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

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