2017 (1) TMI 1519 - AT - Income Tax

TP adjustment with regard to Corporate Guarantee CG - Held that - Hon ble Bombay High Court in CIT Vs. Everest Kento Cylinders Ltd. (2015 (5) TMI 395 - BOMBAY HIGH COURT) has affirmed guarantee adjustment of 0.50% as upheld by the Tribunal. In various other judicial pronouncements, CG has been benchmarked in the range of 0.20% to 0.50%. Therefore, keeping in mind the overall facts and circumstances of the case, we restrict TP adjustment against bank guarantee to 0.50% on CG given by the assessee. Also adjustment has to be calculated on Gross value of CG provided by the assessee. We direct so. This ground is partly allowed. Disallowance of Interest u/s 36(1)(iii) - proof of commercial expediency - Held that - Once it is established that there was nexus between the expenditure and the purpose of the business which need not necessarily be the business of the assessee itself, the revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the role to decide how much s reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look the matter from their own viewpoint but that of a prudent businessman. - Additions deleted - Decided in favour of assessee. Grant of TDS credit & Refund - Held that - AR has stated that the assessee is entitled for full TDS credit on the strength of physical TDS certificates. Therefore, reiterating the stand of DRP and following Hon ble Bombay High Court judgment in Yashpal Sahni Vs. Rekha Hajarnavis (2007 (7) TMI 7 - HIGH COURT , BOMBAY) DCIT is directed to grant full TDS credit of ₹ 1,64,11,584/- after verifying the physical TDS certificates and grant refund, to which assessee is entitled. Both grounds of assessee s appeal stand allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment regarding Corporate Guarantee (CG)
2. Disallowance of Interest under Section 36(1)(iii)
3. Grant of TDS Credit and Refund
4. Initiation of Penalty under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment regarding Corporate Guarantee (CG):
The assessee provided a corporate guarantee of AED 53 million to its Mauritius AE, which was reduced to AED 51 million. The TPO considered this an international transaction due to the amendment in the Finance Act, 2012. The TPO used the External 'CUP' method and determined a TP adjustment of 2.74%, amounting to ?1,71,18,150/-. The assessee argued that the corporate guarantee was provided as part of an overall financing arrangement and that both entities had similar credit ratings, thus no adjustment was necessary. However, the Tribunal found that the assessee initially proposed a 0.5% guarantee fee, indicating a benefit to the AE. The Tribunal restricted the TP adjustment to 0.50% on the gross value of the CG provided, aligning with judicial precedents.

2. Disallowance of Interest under Section 36(1)(iii):
The DCIT disallowed ?492.15 Lacs of interest, noting that the assessee had advanced interest-free loans to its subsidiaries while claiming interest expenditure. The DRP provided partial relief, but the assessee contended that these loans were out of commercial expediency and sufficient interest-free funds were available. The Tribunal observed that the assessee's own funds were sufficient to cover the interest-free loans and that the loans were for business purposes. Citing various judicial pronouncements, the Tribunal concluded that the disallowance was not justified and deleted the impugned additions.

3. Grant of TDS Credit and Refund:
The assessee claimed TDS credit of ?1,57,53,775/- in its return, later revised to ?1,64,11,584/- based on physical TDS certificates. The DRP directed the DCIT to grant full TDS credit based on physical certificates, but the DCIT only granted credit for the amount reflected in Form 26AS. The Tribunal directed the DCIT to grant full TDS credit of ?1,64,11,584/- after verifying the physical TDS certificates, in line with the DRP's directions and relevant judicial precedents.

4. Initiation of Penalty under Section 271(1)(c):
The assessee challenged the initiation of penalty under Section 271(1)(c). The Tribunal found this issue premature and dismissed the ground, indicating no interference was necessary at this stage.

Conclusion:
The Tribunal partly allowed the appeal, providing relief on the TP adjustment for CG and the disallowance of interest under Section 36(1)(iii), and directed the DCIT to grant full TDS credit and refund. The initiation of penalty under Section 271(1)(c) was dismissed as premature. The order was pronounced in the open court on 04th January 2017.