2021 (4) TMI 254 - AT - Income Tax

TP Adjustment - ALP of the corporate guarantee fees determined by the assessee at 0.43% of the amount of loan - HELD THAT - We find no reason to dislodge the ALP of corporate guarantee determined by the assessee at 0.43% p.a by adopting Internal CUP method. In the backdrop of our aforesaid observations we are unable to persuade ourselves to subscribe to the determination of the ALP of the corporate guarantee at 2% p.a by the A.O/TPO. We, thus, uphold the ALP of corporate guarantee as determined by the assessee at 0.43% p.a and direct the A.O/TPO to vacate the upward transfer pricing adjustment made in the hands of the assessee. The Grounds of appeal Nos. 1 to 7 are allowed in terms of our aforesaid observations. Interest charged by the assessee at the rate of LIBOR 2.9% per annum in respect of loan of USD 71.5 million advanced to its AE, viz. Greatship Global Holdings Ltd., Mauritius - HELD THAT - Board of Directors of the assessee company had sanctioned a loan of USD 75 million in the immediately preceding financial year 2010-11 on which interest rate of LIBOR 2.9% p.a was fixed. Loan of USD 40 million was disbursed by the assessee to its AE in the financial year 201-11. Further, during the year in question i.e period relevant to A.Y 2012-13 a further loan of USD 31.5 million was disbursed to the AE. TPO in the immediately preceding year i.e period relevant to A.Y 2011-12 had made a TP adjustment in respect of the loan of USD 40 million that was disbursed during the said preceding year and had determined the ALP of the interest charged by the assessee on the said loan at 6.17% p.a. DRP had vide its order for A.Y 2011-12 held that the interest charged by the assessee on the loan advanced to its AE was at arm s length. Now when DRP in the case of the assessee for A.Y 2011-12 had held that the interest charged by the assessee on the loan advanced to its AE at LIBOR 2.9% was at arm s length, therefore, there would be no justification in holding the same as not being at arm s length during the year in question i.e A.Y 2012-13. Also, the DRP in the assessee s case for A.Y 2010-11 had held that the interest rate of LIBOR 300 basis points that was charged by the assessee on a loan of USD 4 million given to its AE, viz. GGES (and repaid) as being at arm s length. In the backdrop of the aforesaid facts, we find that the DRP had consistently been holding the interest rate of LIBOR 2.9% / 3% charged by the assessee on the loans advanced to its AEs as at arm s length. On the basis of our aforesaid observations, we uphold the Internal CUP applied by the assessee for benchmarking the interest charged on the loans advanced to its AE, viz. GGHL; and hold the interest charged by it on the loan advanced to its AE, viz. GGHL at LIBOR 2.9% as being at arm s length. Grounds of appeal Nos. 8 to 11 are allowed in terms of our aforesaid observations. TP Adjustment in respect of sale of an under construction vessel, viz. Greatship Vimla by the assessee to its AE, viz. Greatship Global Offshore Services Pte. Ltd., Singapore - HELD THAT - When the form of the transaction of sale of vessel is not found to be different from its substance, the TPO, thus, was not justified in re-characterising the same as a loan transaction and therein working out the ALP of the notional interest which the assesseee ought to have charged on such impugned advance/loan given to its AE, viz. GGOS, Singapore. Observation of the lower authorities that the assessee had failed to lead any document in support of its claim that the market situation for sale of ship was not found favourable, we are unable to concur with the same. As observed by us hereinabove, the assessee vide its detailed submissions filed before the lower authorities had placed on record requisite supporting documents. The scope and domain of the jurisdiction of a TPO is restricted to the determination of the arm s length price of the international transaction of an assessee, and the same by no means could be stretched to providing of advise or commenting on the prudence of the assessee as regards its business decisions or providing guidance as regards the manner in which the business ought to have been carried out. We, thus, are of the considered view that the TPO by observing that the assessee had lost the Opportunity cost had clearly exceeded his jurisdiction. Backed by our aforesaid observations, we are unable to uphold the transfer pricing adjustment worked out by the TPO/DRP as regards the notional interest which as per them the assessee ought to have charged from its AE, viz. viz. GGOS, Singapore. Accordingly, we herein direct the A.O/TPO to vacate the transfer pricing adjustment of ₹ 62,23,256/- made towards notional interest. The Grounds of appeal nos. 12 to 14 are allowed Addition u/s 14A r.w.r. 8D - assessee had suo motto offered a disallowance u/s 14A - HELD THAT - As the fact situation in the case of the assessee before us remains the same as was there before the Tribunal in the assessee s case for A.Y 2008-09 A.Y 2009-10, therefore, for the sake of consistency and in all fairness we herein on the same terms set-aside the matter to the file of the A.O for the purpose of readjudicating the issue afresh in light of the judgment of the Hon ble Apex Court in the case of Maxopp Investment Ltd . 2018 (3) TMI 805 - SUPREME COURT . Computation of interest u/s 234C - interest for deferment of advance tax is to be levied on the basis of the tax due on the returned income - HELD THAT - We concur with the claim of the ld. A.R that the interest under Sec. 234C is to be computed on the tax due on the returned income i.e the tax chargeable on the total income declared in the return of income furnished by the assessee for the year in question, as reduced by the amounts contemplated in the Explanation to Sec. 234C(1) of the Act. We, thus, in terms of our aforesaid observations restore the issue to the file of the A.O with a direction to recompute the liability of the assessee towards interest under Sec. 234C on its tax due on returned income as contemplated in the Explanation to Sec. 234C(1) TP Adjustment - computing the guarantee fee - AY 2014-15 - HELD THAT - In terms of our observations and reasoning adopted while determining the ALP of the corporate/financial guarantee given by the assessee to the foreign banks in order to facilitate raising of loans by its foreign AEs by applying Internal CUP i.e the arithmetic mean of the guarantee commission paid by the assessee to various banks for standing guarantee on its behalf to various parties, we, thus, on the same terms direct the A.O/TPO to take the ALP of the corporate guarantee at 0.49% p.a i.e the arithmetic mean of the guarantee commission that was paid by the assessee to various banks for standing guarantee on its behalf to various parties during the year in question. The Grounds of appeal are allowed in terms of our aforesaid observations.

