2021 (10) TMI 453 - AT - Income Tax

Tribunal grants relief on transfer pricing, Section 14A disallowance, and foreign exchange gains

The Tribunal partially allowed the appeal, directing the AO to delete transfer pricing adjustments related to financial guarantee commission and loan ... TP Adjustment - benchmarking of guarantee commission - HELD THAT:- As decided in own case [2021 (4) TMI 254 - ITAT MUMBAI] no reason to dislodge the ALP of corporate guarantee determined by the assessee at 0.43% p.a by adopting Internal CUP method. In the backdrop of our aforesaid observations we are unable to persuade ourselves to subscribe to the determination of the ALP of the corporate guarantee at 2% p.a by the A.O/TPO. We, thus, uphold the ALP of corporate guarantee as determined by the assessee at 0.43% p.a and direct the A.O/TPO to vacate the upward transfer pricing adjustment. Benchmarking done by assessee on the basis of internal CUP was to be accepted. Respectfully following earlier decisions of Tribunal, taking the same view, we would hold that benchmarking done by the assessee by adopting internal CUP was in order. The assessee has followed similar methodology in this year. Therefore, the adjustment as confirmed by Ld. DRP, in this regard, stand vacated. The Ld. AO is directed to delete the same. - Decided in favour of assessee. Benchmarking of loan transaction - HELD THAT:- The bench in own case [2021 (4) TMI 254 - ITAT MUMBAI] has approved the benchmarking of these transactions on the basis of internal CUP. We find the facts to be similar in this year. The assessee has followed same methodology to benchmark the loan transactions. Therefore, the adjustment as confirmed by Ld. DRP would stand deleted. Disallowance u/s 14A - assessee had suo motto offered a disallowance u/s 14A - HELD THAT:- As decided in own case [2021 (4) TMI 254 - ITAT MUMBAI] wherein a suo-motto disallowance offered by the assessee was rejected by the A.O, and was thereafter substituted by an enhanced amount of disallowance as per the methodology contemplated in Sec. 14A r.w Rule 8D matter setˇaside the matter to the file of the A.O for the purpose of re-adjudicating the disallowance afresh in light of the law laid down in the case of Maxopp Investment Ltd. Vs. CIT [2018 (3) TMI 805 - SUPREME COURT] - the matter of disallowance u/s 14A stand restored back to the file of Ld. AO with similar directions. Taxation of foreign exchange gains on loan transactions - Business income or capital income - AO has held the gain to be “Business Income' by virtue of Section 28 (iv) of the Act which provide that value of any benefit or perquisite, whether convertible into money or not, arising from the business or the exercise of profession would be chargeable as Profit and Gains of business or profession - HELD THAT:- The reasoning of Ld. DRP that foreign exchange differences would represent component of interest overlook the fact that loan transactions were in capital field and any accretion on capital account, unless specifically taxed, would not be liable to tax. Another aspect of the matter is that Ld. AO has invoked the provisions of Sec. 28(iv) to make the additions. However, as per the decision of Hon‟ble High Court in Mahindra & Mahindra Ltd.[2018 (5) TMI 358 - SUPREME COURT] the provisions of Sec. 28(iv) are not applicable to a benefit that arose in cash or monetary terms. In the present case, the benefit received by the assessee upon repayment of loan is in the form of cash and therefore, the provisions as invoked by Ld. AO do not have any applicability to the facts of the case - we would hold that foreign exchange gains as arisen to the assessee were in capital field and hence, not liable to tax. Issues Involved:1. Transfer Pricing Issues2. Non-Transfer Pricing IssuesDetailed Analysis:Transfer Pricing Issues:1. Violation of Natural Justice by TPO:The appellant claimed the TPO violated principles of natural justice by not confronting them with the information/materials collected under section 133(6) of the Income-tax Act. The Tribunal did not address this issue directly as it became infructuous due to the resolution of other grounds.2. Financial Guarantee Commission Adjustment:The TPO’s adjustment of financial guarantee commission was contested. The appellant benchmarked the commission rate at 0.46% based on internal CUP (Comparable Uncontrolled Price) using the average rate paid to banks. The TPO, however, determined an average bank guarantee rate of 2.07%. The DRP reduced this rate to 1.25%. The Tribunal, following its earlier decisions, upheld the appellant's internal CUP method and directed the AO to delete the adjustment.3. Loan Interest Rate Adjustment:The TPO adjusted the interest rate on loans given to AEs, determining an arm's length price of LIBOR + 3.332% compared to the appellant's rate of LIBOR + 2.9%. The Tribunal, referencing past decisions, upheld the appellant's internal CUP method, which benchmarked the interest rate against the rates the appellant paid on its foreign currency loans. The Tribunal directed the deletion of the adjustment.Non-Transfer Pricing Issues:1. Taxation of Exchange Gain:The AO taxed the exchange gain of Rs. 47,62,45,500/- as business income under section 28(iv). The DRP upheld this, reasoning that the gain represented a component of interest. The Tribunal, however, found that the loan transactions were in the capital field and any gain or loss therefrom would be capital in nature, not taxable as business income. The Tribunal also noted that section 28(iv) does not apply to benefits arising in cash. Thus, the Tribunal directed the AO to delete the addition.2. Disallowance under Section 14A:The AO disallowed further expenses under Section 14A read with Rule 8D(2)(iii), beyond the appellant's suo-moto disallowance. The Tribunal, following its earlier decisions, restored the matter to the AO to re-adjudicate the disallowance in light of the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, emphasizing the need for the AO to record dissatisfaction with the appellant's methodology before invoking Rule 8D.Conclusion:The Tribunal allowed the appeal partly, directing the AO to delete the transfer pricing adjustments related to financial guarantee commission and loan interest rates, and to re-examine the disallowance under Section 14A. The Tribunal also held that the foreign exchange gains were capital in nature and not taxable.