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TMI Blog2022 (12) TMI 1464X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 14A(2) of the Act as the Assessing Officer has acted in a mechanical manner based upon conjecture/surmise and has recorded dissatisfaction without having regard to the accounts of the Appellant and/or the computation of suo moto disallowance made by the Appellant u/s 14A of the Act. The general hypothesis made by the AO fails to meet the mandate of Section 14A(2) of the Act in view of the methodical computation of disallowance furnished by the Appellant taking into the account the actual expenditure incurred by the Appellant. Accordingly, we delete the addition made by AO u/s 14A read with Rule 8D of the Rules. Thus, Ground raised by the Appellant are allowed. - SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER For the Appellant : Shri M M Golwala For the Respondent : Ms. Samruddhi Hande ORDER PER RAHUL CHAUDHARY, JUDICIAL MEMBER: 1. The present appeal is directed against Assessment Order dated, 25.02.2022 passed under Section 143(3) read with Section 144C(13) read with Section 144B of the Income Tax Act, 1961 [hereinafter referred to as the Act ] for the Assessment Year 2017-18, as per directions issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO/DRP erred in invoking Rule 8D without recording an objective satisfaction that having regard to the accounts of the Appellant, the suo-moto disallowance of expenses of Rs. 6,55,409/- by the Appellant under section 14A of the Act. 3. Brief facts of the case are that the Appellant is a shipping company, provides offshore oilfield services. The Appellant operates a fleet of offshore support vessels and jack-up rigs for providing marine logistics and drilling services to its clients for supporting their offshore oil gas exploration and production services. 4. The Appellant filed its return of income for the Assessment Year 2017-18 on 30.11.2017 declaring total income of INR 2,25,44,06,710/-. The case of the Appellant was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Appellant had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm s Length Price (ALP) under Section 92CA(1) of the Act. 5. The TPO noted that during the Assessment Year 2017-18, the Appellant had provided financial guarantee to DnB Nor Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance of INR 10,67,893/- under Section 14A read with Rule 8D of the Income Tax Rules, 1962. 8. Being aggrieved, the Appellant has filed the present appeal raising 13 grounds of appeals. Ground No. 1 to 9 9. Ground No. 1 to 9 are directed against determination of ALP of the financial guarantee commissioner given by the Appellant to its AEs @ 1.25% per annum by the DRP. 10. The Ld. Authorised Representative for the Appellant, at the outset submitted, made a statement under instruction that he would not be pressing Ground No. 3 whereby it was contended that providing guarantee to AE does not constitute an international transaction. Accordingly, Ground No. 3 is disposed off as being not pressed. 11. The Learned Authorised Representative of the Appellant further submitted that issue related to transfer pricing addition in relation to guarantee commission stands decided in favour of the Appellant by the Tribunal in appeals preferred by the Appellant for the Assessment Years 2010-11 to 2015-16. He placed on record paper-book containing a copy of the aforesaid decision of the Tribunal and submitted that there is no change in the facts and circumstances of the case during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. Notably, the TPO has benchmarked the instant transaction of provision of Corporate Guarantee on the basis of respective abilities of the assessee and AE to raise Bonds in the Indian domestic market. The TPO asserted that based on the debt-equity ratio, the credit rating of the assessee company was higher in comparison to that of the AE and, therefore, the rate of interest payable by the AE to raise bonds in the Indian market would be higher than the rate payable by the assessee-company. Such differential has been used to determine the Corporate Guarantee fee that should have been charged by the assessee company from its AE so as to determine the arm s length price of the instant transaction. In our considered opinion, the aforesaid approach of the TPO is clearly inconsistent with the ratio laid down by the Hon ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra). Notably, in the case of Everest Kanto Cylinder Ltd. (supra), the dispute was relating to the adjustment made by the TPO in the matter of Guarantee commission earned for providing a Corporate Guarantee to the Bank in connection with the borrowings made by the AE of the assessee therein. The TPO dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o infirmity in the adoption of internal CUP i.e the average guarantee fees that was paid by the assessee to, viz. RBS (formerly known as ABN Amro Bank); Kotak Mahindra Bank and Yes Bank, for standing guarantee on its behalf of the assessee in case of third parties, viz. ONGC, BG Exploration etc. 10. Insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% of the amount of loan is concerned, the same, as observed by us