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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
PER S. BALAKRISHNAN, Accountant Member :
This appeal filed by the assessee is against the final assessment order passed U/s. 143(3) r.w.s 144C(13) r.w.s 144B of the Income Tax Act, 1961 vide order dated 28/2/2022 in DIN No. ITBA/AST/S/143(3)/2021-22/1040175032(1) for the AY 2017-18.
Briefly stated the facts are that the assessee filed e-return of income for the AY 2017-18 on 27/11/2017 and revised the same on 7/12/2017 and once again revised on 15/9/2018 admitting a total loss of Rs. 74,15,83,058/-. The case was selected for scrutiny under CASS and notice u/s. 143(2) was issued on 9/8/2018 and duly served on the assessee along with a detailed questionnaire issued on 18/11/2019 calling for various details. In response to the said notices, the assessee uploaded its submissions through ITBA from time to time and furnished the details called for. During the course of assessment proceedings, the submissions made by the assessee have been verified and a reference was made to the Ld. TPO U/s. 92CA(1) of the Act for determining the ALP with respect to international transactions entered in to by the assessee with its Associate Enterprises (hereinafter referred to as “AE”). The Ld. TPO made the following upward adjustments aggregating to Rs. 1,21,95,92,054/-.
Sl Description Adjustment No. U/s. 92CA (in Rs.) 1. Corporate Guarantee fee 54,06,00,000 2. Notional Interest on outstanding 72,03,389 guarantee commission
3. Interest on share application 67,17,88,665 money and investment in preference shares treated as loans Total 121,95,92,054
3. Considering the Transfer pricing upward adjustments made by the Ld. TPO, the Ld.AO passed a draft assessment order dated 15/4/2021.
Aggrieved by the draft assessment order, the assessee filed its objections before the Ld. Dispute Resolution Panel, Bengaluru [DRP]. Considering the objections of the Ld. Assessee’s Representative, the DRP in F.No.
25/DRP-1/BNG/2021-22, dated 27/01/2022 rejected the objections raised by the Ld. AR and upheld the order of the Ld. TPO. Thereafter, the Ld. AO passed the final assessment order giving effect to the directions of the Ld. DRP. Aggrieved by the final assessment order of the Ld. AO, the assessee filed an appeal before us.
The assessee has raised eight grounds in its appeal which comprises of the following issues:
(i) Commission on Corporate Guarantee upheld by the Ld. DRP @ 1.90% (ii) Notional interest on Outstanding Guarantee Commission Receivables at Rs.72,03,389/- upheld by the Ld. DRP . (iii) Interest on Share Application Money and investment in Preference Shares being re-characterized as interest free unsecured loans for Rs. 67,17,88,665/- upheld by the Ld. DRP.
Before us, at the outset, the Ld. AR submitted that this Bench has held the Corporate Guarantee Commission as an international transaction and has upheld the commission @ 0.50% on the outstanding guarantees issued. The Ld. AR relied on the decision of this Bench in the case of M/s. Devi Sea Foods Limited vs. DCIT in (AY: 2018-19), dated 16/12/2022. Further the Ld. AR also submitted that in assessee’s own case in ITA No. 553/Viz/2018 (AY: 2014-15), dated 3/4/2019 this Bench has considered the commission @ 1.90% based on the TP study for that Asst. Year. The Ld. AR therefore pleaded that similarly for the current assessment year, the assessee’s Arm’s Length Price [ALP] for the Corporate Guarantee Commission is 0.45% based on the TP study for the impugned Asst. Year and accordingly this may be allowed.
Per contra, the Ld. DR submitted that the Ld. DRP in its order has substantiated the low credit rating of the assessee and hence justified the charging of higher Corporate Guarantee Fees @ 1.90%. Further, the Ld. DR submitted that as per Rule 10TD of Safe Harbour Rules, the rate specified therein was 1% for guarantees above Rs. 100 Crs. The Ld. DR therefore pleaded that the order of the Ld. DRP be upheld. Contradicting the Ld. DR, the Ld. AR submitted that the assessee has not opted for Safe Harbour Rules and hence it cannot be applied.
We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. We find from the order of the Ld. DRP that the Corporate Guarantee Commission is benchmarked @ 1.90%. The Ld.DRP has compared the issuance of financial / corporate guarantees issued by the Public Sector Banks and has hence benchmarked the commission on outstanding Corporate Guarantee @ 1.90%. Relying on the decision of the Hon’ble Bombay High Court in in the case of Everest Kanto Cylinder Limited, this Bench has consistently considered 0.50% as ALP for benchmarking the Corporate Guarantee Commission issued to the Associated Enterprises [AEs]. Following the principle of consistency and the ratio held in Everest Kanto Cylinder Limited (supra) we are of the considered view that the ALP for Corporate Guarantee Commission shall be benchmarked @ 0.50% of the Corporate Guarantee issued to the AEs.
We therefore direct the Ld. TPO to adopt 0.50% as the Corporate Guarantee Commission and accordingly this issue raised by the assessee in the relevant grounds of appeal is partly allowed.
On the second issue with respect to notional interest on Outstanding Guarantee Commission, the Ld. AR in his written submissions before us, submitted that there is no organized activity of delay in receivable and the outstanding guarantee commission is one off transaction. The Ld. AR further submitted that the delay in receipt of outstanding guarantee commission from the AEs is due to financial difficulties faced by the AEs. The Ld. AR relied on its own case in by the Jurisdictional Tribunal. The Ld. AR further submitted that outstanding guarantee commission receivable is not an international transaction. The Ld. AR therefore pleaded that in the alternative if this transaction is considered as an international transaction it can be benchmarked with reference to the USD LIBOR rates.
