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Income Tax Appellate Tribunal, “A’’ BENCH : BANGALORE
Before: SHRI B.R BASKARAN & SHRI PAVAN KUMAR GADALE
O R D E R PER BENCH:-
All these appeals filed by the assessee relate to assessment years 2008-09 to 2012-13. All these appeals are directed against the assessment order passed by the AO in pursuance of directions given by Ld Dispute Resolution Panel (DRP). Since common issues are urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.
The Ld A.R preferred to take the appeal filed for AY 2010-11 first and he submitted that the decision taken in this year can be conveniently applied to other years also. The Ld A.R further submitted that the assessee has raised many legal issues. He submitted that the assessee has raised two issues on merits in all the years. Accordingly, the bench asked the Ld A.R to advance his arguments on the issues contested on merits.
The assessee company is engaged in the business of providing Distance Learning and Education Services.
The first common issue contested by the assessee relates to the Transfer Pricing adjustment (T.P adjustment) made in respect of Corporate Guarantee given to the subsidiary company of the assessee. The TPO determined the interest rate difference accruing to the Subsidiary company on account of Corporate Guarantee given by the assessee as 4%. Since both the assessee and the subsidiary company have benefitted from the arrangement, the TPO made T.P adjustment @ 2% on the amount of Corporate guarantee given. The Ld DRP also confirmed the same.
The Ld A.R submitted that the assessee has received Corporate Guarantee from its holding company and no adjustment has been made for those transactions.
He further submitted that the Subsidiary company is profit making company and it has also provided its own assets as security for the loans obtained by it. Accordingly he submitted that the Corporate guarantee given by the assessee to its subsidiary company has not really impacted the interest rate, as presumed by the TPO. He submitted that the assessee, being main share holder in the subsidiary company, has provided Corporate Guarantee as a share holder and on commercial considerations. Accordingly he submitted that there is no requirement of making any T.P adjustment in respect of Corporate Guarantee provided by the assessee.
On the other hand, the Ld D.R submitted that the provision of Corporate Guarantee is an international Transaction and hence T.P adjustment was rightly made by the TPO/AO.
In the rejoinder, the Ld A.R submitted that the Mumbai bench of Tribunal has upheld the adjustment made @ 0.20% in respect of Corporate Guarantee given in the case of Addl CIT vs. Asian Paints Ltd (2014)(44 taxmann.com 422)(Mumbai- Trib). The Ld A.R also fairly submitted that the Mumbai bench of Tribunal has upheld the adjustment @ 0.50% in the case of Godrej Consumer Products Ltd vs. ACIT (2016)(60 taxmann.com 436). He further submitted that the adjustment of 0.50% made in respect of Corporate guarantee has been upheld by Hon’ble Bombay High Court in the case of CIT vs. Everest Kento Cylinders Ltd (Income tax Appeal No.1165 of 2013 dated 08-05-2015). However, he submitted that, in the instant cases, the adjustments, if any, may be restricted to 0.20% as held in the case of Asian Paints Ltd.
We have heard the parties on this issue and perused the record. We notice that the Tribunal is consistently holding the transaction of providing Corporate Guarantee as an international transaction. Hence the same is required to be examined under Arms length principles. There should not be any dispute that the provision of Corporate guarantee to its subsidiary in order to enable it to avail loans would bring benefit to the subsidiary, in which case, it is proper to compensate the assessee for those benefits under Arms length principles. We notice that the TPO has made an adjustment of 2%, considering the interest benefit @ 4% and taking the view that half of the same should be attributed to the benefit of the assessee. However, we notice that the Hon’ble Bombay High Court has approved the T.P adjustment of 0.50% in respect of Corporate guarantee given in the case of Everest Kento Cylinders Ltd (supra). Though the Ld A.R has pleaded for an adjustment of 0.20% by placing reliance on the decision of Asian Paints Ltd (supra), yet we notice that the Ld A.R did not highlight the parity of facts between the assessee and the case of Asian Paints Ltd. Hence, on a conspectus of the matter, we are of the view that the T.P adjustment in respect of Corporate Guarantee may be made @ 0.50% as per other decisions of Tribunal and Hon’ble Bombay High Court referred above. Accordingly we set aside the order passed by the AO on this issue and direct the AO/TPO to make T.P adjustment in respect of Corporate Guarantee @ 0.50% in all the years under consideration.
The next common issue urged by the assessee in all the years relate to the disallowance made u/s 14A of the Act. The Ld A.R submitted that the AO has mechanically applied provisions of Rule 8D in all the years and accordingly computed the disallowance. He submitted that the interest free funds available with the assessee are more than the value of investments and hence no disallowance out of interest expenditure under rule 8D(2)(ii) is called for. He further submitted that major part of investments consists of investment made by the assessee in its foreign subsidiary and income there from is taxable. Accordingly he submitted that the disallowance out of administrative expenses under Rule 8D(2)(iii) should be computed by considering only those investments which have yielded exempt dividend income as per the decision rendered by Special bench of Tribunal in the case of Vireet Investments P Ltd (165 ITD 27).
On the contrary, the Ld D.R supported the order passed by the assessing officer.
We heard the parties on this issue and perused the record. The Hon’ble Bombay High Court has held in the case of HDFC Bank Ltd (366 ITR 505) that no disallowance out of interest expenditure u/r 8D(2)(ii) is called for when own funds available with the assessee is in excess of the value of investments. Accordingly we direct the AO to compare the own funds available with the assessee against the value of investments and accordingly apply the provisions of Rule 8D(2)(ii) by duly following the decision rendered by Hon’ble Bombay High Court in the case of HDFC Bank Ltd (supra).
In respect of disallowance to be made u/r 8D(2)(iii) out of administrative expenses, the Special bench of Tribunal has held in the case of Vireet Investments Ltd (supra) that only those investments, which have yielded exempt income should be considered. Accordingly we direct the AO to compute the disallowance u/r 8D(2)(iii) accordingly.
The assessee has raised many legal issues. The Ld A.R submitted that those legal issues may be kept open, if the assessee gets substantial relief on issues urged on merits. We notice that the ground relating to sec.14A has decided in favour of the assessee as prayed for and the assessee has got substantial relief on the issue relating to T.P adjustment on Corporate Guarantee. Accordingly, we are of the view the legal issues urged by the assessee would be rendered academic in nature. Accordingly we decline to adjudicate the same.
In the result, all the appeals of the assessee are treated as partly allowed.
Order pronounced in the Open Court on May, 2019.