Revenue's appeal dismissed on transfer pricing adjustments for corporate guarantee and business expenditure disallowances under section 36(1)(iii)

ITAT Mumbai dismissed Revenue's appeal regarding transfer pricing adjustments for corporate guarantee and other disallowances. The court held that no TP adjustment was warranted for performance guarantee given by assessee to secure Dubai bridge construction contract through subsidiary, as assessee bore entire risk, deployed assets, and reaped 99% profits while associated enterprise performed negligible functions. Interest disallowance under section 36(1)(iii) was upheld following earlier tribunal decisions limiting disallowance to incremental loans from specific date. Depreciation claim on speedboat was allowed based on precedent where assessee had possession and business use despite principal's ownership. Professional fees for arbitration award were allowed as legitimate business expenditure, rejecting Revenue's argument linking it to excluded arbitration income.

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Issues Involved:
1. Adjustment for extension of performance/corporate guarantee.
2. Adjustment for receipts of interest on loans.
3. Disallowance of interest on loans to joint ventures.
4. Disallowance of depreciation on plant and machinery.
5. Disallowance of professional fees for arbitration award.

Summary:

1. Adjustment for Extension of Performance/Corporate Guarantee:
The assessee challenged the adjustment of Rs. 1,73,28,778/- for extending a performance/corporate guarantee to Afcons Construction Mideast LLC. The assessee argued that since it executed the entire contract and earned 99.10% of the profits, the guarantee was effectively for its own performance. The TPO considered the guarantee as an international transaction, attributing a benefit of 0.50% to the AE. The Tribunal, however, concluded that the benefit of the guarantee accrued to the assessee, not the AE, as the entire contract was executed by the assessee. Thus, the adjustment made by the TPO/AO was deleted.

2. Adjustment for Receipts of Interest on Loans:
The assessee contested the adjustment of Rs. 55,59,523/- for interest on loans given to Afcons Mideast and Afcons Infrastructure International Ltd. The AO applied a higher interest rate based on Indian market conditions. The Tribunal held that the interest rate should be based on the local market conditions of the borrower entity (UAE and Mauritius), where the applicable rates were significantly lower. Consequently, the adjustment made by the AO was deleted.

3. Disallowance of Interest on Loans to Joint Ventures:
The Revenue challenged the disallowance of interest under section 36(1)(iii) on loans to Afcons Pauling Joint Ventures. The AO disallowed interest based on the total loans given, while the DRP directed the AO to consider only incremental loans from 31/03/1996. The Tribunal upheld the DRP's direction, consistent with previous Tribunal decisions, and dismissed the Revenue's appeal.

4. Disallowance of Depreciation on Plant and Machinery:
The Revenue's appeal included the disallowance of depreciation on the WDV of plant and machinery. The Tribunal noted that the issue was previously decided in favor of the assessee in earlier years, where it was established that the machinery was utilized by the assessee for its business. Thus, the ground raised by the Revenue was dismissed.

5. Disallowance of Professional Fees for Arbitration Award:
The Revenue also contested the disallowance of professional fees paid for arbitration awards. The Tribunal referred to its earlier decisions, confirming that the professional fees were incurred for business purposes and should be allowed as expenditure. The Tribunal dismissed the Revenue's appeal on this ground.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed.

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