ITAT Mumbai favors assessee on transfer pricing: deletes interest adjustments, upholds guarantee fees, allows forex losses

ITAT Mumbai ruled in favor of the assessee on multiple transfer pricing issues. The tribunal deleted interest adjustments on advances to joint venture partners, holding these were capital contributions to protect business interests rather than loans requiring interest charges. Following precedent, guarantee fee adjustments were confirmed at 0.6% for recovered fees and 0.20% for unrecovered fees. The tribunal upheld deletion of foreign exchange mark-to-market loss additions, treating them as allowable accrued losses. Section 14A disallowance under section 115JB was also deleted as no exempt income was received.

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Issues Involved:
1. Arm's Length Price (ALP) of Corporate Guarantee Commission.
2. Disallowance under Section 14A in computing Book Profits under Section 115JB.
3. Deduction in respect of tax paid at foreign location.
4. Transfer Pricing Adjustment on Interest on Advances to Associated Enterprises.
5. Unrealized Foreign Exchange Loss (Mark to Market).

Summary:

Issue 1: Arm's Length Price (ALP) of Corporate Guarantee Commission
The assessee challenged the adjustment confirmed by the CIT(A) for the corporate guarantee commission at 0.20% on loans taken by Associated Enterprises (AE). The CIT(A) followed the decision of the coordinate bench in the assessee's own case for earlier years and upheld the ALP of the guarantee commission at 0.20%. The Tribunal confirmed this, noting that the guarantee fees with respect to various guarantees where the assessee recovered the commission at 0.6% were upheld in earlier years. The Tribunal directed to recompute the guarantee fee income at 0.20% for financial guarantees given to ICICI Bank UK on behalf of KEC Transmission LLC and KEC US LLC.

Issue 2: Disallowance under Section 14A in computing Book Profits under Section 115JB
The CIT(A) confirmed the disallowance of Rs. 93,145 made by the AO under Section 14A read with Rule 8D in computing book profits under Section 115JB. The Tribunal found this issue covered in favor of the assessee by the decision of the Special Bench in ACIT vs. Vireet Investments Pvt. Ltd. and allowed the ground, noting that the assessee did not receive any exempt income during the year.

Issue 3: Deduction in respect of tax paid at foreign location
The CIT(A) did not allow the deduction claimed by the assessee for taxes paid at foreign locations. The Tribunal dismissed this ground as the assessee did not substantiate it with any arguments.

Issue 4: Transfer Pricing Adjustment on Interest on Advances to Associated Enterprises
The CIT(A) deleted the transfer pricing adjustment of Rs. 13,40,72,569 on interest on advances given to AE, holding that the advances were towards the fulfillment of the assessee's obligation as a joint venture partner and not a loan. The Tribunal upheld this, following the decision in the assessee's own case for AY 2012-13.

Issue 5: Unrealized Foreign Exchange Loss (Mark to Market)
The CIT(A) deleted the addition on account of unrealized foreign exchange loss under normal provisions and for computing book profit under Section 115JB. The Tribunal upheld this, following its decision in the assessee's own case for earlier years, noting that MTM losses on hedging contracts are accrued losses and hence allowable expenditure.

Conclusion:
The Tribunal partly allowed the appeal of the assessee and dismissed the appeal of the AO, confirming the CIT(A)'s decisions on the main issues involved.

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