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

Grounds no.1 and 2 being general in nature do not require specific adjudication.

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 to the Associated Enterprises (AE).

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 call centre services through various centres 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 (Mauritius), worth ` 587,41,59,862. He observed 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 Officer was of the view that the transaction relating to subscription in preferential shares is international transaction covered by Explanation–1(c) to section 92B of the Act. He was of the view that the underlying intention for investment in preferential shares is to grant interest free loan to the 3 Aegis Limited AE. 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 determined. Though, the assessee objected to the proposed adjustment, however, the Transfer Pricing Officer rejecting the objection of 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.

Though, the assessee challenged the aforesaid addition before learned DRP, however, learned 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.

Shri Rajan Vora, learned 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 aforesaid decision of the Tribunal was upheld by the 4 Aegis Limited Hon'ble Jurisdictional High Court while dismissing Revenue’s appeal in assessment year 2009–10, vide judgment dated 28th January 2019, in ITA no.1248/2016. In this context, he drew our attention to the decisions of the Tribunal and the Hon'ble Jurisdictional High Court. He submitted, the same view was reiterated by the Tribunal while deciding assessee’s appeal for the assessment years 2010–11, 2011– 12, 2012–13 and 2013–14. Thus, he submitted, the issue stands covered by the assessee by virtue of the aforesaid decisions of the Tribunal and the Hon'ble Jurisdictional High Court.

Shri Anand Mohan, learned Departmental Representative fairly submitted, in the preceding assessment years this issue has been decided in favour of the assessee by the Tribunal and the Hon'ble Jurisdictional High Court.

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–

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 adjustment

In grounds no.7 to 10, the assessee has challenged the disallowance of interest expenditure under section 36(1)(iii) of the Act amounting to ` 76,90,218.

Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited interest expenditure of ` 27,45,52,925, to the Profit & Loss Account on account of interest on loan. Further, he noticed that as per the Balance Sheet, the assessee has given advance to related parties amounting to ` 77.64 crore and to subsidiary amounting to ` 162,67 crore. Being of 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 interest 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 objections before learned DRP, however, the disallowance made by the Assessing Officer was sustained.

The learned Authorised Representative submitted, the assessee had advanced interest free loan to two related domestic companies viz. Aegis BPO Services Gurgaon Ltd. and Global Vantedge Pvt. Ltd., aggregating to ` 51,56,903. He submitted, the entire loan was advanced out of interest free surplus fund available 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) of 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 Officer 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

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 Pricing 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%.

The learned Departmental Representative relied upon the observations of the Assessing Officer and learned DRP.

We have considered rival submissions and perused material on record. As regards the interest free loans advanced to the related parties in India amounting to ` 51,56,903, it is seen from the material on 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 excess to the interest free loans advanced 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 disallowance was made by the Assessing

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 allowed.

Ground no.12, being premature at this stage, does not require adjudication, hence, dismissed.

In the result, appeal is partly allowed. Order pronounced in the open Court on 30.04.2019