Brief fact of the case
The assessee company was engaged in the making of High Pressure Gas Cylinder and compressed natural gas cylinders. The assessee has subsidiary company at Dubai. The A.O. disallowed interest as per ruled 8D read with section 14A of the Act w.r.t to dividend income of Rs.3191330/- which was claimed to be exempted u/s 10(33) and made addition on account of transfer price adjustment related to ‘Guarantee commission’ received by the assessee company on the basis of report of TPO. During F.Y. 2006-07 the Associated Enterprise had taken loan of Rs.86.88 crores i.e, USD 20,000,000 from ICICI bank and one of the clause of term loan was to provide a corporate guarantee by the assessee. In this behalf the assessee provided a Corporate Guarantee/guaranteeing repayment of borrowings made by the Associated Enterprise at Dubai for purchase of assets and inventories and for working capital and as a term loan. The assessee had charged guarantee commission @ 0.5%. The TPO found that the guarantee fee charged was at a lower rate and proceeded to compare guarantee costs. The Dubai subsidiary was newly formed, was unknown had a low credit rating and as such the TPO concluded that if the guarantee had not been provided, ICICI Bank would not have lent and advanced monies to the AE. The TPO came to the conclusion that the banks and companies are charging atleast 3% for providing guarantees and therefore, the bench mark arms length price for the guarantee given by the Assessee to ICICI for the benefit of the AE at 3% of the amount of guarantee.
Held by CIT(A)
In an appeal before CIT(A), the Commissioner found that the conclusion of Assessing Officer and making disallowance of Rs.2027896/- was reasonably correct. On the second issue of addition of Rs.2850353/-u/s 92CA the Commissioner (Appeals) after detail consideration of the order of the TPO came to the conclusion that bank rate and guarantee of the relevant period was 6% whereas PLR was 10.5% which shows that the return for bearing received was4.5%. He therefore found that return of 3% arrived at by TPO was justified and the challenge on this ground of the appellant was also rejected.
Order of the Tribunal
Against the dismissal of the appeal, the assessee approached the Income Tax Appellate Tribunal questioning rejection of the grounds (i) the disallowance of Rs.20,27,896/- under section 14Aof the Act and (ii) the order computing arms length price and making adjustment of Rs.28,50,353/-. The Tribunal after hearing parties partly allowed the appeal on ground no.1 and estimated sum of Rs.1lac for the purpose of disallowance under section 14A. As far as second ground was concerned, the adjustment of Rs.28,50,253/- was deleted.
Question of Law
Aggrieved by the order, the Revenue filed the appeal before Hon’ble High Court on the following substantial question of law.
“(1) Whether on the facts and in the circumstances of the case and in law, order passed bearing ITANo.542/Mum/2012 dated 23.11.2012 (A.Y. 2007-08) by ignoring the Income Tax (fifth amendment) Rules 8Dfor disallowing of the interest u/s 14A of the I.T.Act1961 was perverse ?
(2) Whether on the facts and circumstance of the case and in law the ITAT Mumbai Bench “K” Mumbai was justified in restricting the disallowance u/s 14A of the I.T. Act 1961 to Rs.1,00,000/-. When the Assessee Company itself had made disallowance ofRs.4,47,649/- ?
(3) Whether on the facts and in the circumstances of the case and in law the Hon’ble ITAT “K” Bench Mumbai was right in deleting the addition ofRs.28,50,353/- on account of TP adjustment on guarantee commission ?”
Contention of Revenue
It was submitted by the ld. counsel appearing on behalf of revenue that the order of the tribunal issuing disallowance u/s 14A of Rs.1 Lac was arbitrary and unsustainable especially in view of the fact that the adjustment to the extent ofRs.4,47,649/- was offered before the Assessing Officer by the Assessee itself. With respect to second issue, it was submitted that in the absence of corporate guarantee, the associated enterprise would not have been granted the loan at all. He justified the benchmark rate of 3% of guarantee commission in a arm’s length price in view of the fact that the enquiry had been made by the TPO from various banks and the companies cases involving similar transactions related to guarantee fees which justifies the same.
Contention of Assessee
It was submitted that the order of the tribunal was perfectly justified and the disallowance of Rs.1 lakh was also justified in view of the fact that the adjustment to the extent of Rs.4,47,649/- that was offered before the Assessing Officer was not based on the original return at all. The admission was thus not a part of the return filed and which was before the Assessing Officer and the Assessee could not be bound by it. He therefore submitted that the qualification made by the Tribunal was appropriate considering the facts of the case. He further submitted that a sum of Rs.11.09 crores which was invested was sourced from funds raised by way of Initial public offering (IPO) to extent of Rs.90 crores. He submitted that investment was made from the surplus funds and nothing was brought on record to show otherwise. Therefore, considering the fact that the interest bearing funds were not used and providing for some administrative costs, a fair assessment of Rs.1 lac was arrived at by the ITAT for the purpose of disallowance under section 14. It was further submitted that AE had obtained loan from its bankers on first charge towards the fixed asset and further hypothecation of inventory and book debts.AE has a gross fixed asset base valued at about USD 13 million and had inventory valued at USD 7.6 million, book debts of USD 5.4 million and cash and a bank balance of USD 1.8 million. He pointed out that against a loan outstanding of USD 10 million as on 31.03.2007, assets available were to the tune of USD 27.4 million. Accordingly there was no question the Associated Enterprise not being able to obtain a loan without this corporate guarantee issued by the Assessee.
Held by the Court
Considering the submission of Revenue and the assessee, it was held that the order of the Tribunal as regards disallowance under section 14Aand restricting the same to Rs.1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of Rs.4,47,649/- was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a corporate guarantee are distinct and separate from that of bank guarantee and accordingly commission charged cannot be called in question, in the manner TPO has done. The comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above, the appeal does not raise any substantial question of law and is dismissed.