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2016 (10) TMI 412 - AT - Income TaxAddition on account of guarantee commission pursuant to the direction of the Dispute Resolution Panel (DRP) - Held that - We find that there is no material difference between the facts of the earlier year and the facts for the year under consideration. Therefore, respectfully following the principle laid down by the Hon ble High Court in assessee s own case, we hold that DRP was not justified in confirming the addition made by the AO. Reversing the order of the AO, completed in pursuance of the direction of the DRP, we decide the second ground in favour of the assessee. Addition on account of interest charged to AE - LIBOR rate computation - Held that - Following the earlier order of this Tribunal in assessee s own case, we hold that the arm s length rate in respect of loan provided to the AE should be LIBOR 2%. Accordingly, the Assessing Officer is directed to recomputed the arm s length rate in respect of the loan transaction to each AE of the assessee by clubbing all the loan transactions of each AE and then compare the interest charged by the assessee with arm s length rate at LIBOR 2%. It appears that as regards the transactions of loan to its AE at China, the said transaction is at arm s length as the as has charged the interest at 7%, therefore, only with respect to the transaction of loan to AE at Dubai are required to be re-computed for the purpose of TP adjustment
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Addition on account of guarantee commission. 3. Addition on account of interest charged to Associate Enterprises (AEs). Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The first ground of appeal concerns the disallowance of ?1.06 lakhs under Section 14A of the Income Tax Act. During the hearing, the Authorized Representative (AR) of the assessee stated that due to the smallness of the tax effect, the assessee was not interested in pursuing this ground. Consequently, this ground was dismissed as not pressed. 2. Addition on Account of Guarantee Commission: The second ground involves an addition of ?7.43 crores on account of guarantee commission pursuant to the direction of the Dispute Resolution Panel (DRP). The Assessing Officer (AO) found that the assessee had entered into international transactions with its Associate Enterprises (AEs) and was required to give corporate guarantees for loans taken by its AEs. The Transfer Pricing Officer (TPO) suggested an adjustment of ?10,79,62,267/- on account of corporate guarantee commission, which was later reduced by the DRP to 3% for the US and Chinese AEs. The Hon'ble Bombay High Court, while deciding the appeal for AY 2007-08, upheld the Tribunal's decision to delete the addition on account of guarantee commission, stating that the considerations for a corporate guarantee are distinct from those of a bank guarantee. Respectfully following this principle, the Tribunal held that the DRP was not justified in confirming the addition made by the AO and decided this ground in favor of the assessee. 3. Addition on Account of Interest Charged to Associate Enterprises (AEs): The next ground is about an addition of ?6.88 crores on account of interest charged to AEs. The TPO found that the assessee had advanced loans to its AEs at rates lower than the market rate and proposed to apply an interest rate of 14.39%. The assessee objected, arguing that it had raised funds at lower rates and that the Tribunal had previously held that LIBOR + rate should be used for determining the Arm’s Length Price (ALP) of foreign currency loans. The DRP dismissed the objections raised by the assessee, stating that the assessee had undertaken various risks and that the interest rate should be benchmarked at the cost of borrowing to the assessee with a markup. However, the Tribunal, following its earlier decision in the assessee’s own case for AY 2009-10, held that the arm’s length rate should be LIBOR + 2%. The AO was directed to recompute the arm’s length rate accordingly. This ground was decided in favor of the assessee, in part. Conclusion: - The appeal filed by the assessee was partly allowed. - The appeal filed by the AO was dismissed. - The order was pronounced in the open court on 7th October 2016.
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