2017 (8) TMI 413 - AT - Income Tax

Disallowance under section 14A - Held that - The assessee had suo motu made a disallowance of ₹ 16.58 lakhs,while calculating the expenditure incurred towards earning exempt income,that it had made disallowance under the head interest expenditure(Rs. 2.28 lakhs) salary cost in relation to employees engaged(Rs. 12.60 lakhs) and miscellaneous expenses for employees(Rs. 1.70 lakhs),that the AO had not given any reason as to how and why the disallowance made by the assessee was not satisfactory.Because of this reason alone disallowance made can be deleted. AO had increased the miscellaneous expenses to the tune of ₹ 62.72 lakhs without given any reason or justification. In our opinion, any disallowance, including the disallowance under section 14A,has to be reason based and it cannot be left to the whims and fancies of the AO. In the case under consideration the FAA has also not passed any reasoned the order. He has mechanically confirmed the order of the AO referring to the judgment in Godrej Boyce Manufacturing Company Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT). He has also not given any reason as to why the calculation submitted by the assessee was not acceptable. Therefore,reversing his order,we decide the first effective ground of appeal in favour of the assessee. TP adjustment on account of interest received from the AE - Held that - We find that the assessee had advanced loan to its AE in US Dollar,that it had charged interest @ 6%-7.5% per annum,that the LIBOR rate as on last date of 2008 was 2.49%, that the AE of the assessee had taken loan from a third party namely ANB and Amro Bank Ltd.,that the bank had charged LIBOR 200 bps,that the assessee had benchmarked the transaction accordingly,that in the subsequent AY.(AY 2012-13),the AO himself had made no adjustment on account of interest rate transaction even though the facts and circumstances were identical to the facts to the year under appeal. We also find that in the cases,relied upon by the assessee,the Tribunal has taken a consistent view that LIBOR 200bps or 300bps interest rate has to be considered arm s length rate of interest.In the case under consideration after adding 300 bps the rate would come to 5.49 %,whereas the assessee has charged 6%/7.5% interest from its AE thus, there was no justification for the FAA to uphold the order of the TPO/AO who had charged interest @14.39%. Therefore,reversing the order of the FAA,we decide third Ground of appeal in favour of the assessee . TP Adjustment of guarantee commission - Held that - We find that the assessee had given guarantee in respect of bank loans in case of two of its AE.s, that it had also given guarantee in respect of performance guarantee for two other AE.s,that it had charged the commisssion @1.5% on the basis of quotations obtained from ICICI bank,that the TPO/AO took the rate at 3% and made adjustment at ₹ 2.70 croress. We find that the TPO, while determining the ALP for the AY.2012-13 the TPO had approved the rate of 1.5% for the financial guarantee, that for performance guarantee he did not make any adjustment. There is nothing on record to prove that facts for year under consideration and the facts for AY.2012-13 were different.Thus, the TPO himself has accepted that the benchmarking done by the assessee was based on reliable data and was at arm s length.Therefore,we are of the opinion that there was no justification for making TP adjustment with regard to guarantee commission. Thus following the judgment of Everest Kanto Cylinders Ltd.(2015 (5) TMI 395 - BOMBAY HIGH COURT), we decide third effective Ground of appeal (GOA-4) in favour of the assessee .

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Transfer Pricing adjustments regarding interest received from Associate Enterprises.
3. Transfer Pricing adjustments regarding guarantee commission.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The first ground of appeal concerns the disallowance of ?58.74 lakhs under Section 14A of the Act. The AO found that the assessee had received dividend income of ?3.23 crores, which was claimed as exempt, and had not apportioned any expenditure to the exempt income. The AO made a disallowance under Section 14A read with Rule 8D of ?75.32 lakhs, after considering the assessee's voluntary disallowance of ?16.58 lakhs. The FAA confirmed the AO's order. However, the Tribunal found that the AO had not provided any reason for increasing the disallowance and that the FAA had mechanically confirmed the AO's order without giving any reason. Therefore, the Tribunal reversed the FAA's order and decided the first ground of appeal in favor of the assessee.

2. Transfer Pricing Adjustments Regarding Interest Received from Associate Enterprises:
The second issue pertains to the TP adjustment on account of interest received from the AE, amounting to ?4.72 crores. The TPO observed that the assessee had given a loan to its AE at an interest rate of 6%/7.5% per annum, which was benchmarked with LIBOR rates. The TPO held that the interest charged was not at arm's length and proposed an adjustment by applying an interest rate of 14.39% per annum. The FAA upheld the TPO's adjustment. However, the Tribunal found that the assessee had charged interest in line with LIBOR rates plus 200-300 basis points, which was consistent with the rates accepted in subsequent assessment years and other Tribunal decisions. Therefore, the Tribunal reversed the FAA's order and decided the third ground of appeal in favor of the assessee.

3. Transfer Pricing Adjustments Regarding Guarantee Commission:
The third issue involves the adjustment of guarantee commission of ?2.70 crores. The TPO found that the assessee had charged a commission of 1.5% for providing guarantees to its AEs, which was benchmarked based on quotations from ICICI Bank. The TPO benchmarked the arms-length price for bank guarantees at 3% and proposed an adjustment. The FAA upheld the TPO's adjustment. However, the Tribunal found that the TPO had accepted a 1.5% rate for financial guarantees in subsequent years and made no adjustment for performance guarantees. The Tribunal also referred to the Bombay High Court's decision in Everest Kanto Cylinders Ltd., which held that corporate guarantees issued by holding companies should not be compared with bank guarantees issued by commercial banks. Therefore, the Tribunal reversed the FAA's order and decided the fourth ground of appeal in favor of the assessee.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal reversing the orders of the FAA on all contested grounds. The issues of penalty under Section 271(1)(c) and the general nature of Ground No. 6 were not adjudicated.