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.

The Tribunal ruled in favor of the assessee on various issues, including the performance guarantee not qualifying as an international transaction, no ... TP Adjustment - performance guarantee provided by the assessee to a third party - international transaction - HELD THAT:- There is absolutely no risk involved for the assessee in issuing the performance guarantee on behalf of its AE, warranting charging of any commission to mitigate that risk. Hence, we hold that assessee was fully justified in not charging any commission from its AE in the subject mentioned performance guarantee transaction. Hence, there is no need to make any adjustment to arm’s length price thereof. In view of this decision in the peculiar facts and circumstances, the issue as to whether issuance of performance guarantee would fall within the ambit of an international transaction or not is left open and no decision is given herein Accordingly, the addition made in the sum is hereby directed to be deleted. Adjustment to arm’s length price in respect of performance bank guarantee issued to Chandian Company for Water & Electricity (CCWE) - HELD THAT:- The credit rating of the AE was not done in the instant case. It is not in dispute that the said guarantee rate of 0.93% which is charged by the bank on the assessee for issuing the bank guarantee in favour of CCWE on behalf of its AE, had been duly recovered by the assessee from its AE. Hence, it is only a case of recovery of cost by assessee without any margin. We are inclined to accept the argument of the AR that in the instant case, 0.93% of guarantee commission charged by Bank of India could be considered as the most direct comparable uncontrolled transaction to benchmark the rate of guarantee commission. The average rate adopted by the TPO at 1.04% is only an external data in the form of third party guarantees issued by the bank. When internal comparable uncontrolled price is available that should be considered as the most direct and reliable way to apply the arm’s length principle. In any case, there is absolutely no loss to the assessee and no bearing on the profits or losses as the entire cost of 0.93% has been duly recovered by the assessee from its AE. Hence, the action of the CIT(A) in holding no further adjustment to ALP is required in respect of the subject mentioned guarantee commission transaction and consequently directing the deletion of addition confirmed. Guarantee commission recovered by the assessee at 0.93% from its AE was at arm’s length in respect of bank guarantee given to CCWE for releasing the advance payment - HELD THAT:- The findings given hereinabove in respect of performance guarantee to CCWE by us would hold good for this bank guarantee also. Accordingly, we hold that the finding of the ld. CIT(A) and consequently deletion of adjustment on account of bank guarantee does not call for any interference. Depreciation on the actual cost of assets of the power transmission business acquired by the assessee - Demerger plan conceived - HELD THAT:- AO failed to explicate as to how the transfer would fall within the meaning of demerger as given under section 2(19AA) and as how all the condition specified under section 2(19AA) of the Act were satisfied. Revenue has not disputed the findings of the first appellate authority that the transfer in question is a case of slump sale and not a case of demerger. The valuation has also not been disputed. Under these circumstances, for the reasons noted in the assessee's appeal, we have to necessarily uphold the order of the first appellate authority and dismiss ground No, 1 of the revenue. Addition made towards mark to market loss of foreign exchange contracts outstanding at the end of the year - HELD THAT:- Loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is allowable as expenditure under section 37(1). As submitted that since the Accounting Standards mandatorily requires the Appellant to provide for such MTM losses, such accounting treatment needs to be considered even for the purposes of determining the allowability of deduction for such provision under the Act. In the present case too, the Appellant has been actually providing for such MTM losses in its Books of Account in accordance with the applicable Accounting Standards and accordingly, even for this reason, the deduction would be allowable to the Appellant while computing its taxable income. Thus, the Appellant prays that the MTM losses arising on account of forward contracts entered into by the Appellant be considered as an accrued loss to the Appellant and thereby allowed as deduction while computing the taxable income Disallowance made towards provision for doubtful debts and advances both under normal provisions of the Act as well as in computation of book profit u/s.115JB - HELD THAT:- AO has been taken due cognizance by the AO while framing the assessment, under the caption of “provision for doubtful debts’ that the assessee had reflected the figure as “nil’. This itself again goes to prove that there was no debit to the profit and loss account in the sum as alleged by the AO while making the disallowance All the confusion which is not in consonance with the profit and loss account of the assessee (audited financial statements) and the revised computation of total income of the assessee. However, the note No.4(b) is relevant for the computation of total income which has already been discussed hereinabove, which in any case is not in dispute before us. CIT(A) had categorically observed from the ledgers of provision for doubtful debts and advances that there was absolutely no debit to the P & L account in the sum of ₹ 4,63,28,957/- warranting any disallowance thereof. CIT(A) has not been controverted by the ld. DR before us. Hence, we do not find any infirmity in the order of CIT(A) granting relief to the assessee in this regard. - Appeal of the Revenue is partly allowed. 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.