2019 (9) TMI 437 - AT - Income Tax

Tribunal rules in favor of assessee on various issues, emphasizing legal definitions and conditions

Asst. Commissioner of Income tax 5 (2) (1), Mumbai Versus M/s. KEC International Ltd.

Asst. Commissioner of Income tax 5 (2) (1), Mumbai Versus M/s. KEC International Ltd. - TMI Issues Involved:1. Whether the performance guarantee provided by the assessee to a third party was an international transaction.2. Whether the adjustment to Arm's Length Price (ALP) for the performance guarantee was justified.3. Whether the guarantee commission recovered by the assessee from its AE was at arm's length.4. Whether depreciation on the actual cost of assets acquired by the assessee was justified.5. Whether the mark-to-market loss on foreign exchange contracts was an accrued loss.6. Whether the provision for doubtful debts and advances should be allowed as a deduction.Issue-wise Detailed Analysis:1. Performance Guarantee as an International Transaction:The primary issue was whether the performance guarantee provided by the assessee to Bahwan Engineering Company LLC on behalf of its AE was an international transaction. The Tribunal noted that the assessee did not charge any commission for this guarantee, arguing that the benefit derived from potential contract assignment outweighed the need for a commission. The Tribunal held that the performance guarantee did not involve any cost to the assessee and thus, did not qualify as an international transaction within the meaning of Section 92B(1) of the Income Tax Act. Consequently, no adjustment to the ALP was necessary, and the addition of Rs. 69,45,342 was deleted.2. Adjustment to ALP for Performance Guarantee:The Tribunal found that the assessee had entered into an agreement with its AE, ensuring that any failure by the AE would result in the contract being assigned to the assessee, who would then execute it. This arrangement meant there was no risk to the assessee, and thus, no need to charge a commission. The Tribunal concluded that the assessee was justified in not charging any commission, and no ALP adjustment was required.3. Guarantee Commission Recovered from AE:The issue revolved around the performance bank guarantee issued to Chandian Company for Water & Electricity (CCWE). The assessee recovered a 0.93% guarantee fee from its AE, which was the same rate charged by Bank of India. The Tribunal noted that the creditworthiness of the assessee (A+ rating) was better than that of the AE (assumed BBB rating). The Tribunal held that the 0.93% rate was the most direct comparable uncontrolled transaction and that no further adjustment was needed. The addition of Rs. 39,354 was deleted.4. Depreciation on Actual Cost of Assets:The Tribunal addressed whether the depreciation claimed by the assessee on assets acquired from a demerged entity was justified. The Tribunal noted that the transfer did not qualify as a demerger under Section 2(19AA) of the Income Tax Act, as the conditions were not met. Consequently, the depreciation should be calculated based on the actual cost of the assets, not the written-down value. The Tribunal upheld the CIT(A)'s decision, allowing the depreciation of Rs. 65,31,55,991.5. Mark-to-Market Loss on Foreign Exchange Contracts:The Tribunal considered whether the mark-to-market loss on foreign exchange contracts was an accrued loss. The Tribunal referred to its earlier decisions in the assessee's case, which held that such losses were accrued and not notional. The Tribunal upheld the CIT(A)'s decision, allowing the deduction for the mark-to-market loss and rejecting the revenue's contention that it was contingent or notional.6. Provision for Doubtful Debts and Advances:The Tribunal examined whether the provision for doubtful debts and advances should be allowed as a deduction. The Tribunal found that the assessee had not debited the profit and loss account with the provision for doubtful debts and advances, as these were taken over from a merged entity. The Tribunal upheld the CIT(A)'s decision, allowing the deduction and rejecting the revenue's disallowance of Rs. 4,63,28,957.Conclusion:The Tribunal's judgment addressed multiple issues related to international transactions, ALP adjustments, depreciation, and provisions for doubtful debts. The Tribunal upheld the CIT(A)'s decisions in favor of the assessee on all counts, emphasizing the importance of accurate accounting and adherence to legal definitions and conditions. The revenue's appeal was partly allowed, primarily on procedural grounds, but the substantive issues were decided in favor of the assessee.