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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM & SHRI MANOJ KUMAR AGGARWAL, AM
It can be observed that as against the income of Rs.10.50 crores earned by assessee during the year, the outstanding receivables are at a much higher figure of Rs.12.35 crores, which prima facie reveals that the receivables represent outstanding for more than one year. Further, clause (i)(c) of explanation to Section 92B covers ‘receivables’ as international transaction w.e.f. 01.04.2002. Therefore, we are of the view that benchmarking of the same could have been done by comparing credit period allowed by assessee for other receivables i.e. internal CUP could have been used to benchmark this transaction. The assessee has relied upon the order of Tribunal in assessee’s own case for 2006-07, order dated 16/12/2016. But a perusal of paragraphs 20 to 25 of the said order reveals that Tribunal has relied firstly upon order for AY 2001-02 and secondly upon M/s Piramal Glass Ltd. Assessment Year 2011-12 the fact that TP adjustment qua these transactions was already made by the TPO and disallowing the same would amount to double deduction. We also find that the assessee was allowed relief in AY 2001-02 on account of ‘commercial expediency’ and following Apex court judgment in S.A.Builders Vs. CIT 288 ITR 1. But the facts are different here. No TP adjustment has been made for the impugned transaction and secondly the outstanding amount represent ‘receivables’ on account of debtors for sales / technical fees as per the contention of the assessee. Therefore, on the facts and circumstances of the case, we deem it fit to restore this issue back to the file of AO for fresh adjudication in proper perspective including benefits derived by AE on account of receivables vis-à-vis normal debtors of the business. The assessee is directed to cooperate with the lower authorities forthwith to substantiate its claim forthwith falling which the AO shall be at liberty to adjudicate the same on the basis of material available on record.
Ground No.13 is related with TP adjustments of Rs.18,02,730/- & Rs.7,35,50,404/- against loan transaction and corporate guarantee respectively. These two transactions were reported by assessee in Form 3CEB and TPO suggested TP adjustment of Rs.7,86,52,228/- against the same. We take up the same one by one. Interest Free Loan to Subsidiaries The assessee advanced interest free loans to one of its subsidiary namely ‘M/s Piramal Glass UK Ltd.’ for Rs.5.10 Crores. The assessee contended that the advances have been made to meet working capital requirements of the AE and with a view to expand its operations in foreign markets. Applying internal ‘CUP’ of USA AE, TPO determined the ALP rate of interest @10% and made TP addition of Rs.51.01 Lacs. Before DRP, assessee raised similar contentions and relied upon Apex Court judgment in S.A.Builders s CIT (supra). DRP after considering various judicial pronouncements benchmarked the same to LIBOR+3%. Before us, Ld. AR has contested the same on the ground that loan is given for working capital and M/s Piramal Glass Ltd. Assessment Year 2011-12 out of commercial expediency and hence, no TP adjustment is called for. Without prejudice, he asserted that adjustment, if any, which is called for, should be restricted to LIBOR only without any mark up. Per Contra, Ld. DR asserted that to determine the appropriate mark up, the matter may be remanded back to AO as the department has procured a sophisticated ‘Bloomberg’ database which scientifically calculates the applicable interest rate and mark up. We have heard the rival contentions. In principal it is agreed that LIBOR rate plus some mark-up shall apply to the transaction. To calculate the appropriate mark-up on the same, as per contentions of Ld. DR, we deem it fit to restore the matter back to the file of AO for limited purposes of calculation of appropriate mark up with the help of the said data base. The ground is allowed for statistical purposes. Corporate Guarantee The assessee provided Corporate Guarantee of USD 83 million to one of its USA AE. Treating the same as international transaction, TPO benchmarked the same @3% by applying bps mark up of 1.25% on SBI bank guarantee rate of 1.75%. Applying the same on outstanding balance at each quarter end, TP adjustment thus got worked out to Rs.7.35 Crores. Before DRP, the assessee contested that guarantee is not international transaction and without prejudice, contested the benchmarked rate of 3% and relying upon various judicial pronouncements, pleaded to restrict the same to maximum of 0.5%. But rejecting the same, DRP confirmed the said benchmarked rate. Before us, Ld. AR raised similar contentions but fairly conceded that in view of amendment in Section 92B and jurisdictional Bombay High Court judgment in CIT Vs. Everest Kento Cylinders Ltd. 378 ITR 57, the said transaction constitute international transaction. On merits, he asserted that rate of 3% benchmarked by applying mark up on SBI rate is too high and not correct. In number of judgments, the rate ranging from 0.20% to 0.50% has been found to be acceptable. The Ld. DR has justified the said rate. We have heard rival contentions and find strength in Ld. AR’s M/s Piramal Glass Ltd. Assessment Year 2011-12 argument. Hon’ble Bombay High Court in CIT Vs. Everest Kento Cylinders Ltd. (supra) has observed that issuance of a corporate guarantee are distinct and separate from that of bank guarantee and therefore, no TP adjustment can be made in respect of guarantee commission by making comparison between guarantees issued by commercial banks as against a corporate guarantee issued by holding company for benefits of its AE, a subsidiary company. Further, in the said case, the Hon’ble court has affirmed guarantee adjustment of 0.50% upheld by the Tribunal. Therefore, respectfully following the same, we restrict TP adjustment against bank guarantee to 0.50%. This ground is partly allowed.
