TMI Blog2012 (11) TMI 1099X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A of the I.T. Act. 2. The learned Commissioner of Income Tax (Appeal) has erred in law and on the facts of the case in sustaining the order of the Assessing Officer disallowing ₹ 28,50,353/- u/s. 92CA of the I.T. Act. 2. The assessee company is engaged in the business of manufacturing of high pressure seamless gas cylinder services and compressed natural gas cylinders. In the year under consideration, the assessee had filed its return of income declaring total income of ₹ 71,90,77,156/- under the normal provisions of the Income Tax Act and ₹ 70,18,79,265/- under Section 115JB of the Act. 3. The brief facts apropos ground No.1 are that the assessee had shown a dividend income of ₹ 31,98,330/- and has claimed the same as exempt from tax u/s. 10(33). In response to the show-cause notice during the course of the assessment proceedings as to why disallowance under Section 14A should not be made, the assessee submitted that most of the investments in the equity shares and mutual funds were made out surplus funds received during the financial year 2005-06 from the Initial Public Offer (in short 'IPO'), which has been accepted by the appellate orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s submission in respect of its investments from proceeds of IPO and decision of CIT(A) for AY. 2006-07 is concerned, it is mentioned that the method proposed by this office clearly provide of consideration of interest expenses which were only directly related to investments and further to exclude such interest expenses from the purview of the computation such interest which would be directly attributable to any particular income or receipt. If the appellant has invested the proceeds of IPO into the investment earning exempt income and there is no interest cost of such funds then in the given situation disallowance of interest would only relate to such other investments which are other than from the funds of IPO and from such interest costs which are not directly relatable to any income or receipt. viii. The appellant has also relied upon on certain case laws and ruling of Hon'ble ITAT. The decision in the case of Balrampur Chini is in respect of the position that section 14A and Rule 8D can be only invoked when the O is not satisfied with regard to the accounts of the assessee that the claim of expenditure made by the assessee is not correct and the claim made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the judgment of the Hon'ble jurisdictional High Court in the case of Godrej Boyce Mfg. Co. (supra). He further submitted that the investments of the assessee company are to be segregated into three parts viz. (i) investment made prior to assessment year 2006-07; (ii) investment made during the assessment year 2006-07 and (iii) investment made during the year 2007-08. He drew our attention to yearwise fund flow statement appearing at page 46 of the paper book and pointed out the details of interest free fund available with the assessee right from the assessment year 2004-05 to the assessment year 2008-09 which were far more than the aggregate investments made by the assessee. He also provided us the chart giving bifurcation of the investments made in various years. From this, he submitted that the investments as on 31st March, 2005, were to the tune of ₹ 2.12 crore, whereas the assessee's interest free funds were to the tune of ₹ 41.67 crore which included the accumulated profits of ₹ 29.69 crore. Regarding investments made in the AY 2006-07, he submitted that the assessee had made investments of ₹ 11.09 crore and during the same year, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 41.03 crore have been invested in the equity shares of foreign subsidiaries in UAE. Under the Income Tax Act, the dividend income from the shares held in foreign companies are taxable and, therefore, the provisions of 14A will not get attracted. Therefore, no disallowance can be made under Section 14A on this amount. Out of the balance amount, sum of ₹ 11.09 crore which has been invested in the assessment year 2006-07, it has been held to be made out of the funds raised by way of IPO for sums aggregating to ₹ 90 crore to the interest free funds by the CIT(A). The said order of the CIT(A) has now been affirmed by the Tribunal vide order dated 21-10-2011, wherein it has been held that when the assessee was having sufficient non-interest bearing funds for making investments during the year, then there is no reason to deviate from the findings of the CIT(A). Thus, this amount also cannot be taken into consideration for making any kind of disallowance under Section 14A. Now, the remaining balance amount of investment [i.e 54.30 - (41.03+11.09) = 2.18], which was invested prior to assessment year 2006-07, it is seen from the records that the assessee has huge surplus fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale of Inventories of Dubai Branch 14,56,79,123 Cost Plus Total 66,58,75,507 Out of the above international transactions except for 'guarantee commission', all the transactions were held to be at arms length. It was only with respect to 'guarantee commission' charged from its subsidiary company that the TPO held that same was not at ALP and adjustment is required to be made. 10. The brief facts which led to the ALP adjustment made by the TPO are that the assessee formed a wholly owned subsidiary company in Dubai, namely, EKC International FZE. Earlier, this subsidiary company was a branch of the assessee company and during the year it had sold all the fixed assets of its branch in Dubai to its wholly owned subsidiary EKC Dubai. The subsidiary company is also engaged in the similar business of manufacture of cylinders. It needed funds for working capital requirements and capital expenditure, for which the said company approached the ICICI Bank, Bahrain branch, which agreed to provide term loans for the working capital and capital expenditure to said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. The rate of interest charged from the AE would have been far higher had the assessee not given its guarantee. B. In fact, without the guarantee being provided by the assessee, the loan giver (i.e. the third party lender) would not even have given the loan at all. C. The clerkage charges/ fee (or whatever be the nomenclature) by a loan giver should not be confused with the risk element borne by the assessee in giving such a guarantee for the AE. The clerkage charges etc. is merely for the paperwork and the administrative work etc. only. D. That such a guarantee (or corporate guarantee) did not cost anything to the assessee is of no consequence. The fact remains that the taxpayer had undertaken the risk on behalf of its AEs which in any third party situation he would not have undertaken or would have charged a consideration for the same. E. An argument that no cost has been incurred by the assessee and, therefore, there was nothing to recover, is of no consequence as the assessee (also) referred to as the taxpayer) has borne risks. There is an inherent cost in giving such a guarantee (or corporate guarantee or letter of comfort or any similar assurance). F. The AE w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of 3% of the amount of the guarantee. 13. The assessee in response had filed its detailed submissions and the objections to the proposed show-cause notice on each and every account which has been elaborately discussed at page 6 to 8 of the TPO's order. The TPO rejected the assessee's said contentions and gathered information from the various banks to ascertain how much banks are charging for furnishing of the bank guarantees, so that CUP method could used to benchmark this transaction. From the information gathered, he found that guarantee rates ranges from 0.15% to 3%, however, held that 3% of the amount of guarantee would be appropriate and for this he has taken various instances of the banks giving such kind of guarantee. He, accordingly, worked out the ALP at 3% of commission at ₹ 34,99,003/- and made upward adjustment of ₹ 28,50,353/-. 14. Before the CIT(A), the assessee made detail submissions, which have been summarized in para 6.3 of the CIT(A), reading as under :- 6.3 In respect of this ground of appeal the submission of the appellant are summarized as under: i. During the year, the assessee had a subsidiary': company in Dubai namely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have funded USD 10 million (debt to equity ratio of 2.13:1) well below the accepted norms of long term lending of 4:1. Further by end of March 2007, AE had Net worth of USD 12.4 million vis- -vis bank funding of USD 10 million, giving debt to equity ratio of 0.80:1. Based on the equity commitment by management, any company could have availed the said loan without third party interferences from Bank at the prevailing market prices (d) That AE has obtained loan from its bankers based on first charge towards the fixed asset and further hypothecation of inventories and book debts and that AE had gross fixed asset base of USD 13 million and not fixed asset base of USD 12.6 million. Further as at 31.03.2007 AE had inventories valued at cost worth USD 7.6 million. Book Debts of 5.4 million and cash and bank balance of USD 1.8 million. In a nutshell against the loan outstanding as at 3 1.03.2007 of USD 10 million, Assets available in case of any default was to the tune of USD 27.4 million. From above it can be deduced that the said loan for which corporate guarantee was issued was secured by 2.7 times of 'the loan value, thus categorizing the said loan at the least risk loan: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for loan to its subsidiary. He further pointed out that the assessee