2020 (8) TMI 562 - AT - Income Tax

Tax Tribunal rules in favor of assessee, dismissing revenue's appeal. Notional interest, guarantees, loans, TDS, MAT errors examined.

The Tribunal largely ruled in favor of the assessee in the case, dismissing the revenue's appeal due to a low tax effect. The adjustments related to ... TP Adjustment - adjustment on account of corporate and performance guarantee - assessee submits that provision of corporate guarantee does not lead to any income generation for the assessee and does not fall within the ambit of section 92C - whether determination of guarantee fee of 1.25% p.a. is arbitrary and incorrect? - whether guarantee is not an international transaction? - HELD THAT:- Considering the order of the Tribunal for earlier years [2020 (7) TMI 435 - ITAT MUMBAI] we direct the AO/TPO to compute the corporate guarantee @0.5%. So far as charging the performance guarantee assessee vehemently submitted that the lower authorities have not appreciated the fact that entire revenue from the performance of the contract flows to the assessee guaranteed for its own performance and there was no risk as regard the performance guarantee and it is the assessee who guaranteed for its own performance. Assessee in its statement of facts before ld DRP has specifically pleaded that in case of performance guarantee extended by the assessee, the contract entered by the Itelnet UK Ltd (on behalf of which the assessee has provided performance guarantee) with third party customers, it was actually the assessee who is undertaken they were as Itelnet UK Ltd subcontracts the work back to the assessee. The assessee is not exposed to any default risk on account of performance guarantee as it is the assessee itself who performs the work for the customer. Thus, the provision of performance guarantee by assessee with third party on behalf of its AE, Itelnet UK Ltd, has benefited the assessee itself since the actual service to be provided to third party was outsourced by the assessee by its AE. It is further pleaded that entire compensation received from the customer back to the assessee. We have noted that there is no finding of TPO on these facts. Considering the aforesaid factual aspects this part of ground of appeal related with performance guarantee is restored to the file of assessing officer/TPO to examine the effect and pass the order a fresh in accordance with law - appeal related with performance guarantee is allowed for statistical purpose. Adjustment of interest received from loans to AEs - assessee submits that the assessee provided loans to its four AEs - TPO made adjustment based on domestic cost of borrowing i.e. State bank of India (SBI) rate + 3% markup resulting in to a total rate of 9% for all the loans - assessee submits that the assessee had correctly charged and benchmarked interest received on loans advanced to AEs at LIBOR plus 2% - HELD THAT:- Considering the order of the Tribunal for earlier years [2020 (7) TMI 435 - ITAT MUMBAI] we direct the AO/TPO to recompute the adjustment of interest on loan by following the decision of CIT Vs Tata Autocomp System Ltd [2012 (5) TMI 45 - ITAT MUMBAI] - The assessee is directed to provide necessary details to AO/TPO. In the result this Ground of appeal is allowed for statistical purpose. Short deduction of TDS - HELD THAT:- AO is directed to verify the fact and grant appropriate relief to the assessee. MAT Computation u/s 115JB - error in computing the tax payable in terms of Section 115JB - assessee submits that the AO computed the tax liability in terms of section 115 JB by applying Minimum Alternate Tax rate of 18% instead of correct rate of 15% - HELD THAT:- Considering the submissions of the ld. AR for the assessee that the rectification application of the assessee is pending disposal from the year 2015, we direct the AO compute the tax liability in terms of the provisions of section 115JB as amended up to date. Issues Involved:1. Adjustment of notional interest on investment in equity shares.2. Adjustment regarding provision of corporate and performance guarantees.3. Adjustment regarding interest received on loans to Associated Enterprises (AEs).4. Short credit of Tax Deducted at Source (TDS).5. Error in computing tax payable under Minimum Alternate Tax (MAT).Detailed Analysis:1. Adjustment of Notional Interest on Investment in Equity Shares:The revenue's appeal for AY 2010-11 questioned the deletion of adjustment made on account of notional interest on the difference in price of equity shares of Associated Enterprise (AE) and the price arrived at using the NAV method. The Dispute Resolution Panel (DRP) followed the Bombay High Court's decision in Vodafone India Services Pvt. Ltd., which led to the deletion of this adjustment. The Tribunal dismissed the revenue's appeal due to the tax effect being below the monetary limit set by CBDT.2. Adjustment Regarding Provision of Corporate and Performance Guarantees:The assessee contested the upward adjustment of Rs. 2,70,65,250/- for AY 2010-11 and Rs. 2,53,51,510/- for AY 2011-12, arguing that the provision of guarantees does not generate income and should not be considered an international transaction. The Tribunal referenced its earlier decisions and the Bombay High Court's ruling in Everest Kento Cylinders Ltd., reducing the guarantee commission fee to 0.5%. For performance guarantees, the Tribunal noted that the revenue from the contract flowed to the assessee, and there was no risk involved. This aspect was remanded back to the AO/TPO for further examination.3. Adjustment Regarding Interest Received on Loans to AEs:The assessee contested the upward adjustment of Rs. 22,60,391/- for AY 2010-11 and Rs. 1,20,03,931/- for AY 2011-12, arguing that the interest rate should be based on LIBOR plus 2% rather than the domestic borrowing rate. The Tribunal, following the Delhi High Court's decision in CIT Vs Cotton Naturals (P) Ltd. and the Bombay High Court's ruling in CIT Vs Tata Autocomp System Ltd., directed the AO/TPO to recompute the interest adjustment based on the market-determined interest rate applicable to the currency and country of repayment.4. Short Credit of TDS:The assessee claimed a TDS credit of Rs. 6,02,59,755/- but was granted only Rs. 4,34,58,009/-. The Tribunal directed the AO to verify the facts and grant the appropriate TDS credit after giving the assessee an opportunity to present their case.5. Error in Computing Tax Payable under MAT:The assessee argued that the AO erroneously computed the tax payable under MAT at 18% instead of 15%. The Tribunal directed the AO to rectify the computation as per the provisions of section 115JB, considering the pending rectification application from the assessee.Conclusion:The Tribunal's decisions were largely in favor of the assessee, with directions to the AO/TPO to recompute adjustments and verify facts where necessary. The revenue's appeal was dismissed due to low tax effect, and the assessee's appeals were partly allowed, with specific directions for further examination and rectification.