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2022 (8) TMI 798 - AT - Income TaxTP adjustment on account of interest paid by the assessee on behalf of the associated enterprise - HELD THAT - Associated enterprise of the assessee is its subsidiary company in which assessee holds majority control i.e. 55% of the shareholding. Apart from the assessee, two other persons staying in Indonesia held balance 45% of shareholding of the said subsidiary company. The associated enterprise of the assessee was to invest in coal mine in Indonesia and therefore for said purpose funds were required to be arranged by aforesaid 3 promoters, including the assessee company, respective of shareholding ratio. To fulfil this commitment of fund for the subsidiary company, the assessee had arranged 3 million USD Bridge Loan from the Bank of India, Singapore branch. Since this loan was arranged by the assessee to fulfill its commitment under the MOU with the other shareholders, the assessee had, inter-alia, borne the entire interest expenditure on the aforesaid loan. In the present case, the lower authorities on the basis that no benefit was received by the assessee by paying the interest on the loan, which loan was in fact utilized by the associated enterprise, treated the arm s length price of the interest to be Nil and accordingly made the addition of the entire amount of interest paid by the assessee on behalf of the associated enterprise. The provisions of Chapter X shall have the relevance when assessee has claimed any expenditure or earned any income from the international transaction, which due to assessee s dealing with associated enterprise has the possibility of being manipulated in order to reduce the taxable income within India. In such situation, the income or expenditure shall be computed / determined having regard to the arm s length price. In the present case, the Revenue though treated the arm s length price of interest paid by the assessee, on behalf of the associated enterprise, as Nil, however, has not disputed the fact that assessee has not claimed such expenditure and thus even when its value is considered at par, i.e. as paid by the assessee, same will not affect the income chargeable to tax in India - Thus the payment of interest by the assessee, on behalf of the associated enterprise, which has not been claimed as expenditure, is revenue neutral and provisions of Chapter X of the Act are not applicable in such a situation. Accordingly, we direct the TPO/AO to delete the transfer pricing adjustment on account of interest paid by the assessee. As a result, ground No. 3 raised in assessee s appeal is allowed. Adjustment on account of corporate guarantee - HELD THAT - During the course of hearing, the learned AR did not press other grounds raised by the assessee in respect of transfer pricing adjustment on account of corporate guarantee and only prayed that rate of guarantee commission for benchmarking should be restricted to 0.5%. We find that Hon ble jurisdictional High Court in Everest Kento Cylinders Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT upheld charging of guarantee commission at the rate of 0.5%. Accordingly, respectfully following the aforesaid decision of Hon ble jurisdictional High Court, we direct the TPO/Assessing Officer to compute the transfer pricing adjustment on account of corporate guarantee by charging guarantee commission at the rate of 0.5%. Accordingly, ground no. 2 raised in assessee s appeal is partly allowed.
Issues Involved:
1. Treatment of interest paid to bank and corporate guarantee fee as an international transaction under section 92B of the Act. 2. Addition on account of arm's length adjustment to income from guarantee commission. 3. Addition on account of interest paid by the appellant on loan given to its associated enterprise (AE). 4. Disallowance of sales tax payable. Detailed Analysis of the Judgment: Issue 1: Treatment of Interest Paid to Bank and Corporate Guarantee Fee as an International Transaction - Grounds Raised: The assessee challenged the CIT(A)'s decision to treat the interest paid to the bank and corporate guarantee fee as an "international transaction" under section 92B of the Income Tax Act. The assessee argued that it was not in the business of providing finance or guarantee and that these transactions were based on commercial expediency. - Tribunal's Decision: This issue was not separately adjudicated as the grounds were addressed in the context of other issues. Issue 2: Addition on Account of Arm's Length Adjustment to Income from Guarantee Commission - Grounds Raised: The assessee contested the CIT(A)'s computation of the arm's length price for corporate guarantees, which led to an addition of Rs. 31,50,000. The assessee argued that the guarantee commission was part of its business obligation and that the disallowance was unjustified. - Tribunal's Decision: The Tribunal noted that the assessee had provided a corporate guarantee to its AE without compensation. The TPO had imputed a 2.5% fee for this guarantee. The Tribunal referenced the jurisdictional High Court decision in CIT vs. Everest Kento Cylinders Ltd., which upheld a 0.5% guarantee commission rate. Consequently, the Tribunal directed the TPO/Assessing Officer to compute the adjustment using a 0.5% rate, partially allowing the assessee's appeal. Issue 3: Addition on Account of Interest Paid by the Appellant on Loan Given to Its AE - Grounds Raised: The assessee challenged the addition of Rs. 46,97,658 for interest paid on behalf of its AE, arguing that the interest was a business obligation and not claimed as an expense, thus making the addition unjustified. - Tribunal's Decision: The Tribunal detailed that the assessee had arranged a loan for its AE and borne the interest cost, which was not claimed as an expense. The Tribunal emphasized that the provisions of Chapter X of the Act, which relate to transfer pricing, are applicable only when there is a possibility of manipulating taxable income in India. Since the interest was not claimed as an expense, the Tribunal found the transaction revenue-neutral and directed the TPO/Assessing Officer to delete the adjustment, allowing the assessee's appeal on this ground. Issue 4: Disallowance of Sales Tax Payable - Grounds Raised: The assessee contested the disallowance of Rs. 9,43,930 as sales tax payable, arguing that it should be allowed as a business expenditure under section 37(1) of the Act. - Tribunal's Decision: This ground was not pressed by the assessee during the hearing and was thus dismissed as not pressed. Conclusion: The appeal was partly allowed. The Tribunal directed the deletion of the transfer pricing adjustment related to the interest paid on behalf of the AE and adjusted the guarantee commission rate to 0.5%. Other grounds were either not pressed or deemed unnecessary for separate adjudication.
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