2023 (12) TMI 1312 - AT - Income Tax

TP Adjustment - interest on advances given to associated enterprises - HELD THAT - The assessee being one of the JV partner advanced a sum which is outstanding without charging any interest. The claim of the assessee is that the amount was given in earlier years and the joint-venture is now facing a huge cash crunch due to operational losses and therefore it is not appropriate to charge any interest. The assessee also claimed that the advance has been made to the joint-venture to meet the deficit in cash flow while executing project in South Africa. It is the advance out of matter of commercial prudence to protect the business interest of the assessee in the project of the joint-venture. Assessee has also stated that there is a difference between providing advance and loan to its associated enterprises and providing advances as a business partner. It is also claimed by the assessee that the entire advances are not recoverable and therefore substantial part of those advances are written off in the financial year 2016 17. Therefore, no interest could be charged. The learned transfer pricing officer held that no independent party would have given such advance to any third-party and therefore the interest is required to be charged. We find that in KEC International Ltd. Versus DCIT-5 (1) (1) , Mumbai And (Vice-Versa) 2020 (9) TMI 1101 - ITAT MUMBAI wherein as per ground number 1 transfer pricing adjustment were made on account of interest on business advances, the coordinate bench has deleted the adjustment as held that advances were more in the nature of capital contribution and by advancing the same, the assessee had protected its own business interest which is evident from the financial statements of JV. The advances were towards fulfilment of the assessee s obligation of being a JV partner as any financial incapacitation of JV would adversely affect the continuation of the project and ultimately jeopardize the interest of the assessee. Therefore, the said advances could not be put in the category of loans as done by the lower authorities. It could not be said that JV entity derived / gained certain benefits out of such advances but rather it was the assessee who would ultimately gain by continuing with the projects and taste the fruits of the success of project. Hence, not convinced with impugned adjustments as confirmed by first appellate authority, we direct Ld. AO to delete the same. Decided in favour of assessee. Addition of corporate guarantee - HELD THAT - As all financial guarantee and performance guarantee issued by the assessee are covered by the decision of the coordinate bench in assessee s own case wherein the guarantee fees with respect to various guarantees where the assessee has recovered the guarantee commission at the rate of 0.6% was upheld, therefore all these guarantees are continuing guarantee from the earlier years and there is no change pointed out before us in the functions, assets and risk of the parties or any change in the economic conditions, respectfully following the decision of the coordinate bench we confirm the order of the learned CIT A. With respect to the financial guarantee given to ICICI bank United Kingdom on behalf of keys the transmission LLC and KC US LLC (whole owned subsidiary of the assessee), no guarantee fee was charged, the learned CIT A following the decision of the coordinate bench in assessee s own case has upheld the arm s-length guarantee fees of 0.20%. As the learned departmental representative could not point out any change in the facts and circumstances of the case as well as any variation in the functions, assets and risk of the parties or change in economic conditions and further as it is a continuing guarantee from earlier years, respectfully following the decision of the coordinate bench we uphold the order of the learned CIT A in benchmarking the guarantee fee income at the rate of 0.20%. Addition on account of foreign exchange loss mark to market provided by the assessee - CIT(A) deleted addition - HELD THAT - The issue is covered in assessee s favor by the decision of this Tribunal for AY 2009-10 - In fact, the decision of learned first appellate authority for AY 2010-11 2019 (9) TMI 437 - ITAT MUMBAI was under challenge before this Tribunal by the revenue 2019 (9) TMI 437 - ITAT MUMBAI wherein the co-ordinate bench followed the order for AY 2009-10 and held that MTM losses on hedging contracts would be accrued losses and hence, an allowable expenditure. Addition u/s 14 A r.w.r. 8D in computing the book profit under section 115JB - HELD THAT - We find that this issue is squarely covered in favour of the assessee by the decision of special bench in case of ACIT versus Vireet investments private limited 2017 (6) TMI 1124 - ITAT DELHI Even otherwise it is stated that assessee has not received any exempt income during the year and therefore there is no question of making any disallowance under section 14 A of the income tax act even in the normal computation of total income and therefore the same also cannot be imputed while computing the book profit u/s 115JB of the act.

Summary

Issues Involved:
1. Arm's Length Price (ALP) of Corporate Guarantee Commission.
2. Disallowance under Section 14A in computing Book Profits under Section 115JB.
3. Deduction in respect of tax paid at foreign location.
4. Transfer Pricing Adjustment on Interest on Advances to Associated Enterprises.
5. Unrealized Foreign Exchange Loss (Mark to Market).

Summary:

Issue 1: Arm's Length Price (ALP) of Corporate Guarantee Commission
The assessee challenged the adjustment confirmed by the CIT(A) for the corporate guarantee commission at 0.20% on loans taken by Associated Enterprises (AE). The CIT(A) followed the decision of the coordinate bench in the assessee's own case for earlier years and upheld the ALP of the guarantee commission at 0.20%. The Tribunal confirmed this, noting that the guarantee fees with respect to various guarantees where the assessee recovered the commission at 0.6% were upheld in earlier years. The Tribunal directed to recompute the guarantee fee income at 0.20% for financial guarantees given to ICICI Bank UK on behalf of KEC Transmission LLC and KEC US LLC.

Issue 2: Disallowance under Section 14A in computing Book Profits under Section 115JB
The CIT(A) confirmed the disallowance of Rs. 93,145 made by the AO under Section 14A read with Rule 8D in computing book profits under Section 115JB. The Tribunal found this issue covered in favor of the assessee by the decision of the Special Bench in ACIT vs. Vireet Investments Pvt. Ltd. and allowed the ground, noting that the assessee did not receive any exempt income during the year.

Issue 3: Deduction in respect of tax paid at foreign location
The CIT(A) did not allow the deduction claimed by the assessee for taxes paid at foreign locations. The Tribunal dismissed this ground as the assessee did not substantiate it with any arguments.

Issue 4: Transfer Pricing Adjustment on Interest on Advances to Associated Enterprises
The CIT(A) deleted the transfer pricing adjustment of Rs. 13,40,72,569 on interest on advances given to AE, holding that the advances were towards the fulfillment of the assessee's obligation as a joint venture partner and not a loan. The Tribunal upheld this, following the decision in the assessee's own case for AY 2012-13.

Issue 5: Unrealized Foreign Exchange Loss (Mark to Market)
The CIT(A) deleted the addition on account of unrealized foreign exchange loss under normal provisions and for computing book profit under Section 115JB. The Tribunal upheld this, following its decision in the assessee's own case for earlier years, noting that MTM losses on hedging contracts are accrued losses and hence allowable expenditure.

Conclusion:
The Tribunal partly allowed the appeal of the assessee and dismissed the appeal of the AO, confirming the CIT(A)'s decisions on the main issues involved.