2019 (8) TMI 1930 - AT - Income Tax

Ruling upholds 0.5% cap on corporate guarantee commission; Rule 8D disallowance excluded from book profit under s.115JB(2)

The Dy. Commissioner of Income Tax, Central Circle 1 (1), Mumbai Versus M/s Rolta India Ltd.

The Dy. Commissioner of Income Tax, Central Circle 1 (1), Mumbai Versus M/s Rolta India Ltd. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the Transfer Pricing Officer's arm's-length adjustment for guarantee commission for corporate guarantees provided to Associated Enterprises is correct, or whether an internal Comparable Uncontrolled Price (CUP) rate of 0.5% should be applied. 2. Whether an amount disallowed under section 14A (read with Rule 8D) as expenditure attributable to exempt income (dividend) must be included in book profit for computation of tax under section 115JB by application of Explanation 1(f) to section 115JB. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability and Rate of Guarantee Commission (Transfer Pricing) Legal framework: Section 92B defines 'international transaction' and the Transfer Pricing provisions require determination of arm's-length consideration; Rule 10B (and accepted transfer pricing methods) govern use of CUP and other methods to determine arm's-length price. Precedent treatment: The Tribunal relied on a coordinate-bench decision in the assessee's own earlier year holding that guarantee commission should be fixed at 0.5% and on the jurisdictional High Court authority cited by that coordinate bench; multiple Tribunal benches, including in the coordinate decision, have applied the 0.5% internal CUP in comparable circumstances. Interpretation and reasoning: The dispute before the Tribunal was confined to the applicable rate for warranty/guarantee commission once it was not disputed that provision of corporate guarantee is an international transaction. The Transfer Pricing Officer had applied a higher rate (different figures appear in the record - 1.5%, 2.25% as determined by TPO in different parts of the proceedings), while the appellate authority had adopted 0.5% by applying an internal CUP approach. The Tribunal examined whether the appellate authority's adoption of 0.5% departed from law or from precedent. As the appellate authority's conclusion followed the earlier coordinate-bench decision in the same assessee's case and that decision accords with the jurisdictional High Court's view and other Tribunal pronouncements accepting a 0.5% guarantee commission in comparable circumstances, the Tribunal concluded there was no basis to interfere with the appellate authority's finding. Ratio vs. Obiter: Ratio - where an international transaction consists of corporate guarantees, an internal CUP rate of 0.5% (as established by consistent Tribunal and High Court authority in the relevant factual matrix) is an appropriate arm's-length benchmark; reliance on coordinate bench decisions in the same assessee's case binds the present conclusion. Obiter - discussion of the TPO's alternative analyses not adopted by the Tribunal. Conclusion: The Tribunal upheld the CIT(A)'s direction to apply guarantee commission at 0.5% and dismissed the revenue's challenge to the transfer pricing adjustment. Issue 2 - Inclusion of Section 14A Disallowance in Book Profit under Section 115JB (Explanation 1(f)) Legal framework: Section 14A and Rule 8D permit disallowance of expenditure in relation to exempt income; section 115JB prescribes computation of book profit for minimum alternate tax with Explanation 1(f) specifying certain adjustments to book profit. Precedent treatment: The appellate authority followed a Special Bench decision of the Tribunal which held that computation under Explanation 1(f) to section 115JB is to be made without resort to computation as contemplated under section 14A read with Rule 8D; that Special Bench relied on higher judicial authority holding the same principle. A coordinate Bench decision of the Mumbai Tribunal (in the assessee's own earlier year) and the Special Bench decision were applied by the appellate authority to delete the addition made by the Assessing Officer. Interpretation and reasoning: The revenue's contention was that an amount disallowed under section 14A should be added back to book profit under Explanation 1(f). The Tribunal examined the appellate authority's reliance on the Special Bench ruling that Explanation 1(f) does not require so adding amounts computed under section 14A/Rule 8D and that book profit adjustments under Explanation 1(f) are to be made without resort to section 14A computations. Given the authoritative Special Bench and coordinate Bench decisions supporting the appellate authority's approach, the Tribunal found no infirmity in deletion of the addition. Ratio vs. Obiter: Ratio - Explanation 1(f) to section 115JB does not incorporate or require inclusion of amounts disallowed under section 14A/Rule 8D in the computation of book profits for section 115JB in the circumstances covered by the cited Special Bench and coordinate-bench authorities. Obiter - potential differences in factual matrices where section 14A linkage might be required were not explored in depth. Conclusion: The Tribunal upheld the deletion of the Rs. 95,55,069 addition made under section 14A for purposes of computing book profit under section 115JB and directed the Assessing Officer to delete the addition. Cross-references and Consolidated Outcome Both issues were resolved by upholding the CIT(A)'s orders because those orders followed binding or persuasive Tribunal/Special Bench decisions and jurisdictional High Court authority in the relevant factual matrix. The Tribunal therefore declined to disturb the appellate authority's determinations on the guarantee commission rate (0.5%) and on exclusion of the section 14A disallowance from book profit under section 115JB.