2018 (12) TMI 1647 - AT - Income Tax

TP Adjustment - addition on account of Arm s Length Price adjustment - Corporate Guarantee and Interest on loan - HELD THAT - As decided in assessee's own case 2018 (10) TMI 1629 - ITAT DELHI we deem it fit to modify the order of the CIT (A) in this regard to the extent that corporate guarantee fee @1% should be applied in the case of the assessee in place of 0.5% as has been applied by the CIT (A) . We accordingly direct the Assessing Officer to re-compute the ALP for corporate guarantee fee @1%. Thus, this ground stands partly allowed CIT (A) held that interest of both the loans was to be charged at LIBOR plus1.5%. We also note that the DRP for immediately preceding assessment year 2006-07 has held that the foreign loan given to UK subsidiary was to be benchmarked at LIBOR plus 100 bps plus certain risk adjustment and accordingly, rate of LIBOR plus 300 bps was proposed by the DRP. Although the CIT(A) has duly made a mention of this direction of the DRP for assessment year 2006-07, it is apparent that he has not considered the directions of the DRP while deciding this issue. We also note that the assessee has not filed any appeal against this direction of the DRP for assessment year 2006-07. Accordingly, in view of the factual matrix, this issue needs to be restored to the file of the CIT (A) to be decided afresh after considering the directions of the DRP in this regard in assessment year 2006-07 and after giving the assessee a proper opportunity present its case. Accordingly, this ground stands allowed for statistical purposes. Addition of excess claim of depreciation u/s 32 - capital subsidy under West Bengal Incentive Scheme, 2000 as part of interest fixed asset - AO reduced the cost of the fixed assets by the capital subsidy and consequently reduced depreciation - HELD THAT - As decided in assessee's own case , 2018 (10) TMI 1629 - ITAT DELHI CIT (A) has noted that he has examined the documents relating to West Bengal Incentive Scheme, 2000 and that further this subsidy is a one-time receipt. It has also been mentioned that nowhere on the perusal of the documents it was found that the subsidy was to be related to the reduction of the cost of fixed assets and, further the recipient of the subsidy was free to use the subsidy in any manner. We find that an identical issue had arisen in Bhagwati Sponge (P) Ltd. vs. DCIT 2016 (7) TMI 608 - ITAT KOLKATA and the co-ordinate Bench held that the capital investment subsidy received from state government could not be reduced from the cost of capital asset for allowing depreciation - decided against revenue

Summary

Issues Involved:
1. Deletion of addition on account of Arm’s Length Price adjustment.
2. Deletion of addition on account of excess claim of depreciation under Section 32 of the IT Act.

Detailed Analysis:

1. Deletion of Addition on Account of Arm’s Length Price Adjustment:

Facts:
The assessee filed returns declaring an income of ?185,85,27,524/- for AY 2008-09. During scrutiny, the AO referred the case to the Transfer Pricing Officer (TPO) concerning international transactions with its AEs. The TPO proposed an addition of ?17,76,54,391/- for transactions involving Corporate Guarantee and Interest on Loan. The AO made the final assessment at ?206,74,23,681/-.

CIT(A) Findings:
The CIT(A) provided partial relief, determining that a corporate guarantee rate of 0.5% was appropriate, and for a counter guarantee given to ABN Amro Bank for a loan availed by Dabur, UK, a rate of 0.6% should be used as the Comparable Uncontrolled Price (CUP). The CIT(A) noted that corporate guarantees are considered international transactions due to the Finance Act, 2012 amendment. The CIT(A) also highlighted that the TPO's approach was flawed as it compared Indian bank guarantees with foreign corporate guarantees.

Tribunal’s Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the issue had been similarly adjudicated in the assessee’s favor in earlier years. The Tribunal directed the AO/TPO to recompute the ALP for corporate guarantee fee at 0.5% and 0.6% for different transactions, consistent with the CIT(A)’s findings.

Interest on Loan:
The CIT(A) directed the AO/TPO to delete the addition regarding interest on loans, noting that the interest rate charged by the assessee at 7% was higher than the LIBOR plus 1.5% prevalent during the financial year 2007-08. The Tribunal upheld this, referencing previous decisions where LIBOR was deemed appropriate for benchmarking international loan transactions.

2. Deletion of Addition on Account of Excess Claim of Depreciation:

Facts:
The AO reduced the cost of fixed assets by a capital subsidy of ?1.50 crore received under the West Bengal Incentive Scheme, 2000, consequently reducing depreciation by ?17,94,174/-.

CIT(A) Findings:
The CIT(A) deleted the addition, following the precedent set in the assessee’s case for AY 2007-08, where it was held that the subsidy was a capital receipt and should not reduce the cost of acquisition of fixed assets.

Tribunal’s Decision:
The Tribunal upheld the CIT(A)’s decision, referencing its earlier order which aligned with the Kolkata Bench of the ITAT in Bhagwati Sponge (P) Ltd. vs. DCIT, where it was held that capital investment subsidies should not reduce the cost of capital assets for depreciation purposes.

Conclusion:
The Tribunal dismissed the department's appeals for both assessment years, affirming the CIT(A)’s decisions on both the Arm’s Length Price adjustment and the excess claim of depreciation. The Tribunal’s decisions were consistent with earlier rulings in the assessee’s favor, ensuring that the principles of benchmarking international transactions and the treatment of capital subsidies were appropriately applied.