Tribunal alters guarantee commission rate, allows re-characterization of preference shares. Interest and admin expenses disallowed.

The tribunal partly allowed the appeal of the assessee, directing the AO/TPO to apply a guarantee commission rate of 1% instead of 1.75% for corporate guarantees, following precedent. The tribunal also instructed the AO/TPO to adhere to previous decisions by Co-ordinate Benches regarding the re-characterization of preference shares as interest-free loans, leading to the allowance of specified grounds raised by the assessee. Additionally, disallowances of interest expenses and administrative expenses were deleted based on commercial expediency and Rule 8D(2)(iii) application, respectively. The issue of non-grant of foreign tax credit was remanded for further consideration, while premature penalty proceedings under section 271(1)(c) were dismissed.

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Issues involved:
1. Transfer Pricing adjustment of guarantee commission.
2. Transfer Pricing adjustment of subscription and redemption of preference share capital.
3. Disallowance of interest expenses under section 36(1)(iii) of the Act.
4. Disallowance under section 14A of the Act for administrative expenses.
5. Non-grant of foreign tax credit.
6. Initiating penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:
1. Transfer Pricing adjustment of guarantee commission:
The issue pertains to the Transfer Pricing adjustment of guarantee commission amounting to Rs. 7,22,77,019 on corporate guarantees provided by the assessee to its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of guarantee commission at 1.75%, which was upheld by the Dispute Resolution Panel (DRP). However, the assessee argued that previous decisions by Co-ordinate Benches favored a guarantee commission of 1% of the outstanding guarantee amount. The tribunal, following precedent, directed the AO/TPO to apply the guarantee commission rate of 1%, thereby allowing Ground Nos. 3 to 6 raised by the assessee.

2. Transfer Pricing adjustment of subscription and redemption of preference share capital:
The issue concerns a Transfer Pricing adjustment of Rs. 20,07,35,929 related to the redemption of preference shares and re-characterization of the transaction as an interest-free loan. The TPO applied an interest rate, which was later reduced by the DRP. The assessee cited previous decisions by Co-ordinate Benches, arguing against the re-characterization of shares as loans. The tribunal directed the AO/TPO to follow the precedent set by the Co-ordinate Benches, allowing Ground Nos. 7 to 10 raised by the assessee.

3. Disallowance of interest expenses under section 36(1)(iii) of the Act:
The issue involves the disallowance of interest expenses amounting to Rs. 1,25,18,107 due to advances made by the assessee to subsidiaries/group concerns. The AO held that the commercial expediency for interest-free loans was not established. The tribunal, following previous decisions by Co-ordinate Benches, directed the AO/TPO to delete the disallowance, as Ground Nos. 11 to 13 raised by the assessee were allowed.

4. Disallowance under section 14A of the Act for administrative expenses:
The issue pertains to the disallowance under section 14A of the Act amounting to Rs. 1,17,74,975 for administrative expenses related to investments. The tribunal considered previous decisions by Co-ordinate Benches and the application of Rule 8D(2)(iii), ultimately sustaining the disallowance. The tribunal also addressed the non-recording of satisfaction by the AO, concluding that the disallowance was justified under Rule 8D(2)(iii).

5. Non-grant of foreign tax credit:
The issue raised concerns the non-grant of foreign tax credit amounting to Rs. 1,84,04,025. The tribunal directed the AO to dispose of the rectification application filed by the assessee, allowing for further consideration of the matter.

6. Initiating penalty proceedings under section 271(1)(c) of the Act:
The issue regarding the initiation of penalty proceedings under section 271(1)(c) of the Act was deemed premature and dismissed by the tribunal.

In conclusion, the tribunal partly allowed the appeal of the assessee, addressing various Transfer Pricing adjustments, disallowances, and procedural matters in the judgment delivered on 06.02.2019.

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