PRECISION CAMSHAFTS LTD.,SOLAPUR vs. ASSESSMENT UNIT, INCOME TAX DEPARTMENT (NFAC), SOLAPUR

3. Determination of ALP on the basis of Bombay High Court Judgment in the case of Everest Kanto- On the facts and in the circumstances of the case and in law, while determining ALP of corporate guarantee on the basis of the judgement of Everest Kanto, the Ld. AO/Ld TPO erred in the following- Disregarding the fact that the decision in the case of Everest Kanto Cylinders Ltd., cannot be standard for every Appellant as benchmarking for different Appellant's is a factual exercise dependent upon number of factors including credit rating, financial strength, country of AE risks, etc. the financial guarantee issued by the Appellant for the loans availed by the AE from banks should be charged at 0.50%, without realizing the fact that the transfer pricing study is highly facts based and it differs from case to case and that all the factors in Rule 108 have to be considered for every case and every year independently and that a rate decided in a different case for different set of facts and for different year cannot be adopted as such to the instant Appellant, which would be violative of the specific provisions in Rule 108. whether the Ld. TPO/AO is correct in arriving at the ad-hoc rate of 0.50%, without conducting any benchmarking analysis prescribed in Section 92C which is violation of law? Whether the rate of guarantee commission determined in the judgement can be adopted as a valid comparable using other method under Rule 10AB? 4. Charging of corporate guarantee commission would attract provision of section 92(3) of the act On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO has erred in not appreciating the fact that the charging of guarantee commission to subsidiary required to be reimburse by the Assessee along with the mark-up as subsidiary company was set up as a cost-plus entity to provide support services to the Assessee. Therefore, charging of corporate guarantee commission would lead to attraction of Proviso of Section 92 (3) of the Act. B. Corporate tax ground 5. On the facts and circumstances of the case and in law, the Ld.AO has erred and has failed to appreciate that the disallowance under section 14A cannot exceed the exempt income earned by the Assessee.

6. On the facts and circumstances of the case and in law, the Ld.AO has erred by enhancing the disallowance u/s 14A by Rs.46,40,245 ignoring the fact that the Assessee had already disallowed Rs. 450,000 in the return of income against the exempt income earned of Rs.570,807.

7. On the facts and circumstances of the case and in law, the Ld. AO has erred and has failed to appreciate that the Explanation to Section 14A inserted by an amendment made by the FinanceAct 2022 is applicable prospectively wef. April 1, 2022 ie. from AY 2022-23 and is not relevant for the year under consideration 8. On the facts and circumstances of the case and in law, the Ld. AO has erred in applying the provisions as contained in the Explanation to Section 14A inserted by the Finance Act 2022 and thereby considered investments from which the Assessee has not earned any exempt income during the year under consideration for the computing the disallowance under Section 14A rw rule 8D 9. On the facts and circumstances of the case and in law, the Ld. AO should not have considered investments from which no exempt income was earned by the Assessee during the year under consideration for computing the disallowance under section 14A The appellant company craves leave to add, alter, amend or delete any of the above grounds of appeal

.” Submission of ld.AR :

2. Ld.AR for the Assessee submitted that the Assessee had shown corporate guarantee in the Transfer Pricing Study Report and Guarantee Commission was shown at NIL following other method. PCL, Netherland is AE of the Assessee. Ld.AR submitted that the it was explained to the TPO that Precision Camshafts Limited, Netherland(PCL, Netherland) had acquired two companies. The PCL, Netherland had taken loan from Bank of Baroda, London for the acquisition of companies. Assessee had provided corporate guarantee. Ld.AR for the assessee took us through the “Deed of [A] Corporate Guarantee between Precision Camshafts Limited and Bank of Baroda, London Branch” and submitted that as per Clause- 5, Bank had imposed condition that the guarantor shall not receive any security or commission from the borrower for giving the guarantee. Ld.AR submitted that since the bank had imposed condition of not charging any commission, the Assessee had not charged any guarantee commission from its AE. Charging of Guarantee Commission would have violated the terms of the Deed of Corporate Guarantee and Bank would have cancelled the loan. Bank of Baroda, London is an independent Nationalized Bank and hence, we had to follow the conditions. Ld.AR invited our attention to the decision of ITAT Mumbai Bench in in the case of B.G.Shirke Construction Technology Private Limited Vs. DCIT, wherein on identical circumstances, ITAT had held that no addition on account of non-receipt of guarantee commission is called-for. Ld.AR submitted that hence, in the present case also TP adjustment may kindly be deleted.

