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2019 (4) TMI 858 - HC - Income TaxDisallowance of notional interest under TP - Purchase of preference share of AE - Transfer Pricing adjustment u/s 92B - AO alleged that it is interest free loans to AE - TPO had re-characterised the transaction of subscription of shares into advancing of unsecured loans - HELD THAT - We are broadly in agreement with the view of the Tribunal. The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon on notional basis. No question of law arises. Allowabilty of interest u/s. 36(1)(iii) - HELD THAT - interest free advances to an AE - HELD THAT - Tribunal came to the conclusion that the assessee had sufficient interest free loans out of which subject advances are made. The Tribunal referred to and relied upon the decision of this Court in the case of Commissioner of Income-tax V/s. Reliance Utilities and Power Ltd. reported in 2009 (1) TMI 4 - BOMBAY HIGH COURT and deleted the disallowances. Addition for corporate guarantee commission by TPO - Tribunal restricted addition to 1% as against 5% by TPO - HELD THAT - This Court in the case of CIT v. Everest Kento Cylinders Ltd. Reported in 2015 (5) TMI 395 - BOMBAY HIGH COURT and submitted that there is a substantial difference between a bank guarantee and a corporate guarantee. He pointed out, that this Court in the said judgment has recognised that in view of inherent differences between the two lines of guarantee, rate of commission to be charged in each cases would be different. The Tribunal applied a lower percentage of commission in the present case considering that, what the assessee had provided was a corporate guarantee and not a bank guarantee. No question of law arises.
Issues involved:
1. Interpretation of transfer pricing provisions regarding redeemable preferential shares and interest charged on notional basis. 2. Treatment of interest-free advances made to associated enterprises and applicability of disallowances. 3. Determination of corporate guarantee fee rate based on the nature of guarantee provided. Analysis: Issue 1: The first issue pertains to the Revenue challenging the judgment of the Income Tax Appellate Tribunal regarding the treatment of redeemable preferential shares as interest-free loans for transfer pricing purposes. The Tribunal held that the Transactional Pricing Officer (TPO) cannot re-characterize the transaction without evidence of exceptional circumstances indicating concealment or sham nature. The Tribunal emphasized that the TPO cannot question the commercial expediency of the transaction. The High Court concurred with the Tribunal's view, stating that the Revenue failed to provide any material suggesting the transaction was a sham, thus dismissing the appeal. Issue 2: The second issue involves interest-free advances made by the assessee to associated enterprises and the subsequent disallowances. The Tribunal, relying on a prior decision, deleted the disallowances, concluding that the assessee had sufficient interest-free funds for the advances. The High Court found no legal question arising from this issue and upheld the Tribunal's decision. Issue 3: The final issue concerns the determination of the corporate guarantee fee rate by the TPO. The Tribunal restricted the guarantee commission to 1% instead of the 5% added by the TPO. The High Court referenced a previous judgment highlighting the differences between bank guarantees and corporate guarantees, emphasizing that the nature of the guarantee impacts the commission rate. The Court agreed with the Tribunal's decision, stating that the comparison should consider the distinct nature of corporate guarantees. Consequently, the High Court dismissed the appeal, finding no substantial legal question to address. In conclusion, the High Court upheld the Tribunal's decisions on all three issues, emphasizing the importance of evidence and legal considerations in interpreting transfer pricing provisions and determining appropriate fees and disallowances in tax assessments.
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