2020 (1) TMI 607 - AT - Income Tax

Tribunal Adjusts Corporate Guarantee Rate, Disallows Interest; Emphasizes Consistency in Transfer Pricing & Tax Matters.

The Tribunal partly allowed the assessee's appeal, directing adjustments and disallowances consistent with precedents from the assessee's previous cases. ... TP Adjustment - providing of Corporate Guarantee (CG) To Associated Enterprise (AE)- HELD THAT:- As decided in own case [2018 (11) TMI 864 - ITAT MUMBAI] we restrict the rate of impugned additions to 0.50% as against 2.25% taken by the lower authorities. This ground stand partly allowed. The Ld. AO is directed to modify the final assessment order to that extent. As regards the difference from the preceding year, as submitted by the learned counsel of the assessee that there was withdrawal of the corporate guarantee, we are in agreement with the observation of the authorities below that this contention of the assessee cannot be accepted because the corporate guarantee has been given to LMI and, in turn, it has been communicated to the banks in the Dubai. As rightly noted, any withdrawal of the corporate guarantee would be effective only when the withdrawal of the corporate guarantee is communicated to the banks. In this regard assessee had accepted that banks were informed about the withdrawal of the corporate guarantee on 7/8/2013 which is after the date of the previous year under consideration. Therefore authorities below are quite correct in holding that in the eyes of law corporate guarantee was in existence and could be validly invoked against the assessee. The above view is also corroborated by the fact that the balance sheet of the assessee as on 31/3/2013 mentioned the corporate guarantees on behalf of subsidiaries under the head ‘contingent liabilities and commitments’. Furthermore, even information to the RBI for the aforesaid withdrawal was communicated in the next financial year in the month of August. Adjustment to Interest on Loan given to AE - HELD THAT:- As decided in own case [2018 (11) TMI 864 - ITAT MUMBAI] assessee has advanced loan pursuant to loan agreements / arrangements to its AE and was entitled to certain rate of interest. These loan transactions as entered into by the assessee with the AE squarely falls within the ambit of Section 92(1) / 92B as an international transactions as accepted by the assessee in its TP study and the statutory provisions mandates that the income from such transactions is to be computed on the principle of arm's length price irrespective of the fact that no such income has actually accrued to the assessee. This being so, the argument of principles of commercial expediency or notional income or revenue neutrality as raised before us fails since as long as the transaction is an international transaction within the framework of law, the computation of income there-from has to be on the basis of arm's length principle. Disallowance of Interest under section 36(1)(iii) - HELD THAT:- In assessee’s own case ITAT for assessment year 2009 – 10 to assessment year 2012 – 13 has held that no disallowance in this regard is warranted as the interest free loan advanced to the subsidiaries was out of commercial expediency. Furthermore, the tribunal had also held that assessee’s interest free funds to grant loans were sufficient and in this regard it had placed reliance upon Hon’ble Bombay High Court decision in the case of CIT vs HDFC bank [2014 (8) TMI 119 - BOMBAY HIGH COURT]. Disallowance u/s14A read with Rule 8D and also section 115JB adjustment in this regard - assessee contended that since the assessee has not earned any exempt income disallowance under section 14A is not warranted - HELD THAT:- We find that since the assessee has not earned any exempt income disallowance in this regard is not warranted Disallowance with regard to computation u/s 115JB - As held by Hon’ble Special Bench of the ITAT in the case of ACIT vs. Vireet Investments Private Limited [2017 (6) TMI 1124 - ITAT DELHI] for computation of book profit provisions of section 14A cannot be imported into clause ‘f’ of the explanation to section 115 JA - We are of the considered opinion that for computation of book profit under section 115JB disallowance under section 14A cannot be accounted Issues Involved:1. Adjustment pertaining to providing Corporate Guarantee (CG) to Associated Enterprise (AE).2. Adjustment pertaining to Interest on Loan given to AE.3. Disallowance of Interest under section 36(1)(iii) of the Act.4. Disallowance under section 14A read with Rule 8D and section 115JB adjustment.5. Mismatch in Form 26AS data.6. Short grant of TDS credit.7. Penalty under section 271(1)(c) of the Act.Issue-wise Detailed Analysis:1. Adjustment pertaining to providing Corporate Guarantee (CG) to AE:The Transfer Pricing Officer (TPO) noted that the assessee provided a corporate guarantee of AED 40 million to its AE without charging any guarantee commission, which was not benchmarked in the Transfer Pricing study report. The TPO computed an arm's-length guarantee fee at Rs. 88,80,000 by adopting a 1.5% rate, derived from the average bank guarantee fee less 0.50%. The Dispute Resolution Panel (DRP) upheld this adjustment, rejecting the assessee's contention that the corporate guarantee was not an international transaction and that it had been withdrawn during the year. The Tribunal noted that in the assessee's own case for the previous year, ITAT had held that the corporate guarantee rate should be 0.5%. The Tribunal followed the same precedent and directed the adjustment to be made at 0.5%.2. Adjustment pertaining to Interest on Loan given to AE:The TPO observed that the assessee had provided loans to its AE without charging any interest, contrary to the earlier years where interest was charged at 13-14%. The TPO computed the interest receivable on the outstanding loan at Rs. 12,98,09,060 using the CUP method. The DRP upheld this adjustment, rejecting the assessee's arguments. The Tribunal noted that in the assessee's own case for the previous year, ITAT had remitted the matter back to the AO/TPO to determine the ALP within the framework of law, considering the principle laid down in the earlier decision. The Tribunal followed the same precedent and directed no adjustment to be made.3. Disallowance of Interest under section 36(1)(iii) of the Act:The AO disallowed interest amounting to Rs. 4,51,66,441 on the grounds that the assessee had given interest-free loans to its subsidiaries. The DRP upheld this disallowance. The Tribunal noted that in the assessee's own case for earlier years, ITAT had held that no disallowance was warranted as the interest-free loans were out of commercial expediency and the assessee had sufficient interest-free funds. The Tribunal followed the same precedent and directed that no disallowance be made.4. Disallowance under section 14A read with Rule 8D and section 115JB adjustment:The AO made a disallowance of Rs. 5,13,050 under section 14A read with Rule 8D(2)(iii) and added it back while computing book profit under section 115JB. The DRP confirmed this addition. The Tribunal noted that since the assessee had not earned any exempt income, disallowance under section 14A was not warranted, citing case laws including Principal CIT vs. Ballarpur Industries Ltd and Chem Invest Ltd vs. CIT. The Tribunal also held that for computation of book profit under section 115JB, disallowance under section 14A cannot be accounted for, as held by the Special Bench of ITAT in ACIT vs. Vireet Investments Private Limited. The Tribunal directed accordingly.5. Mismatch in Form 26AS data:The Tribunal did not provide specific details on this issue in the judgment.6. Short grant of TDS credit:The Tribunal did not provide specific details on this issue in the judgment.7. Penalty under section 271(1)(c) of the Act:The Tribunal did not provide specific details on this issue in the judgment.Conclusion:The Tribunal partly allowed the assessee's appeal, directing adjustments and disallowances to be made in line with the precedents and principles established in the assessee's own case for the previous years. The Tribunal emphasized the importance of consistency and adherence to established legal principles in transfer pricing and corporate tax matters.