2.1 For disallowance of 14A, ld.AR relied on the order of ITAT Pune Bench in in the case of Deepak Pandurang Gadre Vs. ACIT vide order dated 07.11.2023. Ld.AR submitted that the disallowance made by the AO u/s.14A may be deleted. Ld.AR submitted that there cannot be disallowance u/s 14A more than the exempt income earned. Assessee had already made disallowance u/s14A to the extent of exempt income earned.

Submission of ld.DR : 3. Ld.DR for the Revenue relied on the order of DRP,AO and TPO.

Findings & Analysis : 4. We have heard both the parties and perused the material placed before us.

4.1 As per the assessment order, Precision Camshafts Limited(PCL) is a listed company having its office at Solapur. PCL is engaged in manufacturing of Camshafts for Railways and Auto Industry. During the proceedings before the Transfer Pricing Officer, the Assessee submitted that Assessee had not charged any Guarantee Commission on the Corporate Guarantee given to the bank on behalf of AE- PCL Netherland. The Transfer Pricing Order at Paragraph-6 has reiterated the reasons given by the Assessee which are reproduced here as under :

Quote “Assessee has cited 4 reasons for not charging commission on corporate guarantee provided : 1. Restriction by banker for charging any guarantee commission 2. Operating structure of PCL NL 3. Corporate guarantee given in capacity of a shareholder 4. Possible erosion of tax base in India.” Unquote. 4.2 The Assessee also submitted before the TPO that agreement between PCL and Bank of Baroda, London Branch itself becomes a CUP and it has provided NIL Commission. The Transfer Pricing Officer after considering the submission of the assessee, held that Arm’s Length Price(ALP) of Corporate Guarantee Commission shall be 0.5%. Accordingly, proposed an addition of Rs.30.98 lakhs. Aggrieved by the order of the Transfer Pricing Officer, Assessee filed appeal before the Dispute Resolution Panel(DRP). The DRP upheld the order of TPO regarding Corporate Guarantee Commission. Nowhere, either the DRP or TPO has mentioned how they have arrived at 0.5% as Arm’s Length Price. The TPO has arbitrarily considered 0.5% as Arm’s Length Price.

4.3 We have studied the Deed of Corporate Guarantee between the Precision Camshaft Limited and Bank of Baroda, London Branch which is at page no.1 to 38 of the paper book. The Clause No.5.1 of the said agreement is reproduced here as under :

“5.1 The Guarantor hereby declares and agrees that it has not received and shall not receive any security or commission from the Borrower for giving this Guarantee.” 4.4 Thus, it can be observed that Bank of Baroda had imposed a specific condition that Guarantor shall not receive any commission from the borrower. In order to obtain the loan, Assessee had to comply conditions imposed by the Bank. The Bank of Baroda is an independent entity and cannot be regarded as related to the assessee. Therefore, Assessee was right in not charging any Guarantee Commission. In this context, we have noted that ITAT Mumbai in the case of B.G.Shirke Construction Technology P. Ltd., Vs. DCIT in vide order dated 16.10.2019 on identical issue held as under : “…………..Further since the non-charging of guarantee commission is pursuant to the conditions stipulated by the sanctioning Bank, we are of the view that no addition on account of non-receipt of guarantee commission is called for in the present case. We therefore direct the deletion of the addition made by the AO in the hands of assessee”

4.5 No contrary decision has been brought to our notice, therefore, respectfully following ITAT Mumbai’s Decision(supra), we hold that no guarantee commission needs to be charged. Accordingly, we direct the AO/TPO to delete the addition.

