2017 (12) TMI 583 - HC - Income Tax

Benefit of Section 92B - Held that - Taking into account the observations made in Hindalco Industries Ltd. Vs.ACIT 2011 (12) TMI 227 - BOMBAY HIGH COURT the first issue is answered in favour of the assessee and against the department. Tribunal while relying on the international transaction granted benefit of Section 92B to the assessee which is just and proper. Regarding LIBOR rate plus 2% on account of interest free loans provided by the appellant to its associated enterprises, in the view of the observations made by the Delhi High Court in para no.14 as reproduced above, the same is required to be answered in favour of the assessee. Regarding ITA preferred by the assessee in view of the Delhi High Court judgment (para no.14), the international transaction is required to be accepted, therefore, tribunal has committed serious error. The assessee will be entitled for the benefit of average LIBOR rate existing at that time which was 0.79% and addition of adhoc 2% is not proper. In that view of the matter, the addition of 2% interest in the income is required to be quashed and set aside.

Issues Involved:
1. Justification of ITAT in deleting additions without considering the retrospective amendment in Section 92B.
2. Justification of ITAT in deleting adjustments on account of notional interest income due to delay in collection of sales proceeds from associated enterprises.
3. Applicability of adjustment at prevailing LIBOR rate plus 2% on interest-free loans provided to associated enterprises.
4. Justification of ITAT in deleting the adjustment for notional guarantee charges for corporate and bank guarantees given by the assessee.

Issue-wise Detailed Analysis:

Issue 1: Justification of ITAT in Deleting Additions Without Considering Retrospective Amendment in Section 92B
The appellant challenged the ITAT's decision to delete certain additions without considering the amendment in Section 92B, which was inserted with retrospective effect from 1.4.2002. The court referred to the Hyderabad Tribunal's decision in Four Soft Pvt. Ltd. Vs. DCIT, which clarified that corporate guarantees fall within the scope of 'international transaction' as per the amended Section 92B. The court concluded that the ITAT correctly applied the law and granted benefit under Section 92B to the assessee, thus upholding the tribunal's decision.

Issue 2: Justification of ITAT in Deleting Adjustments on Account of Notional Interest Income
The ITAT had directed the deletion of adjustments related to notional interest income due to delays in collecting sales proceeds from associated enterprises. The court observed that the tribunal's decision was consistent with the interpretation of international transactions under Section 92B. The court upheld the ITAT's decision, stating that the tribunal had acted justly and properly in granting the benefit to the assessee.

Issue 3: Applicability of Adjustment at Prevailing LIBOR Rate Plus 2% on Interest-Free Loans Provided to Associated Enterprises
The appellant contended that the adjustment of interest-free loans to associated enterprises should be based on the prevailing LIBOR rate plus 2%. The court referred to the Delhi High Court's decision in Commissioner of Income Tax vs. Cotton Naturals (I) Pvt. Ltd., which held that the LIBOR rate should be the benchmark for international transactions involving foreign currency loans. The court concluded that the addition of an ad hoc 2% was unjustified and arbitrary, thus quashing the addition and ruling in favor of the assessee.

Issue 4: Justification of ITAT in Deleting Adjustment for Notional Guarantee Charges
The ITAT had deleted the adjustment for notional guarantee charges for corporate and bank guarantees given by the assessee on behalf of its associated enterprises. The court referred to the Bombay High Court's decision in Commissioner of Income Tax vs. Everest Kento Cylinders Ltd., which distinguished between corporate guarantees and bank guarantees. The court agreed with the tribunal's view that the considerations for corporate guarantees are distinct from those for bank guarantees and upheld the deletion of the adjustment.

Conclusion:
The court answered all the issues in favor of the assessee and against the department. The appeals filed by the department were dismissed, and the appeal and cross-objection filed by the assessee were allowed. The court upheld the ITAT's decisions, emphasizing the proper application of Section 92B and the appropriate use of the LIBOR rate for international transactions.

← Previous Next →