AEGIS LTD,MUMBAI vs. ITO 6(1)(4), MUMBAI

Date of hearing 20.4.2017 Date of order 12.05.2017

O R D E R Per Ashwani Taneja, AM:- These appeals of the assessee pertain to different assessment years involving identical issue, therefore, these appeals were heard together and are disposed of by this common order.

“1. The learned Assessing Officer ('AO') has erred in completing the assessment of appellant at INR 1,89,51,31,260 (as against returned income of INR 74,45,20,825) vide assessment order under section 143(3) r.w.s 144 of the Income-tax Act, 1961 ('the Act') after considering the adjustments made by learned Transfer Pricing Officer ('TPO') in his order passed under section 920A(3) of the Act and subsequently confirmed by the learned Dispute Resolution Panel ('DRP').

2. The learned AO/DRP has erred in violating the principles of judicial discipline disregarding the decision of the Hon'ble Tribunal in Appellant's own case for AY 2009-10 wherein similar issues have been decided in favour of the Appellant in similar facts and circumstances of the case. GROUNDS RELATING TO TRANSFER PRICING MATTERS: The learned TPO I AO / DRP have erred in 3. making an addition of INR 1,02,69,10,730 to the total income (as detailed below) of the appellant in respect of two international transactions entered into by the appellant with its associated enterprises ('AE') (hereinafter referred to as 'impugned transactions'): S.No. Particulars Amount (INR) 1 Adjustment in respect of 31,03,25,000 guarantee commission on intra-group guarantees extended by the appellant 2 Adjustment in respect of 71 65,85,730 subscription and redemption of preference share capital Total 1,02,69,10,730 3 Aegis Ltd 4. The learned TPO / AO I DRP have erred in not accepting the economic analysis undertaken by the appellant in respect of the impugned transactions entered into by the appellant with its AEs in accordance with provisions of the Act and modifying the economic analysis for determination of arm's length price ('ALP') of the said transactions to hold that the same are not at arm's length. Adjustment in respect of corporate guarantee of INR 31,03,25,000: 5. The learned TPO I AO I DRIP have erred in determining the arm s 4ength compensation at 2.5% for corporate guarantees extended by appellant on behalf of its AEs and confirming an adjustment of INR 31,03,25,000 on this account.

6. Without prejudice to above, the learned TPO I AO I DRP have erred in computing the amount of guarantee commission for the entire year (instead of restricting it from the date of issue of guarantee till 31 March 2011). Adjustment in respect of issue and redemption of preference shares of INR 71,65,85,730: 7. The learned TROI AO I DRP have erred in re-determining the arm's length compensation pertaining to subscription and redemption of preference share capital by re-characterizing the same as interest-free loan and thereby imputing notional interest thereon.

8. Without prejudice to above, the learned TPOI AO/ DRP have erred in imputing notional interest on alleged loans on an arbitrary basis in respect of loans given to foreign AEs.

9. Without prejudice to above, the learned TPO I AO have contravened the provisions of section 144C(10) of the Act in not adhering to the directions of the Hon'ble DRP for considering LIBOR+300 bps as rate of interest but instead applied Indian bond rates for the purpose of computing interest on the alleged loan. GROUNDS RELATING TO CORPORATE TAX MATTERS:

10. The learned AO I DRP have erred in giving consequential effect of not allowing carry forward of current year capital loss of INR

4 Aegis Ltd 29,45,15,762 on account of redemption of preference shares. a. The learned AO I DRP has failed to give due regard to the express scheme of section 920 / Chapter X-B of the Act, whereby no power is vested in the learned AO to enhance or modify the findings of the learned TPO.

T b. he learned AO / DRP has travelled beyond the provisions of the Act in seeking to re-characterize lawfully consummated transaction(s), where no such power, express or implied, is conferred under the Act.

14 The learned AG has erred in initiating penalty proceedings under section 271(1)(c) of the Act.”

AY 2008-09 47,79,801 2009-10 3,23,31,592 2010-11 633,88,653 2011-12 6,92,34,700 2012-13 12,44,78,118

TOTAL 29,42,12,863

6 Aegis Ltd 7. Per contra, Ld. DR did not dispute the factual submissions made by the Ld. Counsel of the assessee. However, it was requested by him that this issue should be sent back to the file of the AO for making fresh study of comparables and benchmarking of the transaction accordingly. It was further submitted that rate of 1% should not be frozen in the manner as has been done by the Tribunal.

