2015 (5) TMI 395 - HC - Income Tax

Disallowance under section 14A - disallowance of ₹ 1 lakh confirmed by ITAT as against ₹ 20,27,896/- Held that - Order of the Tribunal as regards disallowance under section 14A and restricting the same to ₹ 1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of ₹ 4,47,649/- was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. - decided against revenue Order computing arms length price - ITAT deleting the addition on account of TP adjustment on guarantee commission - Held that -Guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. No substantial question of law - decided against revenue

Summary

Issues Involved:
1. Disallowance of interest under Section 14A of the Income Tax Act, 1961.
2. Restriction of disallowance under Section 14A to Rs. 1,00,000 by ITAT.
3. Deletion of addition on account of Transfer Pricing (TP) adjustment on guarantee commission.

Detailed Analysis:

1. Disallowance of Interest under Section 14A:

The revenue questioned whether the ITAT Mumbai Bench was justified in ignoring the Income Tax (fifth amendment) Rules 8D for disallowing the interest under Section 14A of the I.T. Act, 1961. The Assessee had received dividend income and claimed exemption under Section 10(33) of the I.T. Act. The Assessing Officer (AO) disallowed the interest under Rule 8D of the Income Tax Rules, 2008, and made a disallowance of Rs. 20,27,896/-. The Commissioner of Income Tax (Appeals) upheld this disallowance.

2. Restriction of Disallowance under Section 14A to Rs. 1,00,000 by ITAT:

The ITAT, after hearing the parties, partly allowed the appeal and restricted the disallowance under Section 14A to Rs. 1,00,000/-. The Tribunal observed that the investment was made from surplus funds raised through an Initial Public Offering (IPO) and not from interest-bearing funds. Therefore, a fair assessment of Rs. 1,00,000 was considered appropriate for disallowance under Section 14A. The Tribunal's decision was challenged by the revenue, arguing that the disallowance of Rs. 4,47,649/- offered by the Assessee during the assessment should be considered.

3. Deletion of Addition on Account of TP Adjustment on Guarantee Commission:

The Transfer Pricing Officer (TPO) had made an adjustment of Rs. 28,50,353/- on the guarantee commission provided by the Assessee to its subsidiary in Dubai. The TPO concluded that the guarantee commission charged by the Assessee at 0.5% was lower than the arm's length price, which was benchmarked at 3%. This adjustment was upheld by the Commissioner (Appeals). However, the ITAT deleted the adjustment, stating that the comparison made by the TPO between commercial bank guarantees and a corporate guarantee issued by the Assessee was not appropriate. The Tribunal held that the considerations for a corporate guarantee are distinct from those of a bank guarantee.

Judgment:

The High Court upheld the ITAT's decision on both counts. It agreed that the disallowance under Section 14A should be restricted to Rs. 1,00,000, considering the investment was made from surplus IPO funds and not interest-bearing funds. The Court also concurred with the ITAT's view that the TPO's comparison between commercial bank guarantees and a corporate guarantee was flawed. The corporate guarantee issued by the Assessee for its subsidiary could not be equated with guarantees provided by commercial banks, which are more easily encashable and involve higher commissions. Therefore, the appeal did not raise any substantial question of law and was dismissed with no order as to costs.