ARKAY LEATHERS PVT LTD,CHENNAI vs. ACIT, CORPORATE RANGE 1, CHENNAI

The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-1, Chennai in dated 31.10.2017 for assessment year 2013-14.

M/s. Arkay Leathers Pvt. Ltd., the assessee, is engaged in the manufacture of finished leather products and exports them. Its assessment was completed under section 143(3) after making disallowances on account of fees paid to the registrar of companies for the increase in authorised share capital and expenditure incurred for earning exempt income under section 14A. A transfer pricing adjustment on account of commission receivable on extending of corporate guarantee was also made. Aggrieved, the assessee filed appeal before the CIT(A).

On the TP addition made on the corporate guarantee, the Ld AR submitted, inter alia, that though as a holding company the assessee had extended corporate guarantee to Arkay Pacific Ltd., Hong Kong (AE) towards facility enjoyed by the wholly owned subsidiary with Bank of India, HongKong, it had not charged any amount towards the same; on such facts the transfer pricing adjustment cannot be made on hypothetical and notional basis. Without prejudice, in any event, the ALP of the corporate guarantee adopted as 1% of the value of the Corporate Guarantee is unrealistic and excessive and Ld the CIT(A) though has relied on the judgment of the Hon’ble Bombay High Court fixing the ALP at 0.5%, has in the impugned situation fixed the ALP at 1%. Hence, even assuming that the said adjustment is to be made, the same be limited to an ALP 0.5%. Per contra, the Ld DR submitted that the appeal relates to assessment year 2013-14. In respect of items specifically mentioned in the Explanation to sec 92B, there is a presumption under the statute that such transactions have an impact on the profits, income, losses or assets of the enterprise. Further on facts of this case, there is undoubtedly an impact on assets of the company in the light of the terms of the guarantee. Therefore, the transaction of providing guarantee by the assessee in favour of its AE is an international transaction. With regards the quantification of the ALP, the assessee’s argument that it has charged no consideration, does not hold good after the Special Bench decision in the case of M/s. Instrurnentarium Corporation Ltd v ADIT 71 taxmann.com 173 Kolkatta–Trib, wherein it is held that TP provisions would be applicable in respect of every transaction whether the assessee has charged or not. When it is charged, the value of consideration would be substituted by ALP. Where a consideration is not charged, but the transaction is such that in the normal circumstances would result in income of a certain nature, the TP provisions would be applicable to quantify the income. Therefore, he submitted that the impugned addition is correctly made.

We heard the rival submissions and gone through relevant material. We hold that the transaction of providing guarantee in favour of AE is an international transaction. Since the Ld CIT(A), respectfully following the decision of the Bombay High Court in the case of M/s.

The next issue is related to the claim for a deduction at Rs.5,30,968/, being the amount paid to the Registrar Of Companies for the increase in the Authorised Share Capital of the company.

We heard the rival submissions. The Assessing Officer relying on the case of M/s. Punjab State industrial Development Corporation vs CIT (1997) 93 taxman 5 (SC) disallowed the claim. Before the Ld CIT(A) , the assessee placed place reliance upon the decision of the Hon’ble Supreme Court in the case of M/s. Shasun Chemicals And Drugs Ltd vs CIT (2016)

In the result, the assessee’s appeal is partly allowed.