had independent sanction of credit arrangement with the ICICI Bank India, wherein the guarantee fee of 0.6% per annum was paid, whereas the assessee has charged a guarantee commission of 0.5% from its subsidiary company. The difference of 0.1% was towards strategic business interest of the assessee company. Relying upon the decision of the Hyderabad Bench of the ITAT in the case of Four Soft Ltd. v. Dy. CIT [2011] 62 DTR 308 (Hyd)(TRIB), he submitted that transaction of giving corporate guarantee to a bank is not an international transaction. He further reiterated that there is no detriment to the assessee while giving guarantee as it has incurred no cost as entire hypothecation of assets was done by the subsidiary only. Even though the assessee was not required to recover the guarantee commission from its subsidiary being wholly a business strategic decision, still it had charged 0.5%. 16.1 His other limb of argument was that there is no method prescribed under the statute to benchmark such a transaction of guarantee commission and in such a case, the entire charging provisions under Section 92B gets failed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidiary and the issue before the TPO was that whether such charging of guarantee commission is at ALP or not. In these circumstances, the TPO has taken external comparables and based on detail reasoning for taking these comparables, he has rightly benchmarked at the rate of 3%, which is generally accepted rate in the cases of guarantee commission. 18. In the rejoinder, learned Senior Counsel submitted that even if the guarantee commission has been brought within the purview of international transaction, however, the method prescribed under the relevant rules cannot be made applicable in the case of guarantee commission. The only provisions which can be said to be applicable, if at all, has been brought in rule 10AB with effect from May, 2012, which cannot be held to be applicable for this year. Regarding applicability of CUP method, he submitted that in case of the assessee, internal CUP was available i.e. ICICI Bank India was charging the rate of 0.6% of guarantee commission from the assessee, then there was no need for looking at the external CUPs. IN CUP method, one has to see like to like and there is no reason as to why 3% is being applied in the case of the assessee and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been charging rate of around 3% like HSBC Ltd Mumbai was charging rate of 0.15% to 3%, Allahabad Bank is charging 0.75% per quarter i.e. 3% p.a.; Exim Bank USA which has provided a guarantee to Boeing Co. of USA against Hire Purchase Agreement for purchase of Aircrafts by Jet Airways India, has charged a commission of 3% plus commitment charges. Accordingly, he has benchmarked the ALP for bank guarantee at the rate of 3% for the amount of guarantee. 20. While applying these external comparables of the Banks, the TPO has not brought anything on the record that under which terms and conditions and circumstances, the banks have been charging guarantee commission at the rate of 3%. The charging of a guarantee commission depends upon transaction to transaction and mutual understanding between the parties. There may be a case where the bank may not charge any guarantee commission, depending upon its evaluation of relationship with a particular client. Even otherwise also the TPO himself has noted that guarantee commission ranges between 0.15% to 3% in case of HSBC. The universal application of rate of 3% for guarantee commission cannot be upheld in every case as it is largely depende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has to be seen in this case is whether the same is at ALP or not. We have already come to a conclusion in the foregoing paras that the rate of 3% by taking external comparable by the TPO, cannot be sustained in facts of the present case. We also find that in an independent transaction, the assessee has paid 0.6% guarantee commission to ICICI Bank in India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal CUP and comparing the same with the transaction with the AE. The charging of 0.5% guarantee commission from the AE is quite near to 0.6%, where the assessee has paid independently to the ICICI Bank and charging of guarantee commission at the rate of 0.5% from its AE can be said to be at arms length. The difference of 0.1% can be ignored as the rate of interest on which ICICI Bank, Bahrain Branch has given loan to AE (i.e. subsidiary company) is at 5.5%, whereas the assessee is paying interest rate of more than 10% on its loan taken with ICICI Bank in India. Thus, such a minor difference can be on account of differential rate of interest. Thus, on these facts, we do not find any reason to uphold any kind of upward adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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