2022 (9) TMI 587 - AT - Income Tax

TP adjustment - upward adjustment in imputing notional interest on the outstanding overdue receivables from Associated Enterprises - HELD THAT - As working the assessee s margin is significantly higher than the operating margin of the comparable companies. There may be a delay in the collection of receivables even beyond the agreed time limits due to a variety of factors which has to be decided on a case to case basis. When TNM method is considered as the most appropriate method, which was also not disputed by Revenue, the net margin thereunder would take care of such notional interest cost. It was further explained by Ld.AR that the impact of the delay in collection of receivables would have a bearing on the working capital of the assessee. We find that these working capital adjustments on the ALP has been already factored in its pricing / profitability vis- -vis that of its comparables. We therefore are of the considered view that any further adjustment to the margin of the assessee on the outstanding receivables cannot be justified and no separate upward adjustment on outstanding export receivables is required and therefore we direct the Ld.AO to delete the upward adjustment made towards overdue receivables from AE. We therefore allow this ground raised by the assessee. Adjustment towards corporate guarantee commission on the gross guarantee given to AE - AR pleaded that it is not an international transaction as the assessee has not charged the AE - HELD THAT - TPO made the adjustment by instances referring to the commercial banks providing financial guarantees but did not contemplate the issue of corporate guarantee. The concept of bank guarantees and corporate guarantees was explained in the case of Prolifics Corporation Ltd 2015 (1) TMI 551 - ITAT HYDERABAD by the Hyderabad Tribunal wherein it has observed that the provisions of corporate guarantee always involves risk and there is a service provided to the AEs in increasing its creditworthiness in obtaining loans in the market. We find that there must be a minimum charge on the P L Account but there is an enhanced risk which cannot be ruled out in providing guarantees. Ultimately, the Hon ble Tribunal upheld the adjustment made on guarantee commissions given to AEs. We find merit in the arguments of the Ld. AR that the rate of corporate guarantee should be restricted to the amount utilized by the AE, @ 11.5 Million USD, but should not be applied on the gross corporate guarantee. In view of the above discussion and by respectfully following the ratio laid down in the case of CIT vs. Everest Kanto Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT we are of the considered view that the corporate guarantee commission is an international transaction and should be charged @ 0.50% on the corporate guarantee amount utilized, by the AE. We therefore allow the grounds raised by the assessee. Disallowance u/s 14A - Assessee argued assessee has not earned any exempt income - HELD THAT - We find from the records submitted by the Ld. AR that the assessee has not earned any exempt income during the relevant assessment year mandating the invoking of provisions of section 14A of the Act. The Hon ble Supreme Court in CIT vs. Chettinad Logistics (P.) Ltd 2018 (7) TMI 567 - SC ORDER has dismissed the SLP of the Revenue and held that section 14A can only be triggered if assessee claims any expenditure against an income which does not form part of the total income under the Act. The Hon ble Supreme Court further observed that Rule 8D only provides for a method to determine the amount of expenditure incurred in relation to income which does not form part of the total income of the assessee. Appeal of assessee allowed.

Summary

Issues Involved:
1. Upward adjustment in imputing notional interest on overdue export receivables.
2. Adjustment towards corporate guarantee commission.
3. Disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Upward Adjustment in Imputing Notional Interest on Overdue Export Receivables:

The assessee challenged the upward adjustment made by the Transfer Pricing Officer (TPO) regarding notional interest on overdue receivables from Associated Enterprises (AEs). The TPO had determined the Arm's Length Price (ALP) for these transactions and made adjustments under section 92CA(3) of the Income Tax Act. The assessee argued that the delay in receivables should not be considered an international transaction under section 92B of the Act and that the interest on outstanding receivables is subsumed in the Arm's Length Price (ALP) charged to the AEs under the Transaction Net Margin Method (TNMM). The assessee also cited various judicial precedents to support their argument.

The Tribunal noted that receivables are included under the definition of international transaction due to amendments made by the Finance Act, 2012, and therefore, the argument that receivables are not an international transaction was dismissed. However, it was observed that the assessee's operating margin was significantly higher than that of comparable companies, and the working capital adjustments already factored in the pricing/profitability vis-à-vis that of comparables. Consequently, it was concluded that no separate upward adjustment on outstanding export receivables was required, and the appeal on this ground was allowed.

2. Adjustment Towards Corporate Guarantee Commission:

The assessee contested the adjustment made by the TPO/Dispute Resolution Panel (DRP) regarding the corporate guarantee commission on the gross guarantee given to AE. The TPO had determined a rate of 1.9% based on information obtained from various banks, which was upheld by the DRP. The assessee argued that extending a guarantee for a loan taken by AE should not be considered an international transaction and cited several judicial precedents to support a lower rate of 0.50%.

The Tribunal referred to the Notification of the Central Board of Direct Taxes (CBDT) issued on 7/6/2017, which prescribed a rate not less than 1% for corporate guarantees given to AEs. However, it was acknowledged that the corporate guarantee commission should be restricted to the amount utilized by the AE rather than the gross guarantee amount. The Tribunal upheld the corporate guarantee as an international transaction but directed that it should be charged at 0.50% on the amount utilized by the AE, thereby allowing the grounds raised by the assessee.

3. Disallowance Under Section 14A of the Income Tax Act:

The assessee challenged the disallowance made under section 14A of the Act, arguing that no exempt income was earned during the relevant assessment year, and thus, the provisions of section 14A should not be applicable. The assessee relied on the judgment of the Hon'ble Supreme Court in CIT vs. Chettinad Logistics P. Ltd, which held that section 14A can only be triggered if the assessee claims any expenditure against an income that does not form part of the total income.

The Tribunal found that the assessee had not earned any exempt income during the relevant assessment year, and therefore, the provisions of section 14A were not applicable. Respectfully following the ratio laid down by the Hon'ble Supreme Court, the appeal on this ground was allowed.

Conclusion:

In conclusion, the Tribunal allowed the appeal of the assessee on all grounds, including the upward adjustment on overdue receivables, the corporate guarantee commission, and the disallowance under section 14A of the Income Tax Act. The decision emphasized the importance of considering the overall operating margins, the actual utilization of guarantees, and the absence of exempt income in determining the appropriate adjustments and disallowances.