2020 (8) TMI 190 - AT - Income Tax

ITAT rules in favor of assessee on transfer pricing adjustments

The ITAT partly allowed both appeals in a transfer pricing case involving adjustments to arm's length prices of corporate guarantees and interest rates on ... Arm's length price - Comparable Uncontrolled Price (CUP) - internal CUP - performance/corporate guarantee as an international transaction - interest charged at arm's length for short-term intra-group loan - interest under section 234A of the Act - interest under section 234B of the Act - interest under section 234C of the Act - remand for verification/reconciliationArm's length price - Comparable Uncontrolled Price (CUP) - internal CUP - performance/corporate guarantee as an international transaction - Arm's length commission for performance guarantee provided to the AE in respect of bareboat charter hire charges (AY 2011-12). - HELD THAT: - The Tribunal proceeded on the admitted footing that provision of performance/corporate guarantee falls within the definition of an international transaction. The Transfer Pricing Officer had applied the commission charged by State Bank of India (Singapore Branch) as an external CUP and determined a higher rate, which the DRP reduced. The assessee contended that a performance/corporate guarantee is not equivalent to a bank guarantee and relied on the guarantee commission actually charged to the assessee by ICICI Bank. The Tribunal accepted that a performance/corporate guarantee (unsecured) is distinguishable from a bank guarantee and that the assessee's own bank guarantee commission of 0.25% constitutes a reliable internal CUP. On that basis the arm's length price of the guarantee commission was fixed at 0.25% and the addition was disallowed to that extent. [Paras 9]Arm's length price of performance guarantee commission fixed at 0.25%; ground partly allowed.Interest charged at arm's length for short-term intra-group loan - arm's length price - Whether the interest charged by the assessee on a short-term loan (approx. 15 days) to its AE is at arm's length (AY 2011-12). - HELD THAT: - The assessee had charged interest at LIBOR plus 1.5% for very short-term advances. The TPO applied an alternative benchmark based on domestic prime lending rate plus mark-up, and the DRP directed a higher mark-up. The Tribunal observed that the loan was for a brief period (about 15 days) and that the AE had obtained finance from SBI Singapore at six months LIBOR plus 250 basis points. On these facts the Tribunal concluded that the rate charged by the assessee was at arm's length and required no adjustment. [Paras 12]Ground allowed; no adjustment to the interest charged.Arm's length price - corporate guarantee - internal CUP - Arm's length guarantee fee for unsecured corporate guarantee provided for loan availed by the AE (AY 2011-12). - HELD THAT: - The assessee had charged 0.25% as guarantee fee for an unsecured corporate guarantee while the TPO and DRP applied higher rates. The Tribunal noted that the lender's loan to the AE was fully secured by the value of the vessels, so the lender's exposure was effectively secured and the assessee's corporate guarantee remained unsecured with negligible risk. On these facts the Tribunal held that the fee charged by the assessee at 0.25% represented the arm's length rate and no adjustment was warranted. [Paras 17]Ground allowed; guarantee fee of 0.25% accepted as arm's length.Interest under section 234A of the Act - Levy of interest under section 234A where return of income was filed within the due date (AY 2011-12). - HELD THAT: - The Tribunal recorded that the return for the impugned assessment year was filed within the time provided under section 139(1). In such circumstances interest under section 234A is not chargeable. [Paras 19]Ground allowed; no interest under section 234A is chargeable.Interest under section 234B of the Act - interest under section 234C of the Act - Levy of interest under sections 234B and 234C (AY 2011-12). - HELD THAT: - The Tribunal held that interest under section 234B is consequential and need not be separately adjudicated at this stage. As to section 234C, the Tribunal directed that such interest, if chargeable, should be computed not on the assessed income but on the income returned by the assessee, thereby reducing the base for computation of installment defaults. [Paras 21]Ground partly allowed; 234B left consequential, 234C to be computed on returned income.Remand for verification/reconciliation - Addition on account of difference between interest credited to Profit & Loss and interest reflected in Form 26AS - whether addition sustainable (AY 2012-13). - HELD THAT: - A monetary addition was made by the Assessing Officer for discrepancy between interest credited in books and Form 26AS entries. The assessee explained that interest for the last quarter had been accounted in the subsequent year and offered part of the amount in that later year. The Tribunal found that the AO had made the addition without seeking explanation and that the matter required verification. The issue was restored to the file of the Assessing Officer for reconciliation and fresh adjudication after giving the assessee opportunity to produce corroborative evidence. [Paras 30]Issue remanded to Assessing Officer for verification and fresh adjudication after hearing the assessee.Arm's length price - Comparable Uncontrolled Price (CUP) - internal CUP - Arm's length commission for performance guarantee (AY 2012-13) and corporate guarantee for loan availed by AE (AY 2012-13). - HELD THAT: - Facts for AY 2012-13 were stated to be identical to those in the corresponding grounds for AY 2011-12. The Tribunal applied its earlier reasoning and directed the Assessing Officer to compute the arm's length price of performance guarantee commission and corporate guarantee commission at 