2018 (3) TMI 1766 - AT - Income Tax

Tax Appeal Outcome: Corporate guarantee adjustment removed, interest on OFCDs reconsidered, disallowances under Section 14A & 115JB overturned.

The Tribunal partly allowed the appeal, deleting the upward adjustment for corporate guarantees as not constituting an international transaction. The ... TP Adjustment - upward adjustment made towards providing corporate guarantee - HELD THAT:- There is a cleavage of opinion, as to the issue whether corporate guarantee to an Associated Enterprise could be considered as international transaction. DR has pointed out to decisions in Mahindra and Mahindra Ltd [2013 (12) TMI 139 - ITAT MUMBAI] and Prolifics Corpn. Ltd [2015 (1) TMI 551 - ITAT HYDERABAD] . However, since in assessee’s own case, [2016 (10) TMI 1264 - ITAT CHENNAI] the Tribunal has already held that providing corporate guarantee to its Associated Enterprise could be considered as an international transaction, which decision was rendered after considering the amendment to clause (c) of Section 92B(2), through Finance Act, 2012, we are inclined to follow this view. Accordingly the upward adjustment made towards providing corporate guarantee stands deleted. Upward adjustment for interest charged on “Optionally and Fully Convertible Debentures’’ (OFCD) - rate of interest charged more than the LIBOR rate - HELD THAT:- Once assessee had charged rate of interest more than the LIBOR rate, there could be no question of any Transfer pricing adjustment. Nevertheless, how the ld. TPO had arrived at the LIBOR rate of 0.95% is not clear. LIBOR rate for assessment year 2006-07 was 4.42% whereas what was considered by the ld. TPO as LIBOR rate for the impugned assessment year is 0.95%. We are therefore of the opinion that ld. Assessing Officer/TPO has to revisit the issue to fix the correct LIBOR rate, before deciding whether any adjustment for Arms Length Pricing is required. We set aside the orders of the lower authorities on the Arms Length Price adjustment, if any, required on interest on OFCD, and remit it back to the file of the ld. Assessing Officer/ld. TPO for consideration afresh in accordance with law. Disallowance u/s.14A - AO clearly expressed his dissatisfaction on the suo-motu disallowance made by the assessee as expenditure incurred for earning exempt income - HELD THAT:- Invocation of Section 14A of the Act r.w.r. 8D of the Rules, in our opinion, cannot be faulted. Nevertheless, none of the lower authorities had verified the claim of the assessee that its investments were all in wholly owned subsidiaries and investments which did not yield any exempt income had to be excluded, for the purpose of computing the disallowance u/s.14A. AO also did not have the benefit of the judgment of Joint Investments Pvt. Ltd [2015 (3) TMI 155 - DELHI HIGH COURT] when he was considering the issue. In the fitness of the things, we are of the opinion that disallowance, if any, required under Section 14A of the Act needs a fresh look by the ld. Assessing Officer. Disallowance u/s.14A while computing its book profits for applying Section 115JB - HELD THAT:- In case of Vireet Investment Pvt. Ltd [2017 (6) TMI 1124 - ITAT DELHI] answered the question referred to us in fvour of assessee by holding that the computation under clause(f) of Explanation 1 to Section 115JB (2) is to be made without resorting to the computation as contemplated u/s.14A read with Rule 8D of the Income Tax Rules, 1962 . Judgment of Cheminvest Ltd. vs. CIT followed [2015 (9) TMI 238 - DELHI HIGH COURT] - Thus we are of the opinion that no disallowance could have been made u/s.14A of the Act, while computing book profit u/s.115JB. Credit for TDS and advance tax denied - HELD THAT:- AO is directed to verify the claim of the assessee on these and if found correct allow credit to extent proved by the assessee. Ordered accordingly. Issues Involved:1. Transfer Pricing Adjustments2. Disallowance under Section 14A of the Income Tax Act3. Disallowance while computing book profits under Section 115JB4. Credit for TDS and advance taxIssue-wise Detailed Analysis:1. Transfer Pricing Adjustments:- Corporate Guarantee Adjustments: The assessee contested an upward adjustment of Rs. 22,06,65,514/- made by the Assessing Officer based on the Transfer Pricing Officer’s (TPO) recommendation for corporate guarantees provided to its Associated Enterprise (AE). The assessee argued that this Tribunal had previously ruled in its favor for earlier assessment years, stating that providing a corporate guarantee is not an international transaction. The Tribunal had relied on decisions such as Bharti Airtel Ltd vs. Addl. CIT and Micro Ink Ltd. vs. Addl. CIT. However, the Departmental Representative argued that the Dispute Resolution Panel (DRP) upheld the adjustment, citing retrospective amendments to Section 92B (2) of the Income Tax Act through the Finance Act, 2012, which included corporate guarantees as international transactions. The Tribunal, after considering past decisions and the amendment, concluded that providing corporate guarantees to AE does not involve any cost to the assessee and thus, does not constitute an international transaction. Consequently, the upward adjustment of Rs. 22,06,65,514/- was deleted.- Interest on Optionally and Fully Convertible Debentures (OFCD): The assessee challenged an upward adjustment of Rs. 3,75,50,666/- for interest on investments in OFCDs in its AE. The TPO had added the LIBOR rate to the 2% interest on OFCDs, arriving at an Arms Length Price (ALP) of 2.95%. The Tribunal noted that the TPO did not provide a clear basis for this calculation and that the LIBOR rate considered was inconsistent with past assessments. The Tribunal directed the Assessing Officer/TPO to re-examine the issue and determine the correct LIBOR rate before deciding on any ALP adjustment. The matter was remitted back for fresh consideration.2. Disallowance under Section 14A of the Income Tax Act:- The assessee contested a disallowance of Rs. 101,96,34,654/- under Section 14A read with Rule 8D. The assessee argued that the Assessing Officer did not express dissatisfaction with its own disallowance of Rs. 17,90,085/- and failed to exclude investments that did not yield exempt income. The Tribunal noted that while the Assessing Officer had expressed dissatisfaction with the assessee’s disallowance, there was no verification of the claim that investments were in wholly owned subsidiaries. The Tribunal set aside the disallowance and remitted the issue back to the Assessing Officer for fresh consideration, instructing to exclude investments that did not yield exempt income.3. Disallowance while computing book profits under Section 115JB:- The assessee argued that the disallowance under Section 14A should not be considered while computing book profits under Section 115JB. The Tribunal referred to the Special Bench decision in Vireet Investment Pvt. Ltd, which held that computation under clause (f) of Explanation 1 to Section 115JB (2) should be made without resorting to Section 14A read with Rule 8D. Following this precedent, the Tribunal deleted the disallowance under Section 115JB.4. Credit for TDS and advance tax:- The assessee claimed that credit for TDS amounting to Rs. 5,41,97,523/- and advance tax of Rs. 3,50,00,000/- were not given. The Tribunal directed the Assessing Officer to verify these claims and allow credit if found correct.Conclusion:- The appeal was partly allowed for statistical purposes, and the stay petition was dismissed as infructuous. The Tribunal directed fresh consideration on specific issues and upheld certain contentions of the assessee based on legal precedents and proper application of the law.