4.6 In the Transfer Pricing Order the TPO has relied on the decision of Hon’ble Bombay High Court in the case of CIT Vs. Everest Kanto Cylinders Ltd., in of 2013. We have studied the order of the Hon’ble Bombay High Court and it is distinguishable on facts. The relevant paragraphs of Hon’ble Bombay High Court’s order are reproduced here as under : Quote, “In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did 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 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 between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law.” Unquote.

4.7 Thus, it can be noted from the order of the Hon’ble Bombay High Court that the facts in the case of the assessee are distinguishable. In the case of the assessee, Bank of Baroda has specifically imposed the condition that no guarantee commission will be charged, however, in the case referred by TPO of Hon’ble Bombay High Court(supra), there was no such condition imposed by ICICI Bank, hence the said decision is distinguishable on facts and not applicable to the case of the assessee.

14A Disallowance : 6. The Assessing Officer has made a disallowance of Rs.46,40,245/- u/s.14A read with Rule 8D of the Act. The Assessee specifically submitted during the assessment proceedings that disallowance u/s.14A cannot exceed the exempt income. The Assessee relied on the decision of Hon’ble Supreme Court in the case of PCIT Vs. Bank of Patiala. Assessee also relied on the decision of Hon’ble Jurisdictional High Court in various cases. As per the assessment order, Assessee has earned exempt income of [A] Rs.5,70,807/-. Assessee had suo-moto disallowed Rs.4,50,000/- u/s.14A of the Act, as per the calculation which is reproduced in para 4.3.1 of the order. The Assessing Officer in the assessment order noted that Assessee has made investment in Dividend Yielding Mutual Funds and shares of companies. The Assessing Officer relied on the amendment made by Finance Act, 2022 and calculated the disallowance u/s.14Aof the Act.

Similar view has been taken by the Hon'ble Delhi High Court in CIT vs. Holcim India P. Ltd. (2014) 90CCH 081-Del-HC.

8. It is seen that an amendment has been carried out to section 14A by the Finance Act, 2022 providing that the disallowance u/s 14A would be called for notwithstanding no receipt of exempt income during the year. The Hon'ble Delhi High Court in Pr.CIT Vs. Era Infrastructure (India) Ltd. (2022) 448 ITR 674 (Delhi) has held such amendment to be prospective. In that view of the matter, the casepertaining to the A.Y. 2017-18 under consideration, the assessee having earned tax free dividend of Rs.40,750/-, will be governed by the ruling in Cheminvest (supra). Respectfully following the precedent, I order to restrict the disallowance to Rs.40,750/-.”

7.2 Thus, ITAT categorically held that the amendment brought by Finance Act, 2022 is prospective in nature and hence will not be applicable for earlier years. Accordingly, we hold that amendment brought by the Finance Act, 2022 providing that the disallowance u/s.14A would be called-for notwithstanding non-receipt of exempt income during the year, is prospective in nature and not applicable to A.Y.2020-21 in the case of the Assessee.

Quote ,“9. There is no perversity in the orders passed by the Commissioner (Appeals) and the ITAT on this issue. Besides in Nirved Traders (P.) Ltd. (supra), this Court has held that disallowance under section 14A of the IT Act cannot be more than the exempt income earned by the Assessee during the assessment year in question. In this case, there is no dispute that the dividend i.e. the exempt income earned by the Assessees during the relevant Assessment Year, was only Rs. 45,371/-. Accordingly, the disallowance in this case could not have exceeded Rs. 45,371/-. It is only because the Assessees voluntarily offered a disallowance to the extent of Rs. 65,000/-, that the Commissioner (Appeals) made a disallowance to the extent of Rs. 65,000/-. Thus, the first substantial question of law is required to be answered against the Revenue and in favour of the Assessees.” Unquote.

8.1 Therefore, respectfully Hon’ble Bombay High Court, we direct the Assessing Officer to restrict the disallowance u/s.14A to Rs.4,50,000/- only and delete the remaining disallowance. Accordingly, Ground No.5 to 9 raised by the assessee are allowed.