2023 (3) TMI 1203 - AT - Income Tax

TP Adjustment - ALP adjustment towards Corporate Guarantee - TPO in the instant case has adopted the corporate guarantee commission rate of 1.80% on account of the corporate guarantee provided by the assessee to its AE and accordingly suggested upward adjustment - HELD THAT - Respectfully following the decision of the Tribunal in assessee s own case in the preceding A.Ys and in absence of any distinguishable features brought to our notice against the order of the Tribunal in assessee s own case 2022 (4) TMI 1514 - ITAT HYDERABAD we direct the Assessing Officer/TPO to adopt the corporate guarantee commission rate of .5% qua the extent of amount of assessee s corporate guarantee actually utilized. The grounds raised by the assessee on this issue are accordingly allowed for statistical purposes. Addition on account of interest on outstanding receivables - As submitted that since the AO in the final order has not followed the directions of the DRP, therefore, he has no objection if the matter is restored to the file of the AO with a direction to compute the interest on receivables after netting off payables - HELD THAT - Since the AO in the instant case has not followed the direction of the ld.DRP, therefore, the grounds on this issue are restored to the file of the Assessing Officer with a direction to follow the directions of the DRP and make appropriate addition. Disallowance u/s 14A r.w.r. 8D - HELD THAT - DRP upheld the action of the AO in the draft assessment order holding that the disallowance under section 14A r.w.Rule 8D is mandatory in nature irrespective of earning or not earning any exempt income. Assessee submitted that he has not earned any exempt income during the year. All these investments are made outside India in assessee s subsidiary companies, the income of which when received is taxable in India. A perusal of the order of the AO DRP shows that the same is very cryptic on this issue. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the AO with a direction to adjudicate the issue afresh. Addition towards duty drawback - HELD THAT - Since the assessee had not provided the necessary details with supporting evidence, the AO in the instant case made the addition. Since it is the contention of the learned Counsel for the assessee that given an opportunity, the assessee is in a position to substantiate that the duty drawback has already been offered to tax as business income, therefore, considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the AO with a direction to grant one last opportunity to the assessee to substantiate its case and decide the issue as per fact and law. Ground raised by the assessee on this issue are accordingly allowed for statistical purposes.

Issues Involved:
1. Adjustment of Arm's Length Price (ALP) for Corporate Guarantee.
2. Adjustment of ALP for Interest on Receivables.
3. Disallowance under Section 14A.
4. Addition towards Duty Drawback.

Issue-wise
Detailed Analysis:

1. Adjustment of ALP for Corporate Guarantee:
The primary issue revolves around the adjustment of ALP for a corporate guarantee provided by the assessee to its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) initially suggested an upward adjustment of Rs. 1,34,01,000/- by adopting a corporate guarantee fee rate of 1.80% per annum. The Dispute Resolution Panel (DRP) reduced this rate to 1%, resulting in a revised adjustment of Rs. 74,45,000/-. The assessee argued that the corporate guarantee should not be treated as an international transaction under Section 92B of the Act and that no fee should be charged. The Tribunal, referencing its previous rulings in the assessee's own case for earlier assessment years, directed the Assessing Officer (AO)/TPO to adopt a lumpsum commission rate of 0.5% for the corporate guarantee. This decision was based on the principle that the guarantee provided does not have a direct bearing on the profits or income of the assessee.

2. Adjustment of ALP for Interest on Receivables:
The second issue concerns the addition of Rs. 55,03,931/- on account of interest on outstanding receivables from the AE. The DRP had directed the TPO to impute interest on receivables after netting off payables, applying the SBI short-term deposit rate. However, the AO did not follow these directions in the final assessment order. Both parties agreed to restore the matter to the AO to compute the interest on receivables after netting off payables as directed by the DRP.

3. Disallowance under Section 14A:
The third issue involves the disallowance of Rs. 1,49,18,829/- under Section 14A read with Rule 8D, which pertains to the expenditure incurred in relation to income that does not form part of the total income. The AO made this disallowance based on the increase in investment and applied 1% of the annual average of monthly average of opening and closing balances of the value of investment. The DRP upheld this disallowance, noting that it is mandatory irrespective of whether exempt income was earned. The assessee contended that no exempt income was earned during the year and that the investments were made in foreign subsidiaries, whose income when received would be taxable in India. The Tribunal restored the issue to the AO for fresh adjudication, directing that the AO consider these arguments and decide the issue as per the facts and law.

4. Addition towards Duty Drawback:
The final issue pertains to the addition of Rs. 67,46,635/- towards duty drawback. The AO made this addition based on ITS information, as the assessee did not furnish the necessary details. The DRP directed the AO to verify the claim from the books of account, but the AO made the addition in the final order due to lack of evidence from the assessee. The Tribunal restored the issue to the AO, granting the assessee one last opportunity to substantiate its claim that the duty drawback had already been offered to tax under the head business income.

Conclusion:
The appeal filed by the assessee is partly allowed for statistical purposes. The Tribunal provided detailed directions for each issue, emphasizing the need for proper verification and adherence to legal principles. The AO is directed to follow the Tribunal's guidelines and provide the assessee with opportunities to present relevant evidence.

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