TaxTMI 
TaxTMI 
2020 (9) TMI 276
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....of Rs. 20.58.028/- pertaining to providing of Corporate Guarantee (CG) to Associated Enterprise (AE) 2.1 erred in making an adjustment under Section 92CA(3) of the Act of Rs. 20,58,0287- in respect of CG given by the Appellant to its AE, Laqshya Media International, Mauritius ('LMI') against the guarantee given by LMI to HSBC Bank Middle East Ltd and National Bank of Dubai for the amount borrowed by the Appellant's step down Dubai subsidiary Right Angle Media FZ LLC('RAM' or 'AE') which has been withdrawn with effect from 1 April 2012; 2.2 erred in not appreciating the fact that the Appellant has withdrawn the corporate guarantee provided to its AE with effect from 1 April 2012 and hence no guarantee existed for the year under consideration and thereby no adjustment is warranted in this regard; Without prejudice grounds: 2.3 erred in not appreciating the fact that the transaction of providing corporate guarantee to AE is not an International Transaction within meaning of Section 92B; 2.4 erred in not considering the overall financial structuring arrangement between the Appellant and AEs, where over and above the share capital invested, funds we....
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....82/- under section 36(1)(iii) of the Act 4.1 erred in making disallowance of interest expenditure claimed by the assessee under section 36(1){iii) of the Act amounting to Rs. 64,95,182 on the ground that interest free funds were advanced to the subsidiaries of the Assessee out of interest-bearing funds and hence, the same were not used for business purposes; 4.2 erred in not following principles of judicial discipline by not following the order of Hon'ble ITAT in Appellant's own case for earlier years, wherein such disallowance has been deleted; 4.3 erred in making a disallowance of the interest expenditure claimed by the appellant, without appreciating the commercial expediency in advancing interest free loans to its subsidiaries; 4.4 erred in not appreciating the fact that the advances to Subsidiary Companies were made from own surplus funds and no portion of the borrowed funds was used for the same; and 4.5 erred in not appreciating the fact that borrowed funds on which interest was paid, was used wholly and exclusively for the purpose of business and hence disallowance of Rs. 65,95,182/- during the year under consideration cannot be sustained. 5. Disallowanc....
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....tion 234B 10.1 erred in levying interest under section 234B of the Act of Rs. 78,63,130. 11. Penalty under section 271 (1 )f c) of the Act 11.1 erred in initiating penalty under section 271{1)(c) of the Act." 3. Brief facts of the case are that the assessee, a company engaged in the business of outdoor media advertising services, filed its return of income for A.Y. 2014-15 declaring loss of Rs. 8.55 crores under the normal provisions of the Act. The assessee, along with the return of income, furnished report in Form No. 3CEB reporting international transactions with its Associated Enterprises (AE). Consequent upon reporting international transaction, the assessing officer (AO) made reference to the Transfer Pricing Officer (TPO) for computation of arms length price (ALP) with regard to international transactions. The TPO, while undertaking the transfer pricing assessment, after granting opportunity to the assessee suggested adjustment of Rs. 20,58,028/- on account of corporate guarantee extended by assessee to its AE and Rs. 13,28,39,482/- on account of interest on loans given to Laqshya Media International, Mauritius (LMI)/AE. On receipt of report of TPO, the AO included th....
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....porate guarantee was a bilateral agreement between the assessee and its step down AE. The TPO disregarded the contention of the assessee and held that corporate guarantee given by assessee to its AE was withdrawn by way of mutual consent. The TPO took his view that the intimation of withdrawal of guarantee to RAM was communicated only in August, 2013. The TPO benchmarked the transaction of guarantee fees @1.25% which is average of fees charging for bank guarantee by banks. The DRP affirmed the action of the TPO. 6. The learned A.R. of the assessee submits that no adjustment of corporate guarantee is warranted as the same has been withdrawn w.e.f. 01.04.2012. The learned A.R. of assessee further submits that similar issue was raised in appeal for A.Y. 2013-14. However, the Tribunal has not accepted the submission of the assessee that no corporate guarantee existed in A.Y. 2013-14. However, the Tribunal, by following the decision of the Hon'ble Bombay High Court in the case of CIT vs. Everest Kanto Cylinder Ltd. (378 ITR 57), restricted the addition to 0.05%. The learned A.R. submits that during the year under consideration transaction pertaining to corporate guarantee does not ....
