2019 (6) TMI 346 - AT - Income Tax

Tribunal rules for assessee on transfer pricing, interest, and disallowance issues.

The Tribunal ruled in favor of the assessee on various issues, including the transfer pricing adjustment of guarantee commission, notional interest on ... TP adjustment of guarantee commission - HELD THAT:- There are number of decision such as CIT Vs. Everest Kento Cylinder Ltd. [2015 (5) TMI 395 - BOMBAY HIGH COURT] and Thomas Cook India Ltd. Vs. ACIT [2016 (5) TMI 262 - ITAT MUMBAI] are on record in which the guarantee commission has been restricted to the extent of 0.5% of guarantee amount. In view of the above mentioned law, we are of the view that it would be the reasonable to determination the Arm’s Length Price (ALP) in connection with the guarantee commission @ 0.5% of the guarantee amount. Accordingly. we set aside the finding of the DRP in this regard and restrict the guarantee fee @ 0.5% of the guarantee amount. Accordingly we decide the issue in favour of the assessee against the revenue. Addition of notional interest on loan given to associate enterprises - HELD THAT:- Since the assessee has charged @ 9.5% of the per annum, therefore, there is no need for making the TPO adjustment in this regard. Accordingly, we are of the view that the DRP has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Addition of notional interest on investment in subsidiary as deemed loan - HELD THAT:- We noticed that the issue has been decided on the basis of decision of Hon’ble ITAT in the assessee’s own case for A.Y. 2009-10 [2014 (11) TMI 845 - ITAT MUMBAI]. Accordingly, we are of the view that the DRP has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Disallowance of ESI u/s 2(24)(x) r.w.s 36(1)(va) - HELD THAT:- On appraisal of the above mentioned finding, we noticed that the assessee deposited the contribution towards employees ESIC earlier to the due date of filing the return of income, therefore, no doubt in the said circumstances, the same is not liable to be disallowed. DRP has also relied upon the decision of the various authorities which has been mentioned in the order. The facts are not distinguishable at this stage. Therefore, in the said circumstances, we are of the view that the DRP has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Disallowance u/s 14A - HELD THAT:- The assessee has earned the dividend income of ₹ 1,11,636/- and suo-motu disallowed. At the very outset, the assessee agreed to restrict the disallowance to the extent of dividend income, therefore, in the said circumstances and by relying upon the law settled in PCIT Vs. State Bank of Patiala [2018 (11) TMI 1565 - SC ORDER] we restrict the addition to the extent of dividend income to the tune. Accordingly, this issue is decided in favour of the assessee against the revenue. Disallowance u/s 14A r.w. Rule 8D and computation of book profit u/s 115JB - HELD THAT:- Godrej & Boyce Manufacturing Co. Ltd.V/s. DCIT [ 2010 (8) TMI 77 - BOMBAY HIGH COURT] directing the AO to work out the disallowance on a reasonable basis and not under Rule 8D under the Income Tax Rules for the A.Y. 2007-08. The Tribunal has merely followed the decision of the jurisdictional High Court and no fault can be found with the same. MAT computation - the matter of controversy has already been discussed and decided in the case of ACIT vs. Vireet Investment Pvt. Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI] . In view of the above mentioned decision, we are of the view that the provisions of u/s 14A r.w. Rule 8D is not applicable upon the books profit u/s 115JB. Accordingly, we delete the said addition raised against the assessment u/s 115JB of the Act. Accordingly, we decide this issue in favour of the assessee against the revenue. Issues Involved:1. Addition on account of transfer pricing adjustment of guarantee commission.2. Incorrect computation of tax demand, interest u/s 234B & 234C, and non-grant of refund.3. Deletion of addition of notional interest on account of loan given to associate enterprises.4. Deletion of addition of notional interest on investment in subsidiary as deemed loan.5. Deletion of addition on account of disallowance u/s 2(24)(x) r.w.s 36(1)(va).6. Violation of principles of natural justice.7. Reference made to the Transfer Pricing Officer (TPO) as bad-in-law.8. Disallowance u/s 14A of the Act and computation of book profit u/s 115JB.Detailed Analysis:Issue 1: Addition on account of transfer pricing adjustment of guarantee commissionThe assessee challenged the addition of Rs. 1,79,190/- on account of transfer pricing adjustment of guarantee commission. The TPO had charged commission based on rates normally charged by banks. The assessee argued that the corporate guarantee is not an international transaction and cited judgments from CIT vs. Everest Kento Cylinders Ltd. and CIT vs. Asian Paints (India) Ltd. The Tribunal found that the facts were similar to these cases and determined that the Arm’s Length Price (ALP) for the guarantee commission should be restricted to 0.5% of the guarantee amount, thus deciding in favor of the assessee.Issue 2: Incorrect computation of tax demand, interest u/s 234B & 234C, and non-grant of refundThe assessee contended that the AO wrongly computed the tax demand and interest under sections 234B & 234C and stated that no refund was granted. The Tribunal noted that the calculation of interest is consequential based on the demand raised and directed the AO to calculate the interest strictly as per the provisions of sections 234B & 234C.Issue 3: Deletion of addition of notional interest on account of loan given to associate enterprisesThe revenue challenged the deletion of notional interest on loans given to associate enterprises. The DRP had directed the AO to adopt LIBOR plus 2% as the rate of interest for making adjustments. The Tribunal upheld the DRP’s decision, noting that the issue had been previously decided in the assessee’s favor for earlier assessment years, and found no need for TPO adjustment since the interest rate charged was 9.5% per annum.Issue 4: Deletion of addition of notional interest on investment in subsidiary as deemed loanThe revenue contested the deletion of notional interest on investments in subsidiaries characterized as deemed loans. The DRP, following the Tribunal’s order in the assessee's own case for earlier years, directed the AO to delete the proposed addition. The Tribunal upheld this decision, emphasizing that investments cannot be re-characterized as loans and citing multiple judicial precedents supporting this view.Issue 5: Deletion of addition on account of disallowance u/s 2(24)(x) r.w.s 36(1)(va)The revenue challenged the deletion of disallowance of employees' ESIC contributions made beyond the stipulated period but before the due date for filing the return of income. The DRP found the assessee’s contention correct, supported by various judicial decisions, and directed the AO to delete the disallowance. The Tribunal upheld this decision, noting the contributions were made before the due date for filing the return.Issue 6: Violation of principles of natural justiceThe assessee claimed a violation of natural justice in the rejection of objections related to transfer pricing adjustments. The Tribunal did not separately adjudicate this issue, considering it would be addressed in the other grounds raised.Issue 7: Reference made to the Transfer Pricing Officer (TPO) as bad-in-lawThe assessee argued that the reference to the TPO was made without providing an opportunity to be heard, thus violating principles of natural justice. This issue was not pressed by the assessee and was decided in favor of the revenue.Issue 8: Disallowance u/s 14A of the Act and computation of book profit u/s 115JBThe assessee challenged the disallowance of Rs. 28,33,730/- u/s 14A and its addition to book profits u/s 115JB. The Tribunal restricted the disallowance to the extent of the dividend income earned and deleted the addition to book profits, following jurisdictional High Court decisions and other judicial precedents.Conclusion:The Tribunal decided in favor of the assessee on most issues, including the transfer pricing adjustment of guarantee commission, notional interest on loans and investments, and disallowance u/s 14A. The revenue's appeal was dismissed, and the assessee's appeal was allowed.