TMI Blog2017 (5) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... ept the addition @1% as has been proposed by the assessee. Determining the arm’s length price pertaining to subscription and redemption of preference share capital by re-characterising the same as interest from loan and thereby computing notional interest thereon - Held that:- In this ground assessee is 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. Disallowance of interest u/s 36(1)(iii) - Held that:- Tribunal decided this issue in favour of the assessee for AYs 2009-10 & 2010-11 wherein held where the assessee has substantial own funds, then presumption is that assessee has given advance to its sister concern from its own funds. The view taken by the Tribunal is applicable on the facts of this year as well. Therefore, respectful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 guarantee commission on intra-group guarantees extended by the appellant 31,03,25,000 2 Adjustment in respect of subscription and redemption of preference share capital 71 65,85,730 Total 1,02,69,10,730 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 corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies were made from own surplus funds and no portion of the borrowed funds was used for the same. 12. The learned AG / DRP have erred in charging interest under section 234B of Act amounting to INR 15,90,86,399 and section 234D of the Act amounting to INR 7,69,43,968. 13 The learned AG I DRP has erred in levying the interest under section 244A of the Act amounting to INR 5,20,98,981. 14 The learned AG has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. Grounds 1 to 4 are general, therefore, these are dismissed. 4. Grounds 5 6: In these grounds, assessee is aggrieved by the action of the lower authorities in determining the arm s length compensation paid @2.5% on account of corporate guarantees extended by the assessee company on behalf of its associated enterprises and resultantly making an adjustment of ₹ 31,03,25,000 on this account. 5. During the course of hearing, it was stated at the outset by the Ld. Counsel of the assessee that identical issue had come up before the Tribunal for AYs 2009-10 2010-11, wherein the Tribunal vide its order in ITA Nos 1213/Mum/2014 dated 27-07-2015 (2009-10) and in ITA No.7694/M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to ₹ 666,46,80,000/- and on behalf of Essar Services, Mauritius for ₹ 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 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 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 indepen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions 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 ₹ 6,13,19,000/-. As against that, the assessee had own funds to the tune of ₹ 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 ..... 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