Tribunal partially allows appeal, adjusts transfer pricing, corporate fee, non-genuine purchases, Section 14A disallowance

The appeal was partly allowed by the Tribunal. The Transfer Pricing Officer was directed to apply only the LIBOR rate for the transfer pricing adjustment on the notional interest, reducing the adjustment amount. The determination of the corporate guarantee fee was upheld at 0.5%, dismissing the Revenue's higher rate argument. The disallowance on alleged non-genuine purchases was partially reduced to 2.5% due to lack of verification of suppliers. The disallowance under Section 14A was reduced after adjustments, partially allowing the assessee's appeal.

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Issues Involved:
1. Transfer pricing adjustment on account of notional interest on loan to a wholly owned subsidiary.
2. Transfer pricing adjustment on account of fee for corporate guarantee.
3. Disallowance on account of alleged non-genuine purchases.
4. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2)(iii) of the Income Tax Rules.

Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Notional Interest on Loan to Wholly Owned Subsidiary:

The primary issue raised by the assessee was regarding the transfer pricing adjustment made for notional interest on an interest-free loan given to its wholly owned subsidiary. The assessee argued that the loan was a part of capital funding and should not be considered an international transaction under Section 92B of the Income Tax Act. The Transfer Pricing Officer (TPO) applied a notional interest rate of 3.52% based on LIBOR plus a spread, leading to an upward adjustment of Rs. 16,32,966. The assessee contended that only the LIBOR rate should be used for benchmarking. The Tribunal, referencing its own decision in the assessee's case for A.Y. 2014-15 and the Rajasthan High Court's ruling in CIT vs. Vaibhav Gems Ltd., directed the TPO to apply only the LIBOR rate of 1.52% for the transfer pricing adjustment, partially allowing the assessee's appeal.

2. Transfer Pricing Adjustment on Account of Fee for Corporate Guarantee:

The second issue was the transfer pricing adjustment related to the corporate guarantee fee. The assessee had provided a corporate guarantee to Barclays Bank on behalf of its AE without charging any commission. The TPO determined the fee at 2.25%, while the CIT(A) reduced it to 0.5%. The Tribunal referenced its decision in the assessee's own case for A.Y. 2014-15 and upheld the CIT(A)'s determination of the commission at 0.5%, dismissing the Revenue's higher rate argument due to low tax effect. The Tribunal found no merit in the assessee's claim that the corporate guarantee was not an international transaction and upheld the CIT(A)'s decision, partially allowing the assessee's appeal.

3. Disallowance on Account of Alleged Non-Genuine Purchases:

The third issue involved the disallowance of purchases deemed non-genuine by the AO, who identified suppliers linked to the Rajendra Jain group, known for providing bogus purchase bills. The assessee furnished various documents to prove the genuineness of the purchases but failed to produce the suppliers for examination. The AO estimated a profit element of 5% on the disputed purchases, resulting in an addition of Rs. 23,52,068, which was upheld by the CIT(A). The Tribunal noted that the AO did not issue notices under Section 133(6) to verify the suppliers and concluded that the purchases remained unverifiable. It reduced the profit percentage to 2.5%, directing the AO to adjust the disallowance accordingly, partially allowing the assessee's appeal.

4. Disallowance under Section 14A Read with Rule 8D(2)(iii):

The fourth issue concerned the disallowance under Section 14A for expenses related to exempt income. The AO disallowed Rs. 94,69,024 based on Rule 8D, which was partially upheld by the CIT(A). The Tribunal found that the assessee had sufficient interest-free funds, negating the need for disallowance under Rule 8D(2)(ii). For Rule 8D(2)(iii), the Tribunal directed the AO to consider only those investments that yielded exempt income during the year, reducing the disallowance to Rs. 19,00,825 after accounting for the assessee's voluntary disallowance of Rs. 1,00,000, partially allowing the assessee's appeal.

Conclusion:

The appeal was partly allowed, with specific directions given for each issue to adjust the transfer pricing and disallowances as per the Tribunal's findings. The order was pronounced on 23/07/2021.

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