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TMI Blog2016 (6) TMI 558X X X X Extracts X X X X X X X X Extracts X X X X ..... .05 Crores in India and the assessee is liable to pay tax on that. By diverting the equity capital raised to its Associate Enterprises, the assessee is claiming the payment of interest on the borrowed funds to the extent of ₹ 10.05 Crores as expenditure. Therefore, this Tribunal is of the considered opinion that it is an attempt on the part of the assessee to reduce the tax burden to that extent. Therefore, this Tribunal is of the considered opinion that interest on the funds advanced to Associate Enterprise outside India has to be computed on notional basis by applying LIBOR rate. LIBOR is one of the internationally accepted rates for the loan advanced in the international market. Therefore, the TPO has rightly determined the arm's length price for the advance made by the assessee to its Associate Enterprises by adopting LIBOR rate of interest. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Corporate Guarantee given by the assessee to its Associate Enterprises - Held that:- It is not in dispute that the assessee has offered Corporate Guarantee to its Associate Enterprises at UK. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This said Letter of Comfort is almost a guarantee given by the assessee to its Associate Enterprise. As found by this Tribunal in Redington (India) Limited (2015 (11) TMI 853 - ITAT CHENNAI ), by giving such a guarantee or Letter of Comfort by the assessee-company, it does not involve any cost to the assessee, therefore, it is outside the ambit of international transaction. By following the order of this Tribunal in Redington (India) Limited (supra) and for the reason stated therein, this Tribunal is of the considered opinion that there may not be any need to make any adjustment in respect of Letter of Comfort. Accordingly, the orders of the lower authorities are set aside the and Assessing Officer is directed to delete the addition made with regard to Letter of Comfort on notional basis. - ITA No. 458/Mds/2016 - - - Dated:- 9-6-2016 - Shri N.R.S. Ganesan, Judicial Member And Shri A. Mohan Alankamony, Accountant Member For the Appellant : Shri M. Viswanathan, CA For the Respondent : Smt. Vijayalakshmi , CIT ORDER Per N. R. S. Ganesan, Judicial Member This appeal of the assessee is directed against the order of the Assessing Officer consequent to the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncement of interest-free loan to its Associate Enterprises outside the country is for reducing/shifting the taxable profit in India. Accordingly, the Transfer Pricing Officer computed the interest at LIBOR rate on the advance made to its Associate Enterprises. The Dispute Resolution Panel, after examining the facts of the case, including the payment of interest to the extent of ₹ 10.05 Crores, found that the TPO computed the interest by using CUP method / Yield Approach method. According to the Ld. D.R., the DRP has rightly confirmed the order of the Transfer Pricing Officer. 5. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee advanced interest-free loan / advance to its Associate Enterprises outside the country. It is also not in dispute that the assessee has not charged any interest on the loan given to its Associate Enterprises. The assessee claims before this Tribunal that the borrowed funds were not diverted for making advance to its Associate Enterprises. The assessee contends that it had surplus funds in the form of equity capital raised through issuance of share to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers are not diverted to its Associate Enterprises outside India, there may not be any necessity for the assessee to borrow funds and pay interest of ₹ 10.05 Crores on the borrowed funds. From the material available on record, it is obvious that just to shift the profit outside India and reduce the tax liability in India, the assessee diverted its funds raised through equity capital outside India, and borrowed funds in India. Had the assessee used the equity capital in India, there is no necessity to borrow funds in India and pay interest to the extent of ₹ 10.05 Crores. In such a situation, the profit of the assessee will increase to the extent of ₹ 10.05 Crores in India and the assessee is liable to pay tax on that. 6. Now, by diverting the equity capital raised to its Associate Enterprises, the assessee is claiming the payment of interest on the borrowed funds to the extent of ₹ 10.05 Crores as expenditure. Therefore, this Tribunal is of the considered opinion that it is an attempt on the part of the assessee to reduce the tax burden to that extent. Therefore, this Tribunal is of the considered opinion that interest on the funds advanced to Associate En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer Pricing Officer further found that interest received could be an appropriate way of determining the appropriate fee for guarantee. The Ld. D.R. further submitted that by giving a bank guarantee to its Associate Enterprise, the assessee-company is inviting a risk by itself. If the Associate Enterprise fails to repay the loan borrowed on the basis of Corporate Guarantee given by the assessee, then the assessee has to naturally repay the loan. In that case, the profit of the assessee and tax thereto will be shifted to outside the jurisdiction of the country. The Ld. D.R. further submitted that guarantee to the banker in most cases result in a loan with lower rate of interest. Therefore, according to the Ld. D.R., there is a cost saving to the group concern which would reflect in the books of account as well. The Ld. D.R. further submitted that the decision of this Tribunal in Redington (India) Limited (supra) has not reached finality and the matter is pending before the High Court. Moreover, the opinion of this Tribunal and various Benches of the Tribunal are equally divided. Therefore, the DRP found that the benefit accrued to the Associate Enterprises because of the guarantee g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in the Associate Enterprise, therefore, the dividend income earned from the Associate Enterprise are taxable in India. Hence, the DRP is not justified in confirming the order of the Transfer Pricing Officer. 13. On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that the assessee has not maintained any separate books of account with regard to investment from which the income was earned. The claim of the assessee before the lower authorities appears to be that no expenditure was incurred for the investment made for earning the tax-free dividend income. The assessee has also claimed that no income exempted from taxation was earned by the assessee. The Ld. D.R. further submitted that it is an admitted fact that the assessee borrowed loan for the business and paid interest to the extent of ₹ 10.05 Crores during the year under consideration. The investment decision was taken by the top most executives of the company and the investment was managed by its key management personnel and executives. The corporate structure itself requires an administrative establishment, which requires incurring of multifarious expenses including establishment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbs of Rule 8D(2) has to be notionally taken for the purpose of disallowing the expenditure. In the absence of any other details, the DRP has rightly found that disallowance has to be made by applying Rule 8(2) of Income-tax Rules, 1962. Therefore, we find no infirmity in the order of the lower authority and accordingly the same is confirmed. 16. The last issue arises for consideration is with regard to Letter of Comfort issued by the assessee-company to its Associate Enterprise. 17. Shri M. Viswanathan, the Ld. representative for the assessee, submitted that a Letter of Comfort was issued by the assessee-company as a procedural formality to be complied with by wholly owning shareholder to enable the subsidiary company to borrow funds from banks. According to the Ld. representative, the assessee has not derived any benefit out of this Letter of Comfort. In the absence of any benefit derived from Letter of Comfort, there is no justification for imputing the recovery charges of 1% on the amount generated along with incidental charges incurred by the assessee for issuing the Letter of Comfort as part of procedural compliance. According to the Ld. representative, it is obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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