2019 (4) TMI 1504 - AT - Income Tax

Tribunal adjusts corporate fees, interest on loans, allows donation deduction

Technocraft Industries (India) Ltd. Versus Dy. Commissioner of Income Tax-8 (3), Mumbai

The tribunal allowed the appeal in part, directing adjustments to corporate guarantee fees and interest on loans based on established precedents. The ... TP Adjustment - addition on account of guarantee fee - HELD THAT:- Tribunal in assessee's own case wherein with respect to the similar bank guarantee the Tribunal has upheld addition to the extent of 0.9%. As the facts and circumstances of the case during the year under consideration are same, respectfully following the order of the Tribunal in assessee's own case, we direct the AO to restrict addition on account of guarantee fee @ 0.9%. Addition in respect of interest on loan advanced to AE - HELD THAT:- We direct the AO to restrict the addition on account of interest as per rates applicable to currency in which loan was required to be repaid to the assessee i.e. LABOR rate. Disallowance u/s 37(1) - donation made to Shanti Seva Nidhi - eligible for deduction u/s 80G and also claimed in original return - Allowable revenue expenditure - HELD THAT:- The assessee had claimed an expenditure of ₹ 50,00,000/- u/s 37(1) of the Act which is in the form of donation given to Shanti Seva Nidhi for the purpose of training and providing technical knowledge along with diploma courses to the employees of the assessee company and their children. These students with qualified diploma degrees are in turn recruited by the assessee company for their manufacturing division. Thus the amount given to Shanti Seva Nidhi have resulted in training and providing technical knowledge along with diploma course to the employees of the assessee company and their children and who in turn were recruited by the assessee company in its manufacturing division. Thus, the business purpose of assessee is fulfilled. There is no justification for disallowance of the expenditure u/s 37(1). Issues Involved:1. Upward adjustment of Rs. 68,77,987 in respect of Arm's Length Price (ALP) for international transactions.2. Upward adjustment of Rs. 43,22,478 in respect of corporate guarantee fees and whether corporate guarantee is an international transaction.3. Addition of Rs. 25,55,509 in respect of interest on loan and short-term business advances given to Associated Enterprises (AE).4. Disallowance of Rs. 50 lakhs claimed under Section 37(1) of the Income Tax Act for donation made to Shanti Seva Nidhi.Detailed Analysis:1. Upward Adjustment of Rs. 68,77,987 in respect of Arm's Length Price (ALP):The assessee contested the upward adjustment of Rs. 68,77,987 made by the CIT(A) for the international transactions with Associated Enterprises. The Transfer Pricing Officer (TPO) initially determined an upward adjustment of Rs. 1,21,97,403, which was later reduced to Rs. 68,77,987. The CIT(A) confirmed the AO’s action. The tribunal reviewed the facts and upheld the CIT(A)'s decision, emphasizing that the adjustment was justified based on the transfer pricing regulations.2. Upward Adjustment of Rs. 43,22,478 in respect of Corporate Guarantee Fees:(a) The CIT(A) upheld the upward adjustment made by the AO/TPO in respect of corporate guarantee fees amounting to Rs. 43,22,478. The assessee argued that the corporate guarantee was extended as a matter of commercial prudence to protect the business interests of the group.(b) The tribunal referred to the decision in Thomas Cook (India) Ltd. v. Addl. CIT, where the rate of 0.5% was considered appropriate for guarantee commission. The tribunal also considered the assessee's own case for the assessment year 2009-10, where a rate of 0.9% was upheld. Consequently, the tribunal directed the AO to restrict the addition on account of guarantee fees to 0.9%.3. Addition of Rs. 25,55,509 in respect of Interest on Loan and Short-term Business Advances:(a) The CIT(A) confirmed the addition of Rs. 25,55,509 made by the AO/TPO by treating short-term business advances as loans given to AE and applying an interest rate of 11.5%.(b) The tribunal referred to the decision of the Delhi High Court in Cotton Naturals (I) Pvt. Ltd., which held that the arm's length interest rate for loans advanced to foreign subsidiaries should be based on the market-determined interest rate applicable to the currency in which the loan is to be repaid. The tribunal directed the AO to compute the interest as per the LIBOR rate prevailing during the year.4. Disallowance of Rs. 50 Lakhs Claimed under Section 37(1) for Donation to Shanti Seva Nidhi:The assessee claimed a deduction of Rs. 50 lakhs under Section 37(1) for a donation made to Shanti Seva Nidhi, arguing that it was for employee welfare and business development. The CIT(A) dismissed this claim, but the tribunal considered several judicial precedents supporting the claim that donations made for commercial expediency and employee welfare can be allowed as business expenditure under Section 37(1).The tribunal noted that the donation was made to a vocational training school that provided skilled personnel for the assessee's manufacturing processes. The tribunal found a direct nexus between the donation and the business benefits, including employee welfare and securing trained personnel. Consequently, the tribunal allowed the deduction under Section 37(1), overturning the CIT(A)’s decision.Conclusion:The appeal was allowed in part, with the tribunal directing adjustments to the corporate guarantee fees and interest on loans based on established precedents, and allowing the deduction for the donation under Section 37(1).