Aegis Limited Vs DCIT (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT), Mumbai, adjudicated the appeal for Assessment Year 2014–15 against the final assessment order passed under section 143(3) read with section 144C(13) pursuant to directions of the Dispute Resolution Panel (DRP). The principal issues related to transfer pricing adjustments arising from re-characterisation of preference share investments and disallowance of interest expenditure under section 36(1)(iii).
The Transfer Pricing Officer (TPO) treated the closing balance of preference shares held by the assessee in its associated enterprise as an interest-free loan and computed notional interest at 11.91%, resulting in a substantial adjustment. The DRP partly modified the rate to LIBOR plus 300 basis points, reducing the addition. The assessee challenged this re-characterisation, contending that the issue had already been decided in its favour in earlier assessment years and upheld by the jurisdictional High Court.
The Tribunal observed that identical issues in earlier years had consistently been decided in favour of the assessee, including confirmation by the High Court. It held that re-characterisation of preference share investments as loans without evidence was not valid and deleted the transfer pricing adjustment.
On the issue of disallowance of interest expenditure, the Assessing Officer had disallowed interest on the ground that borrowed funds were used for advancing loans to related parties and subsidiaries, and that a higher interest rate should have been charged. The assessee contended that interest-free advances were made out of surplus funds and that interest on loans to associated enterprises had already been accepted at arm’s length by the TPO.