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....he assessee grated to loan of Rs. 78.72 crore to LMI for the purpose of lending to RAM through Gulf Media Holding. The assessee agreed to grant loan to LMI aggregating Rs. 159.04 crores vide Board Resolutions dated 10.02.2009 and 14.04.2009 and loan agreement dated 17.07.2009 for the purpose of lending to RAM @14%. The loan was unsecured in nature and would remain outstanding until such time as: - (i) LMI repays the loan to LML, in its entirety including accrued interest (ii) LML and LMI mutually agree to restructure the loan by way of revised loan agreement Remaining outstanding loan of Rs. 2.83 crores was granted to LMI vide Board Resolution dated 09.04.2007 and Loan Agreement dated 11.04.2007 @ 13%. The loan advanced to LMI and Gulf Media Holding has further granted loan to RAM, which is a Media Free Zone Company registered with Dubai Technology and Media Free Zone Authority, Government of Dubai. RAM is engaged in providing out of Home Media Advertising solutions, which was awarded the contract for setting up Air Conditioner Bus Shelter project in Dubai by the Road Transport Authority of Dubai, but the same was not extended. RAM had defaulted in repayments of secured loans....
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....nterest of Rs. 2.61 crore in FY 2009-10 and Rs. 23.53 crores in FY 2011-12 in the books of LML, as principal loan itself was doubtful of recovery for the reasons mentioned above. The provision for accrued interest was increased to Rs. 26,29 crores and Rs. 26.61 crores during the financial year 2012-13 and 2013-14 respectively. * Since the financial position of the AE and step- down subsidiaries further deteriorated as explained above, the AE waived of all the loans granted to step down subsidiaries during FY 2014-15 and LML also converted its entire loan of Rs. 94.55 Crores extended to LMI into Preference Share Capital on 11 June 2014 and also made provision of Rs. 59.15 Crores for investment in equity and preference shares for diminution in value of investments other than temporary. * In FY 2016-17, RTA Dubai re-possessed the BQS set-up by the RAM and accordingly, the RAM lost control over the project and was to also liable to pay claim of AED 11.27 Crores to RTA, Dubai for settlement. This had created material uncertainty with regard to the recoverability of investment and loan granted to RAM by AE and correspondingly by the AE to Assessee. * RAM's financial for FY 2016....
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....ssee submits that interest on the loans given to AE to be benchmark by using the prevalent rate in the country where loans utilised for appropriate LOBOR rates as per the decision of Bombay High Court in case of Tata Auto Comp Limited (374 ITR 516 Bom). The loans were ultimately utilised in Dubai. 14. The learned AR of the assessee submits that TPO and ERP made adjustment of Rs. 13.07 crore by disregarding the factual matrix and principal of commercial expediency and real income theory, without undertaking any benchmarking analyses. In his all fairness the learned AR of the assessee submits that the Tribunal in assessee's own case for AY 2012-13 in ITA No. 1984/Mumbai/2017 dated 14th November 2018 has disregarded the argument of assessee that real income theory does not apply to transfer pricing proceedings and the loans were advanced to AE cannot be challenged due to commercial expediency. The assessee has filed Miscellaneous Application (MA) before the Tribunal to make the certain rectification in the order passed on 14th November 2 018. The Tribunal vide its order dated 12 March 2 019 in assessee's MA had directed to calculate ALP within framework of law laid down in para 5.6 t....
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....cial Bench of Kolkata Tribunal in Instrumentarium Corporation Ltd versus ADIT (71 taxmann.com and 93). The coordinate bench of Tribunal in assessee's own case for AY 2012-13 in ITA No. 1984/Mum/2017 passed the following order; "5.6 We have carefully considered the submissions and relevant material on record. The undisputed facts are that pursuant to contractual terms, the assessee had advanced loans to its AE in furtherance of business interest i.e. for the purpose of further lending to step down subsidiary as well as to acquire the stake in another entity. It is also undisputed fact that as per the contractual terms, the assessee was entitled for interest ranging from 13%-14% and the same has also been recognized as income in the earlier years. However, for the impugned AY, no interest has been charged by the assessee primarily in view of the fact that the aforesaid loans became doubtful due to losses sustained by its AE. The primary argument of Ld. AR rest on the premise that the loans being stressed asset / non-performing assets and therefore, are to be benchmarked at Nil rate of interest. However, the fact remains the same that the assessee has advanced loan pursuant to loan ....
