2017 (5) TMI 208 - AT - Income Tax

Transfer pricing adjustment - Corporate guarantee addition - Held that - The difference in interest charged on the loan cannot be considered as a guarantee commission fee as the parameter for obtaining a loan at a particular interest rate is different from providing Corporate guarantee. Thus there is no basis for determining @ 6% by the DRP. In the above referred case of Asian Paints Ltd 2014 (5) TMI 880 - ITAT MUMBAI , after analyzing the various guarantee Commissions charged by banks and also relying on the order for the A.Y 2006-07 in that Assessee s case, the ITAT has held that the guarantee commission can be charged at 0.25%. Respectfully following the same, we also direct the TPO/AO to restrict the adjustment to 0.25% of the amount. Disallowance u/s 14A - Held that - Considering the submissions made by the Assessee we notice that the dividend income earned by Assessee was not exempt from tax and offered as income, therefore the provisions of Sec. 14A of the IT Act does not apply to these investments. AO is directed to delete the disallowance on the above issue Addition towards excise duty on closing stock - Held that - We are of the opinion that the A.O has not followed the directions of the DRP stating that the contentions of the Assessee appears to be correct and if such contentions are correct there is no double deduction of Excise duty in view of the above submission of the Assess, the A.O is directed to verify the claim. Thus A.O is directed to examine the details furnished by Assessee and if the contentions are found correct as stated by the DRP the amount has to be deleted. Interest on loan to AE - Held that - As the loan was given in foreign currency outside India and accordingly the LIBOR rate should be the basis for calculation of interest rate. Since Assessee has charged more than of the LIBOR rate at 8%, we are of the opinion that no adjustment is required to be made and accordingly the amount confirmed by the DRP stands deleted. Addition on Reimbursement of Expenditure - Held that - No ALP adjustments can be made to the reimbursement expenditure, which is only reimbursement of traveling and other miscellaneous expenditures and is not charged to profit and loss account. Accordingly grounds of the Assessee on this issue are allowed. Disallowance of expenditure on sales promotion, office maintenance, corporate expenses and site maintenance - Held that - A.O is correct in the disallowing certain expenditure as the vouchers are not verifiable, being self-made. However, we are of the opinion that 5% of the said expenditures can be disallowed as A.O has adopted 10% on certain expenditure and 5% on certain other expenditure. We direct the A.O to disallow the expenditure uniformly at 5% on sales promotion expenses of 53,13,003/-, office maintenance expenses of ₹ 28,74,687/-, out of pocket expenses of 20,71,280/-. 5% on site maintenance expenses of ₹ 4,93,27,915/- does not require any modification. The grounds are accordingly considered partly allowed.

Issues Involved:
1. Corporate Guarantee Fee
2. Disallowance under Section 14A of the Income Tax Act
3. Addition towards Excise Duty on Closing Stock
4. Interest on Loan to AE
5. Addition on Reimbursement of Expenditure
6. Disallowance of Expenditure under Section 37(1) of the Income Tax Act

Issue-wise Detailed Analysis:

1. Corporate Guarantee Fee:
For A.Y 2010-11, the Assessee provided a corporate guarantee to its AE, Aster Infrastructure Services Ltd., Afghanistan, amounting to ?3.45 Crores. The TPO proposed an adjustment of ?38,29,500 at an Arm's Length Guarantee Commission rate of 11.10%. The DRP later restricted this to 6%. The Assessee contended that corporate guarantees do not fall under Transfer Pricing Provisions and cited various case laws. The Tribunal, considering the rival contentions and the case of Asian Paints Ltd., directed the TPO/AO to restrict the adjustment to 0.25% of the amount. For A.Y 2011-12, the Tribunal similarly directed the AO to accept 0.25% as the fee for the corporate guarantee.

2. Disallowance under Section 14A of the Income Tax Act:
For A.Y 2010-11, the AO disallowed ?21,35,456 under Section 14A, citing investments in sister concerns. The Assessee argued that no exempt income was derived during the year and that the dividend from the foreign subsidiary was taxable. The Tribunal concluded that since the dividend income was not exempt, Section 14A provisions did not apply and directed the AO to delete the disallowance.

3. Addition towards Excise Duty on Closing Stock:
For A.Y 2010-11, the AO added ?68,42,242 towards excise duty on closing stock, contending double deduction. The DRP directed the AO to verify the Assessee's claim that there was no double deduction. The Tribunal noted that the AO did not follow DRP's directions and remitted the issue back to the AO for verification and deletion if the Assessee's contentions were correct.

4. Interest on Loan to AE:
For A.Y 2011-12, the Assessee provided a loan to its subsidiary in Afghanistan at 8% interest. The TPO proposed an adjustment by charging 12.25% interest, but the DRP restricted it to 8.25%. The Assessee argued that the loan was in foreign currency and should be based on the LIBOR rate. The Tribunal agreed, stating that since the Assessee charged 8%, which was higher than the LIBOR rate, no adjustment was required, and the addition of ?2,09,500 was deleted.

5. Addition on Reimbursement of Expenditure:
For A.Y 2011-12, the Assessee received reimbursement of ?6.35 crores on a cost-to-cost basis. The TPO added 10% as fees, later restricted by the DRP to 5%. The Assessee contended that the reimbursement was not part of the profit and loss account and cited various case laws. The Tribunal agreed that no ALP adjustments were warranted for reimbursement expenditures and allowed the grounds.

6. Disallowance of Expenditure under Section 37(1) of the Income Tax Act:
For A.Y 2011-12, the AO disallowed 10% of certain expenses and 5% of site maintenance expenses due to unverifiable self-made vouchers, totaling ?40,32,293. The DRP upheld the AO's decision, noting the Assessee's failure to substantiate claims. The Tribunal, while agreeing with the AO's disallowance due to unverifiable vouchers, directed a uniform disallowance of 5% on all expenses, modifying the AO's approach.

Conclusion:
The appeals filed by the Assessee were partly allowed for both assessment years, with specific directions provided to the AO for recalculating adjustments and disallowances based on the Tribunal's findings.

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