2022 (8) TMI 798 - AT - Income Tax

Tribunal adjusts transfer pricing and guarantee commission rates in appeal decision.

The appeal was partly allowed by the Tribunal. The transfer pricing adjustment related to interest paid on behalf of the associated enterprise was ... Arm's length price - international transaction - transfer pricing adjustment - corporate guarantee fee - revenue neutrality - provisions of Chapter X - benchmarking of guarantee commission - dismissed as not pressedArm's length price - revenue neutrality - allowance of expense - provisions of Chapter X - Transfer pricing adjustment on account of interest paid by the assessee on behalf of its associated enterprise was deleted. - HELD THAT: - The TPO had imputed the entire interest paid by the assessee for a loan utilized by the associated enterprise as not at arm's length and proposed an adjustment. The Tribunal noted that the interest so paid was not claimed by the assessee as an expenditure and that Chapter X provisions operate where income or expenditure from international transactions affects taxable income. Since the assessee had not claimed the interest, treating its arm's length value as Nil or otherwise would be revenue neutral and would not alter the income chargeable to tax in India. Consequently the transfer pricing adjustment in respect of the interest paid on behalf of the associated enterprise was directed to be deleted. [Paras 8]Adjustment of Rs. 46,97,658 made for interest paid on behalf of the associated enterprise deleted; ground No. 3 allowed.Corporate guarantee fee - benchmarking of guarantee commission - precedent of jurisdictional High Court - transfer pricing adjustment - Adjustment on account of corporate guarantee was partly allowed by directing computation of guarantee commission at 0.5%. - HELD THAT: - The TPO had imputed a guarantee fee (2.5% of loan funds) for corporate guarantees provided without compensation. The assessee did not press all challenges to the imputation but sought restriction of the benchmarking rate to 0.5%. The Tribunal, following the decision of the jurisdictional High Court in Everest Kento Cylinders Ltd., held that the rate for computing guarantee commission should be restricted to 0.5% and directed the TPO/Assessing Officer to recompute the transfer pricing adjustment accordingly. [Paras 11, 12]Corporate guarantee adjustment to be recomputed using a guarantee commission rate of 0.5%; ground No. 2 partly allowed.Dismissed as not pressed - Disallowance of sales tax payable (ground No. 4) was dismissed as not pressed. - HELD THAT: - The assessee's authorised representative did not press ground No. 4 during hearing. Consequently the Tribunal declined to adjudicate the matter on merits and treated the ground as not pressed. [Paras 14]Ground No. 4 dismissed as not pressed.Final Conclusion: The appeal is partly allowed: the transfer pricing adjustment in respect of interest paid on behalf of the associated enterprise is deleted; the adjustment in respect of corporate guarantee is to be recomputed applying a 0.5% guarantee commission; the sales-tax disallowance ground was dismissed as not pressed and one ground required no separate adjudication. Issues Involved:1. Treatment of interest paid to bank and corporate guarantee fee as an international transaction under section 92B of the Act.2. Addition on account of arm's length adjustment to income from guarantee commission.3. Addition on account of interest paid by the appellant on loan given to its associated enterprise (AE).4. Disallowance of sales tax payable.Detailed Analysis of the Judgment:Issue 1: Treatment of Interest Paid to Bank and Corporate Guarantee Fee as an International Transaction- Grounds Raised: The assessee challenged the CIT(A)'s decision to treat the interest paid to the bank and corporate guarantee fee as an 'international transaction' under section 92B of the Income Tax Act. The assessee argued that it was not in the business of providing finance or guarantee and that these transactions were based on commercial expediency.- Tribunal's Decision: This issue was not separately adjudicated as the grounds were addressed in the context of other issues.Issue 2: Addition on Account of Arm's Length Adjustment to Income from Guarantee Commission- Grounds Raised: The assessee contested the CIT(A)'s computation of the arm's length price for corporate guarantees, which led to an addition of Rs. 31,50,000. The assessee argued that the guarantee commission was part of its business obligation and that the disallowance was unjustified.- Tribunal's Decision: The Tribunal noted that the assessee had provided a corporate guarantee to its AE without compensation. The TPO had imputed a 2.5% fee for this guarantee. The Tribunal referenced the jurisdictional High Court decision in CIT vs. Everest Kento Cylinders Ltd., which upheld a 0.5% guarantee commission rate. Consequently, the Tribunal directed the TPO/Assessing Officer to compute the adjustment using a 0.5% rate, partially allowing the assessee's appeal.Issue 3: Addition on Account of Interest Paid by the Appellant on Loan Given to Its AE- Grounds Raised: The assessee challenged the addition of Rs. 46,97,658 for interest paid on behalf of its AE, arguing that the interest was a business obligation and not claimed as an expense, thus making the addition unjustified.- Tribunal's Decision: The Tribunal detailed that the assessee had arranged a loan for its AE and borne the interest cost, which was not claimed as an expense. The Tribunal emphasized that the provisions of Chapter X of the Act, which relate to transfer pricing, are applicable only when there is a possibility of manipulating taxable income in India. Since the interest was not claimed as an expense, the Tribunal found the transaction revenue-neutral and directed the TPO/Assessing Officer to delete the adjustment, allowing the assessee's appeal on this ground.Issue 4: Disallowance of Sales Tax Payable- Grounds Raised: The assessee contested the disallowance of Rs. 9,43,930 as sales tax payable, arguing that it should be allowed as a business expenditure under section 37(1) of the Act.- Tribunal's Decision: This ground was not pressed by the assessee during the hearing and was thus dismissed as not pressed.Conclusion:The appeal was partly allowed. The Tribunal directed the deletion of the transfer pricing adjustment related to the interest paid on behalf of the AE and adjusted the guarantee commission rate to 0.5%. Other grounds were either not pressed or deemed unnecessary for separate adjudication.