2019 (1) TMI 845 - AT - Income Tax

Taxpayer appeal allowed for statistical purposes, directions for TPO and AO adjustments.

M/s. JE Energy Venture Private Ltd., (formerly known as Jubilant Energy Pvt. Ltd.) Versus ACIT, Circle 1, Noida

M/s. JE Energy Venture Private Ltd., (formerly known as Jubilant Energy Pvt. Ltd.) Versus ACIT, Circle 1, Noida - TMI Issues Involved:1. Enhancement of returned income.2. Addition to income due to corporate guarantee provision.3. Directions from DRP on corporate guarantee commission.4. Addition to income due to payment of interest on inter-corporate deposit/loan.5. Charging of interest under sections 234B and 234C.6. Initiation of penalty under section 271(1)(c).Detailed Analysis:Issue 1: Enhancement of Returned IncomeThe taxpayer contested the enhancement of its returned income by Rs. 20,57,19,110/- by the AO/TPO, which was initially Rs. 16,52,19,000/-. This enhancement was primarily due to the addition of Rs. 20,09,07,000/- related to the provision of corporate guarantees and Rs. 48,12,110/- related to the payment of interest on inter-corporate deposits/loans.Issue 2: Addition to Income Due to Corporate Guarantee ProvisionThe taxpayer provided corporate guarantees to its AE, which the TPO considered an international transaction under section 92B of the Act. The TPO applied the Comparable Uncontrolled Price (CUP) method using bank guarantee rates to determine the Arm's Length Price (ALP), resulting in an addition of Rs. 20,09,07,000/- to the taxpayer's income. The taxpayer argued that the provision of corporate guarantees was a shareholder activity and should not attract any compensation. The Tribunal found the TPO's use of bank guarantee rates inappropriate for benchmarking corporate guarantees, as they are conceptually different. The Tribunal directed the TPO to re-benchmark the transaction using appropriate comparables and provide an opportunity for the taxpayer to be heard.Issue 3: Directions from DRP on Corporate Guarantee CommissionThe DRP had directed the TPO to revise the corporate guarantee commission rate from 4.60% to 4.1% and the corresponding adjustment to Rs. 20,09,07,000/-. The Tribunal upheld the DRP's decision to treat the provision of corporate guarantees as an international transaction but directed the TPO to benchmark the transaction appropriately.Issue 4: Addition to Income Due to Payment of Interest on Inter-Corporate Deposit/LoanThe TPO made an adjustment of Rs. 48,12,110/- by comparing the interest rate paid by the taxpayer to its related party with the prime lending rate of the State Bank of India (SBI). The taxpayer argued that the internal CUP method should be applied, as the interest rate paid to the related party was lower than that paid to an unrelated lender. The Tribunal agreed with the taxpayer and directed the TPO to reconsider the adjustment by applying the internal CUP method and providing an opportunity for the taxpayer to be heard.Issue 5: Charging of Interest Under Sections 234B and 234CThe Tribunal noted that the issue of charging interest under sections 234B and 234C was consequential in nature and did not require a specific finding.Issue 6: Initiation of Penalty Under Section 271(1)(c)The Tribunal found the initiation of penalty under section 271(1)(c) to be premature and did not provide a specific finding on this issue.Additional Grounds: Disallowance Under Section 14AThe taxpayer had suo motu disallowed Rs. 21 crores under section 14A, which was more than the dividend income earned during the year. The Tribunal directed the AO to recompute the disallowance under section 14A in light of the decision in Maxopp Investments Limited vs. CIT, ensuring it did not exceed the exempt income received.Conclusion:The appeal filed by the taxpayer was allowed for statistical purposes, with directions for the TPO to re-benchmark the corporate guarantee transaction and reconsider the interest payment adjustment, providing an opportunity for the taxpayer to be heard. The AO was also directed to recompute the disallowance under section 14A.