Tribunal allows appeal, adjusts receivables, limits guarantee commission, exempts disallowance under section 14A

The Tribunal allowed the appeal of the assessee on all grounds. It directed the deletion of the upward adjustment towards overdue receivables from Associated Enterprises, restricted the corporate guarantee commission to 0.50% on the amount utilized by the AE, and held that the disallowance under section 14A was not applicable due to the absence of exempt income.

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Issues Involved:
1. Adjustment towards interest on overdue receivables.
2. Adjustment towards corporate guarantee.
3. Disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Adjustment towards interest on overdue receivables:
The main issue raised by the assessee was the upward adjustment in imputing notional interest on the outstanding overdue receivables from Associated Enterprises (AEs). The assessee argued that the interest on outstanding receivables is subsumed in the Arm's Length Price (ALP) charged to the AEs under the Transaction Net Margin Method (TNMM). The assessee's operating margin was significantly higher than that of comparable companies, implying compensation for the cost of delayed receivables through higher operating margins. The assessee also contended that no interest was charged on outstanding receivables to either AE or Non-AE parties. Various judicial precedents were cited to support the argument that transfer pricing adjustments cannot be made on a hypothetical and notional basis without material evidence of undercharging real income. The Departmental Representative (DR) countered that deferred receivables constitute an international transaction as per section 92B of the Act and argued that notional interest cannot be subsumed in the TNMM. The Tribunal, following its earlier decision in the assessee's own case for A.Y. 2017-18, held that when TNMM is considered the most appropriate method, the net margin would take care of such notional interest cost. Therefore, no separate upward adjustment on outstanding export receivables is required, and this ground raised by the assessee was allowed.

2. Adjustment towards corporate guarantee:
The issue raised was the adjustments made by the TPO/DRP in the corporate guarantee commission on the gross guarantee given to AE. The assessee argued that extending a corporate guarantee cannot be considered an international transaction as it does not fall within the purview of "capital financing" under section 92B of the Act. The assessee also contended that no cost was incurred in providing the corporate guarantee and thus no commission should be charged. The DRP/TPO/AO had partially sustained the adjustment, reducing it to 1% of the actual loan utilized by AE. The Tribunal, following its earlier decision in the assessee's own case for A.Y. 2017-18 and the ratio laid down by the Bombay High Court in CIT vs. Everest Kanto Ltd, held that the corporate guarantee commission is an international transaction and should be charged at 0.50% on the amount utilized by the AE. This ground raised by the assessee was allowed.

3. Disallowance under section 14A of the Income Tax Act:
The issue was the disallowance made under section 14A of the Act r.w.r 8D. The assessee argued that no exempt income was earned during the assessment year, and thus the provisions of section 14A should not be applicable. The Tribunal, following its earlier decision in the assessee's own case for A.Y. 2017-18 and the judgment of the Hon'ble Supreme Court in CIT vs. Chettinad Logistics P. Ltd, held that section 14A can only be triggered if the assessee claims any expenditure against an income that does not form part of the total income under the Act. Since the assessee did not earn any exempt income, the provisions of section 14A were not applicable, and this ground raised by the assessee was allowed.

Conclusion:
The appeal of the assessee was allowed on all grounds. The Tribunal directed the deletion of the upward adjustment made towards overdue receivables from AE, restricted the corporate guarantee commission to 0.50% on the amount utilized by the AE, and held that the disallowance under section 14A was not applicable in the absence of exempt income.

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