2023 (7) TMI 603 - AT - Income Tax

Tribunal grants relief to assessee, orders deletion of inventory addition & upholds corporate guarantee commission rate.

The tribunal partly allowed the assessee's appeals for statistical purposes, directing the deletion of inventory addition and disallowance of interest on ... Inventory Written off - as submitted that the assessee has not claimed deduction in the P&L account and hence no disallowance is called for - HELD THAT:-We are in agreement with the contention of the ld. AR that no disallowance is called for unless claimed in the P&L account. AO is directed to examine and delete the addition after verification in case the expenditure is not claimed in the P&L account. Administrative Expenses – Ballarpur Industries - HELD THAT:- The similar expenses disallowed by the revenue have been allowed by the revenue for A.Y. 2007-08 and A.Y. 2010-11 and by the ITAT [2023 (1) TMI 1270 - ITAT DELHI] - In the absence of any change in the factual matrix, we hereby direct that the addition be deleted. Provision for Bad & Doubtful Debts/Farmers Advance - HELD THAT:- AO is directed to allow the amount on write off basis. The assessee shall produce the written off details before the AO. ESI/PF Contribution - As contended that part of amount was paid within the due date - HELD THAT:- AO may examine the exact details of payment of Employee Contribution & Employer Contribution and disallow the amount not paid within the due date as per the judgment of Checkmate Services Pvt. Ltd. [2022 (10) TMI 617 - SUPREME COURT] MAT - Section 115JB on provisions for Doubtful Debts - HELD THAT:- All the debts which have been rightly obliterated even though the terminology used was “provision” was directed to be excluded from the purview of computation of Section 115JB. Adjustment u/s 92CA(3) - MAM selection - TPO compared the price charged by the assessee from its AEs for each transaction with the weighed average selling price (WASP) of the sales made by it to third parties - As argued TPO arbitrarily adopted third parties sale transaction and in most of the cases compared the selling price of different grades of GHERKINS sold to the AEs with the WASP of different grades sold to the third parties - HELD THAT:- We hold that internal CUP is the most appropriate method for undertaking the determination of Arm’s Length Price. Hence, we direct that the economic analysis be conducted afresh by taking into consideration the “like with the like” and following right foreign currency conversion. The AO is also directed to accord reasonable and accurate adjustment to Product characteristics, contractual terms, risk incurred and geographical factors. Provision for bad debts – farmers/trade - HELD THAT:- As Directed to be allowed on actual write off basis. Loss on Foreign Exchange Fluctuation - AO disallowed the loss on exchange fluctuation holding it to be notional. The AO held that actual loss would arise only at the time of remittances and not before - HELD THAT:- Keeping in view, the judgments of Hon’ble Apex Court in the case of ONGC Vs. CIT [2010 (3) TMI 81 - SUPREME COURT] and CIT Vs. Woodward Governor [2009 (4) TMI 4 - SUPREME COURT] we hold that the Loss on Foreign Exchange Fluctuation is an allowable expenditure. TP – ALP on Interest Received - whether the interest rate prevailing in India should be applied, for the lender who was an Indian company, or the lending rate prevalent in the state of recipient company should be applied? - HELD THAT:- By adopting a commonsensical and pragmatic reasoning, it was held that interest should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. It was clarified that interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. The Hon’ble Court in Cotton Naturals [2015 (3) TMI 1031 - DELHI HIGH COURT] concluded that the currency in which the loan is to be repaid normally determines the rate of return on the money lent. The Hon’ble Court also held that in case of capital investment borrowing rate will apply whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply. This would require examination of loan agreement. AO shall charge suitable interest after examination of the loan agreement as per the guidelines given above. Corporate Guarantee Commission - International Transaction or not? - HELD THAT:- The issue of credit guarantee fees has been examined by the Hon’ble Court. In most cases, interest rates quotes and guarantee rate quotes available