2021 (4) TMI 768 - AT - Income Tax

Corporate guarantee fees ruled international transactions under Section 92B, rate reduced from 1.04% to 0.50% based on bank comparables

M/s. Aban Offshore Limited, C/o M/s. P. Murali & Co. Versus Deputy Commissioner of Income Tax, Circle – 1 (1), Chennai

ITAT Chennai-AT decided multiple transfer pricing and tax issues. Corporate guarantee fees were held to constitute international transactions under ... TP adjustment - Corporate Guarantee Fee addition - whether Corporate Guarantee issued by the Assessee to its AEs comes within the definition of International Transaction or not? - HELD THAT:- The Finance Act, 2012 has inserted, an explanation to Section 92B with retrospective effect from 1st April, 2002 to include the term guarantee within the definition of international transaction. Therefore, the Corporate Guarantee issued by an entity on behalf of its AEs is an international transaction as considered by the Bombay High Court in the case of the Commissioner of Income Tax Vs. Everest Kentor Cylinder Limited [2015 (5) TMI 395 - BOMBAY HIGH COURT] Thus it is clear that Corporate Guarantee by an entity on behalf of its AEs a subsidiary company is a international transaction. However, while arriving at a rate, the Assessing Officer has taken comparables from commercial banks to at arrive at mean margin of 1.04% and adopted such rate to determine the ALP of corporate guarantee issued by the Assessee. The Hon’ble Mumbai High Court has confirmed the order of the Tribunal wherein the Tribunal estimated the guarantee commission at the rate of 0.50%. We therefore by considering the facts and circumstances of the case, we are of the opinion that we will fix the guarantee commission at the rate of 0.50%. Accordingly, we set aside the order passed by the Assessing Officer and direct the Assessing Officer to adopt at the rate of 0.50% commission on guarantee issued by the Assessee on behalf of its AEs, a subsidiary company. Disallowance of Interest Expenditure - interest expenditure on borrowed funds utilized for the purpose of additional capital in foreign owned subsidiary - HELD THAT:- We find that the similar issue came up for consideration in the Assessment Year 2010 – 2011, 2011 – 2012 in [2016 (10) TMI 807 - ITAT CHENNAI] AND [2017 (6) TMI 1345 - ITAT CHENNAI] for the Assessment Year 2012 – 2013, the Hon’ble Tribunal has considered for the Assessment Year 2011 – 2012, 2010 – 2011 and 2011 – 2012 by order dated 19.06.2017 and directed the Assessing Officer to verify as to whether the investment made in subsidiary to have controlling interest, or to avoid the dilution of controlling interest, or to keep the controlling interest intact as per the object clause of the Memorandum of Association of the Assessee company and to decide thereupon. In view of the above decision of the Hon’ble ITAT in the Assessee’s own case and also the principle of consistency laid down by the Hon’ble Supreme Court in the case of Radhasoami Satsang Vs Commissioner of Income Tax [1991 (11) TMI 2 - SUPREME COURT], we direct the Assessing Officer to follow the above passed order thereupon. So far as reliance placed by Ld. DR in the case of Maxopp Investment Ltd. (supra) is concerned, no application to the facts of this case.Thus the ground of appeal filed by the Assessee is allowed for statistical purposes. TDS u/s 195 - Non-Deduction of tax on Professional and Consultancy Fee and payment of drilling services & Management fee - HELD THAT:- The similar issue has been considered by thewherein eld Co-ordinate Bench of the Tribunal in assessee’s own case for AY 2012-13 [2017 (6) TMI 1345 - ITAT CHENNAI] as held criterion of residence, place of business or business connection of a non-resident in India has been done away with for fastening the tax liability. However, the criteria of rendering service in India and the utilization of the service in India to attract tax liability u/s.9(i)(vii) remained untouched and unaffected by the Explanation to Section 9 of the Act and outside India. Therefore, the twin criterion of rendering of services in India and utilization of services in India become evidently necessary condition to deduct tax. However, in respect of the said payments, the rendering of services being purely off shore and outside India, the whatever paid towards the said services does not attract tax liability. We are inclined to remit the issue to the file of the Assessing Officer to examine the issue afresh in the light of the above order along with the concerned DTAA and decide thereupon. Denial of tax credit u/s. 90 - HELD THAT:- As relying on own case we are inclined to hold that once the interest income subject to tax in any manner in the hands of the assessee, the corresponding tax credit to be given. Accordingly, this ground is remitted to the AO to examine the issue in the light of our above findings Disallowance of loss on forward contracts - AO disallowed the Forex loss of the Assessee mainly on the ground that the Assessee need not enter into such a contract for the nature of the business of the Assessee - HELD THAT:- So far as the first objection raised by the AO is concerned, we find that the line of the business of the Assessee is charter-hiring of offshore drilling rigs to oil companies like ONGC, Hardy Exploration, etc. The revenue is in the nature of charter-hire income from drilling and production services. All payments under these agreements for provision of the rigs on charter-hire and drilling services are in foreign currency, predominantly in USD. Therefore, the Assessee pleads that it has taken a business decision to protect its interest and had entered into a Forex contract with Banks and subsequently it has claimed loss on the Forex contracts. Second objection raised by the AO, non furnishing of details i.e., invoices, risk analysis statement submitted to the bank etc. e are setting aside the order passed by the Assessing Officer and we direct the Assessing Officer to re-consider the issue details and pass the order thereupon, keeping in view the decision of the Hon’ble ITAT of Bangalore Bench in the case of M/s. Essilor India Private Limited Vs. The Deputy Commissioner of Income Tax [2020 (2) TMI 1487 - ITAT BANGALORE]. Thus the ground of appeal filed by the Assessee is allowed for statistical purposes. Disallowance of expenses relates to earning exempt income u/s.14A r.w.R 8D - Dispute Resolution Panel has modified the order passed by the Assessing Officer and also made one more addition u/s.115 JB - HELD THAT:- As case of the Assessee that no disallowance u/s.14A has to be made because the Assessee is having sufficient own funds. However, as for the Assessing Officer, the Assessee is not able to submit the details and substantiate that the borrowed funds are not utilized for the purpose of the business. Thus, we set aside the order passed by the Assessing Officer and remit the issue back to the file of the Assessing Officer to examine afresh, keeping in view the decision of the Delhi Bench Special of the Tribunal in Vireet Investments [2017 (6) TMI 1124 - ITAT DELHI] passed order thereupon. Disallowance of long term capital loss - loss on sale of investments in the equity shares of M/s. Aban Holdings Pvt. Ltd., Singapore, who is a wholly owned foreign subsidiary of the assessee-company (or in other words bought by back of shares by the wholly owned foreign subsidy) - HELD THAT:- We find that the Board has taken a decision to buy back the entire shares of M/s. Aban Holdings Private Limited, Singapore, Assessee’s wholly owned subsidiary company and that no third party in involved. The transaction is between the Assessee’s own sister concern and the Assessee. The Board has taken a decision on 13th November, 2013. As regards to the entire buyback of the shares, the Assessing Officer for the Assessment Year 2014 – 2015, in the scrutiny proceedings allowed the capital loss of the Assessee. In the year under consideration, the Assessing Officer says that the Assessment Year 2014 – 2015 is different from the Assessment Year 2015 – 2016. The Board has taken a decision with regard to the buyback of the shares. One transaction has already been completed for the Assessment Year 2014 – 2015 and the same is allowed by the Assessing Officer. The remaining part of the transaction is completed during the subsequent year and the Assessing Officer has doubted the same on the ground that the Minutes of the Meeting has not been placed before the Assessing Officer and also the Assessee has sold the same shares to M/s. Aban Holdings Private Limited, Singapore. We find that the reason given by the AO in our opinion is justified for the reason that the AO has given different treatment for the same shares for the year 2014-15 and 2015-16, the AO is disallowed the capital loss claimed by the assessee by following the decision of the Hon’ble Jurisdictional High Court in the case of Premier Synthetic Industries Vs. Income-Tax Officer, Ward – II (7), Coimbatore [2012 (7) TMI 72 - MADRAS HIGH COURT] Even the Hon’ble Dispute Resolution Panel [DRP] has taken support from the same decision. In the case of the Premier Synthetic Industries held that the loss cannot be allowed either as a revenue loss or a capital loss. The above decision is not applicable to the facts of the case. As per the note filed by the Assessee in the present case, the Assessee has made investment in M/s. Aban Holdings Private Limited, Singapore for the financial year 2008 – 2009 dated 27.09.2012, AGM held by M/s. Aban Offshore Private Limited to buyback of shares on 30.10.2013, buyback of shares of the first half on 01.02.2013 and buyback of shares of the second half was on June 2014. The above facts were neither properly examined by the DRP nor by the Assessing Officer. We are of the opinion that the order passed by DRP has to be set aside and the issue has to be remitted back to the A.O. Accordingly, we set aside the order passed by DRP and remit the matter back to the AO to decide the issue afresh keeping in view of the observations made by us. Disallowance of Professional and Consultancy Services - HELD THAT:- In our opinion it is the business decision taken by