Per contra, the Ld. DR relied on the order of the Ld. DRP and supported the directions given by them.
We have heard both the parties and perused the material available on record and the orders of the Ld. Revenue Authorities. Admittedly, outstanding receivables is considered as an international transaction. As
per the Explanation (i)(c) to section 92B of the Act, in the instant case it cannot be disputed to be an international transaction. The contention of the Ld. AR is against the benchmarking @ 7% on the outstanding guarantee commission receivable. The Ld. AR also demonstrated that the AE is in financial difficulties and hence the assessee has subscribed the preference share capital issued by the AE. In the assessee’s own case for the AY 2013-14, this Coordinate Bench of the Tribunal relying on the decision of the Motherson Sumi Infotech & Designs Limited vs. DCIT reported in (2018) 52 CCH 0122 (Delhi) and in the decision of the Pr. CIT vs. B.C. Management Services (P) Ltd (2018) 164 DTR (Del.) 299 and considering the decision in the case of Bechtel India (P) Ltd, held that disallowance of notional interest on delayed payments shall be deleted from the additions made by the Ld. TPO. In the assessee’s own case for the AY 2013-14, relied on by the Ld. AR, we find that the interest on the outstanding receivables has not accrued or crystallized in the year under consideration and hence it does not support the facts in the instant case. However, we find merit in the argument of the Ld. AR that the assessee has not indulged in any systematic or organized activity of allowing the undue credit to the AEs. In the light of the facts and circumstances discussed above, we deem it fit and appropriate to consider the alternative plea raised by the Ld.AR in his written submissions and therefore direct the Ld. TPO to adopt the USD LIBOR rate while benchmarking the ALP for the interest on outstanding guarantee commission receivable by the assessee. Accordingly, this ground is allowed for statistical purposes.
The third issue is with respect to notional interest on share application money given to the AEs. The Ld. AR argued that the assessee has invested in 8% preference share capital of the AE and it is not a sham transaction. The Ld. AR submitted that for this overseas investment, the assessee has complied with the ODI Guidelines as prescribed by the RBI. The Ld. AR vehemently objected to the re- characterization of the share application money as unsecured loans by the Ld. AO. The Ld. AR submitted that the assessee invested in the preference share capital of the AE to meet the margin requirement of the AEs. The Ld. AR relied on the decision of the DCIT vs. Aegis Limited (2019) 104 CCH 0116 (Mumbai High Court). The Ld. AR also relied on the Coordinate Bench of Delhi in Cairn India Limited vs. ACIT (2018) 196 TTJ 0628 (Del.). He therefore pleaded that the order of the Ld. AO be quashed on this Ground.
Per contra, the Ld. DR submitted that as per Explanation (i)(c) to section 92B of the Act it is capital financing which includes any type of short term or long term borrowing, lending or guarantee. The Ld. DR further submitted that the assessee has received no returns on the investments made in the AEs. The Ld. DR also relied on the order of the Ld. DRP and pleaded that it may be upheld. Considering the above, the Ld. AR submitted that the assessee has subscribed to share capital of AE and has not given any kind of financing.
We have heard both the parties and perused the material available on record and the orders of the Ld. Revenue Authorities. We find from the submissions made by the Ld. AR that the assessee has invested in the 8% of the preference share capital in the AE companies. Accordingly 8% preference shares were allotted to the assessee for Rs. 2,64,79,39,036/-. The balance amount of Rs. 3,99,80,12,401/- is held by AE’s as share application money pending for future allotments. The Ld. AR in his submissions has mentioned that the Ld. TPO has miscalculated the investment of Rs.887,71,00,000/- and computed the ALP by charging the interest @ 14.05% on such amount. It is also found from the written submissions of Ld.AR, that the investments in the share capital of the AE is part of the business strategy to acquire high quality coal on long term basis at a concessional price and to facilitate backward integration of the power projects. It is also found that there were no fresh borrowings during the FY 2016-17 as demonstrated by the Ld. AR in his written submissions. We therefore are of the view that interest bearing funds were not invested in the preference share capital of the AE companies. The Hon’ble Mumbai High Court in ACIT vs. Aegis Limited (surpa) relied on by the Ld. AR in para 2 and 3 of the order held as under:
“2. The respondent assessee is a company registered under the companies Act. For the assessment year 2009-10, the assessee was subjected to transfer pricing regime. Question No.1 arises out of the action of the Revenue to tax notional interest in the hands of the assessee through transfer pricing. The facts are that, during the period relevant to the assessment year in question, the assessee had subscribed to redeemable preferential shares of its Associated Enterprises and redeemed some of its shares at par. The TPO held that the preference shares were equivalent to interest on notional basis. The Tribunal by the impugned judgment, deleted the addition by observing that the TPO had re- characterized the transaction of subscription of shares into advancing of unsecured loans. The Tribunal did not accept such conclusion, inter alia on the grounds that the TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction.
We are broadly in agreement with the view of the Tribunal. The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon notional basis. No question of law arises.”
In the instant case also, nothing brought on record by the Ld. Revenue Authorities to suggest that the transaction was a sham.
Therefore judicially following the above decision in the case of Aegis Limited (supra), we are inclined to delete the addition of notional interest for Rs. 67,17,88,665/- made by the Ld. TPO and hereby direct the Ld. TPO to delete the addition made on account of notional interest on the share application money outstanding. We therefore allow the appeal of the assessee on this ground.
In the result, appeal of the assessee is partly allowed.
Pronounced in the open Court on the 16th March, 2023.