR 466 (SC) South Indian Bank Ltd (438 ITR 1) (SC) (2021) CIT vs. Reliance Utilities & Power Ltd (313 ITR 340) (Bom HC) HDFC Bank Ltd vs. DCIT (383 ITR 529) (Bom HC) Ashok Commercial Enterprises (ITA (L) No 2985 of 2009) (Bom HC) 23. Moreover, this Tribunal in A.Y.2009-10 had deleted the similar disallowance which reads as under:- “57 In such a situation, where the assessee has substantial own funds, then presumption is that assessee has given advance to its sister concern from its own funds. Thus, following the ratio laid down by the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd (supra) which have been followed in various other decisions, we hold that no disallowance of interest is called for. Accordingly, ground no. 22 is treated as allowed."
The Hon’ble High Court for the same has confirmed the order of the Tribunal in the following manner:- “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 Vis. Reliance Utilities and Power Ltd. reported in [2009] 313 ITR 340 (Bom) and deleted the disallowances..... 5. No question of law in this respect arises.
M/s. Aegis Limited 25. Again, similar disallowance u/s.36(1)(iii) has been deleted by the Tribunal in assessee’s own case for A.Y.2010-11 to 2014- 15. Accordingly, the addition made by the AO is deleted. Apart from that it has also been contended that once TPO accepted the interest charged by the assessee at ALP, no disallowance of notional Interest is warranted under 36(1)(iii) of the Act. In any case, once we have already deleted the addition on account of interest this issues becomes purely academic.
The ground No. 13 pertains to levy of interest u/s.234B and 234D is consequential in nature and therefore, same is dismissed as infructuous.
Lastly, ground no.14 regarding initiation of penalty under various sections is premature and accordingly, the same is also dismissed.
In the result, appeal of the assessee is partly allowed. Order pronounced on 21st July, 2023.