2020 (2) TMI 558 - AT - Income Tax

TP Adjustment - corporate guarantee provided by assessee company to its subsidiaries - international transaction - interest on receivables for extra credit period - ALP adjustment on sale of instant coffee - HELD THAT - As decided in own case 2019 (4) TMI 1820 - ITAT VISAKHAPATNAM assessee had given corporate guarantee to its 100% subsidiary and the AE for the purpose of business. The assessee had not incurred any expenditure towards the corporate guarantee. The revenue could not bring any evidence to establish that the assessee had incurred any expenditure for extending the corporate guarantee. As stated by the Ld.AR it is the obligation on the part of the assessee to extend the support and assistance to its subsidiaries for business development. Since the facts are identical, respectfully following the view taken by coordinate benches in the case laws cited, we hold that the corporate guarantee given by the assessee on behalf of its AE would not constitute an international transaction within the meaning of 92B of the Act. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. Interest on receivables - HELD THAT - In the instant case also it is established that the transactions with the AEs are at arms length price. All the AEs are 100% subsidiary companies and the assessee is debt free company having large amount of reserves. The department has not made out a case of undue advantage of allowing credit. The Ld.CIT(A) has given finding that the receivables were received in reasonable period and there was no delay. The department did not place any evidence to controvert the finding given by the Ld.CIT(A). Therefore, we hold that there is no case for making adjustment of interest on receivables in the assessee‟s case. ALP adjustment suggested by the TPO in respect of difference in price charged to assessee s AE when compared sale to non-AE - HELD THAT - After considering the submissions and data, the TPO has suggested and worked out the adjustments on sale of instant coffee to the AE and computed the same at ₹ 1,09,42,509/- which is charged less to the AE compared to the non-AE and called explanation from the assessee. The assessee has submitted that TPO has taken only two sizes out of 11 sizes i.e. 100 grams and 200 grams and suggested adjustment which is not correct. Out of 11 sizes in 6 cases, the assessee has charged higher price. It was further contended before the TPO that comparing the product size-wise is unfair and incorrect and also unscientific and requested the TPO to adopt weighted average method and find out the ALP and submitted that weighted average method is applied difference is only less than 3% which is permissible according to law. The TPO rejected the request of the assessee and suggested the adjustment of ₹ 1,09,42,509/- u/sec. 92CA(3) of the Act. On appeal, ld. CIT(A) directed the Assessing Officer to delete the addition. As per proviso to sub-section (2) of section 92C, the difference to the extent of 3% is permissible. We further find that the assessee by submitting all the details explained before the TPO that the assessee has charged for AE as well as non-AE similar prices for the supply of instant coffee and no profit has been shifted to AE, however, the TPO not accepted the explanation given by the assessee and suggested TP adjustment without giving any reasons. The TPO has not given what is the reason for choosing only two sizes 100 grams and 200 grams, when the assessee specifically submitted before the TPO that out of 11 sizes, 6 sizes the assessee has charged high price and submitted that average has to be taken. Without considering the same, the TPO simply suggested adjustment by taking only two sizes, in our opinion, the assessee has discharged the burden casted upon him to show that it has not shifted profits to AE, therefore it is the duty of the TPO to establish that the assessee has shifted profits to AE. In this case, without giving any reason simply suggested TP adjustment by the TPO. We find that TPO is not correct. Thus, we find that the ld.CIT(A) has considered the facts and directed the Assessing Officer to delete the addition. We find no reason to interfere with the order passed by the ld. CIT(A). Thus, this ground of appeal raised by the Revenue is dismissed.

Summary

Issues Involved:

1. Corporate guarantee provided by the assessee to its subsidiaries as an international transaction.
2. Interest on receivables for extra credit period allowed as an international transaction.
3. Arm's Length Price (ALP) adjustment on the sale of instant coffee.

Issue-wise Detailed Analysis:

1. Corporate Guarantee:

The Revenue contended that the corporate guarantee provided by the assessee to its subsidiaries should be considered an international transaction. The Transfer Pricing Officer (TPO) had treated the corporate guarantee as a service and calculated an adjustment of ?2.48 crores. However, the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, referencing previous tribunal decisions in the assessee’s own case for earlier assessment years (AY 2013-14 and 2014-15). The CIT(A) concluded that the corporate guarantee given to 100% subsidiaries does not constitute an international transaction for Transfer Pricing (TP) adjustment purposes. This decision was upheld by the tribunal, which found no reason to interfere with the CIT(A)'s order, thus dismissing the Revenue's appeal on this ground.

2. Interest on Receivables:

The TPO proposed an adjustment of ?91,96,360/- on the outstanding receivables balance of ?10,21,81,783/- from the assessee’s subsidiary, suggesting that interest should be charged at 9%. The CIT(A) deleted this adjustment, again referencing the assessee’s own case for AY 2014-15, where it was determined that no separate benchmark is required on receivables when the Profit Level Indicator (PLI) is comparable. The tribunal upheld this view, noting that the assessee had received most payments within 120 days and that the facts were similar to those of the previous year. The tribunal found no justification for charging interest on receivables and dismissed the Revenue's appeal on this ground as well.

3. ALP Adjustment on Sale of Instant Coffee:

The TPO suggested an ALP adjustment of ?1,09,42,509/- based on the difference in prices charged to the assessee’s subsidiary compared to non-AE sales, using the Comparable Uncontrolled Price (CUP) method. The assessee argued that the TPO should use the weighted average price of all sizes rather than individual size-wise comparisons since the product quality remained the same across different packaging sizes. The CIT(A) agreed with the assessee, noting that the difference in prices was only 1.49%, which is within the permissible limit of 3% as per the law. The tribunal upheld the CIT(A)'s decision, finding that the TPO's selective adjustment based on only two sizes (100 grams and 200 grams) was unjustified. The tribunal dismissed the Revenue's appeal on this ground, concluding that there was no profit shifting to the AE.

Conclusion:

The tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decisions regarding the corporate guarantee, interest on receivables, and ALP adjustment on the sale of instant coffee. The tribunal found that the CIT(A)'s findings were consistent with previous decisions and the facts of the case, and there was no reason to interfere with the CIT(A)'s orders.