Tribunal Adjusts Guarantee Fees & Loan Interest Rates, Assessee Given Fresh Opportunity

The Tribunal allowed the appeal in part. It directed the AO to compute the guarantee fees at 0.9% for the guarantee provided to the foreign subsidiary. The Tribunal also instructed the AO to calculate the interest on the loan to the AE based on market-determined rates applicable to the repayment currency. Additionally, the Tribunal found that the AO misinterpreted the law regarding deduction and depreciation claims, and the matter was sent back to the AO for reconsideration, allowing the assessee a fresh opportunity. The decision was announced on 31/07/2018.

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Issues:
1. Adjustment of ALP by TPO for guarantee fee provided to foreign subsidiary
2. Addition on account of interest charged on loan advanced to AE
3. Claim of deduction u/s.35D and depreciation u/s.32(1)(ii)(a) of the IT Act

1. Adjustment of ALP for Guarantee Fee:
The appeal was filed against the CIT(A)'s order regarding an upward adjustment of ALP by the TPO for a guarantee fee provided to the assessee's foreign subsidiary. The assessee argued that the guarantee was given as a commercial necessity to protect the business interests, and hence, did not warrant additional compensation. The Tribunal noted various judgments where the rate of guarantee commission ranged from 0.25% to 0.50%. However, since the assessee provided an SBLC and not a corporate guarantee, a rate of 0.9% charged by an Indian bank for SBLC was considered an internal CUP. The Tribunal directed the AO to compute the guarantee fees at 0.9%.

2. Addition on Account of Interest on Loan:
The issue involved an addition on account of interest charged on a loan advanced to an AE. The Tribunal relied on a decision of the Delhi High Court, stating that the arm's length interest rate for a loan advanced to a foreign subsidiary should be based on market-determined interest rates applicable to the currency in which the loan has to be repaid. Therefore, the AO was directed to compute the interest based on the applicable currency rates.

3. Claim of Deduction and Depreciation:
Regarding the claim of deduction u/s.35D and depreciation u/s.32(1)(ii)(a) of the IT Act, the AO had declined the assessee's claim citing a certain case law. However, the Tribunal found that the AO misinterpreted the case law and did not consider the revised claims submitted by the assessee during the assessment proceedings. The Tribunal held that the appellate authority can consider grounds arising from assessment proceedings and has the power to accept additional grounds. The matter was restored back to the AO for deciding afresh, providing the assessee with a due opportunity. Both issues regarding the revised claim of deduction u/s.35D and additional depreciation u/s.32(1)(a) were to be decided afresh by the AO.

In conclusion, the appeal of the assessee was allowed in part, and the matter was pronounced in the open court on 31/07/2018.

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