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TMI Blog2023 (10) TMI 1180X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. 4. The AO/TPO/ DRP failed to appreciate that giving of financial guarantees by the Appellant on behalf of its subsidiaries was a shareholder activity for which no charge is required. 5. The AO/TPO/DRP erred in determining the Arm's Length Price of the financial guarantees given by the Appellant on behalf of its AES @ 1.25% per annum. 6. The AO/TPO/DRP erred in making a transfer pricing adjustment of Rs. 2,81,85,557/- on account of guarantee commission. 7. The AO/TPO/ DRP erred in rejecting the internal CUP method and arm's length price of 0.30% pa. adopted by the Appellant for benchmarking guarantee commission 8. The AO/TPO/DRP failed to appreciate that the internal CUP method has been consistently followed by the Appellant and accepted by the income- tax Appellate Tribunal in the preceding Assessment Years. 9. Without prejudice to Ground Nos. 1 to 8, the AO/TPO/ DRP erred in computing the arm's length price of the financial guarantees given by the Appellant on behalf of its AEs in an arbitrary manner 10. The AO/DRP erred in holding that suo moto disallowance of expenditure u/s 14A of Rs. 10,42,637 for earning exempt dividend income of Rs. 1,92, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 147,44,27,500/- was filed 29.11.2018. The assessee is a company and it operates fleet of offshore support vessels which provides marine logistics and drilling services etc. The AO has passed assessment order u/s 143(3) r.w.s 144C of the Act on 24.09.2021 and proposed addition of Rs. 2,81,85,557/- on account of guarantee commission in relation to the international transactions entered into by the assessee company with its associated enterprise during the F.Y. 2017-18 relevant to assessment year under consideration. The Assessing officer has also proposed disallowance u/s 14A r.w. Rule 8D to the amount of Rs. 38,51,576/-. 3. The assessee has filed objections before the Dispute Resolution Panel against the addition disallowances proposed by the assessing officer in the draft assessment order. The Dispute Resolution Panel issued directions u/s 144C(5) of the Act on 12.06.2022. The ld. DRP has rejected both the objections filed by the assessee against the aforesaid two addition disallowance proposed by the assessing officer in the draft assessment order. Thereafter the assessing officer has passed final assessment order u/s 143(3) r.w.s 144C(3) of the Act on 31.07.2022 and assessed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled. 7. On the other hand, the ld. D.R supported the order of lower authorities. 8. Heard both the sides and perused the material on record. With the assistance of the ld. Representative we have perused the decision of ITAT, Mumbai in the case of the assessee itself for assessment year 2017-18 vide ITA No. 650/Mum/2022 dated 07.12.2022 wherein after referring the decision of ITAT for assessment year 2012-13 (ITA No. 1827/Mum/2017) and 2014-15 (ITA No. 6083/Mum/2018 deleted the transfer pricing addition after accepting the ALP for corporate guarantee determined by the assessee. The relevant part of the decision of Tribunal is reproduced as under: "13. We note that, in appeal filed by the Appellant against the order of DRP for Assessment Year 2012-13 (ITA No. 1287/Mum/2017) & 2014-15 (ITA No. 6083/Mum/2018), the Tribunal accepted the ALP for corporate guarantee determined by the Appellant and deleted the transfer pricing addition. The relevant extract of the decision of the Tribunal for read as under: "9. We have heard.....................................................In fact, involving identical facts the Tribunal in the assessee's own case for A.Y 2008- 09, ITA No. 7673/M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistent with the ratio laid down by the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra). Notably, in the case of Everest Kanto Cylinder Ltd. (supra), the dispute was relating to the adjustment made by the TPO in the matter of Guarantee commission earned for providing a Corporate Guarantee to the Bank in connection with the borrowings made by the AE of the assessee therein. The TPO determined the arm's length price of such transaction based on the instance of commercial banks providing Guarantee on behalf of their clients. The Hon'ble High Court held that the considerations which apply for issuance of Corporate Guarantee were distinct and separate from that of Guarantee provided by the banks and, therefore, the two transactions were incomparable. In our considered opinion, similar parity of reasoning is applicable in the present case too because the considerations which weigh for raising of bonds, that too in Indian market, are quite distinct and incomparable with the instance of providing of Corporate Guarantee to a bank abroad in connection with raising of loan from such bank by the AE of assessee outside India. Therefore, in our considered opinion, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as they are easily encashable in the event of default as in comparison to corporate guarantee provided by an assessee company to a bank for facilitating raising of loan by its AE. Accordingly, we are of the considered view that insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% is concerned, the same in the backdrop of the aforesaid facts cannot be called in question. Apart from that, we find that it was also the claim of the assessee before the lower authorities that Kotak Mahindra Bank (as per its sanction letter) had expressed its willingness to give guarantee