2018 (9) TMI 1545 - AT - Income Tax

TPA - guarantee commission benchmarking - assessee-company provided corporate guarantee on behalf of its associated enterprise - Held that - Looking to the fact that the Tribunal in various cases has accepted guarantee commission chargeable between 0.5% to 1%, we hold that guarantee commission of 1% should be chargeable. Here in this case, assessee itself has agreed to charge guarantee commission @ 0.38%% of the outstanding guaranteed amount, accordingly, we also hold that a guarantee commission should be benchmark by taking the rate of 1% of the outstanding guaranteed amount in line with the consistent views taken by the coordinate Benches, from its AE and adjustments should be made accordingly. Thus, this ground raised by the Revenue is treated as partly allowed. Loss on embezzlement by the employee and the employment of the employee - Held that - Hon ble Supreme Court has considered the matter and laid down the law in this regard in two decisions in BadridasDaga vs CIT 1958 (4) TMI 2 - SUPREME COURT and Associated Banking Corporation of India Ltd, v. CIT 1964 (10) TMI 7 - SUPREME COURT wherein it was held that the loss resulting from embezzlement by an employee or agent of a business is admissible as a deduction under section 10(1) of the 1922 Act corresponding to section 28 of the 1961 Act , if it arises out of the carrying on of the business and is incidental to it, and loss must be deemed to have arisen only when the employer comes to know about it and realizes that the amounts embezzled cannot be recovered. Since the loss caused by the embezzlement by the employee and the employment of the employee is incidental to the carrying on of business, then the losses which are incidental to such employment are also incidental to the carrying on of the business. The loss caused by embezzlement by the employee was incidental to the employment and entrustment of duty and should be allowed in computing the business income of the year under consideration, that being so we decline to interfere in the order passed by CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the revenue is dismissed.

Issues Involved:
1. Classification of service charges as business income versus house property income.
2. Allowance of loss due to embezzlement of goods.
3. Upward adjustment of income under transfer pricing provisions.

Detailed Analysis:

1. Classification of Service Charges:
The main issue was whether the service charges received by the assessee should be treated as business income or house property income. The Assessing Officer (AO) had assessed the income from rendering services at the Barakhamba Road Property as "Income from House Property" instead of "Business Income." The AO relied on the judgment of the Hon'ble Kolkata High Court in the case of Shambhu Investment Pvt. Ltd., where it was held that when rendering services are an integral part of the tenancy agreement, it becomes part of income from house property.

However, the CIT(A) deleted this addition, treating the service charges as business income. The ITAT upheld the CIT(A)'s decision, noting that the issue was covered by the decision of the Assessee's own case for AY 2006-07 passed by the Hon'ble Jurisdictional High Court, Calcutta, and other ITAT judgments for AY 2005-06 and AY 2006-07. The ITAT confirmed that the receipts from service charges should be assessed as business income, and there was no change in facts and law to warrant a different conclusion.

2. Allowance of Loss Due to Embezzlement:
The AO had disallowed the loss of ?32,61,237/- claimed by the assessee due to embezzlement, arguing that the legal proceedings were not completed and that the loss was not wholly and exclusively for the purpose of the business. The CIT(A) allowed the loss, referencing the CBDT Circular No. 35-D (XLVII-20) dated 24-11-1965, which allows losses arising due to embezzlement by employees if the loss took place in the normal course of business.

The ITAT upheld the CIT(A)'s decision, noting that the loss was incidental to the business and should be allowed in computing the business income. The ITAT referenced the Supreme Court decisions in Badridas Daga vs CIT and Associated Banking Corporation of India Ltd. v. CIT, which held that losses due to embezzlement by employees are deductible if they arise out of the carrying on of the business and are incidental to it.

3. Upward Adjustment Under Transfer Pricing Provisions:
For AY 2011-12 and AY 2012-13, the AO/TPO made an upward adjustment on account of guarantee commission income for corporate guarantees given by the assessee. The AO/TPO determined the arm's length rate of corporate guarantee fee at 3% p.a., whereas the assessee had charged 0.38%. The CIT(A) deleted the adjustment, noting that the guarantee was a shareholder activity and should not attract TP adjustment.

The ITAT partially allowed the Revenue's appeal, holding that while the transaction of providing a corporate guarantee is an international transaction, the TPO's determination of the 3% rate was not justified. The ITAT noted that the rate should be dependent on various factors such as terms and conditions, risk undertaken, and economic interest. The ITAT concluded that a guarantee commission of 1% should be chargeable, in line with consistent views taken by coordinate benches in similar cases.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on the classification of service charges as business income and the allowance of loss due to embezzlement. However, it partially allowed the Revenue's appeal concerning the upward adjustment under transfer pricing provisions, setting the guarantee commission rate at 1%. The appeals filed by the Revenue were thus partly allowed.

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