EVEREST KANTO CYLINDER LTD,MUMBAI vs. ASST CIT (LTU) 2, MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

A.Y.2011-12 “1. The learned assessing officer has erred in law and on the facts of the case in disallowing Rs.16,37,570/- u/s.14A of the I.T.Act pursuant to the directions of the DRP.

2. The learned assessing officer has erred in law and on the facts of the case in making addition of Rs.16,37,570/- u/s.14A to the book profits u/s.115JB of the Income Tax Act pursuant to directions of the DRP.

3. The learned assessing officer has erred in law and on the facts of the case in making an addition of Rs.4,30,87,250/- on account of guarantee commission pursuant to the directions of the DRP.

4. The learned assessing officer has erred in law and on the facts of the case in making an addition of Rs.56,97,769/- on account of interest charges to Associate Enterprise pursuant to the directions of the DRP.

3. Brief facts of the case are that the in the present case draft assessment order dated 23.03.2015 was passed u/s 144C(1) of the Act, 1961 and forwarded to the assessee. The assessee has filed the objection form no. 35 in respect of variations made by AO in the draft order dated 23.03.2015. The dispute resolution panel DRP-1 Mumbai offered an opportunity of being heard to the assessee. The assessee in pursuance of provision 144(C) of the I.T. Act, 1961 appeared before the DRP and raised the objection. The assessee company is engaged in the business of manufacturer of high pressure Seamless gas cylinder services and compressed natural gas cylinders. The TPO passed an order on 30.01.2015 u/s 52CA(3) of the Act and made the transfer pricing adjustment of Rs.13,73,10,992/-. Thereafter the Assessing Officer incorporated the TPO order and passed the draft order u/s 143(3) of the Act r.w. Rule 144C(1) of the Act on 23.03.2015 which was served on 30.03.2015. The assessee filed the objection in form no. 35A on 23.04.2015. The objections were decided by the DRP-1, 2 A.Y.2011-12 Mumbai and passed the direction on 03.12.2015. The assessee was not satisfied, therefore, the assessee has filed the present appeal before us. ISSUE NO.1 TO 2:-

4. Under these issues the assessee has challenged the disallowance u/s.14A. The assessee has earned the dividend income to the tune of Rs.1,26,70,862/- which has been claimed exempted u/s.10(33) of the Act. The assessee did not make any disallowance u/s.14A of the Act. The notice was issued and thereafter a revised computation of disallowance u/s.14A r.w. Rule 8D of the Act to the extent of Rs.9,05,594/- was submitted. However, the assessee requested to not to disallow any expenditure because the assessee did not borrow any funds for the investment to earn the exempt income but the Assessing Officer applied the provision u/s.14A r.w.Rule 8D of the Act and disallowed the expenditure under the provision of 14A read with rule 8D(2)(i) and 8D(2)(iii) of the Act to the tune of Rs.16,37,570/- and also disallowed the same u/s.115JB of the Act. The learned representative of the assessee has argued that the assessee was having his own fund more than the investment, therefore, in view of the law settled in HDFC Bank Ltd. Vs. DCIT (Bombay) 383 ITR 529, the investment was liable to be treated from its own funds and no expenditure of any kind was liable to be assessed to earn the said income in accordance with law. However, on the other hand the learned representative of the department has strongly relied upon the order passed by the Assessing Officer under challenge. By giving the careful thoughts to the contention raised by the learned representative of the parties and perusing the record carefully, it came into the notice that assessee was having more funds in 3 A.Y.2011-12 comparison to the investment. The balance sheet and profit and loss account has been filed which lies at page 1 to 69 of the paper book. The balance sheet lies at Page 30 of speaks that the assessee was having the funds in lacs to the tune of Rs.52,129.05. The said balance sheet speaks about the investment to the tune of Rs.14,237.24. According, to the said balance sheet, it is not in dispute that the assessee was having more funds then his investments. In view of the law settled in HDFC Bank Ltd. Vs. DCIT (Bombay) 383 ITR 529, it is presumed that the assessee made the investment from his own funds to earn the exempt income. In the said circumstances, no disallowance on account of interest expenditure is permissible u/s.14A of the Act. Under the said circumstances no disallowance of interest expenditure is justifiable. Therefore, we delete the addition on account of interest expenses made in view of the provision u/s.14A r.w.Rule 8D of the Act and addition on account of the provision u/s.115JB of the Act. We restrict the claim to the extent of 9,05,594/- made in view of provision rule 8D(2)(III) of the Act. Accordingly, we set aside the finding of the DRP Mumbai(1) and decide this issue in favour of the assessee against the revenue.

