2023 (1) TMI 17 - AT - Income Tax

TP Adjustment - corporate guarantee for a working capital term loan availed by its AE - TPO concluded that the corporate guarantee provided by the assessee to HSBC Bank, for the loan availed by DIPL, is an international transaction and commission from such corporate guarantee would be taxable in India in the hands of the assessee under Article 21 of the Double Taxation Avoidance Agreement ('DTAA') between India and Germany - HELD THAT - DRP having given categorical finding that as per the DTAA with Germany, guarantee commission which falls under other income is taxable only in Germany as per Article 21. We find that decision relied by the ld. TPO on Delhi Tribunal in the case of Johnson Matthey Public Limited is factually distinguishable as it pertains to India UK DTAA wherein under Article 23, it specifically provided for taxability of other income in source state i.e. India. Whereas under India- Germany DTAA, Article 21 provides for taxability of other income only in Germany and not in India. We find that the ld. AO in final assessment order had held that objections raised by the assessee before the ld. DRP were rejected and accordingly, added the transfer pricing adjustment made on account of guarantee commission - This action of the ld. AO is merely erroneous in view of the fact that against the categorical finding of ld. DRP on objections 6-7, which were allowed in favour of the assessee, the Revenue had not preferred any appeal before us. Hence, in view of the aforesaid observations we have no hesitation in directing the ld. AO to delete the transfer pricing adjustment made on account of guarantee commission income - Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Assessment of total income of the appellant.
2. Conformity with Dispute Resolution Panel (DRP) directions.
3. Taxability of income from corporate guarantee under the India-Germany Double Taxation Avoidance Agreement (DTAA).
4. Levy of interest under Section 234B.
5. Initiation of penalty proceedings under Section 274 read with Section 270A.

Detailed Analysis:

1. Assessment of Total Income:
The appellant contested the Assessing Officer's (AO) decision to assess the total income at INR 4,14,30,810 instead of INR 2,92,72,680 as computed by the appellant. The Tribunal noted the appellant's grounds and reviewed the materials available on record.

2. Conformity with DRP Directions:
The appellant argued that the final order passed under section 143(3) read with section 144C(13) was not in conformity with the DRP's directions, thus making it legally unsound. The Tribunal scrutinized the DRP's directions and the AO's adherence to these directions.

3. Taxability of Income from Corporate Guarantee:
The appellant provided a corporate guarantee for a working capital term loan availed by its AE, Draeger India Private Limited (DIPL), from HSBC bank. The AO considered this as an international transaction and proposed an adjustment of INR 1,21,58,130 under Section 92CA(3) of the Act. The appellant argued that this notional income from the corporate guarantee commission is not taxable in India under the India-Germany DTAA. The DRP agreed with the appellant, stating that under Article 21 of the India-Germany DTAA, such income is taxable only in Germany. The Tribunal upheld the DRP's view, emphasizing that the AO's reliance on the Johnson Matthey Public Limited Company case was misplaced as it pertained to the India-UK DTAA, which has different provisions.

4. Levy of Interest under Section 234B:
The appellant contested the levy of interest of INR 29,58,580 under Section 234B. The Tribunal reviewed the grounds and the legal provisions but did not provide a separate detailed analysis in the judgment.

5. Initiation of Penalty Proceedings:
The appellant also contested the initiation of penalty proceedings under Section 274 read with Section 270A. The Tribunal's focus remained on the primary issues of income assessment and the taxability of the corporate guarantee commission.

Conclusion:
The Tribunal concluded that the AO's action of adding the transfer pricing adjustment of INR 1,21,58,130 was erroneous, as the income from the corporate guarantee commission is taxable only in Germany under the India-Germany DTAA. Consequently, the Tribunal directed the AO to delete the transfer pricing adjustment. The appeal of the assessee was allowed, and the order was pronounced in open court.