2018 (7) TMI 1956 - AT - Income Tax

Adjustment of ALP by TPO in respect of guarantee fee in respect of corporate guarantee provided to the assessee s foreign subsidiary - HELD THAT - Rate adopted was in the range of 0.25% - 0.50%. These rates were in case of corporate guarantee whereas in case of assessee, it is issuance of SBLC. Hence, the said rates are not applicable in case of the assessee. We observe that the assessee has been charged a rate of 0.9% by an Indian bank for SBLC. This is a clear case of internal CUP. Further, in this case, the DR has not raised any objection on adoption of internal CUP of 0.9% p.a. Hence, in our opinion since the internal CUP is available with the assessee, the said rate of commission of 0.9% p.a. should be considered as arm s length rate of commission. Accordingly, AO is directed to compute guarantee fees @0.9%. Addition on account of interest charged - loan advanced to AE - HELD THAT - Issue under consideration is squarely covered by the decision of Delhi High Court in the case of Cotton Naturals (I) Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT wherein it was held that arm s length interest rate for loan advanced to foreign subsidiary by the Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. Respectfully following the proposition laid down by Delhi High Court, we direct the AO to compute interest as per the interest rates applicable to currency in which loan was required to be repaid by the assessee. Claim of deduction u/s.35D and depreciation u/s.32(1)(ii)(a) - appellate authority power to accept the additional grounds - HELD THAT - We found that issue is now squarely covered by the decision of Bombay High Court in case of Godrej Boyce Mfg. Ltd., 2010 (8) TMI 77 - BOMBAY HIGH COURT wherein it was held that appellate authority has the power to accept the additional grounds. Accordingly, we accept the ground raised and restore the matter back to the file of the AO for deciding afresh after giving due opportunity to the assessee. Accordingly, both the issues regarding revised claim of deduction u/s.35D and additional depreciation u/s.32(1)(a) of the Act is restored back to the file of the AO for deciding afresh.

Summary

Issues:
1. Adjustment of ALP by TPO for guarantee fee provided to foreign subsidiary
2. Addition on account of interest charged on loan advanced to AE
3. Claim of deduction u/s.35D and depreciation u/s.32(1)(ii)(a) of the IT Act

1. Adjustment of ALP for Guarantee Fee:
The appeal was filed against the CIT(A)'s order regarding an upward adjustment of ALP by the TPO for a guarantee fee provided to the assessee's foreign subsidiary. The assessee argued that the guarantee was given as a commercial necessity to protect the business interests, and hence, did not warrant additional compensation. The Tribunal noted various judgments where the rate of guarantee commission ranged from 0.25% to 0.50%. However, since the assessee provided an SBLC and not a corporate guarantee, a rate of 0.9% charged by an Indian bank for SBLC was considered an internal CUP. The Tribunal directed the AO to compute the guarantee fees at 0.9%.

2. Addition on Account of Interest on Loan:
The issue involved an addition on account of interest charged on a loan advanced to an AE. The Tribunal relied on a decision of the Delhi High Court, stating that the arm's length interest rate for a loan advanced to a foreign subsidiary should be based on market-determined interest rates applicable to the currency in which the loan has to be repaid. Therefore, the AO was directed to compute the interest based on the applicable currency rates.

3. Claim of Deduction and Depreciation:
Regarding the claim of deduction u/s.35D and depreciation u/s.32(1)(ii)(a) of the IT Act, the AO had declined the assessee's claim citing a certain case law. However, the Tribunal found that the AO misinterpreted the case law and did not consider the revised claims submitted by the assessee during the assessment proceedings. The Tribunal held that the appellate authority can consider grounds arising from assessment proceedings and has the power to accept additional grounds. The matter was restored back to the AO for deciding afresh, providing the assessee with a due opportunity. Both issues regarding the revised claim of deduction u/s.35D and additional depreciation u/s.32(1)(a) were to be decided afresh by the AO.

In conclusion, the appeal of the assessee was allowed in part, and the matter was pronounced in the open court on 31/07/2018.