ISSUE NO.3:- 5. The present issue relates to addition of Rs.4,30,87,250/-on account of guarantee commission pursuant to the directions of the DRP. The issue is in relation to an addition of Rs.4,30,87,250/- made to the total income on account of transfer pricing adjustments with respect to the corporate guarantee issued by the assessee on behalf of its foreign associated enterprises namely, EKC International FZE, UAE, EKC Industries 4 A.Y.2011-12 (Tianjin), China and CP Industries Ltd., USA. In this context brief facts are that the assessee was found to have entered into certain international transactions with its associated enterprise within the meaning of section 92B of the Act and consequential reference under section 92CA(1) was made by the Assessing Officer to the Transfer Pricing Officer (TPO) for determination of arm's length price of such transactions. The TPO had passed an order u/s. 92CA(3) dated 30-01-2015 making an adjustment on account of corporate guarantee as under:

Name of the AE Corporate Percentage ALP of the corporate Percentage Adjustment guarantee guarantee commission commission charged EKC 51,34,750 0.5% 1,02,69,500 1% 51,34,750 International FZE, UAE EKC Industries Nil Nil 89,30,000 4% 89,30,000 (Tianjin), China CP Industries Nil Nil 9,04,16,250 4.5% 9,04,16,250 Ltd. USA 51,34,750 10,96,15,750 10,44,81,000

In the present case also, the assessee had issued financial guarantee to the bank on behalf of its AEs. It has relied on the order of the Hon'ble Tribunal in its case for AY 2009-10 for applying rate of 0.5% in respect of all the three guarantees issued by it. On the other hand, it has been 5 A.Y.2011-12 pointed out by the TPO that financial guarantees issued by the assessee should not be compared with the bank guarantee because the bank guarantee is secured against assets whereas a financial guarantee issued by the assessee is not. Thus, risks taken in issuing an unsecured financial guarantee issued by the assessee is much higher. We are in agreement with the TPO on this issue. Bombay High Court has also, in the case of the assessee itself for AY 2007-08 (Everest Kanto Cylinders Ltd. 119 DTR Born (0394), has held that a corporate guarantee cannot be compared with bank guarantee. Further, the guarantee rates charged to the assessee cannot be the same as the guarantee rate chargeable to its AEs since both are different and independent from each other. Hence, the guarantee rates, charged by YES Bank to the assessee cannot be taken as internal CUP. However, this secured guarantee can be taken as a guide for bench marking the unsecured guarantees issued by the assessee. Looking to the rate at which assessee has taken bank guarantee from YES Bank, considering the financial position of other AEs and also considering the fact that the assessee has issued unsecured financial guarantees we are of the opinion that charging guarantee commission at the rate of 1% for unsecured corporate guarantee issued to UAE subsidiary, 1.25% for unsecured corporate guarantee issued to Chinese subsidiary and 1.75% for unsecured corporate guarantee issued to CP Industries Ltd., USA would be appropriate. The AO shall modify the amount accordingly.

.......... 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 6 A.Y.2011-12 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 consideration 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 a between like transactions but the comparisons are between guarantees issued by the commercial bank 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 low and it is dismissed. There will be no order as to on costs

ISSUE NO. 4

Name of the AE Interest Percentage ALP of the Interest Percentage Adjustment charged EKC 21,16,958 LIBOR+1 1,60,78,033 10.25% 1,39,61,075 International FZE, UAE EKC Industries 1,79,70,397 5% 3,68,39,314 10.25% 1,88,68,917 (Tianjin), China 7 A.Y.2011-12 Total 2,00,87,355 5,29,17,347 ,328,29,992

In the aforesaid order Hon'ble Delhi High Court has held that interest rate applicable in case of loan transactions should be market determined interest rate applicable to the currency in which the loan has to be repaid. The currency in which the loan is to be repaid determines the rate of return on the money lent. In this case, the loan to both subsidiaries have been given in USD. Under these circumstances, we are of the opinion that USD rates for unsecured loan as applicable to the party whose credit rating is equivalent to that of the subsidiary should be applicable. The assessee has submitted that the I7-AT has held in its case for AY 2009-10 that charging of interest at the rate of LIBOR + 2% will be appropriate. The assessee has also submitted that its UAE subsidiary has taken loan from ICICI Bank were in facts three months LIBOR + .95% whereas Chinese subsidiary has taken loan in Chinese Yuan from Citi Bank at the rate of 5.95%. The AO has applied rate of 10.25% in respect of both the subsidies. So far as loan taken by the UAE subsidiary from ICICI Bank is concerned, it is seen that the loan is only USD 5 million. It is a secular loon with o charge on assets of the subsidiary and a corporate guarantee provided by the assessee. Besides, the UAE subsidiary has also to incur cost on insurance, upfront fee of 1% etc. Looking to the fact that the loan given by the assessee was a long term unsecured loan, no details have been provided by the assessee regarding the credit rating of the AEs and credit rating of the UAE subsidiary as determined by the AO is lower than that of the assessee, we are of the opinion that a of six months LIBOR + 350 basis points will be appropriate for UAE subsidiary and a rate of six months LIBOR + 500 basis points would be appropriate for the Chinese subsidiary. The AO/WO is directed to make that adjustments accordingly.

Following the earlier order of this Tribunal in assessee's own case, we hold that the arm's length rote in respect of loon provided to the AE should be LIBOR +2%. Accordingly, the Assessing Officer is directed to recompute the arm's length rate in respect of the Joan transactions to each AE of the assessee by clubbing all the loan transactions of each AE and compare the interest charged by the assessee with arm's length rate at LIBOR + 2%. It appears that as regards the transactions of loon to its AF at China, the said transaction is at arm's length as the assessee has charged the interest at 796, 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.