2015 (12) TMI 683 - AT - Income Tax

Assessee's Appeal Partially Allowed, Recomputation Directed, Arm's Length Guarantee Commission Upheld

Everest Kanto Cylinder Ltd. Versus Assistant Commissioner of Income-tax, (LTU), Mumbai

The appeal filed by the assessee was allowed in part. The Tribunal directed the Assessing Officer to recompute the disallowance under section 14A, ... Disallowance u/s 14A - Held that:- Disallowance under Rule 8D has been worked out by the AO on the total investment, which included investment made in mutual funds with growth scheme. Such mutual fund investment is required to be excluded while calculating disallowance under Rule 8D, since it is not generating any tax free income. The assessee has also filed copy of the scheme of UTI fixed maturity plan before us, according to which it is a growth oriented fund and not eligible for dividend. If we exclude the amount invested by the assessee in the growth plan, disallowance under Rule 8D @0.5% works out to be ₹ 1.39 lakhs. However, copy of scheme of UTI Fixed Maturity Plan was first time filed before Tribunal as an additional evidence along with application for admission of additional evidence dated 27-2-2014. We accept the additional evidence and matter is restored back to the file of AO for deciding afresh the quantum of disallowance keeping in view our above observations. Addition to book profit under Section 115JB on account of disallowance under Section 14A - Held that:- We direct the AO to exclude the amount of disallowance made u/s.14A, while computing the book profit u/s.115JB. Addition made in respect of corporate guarantee - Held that:- As decided in assessee's own case in an independent transaction, the assessee has paid 0.6% guarantee commission to IGIGI Bank India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal GUP and comparing the same with the transaction with the AE. The charging of 0.5% guarantee commission from the AE is quite near to 0.6%, where the assessee has paid independently to the IGIGI Bank and charging of guarantee commission at the rate of 0.5% from its AE can be said to be at arms length. The difference of 0.1% can be ignored as the rate of interest on which IGIGI Bank, Bahrain Branch has given loan to AE (i.e. subsidiary company) is at 5.5%, whereas the assessee is paying interest rate of more than 10% on its loan taken with IGIGI Bank in India. Thus, such a minor difference can be on account of differential rate of interest. Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission Addition on account of adjustment in respect of interest on loan advanced to EKC Dubai and EKC China - Held that:- The rate to be used for undertaking an adjustment should be LIBOR and not the average yield rates considered by the learned TPO. The LIBOR rate for March 2008 was 2.6798%. However the assessee has charged 7% from its AE as per the internal CUP available. Thus, the assessee has charged interest to EKC Dubai and EKC China at the rate higher than existing LIBOR rates. Accordingly, the said transaction of providing loan to EKC Dubai and EKC China is at arm's length. Additions made by the AO are accordingly set aside. Issues Involved:1. Disallowance under section 14A of the Act.2. Addition on account of adjustment in respect of guarantee commission for guarantee provided to banks in respect of loans taken by Associated Enterprises (AEs).3. Addition on account of adjustment in respect of interest on loan given to AEs.Issue-wise Detailed Analysis:1. Disallowance under section 14A of the Act:Original Ground: The assessee contested the disallowance of Rs. 17,33,157/- under section 14A read with Rule 8D of the Income-tax Rules, 1962.Supplementary Ground: The assessee also contested the addition of Rs. 17,33,157/- to Book Profits for the purpose of section 115JB on account of disallowance under section 14A.Findings and Judgment:- The assessee had earned dividend income of Rs. 8,57,149/- claimed as exempt under section 10(33). The AO computed disallowance under Rule 8D at Rs. 17,33,157/-.- The assessee argued that investments should be segregated into different parts for accurate computation.- The Tribunal noted that investments in mutual funds with growth schemes should be excluded while calculating disallowance under Rule 8D, as they do not generate tax-free income.- The Tribunal accepted additional evidence regarding the UTI Fixed Maturity Plan and restored the matter to the AO for fresh computation.- The Tribunal also held that no addition under section 115JB is warranted for the amount disallowed under section 14A, citing various judicial precedents including Cadila Healthcare Ltd., Reliance Industrial Infrastructure Ltd., and others.2. Addition on account of adjustment in respect of guarantee commission for guarantee provided to banks in respect of loans taken by AEs:Original Ground: The assessee contested the adjustment of Rs. 2,47,07,596/- on account of guarantee commission.Supplementary Ground: The assessee argued that the adjustment should be restricted to the actual amount of loan availed by the AE during the year.Findings and Judgment:- The assessee provided corporate guarantees to its subsidiaries and charged a guarantee commission of Rs. 44,00,799/- at 0.5% p.a. from EKC Dubai.- The TPO proposed a 3% rate based on comparisons with other banks and added Rs. 2,47,07,596/-.- The Tribunal noted that the transaction of giving corporate guarantee should not be considered an international transaction if it does not affect profits, income, losses, or assets, citing the Delhi Tribunal's decision in Bharti Airtel Ltd.- However, in this case, the assessee incurred costs and recovered some commission, affecting its income and expenditure.- The Tribunal upheld the charging of 0.5% guarantee commission from AE as at arm's length, following its own decision in the assessee's case for the previous year.3. Addition on account of adjustment in respect of interest on loan given to AEs:Original Ground: The assessee contested the adjustment of Rs. 63,44,901/- on account of interest on loan given to AE.Supplementary Ground: The assessee argued for the benefit of the 5% variation from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act.Findings and Judgment:- The assessee provided loans to EKC Dubai and EKC China at 7% p.a. while the TPO determined an ALP of 14.39%.- The Tribunal held that international rates like LIBOR should be used for comparability analysis, citing multiple judicial precedents.- The LIBOR rate for March 2008 was 2.6798%, and the assessee charged 7%, which was higher than LIBOR, making the transaction at arm's length.- The Tribunal set aside the additions made by the AO.Conclusion:The appeal filed by the assessee was allowed in part, with directions to the AO to recompute the disallowance under section 14A excluding mutual fund investments and to exclude the disallowance amount from book profits under section 115JB. The Tribunal upheld the arm's length nature of the guarantee commission and interest on loans provided to AEs.