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2016 (6) TMI 558 - AT - Income TaxDetermination of arm s length price with regard to commission for Corporate Guarantee given by the assessee to its Associate Enterprises - Held that - Tribunal is of the considered opinion that this is a method adopted by the assessee to reduce the tax burden in India by paying interest to the extent of ₹ 10.05 Crores on the borrowed funds. If the equity capital funds raised from its shareholders are not diverted to its Associate Enterprises outside India, there may not be any necessity for the assessee to borrow funds and pay interest of ₹ 10.05 Crores on the borrowed funds. From the material available on record, it is obvious that just to shift the profit outside India and reduce the tax liability in India, the assessee diverted its funds raised through equity capital outside India, and borrowed funds in India. Had the assessee used the equity capital in India, there is no necessity to borrow funds in India and pay interest to the extent of ₹ 10.05 Crores. In such a situation, the profit of the assessee will increase to the extent of ₹ 10.05 Crores in India and the assessee is liable to pay tax on that. By diverting the equity capital raised to its Associate Enterprises, the assessee is claiming the payment of interest on the borrowed funds to the extent of ₹ 10.05 Crores as expenditure. Therefore, this Tribunal is of the considered opinion that it is an attempt on the part of the assessee to reduce the tax burden to that extent. Therefore, this Tribunal is of the considered opinion that interest on the funds advanced to Associate Enterprise outside India has to be computed on notional basis by applying LIBOR rate. LIBOR is one of the internationally accepted rates for the loan advanced in the international market. Therefore, the TPO has rightly determined the arm s length price for the advance made by the assessee to its Associate Enterprises by adopting LIBOR rate of interest. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Corporate Guarantee given by the assessee to its Associate Enterprises - Held that - It is not in dispute that the assessee has offered Corporate Guarantee to its Associate Enterprises at UK. An identical fact was considered by this Tribunal in Redington (India) Limited (2015 (11) TMI 853 - ITAT CHENNAI ) found that the Corporate Guarantee given by the assessee to its Associate Enterprise does not involve any cost to the assessee, therefore, it was outside the ambit of international transaction. In view of this decision co-ordinate Bench of this Tribunal on identical set of facts in respect of similar Corporate Guarantee, this Tribunal is of the considered opinion that determination of arm s length price may not be necessary.Accordingly, the addition made by the Transfer Pricing Officer is deleted. Disallowance made under Section 14A - Held that - The assessee has not maintained any separate books of account for the investment made by the assessee. Even though the assessee claims that major investment was made in Associate Enterprise, no details of such investment are available on record. Therefore, the claim of the assessee that major investment was made in Associate Enterprise is not substantiated. The fact remains that the assessee has made investment in the Associate Enterprise and it is also an admitted fact that the assessee has paid interest to the extent of ₹ 10.05 Crores on the loan borrowed for the business. In the absence of any direct link between the payment of interest and the income earned by the assessee, this Tribunal is of the considered opinion that the provisions of second and third limb of Rule 8D(2) of the Income-tax Rules, 1962 have to be applied. In other words, the average of the amount as computed under second and third limbs of Rule 8D(2) has to be notionally taken for the purpose of disallowing the expenditure. In the absence of any other details, the DRP has rightly found that disallowance has to be made by applying Rule 8(2) of Income-tax Rules, 1962. Therefore, we find no infirmity in the order of the lower authority and accordingly the same is confirmed. Letter of Comfort issued by the assessee-company to its Associate Enterprise - Held that - Letter of Comfort is nothing but a guarantee given by the assessee-company to its Associate Enterprise to avail loan from financial institutions so as to enable the Associate Enterprise to avail loan facility. As rightly submitted by the Ld. D.R., by giving such loan, the assessee exposed itself to the risk of repaying the loan availed by the Associate Enterprise. This said Letter of Comfort is almost a guarantee given by the assessee to its Associate Enterprise. As found by this Tribunal in Redington (India) Limited (2015 (11) TMI 853 - ITAT CHENNAI ), by giving such a guarantee or Letter of Comfort by the assessee-company, it does not involve any cost to the assessee, therefore, it is outside the ambit of international transaction. By following the order of this Tribunal in Redington (India) Limited (supra) and for the reason stated therein, this Tribunal is of the considered opinion that there may not be any need to make any adjustment in respect of Letter of Comfort. Accordingly, the orders of the lower authorities are set aside the and Assessing Officer is directed to delete the addition made with regard to Letter of Comfort on notional basis.
Issues Involved:
1. Determination of arm's length price for interest-free advances to Associate Enterprises. 2. Corporate Guarantee provided to Associate Enterprises. 3. Disallowance under Section 14A of the Income-tax Act. 4. Letter of Comfort issued to Associate Enterprises. Detailed Analysis: 1. Determination of Arm's Length Price for Interest-Free Advances: The primary issue revolves around the determination of the arm's length price for interest-free advances made by the assessee to its Associate Enterprises. The assessee advanced substantial sums to its Associate Enterprises without charging any interest, arguing that these funds were surplus equity capital raised for business expansion. The Department contended that the advances were a method to shift profits outside India, thereby reducing taxable profits in India. The Tribunal noted that the assessee paid ?10.05 Crores in interest on borrowed funds in India, which could have been avoided if the equity capital was used domestically. The Tribunal upheld the Transfer Pricing Officer's (TPO) method of computing interest using the LIBOR rate, confirming that the advances were aimed at reducing the tax burden in India. 2. Corporate Guarantee Provided to Associate Enterprises: The second issue concerned the corporate guarantee provided by the assessee to its Associate Enterprises without charging any fee. The assessee argued that providing such a guarantee did not involve any cost and was outside the ambit of international transactions. The Department, however, maintained that the guarantee involved implicit support and potential risks. The Tribunal referred to its previous decision in Redington (India) Limited, which held that such guarantees do not involve any cost and are outside the scope of international transactions. Consequently, the Tribunal set aside the lower authorities' orders and deleted the addition made by the TPO. 3. Disallowance Under Section 14A of the Income-tax Act: The third issue was the disallowance made under Section 14A of the Income-tax Act, which deals with expenses incurred in relation to exempt income. The assessee claimed that no exempt income was earned during the year, and therefore, Section 14A was not applicable. The Department argued that the assessee did not maintain separate books for investments and incurred expenses for investment decisions. The Tribunal found that the assessee had not substantiated its claim of major investments in Associate Enterprises and upheld the DRP's decision to apply Rule 8D(2) of the Income-tax Rules for disallowance. 4. Letter of Comfort Issued to Associate Enterprises: The final issue pertained to the Letter of Comfort issued by the assessee to its Associate Enterprises, which the Department treated as a guarantee involving potential risks. The assessee contended that it was a procedural formality without any profit element. The Tribunal referred to its decision in Redington (India) Limited, which held that such guarantees do not involve any cost and are outside the ambit of international transactions. The Tribunal set aside the lower authorities' orders and directed the deletion of the addition made for the Letter of Comfort. Conclusion: The Tribunal partly allowed the appeal, confirming the determination of arm's length price using the LIBOR rate for interest-free advances while setting aside the additions related to the corporate guarantee and Letter of Comfort. The disallowance under Section 14A was upheld based on the application of Rule 8D(2) of the Income-tax Rules.
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