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The Commissioner of Income Tax, Mumbai Versus M/s. Everest Kento Cylinders Ltd.

2015 (5) TMI 395 - BOMBAY HIGH COURT

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 course of assessment, the assessee could not be bound by it. The Tribu .....

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id 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 Corporate Guarantee to the effect that if the subsidiary AE does n .....

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s 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 filed the present appeal proposing the following three questions as .....

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. 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 gas cylinder. The assessee had subsidiary company at Dubai. The a .....

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ith 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 objections before DRP. Instead it filed a letter dated 7.1.2011 stati .....

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ss 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 concluded the amount of guarantee commission received by the assessee f .....

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ntee 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 found to be an international transaction as defined under section .....

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he 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 return for bearing the risk was around 5.35%. It was also found in a .....

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ice 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 Court in Godrej and Boyce Manufacturing Co. Ltd. the Assessing Office .....

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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 of ₹ 20,27,896/- under section 14A of the Act and (ii) the o .....

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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 would not have been granted the loan at all. In this view of the matt .....

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f 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/-. As far as the order of the Tribunal issuing disallowance under s .....

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st 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 assessee submitted during the course of assessment. The admission was th .....

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er 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, considering the fact that the interest bearing funds were not used and .....

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tal 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 debts. AE has a gross fixed asset base valued at about USD 13 million .....

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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 fact finding authority had gone into factual aspects in great detail .....

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