the Assessee to engage the services of a particular company for the purpose of business. Assessing Officer is not justified in respect of the Consultancy Services received by the Assessee because the Assessee has paid an amount of ₹ 1,89,00,000/- and TDS is also being deducted on the said payment. No prudent businessman can make a payment to the third party without receiving the services from the party. The only objection in our view that is concerned is the details in respect of the services rendered that are not filed before the Assessing Officer. AO has not examined as to whether M/s. Emkay Global Financial Limited has offered the same for taxation or not? This fact is very much necessary to decide this issue. Therefore, we set aside the order passed by the Assessing Officer and remit the matter back to the file of the Assessing Officer to examine as to whether M/s. Emkay Global Financial Limited has offered the amount received from the Assessee for taxation or not? We also direct the Assessee to submit all the details of the services rendered by M/s. Emkay Global Financial Limited. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:Whether the Corporate Guarantee fee paid by the Assessee to its Associated Enterprises (AEs) constitutes an international transaction under Section 92B of the Income Tax Act, 1961, and if so, the appropriate arm's length price (ALP) to be adopted for such guarantee fee.Whether the interest expenditure incurred on borrowed funds used for investment in wholly owned foreign subsidiaries is allowable as a deduction under Section 36(1)(iii) of the Income Tax Act, 1961 or should be capitalized or disallowed.Whether tax deduction at source (TDS) was required to be made on professional and consultancy fees paid to non-resident entities for services rendered outside India and the tax implications thereof.Whether TDS was required on payments made for drilling services and management fees to foreign entities and the taxability of such payments under Section 9(1)(vii) of the Income Tax Act, 1961.Whether the assessee is entitled to foreign tax credit under Section 90 of the Income Tax Act, 1961 for withholding tax deducted in Singapore on interest income earned from its foreign subsidiary.Whether the loss on forward contracts entered into by the Assessee to hedge foreign exchange risk is allowable as business expenditure or should be disallowed as speculative loss under Section 37 of the Income Tax Act, 1961.Whether disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961 is justified in respect of expenses relating to exempt dividend income.Whether the long-term capital loss claimed on sale of shares of wholly owned foreign subsidiary is allowable, especially considering the subsequent reinvestment in the same shares shortly after the sale.Whether the professional and consultancy fees paid to a domestic financial services company for business restructuring are allowable deductions under Section 37(1) of the Income Tax Act, 1961.2. ISSUE-WISE DETAILED ANALYSISCorporate Guarantee FeeLegal Framework and Precedents: Section 92B of the Income Tax Act, 1961 defines 'international transaction' and includes guarantees given by an enterprise on behalf of its Associated Enterprises (AEs). The Finance Act, 2012 inserted an explanation to Section 92B retrospectively from 1st April 2002 to include guarantees within the scope of international transactions. The Bombay High Court in Commissioner of Income Tax Vs. Everest Kentor Cylinder Limited held that corporate guarantees issued by a holding company for its AE subsidiary constitute international transactions but distinguished such guarantees from bank guarantees for ALP benchmarking.Court's Interpretation and Reasoning: The Tribunal accepted that the corporate guarantee given by the Assessee to its AEs is an international transaction under Section 92B. However, it disagreed with the Assessing Officer's adoption of a 1% guarantee fee based on comparables from commercial banks, considering the Bombay High Court's observation that such comparisons are not appropriate. The Tribunal, therefore, fixed the guarantee commission at 0.50%, following the principle that corporate guarantees for AEs should be benchmarked differently.Key Evidence and Findings: The outstanding guarantee amount was Rs. 152.57 crores. The Assessing Officer's rate of 1% was based on commercial bank comparables. The Tribunal relied on judicial precedent to adjust this rate.Application of Law to Facts: The Tribunal applied the retrospective explanation to Section 92B and judicial precedent to hold the guarantee fee as an international transaction but modified the ALP to 0.50%.Competing Arguments: The Assessee argued no cost was incurred and thus no adjustment was needed or alternatively a lower rate of 0.25% should apply. The Department supported the 1% rate. The Tribunal found the 1% rate excessive and fixed 0.50%.Conclusion: The ground was partly allowed, directing the Assessing Officer to adopt 0.50% as the guarantee commission rate.Interest Expenditure DisallowanceLegal Framework and Precedents: Section 36(1)(iii) allows deduction of interest on borrowed funds used for business or profession. The Supreme Court and Tribunal decisions clarify that interest incurred before acquisition of shares can be capitalized as part of cost, but interest after acquisition is revenue expenditure. The Tribunal's earlier orders in the Assessee's own case for AYs 2010-11, 2011-12, and 2012-13 were relied upon.Court's Interpretation and Reasoning: The Tribunal noted that borrowed funds were invested in wholly owned subsidiaries to acquire or maintain controlling interest, which promotes the Assessee's business. The Assessing Officer's disallowance was based on the view that the investment aided subsidiary business, not the Assessee's. However, the Tribunal held that if the investment is for controlling interest and business promotion, interest should be allowed under Section 36(1)(iii). The issue was remitted to the Assessing Officer for fresh consideration with directions to verify the purpose of investment and allow proportionate benefit.Key Evidence and Findings: The Assessee's capital structure showed mixed funds; the borrowed funds were used for investments in subsidiaries. The Assessing Officer had earlier disallowed the entire interest on the ground of lack of commercial expediency.Application of Law to Facts: The Tribunal applied the principle that interest on borrowed funds used for business purposes is deductible and remitted the issue for detailed verification of the business purpose and controlling interest.Competing Arguments: The Assessee argued the interest was for business expediency and controlling interest in subsidiaries; the Department relied on Supreme Court decision in Maxopp Investment Ltd. to contend that interest on funds advanced to sister concerns is not deductible.Conclusion: The ground was partly allowed and remitted for fresh adjudication.Non-Deduction of Tax on Professional and Consultancy FeesLegal Framework and Precedents: Section 195(2) requires TDS on payments to non-residents if income is chargeable to tax in India. Section 9(1)(vii) deals with income deemed to accrue or arise in India from technical services. The Supreme Court decision in GE India Technology Centre Pvt. Ltd. and Tribunal decisions were cited.Court's Interpretation and Reasoning: The Tribunal observed that the services were rendered and utilized outside India (Dubai branch), and thus no income accrued or arose in India. The twin conditions of rendering and utilization of services in India are necessary to attract tax liability under Section 9(1)(vii). The Assessing Officer's addition without examining Section 195(2) was set aside. The matter was remitted to the Assessing Officer to examine afresh in light of the DTAA and judicial precedents.Key Evidence and Findings: Payments totaling Rs. 2.48 crores were made to various foreign entities for consultancy services utilized outside India.Application of Law to Facts: The Tribunal applied the principle that offshore services utilized outside India do not attract TDS under Section 195 or tax under Section 9(1)(vii).Competing Arguments: The Assessee argued non-applicability of TDS and tax as services were outside India; the Department supported the Assessing Officer's order.Conclusion: The ground was allowed for statistical purposes and remitted for fresh consideration.Disallowance of Tax on Drilling Services and Management FeeLegal Framework and Precedents: Similar to the previous issue, Section 9(1)(vii) and Section 195(2) apply.Court's Interpretation and Reasoning: Following the coordinate Bench's earlier decision for AY 2012-13, the Tribunal held that payments for services rendered and utilized outside India do not attract tax or TDS in India. The matter was remitted for fresh examination.Conclusion: Ground allowed for statistical purposes with remand.Denial of Tax Credit under Section 90Legal Framework and Precedents: Section 90 provides relief from double taxation by allowing credit for foreign taxes paid. The Tribunal's earlier decisions in the Assessee's own case were relied upon.Court's Interpretation and Reasoning: The Tribunal held that since the income from the foreign subsidiary was offered to tax in India, the Assessee is entitled to credit for tax withheld in Singapore. The matter was remitted to the Assessing Officer to grant credit accordingly.Conclusion: Ground partly allowed with remand.Disallowance of Loss on Forward ContractsLegal Framework and Precedents: Section 37 allows deduction of expenses incurred wholly and exclusively for business. Forex derivatives used for hedging are recognized risk management tools. The Tribunal relied on Essilor India Pvt. Ltd. decision.Court's Interpretation and Reasoning: The Assessing Officer disallowed the loss treating it as speculative due to lack of evidence of underlying exposure and risk analysis. The Tribunal observed that the Assessee's business involves foreign currency transactions and hedging is a prudent business decision. The matter was remitted for fresh consideration after verifying details and risk analysis.Conclusion: Ground allowed for statistical purposes with directions for fresh adjudication.Disallowance of Expenses Related to Exempt Income under Section 14A r.w. Rule 8DLegal Framework and Precedents: Section 14A disallows expenditure incurred in relation to exempt income. Rule 8D provides a method to compute such disallowance. The Tribunal relied on the Delhi Special Bench decision in Vireet Investments.Court's Interpretation and Reasoning: The Assessing Officer disallowed a small amount based on assumed expenditure related to exempt dividend income. The Tribunal held that the Assessee failed to establish non-utilization of borrowed funds for investments. However, the issue was remitted for fresh examination considering judicial precedents.Conclusion: Ground allowed for statistical purposes with remand.Disallowance of Long Term Capital LossLegal Framework and Precedents: Capital loss is allowable if genuine. The Assessing Officer relied on Madras High Court decision in Premier Synthetic Industries holding that transactions lacking genuineness are not allowable. The Assessee relied on Supreme Court and Delhi High Court decisions supporting business decisions and bona fide losses.Court's Interpretation and Reasoning: The Assessing Officer doubted genuineness due to sale and reinvestment in the same shares within a short period and lack of supporting minutes of meeting. The Tribunal noted that the buyback decision was taken in FY 2013-14 and partly allowed in AY 2014-15. The Tribunal held that the Assessing Officer and DRP did not properly examine facts and remitted for fresh consideration.Conclusion: Ground allowed for statistical purposes with remand.Disallowance of Professional and Consultancy ServicesLegal Framework and Precedents: Section 37(1) allows deduction of expenses incurred wholly and exclusively for business. The Supreme Court decisions in India Cements Limited and S.A. Builders Ltd. were cited.Court's Interpretation and Reasoning: The Assessing Officer disallowed the expenditure due to non-furnishing of details and suspicion of capital nature. The Tribunal observed that the Assessee engaged consultancy services for financial restructuring, deducted TDS, and the payments were reflected in Form 26AS of the service provider. The Tribunal held that the Assessing Officer could not sit in judgment over business decisions without proper examination and remitted the issue for verification whether the service provider had offered the income to tax.Conclusion: Ground allowed for statistical purposes with remand.3. SIGNIFICANT HOLDINGS'The Finance Act, 2012 has inserted, an explanation to Section 92B with retrospective effect from 1st April, 2002 to include the term guarantee within the definition of international transaction.''Corporate Guarantee by an entity on behalf of its AEs a subsidiary company is an international transaction. However, while arriving at a rate, the Assessing Officer has taken comparables from commercial banks to arrive at mean margin of 1.04% and adopted such rate to determine the ALP of corporate guarantee issued by the Assessee. The Hon'ble Mumbai High Court has confirmed the order of the Tribunal wherein the Tribunal estimated the guarantee commission at the rate of 0.50%. We therefore... fix the guarantee commission at the rate of 0.50%.''If the money was borrowed for purchase of shares of subsidiary company for the purpose of acquiring controlling interest and acquisition of such controlling interest was of the business of the assessee and it resulted in promote the business of the assessee as well as helpful to the assessee for having management control over said such subsidiary company, then the interest expenditure should be allowed u/s.36(1)(iii) of the Act.''The twin criterion of rendering of services in India and utilization of services in India become evidently necessary condition to deduct tax under Section 9(1)(vii). However, in respect of the said payments, the rendering of services being purely off shore and outside India, the whatever paid towards the said services does not attract tax liability.''Once the income is included either in the Profit & Loss Account or in the return of income, the corresponding tax credit on the same income has to be given.''Forward contracts entered into for hedging foreign exchange risk in the course of business are business decisions and losses suffered thereon are allowable as business expenditure.''Section 14A disallows expenditure incurred in relation to exempt income. However, the disallowance must be based on proper examination of facts and evidence.''Where shares are sold and subsequently repurchased shortly thereafter without valid commercial reasons, the genuineness of the loss is doubtful and requires detailed examination.''Expenditure incurred for consultancy services wholly and exclusively for business purposes and where TDS is deducted and the service provider has offered income to tax, is allowable under Section 37(1).''The Assessing Officer cannot sit in judgment over bona fide business decisions without proper examination and evidence.'