Ground No. 14 is related with addition on account of certain interest income. The AO noted that Form 26AS of the assessee reflected receipt of interest income from ‘Bank of America’ for Rs.57,817/- but it was nowhere shown in the financial statements of the assessee. The assessee contended that it has not placed any FDRs with ‘Bank of America’ and these entries do not belong to assessee and erroneously being reflected in Form 26AS. It also stated that it has requested the Bank of America to rectify their TDS returns vide letters dated 26/11/2012 and 18/11/2015. AO rejected the contentions of the assessee and added impugned amount to the income of the assessee. Before us, Ld. AR has asserted that the assessee has not entered into any transaction with ‘Bank of America’ which can give rise to interest income. The assessee has twice requested the concerned bank to rectify their TDS returns. Thus, adequate efforts have been made by assessee and the assessee cannot be asked to prove the negative. We agree with AR’s stand that additions cannot be made solely on the basis of Form 26AS entries only which is well settled by various judicial pronouncements. The revenue has not brought anything on record to substantiate its stand and relied merely upon entries in Form 26AS. It appears that the same is erroneous and has crept in due to quoting of wrong PAN by the Bank in their TDS returns and therefore, at least addition, in such a scenario, in the hands of assessee could not be in made. Thus, we are inclined to M/s Piramal Glass Ltd. Assessment Year 2011-12 delete the impugned addition. The bench was informed that similar entries are appearing in Form 26AS of the assessee for other assessment years also. Therefore, the assessee is directed to pursue the correction thereof forthwith with due diligence. The revenue is also directed to scrutinize the TDS return of ‘Bank of America’ and enable to Bank to take steps in rectifying the impugned errors.
Ground No. 15 is related with foreign exchange gains of Rs.37.12 Lacs arising out of loans given to subsidiaries. The assessee stood benefitted to the extent of Rs.37.12 Lacs on account of reinstatement of foreign currency loan at year end advanced to its subsidiary companies. It treated the same as capital in nature and reduced it from the profit in computation of income. Relying upon the decision of Bombay High Court in Solid Containers Ltd. Vs. DCIT 308 ITR 417, AO and DRP found the gain to be revenue in nature and concluded the same to be taxable in the hands of the assessee. Before us, the primary contention of the AR is that it incurred losses on this account in AY 2010-11 but it did not claim the same as allowable expenditure. It has consistently followed accounting policy regarding treatment of foreign exchange on loans. The loans advanced to subsidiary are capital in nature and therefore, the same are not taxable. Reliance has been placed on the Apex court judgment of Sutlej Cotton Mills Ltd. V CIT 116 ITR 1 to contend that gain / loss on foreign exchange held on ‘Capital Account’ is capital in nature and held in ‘revenue account’ is revenue in nature. Per contra, Ld. DR contended that when assessee made suo- moto disallowance of exchange loss in 2010-11 then the benefit of the same could not be given by AO as he had no power to reduce the income of the assessee. We have heard the rival contentions and perused the relevant material including cited case laws. We find that foreign exchange gain or loss on acquisition of assets is covered by Section 43A whereas all the other foreign exchange gains / losses are covered by general accounting principles. Further, the assessee all along has assailed TP adjustment and interest adjustment u/s M/s Piramal Glass Ltd. Assessment Year 2011-12 36(1)(iii) on the ground that transactions with subsidiary companies are out of commercial expediency and with a view to derive varied revenue benefits from these investments whereas on the contrary, this ground has been assailed on the premises that loans to subsidiaries are on capital account. It is also noted that the said transaction is reported in Tax Audit Report as follows:- “13. Amounts not credited to the Profit & Loss Account, being- (a) to (d)… (e) Capital Receipt, if any Foreign Exchange Gain (Net) on Loans given to subsidiary companies Rs. 37,12,635/- …..”
We fail to understand when the item has not been credited to the Profit & Loss Account, how the deduction thereof could be claimed in the computation of income treating it as capital in nature. Therefore, on the facts and circumstances of the case, we are inclined to dismiss this ground of assessee’s appeal.
Ground No. 16 is related with certain adjustment of provision for bad and doubtful debts from book profits u/s 115JB. While calculating book profit u/s 115JB, the assessee, due to oversight, did not reduced an amount of Rs.6.88 crores as provision for bad and doubtful debts written back from book profits. The said amount represented reversal of provision for bad and doubtful debts made by debiting profit & loss account in earlier years but added back to compute book profits for those years. Although, AO accepted the factual matrix, yet relying upon apex court decision in Goetz India Ltd. Vs CIT 284 ITR 323, did not entertain the claim of the assessee on the premises that the same could be admissible only by way of filing the revised return of income. The assessee took support of CBDT circular No. 14 (XL-35) dated 11/04/1955 to assert that it was the duty of AO to grant the admissible reliefs, although not claimed by the assessee due to oversight / inadvertent mistake. AO was duty bound to assess the correct income of the assessee. But DRP and AO rejected the same M/s Piramal Glass Ltd. Assessment Year 2011-12 relying upon Apex Court decision in Goetz India Ltd. Vs CIT(Supra). Before us, the Ld. AR has raised similar contentions. As the factual matrix is not in dispute and the lower authorities, in principal, agreed with the claim of the assessee, the issue is decided in favor of the assessee and hence the AO is directed the give the benefit of impugned amounts in computation of Book Profit u/s 115JB.
In Ground No. 17, the assessee is aggrieved by the stand of AO in not allowing set off of brought forward of business losses and unabsorbed depreciation amounting to Rs.104.23 crores. The assessee recomputed brought forward business losses and unabsorbed depreciation on the basis of outcome of appeals of earlier years at Rs.104.23 crores, the set off of which was not allowed to assessee. DRP concluded that since the issue was consequential, AO was directed to consider the said claim. However, in the final computation of income, we find that credit thereof was not granted to the assessee. Therefore, reiterating the stand of DRP, AO is directed to verify the claim of assessee in this respect and allow the same as per statutory provisions.
All the grounds of appeal are disposed off in the above manner and resultantly, the appeal of the assessee stands partly allowed.