ITAT Mumbai deletes transfer pricing adjustment on corporate guarantee commission and Section 14A disallowance

ITAT Mumbai allowed the appeal regarding transfer pricing adjustment for corporate guarantee commission. Following coordinate bench decisions for assessment years 2011-12 to 2014-15, the tribunal held that corporate guarantee commission at 0.35% per annum was at arm's length, requiring no transfer pricing adjustment. The AO's addition confirmed by DRP was deleted. Regarding Section 14A disallowance, the tribunal found AO's dissatisfaction recording was mechanical and not in accordance with Section 14A(2) mandate, as it ignored appellant's methodical computation of actual expenditure. The disallowance under Section 14A read with Rule 8D was deleted, and appellant's grounds were allowed.

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Issues Involved:

1. Violation of the principle of natural justice by the Transfer Pricing Officer (TPO).
2. Non-confrontation of information/material collected under Section 133(6) by the TPO.
3. Classification of financial guarantee as an "international transaction" under Section 92B.
4. Determination of Arm's Length Price (ALP) for financial guarantees at 1.25% per annum.
5. Transfer pricing adjustment of Rs. 9,43,88,840/- for guarantee commission.
6. Classification of financial guarantees as a shareholder activity.
7. Rejection of the internal Comparable Uncontrolled Price (CUP) method and ALP of 0.35% p.a.
8. Consistency of the internal CUP method accepted by the Tribunal in the past.
9. Arbitrary computation of ALP for financial guarantees.
10. Disallowance of expenditure under Section 14A for earning exempt dividend income.
11. Consistency of the suo-moto disallowance method accepted in the past.
12. Additional disallowance of Rs. 10,67,983/- under Section 14A read with Rule 8D(2)(iii).
13. Invoking Rule 8D without recording objective satisfaction.

Issue-wise Detailed Analysis:

Ground No. 1 to 9: Determination of ALP for Financial Guarantee Commission

1. Violation of Natural Justice: The TPO passed the order under Section 92CA(3) without adhering to the principle of natural justice.

2. Non-confrontation of Information: The TPO did not confront the Appellant with the information/material collected under Section 133(6) upon which the adjustment was based.

3. International Transaction Classification: The Appellant did not press Ground No. 3, which contended that providing guarantees to AE does not constitute an international transaction.

4. ALP Determination at 1.25%: The DRP determined the ALP for financial guarantees at 1.25% per annum, which was contested by the Appellant.

5. Transfer Pricing Adjustment: The TPO proposed an upwards transfer pricing adjustment of INR 9,43,88,840/- based on an ALP of 1.25% per annum.

6. Shareholder Activity: The Appellant argued that financial guarantees were a shareholder activity requiring no charge, which was rejected by the AO/TPO/DRP.

7. Rejection of Internal CUP Method: The TPO rejected the internal CUP method and the ALP of 0.35% p.a. adopted by the Appellant.

8. Consistency of Internal CUP Method: The Appellant highlighted that the internal CUP method had been consistently followed and accepted by the Tribunal in the past.

9. Arbitrary Computation of ALP: The Appellant argued that the ALP computation for financial guarantees was arbitrary.

The Tribunal noted that in previous appeals for Assessment Years 2010-11 to 2015-16, the issue was decided in favor of the Appellant, accepting the internal CUP method. The Tribunal cited several cases where the ALP for corporate guarantees was determined at lower rates (e.g., 0.5% in Everest Kento Cylinder Ltd.). The Tribunal concluded that the corporate guarantee commission determined by the Appellant at 0.35% per annum was at arm's length, requiring no transfer pricing adjustment. Consequently, the transfer pricing addition of INR 9,43,88,840/- was deleted, and Grounds No. 1, 2, 4, 5, 6, 8, and 9 were disposed of as infructuous.

Ground No. 10 to 13: Disallowance under Section 14A

1. Disallowance of Expenditure: The AO/DRP disallowed an additional INR 10,67,893/- under Section 14A read with Rule 8D, over and above the suo-moto disallowance of INR 6,55,409/- made by the Appellant.

2. Consistency of Suo-moto Disallowance: The Appellant argued that the suo-moto disallowance method had been consistently followed and accepted in the past.

3. Additional Disallowance: The AO proposed additional disallowance without proper objective satisfaction.

4. Invoking Rule 8D: The AO invoked Rule 8D without recording objective satisfaction as required under Section 14A(2).

The Tribunal noted that the Appellant had methodically identified actual expenses related to exempt income and disallowed such expenses. The AO's reasoning was based on presumption without pointing out any infirmity in the Appellant's computation. The Tribunal found that the AO's dissatisfaction was not in accordance with the mandate of Section 14A(2), which requires objective satisfaction having regard to the accounts of the Appellant. The Tribunal deleted the additional disallowance of INR 10,67,893/- made by the AO under Section 14A read with Rule 8D. Consequently, Grounds No. 10 to 13 were allowed.

Conclusion:

The appeal filed by the Appellant was allowed. The Tribunal deleted the transfer pricing addition of INR 9,43,88,840/- and the additional disallowance of INR 10,67,893/- under Section 14A read with Rule 8D. The order was pronounced on 07.12.2022.

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