0.25% respectively. [Paras 26, 28]Grounds partly allowed; arm's length commission fixed at 0.25% for both guarantees by application of the earlier decision mutatis mutandis.Interest under section 234A of the Act - Direction regarding levy of interest under section 234A where return filed within due date (AY 2012-13). - HELD THAT: - Mirroring the decision for AY 2011-12, the Tribunal directed the Assessing Officer not to levy any interest under section 234A if the return was filed within the time specified under section 139(1). [Paras 32]Assessing Officer directed not to levy section 234A interest if return filed within due date.Interest under section 234B of the Act - interest under section 234C of the Act - Levy of interest under sections 234B and 234C (AY 2012-13). - HELD THAT: - As in the earlier assessment year, the Tribunal held that section 234B is consequential and need not be separately adjudicated. For section 234C the Tribunal directed computation of interest on the basis of the income returned by the assessee and not on the assessed income. [Paras 34]Ground partly allowed; 234B consequential, 234C to be computed on returned income.Remand for verification/reconciliation - Initiation of penalty proceedings under section 271(1)(c) - pre mature dismissal (both years). - HELD THAT: - The Tribunal found challenges to initiation of penalty proceedings premature at the appellate stage and dismissed those grounds accordingly. [Paras 23, 36]Grounds dismissed as premature.Final Conclusion: Both appeals were partly allowed: guarantee commissions for performance and corporate guarantees were accepted at 0.25% (AO to compute accordingly for both assessment years), the short term interest rate charged was held to be at arm's length, section 234A interest was disallowed where returns were filed in time, section 234C interest must be computed on returned income (section 234B left consequential), a discrepancy in interest receipt for AY 2012-13 was remanded to the AO for verification, and penalty challenges were dismissed as premature. Issues Involved:1. Adjustment to the arm's length price of Corporate Guarantee.2. Adjustment to the arm's length price of interest on short-term loan.3. Adjustment to the arm's length price of Corporate Guarantee for loan availed by AE.4. Levy of interest under section 234A of the Act.5. Levy of interest under sections 234B and 234C of the Act.6. Initiation of penalty proceedings under section 271(1)(c) of the Act.7. Addition due to difference in interest credited to Profit & Loss account and Form 26AS.Detailed Analysis:1. Adjustment to the Arm's Length Price of Corporate Guarantee:The assessee, engaged in chartering offshore supply vessels, provided a performance guarantee for its AE's outstanding bareboat charter hire charges. The Transfer Pricing Officer (TPO) determined a guarantee commission of 2.5% based on a bank guarantee commission rate of 1.25% from SBI, Singapore Branch. The Dispute Resolution Panel (DRP) reduced it to 1.75%. The ITAT found merit in the assessee’s argument that a performance guarantee cannot be equated with a bank guarantee. It was noted that the assessee had availed a bank guarantee from ICICI Bank at 0.25%. Consequently, the arm's length price of the guarantee commission was reasonably fixed at 0.25%.2. Adjustment to the Arm's Length Price of Interest on Short-Term Loan:The assessee provided a short-term loan to its AE at LIBOR plus 1.5%. The TPO adopted SBI’s prime lending rate of 7.50% plus 1.5%, determining an arm's length interest rate of 9%. The DRP directed the interest to be charged at LIBOR plus 4%. The ITAT noted that the AE had availed a loan from SBI, Singapore Branch, at six months LIBOR plus 250 basis points. Therefore, the interest rate charged by the assessee was deemed at arm's length, requiring no further adjustment.3. Adjustment to the Arm's Length Price of Corporate Guarantee for Loan Availed by AE:The assessee provided an unsecured corporate guarantee for its subsidiary in the Netherlands, charging a fee of 0.25%. The TPO charged a fee of 2.25%, which the DRP reduced to 2%. The ITAT found that the value of the vessels provided as security to the lender bank was much more than the loan amount, making the loan fully secured. Thus, the guarantee fee charged by the assessee at 0.25% was deemed at arm's length, requiring no further adjustment.4. Levy of Interest Under Section 234A of the Act:The ITAT found that the return of income for the impugned assessment year was filed within the due date provided under section 139(1) of the Act. Therefore, no interest under section 234A was chargeable.5. Levy of Interest Under Sections 234B and 234C of the Act:The levy of interest under section 234B was deemed consequential and required no adjudication. For section 234C, the ITAT directed the Assessing Officer to charge interest based on the income returned by the assessee, not the assessed income.6. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Act:The ground raised by the assessee regarding the initiation of penalty proceedings was dismissed as premature.7. Addition Due to Difference in Interest Credited to Profit & Loss Account and Form 26AS:The addition of Rs. 18,62,317 was made due to a difference in interest credited to the Profit & Loss account and Form 26AS. The ITAT noted that the interest income for the last quarter was not accounted for in the financial year 2011–12 but was accounted for in 2012–13. The Assessing Officer added the differential amount without seeking an explanation. The ITAT restored the issue to the Assessing Officer for verification, allowing the assessee to reconcile the difference.Conclusion:Both appeals were partly allowed. The ITAT also addressed a procedural issue regarding the delayed pronouncement of the order due to the COVID-19 pandemic, citing precedents and legal provisions to justify the delay.