2019 (5) TMI 1942 - AT - Income Tax

T.P adjustment - Corporate Guarantee given to the subsidiary company of the assessee - International transaction - TPO determined the interest rate difference accruing to the Subsidiary company on account of Corporate Guarantee given by the assessee as 4% - TPO made T.P adjustment @ 2% on the amount of Corporate guarantee given. The Ld DRP also confirmed the same - HELD THAT - We notice that the Tribunal is consistently holding the transaction of providing Corporate Guarantee as an international transaction. Hence the same is required to be examined under Arms length principles. There should not be any dispute that the provision of Corporate guarantee to its subsidiary in order to enable it to avail loans would bring benefit to the subsidiary in which case it is proper to compensate the assessee for those benefits under Arms length principles. We notice that the TPO has made an adjustment of 2% considering the interest benefit @ 4% and taking the view that half of the same should be attributed to the benefit of the assessee. Hon ble Bombay High Court has approved the T.P adjustment of 0.50% in respect of Corporate guarantee given in the case of Everest Kento Cylinders Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT . Though the Ld A.R has pleaded for an adjustment of 0.20% by placing reliance on the decision of Asian Paints Ltd 2014 (1) TMI 16 - ITAT MUMBAI yet we notice that the Ld A.R did not highlight the parity of facts between the assessee and the case of Asian Paints Ltd. Hence on a conspectus of the matter we are of the view that the T.P adjustment in respect of Corporate Guarantee may be made @ 0.50% as per other decisions of Tribunal and Hon ble Bombay High Court referred above. Accordingly we set aside the order passed by the AO on this issue and direct the AO/TPO to make T.P adjustment in respect of Corporate Guarantee @ 0.50% in all the years under consideration. Disallowance made u/s 14A - Sufficiency of own funds as in excess of value of investment - HELD THAT - The Hon ble Bombay High Court has held in the case of HDFC Bank Ltd 2014 (8) TMI 119 - BOMBAY HIGH COURT that no disallowance out of interest expenditure u/r 8D(2)(ii) is called for when own funds available with the assessee is in excess of the value of investments. Accordingly we direct the AO to compare the own funds available with the assessee against the value of investments and accordingly apply the provisions of Rule 8D(2)(ii) by duly following the decision rendered by Hon ble Bombay High Court in the case of HDFC Bank Ltd (supra). In respect of disallowance to be made u/r 8D(2)(iii) out of administrative expenses the Special bench of Tribunal has held in the case of Vireet Investments Ltd 2017 (6) TMI 1124 - ITAT DELHI that only those investments which have yielded exempt income should be considered. Accordingly we direct the AO to compute the disallowance u/r 8D(2)(iii) accordingly.

Summary

Issues:
1. Transfer Pricing adjustment on Corporate Guarantee
2. Disallowance under Section 14A of the Act

Transfer Pricing adjustment on Corporate Guarantee:
The appeals filed by the assessee pertain to assessment years 2008-09 to 2012-13 against the assessment order passed by the AO following directions by the Dispute Resolution Panel. The primary issue contested by the assessee relates to the Transfer Pricing adjustment made concerning a Corporate Guarantee provided to its subsidiary company. The Transfer Pricing Officer (TPO) and the DRP confirmed an adjustment of 2% on the Corporate Guarantee amount. The assessee argued that the Corporate Guarantee did not impact the interest rate as presumed by the TPO, emphasizing that it was provided as a shareholder and on commercial considerations. The DR contended that the Corporate Guarantee constituted an international transaction, justifying the T.P adjustment. The assessee cited precedents where adjustments of 0.20% and 0.50% were upheld in similar cases. The Tribunal recognized the Corporate Guarantee as an international transaction, requiring examination under Arms length principles. While the TPO made a 2% adjustment, the Tribunal settled on a 0.50% adjustment, aligning with previous decisions and the Bombay High Court's approval in a related case. Consequently, the AO was directed to adjust the Corporate Guarantee at 0.50% for all relevant years.

Disallowance under Section 14A of the Act:
Another common issue raised by the assessee across the years pertained to disallowances under Section 14A of the Act. The assessee argued against the mechanical application of Rule 8D by the AO in computing disallowances, contending that no disallowance should be made when own funds exceed investment value. Additionally, the assessee proposed that disallowances should only consider investments yielding exempt dividend income. The DR supported the AO's decision. The Tribunal referenced a Bombay High Court ruling stating that no disallowance should occur when own funds surpass investment value. Following this precedent, the AO was instructed to assess own funds against investment value before applying Rule 8D(2)(ii). Regarding disallowances under Rule 8D(2)(iii) for administrative expenses, the Tribunal directed the AO to consider only investments generating exempt income, in line with a Special bench decision. With the Section 14A issue decided in favor of the assessee and substantial relief granted on the T.P adjustment, the Tribunal deemed the remaining legal issues academic and declined to adjudicate them, partially allowing the assessee's appeals.