from banking companies are taken as the benchmark rate to arrive at the ALP. The difference in the credit ratings between the parent in India and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of Indian bonds is also considered for determination of the arm‘s length price of such guarantees. The Hon’ble Court held that there would be a difference between the lending rate and borrowing rate in each country. The Hon’ble Court held in case of a capital investment, the borrowing rate will apply, whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply. With regard to Corporate Guarantees, the Co-ordinate Bench of ITAT in the case of Kohinoor Foods Ltd. [2015 (7) TMI 147 - ITAT DELHI] held that commission at the rate of 1% is fair and reasonable. In Havells India Ltd. [2022 (5) TMI 685 - ITAT DELHI] the corporate guarantees determined @ 0.5%. In the specific facts of the instant case, we hold that 0.5% can be considered as the justifiable corporate guarantee commission. Disallowance u/s 36(1)(iii) - AO disallowed the interest on the amounts invested in the subsidiary company - CIT(A) relying on the judgment of Hero Cycle [2015 (11) TMI 1314 - SUPREME COURT] held that the disallowance of interest on the investments in the subsidiaries cannot be disallowed in the absence of evidence that the said investment had no element of commercial expediency from the business point of view - HELD THAT:- Since, the decision of the ld. CIT(A) is based on the order of the Hon’ble Apex Court, we decline to interfere with the adjudication of the ld. CIT(A). Issues Involved:1. Addition of Inventory Written Off2. Disallowance of Administration Expenses3. Transfer Pricing Adjustment for Export of Goods4. Transfer Pricing Adjustment for Purchase of Packing Materials5. Disallowance of Provision for Bad and Doubtful Debts6. Disallowance of Employees' Contribution to Provident Fund and Employee State Insurance Corporation7. Addition to Book Profits under Section 115JBSummary:1. Addition of Inventory Written Off:The assessee argued that the inventory write-off was not claimed as a deduction in the profit and loss account. The tribunal agreed and directed the AO to delete the addition after verification if the expenditure was not claimed in the P&L account.2. Disallowance of Administration Expenses:The tribunal noted that similar expenses were allowed in previous years and directed the deletion of the disallowance in the absence of any change in the factual matrix.3. Transfer Pricing Adjustment for Export of Goods:The tribunal held that the internal Comparable Uncontrolled Price (CUP) method is the most appropriate method for determining the arm's length price (ALP) and directed the AO to conduct a fresh economic analysis considering 'like with like' and proper foreign currency conversion.4. Transfer Pricing Adjustment for Purchase of Packing Materials:The tribunal upheld the TPO's determination of the ALP and the addition of Rs. 7,90,535/- to the income of the assessee, disallowing the setting off of negative variation.5. Disallowance of Provision for Bad and Doubtful Debts:The tribunal directed the AO to allow the amounts on an actual write-off basis and to verify the details provided by the assessee.6. Disallowance of Employees' Contribution to Provident Fund and Employee State Insurance Corporation:The tribunal directed the AO to examine the exact details of payment and disallow any amount not paid within the due date as per the judgment in Checkmate Services Pvt. Ltd. Vs. CIT.7. Addition to Book Profits under Section 115JB:The tribunal directed the AO to pass a rectification order after verification, correcting the amount of Rs. 1,56,84,359/- to Rs. 61,86,982/-. All debts rightly obliterated were directed to be excluded from the computation under Section 115JB.Additional Points:- The tribunal also addressed various other grounds related to different assessment years, including issues of ALP adjustments, disallowance of bonus, and loss on foreign exchange fluctuation.- The tribunal upheld the CIT(A)'s decision on the deletion of inventory addition and disallowance of interest on investments in subsidiaries, citing commercial expediency.- The tribunal affirmed a corporate guarantee commission rate of 0.5% as justifiable.Conclusion:The appeals of the assessee were partly allowed for statistical purposes, and the appeals of the revenue were dismissed. The order was pronounced in the open court on 20/06/2023.