TECHNOCRAFT INDUSTRIES (I) LTD,MUMBAI vs. DCIT 8(3), MUMBAI

This is an appeal filed by assessee against the order of CIT(A)-15, Mumbai dated 20/08/2014 in the matter of order passed u/s.143(3) of the IT Act.

Only grievance of assessee relates to making upward adjustment of ALP by TPO of Rs.58,29,300/- in respect of guarantee fee in respect of corporate guarantee provided to the assessee’s foreign subsidiary.

Rival contentions have been heard and record perused. Facts in brief are that assessee is a company engaged in the business of manufacturing and exporting of drum closures, pipes and cotton yard. During the year under consideration, the TPO made upward adjustment in M/s. Technocraft Industries (India) Ltd., respect of international transaction entered into by the assessee with its associated enterprises in respect of guarantee provided to its AE.

It was argued by learned AR that guarantee was advanced by the assessee as a matter of commercial presidency to protect the business interest of the group and in the absence of guarantee assessee would have provided the funds to its subsidiary, hence provision of guarantee does not lead to any additional risk in the assessee warranting compensation. He further placed on record the decision of the Hon’ble Bombay High Court in case of Everest Kanto Cylinder Ltd., 378 ITR 57 wherein under similar facts and circumstances, guarantee commission was restricted to 0.5%. Learned AR also placed on record various decisions of Co-ordinate Benches in case of Videocon Industries Ltd., 186 TTJ 353 and M/s. Asian Paints Ltd., 149 ITD 551, Nimbus Communication Ltd., 45 ITD 582 (Mum), Reliance Industries Ltd., and Godrej Household Products Ltd., ITA No.7369/Mum/2010 wherein guarantee commission was determined at 0.5%.

We have considered rival contentions and found that, as discussed in various judgments the rate adopted was in the range of 0.25% - 0.50%. These rates were in case of corporate guarantee whereas in case of assessee, it is issuance of SBLC. Hence, the said rates are not applicable in case of the assessee. We observe that the assessee has been charged a rate of 0.9% by an Indian bank for SBLC. In our view, this is a clear case of internal CUP. Further, in this case, the DR has not raised any objection on adoption of internal CUP of 0.9% p.a. Hence, in our opinion since the internal CUP is available with the assessee, the said rate of commission of 0.9% p.a. should be considered as arm’s length rate of commission. Accordingly, AO is directed to compute guarantee fees @0.9%.

Next grievance pertains to addition on account of interest charged On loan advanced to AE amounting to Rs.59,172/-. Issue under M/s. Technocraft Industries (India) Ltd., consideration is squarely covered by the decision of Delhi High Court in the case of Cotton Naturals (I) Pvt. Ltd., 55 taxmann.com 523 wherein it was held that arm’s length interest rate for loan advanced to foreign subsidiary by the Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. Respectfully following the proposition laid down by Delhi High Court, we direct the AO to compute interest as per the interest rates applicable to currency in which loan was required to be repaid by the assessee. We direct accordingly..

With respect to claim of deduction u/s.35D and depreciation u/s.32(1)(ii)(a) of the IT Act, AO has declined assessee’s claim by applying Goetze India Ltd., We have considered rival contentions and found that during the course of assessment proceedings, assessee had filed letter dated 29/10/2012 furnishing revised working of deduction u/s.35D. As per the revised working, assessee has claimed deduction u/s.35D of Rs.60,04,416/- as against the original claim of Rs.23,20,680/-. However, by misinterpreting the decision of Goetze India Ltd, the AO declined to consider the revised claim. Similarly, during the course of assessment proceedings, the assessee filed its letter dated 01/03/2013 claiming therein additional depreciation of Rs.80,50,615/- under Section 32(1)(ii)(a) of the Income Tax Act. By misinterpreting the decision of Goetze India Ltd, the AO did not accept assessee’s revised claim. We do not find any merit for the same in so far as the Hon’ble Supreme Court in the case of Jute Corporation of India 187 ITR 688 has held that appellate