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2019 (5) TMI 289 - AT - Income TaxTransfer pricing adjustment - re–characterizing the closing balance of preferential shares held by the assessee as interest free loan to the Associated Enterprises (AE) - HELD THAT:- 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%. While doing so, the TPO, 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, 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. As brought to our notice by the AR, in the meanwhile, the has disposed of the appeal filed by the Revenue for the assessment year 2009–10, [2019 (4) TMI 858 - BOMBAY HIGH COURT] upholding the decision of the Tribunal - we hold that re–characterization of preferential shares as interest free loan is invalid. Accordingly, we delete the addition made on account of adjustment made by the Transfer Pricing Officer on this account. Grounds are allowed. Disallowance of interest expenditure u/s 36(1)(iii) - HELD THAT:- 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) 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. [2009 (1) TMI 4 - BOMBAY HIGH COURT] . Notably, similar disallowance was made by the AO in assessee’s 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 Officer. We hold that disallowance of interest expenditure cannot be made on account of interest free loan advanced to the related parties in India. 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. No justification in the disallowance made u/s 36(1)(iii). Accordingly, we delete the addition.
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