2021 (5) TMI 294 - AT - Income Tax

Tribunal rejects Revenue's additions on interest, guarantee fee, and service fee. Limited TPO jurisdiction emphasized.

The Tribunal upheld the deletion of additions made by the Revenue under sections 69 and on account of interest on External Commercial Borrowings (ECB) and ... Addition u/s 69 - Transfer pricing adjustments - extending loan facility to Tata Tea UK as part of consortium/syndicate - letter written by one of the employee indicating that the assessee has extended loan of GBP 37.50 million as per part of syndicate and the participation/commitment fee of GBP 1,50,000 has been received by the assessee - HELD THAT:- Apart from the said letters, there is no other material on record to corroborate that the assessee in any manner participated in extending loan facility to Tata Tea UK as part of consortium/syndicate. The findings of the TPO and the Assessing Officer in draft assessment order that the assessee has advanced loans from undisclosed sources is merely based on surmises and conjunctures. It is a well settled legal proposition that suspicion, howsoever strong, cannot take place of evidence. Except from the letters referred above there is no material to back the observations made by the TPO/AO. On the contrary, the assessee has furnished various documents to substantiate that the assessee was not part of syndicate that has extended loan facility to Tata Tea UK, however, the same have been ignored by the TPO and the assessing officer while passing the draft assessment order. In the absence of any cogent evidence, the Revenue has failed to discharge its onus while alleging that there was an outflow of funds from India by assessee or receivables from Rabobank London have been squared off for diversion of funds to syndicate for advancing loan to Tata Tea UK. The assessee cannot be expected to prove negative. We find that the TPO and the assessing Officer in draft assessment order has placed reliance solely on the letters furnished by an employee of the assessee without there being any corroborative evidence for making addition u/s.69 Commitment charges received by the assessee are in fact, part of interest income on the loan advanced - The assessee has clarified that the role of assessee was limited to identifying and referring the opportunity to Rabobank London. Rabobank London is the lead arranger for the loan and the other financial institutions/banks joined hands to form a consortium for extending loan facility to Tata Tea UK. The assessee is remunerated for the services rendered by way of share in upfront fee, participation/commitment fee. The share in participation/commitment fee at some percentage (0.40%) of the credit allocation of GBP37.5 million was the method of remunerating the assessee for the functions performed - As already held that the assessee had not participated in extending loan facility to Tata Tea UK through the consortium in any manner whatsoever, the remuneration received by the assessee in lieu of the services rendered cannot be termed as interest income of the assessee from the alleged advancing of loan. The aforesaid income received by the assessee has already been offered to tax, this fact has not been disputed by the Revenue. We find no merit in ground No.1 and 2 raised by the Revenue in appeal, the same are dismissed. Addition in respect of interest paid on External Commercial Borrowings (ECB), payment of guarantee fee and service fee - charges/payments disallowed primarily for the reason that the assessee has not been able to establish need for the services and the benefit derived from the said services - HELD THAT:- In the instant case the assessee has borrowed funds from Rabobank Hong Kong to finance its working capital requirements. The interest paid to Rabobank Hong Kong on ECB has been reflected in the books. Tax has been duly deducted on the payment of interest. Similarly, in respect of guarantee fee and service fee the assessee has been able to substantiate that the payments have been made for the purpose of assessee’s business. The TPO cannot sit in the judgment whether these expenses were necessary for conducting the business or whether any benefit has been derived from the expenditure so incurred. The requirement of the law is that the expenditure should have been incurred ‘wholly and exclusively’ for the purpose of business. Issues Involved:1. Deletion of addition on account of Transfer Pricing (TP) adjustment.2. Deletion of addition on account of unexplained investment under section 69.3. Deletion of addition on account of interest on External Commercial Borrowings (ECB).4. Deletion of addition on account of guarantee fee and service fee paid to the holding company.Detailed Analysis:1. Deletion of Addition on Account of Transfer Pricing (TP) Adjustment:The Revenue challenged the deletion of an addition of GBP 37.5 million (Rs. 297 crores) made under section 69 of the Income Tax Act, 1961, on account of TP adjustment. The Department argued that the assessee, in consortium with its Associated Enterprises (AE) Rabobank London and other financial institutions, advanced a loan to Tata Tea (GB) Ltd. UK (Tata Tea UK). The Department relied on letters dated 27/07/2011 and 06/09/2011 from the assessee's representative, which indicated the assessee's involvement in the consortium. However, the assessee contended that it merely originated the deal and was remunerated for the same, without being part of the consortium or extending the loan. The Tribunal found that the assessee had provided sufficient documentary evidence to prove its non-involvement in the consortium. The Tribunal held that the Revenue's addition under section 69 was based on surmises and conjectures and lacked substantive evidence. Thus, the Tribunal upheld the DRP's decision to delete the addition.2. Deletion of Addition on Account of Unexplained Investment under Section 69:The Revenue's second ground was linked to the first, arguing that the assessee's receipt of participation/commitment fee indicated an unexplained investment. The Tribunal noted that the assessee had satisfactorily explained its role in the transaction and provided ample evidence that it did not extend any loan to Tata Tea UK. The Tribunal reiterated that the Revenue's addition was based on mere suspicion without corroborative evidence. Consequently, the Tribunal dismissed this ground as well.3. Deletion of Addition on Account of Interest on External Commercial Borrowings (ECB):The Revenue contested the deletion of the addition related to interest paid on ECB. The Department argued that the assessee failed to establish the necessity and benefits of the ECB. The Tribunal observed that the assessee had borrowed funds from Rabobank Hong Kong for its working capital requirements and had duly reflected the interest payment in its books, complying with TDS provisions. The Tribunal emphasized that the Transfer Pricing Officer (TPO) could only determine the Arm's Length Price (ALP) and not question the commercial expediency of the transaction. Citing precedents, the Tribunal held that the TPO exceeded its jurisdiction by questioning the necessity and benefits of the ECB. Therefore, the Tribunal upheld the DRP's decision to delete the addition.4. Deletion of Addition on Account of Guarantee Fee and Service Fee Paid to the Holding Company:The Revenue also challenged the deletion of additions related to guarantee fee and service fee paid by the assessee. The Department argued that the assessee failed to provide evidence of cost-benefit analysis or benchmark analysis for these payments. The Tribunal noted that the assessee had furnished relevant agreements and documents to substantiate the payments. The Tribunal reiterated that the TPO's role was limited to determining the ALP and not to question the necessity or benefits of the transactions. The Tribunal found that the payments were made for business purposes and were duly substantiated by the assessee. Hence, the Tribunal upheld the DRP's decision to delete the additions.Conclusion:The Tribunal dismissed the Revenue's appeals for both assessment years 2006-07 and 2007-08, finding no merit in the grounds raised. The Tribunal also dismissed the assessee's cross objections for assessment year 2007-08 as not pressed. The Tribunal's decision was based on the lack of substantive evidence from the Revenue and the satisfactory explanations and documentation provided by the assessee. The Tribunal emphasized the limited jurisdiction of the TPO in determining ALP and not questioning the commercial expediency of transactions.