Summary

Issues Involved:
1. Determination of whether the financial guarantee given by the assessee to its Associated Enterprises (AEs) constitutes an "international transaction" under Section 92B of the Income Tax Act.
2. Determination of the Arm's Length Price (ALP) of the financial guarantees given by the assessee on behalf of its AEs.
3. Transfer pricing adjustment related to guarantee commission.
4. Classification of the financial guarantees as shareholder activity.
5. Rejection of the benchmarking analysis undertaken by the assessee.
6. Computation of the ALP of the financial guarantees.
7. Application of the +/-5% range as per the proviso to section 92CA(2).
8. Arm's length nature of the interest rate charged on loans given to AEs.
9. Transfer pricing adjustment related to interest on loans.
10. Consistency with the DRP order for the previous assessment year.
11. Transfer pricing adjustment related to the sale of an under-construction vessel.
12. Reclassification of the transaction of sale of the under-construction vessel.
13. Disallowance under Section 14A read with Rule 8D.
14. Levy of interest under Section 234C.

Detailed Analysis:

1. Financial Guarantee as "International Transaction"
The Tribunal addressed whether the transaction of giving financial guarantee by the assessee on behalf of its AEs was an "international transaction" under Section 92B of the Act. The Tribunal upheld the view that such transactions do fall under the purview of "international transactions" as per the Act, aligning with the precedents set in similar cases.

