2017 (3) TMI 187 - AT - Income Tax

Transfer pricing adjustment - corporate guarantee fee adjustment - Held that - The details of loans vis- -vis the security thereof had already been reproduced above. It has also been brought on record that State Bank of India has charged bank guarantee commission to assessee by giving 50% concession on the rate of 1.75% which works out to approximately 0.875%. If various factors and risk involved are evaluated which is quite normal under the foreign guarantee like, country risk, currency risk and entity risk etc., then charging of corporate guarantee commission would fall down below 0.5%. Thus, this constitutes a kind of internal CUP available to the assessee to benchmark the transaction of giving corporate guarantee/letter of undertaking. Moreover, there are catena of decisions wherein this Tribunal has held that corporate guarantee commission around 0.50% can be accepted as ALP. Accordingly, we hold that the corporate guarantee commission fee which is to be recovered from AE should be 0.50% which would meet the arms length requirement. Thus, under the facts and circumstances of the case, we direct the TPO/Assessing Officer to take the corporate guarantee fee @ 0.50% and make the adjustment accordingly. Thus, the issue of corporate guarantee as raised vide ground nos. 1.1 to 1.5 is treated as partly allowed. Disallowance u/s. 14A read with rule 8D - Held that - The ratio and the principle laid down by the Hon ble Bombay High Court in the case of Reliance Utilities Ltd (2009 (1) TMI 4 - BOMBAY HIGH COURT) and HDFC Bank, (2014 (8) TMI 119 - BOMBAY HIGH COURT) are clearly applicable, wherein their Lordships have reiterated several times that if the assessee has surplus funds in the form of reserves & surplus or share capital, then presumption is that investment would have been made from surplus funds/interest free funds and not from the borrowed funds. Accordingly, we direct the AO to delete the disallowance of interest expenditure as worked out under rule 8D (2)(ii). Now coming to issue of disallowance of indirect expenditure u/r 8D (2)(iii), we agree with Ld. Counsel that the investments from where income is taxable or the investments which are for business or strategic reasons need to be removed from the working of the average value of investments as contemplated in rule 8D(2)(iii). The later proposition has been consistently held in catena of cases by this Tribunal as referred to by ld. Counsel before us. Thus, respectfully following the ratio we also hold accordingly. Further ld. Counsel has given the working of disallowance under rule 8D (2)(iii) in light of various judicial decisions and propositions which needs verification. Accordingly, we direct the AO to examine the same and compute the disallowance of indirect expenditure. Since our decision on disallowance of interest is based on direct Jurisdictional High Court decisions, therefore, we do not deem fit to go into the various propositions made by the Ld. CIT, DR in his written notes which is more on intention and purpose for insertion of section 14A. On the issue of indirect expenditure also, we are following the decisions of the coordinate decisions as relied upon before us. Disallowance u/s. 14A should be added as part of the book profit, the same too is now a settled proposition that if any disallowance under sec. 14A is made in the normal computation, then the same would be added to the book profit u/s. 115 JB. Accordingly, we order that, whatever disallowance is made under rule 8D, the same should be added to the book profit. Additions on bogus purchases - Held that - We are of the opinion that the entire purchase cannot be disallowed by the department solely on the basis of first statement of Shri Suresh A. Parekh. As regards the submission and contention of the Ld. CIT, DR that there is lack of documentation in respect of purchases made from the hawala operators because supply of goods could not be proved, in this regard, one has to see the other attended facts and circumstances also which are that, the purchase of materials are backed by firstly, entry in the gate pass at factory premises; and secondly, entry in the books of account and manufacturing account showing item wise material purchase, material consumed, addition in the plant and machinery, inventory of parts etc. Once the factum of material consumed in the manufacturing or inventory is not disputed then no addition of purchases can be made even if the material have been purchased through the hawala operator. The crucial point to see here is that, the source of purchases have gone through books of account and in lieu of payments made material has been purchased which are proven from item wise inventory prepared and entered in the books of account and is reflected from material consumed in manufacturing or credited to capital WIP, etc.,( which stands unrebutted or undisputed), then no adverse inference qua the purchases can be made, because instead of registered dealers assessee has made purchase from grey market. As regard the other discrepancies as highlighted by ld. CIT DR by referring to AO s order qua the delivery part, the same loses its credibility whence it has been shown that material purchases are appearing in the books of account and consumption of the same has not been doubted. AO should have carried further this information to examine the entries in the books of account and the consumption details. As reiterated above at various places, the factum of purchase so far as the assessee is concerned cannot be disputed when the hawala person himself had admitted that he had arranged the purchases from grey market and got them supplied. This statement before the AO cannot be discarded at all. Thus, in the totality of the facts and circumstances of the case, we hold that the addition on account of so called alleged bogus purchases cannot be added as income of the assessee and the same as directed to be deleted.

Summary

Issues Involved:

1. Transfer pricing adjustment for 'Guarantee Commission' and 'Fee for Letter of Undertaking'.
2. Disallowance under section 14A read with rule 8D.
3. Addition under section 14A while computing book profit under section 115JB.
4. Disallowance on account of alleged bogus purchases.
5. Credit of TDS.
6. Short period for advance tax.
7. Charging of interest under section 234B and 234C.
8. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis of Judgment:

1. Transfer Pricing Adjustment:
The Transfer Pricing Officer (TPO) made adjustments for guarantee commission and fee for the letter of undertaking at a rate of 3%, which was challenged by the assessee. The assessee argued that the appropriate rate should be between 0.25% and 0.50%, supported by various tribunal decisions. The tribunal directed the TPO/Assessing Officer to take the corporate guarantee fee at 0.50% and make the adjustment accordingly, treating the issue as partly allowed.

2. Disallowance under Section 14A read with Rule 8D:
The assessee earned dividend income but did not claim it as exempt. The Assessing Officer still made a disallowance under section 14A. The tribunal held that when no exempt income is claimed, section 14A does not apply. Furthermore, the assessee had sufficient surplus funds, making disallowance of interest expenditure under rule 8D(2)(ii) inapplicable. The tribunal directed the AO to delete the disallowance of interest expenditure and compute the disallowance of indirect expenditure under rule 8D(2)(iii) after verification.

3. Addition under Section 14A while Computing Book Profit under Section 115JB:
The tribunal held that any disallowance under section 14A made in the normal computation should be added to the book profit under section 115JB.

4. Disallowance on Account of Alleged Bogus Purchases:
The AO disallowed purchases from certain dealers based on statements indicating they provided accommodation entries without actual delivery. The tribunal noted that the material purchased was accounted for in the books and utilized in manufacturing, plant and machinery, and inventory. The tribunal held that the purchases could not be treated as bogus and directed the AO to delete the addition.

5. Credit of TDS:
The tribunal directed the AO to examine the matter and grant the credit of TDS after proper verification.

6. Short Period for Advance Tax:
The tribunal did not provide a specific ruling on this issue but directed the AO to address the matter as per the records.

7. Charging of Interest under Section 234B and 234C:
The tribunal noted that the charging of interest is consequential and dismissed the grounds as they were admitted to be consequential.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The tribunal dismissed the ground as premature and infructuous.

Conclusion:
The tribunal partly allowed the assessee's appeal, providing detailed directions on each issue, ensuring that the adjustments and disallowances were made in accordance with the law and supported by proper evidence and judicial precedents.