2021 (4) TMI 768 - AT - Income Tax

TP adjustment - Corporate Guarantee Fee addition - whether Corporate Guarantee issued by the Assessee to its AEs comes within the definition of International Transaction or not? - HELD THAT - The Finance Act, 2012 has inserted, an explanation to Section 92B with retrospective effect from 1st April, 2002 to include the term guarantee within the definition of international transaction. Therefore, the Corporate Guarantee issued by an entity on behalf of its AEs is an international transaction as considered by the Bombay High Court in the case of the Commissioner of Income Tax Vs. Everest Kentor Cylinder Limited 2015 (5) TMI 395 - BOMBAY HIGH COURT Thus it is clear that Corporate Guarantee by an entity on behalf of its AEs a subsidiary company is a international transaction. However, while arriving at a rate, the Assessing Officer has taken comparables from commercial banks to at arrive at mean margin of 1.04% and adopted such rate to determine the ALP of corporate guarantee issued by the Assessee. The Hon ble Mumbai High Court has confirmed the order of the Tribunal wherein the Tribunal estimated the guarantee commission at the rate of 0.50%. We therefore by considering the facts and circumstances of the case, we are of the opinion that we will fix the guarantee commission at the rate of 0.50%. Accordingly, we set aside the order passed by the Assessing Officer and direct the Assessing Officer to adopt at the rate of 0.50% commission on guarantee issued by the Assessee on behalf of its AEs, a subsidiary company. Disallowance of Interest Expenditure - interest expenditure on borrowed funds utilized for the purpose of additional capital in foreign owned subsidiary - HELD THAT - We find that the similar issue came up for consideration in the Assessment Year 2010 2011, 2011 2012 in 2016 (10) TMI 807 - ITAT CHENNAI AND 2017 (6) TMI 1345 - ITAT CHENNAI for the Assessment Year 2012 2013, the Hon ble Tribunal has considered for the Assessment Year 2011 2012, 2010 2011 and 2011 2012 by order dated 19.06.2017 and directed the Assessing Officer to verify as to whether the investment made in subsidiary to have controlling interest, or to avoid the dilution of controlling interest, or to keep the controlling interest intact as per the object clause of the Memorandum of Association of the Assessee company and to decide thereupon. In view of the above decision of the Hon ble ITAT in the Assessee s own case and also the principle of consistency laid down by the Hon ble Supreme Court in the case of Radhasoami Satsang Vs Commissioner of Income Tax 1991 (11) TMI 2 - SUPREME COURT , we direct the Assessing Officer to follow the above passed order thereupon. So far as reliance placed by Ld. DR in the case of Maxopp Investment Ltd. (supra) is concerned, no application to the facts of this case.Thus the ground of appeal filed by the Assessee is allowed for statistical purposes. TDS u/s 195 - Non-Deduction of tax on Professional and Consultancy Fee and payment of drilling services Management fee - HELD THAT - The similar issue has been considered by thewherein eld Co-ordinate Bench of the Tribunal in assessee s own case for AY 2012-13 2017 (6) TMI 1345 - ITAT CHENNAI as held criterion of residence, place of business or business connection of a non-resident in India has been done away with for fastening the tax liability. However, the criteria of rendering service in India and the utilization of the service in India to attract tax liability u/s.9(i)(vii) remained untouched and unaffected by the Explanation to Section 9 of the Act and outside India. Therefore, the twin criterion of rendering of services in India and utilization of services in India become evidently necessary condition to deduct tax. However, in respect of the said payments, the rendering of services being purely off shore and outside India, the whatever paid towards the said services does not attract tax liability. We are inclined to remit the issue to the file of the Assessing Officer to examine the issue afresh in the light of the above order along with the concerned DTAA and decide thereupon. Denial of tax credit u/s. 90 - HELD THAT - As relying on own case we are inclined to hold that once the interest income subject to tax in any manner in the hands of the assessee, the corresponding tax credit to be given. Accordingly, this ground is remitted to the AO to examine the issue in the light of our above findings Disallowance of loss on forward contracts - AO disallowed the Forex loss of the Assessee mainly on the ground that the Assessee need not enter into such a contract for the nature of the business of the Assessee - HELD THAT - So far as the first objection raised by the AO is concerned, we find that the line of the business of the Assessee is charter-hiring of offshore drilling rigs to oil companies like ONGC, Hardy Exploration, etc. The revenue is in the nature of charter-hire income from drilling and production services. All payments under these agreements for provision of the rigs on charter-hire and drilling services are in foreign currency, predominantly in USD. Therefore, the Assessee pleads that it has taken a business decision to protect its interest and had entered into a Forex contract with Banks and subsequently it has claimed loss on the Forex contracts. Second objection raised by the AO, non furnishing of details i.e., invoices, risk analysis statement