IL & FS TECHNOLOGIES LTD,MUMBAI vs. DCIT CIR 14(2)(1), MUMBAI

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ITA 2819/MUM/2017Status: DisposedITAT Mumbai16 September 2021AY 2012-136 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that corporate guarantee is an international transaction and directed the AO to recompute the ALP at 0.5%. It also deleted the disallowance under Section 14A, as no exempt income was earned by the assessee during the year.

What were the facts?

The assessee's appeal concerned adjustments to the Arm's Length Price (ALP) for corporate guarantees and disallowance of expenses related to exempt income. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) made adjustments for corporate guarantees and disallowed expenses under Section 14A.

What were the issues?

Whether the ALP for corporate guarantee was correctly computed and whether disallowance under Section 14A is permissible when no exempt income is earned.

Which sections of the Income-tax Act were involved?

Section 14A,Section 143(3),Section 144C(13)

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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI

For Appellant: Shri. Atul Nirawat, AR
Hearing: 16.09.2021Pronounced: 16.09.2021

O R D E R भहावीय स िंह, उऩाध्मक्ष के द्वाया / PER MAHAVIR SINGH, VP: This appeal of assessee is arising out of the order of Dispute Resolution Panel-I, Mumbai [in short ‘DRP’], in objection No. 70 vide direction dated 08.12.2016. The Assessment was framed by the Asst. Commissioner of Income Tax, Circe 14(2)(1), Mumbai (in short ‘ACIT/AO’) for the assessment year 2012-13 vide order dated 30.01.2017 under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as 'Act')..

1.

3. That the Ld. AO/TPO has erred on facts and in law in making an addition/ adjustments of ₹1,20,60,000/- to the arm‟s length price of the „international transactions‟ pertaining to following transactions on:- a) Corporate guarantee issued on behalf of its AE (M/s land Registration systems, Inc., (equivalent to Approx 361 Million rupees) in connection with sanction/ issue of a bridge Loan being availed AE. b) Surety/ guarantee/ Indemnity on behalf of its AE (M/s IL&FS Technologies Philippines, Inc., Philippines a wholly owned subsidiary of the company) for not less than Philippine sanction/issue of a Credit Facility being availed by AE. c) Without prejudice, the proposed transfer pricing adjustment made by the Ld. Assessing Officer/ TPO by applying an incomparable rate of 2% which is unreasonably high and unjustified based on the rate charged by the commercial banks whose function, asset and risk („FAR‟) profile is significantly different from the FAR of the appellant.

“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

4.

In view of the above, we hold that this is international transaction and accordingly, we direct the AO to recompute the ALP by applying the rate at 0.5% on the transaction of corporate guarantee. We direct the AO accordingly. This issue of assessee’s appeal is partly allowed.

5.

The second issue in this appeal of assessee is against the order of the Assessing Officer and DRP making disallowance of expenses relatable to exempt income by invoking the provisions of section 14A “4. That the Ld. Assessing Officer (Assessing Officer) erred on facts and in Law in proposing aggregate addition / adjustment of ₹6,28,492/- to disallowance under section 14A read with Rule 8D made in respect of the expenditure incurred by the appellant in relation to income, which does not from part of total income. a) The Ld. Assessing Officer erred in law by not considering the fact that the investment made by the appellant in the shares of its subsidiary is done for controlling purpose and commercial prudence and not to earn exempt income. b) The Ld. Assessing Officer erred in law by not considering the fact that the appellant has not earned any exempt income from the subsidiary company during the year.”

6.

At the outset, the learned Counsel for the assessee stated that there is no exempt income earned by the assessee during the year and no exempt income has been claimed in the return of income. The assessee before DRP as well as before Assessing Officer claimed that there is no exempt income earned by assessee during the year. Once, there is no exempt income, we find that disallowance cannot be made in view of the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC). Hence,

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