2016 (7) TMI 1499 - AT - Income Tax

Transfer pricing adjustment incorporated in the assessment order is on account of fees for guarantee issued by the assessee in favour of its Associated Enterprise - Held that - The issue under consideration is squarely covered by the decision of ITAT Mumbai in the case of Everest Kento Cylinders Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT wherein the Tribunal held that guarantee commission rate of 0.5% can be said to be at arms length. This decision of Tribunal has been upheld by Hon ble Bombay High Court, which is reported at 2015 (5) TMI 395 - BOMBAY HIGH COURT . Thus we direct the AO to restrict bank guarantee commission at 0.5%. Transfer pricing adjustment made in the assessment order on account of interest on advances given by the assessee to its AE - Held that - The assessee had given advances to its Associate Enterprise Grabal Alok International Ltd ( GAlL ) of ₹ 81,08,748/-. The said advance were given in the normal course of business and adjusted against payables. Based on the various precedents of Courts and Tribunals, it has been held that ALP interest in the case of foreign currency loans should be arrived on the basis of LIBOR. Thus we direct the AO to restrict the disallowance in respect of notional interest adjustment towards advance granted to AE, on the basis of LIBOR. We direct accordingly. Disallowance of expenses u/s.14A - Held that - In the appellate order passed for AY 2008-09 and AY 2009-2010, the CIT(A) has accepted the fact of the investments (including share application money) being funded through own funds of the assessee and has deleted the disallowance of interest expenditure. Further the assessee had sufficient owned funds of ₹ 144.1 crores for making incremental investments during the year of ₹ 5.24 crores in Alok Industries Limited (excluding share application money converted into shares during the year. In view of the decision of Hon ble Jurisdictional High Court in the case of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT and Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT as well as various judicial pronouncements referred by ld. AR, no disallowance on account of interest is to be made u/s.14A, when the investments are made from own funds. Accordingly, we direct the AO not to make any disallowance on account of interest. Since the assessee has suo-moto disallowed ₹ 8,10,663/- in its Return of Income. The additional disallowance under Section 14A should be ₹ 4,33,544/-. Treating interest subsidy received under Technology Upgradation Fund (TUF) Scheme as revenue receipt - Held that - DEPUTY COMMISSIONER OF INCOME TAX VERSUS M/S GLOSTER JUTE MILLS LTD 2014 (7) TMI 172 - ITAT KOLKATA held that in order to sustain competitiveness in the domestic as well as international markets and overall long-term viability of the industry, the concerned Ministry adopted the TUFS scheme envisaging Technology Upgradation of the Industry. Hence the subsidy received in this regard falls into capital field.

Summary

Issues Involved:
1. Transfer pricing adjustment on account of fees for corporate guarantee.
2. Transfer pricing adjustment on account of interest on advances to Associated Enterprises (AEs).
3. Disallowance of expenses under Section 14A.
4. Treatment of interest subsidy received under the Technology Upgradation Fund (TUF) Scheme.

Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Fees for Corporate Guarantee:
The first issue revolves around a transfer pricing adjustment of ?71,05,654 for corporate guarantees issued by the assessee on behalf of its AE. The assessee argued that these guarantees were quasi-equity in nature and provided for business synergies, thus not requiring financial compensation. However, the TPO and AO disagreed, citing Section 92B of the Act, which includes capital financing such as guarantees under 'international transactions'. The AO used the CUP method to compute a guarantee commission at 2.4% per annum. The CIT(A) upheld this view.

The assessee relied on several tribunal decisions, including Bharti Airtel Limited, Videocon Industries Ltd, and others, to argue that no addition should be made. Alternatively, the assessee suggested a lower rate of 0.5%, referencing the Everest Kento Cylinders Ltd. case. The tribunal agreed with the assessee, directing the AO to restrict the bank guarantee commission to 0.5%.

2. Transfer Pricing Adjustment on Account of Interest on Advances to AEs:
The second issue concerns a transfer pricing adjustment of ?9,60,867 for interest on advances given to its AE, Grabal Alok International Limited. The assessee claimed these advances were equity investments and did not benchmark them. The TPO treated these as short-term credit facilities and computed interest at 11.86% based on bond yield rates. The CIT(A) confirmed this adjustment.

The tribunal, however, directed the AO to apply the LIBOR rate for calculating the notional interest adjustment, in line with precedents from various courts and tribunals, including Tata Autocomp Systems Limited and Cotton Naturals (I) Pvt Ltd.

3. Disallowance of Expenses Under Section 14A:
The third issue involves the disallowance of expenses under Section 14A. The assessee earned dividend income and disallowed ?8,10,663 suo moto. The AO computed a higher disallowance of ?1,27,03,271 using Rule 8D. The tribunal noted that the assessee had sufficient own funds, far exceeding the investments, and thus, no disallowance on account of interest should be made. The tribunal directed the AO to restrict the disallowance to ?12,44,207, reducing the additional disallowance to ?4,33,544 after accounting for the assessee's suo moto disallowance.

4. Treatment of Interest Subsidy Received Under the TUF Scheme:
The final issue pertains to the treatment of interest subsidy received under the TUF Scheme. The AO and CIT(A) treated it as a revenue receipt, while the assessee argued it should be considered a capital receipt. The tribunal referenced the Supreme Court's decision in National Thermal Power Company Ltd. and the Bombay High Court's decision in Pruthvi Brokers & Shareholders Pvt. Ltd., which allow new claims before appellate authorities.

The tribunal found that the subsidy aimed to encourage technology upgradation and should be treated as a capital receipt, not chargeable to tax. This view was supported by several judicial precedents, including the Punjab & Haryana High Court in Shri Sham Lal Bansal and the Kolkata Tribunal in Gloster Jute Mills Ltd.

Conclusion:
The tribunal allowed the appeal in part, directing the AO to:
- Restrict the bank guarantee commission to 0.5%.
- Apply the LIBOR rate for interest on advances to AEs.
- Restrict the disallowance under Section 14A to ?12,44,207.
- Treat the interest subsidy received under the TUF Scheme as a capital receipt not liable to tax.