Tribunal Adjusts Transfer Pricing, Deletes Disallowances

The Tribunal partly allowed the appeal, directing the AO/TPO to recompute transfer pricing adjustments for corporate guarantees at 0.5% as an arm's length commission. It also deleted disallowances under sections 14A and 36(1)(iii) related to interest and investments. The Tribunal directed the deletion of an addition on account of CENVAT credit in the valuation of closing stock and disallowance of interest on business advances from subsidiaries. The ground regarding set-off of brought forward MTM loss against gain was dismissed as infructuous. The order was pronounced on 27-05-2020.

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Issues Involved:
1. Transfer Pricing Adjustment - Guarantee Fees
2. Disallowance u/s 14A
3. Disallowance of Interest u/s 36(1)(iii)
4. Addition on account of inclusion of CENVAT credit in valuation of Closing Stock
5. Disallowance of Interest u/s 36(1)(iii) in respect of business advances and other receivables from subsidiaries
6. Set-off of brought forward MTM loss against MTM gain

Detailed Analysis:

1. Transfer Pricing Adjustment - Guarantee Fees:
The assessee contested the adjustments made by the DRP/TPO/AO on various corporate guarantees provided to its associated enterprises (AEs). The TPO suggested transfer pricing adjustments based on different rates for various guarantees, which were partially upheld by the DRP. The Tribunal found merit in the alternative submission that 0.5% of the guarantee amount is considered an arm's length commission for corporate guarantees, as held in CIT vs. Everest Kanto Cylinders Ltd. The Tribunal directed the AO/TPO to recompute the adjustments at 0.5% in addition to the commissions already charged by the assessee. Furthermore, the Tribunal agreed that the guarantee commission on operating leases should be computed based on outstanding lease rentals only, not on the aggregate of future lease rentals.

2. Disallowance u/s 14A:
The assessee argued that the disallowance under section 14A was unwarranted as it had not earned any exempt income during the relevant financial year. The Tribunal noted that the assessee had offered dividend income from foreign subsidiaries to tax and had not earned any exempt income from Indian subsidiaries. It was established that in the absence of exempt income, no disallowance under section 14A is applicable. The Tribunal directed the AO to delete the disallowance under section 14A.

3. Disallowance of Interest u/s 36(1)(iii):
The DRP upheld the disallowance under section 36(1)(iii) as an alternative to the disallowance under section 14A. The assessee contended that its reserves and surplus were far in excess of the investments made, and thus, no interest disallowance was warranted. The Tribunal, agreeing with the assessee and relying on the decision in CIT vs. Reliance Utilities & Power Ltd, presumed that the investments were made out of interest-free funds. Consequently, the Tribunal directed the AO to delete the disallowance under section 36(1)(iii).

4. Addition on account of inclusion of CENVAT credit in valuation of Closing Stock:
The assessee followed an exclusive method of accounting, recording purchases, sales, and stock exclusive of indirect taxes. The AO made an ad hoc adjustment only to the closing stock, which was upheld by the DRP. The Tribunal noted that similar additions in previous years were deleted, holding that whether the inclusive or exclusive method of accounting is followed, it is tax neutral. Following the precedent, the Tribunal directed the deletion of the addition.

5. Disallowance of Interest u/s 36(1)(iii) in respect of business advances and other receivables from subsidiaries:
The AO treated the amounts recoverable from AEs as interest-free advances and disallowed interest under section 36(1)(iii), which was confirmed by the DRP. The Tribunal, referring to its decisions in the assessee's own case for earlier years, found that these amounts represented expenses incurred on behalf of subsidiaries and not loans. Therefore, no disallowance under section 36(1)(iii) was warranted. The Tribunal directed the deletion of the disallowance.

6. Set-off of brought forward MTM loss against MTM gain:
The assessee's ground related to the set-off of brought forward MTM loss against MTM gain was rendered infructuous due to the Tribunal's earlier decisions treating MTM loss as business loss. Consequently, this ground of appeal was dismissed as infructuous.

Conclusion:
The Tribunal partly allowed the appeal, providing relief on several grounds while dismissing one ground as infructuous. The order was pronounced in the open court on 27-05-2020.

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