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.... case (supra) in this regard, is wholly misplaced because that proposition is in the context of tax laws in general, whereas, transfer pricing provisions, being anti abuse provisions with the sanction of the statute, come into play in the specific situation of certain transactions with the associated enterprise. The general provisions of the law have to give way to these specific anti abuse provisions. While a notional interest income cannot indeed be brought to tax in general, the arm's length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. When the legal provisions are not in pari materia, as the provision of normal computation of income and the provision of computation of income in the case of international transactions between the associated enterprises, what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions. Keeping in view the same, we reject the various contentions raised by Ld. AR, in this regard. 5.7 Now the only question that survives for our consideration is applicable interest rat....
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....e arriving at such a conclusion, strength has been drawn from the cited decision of the special bench. This being the case, the submission that the cited decision was factually different and distinguishable, in our opinion, carry no weight. 4. Proceeding further, in para 5.7, the matter of quantification of appropriate applicable rate has been remitted back to the file of Ld. AO / TPO with certain observations in the light of additional evidences submitted by the assessee. It is made clear that the Arm's Length Price of the stated transactions shall be determined within the framework of law keeping in view the principle laid down in para 5.6 of the said order. Needless to add that the assessee is free to agitate the applicable rate of stated transactions." 19. We have further noted that order of AY 2012-13 was followed in AY 2013-14, therefore, respectfully following the orders of the coordinate benches of the Tribunal this issues is restored back the file of TPO/AO to pass the order by following the directions in the order dated 14.11.2108 and 12.03.2109 (order on MA). Further considering submissions of the ld. AR for the assessee, which we have recorded in para 16 (supra), the....
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....arly no adjustment on account of disallowance of section 14A in the book profit under section 115JB is warranted as per the decision of the Special Bench of the Delhi Tribunal in Vireet Investments Pvt. Ltd. (82 taxmann.com 415 [Delhi - Trib.) (SB)]. In the result this ground of appeal is allowed. 24. Ground No. 5 relates to disallowance of interest under section 36(1)(iii) of the Act. During the assessment, the AO noted that assessee has incurred interest of Rs. 6.71 crore. It was further noted that the assessee has advanced interest free loan to its subsidiary. The AO issued show-cause notice for interest disallowance under section 36(1)(iii). The assessee filed detailed submission vide reply dated 30.11.2017 as recorded in para-7.2 of the draft assessment order. In the reply the assessee submitted that the advance to the subsidiaries was given for commercial expediency and that the assessee had sufficient interest free funds available with it. The AO disregarded the contention of the assessee. The AO made disallowance under section 36(1)(iii) by taking view that assessee is unable to justify the commercial necessity for making interest free advances to its subsidiaries nor been....
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....facts are identical and DRP has also followed its earlier year order which has been reversed by the ITAT, respectfully following the above said precedent we direct that no disallowance in this regard is to be made 28. Respectfully following the decision of the Coordinate Bench in earlier assessment years, wherein it was held that the assessee has sufficient interest free funds available with it and the advances was given for commercial expediency; hence we are in agreement with the submissions of the assessee that this ground of appeal is covered in favour of the assessee. Hence, we are inclined to delete the addition/disallowance under Section 36(1)(iii) of the Act. No contrary fact or law is brought to our notice. Ins the result this Ground of appeal is allowed. 29. Ground No. 6 relates to addition on account of mismatch in 26AS data. The ld AR for the assessee submits that during the course of the assessment proceedings, the AO provided the assessee with the copy of Form 26AS and asked the assessee to reconcile the data vis-à-vis Profit & Loss account of the assessee due to a mis-match. The assessee vide its reply dated 8.11. 2017, 30.11.2017 and 22.12 2018 submitted t....