2017 (4) TMI 1092 - AT - Income Tax

TPA - adjustment in respect of Guarantee Commission and Fee for Letter of Undertaking - 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 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). 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). 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. Accordingly, ground no. 2.1 to 2.5 is treated as allowed. Disallowance u/s. 14A should be added as part of the book profit - Held that - 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. Bogus purchases - Held that - 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, 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. - Decided in favour of assessee Non-granting of credit of taxes or short credit of TDS/advance tax -- Held that - We direct the AO to examine the matter and after verifying the records grant the credit of TDS/advance tax properly.

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 on account of disallowance 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).

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contested a transfer pricing adjustment of ?46,94,26,016/- for 'Guarantee Commission' and 'Fee for Letter of Undertaking'. The AO proposed a 3% rate for guarantee commission, which the assessee argued should be 0.25%. The Tribunal directed the TPO to apply a 0.50% rate, referencing several ITAT decisions supporting this lower rate, and did not adjudicate whether the corporate guarantee is an 'International Transaction'.

2. Disallowance under Section 14A read with Rule 8D:
The AO disallowed ?110,33,96,481/- under section 14A, despite the assessee not claiming the dividend income as exempt. The Tribunal noted that when no exempt income is claimed, section 14A should not apply. The Tribunal also observed that the assessee had sufficient surplus funds, and thus, no interest disallowance was warranted. The Tribunal directed the AO to verify and compute the disallowance of indirect expenditure under Rule 8D(2)(iii) based on the assessee's submission.

3. Addition under Section 14A for Book Profit:
The Tribunal confirmed that any disallowance under section 14A should be added to the book profit under section 115JB.

4. Disallowance on Account of Alleged Bogus Purchases:
The AO disallowed ?63,06,73,365/- based on information that certain suppliers provided accommodation entries without actual delivery of goods. The Tribunal, referencing the cross-examination of the supplier, Mr. Suresh A. Parekh, who admitted sourcing materials from the grey market, concluded that the purchases were genuine. The Tribunal emphasized that the materials were recorded in the assessee's books and used in manufacturing, thus directing the deletion of the disallowance.

5. Credit of TDS:
The Tribunal directed the AO to verify and grant the appropriate credit for TDS.

6. Short Period for Advance Tax:
The Tribunal did not specifically address this issue in detail but implied it should be resolved based on the records.

7. Charging of Interest under Sections 234B and 234C:
The Tribunal noted that charging of interest under these sections is consequential and thus dismissed the ground.

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

Conclusion:
The Tribunal partly allowed the assessee's appeal, providing significant relief on the issues of transfer pricing adjustment, disallowance under section 14A, and alleged bogus purchases, while directing the AO to verify and grant appropriate credits and adjustments.