2016 (1) TMI 936 - AT - Income Tax

Tribunal partially allows appeals on interest benchmarking, corporate guarantee fee, disallowances, interest levy, and TP adjustments.

Rain Commodities Ltd. Versus Addl. Commissioner of Income-tax, Range - 3, Hyderabad. and Dy. Commissioner of Incometax, Circle – 3 (1), Hyderabad Versus Rain Commodities Ltd.

The Tribunal partly allowed the appeals of both parties for statistical purposes. Key points include using LIBOR PLUS for interest benchmarking on ... Transfer pricing adjustment - bench marking technique - Held that:- The assessee facilitated the acquisition of CII Carbon LLC by RCUSA by lending loan to its wholly owned enterprises. The assessee has taken the decision to make investment in its AE either on share capital or lending loan using its business expediency. Since, it had made the decision to make loan to its AE. By virtue of amendment to section 92B, it is international transaction. Once it is considered as international transaction, it is prudent to make bench marking also in the international arena. Determination of rate of corporate guarantee - Held that:- There is no corporate guarantee commission charged by the assessee. Therefore, we remit this issue to the file of the AO/TPO to determine the ALP of the corporate guarantee by following the judicial precedents, more particularly, the case of Glenmark Pharmaceuticals Vs. ACIT (2013 (11) TMI 1583 - ITAT MUMBAI ). In the result both the assessee’s as well as revenue’s appeal are treated as allowed for statistical purposes. Issues Involved:1. ALP adjustment on interest on advance to AE.2. ALP adjustment on corporate guarantee.3. Disallowance of selling and distribution expenses.4. Disallowance of repairs and maintenance expenses.5. Computation of TDS & TCS credit.6. Levy of interest under Section 234B and on TP adjustment due to retrospective amendments.Detailed Analysis:1. ALP Adjustment on Interest on Advance to AE:The assessee contested the Transfer Pricing Officer's (TPO) adjustment of interest on loans provided to its Wholly Owned Subsidiary (WOS), arguing that the loans were for commercial expediency and should be benchmarked using LIBOR rates rather than domestic rates. The revenue opposed this, citing recent frauds involving LIBOR rates. The Tribunal upheld the CIT(A)'s decision to use LIBOR PLUS for benchmarking, citing similar cases (Four Soft Pvt. Ltd., Siva Industries & Holdings Ltd.) where international commercial principles were applied for such transactions.2. ALP Adjustment on Corporate Guarantee:The assessee challenged the TPO's adjustment of the corporate guarantee fee, arguing it was a shareholder activity and not an international transaction under Section 92B. The CIT(A) had reduced the guarantee fee from 2% to 1.25%. The Tribunal, referencing cases like Glenmark Pharmaceuticals and Four Soft Pvt. Ltd., determined that corporate guarantees are international transactions and remitted the issue back to the TPO to determine the appropriate ALP, suggesting a rate closer to 0.50% as upheld in similar cases.3. Disallowance of Selling and Distribution Expenses:The Assessing Officer (AO) disallowed Rs. 50,00,000/- in selling and distribution expenses, suspecting inflation despite the assessee providing supporting bills and vouchers. The CIT(A) did not address this issue explicitly in the provided judgment, and hence it remains as per the AO's assessment.4. Disallowance of Repairs and Maintenance Expenses:Similarly, the AO disallowed Rs. 4,31,383/- in repairs and maintenance expenses on the same grounds of possible inflation. This issue also remains unresolved in the provided judgment, defaulting to the AO's original disallowance.5. Computation of TDS & TCS Credit:The assessee's ground relating to TDS & TCS credit was remitted back to the AO for reconsideration. This indicates that the Tribunal found merit in the assessee's claim but required further examination by the AO.6. Levy of Interest under Section 234B and on TP Adjustment Due to Retrospective Amendments:The assessee's grounds regarding the levy of interest under Section 234B and on TP adjustments due to retrospective amendments were dismissed, as these are automatic and consequential to the additions made to the total income.Conclusion:The Tribunal partly allowed the appeals of both the assessee and the revenue for statistical purposes. The key takeaways include the affirmation of using LIBOR PLUS for interest benchmarking on international transactions and the remittance of the corporate guarantee fee issue back to the TPO for recalculating the ALP, potentially at a lower rate (around 0.50%). Disallowances on selling, distribution, repairs, and maintenance expenses were upheld as per the AO's original assessment. The TDS & TCS credit issue was sent back for further examination, and the levy of interest was upheld as automatic and consequential.