2021 (2) TMI 1018 - AT - Income Tax

TP Adjustment - addition on account of arm's length interest on loans advanced to the Associated Enterprises (AE) - Commissioner (Appeals) directed the Assessing Officer to determine the arm's length interest applying LIBOR rate - HELD THAT - As assessee has submitted that advancing of interest free loans to the subsidiaries is a shareholder s activity, hence, should not be subjected to arm's length price determination, however, we are not convinced. A perusal of Explanation I(c) of section 92B of the Act makes it clear that capital financing including any type of long term and short term borrowing, lending, etc., comes within the ambit of international transaction. Since, the assessee has provided interest free loan to the AEs, which, under similar circumstances would not have been provided to unrelated parties, arm's length interest has to be determined. It is further observed, in the course of proceedings before the first appellate authority the assessee relying upon various judicial precedents had submitted that arm's length interest should be determined by applying LIBOR rate. Addition made on account of adjustment made towards fee on corporate guarantee - Assessee had not charged any commission/fee from the AEs for the corporate guarantee so provided, the Transfer Pricing Officer determined the fee/commission for corporate guarantee @ 1.25% on the quantum of loan availed and proposed an adjustment - HELD THAT - As rightly observed by learned first appellate authority, the Tribunal, Mumbai Bench, in Everest Kanto Cylinders Ltd. v/s DCIT, 2012 (11) TMI 1099 - ITAT MUMBAI while negating identical contention made by the assessee has held that provision of corporate guarantee is an international transaction. The aforesaid decision of the Co ordinate Bench has also been upheld in case of the same assessee as reported in 2015 (5) TMI 395 - BOMBAY HIGH COURT . That being the case, we do not find any merit in the submissions of the assessee that provision of corporate guarantee is not an international transaction. As regard the arm's length rate of fee/commission, the assessee relying upon the decision of the Asian Paints India Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT has submitted that it should be reduced to 0.2%.On careful perusal of the decision rendered in case of Asian Paints (supra), we find that in the facts of the said case the assessee itself had charged commission @ 0.2% over the years and the Tribunal has accepted the claim of the assessee which was not contested by the Revenue. Taking note of these facts the Hon'ble Jurisdictional High Court has dismissed the appeal of the Revenue. These are not the facts in case of the present assessee. Therefore, we are not inclined to interfere with the decision of learned Commissioner (Appeals) on this issue. This ground is dismissed. Disallowance made on account of alleged non genuine purchases - HELD THAT - What should be the reasonable rate of profit which can be applied. As noticed, the Assessing Officer has referred to a report of the task group for Diamond sector published by the Government of India, Ministry of Commerce and Industry, New Delhi, wherein the benign / presumptive taxation threshold was set at 2.5%. Keeping in view the aforesaid threshold limit set by the task group, in our considered opinion the reasonable profit element on the alleged non genuine purchases can be estimated @ 3%. Therefore, we direct the Assessing Officer to restrict the disallowance to 3% on the purchases made from Sun Diam only. No disallowance should be made on the purchases made from Nayan Gems. Before parting, we must observe that on a careful examination of the decisions relied upon by the learned Counsel for the assessee, we found them to be not applicable to the facts of the present case, hence, we have not deliberated upon them at length. This ground is partly allowed.

Summary

Issues:
1. Addition of arm's length interest on loans advanced to Associated Enterprises (AE).
2. Adjustment made towards fee on corporate guarantee.
3. Disallowance on alleged non-genuine purchases.

Issue 1: Addition of arm's length interest on loans to AE
- The appellant challenged the addition of ?22,68,928 as arm's length interest on loans to AEs.
- Transfer Pricing Officer proposed an adjustment of ?56,19,348 for interest-free loans to AEs.
- Commissioner (Appeals) directed determination of arm's length interest applying LIBOR rate.
- Assessee argued that shareholder activity of capital funding is not an international transaction under section 92B.
- Tribunal held that interest-free loans to AEs constitute an international transaction, requiring arm's length interest determination.
- Upheld Commissioner (Appeals) decision to apply LIBOR rate for interest calculation.

Issue 2: Adjustment made towards fee on corporate guarantee
- The appellant contested the addition of ?13,04,860 for corporate guarantee fee adjustment.
- Transfer Pricing Officer proposed a fee of 1.25% on loans availed by AEs.
- Commissioner (Appeals) reduced the fee to 0.5%.
- Assessee argued that corporate guarantee provision is not an international transaction under section 92B.
- Tribunal held that provision of corporate guarantee falls under international transaction.
- Upheld Commissioner (Appeals) decision on fee rate, rejecting the request to reduce it to 0.2%.

Issue 3: Disallowance on alleged non-genuine purchases
- The appellant challenged the disallowance of ?2,19,539 on alleged non-genuine purchases.
- Assessing Officer disallowed 5% of purchases made from entities linked to Rajendra Jain Group.
- Tribunal found one entity's purchases genuine based on documentary evidence and lack of conclusive proof against it.
- For the other entity, Sun Diam, doubted the genuineness of purchases and applied a 3% profit element based on a government report.
- Directed Assessing Officer to restrict disallowance to 3% on purchases from Sun Diam only, allowing purchases from the other entity.
- Noted decisions cited by the appellant were not applicable to the case.

In conclusion, the Tribunal partly allowed the appeal, directing adjustments on arm's length interest, corporate guarantee fee, and disallowance on non-genuine purchases based on detailed analysis and legal interpretations.