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2015 (5) TMI 395 - BOMBAY HIGH COURT

2015 (5) TMI 395 - BOMBAY HIGH COURT - [2015] 378 ITR 57 (Bom) - Disallowance under section 14A - disallowance of ₹ 1 lakh confirmed by ITAT as against ₹ 20,27,896/- Held that:- Order of the Tribunal as regards disallowance under section 14A and restricting the same to ₹ 1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of ₹ 4,47,649/- was not conceded in the return but was adhoc acceptance during the cours .....

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ces restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing C .....

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mparisons 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. No substantial question of law - decided against revenue - Income Tax Appeal No. 1165 of 2013 - Dated:- 8-5-2015 - S. C. Dharmadhikari And A. K. Menon,JJ. For the Appellant : Mr. A. R. Malhotra For the Respondent : Mr. Percy Pardiwalla, Sr. Counsel along with Mr. Atul Jasani JUDGMENT (Per A. K. Menon, J.) 1. The revenue has fi .....

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e disallowance u/s 14A of the I.T. Act 1961 to ₹ 1,00,000/-. When the Assessee Company itself had made disallowance of ₹ 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 of ₹ 28,50,353/- on account of TP adjustment on guarantee commission ? 2. The facts in brief are as follows : The Assessee was engaged in making High Pressure Gas Cylinder services and compressed natural .....

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questionaire. Subsequently the case was transferred to the DCIT with effect from 1.9.2010. The assessee was heard. After verifying the accounts of the assessee company a draft assessment order was prepared and served on 30.12.2010. The assessee was made aware that the objections to the draft assessment order were to be filed within 30 days from the date of service, before Dispute Resolution Panel (DRP) failing which the draft assessment order would be finalised. 3. The assessee did not file obje .....

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laim by the assessee on account of foreign exchange variations loss was ₹ 22,71,802/-. The assessing officer disallowed this amount of foreign exchange loss. With specific reference to investments the assessee contended it made investments out of surplus funds available during financial year 2005-06 from an initial public offering. As far as transfer pricing adjustment was concerned when the Transfer Pricing Officer (TPO) passed an order under section 26A dated 28.10.2000 wherein he conclu .....

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d 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 Assesee 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 provision of guarantee was .....

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n 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. Relying upon the principles of computing guarantee fees in a case of General Electronic Capital Canada Inc. Vs. Her Majesty, The Queen, the difference between the bank rate and PLR rate it showed a return for bearing risk followed by other banks during relevant year was 6%, while the average PLR rate was 11.35%. This shows that the ret .....

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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. In this manner he arrived at an amount of ₹ 34,99,003/- as guarantee commission and made adjustment of ₹ 28,50,353/- since the amount of ₹ 6,48,650/- (equivalent to 0.5%) had already been provided for. 5. In appeal before the CIT (Appeals) the Commissioner found that in view of the decision of this Cour .....

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tail 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 was 4.5%. He therefore found that return of 3% arrived at by TOP is justified and the challenge on this ground of the appellant was also rejected. 6. Against the dismissal of the appeal, the assessee approached the Income Tax Appellate Tribunal questioning rejection of the grounds (i) the disallowance o .....

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lant supported the order of the Assessing Officer on both counts. He submitted that referring to paragraph 4 of the order that the assessee itself had stated that disallowance of ₹ 4,47,649/- could be made under section 14A. He further took us through the various computations of bank guarantee commission including the order of TPO in paragraph 5.2 which set out the manner in which transaction was entered into. According to him but for the corporate guarantee, the Associated Enterprise woul .....

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Company of USA against the Hire Purchase Agreement for purchase of aircrafts by Jet Airways India. The EXIM bank has charged a commission of 3% plus commitment charges from Jet Airways as consideration for guarantee. Accordingly, he justified the bench mark in a arm's length price for the bank guarantee at 3% of the amount of guarantee. In this manner Mr.Malhotra sought to justify arm's length price of ₹ 34,99,003/- and therefore the adjustment to the extent of ₹ 28,50,353/-. .....

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e assessee pointed out that the first issue of disallowing interest under section 14A of the I.T. Act, the order of the tribunal was prefectly justified and the disallowance of ₹ 1 lakh is also justified in view of the fact that the adjustment to the extent of ₹ 4,47,649/- that was offered before the Assessing Officer was not based on the original return at all. He pointed out that the original return did not contain any such concession and adhoc figure was something that the assesse .....

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been made out of funds raised by IPO and order of the Commissioner of Income Tax (Appeal) has been confirmed by the tribunal. He submitted that investment was made from the surplus funds and nothing was brought on record to show otherwise. The tribunal observed that after having considered fund flow statement there was no scope of supporting the views of the Commissioner of Income Tax and the Assessing Officer that the assesee has made investment out of interest bearing funds. Therefore, consid .....

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borrowed at the rate LIBOR + 0.83% for term loan for working capital purpose. Thus, if it could have borrowed at the said rate, the prevailing LIBOR rates were ranging from 5.3% and effective rate of borrowing was @ 6.13% for term loan and 5.8% for working capital loan, which was in line with normal rates prevailing in AE country. Mr.Pardiwalla further submitted that AE had obtained loan from its bankers on first charge towards the fixed asset and further hypothecation of inventory and book debt .....

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missions of Mr.Malhotra for the revenue and Mr.Pardiwalla for the assessee, we are of the view that the order of the Tribunal as regards disallowance under section 14A and restricting the same to ₹ 1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of ₹ 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 fac .....

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