submitted to the bank etc. e are setting aside the order passed by the Assessing Officer and we direct the Assessing Officer to re-consider the issue details and pass the order thereupon, keeping in view the decision of the Hon ble ITAT of Bangalore Bench in the case of M/s. Essilor India Private Limited Vs. The Deputy Commissioner of Income Tax 2020 (2) TMI 1487 - ITAT BANGALORE . Thus the ground of appeal filed by the Assessee is allowed for statistical purposes. Disallowance of expenses relates to earning exempt income u/s.14A r.w.R 8D - Dispute Resolution Panel has modified the order passed by the Assessing Officer and also made one more addition u/s.115 JB - HELD THAT - As case of the Assessee that no disallowance u/s.14A has to be made because the Assessee is having sufficient own funds. However, as for the Assessing Officer, the Assessee is not able to submit the details and substantiate that the borrowed funds are not utilized for the purpose of the business. Thus, we set aside the order passed by the Assessing Officer and remit the issue back to the file of the Assessing Officer to examine afresh, keeping in view the decision of the Delhi Bench Special of the Tribunal in Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI passed order thereupon. Disallowance of long term capital loss - loss on sale of investments in the equity shares of M/s. Aban Holdings Pvt. Ltd., Singapore, who is a wholly owned foreign subsidiary of the assessee-company (or in other words bought by back of shares by the wholly owned foreign subsidy) - HELD THAT - We find that the Board has taken a decision to buy back the entire shares of M/s. Aban Holdings Private Limited, Singapore, Assessee s wholly owned subsidiary company and that no third party in involved. The transaction is between the Assessee s own sister concern and the Assessee. The Board has taken a decision on 13th November, 2013. As regards to the entire buyback of the shares, the Assessing Officer for the Assessment Year 2014 2015, in the scrutiny proceedings allowed the capital loss of the Assessee. In the year under consideration, the Assessing Officer says that the Assessment Year 2014 2015 is different from the Assessment Year 2015 2016. The Board has taken a decision with regard to the buyback of the shares. One transaction has already been completed for the Assessment Year 2014 2015 and the same is allowed by the Assessing Officer. The remaining part of the transaction is completed during the subsequent year and the Assessing Officer has doubted the same on the ground that the Minutes of the Meeting has not been placed before the Assessing Officer and also the Assessee has sold the same shares to M/s. Aban Holdings Private Limited, Singapore. We find that the reason given by the AO in our opinion is justified for the reason that the AO has given different treatment for the same shares for the year 2014-15 and 2015-16, the AO is disallowed the capital loss claimed by the assessee by following the decision of the Hon ble Jurisdictional High Court in the case of Premier Synthetic Industries Vs. Income-Tax Officer, Ward II (7), Coimbatore 2012 (7) TMI 72 - MADRAS HIGH COURT Even the Hon ble Dispute Resolution Panel DRP has taken support from the same decision. In the case of the Premier Synthetic Industries held that the loss cannot be allowed either as a revenue loss or a capital loss. The above decision is not applicable to the facts of the case. As per the note filed by the Assessee in the present case, the Assessee has made investment in M/s. Aban Holdings Private Limited, Singapore for the financial year 2008 2009 dated 27.09.2012, AGM held by M/s. Aban Offshore Private Limited to buyback of shares on 30.10.2013, buyback of shares of the first half on 01.02.2013 and buyback of shares of the second half was on June 2014. The above facts were neither properly examined by the DRP nor by the Assessing Officer. We are of the opinion that the order passed by DRP has to be set aside and the issue has to be remitted back to the A.O. Accordingly, we set aside the order passed by DRP and remit the matter back to the AO to decide the issue afresh keeping in view of the observations made by us. Disallowance of Professional and Consultancy Services - HELD THAT - In our opinion it is the business decision taken by the Assessee to engage the services of a particular company for the purpose of business. Assessing Officer is not justified in respect of the Consultancy Services received by the Assessee because the Assessee has paid an amount of ₹ 1,89,00,000/- and TDS is also being deducted on the said payment. No prudent businessman can make a payment to the third party without receiving the services from the party. The only objection in our view that is concerned is the details in respect of the services rendered that are not filed before the Assessing Officer. AO has not examined as to whether M/s. Emkay Global Financial Limited has offered the same for taxation or not? This fact is very much necessary to decide this issue. Therefore, we set aside the order passed by the Assessing Officer and remit the matter back to the file of the Assessing Officer to examine as to whether M/s. Emkay Global Financial Limited has offered the amount received from the Assessee for taxation or not? We also direct the Assessee to submit all the details of the services rendered by M/s. Emkay Global Financial Limited.