“22. We have heard the rival submissions and also perused the relevant material placed on record. The assessee has given corporate guarantee on behalf Aegis USA amounting to Rs. 666,46,80,000/- and on behalf of Essar Services, Mauritius for Rs. 75,73,50,000/-. Before us, the Ld. Counsel had submitted that in the subsequent years the assessee has suo moto entered into Guarantee Agreements with its AE pursuant to which it has charged guarantee commission of 1% from its AE, w.e.f. financial year 2007-08 for a period of five years. The said guarantee commission recovered by the assessee has been recognized in the financial statement by the assessee for the assessment year 2012-13 and has also been offered for tax in that year. In wake of these facts and without going into the other arguments of the assessee and also looking to the fact that the Tribunal in various cases has accepted guarantee commission chargeable between 0.5% to 1%, we hold that guarantee commission of 1% should be chargeable. Here in this case, assessee itself has agreed to charge guarantee commission @ 1% of the outstanding guaranteed amount, accordingly, we also hold that a guarantee 7 Aegis Ltd commission should be benchmark by taking the rate of 1% of the outstanding guaranteed amount in line with the consistent views taken by the coordinate Benches, from its AE and adjustments should be made accordingly. Thus, grounds 12 & 13 as raised by the assessee are treated as partly allowed.”

8 Aegis Ltd 11. During the course of hearing, both the parties jointly stated that this issue is covered in favour of the assessee by the decision of the Tribunal passed in assessee’s own case for AYs 2009-10 & 2010-11. We have gone through the orders passed by the lower authorities and by the Tribunal for AYs 2009-10 & 2010-11. It is noted that the Tribunal decided this issue in favour of the assessee by observing as under:-

“27 We have heard the rival submissions and also perused the relevant findings in this regard in the impugned orders. H The assessee has subscribed to redeemable preference shares of its AE, Essar Services, Mauritius and has also redeemed some of these shares at par. The TPO has redeemed some of these shares at par. he TPO has re-characterized the said transaction of subscription of shares into advancing of unsecured loan by terming it as an exceptional circumstance and has charged/imputed interest, on the reasoning that in an uncontrolled third party situation, interest would have been charged. 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 disregard any apparent transaction and substitute it, without any material of exceptional 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- characterizing it as interest free loan. Now, whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterized as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Honb1e jurisdictional High Court in the case of Dexiskier 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 9 Aegis Ltd characterized 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 Assessing Officer. Thus, ground no. 14 is treated as allowed.” Since no distinction has been made on law or on facts, respectfully following the order of the Tribunal, these grounds are allowed in favour of the assessee. The AO is directed to follow the order of the Tribunal for AYs 2009-10 & 2010- 11. Ground 10 is consequential to grounds 7 & 8. In this ground assessee is 12. aggrieved by the action of the lower authorities in denying the benefit of carry forward of current year’s capital loss on account of preference shares. This ground is consequential to the issue of characterization of preferential shares as interest free loans. Therefore, this ground is restored back to the file of the AO with the direction to verify the facts and follow the aforesaid order of the Tribunal for AYs 2009-10 & 2010-11. This ground may be treated as allowed, for statistical purpose.

10 Aegis Ltd “57. After considering the rival submissions and on perusal of the relevant material on record, it is seen that the advance given to the subsidiary was 1.32 crores as on 01.04.2008 and as on 31.03.2009 it stood at Rs. 6,13,19,000/-. As against that, the assessee had own funds to the tune of Rs. 346.19 crores in the form of share capital and share premium and during the year it has raised shares of 279.93 crores out of which 4.81 crores had been lent to the sister concern. 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.” As stated by us in earlier part of our order, the facts are identical in this year also. The view taken by the Tribunal is applicable on the facts of this year as well. Therefore, respectfully following the order of the Tribunal, this ground is allowed in favour of the assessee and the AO is directed to delete the disallowance on account of interest.