2021 (8) TMI 896 - AT - Income Tax

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

M/s. Rosy Blue (India) Pvt. Ltd. Versus Deputy Commissioner of Income Tax Central Circle-8 (3) Mumbai

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 ... TP Adjustment made on account of notional interest on loan given to wholly owned subsidiary by the assessee company - As argued only LIBOR rate should be taken for the purpose of adding notional interest income on account of interest free loan given to foreign subsidiary - HELD THAT:- As relying on own case [2021 (2) TMI 1018 - ITAT MUMBAI] we direct the ld. TPO to consider only LIBOR rate @1.52% as arm’s length price for benchmarking the interest free loan given by the assessee to its AE and recompute the transfer pricing adjustment accordingly. Accordingly, the ground No.1 raised by the assessee is partly allowed. Transfer pricing adjustment made on account of fee for corporate guarantee - HELD THAT:- As decided in own case [2021 (2) TMI 1018 - ITAT MUMBAI] we do not find any merit in the submissions of the assessee that provision of corporate guarantee is not an international transaction. As regard the arm's length rate of fee/commission, the learned Counsel for the assessee relying decision of the Asian Paints India Ltd. (supra) has submitted that it should be reduced to 0.2% - on careful perusal of the decision rendered in case of Asian Paints (supra), we find that in the facts of the said case the assessee itself had charged commission @ 0.2% over the years and the Tribunal has accepted the claim of the assessee which was not contested by the Revenue. Taking note of these facts the Hon'ble Jurisdictional High Court has dismissed the appeal of the Revenue. These are not the facts in case of the present assessee. Therefore, we are not inclined to interfere with the decision of learned Commissioner (Appeals) on this issue. Disallowance made on account of alleged non-genuine purchases - HELD THAT:- All the documents furnished by the assessee are only self-serving documents which are available in the books of accounts of the assessee company and which are not corroborated by third party confirmation. Even the assessee had failed to produce parties for examination as directed by the ld. AO. In these circumstances, it would be just and fair to conclude that the purchases made from the aforesaid suppliers remain unverifiable - corresponding sales made out of disputed purchases had not been doubted by the Revenue, it would be safe to conclude that assessee could have made purchases from grey market in order to have some savings in indirect taxes and the incidental profit element thereon for making purchases in cash. Based on the report of the task group for diamond sector published by the Government of India, Ministry of Commerce and Industry in this regard, wherein the benign / presumptive taxation threshold was set at 2.5%, we hold that profit percentage embedded in the value of disputed purchases estimated at 2.5% thereon would meet the ends of justice. The ld. AO is directed accordingly. Disallowance u/s.14A of the Act r.w.Rule 8D(2)(iii) - Assessee made suomoto disallowance of administrative expenses - HELD THAT:- We find that assessee had only made an adhoc disallowance of ₹ 1 lakh in the instant case u/s.14A of the Act and had also not provided the basis of arriving at such disallowance before the lower authorities. Hence, there is no need to record any satisfaction by the ld. AO to disapprove the said adhoc disallowance. The ld. AO had proceeded to make the disallowance based on computation mechanism provided under Rule 8D (2)(iii) of the Rules, which action cannot be faulted with. The only dispute before us is with regard to disallowance made under Rule 8D(2)(iii) of the Rules. Hon’ble Special Bench of Delhi Tribunal in the case of ACIT vs. Vireet Investments [2017 (6) TMI 1124 - ITAT DELHI] had held that only those investments which had yielded exempt income to the assessee during the year alone should be considered for the purpose of making the disallowance under Rule 8D(2)(iii) of the Rules. Respectfully following the same, we hereby direct the ld. AO to consider only the investments of ₹ 40,01,64,994/- and apply 0.5% thereon for the purpose of working out the disallowance under Rule 8D(2)(iii) of the Rules which would work out to ₹ 20,00,825/-. AO is directed to disallow a sum of ₹ 19,00,825/- (20,00,825- 1,00,000) in the instant case u/s.14A of the Act read with Rule 8D(2)(iii) of the Rules. Accordingly, the ground No.4 raised by the assessee is partly allowed. 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.