on behalf of the AEs at a commission rate of 0.40% p.a/0.50% p.a. In the backdrop of the aforesaid fact, we find substantial force in the claim of the ld. A.R that the aforesaid credit sanction letter too would constitute a CUP for benchmarking the transaction of providing of corporate guarantee by the assessee to the banks for facilitating raising of loans by its AEs. Be that as it may, the adequacy of the ALP of corporate guarantee fee at 0.43% can also safely be gathered by drawing support from the following judicial pronouncements as had been relied upon by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the assessee submitted that it has correctly computed the suo moto disallowance to the amount of Rs. 10,42,637/- u/s 14A of the Act. The assessee has also given working of suo moto disallowance made u/s 14A but the AO has not agreed with the submission of the assessee and computed the disallowance as per Rule 8D to the amount of Rs. 33,51,576/-. However, DRP has rejected the objection filed by the assessee after referring the order of the DRP for assessment year 2017-18. 11. During the course of appellate proceedings before us the ld. Counsel submitted that during the course of assessment, assessee has given the relevant working of expenditure disallowed u/s 14A of the Act, however, the AO without disproving the working of the assessee company has computed disallowance arbitrarily without any basis. The ld. Counsel also submitted that similar issue on identical facts has been adjudicated by the ITAT in the case of the assessee itself in the preceding assessment year. On the other hand, the ld. D.R supported the order of lower authorities. 12. Heard the rival contention and perused the material no record. In the return of income the assessee has suo moto disallowed expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenses allocated to treasury function on the above basis aggregate to INR.40,17,661/- whereas the Treasury Income comprises of exempt dividend income (INR 90,47,692/-), taxable interest income (INR 4,64,16,265/-) and loss on sale of mutual funds (INR 1,546/-). On the basis of the aforesaid, the percentage of exempt income to total income from investments was computed at 16.31%. Therefore, 16.31% of total expenses allocated to treasury function which came to INR 6,55,409/- [40,17,661/- x 16.31%]. Thus, the Appellant had arrived at the amount of disallowance of INR 6,55,409/- which was disallowed suo-moto by the Appellant. All relevant information and details were provided to the Assessing Officer. 20. However, the Assessing Officer had rejected the computation/statements furnished by the Appellant. The satisfaction recorded by the Assessing Officer in paragraph 5.3.3 of the Final Assessment Order read as under: "5.3.3 Recording of satisfaction The AO is satisfied that the assessee has incurred more expenditure on account of maintaining/acquiring/selling investments then already disallowed by assessee, due to the following reasons: * It is seen that there is substant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinabove shows that the Assessing Officer not dealt with the computation furnished by the Appellant. The Assessing Officer has expressed his view that the expenditure incurred by the Appellant for the purpose of earning exempt income were much greater than suo-moto disallowance of INR 6,55,409/- made by the Appellant. The reason to arrive at the aforesaid conclusion were stated to be substantial amount of new investment in Mutual Fund and incurring of various expenditure (such managerial remuneration, salary bonus & allowances, employee benefit expenses, interest expenses, travelling and communication expenses) which should also have been apportioned towards earning of the exempt income. The reasoning given by the Assessing Officer is based upon presumption as the Assessing Officer has failed to point out any infirmity in the computation furnished by the Appellant. The Assessing Officer has incorrectly stated that the Appellant had disallowed certain percentage of employees cost and other expenses without giving details. We note that all the details were furnished by the Appellant vide letter dated 13.02.2021 and 10.04.2021. The letter dated 13.02.2021 was accompanied by computat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion furnished by the assessee. The AO in the draft assessment order has discussed general principles for making disallowance under section 14A read with Rule 8D and has also referred to a case laws. However, there is no observation/comments whatsoever by the AO on the computation made by the AO. Thus, the satisfaction recorded by the AO in rejecting assessee's computation is not in accordance with the mandate envisaged under section 14A(2) of the Act." (Emphasis Supplied) 23. In the present case the dissatisfaction has been recorded, however, the same is not in accordance with mandate of Section 14A(2) of the Act as the Assessing Officer has acted in a mechanical manner based upon conjecture/surmise and has recorded dissatisfaction without having regard to the accounts of the Appellant and/or the computation of suo moto disallowance made by the Appellant under Section 14A of the Act. The general hypothesis made by the Assessing Officer fails to meet the mandate of Section 14A(2) of the Act in view of the methodical computation of disallowance furnished by the Appellant taking into the account the actual expenditure incurred by the Appellant. Accordingly, we delete the addition o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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