2013 (9) TMI 199 - AT - Income Tax

Tribunal directs AO to recompute adjustments, dismisses expense issues, and orders fresh verification

M/s Nimbus Communications Ltd. Versus Asstt. Commissioner of Income-Tax – 11(1), Mumbai

The Tribunal partly allowed the appeals, directing the Assessing Officer to recompute adjustments like TP guarantee commission, notional interest, and ... Adjustment of arm's length price - Corporate Gurantee given to associated enterprise - Bank guarantee commission - Held that:- As rightly held by the ld. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which “price” has to be charged - there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm’s length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm’s length price - Decision in case of Assistant Commissioner of Income-tax - 11(1)Versus Nimbus Communications Ltd. [2013 (9) TMI 204 - ITAT MUMBAI] followed - Decided in favour of assessee. Arm's length price - The assessee did not charge any interest on overdue payments - After a period of time of normally 30 days, would be the expected normal arm's length price - The quantification of notional interest was done by adopting interest at 2.19 % LIBOR on overdue amount beyond 30 days - A continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the international transaction - What can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into - It appears that the TPO has adopted interest @ 2.19% LIBOR on balances which exceed 30 days, but LIBOR rate is relevant only in the case of lending or borrowing of funds, and not in the case of commercial overdues – Held that the impugned addition of Rs. 12,51,175 is unsustainable in law – Following decision of Nimbus Communications Limited Versus. Assistant Commissioner of Income Tax [2011 (1) TMI 68 - ITAT MUMBAI] - Appeal is allowed. It is clearly manifest from the order of the DRP that a specific case was made out by the assessee in support of its claim for deduction on account of sundry/old balance written off before the DRP for the first time and since the case so made out by the assessee required verification by the A.O., the DRP having no power to set aside the case, declined to interfere with the decision of the A.O. Keeping in view this position, we consider it fair and proper and in the interest of justice to set aside this issue to the file of the A.O. with a direction to decide the same afresh after verifying the stand of the assessee as taken before the DRP from the relevant record. Issues Involved:1. Assessment of income.2. TP adjustment on account of guarantee commission.3. Adjustment of notional interest.4. Disallowance under Rule 8D for earning exempted income.5. Disallowance of expenses for food, equipment hire, etc.6. Disallowance of sundry old balances written off.7. Disallowance of deduction claimed under Section 35-D.Issue-wise Detailed Analysis:1. Assessment of Income:- The assessee contested the assessment of income at Rs. 4,80,19,930/- instead of the declared Rs. 3,34,36,493/- for A.Y. 2006-07 and Rs. 11,58,61,620/- instead of Rs. 8,71,81,798/- for A.Y. 2007-08. The Tribunal did not find it necessary to adjudicate this general ground.2. TP Adjustment on Account of Guarantee Commission:- For both A.Y. 2006-07 and 2007-08, the issue was the adjustment made by the A.O. for corporate guarantees given to AEs. The Tribunal followed its earlier decision for A.Y. 2005-06, holding that the guarantee commission should be computed at 0.5% of the arm's length price, modifying the A.O.'s adjustments. This decision was based on the principle that the commercial relationship between the assessee and its AEs should be distinct and that the guarantee provided should have a price charged at arm's length.3. Adjustment of Notional Interest:- For A.Y. 2006-07, the Tribunal deleted the addition of Rs. 1,99,504/- made on account of notional interest payable by Nimbus Sport International P. Ltd. on outstanding trade balances, following its earlier decision for A.Y. 2005-06. Similarly, for A.Y. 2007-08, the Tribunal deleted the addition of Rs. 22,78,937/- on the same grounds, emphasizing that the TPO did not carry out the necessary exercise to compare the non-charging of interest with other similar transactions.4. Disallowance under Rule 8D for Earning Exempted Income:- For both assessment years, the Tribunal followed its earlier decision in the assessee's case for A.Y. 2005-06, directing the A.O. to recompute the disallowance under Section 14A by following a reasonable basis and considering the substantial investment in shares of foreign companies, whose dividend income is not exempt from tax.5. Disallowance of Expenses for Food, Equipment Hire, etc.:- The Tribunal did not address this issue in detail as the assessee's counsel did not press these grounds during the hearing, leading to their dismissal.6. Disallowance of Sundry Old Balances Written Off:- For A.Y. 2007-08, the Tribunal set aside the issue to the A.O. for fresh verification. The assessee had claimed that the balances written off represented amounts booked as income earlier and were irrecoverable. The Tribunal directed the A.O. to verify the assessee's claims from the relevant records and decide the issue afresh.7. Disallowance of Deduction Claimed Under Section 35-D:- The Tribunal did not address this issue in detail as the assessee's counsel did not press these grounds during the hearing, leading to their dismissal.Conclusion:- The Tribunal's judgment involved detailed consideration of various adjustments and disallowances made by the A.O., with several issues being resolved by following precedent decisions in the assessee's own case for earlier years. The Tribunal's directions often involved recomputation or verification by the A.O., ensuring that the adjustments were made on a reasonable and substantiated basis. The appeals were partly allowed, reflecting a balanced approach to the issues raised.