hereinabove is the average of the guarantee fees that was paid by the assessee to various banks for standing guarantees on its behalf for certain third parties. As observed by the Hon ble High Court in the case of Everest Kento Cylinders Ltd. (supra), higher commission is to be paid for obtaining bank guarantee, as they are easily encashable in the event of default as in comparison to corporate guarantee provided by an assessee company to a bank for facilitating raising of loan by its AE. Accordingly, we are of the considered view that insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% is concerned, the same in the backdrop of the aforesaid facts cannot be called in question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thomas Cook (India) Limited (2016) 47 CCH 0162 (Mum) .5% Accordingly, in terms of our aforesaid observations 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 of Rs. 28,69,70,745/- made in the hands of the assessee. The Grounds of appeal Nos. 1 to 7 are allowed in terms of our aforesaid observations. (Emphasis Supplied) 14. We are not persuaded to depart from a view consistently taken by the Tribunal in the case of the Appellant for preceding assessment years. Respectfully following the above said decisions of the co-ordinate benches of the Tribunal in the case of the Appellant for the Assessment Years 2011-12, 2012-13, 2013-14 and 2014-15, we hold that corporate guarantee commission determined by the Appellant at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8D of the Income Tax Rules, 1962, the Assessing Officer was justified in making disallowance by applying the aforesaid rule. As regards, satisfaction the Ld. Authorised Representative for the Appellant submitted that proper satisfaction has been recorded by the Assessing Officer in this regard reliance was placed on paragraph 5.3.3 of the Final Assessment Order dated 25.02.2022. 19. We have considered the rival submissions and perused the material on record including letter dated, 13.02.2021, filed by the Appellant before during the course of assessment proceedings, and written submissions filed by the Appellant before DRP. We note that the Appellant had methodically identified actual expenses which can be reasonably treated as relatable to the exempt income and disallowed such expenses under Section 14A of the Act. The Appellant had methodically identified actual expenses which can be reasonably treated as relatable to the exempt income and disallowed such expenses. Statement showing details of exempt income along with calculation of disallowance under Section 14A was filed during the assessment proceeding as Annexure-5 to letter dated 13.02.2021. In the aforesaid statement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . - Assessee has simply disallowed expenses taking percentage of exempted income total income from investments and disallowed certain percentage of staff cost and other expenses without giving complete details. - Further there is huge churn in investment in Mutual Funds. The change in monthly investments is as per para 5.1.3 above. - Various expenses have been incurred by the assessee, significantly managerial remuneration, salaries bonus allowances, Employee benefits expenses, Interest expenses, Administrative expenses, travelling and communication which also entail a portion relating to make such investments and earn income on same. Accordingly, in view of the above, the AO is satisfied that the assessee has incurred expenditure much greater than already disallowed by assessee on account of making Investments, income of which will be exempt. The proportionate expense of Rs 6,55,409 is less and not accurate as already disallowed by assessee. Assessee has disallowed such expenses which is not in order as compared to the proportion of new investments made. 5.4 Conclusion/Summary 5.4.1 Form the above discussions, it is clear that the assessee has failed to disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions and details were simply brushed aside by the Assessing Officer. 22. We note that the Tribunal had deleted similar disallowance made by the Assessing Officer under Section 14A read with Rule 8D of the Rules vide order dated 31.08.2021 passed in ITA No. 1457/Mum/2016 pertaining Assessment Year 2011-12 holding that the satisfaction recorded by the Assessing Officer in rejecting Appellant s computation was not in accordance with the mandate envisaged under section 14A(2) of the Act. The relevant extract of the aforesaid decision of the Tribunal read as under: 6. In ground no. 8 9 of appeal, assessee has assailed additional disallowance of Rs. 4,23,051/- made under section 14A read with Rule 8D. The primary contention of the assessee on this issue is that no satisfaction has been recorded by the AO before rejecting assessee s computation of suo-moto disallowance. The assessee during the period relevant to the AY under appeal has earned dividend income of Rs. 5,29,42,293/-, the assessee has made suomoto disallowance of Rs. 35,74,694/- under section 14A for earning exempt income. The provisions of section 14A(2) of the Act mandates that having regard to the accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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