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2012 (11) TMI 1099

(ALP) under Section 92CA by the TPO - NO upward adjustment in ALP in relation to charging of guarantee commission. - ITA NO. 542 (MUM.) OF 2012 - Dated:- 23-11-2012 - B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND AMIT SHUKLA, JUDICIAL MEMBER For the Appellant: Rajan Vora for the Appellant. For the Respondent: Ajeet Kumar Jain and Ms. Sasmita Mishra ORDER 1. This appeal has been preferred by the assessee against the impugned order dated 12-12-2011, passed by CIT(A)-15, Mumbai in relation to the quantum of assessment passed under Section 143(3) r.w.s. 144C of the Act, for the assessment year 2007-08. In this appeal, the assessee has raised following two grounds :- "1. 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 ₹ 20,27,896/- u/s. 14A 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 co .....

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do not form part of the total income on a reasonable basis. Learned CIT(A) accordingly issued a show-cause notice to the assessee to furnish the details to work out the amount of disallowance. The assessee reiterated the same submissions and heavily relied upon the fact that in the earlier assessment year, it has been categorically held by the CIT(A) that investment made out of funds collected by way of IPO, cannot be held for disallowance under Section 14A and such a decision of CIT(A) has now been affirmed by the ITAT, wherein the departmental appeal has been dismissed. The learned CIT(A), however, held that the assessee despite specific show-cause notice has not submitted its reply for quantum of disallowance, he, therefore, confirmed the entire addition after observing and holding as under :- "vii. As far as the appellant'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 computat .....

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igh Court in the case of CIT v. Tin Box Co. 260 ITR 637 is concerned, it is mentioned that the same is not in respect of section 14A of the Act. ix. In the set of facts of the case that the appellant has not submitted information and details which was considered necessary to arrive at the figure of disallowance u/s. 14A and has further not replied specifically to the show-cause notice issued to the appellant, the disallowance reached by the AO is considered justified and the disallowance made by him is therefore upheld." 5. Before us, learned Senior Counsel, Shri Rajan Vora, first and foremost submitted that even though the CIT(A) has held that Rule 8D is applicable from the AY 2008-09, however, has confirmed the disallowance made by the AO, which was worked out on the basis of working given in Rule 8D, which is completely in violation 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 .....

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ilation of case laws. 6. On the other hand, learned CIT DR strongly relied upon the reasonings and the conclusion drawn by the CIT(A) and submitted that even though the Rule 8D is not applicable in this year, however, some reasonable estimate of the disallowance has to be made. It cannot be held that no expenditure is attributable to earning of exempt income, specifically when the assessee has a huge interest liability and administrative cost. She submitted that on the facts of the case some reasonable disallowance is definitely called for. 7. We have carefully considered the rival submissions, perused the material placed on record and also the findings given by the AO as well as the CIT(A). From the records, it is borne out that the assessee has made aggregate investments of ₹ 54.30 crores upto 31st March, 2007, out of which sum of ₹ 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 amo .....

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nt year, the assessee had shown following international transactions in its TP Study Report :- Sl. No. Nature of Transaction Amount Method I Purchase of Raw Materials 13,76,83,652 Cost Plus II Sale of Finished Goods 2,35,14,425 CUP III Sale of Trading Item (Spares, Consumables etc) 7,95,24,820 CUP IV Guarantee Commission on Guarantee Given 6,48,650 Cost Plus V Sale of Fixed Assets of Dubai Branch 27,88,24,837 CUP VI 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 .....

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had not benchmarked the guarantee commission. It had taken the ALP of the said transaction at 'Nil' as it had contended that no cost has been incurred in providing the bank guarantee for its AE. The TPO issued a detailed show cause notice to the assessee on the following grounds :- "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 .....

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ecurity from its AE. It has just provided a blanket guarantee. Therefore, the Arm's Length Compensation should be much more than the rate charged by the banks for their commission." He, therefore, proposed to benchmark the ALP for the guarantee commission at the rate 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 su .....

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there have been no benefit of interest rate derived by AE in connection with corporate guarantee furnished by assessee to the bankers) of AE. (c) That AE had capital base in form of Equity of USD 4.70 million, against the said equity base the banks 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-à-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 cas .....

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he assessee only to provide for corporate comfort, has given the corporate guarantee to the said Bank. The subsidiary company had hypothecated its assets and no cost was incurred by the assessee for providing the guarantee to the bank 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. .....

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nchmarking the ALP on transaction of guarantee commission, which is legally and factually correct and the data which has been taken is based on public domain. The assessee itself has charged 0.5% guarantee commission from its subsidiary 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 g .....

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evaluation, he has compared the bank rate based on the PLR rate and worked out the rate of return for bearing the risk around 4.5%. Thus, on this premise, he went for external comparables and found that various banks have 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 al .....

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ind of guarantee to AE. However, in this case, the assessee has itself charged 0.5% guarantee commission from its AE, therefore, it is not a case of not charging of any kind of commission from its AE. The only point 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 th .....

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