Tribunal rules in favor of GVK Power, overturns transfer pricing adjustments and disallowances

The Tribunal allowed the appeal of the assessee, GVK Power & Infrastructure Limited, deleting transfer pricing adjustments related to corporate guarantee commission and notional interest on outstanding amounts from Associated Enterprises. The disallowance of sponsorship expenses and legal and professional charges was also overturned. The matter of disallowance under Section 14A was remitted back to the Assessing Officer for reconsideration. The appeal was partly allowed on various grounds, with the order pronounced on 18th May 2018.

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Issues Involved:
1. Transfer pricing adjustment related to corporate guarantee commission.
2. Transfer pricing adjustment related to notional interest on outstanding amounts from Associated Enterprises (AEs).
3. Disallowance of sponsorship expenses.
4. Disallowance of legal and professional charges.
5. Disallowance under Section 14A of the Income Tax Act.
6. Charging of interest under Sections 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment Related to Corporate Guarantee Commission:
The assessee, GVK Power & Infrastructure Limited, extended a corporate guarantee to its AE, GVK Coal Developers (Singapore) PTE Limited, charging a commission of 0.90%. The Transfer Pricing Officer (TPO) proposed an adjustment, suggesting a 1.30% commission based on bank guarantee rates. The assessee argued that corporate guarantees differ from bank guarantees in terms of risk and purpose, citing various tribunal decisions supporting a lower commission rate. The Dispute Resolution Panel (DRP) upheld the TPO's adjustment. However, the Tribunal found that the TPO failed to account for differences in risk and terms between bank and corporate guarantees. The Tribunal ruled that the 0.90% commission charged by the assessee was at arm's length, citing multiple judicial precedents favoring lower rates for corporate guarantees. Consequently, the Tribunal deleted the upward adjustment of Rs. 11,32,94,387/-.

2. Transfer Pricing Adjustment Related to Notional Interest on Outstanding Amounts from AEs:
The TPO imputed notional interest on receivables from AEs, proposing an adjustment based on a 14.45% interest rate. The DRP adjusted this to the domestic term deposit rate of SBI, resulting in an addition of Rs. 22,44,330/-. The assessee argued that the receivables were not overdue within the assessment year and that there was no systematic delay in payments. The Tribunal agreed, noting that the invoices were raised at the end of the financial year, and the credit period did not fall within the assessment year. The Tribunal also cited judicial precedents supporting the non-imposition of notional interest in such cases. Therefore, the Tribunal deleted the addition.

3. Disallowance of Sponsorship Expenses:
The A.O. disallowed Rs. 10,68,138/- claimed as sponsorship expenses, citing a lack of nexus with the assessee's business. The DRP upheld this disallowance. The assessee argued that the expenses were for promoting public awareness and corporate image, which is incidental to its business. The Tribunal agreed, noting that sponsorship expenses for events can promote the company's image and are common in business practices. The Tribunal cited various judicial precedents supporting the allowance of such expenses as revenue expenditure. Consequently, the Tribunal deleted the disallowance.

4. Disallowance of Legal and Professional Charges:
The A.O. disallowed Rs. 2,41,47,303/- incurred for feasibility studies and due diligence related to the development of Okha Port, treating it as capital expenditure. The DRP upheld this view. The assessee argued that these expenses were for business expansion and should be treated as revenue expenditure. The Tribunal referred to its earlier decision in the assessee's case for AY 2010-11, where similar expenses were allowed as revenue expenditure. Following this precedent, the Tribunal held that the expenses were incurred for business purposes and allowed the deduction under Section 37(1) of the Income Tax Act.

5. Disallowance under Section 14A of the Income Tax Act:
The assessee initially disallowed certain expenses under Section 14A but later claimed no disallowance was warranted as no exempt income was earned during the year. The A.O. and DRP rejected this claim, stating that the assessee did not file a revised return. The Tribunal noted that appellate authorities are not barred from entertaining fresh claims during appellate proceedings, citing the Supreme Court's decision in Goetze India Ltd. vs. CIT. The Tribunal remitted the matter back to the A.O. to reconsider the disallowance under Section 14A on merits.

6. Charging of Interest under Sections 234B and 234C of the Income Tax Act:
The Tribunal noted that charging interest under Sections 234B and 234C is consequential and mandatory. Therefore, this ground of appeal was dismissed.

Conclusion:
The Tribunal allowed the appeal of the assessee on most grounds, deleting the additions related to transfer pricing adjustments, sponsorship expenses, and legal and professional charges. The matter related to disallowance under Section 14A was remitted back to the A.O. for reconsideration. The appeal was partly allowed, and the order was pronounced on 18th May 2018.

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