2018 (4) TMI 1742 - AT - Income Tax

Tribunal dismisses procedural error, reverses interest disallowance, remits corporate guarantee issues for reassessment.

BS Ltd. Versus Assistant Commissioner of Income Tax, Central Circle-2 (3), Hyderabad

BS Ltd. Versus Assistant Commissioner of Income Tax, Central Circle-2 (3), Hyderabad - TMI Issues Involved:1. Issuance of Draft Assessment Order2. Adjustment for Corporate Guarantee3. Disallowance of Interest on Sham Transactions4. Disallowance of Interest on Payments to Silver Point Infratech Ltd.Detailed Analysis:1. Issuance of Draft Assessment Order:The assessee contended that the Assessing Officer (AO) erred in not issuing a Draft Assessment Order as per the procedure laid down under section 144C(1) of the Income Tax Act, 1961. The AO issued a notice of demand under section 156 and penalty notices under sections 271(1)(c) and 271AAB along with the draft assessment order dated 30/12/2016, which the assessee argued amounted to passing a final assessment order. The tribunal noted that the AO had indeed passed a draft assessment order but accompanied it with procedural notices. The tribunal held that the procedural mistakes did not amount to passing a final assessment order, and therefore, the ground raised by the assessee was dismissed.2. Adjustment for Corporate Guarantee:The assessee argued that the corporate guarantee provided to its Associate Enterprise (AE) did not fall within the scope of an international transaction under section 92B and that the Transfer Pricing Officer (TPO) had incorrectly adopted the State Bank of India (SBI) rates for determining the Arm's Length Price (ALP). The tribunal noted that the term 'guarantee' was included in the definition of international transactions by the Finance Act, 2012, with retrospective effect from 01/04/2002. The tribunal agreed that the corporate guarantee should be considered an international transaction. However, the tribunal found that the TPO should have applied a rate of 0.53% as per the decision in Glenmark Pharmaceuticals Ltd. and remitted the issue back to the TPO/AO to determine the actual exposure of contingent liability for the assessment year and apply the appropriate rate.3. Disallowance of Interest on Sham Transactions:The AO disallowed interest expenses amounting to Rs. 27,94,43,971/- on the grounds that the transactions with related parties were sham. The assessee argued that the transactions were genuine and entered into during the regular course of business. The tribunal observed that the AO had not rejected any purchases or made any inquiry to find the fair market value of transactions but proceeded to disallow the associated financial cost. The tribunal found that the AO's method of calculating interest was improper and noted that the assessee had made a margin of Rs. 2.34 crores in the transactions, which was enough to cover the interest cost. The tribunal held that since the AO accepted the turnover without disallowing any purchases, he could not disallow the interest cost. Therefore, the disallowance made by the AO on interest was deleted.4. Disallowance of Interest on Payments to Silver Point Infratech Ltd.:The AO disallowed interest of Rs. 1,37,88,369/- on payments made to Silver Point Infratech Ltd., arguing that the assessee used borrowed funds for these payments without any business prudence. The assessee contended that the payments were part of commercial transactions and back-to-back payments from contractors to sub-contractors. The tribunal noted that the information provided by the assessee was not verified by the tax authorities. The tribunal remitted the issue back to the AO to verify the claim and determine if the payments were indeed back-to-back payments. If verified, the addition on interest should be deleted, and the assessee should be given a proper opportunity of being heard.Conclusion:The tribunal allowed the appeal for statistical purposes, remitting the issues related to corporate guarantee and payments to Silver Point Infratech Ltd. back to the AO for further verification and appropriate action. The disallowance of interest on sham transactions was deleted, and the procedural mistake regarding the draft assessment order was dismissed.