Summary

Issues Involved:
1. Corporate Guarantee Fee
2. Disallowance of Interest Expenditure
3. Non-Deduction of Tax on Professional and Consultancy Fee
4. Disallowance for Non-Deduction of Tax on Payment of Drilling Services & Management Fee
5. Denial of Tax Credit u/s 90 of the Act
6. Disallowance of Loss on Forward Contracts
7. Disallowance of Expenses Relating to Earning Exempt Income u/s 14A r.w. Rule 8D
8. Disallowance of Long Term Capital Loss
9. Disallowance of Professional and Consultancy Services

Detailed Analysis:

1. Corporate Guarantee Fee:
The assessee argued that providing a corporate guarantee to its Associated Enterprises (AEs) should not be considered an 'International Transaction' under Section 92B of the Income Tax Act, 1961. However, the Tribunal held that the Finance Act, 2012, retrospectively included guarantees within the definition of international transactions. The Tribunal referred to the Bombay High Court's decision in the case of Commissioner of Income Tax Vs. Everest Kentor Cylinder Limited, which established that corporate guarantees are international transactions but should not be benchmarked against bank guarantees. The Tribunal directed the Assessing Officer to adopt a guarantee commission rate of 0.50% instead of 1%.

2. Disallowance of Interest Expenditure:
The Assessing Officer disallowed interest expenditure on borrowed funds used for investments in the subsidiary, arguing no business expediency. The Tribunal referred to its earlier decisions in the assessee's own case, where it was established that interest on borrowed funds used for business purposes, including investments in subsidiaries, is allowable under Section 36(1)(iii). The Tribunal directed the Assessing Officer to verify if the investments were made to maintain controlling interest and to ensure no double disallowance under Section 14A.

3. Non-Deduction of Tax on Professional and Consultancy Fee:
The Assessing Officer added back expenses incurred outside India, arguing that these payments attracted TDS provisions under Section 9(1)(vii). The Tribunal referred to its earlier decision in the assessee's own case, which remitted the issue back to the Assessing Officer to verify if the services were rendered and utilized outside India, thus not attracting tax liability.

4. Disallowance for Non-Deduction of Tax on Payment of Drilling Services & Management Fee:
The Assessing Officer added back payments for drilling services and management fees, arguing they attracted TDS provisions under Section 9(1)(vii). The Tribunal referred to its earlier decision, remitting the issue back to the Assessing Officer to verify if the services were rendered and utilized outside India.

5. Denial of Tax Credit u/s 90 of the Act:
The Assessing Officer denied tax credit for taxes paid in Singapore on interest income. The Tribunal referred to its earlier decision, remitting the issue back to the Assessing Officer to verify if the income was included in the assessee's total income, thus entitling the assessee to tax credit.

6. Disallowance of Loss on Forward Contracts:
The Assessing Officer treated the loss on forward contracts as speculative and not related to business. The Tribunal noted that the assessee's business involved significant foreign exchange exposure and remitted the issue back to the Assessing Officer to verify the details and reconsider the claim in light of relevant case law.

7. Disallowance of Expenses Relating to Earning Exempt Income u/s 14A r.w. Rule 8D:
The Assessing Officer made a disallowance under Section 14A for expenses related to earning exempt income. The Tribunal noted that the assessee had not provided sufficient details to substantiate its claim and remitted the issue back to the Assessing Officer to examine afresh, following the decision of the Delhi Special Bench in Vireet Investments.

8. Disallowance of Long Term Capital Loss:
The Assessing Officer disallowed long-term capital loss on the sale of shares in a wholly-owned subsidiary, suspecting the transaction's genuineness. The Tribunal noted that the assessee had not provided sufficient evidence and remitted the issue back to the Assessing Officer to re-examine the transaction details and the Board's decision.

9. Disallowance of Professional and Consultancy Services:
The Assessing Officer disallowed consultancy fees paid to M/s. Emkay Global Financial Services, questioning the nature of services rendered. The Tribunal noted that the assessee had deducted TDS on the payment and remitted the issue back to the Assessing Officer to verify if the consultancy services were offered and to examine the details of services rendered.

Conclusion:
The Tribunal provided detailed directions for each issue, emphasizing the need for thorough verification and adherence to legal precedents. The appeal was allowed for statistical purposes, with most issues remitted back to the Assessing Officer for fresh consideration.