2. Determination of ALP of Financial Guarantees
The Tribunal examined the methodology used by the assessee to determine the ALP of the financial guarantees, which was based on the Internal Comparable Uncontrolled Price (CUP) method. The assessee had benchmarked the guarantee fees at 0.43% of the loan amount. The Tribunal found that the TPO's ad hoc determination of the ALP at 2% without using a specified method was not justified. The Tribunal upheld the assessee’s use of the Internal CUP method, citing consistency with the assessee’s previous years and judicial precedents.

3. Transfer Pricing Adjustment of Guarantee Commission
An upward adjustment of ?28,69,70,745 was made by the TPO. The Tribunal found this adjustment to be arbitrary and unsupported by a specified method. The Tribunal directed the TPO to vacate the upward adjustment and upheld the ALP of the corporate guarantee as determined by the assessee at 0.43% per annum.

4. Classification as Shareholder Activity
The Tribunal noted that the assessee argued that giving financial guarantees was a shareholder activity for which no charge is required. However, this argument was not accepted by the lower authorities, and the Tribunal did not find sufficient grounds to overturn this view.

5. Rejection of Benchmarking Analysis
The Tribunal found that the TPO had erred in rejecting the benchmarking analysis undertaken by the assessee. The Tribunal supported the assessee’s use of the Internal CUP method, aligning with judicial precedents and the assessee’s previous practice.

6. Computation of ALP of Financial Guarantees
The Tribunal found that the TPO’s computation of the ALP at 2% was arbitrary and unsupported by a specified method. The Tribunal upheld the assessee’s computation of the ALP at 0.43% using the Internal CUP method.

7. Application of +/-5% Range
The Tribunal did not specifically address the application of the +/-5% range as the primary issue was resolved by upholding the assessee’s ALP determination.

8. Arm's Length Nature of Interest Rate on Loans
The Tribunal upheld the assessee’s interest rate of LIBOR + 2.9% on loans to its AE, citing consistency with previous years and judicial precedents. The Tribunal found that the TPO’s rejection of the Internal CUP method was unjustified.

9. Transfer Pricing Adjustment of Interest on Loans
The Tribunal found the TPO’s adjustment of ?97,39,903 to be unsupported. The Tribunal directed the TPO to vacate the adjustment and upheld the assessee’s interest rate determination using the Internal CUP method.

10. Consistency with Previous DRP Orders
The Tribunal emphasized the importance of consistency with previous DRP orders, particularly where the facts and circumstances remain unchanged. The Tribunal upheld the interest rate of LIBOR + 2.9% as determined in previous years.

11. Transfer Pricing Adjustment on Sale of Under-Construction Vessel
The Tribunal found that the TPO had erred in reclassifying the transaction of the sale of an under-construction vessel as a loan. The Tribunal upheld the assessee’s transaction as a sale and directed the TPO to vacate the adjustment of ?62,23,256.

12. Reclassification of Transaction
The Tribunal held that the TPO was not justified in reclassifying the transaction of the sale of the vessel as a loan. The Tribunal emphasized that reclassification should only occur when the form and substance of the transaction differ, which was not the case here.

13. Disallowance under Section 14A read with Rule 8D
The Tribunal found that the A.O. had failed to record an objective satisfaction that the suo-motto disallowance by the assessee was incorrect. The Tribunal set aside the matter to the A.O. for fresh adjudication in light of the Supreme Court's rulings in Godrej & Boyce and Maxopp Investment.

14. Levy of Interest under Section 234C
The Tribunal found that the interest under Section 234C should be computed based on the tax due on the returned income, not the assessed income. The Tribunal directed the A.O. to recompute the interest accordingly.

Conclusion:
The appeals for A.Y. 2012-13 and A.Y. 2014-15 were allowed in terms of the Tribunal’s observations and directions. The Tribunal upheld the assessee’s methods for determining the ALP of financial guarantees and interest rates on loans, vacated arbitrary adjustments by the TPO, and directed the A.O. to recompute disallowances and interest as per the law.