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2016 (10) TMI 412 - ITAT MUMBAI

2016 (10) TMI 412 - ITAT MUMBAI - TMI - Addition on account of guarantee commission pursuant to the direction of the Dispute Resolution Panel (DRP) - Held that:- We find that there is no material difference between the facts of the earlier year and the facts for the year under consideration. Therefore, respectfully following the principle laid down by the Hon'ble High Court in assesseeís own case, we hold that DRP was not justified in confirming the addition made by the AO. Reversing the order o .....

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of the assessee by clubbing all the loan transactions of each AE and then compare the interest charged by the assessee with armís length rate at LIBOR +2%. It appears that as regards the transactions of loan to its AE at China, the said transaction is at armís length as the as has charged the interest at 7%, therefore, only with respect to the transaction of loan to AE at Dubai are required to be re-computed for the purpose of TP adjustment - ITA No. 1131/Mum/2015, ITA No. 1042/Mum/2015 - Dated .....

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Crores. The AO completed the assessment u/s. 143(3) r. w. s. 144C(13) on 29. 10. 2015, determining its income at ₹ 33. 41 Crores. Vide its application, dt. 26/9/2016, the assessee made submissions to allow it to produce additional evidences as per Rule 29 of the ITAT Rules, 1963(Rules). It was stated that sanction letter, dt. 3. 3. 2010, regarding loan taken by EKC, Dubai and sanction letter regarding loan taken by EKC-China could not be produced before the AO, that same were vital to dec .....

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31/M/15(By Assessee ): 2. First ground of appeal is about disallowance of ₹ 1. 06lakhs u/s. 14A of the Act. During the course of hearing before us, the Authorised Representative (AR) of the assessee stated that considering the smallness of the tax effect the assessee was not interested in pursuing Ground No. 1. Hence, same stands dismissed as not pressed. 3. Second Ground is about addition of ₹ 7. 43 crores on account of guarantee commission pursuant to the direction of the Dispute R .....

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corporate guarantee to the banker, against the said guarantee it had charged guarantee commission@ 0. 5% p. a. , that the AE had availed the loan of USD 13 million only against the limit. The TPO further found that EKC Industries (Tianjin)Co. Ltd. , China, an AE of the assessee, availed loan of USD 4 million from Citi bank, that the assessee was required to get stand by letter of credit (SBLC/corporate guarantee) from the India Banker, that Citi Bank issued SBLC to Chinese Bank, that based on su .....

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ed CUP. It was contended that Yes Bank, an independent banker, had provided similar financing arrangement to EKC, India and had charged 0. 5% for the said financial arrangement, that internal comparable had been used to determine arms length rate for commission charged by EKC India to EKC Dubai. After considering the submission of the assessee, the TPO suggested an adjustment of ₹ 10, 79, 62, 267/- on account of corporate guarantee commission as under :- Name of the AE Corporate Guarantee .....

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DRP held that the Tribunal in assessee s own case for the AY 2007-08 had upheld the additions made on account of guarantee commission, that the ALP rate of guarantee commission in the case of USA and Chinese AE. s had been restricted to 3%, that the assessee had taken huge risks in respect of corporate guarantee regarding Dubai, US and Chinese AE. s. The DRP restricted the rate of guarantee commission to 3% with regard to US and Chinese AE. s. 4. During the course of hearing before us, the AR s .....

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tances 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. Upholding the order of the Tribunal, wherein the ITAT had deleted the addition on account of guarantee commission of ₹ 28. 50 lakhs, the Hon'ble High Court has held as under :- ………. . In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to th .....

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o the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are betwee .....

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le laid down by the Hon'ble High Court in assessee s own case, we hold that DRP was not justified in confirming the addition made by the AO. Reversing the order of the AO, completed in pursuance of the direction of the DRP, we decide the second ground in favour of the assessee. 6. Next ground is about addition of ₹ 6. 88 crores on account of interest charged to AE. During the TP proceedings, the TPO found that the assessee had advanced loans of ₹ 71. 93 crores(EKC Intl. , UAE-Rs. .....

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of USD 4. 30 million was advanced out of zero coupon foreign currency, convertible bonds and USD 3. 75 million was advanced from the reserves of the company . Referring to the order of the AY. 2008-09 the TPO proposed to apply the interest @ 14. 39% on the loans advanced to the AE. s. The assessee objected to the proposal of the TPO stating that it had raised zero coupon bonds during the year amounting to USD 35 million at an interest rate of 7. 25%, that these funds were placed in foreign curr .....

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, that it had borrowed by way of term loan at interest rate of 7% during AY 2006-07, that EKC International , UAE had received loan from ICICI, Bank, Bahrain at LIBOR at 0. 95%, that Tribunal had held that LIBOR +rate should be used for determining the ALP of foreign currency loans. After considering the submission of the assessee, the TPO held that the assessee had raised funds@7. 25%, that it had advanced loans to UAE-AE and China-AE @ 3. 49% and 5% respectively, that the assessee had used CUP .....

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of corporate guarantee. Therefore, total adjustment in this case is worked out to ₹ 17, 67, 96, 715/-. This order is in response to specific reference under Section 92CA(1) of the Act received and will apply to the case of the Assessee for A. Y. 2010-11 only and not for any subsequent years. Similar calculation was made for the Chinese AE. Finally, he made the following adjustment on account of loans given to AE. s. Name of the AE Interest Charged ALP of the Interest Adjustment EKC Interna .....

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Tribunal. It was also argued that in the subsequent years, DRP/ITAT had adopted LIBOR + 1% for Dubai subsidy and 7% for China subsidy. 7. 1. After considering the available material the DRP referred to the earlier years discussion with regard to charging of interest. The DRP held that assessee had granted loan to its AE. s without any security, that it had undertaken various risks, that in a third party situation the transaction under consideration had to be benchmarked at the interest rate tha .....

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e applied. Finally, the DRP dismissed the objections raised by the assessee. 8. Before us, the AR argued that the Tribunal had held that LIBOR + 2% would be a reasonable rate in such cases. He referred to the cases of Tata Autocom Systems Ltd. (56taxmann. com 206) and Cotton Naturals (I) )P. ) Ltd. (55taxmann. com 523). He also referred to order of the Tribunal for the AY 2009-10 in assessee s own case ITA/550/Mum/2014 dt. 27. 2. 15. The DR stated that interest should be charged as per the preva .....

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and gone through the orders of lower authorities. As per our considered opinion, appropriate international rates should be used for the purpose of the comparability analysis. For this purpose, the London Inter Bank Offer Rate (LIBOR) is an internationally recognized rate for benchmarking loans denominated in foreign currency. For this purpose, reliance may be placed on the following decision of the coordinate bench :- i) Great Eastern Shipping Co. Ltd (ITA No 397/M/2012) dated 10 January 2014; .....

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/0el/201Z) dated 11 March 2014 ix) Infotech Enterprises Limited (ITA No 115/Hyd/2011) dated 16 January 2014; x) Kohinoor Foods Ltd (ITA Nos 3688-3691/0el/2012 and ITA Nos 3868-3869/0el/2012) dated 21 July 2014; and xi) Four Soft Ltd vs. OCIT, IT Appeal No. 1495 of 2011 (Hyderabad Tribunal) 12. In light of the above decisions, the rate to be used for undertaking an adjustment should be LIBOR and not the average yield rates considered by the learned TPO. The LIBOR rate for March 2008 was 2. 6798%. .....

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