Recently, Income Tax Appellate Tribunal ( ITAT ) Ahmedabad ruled in favour of the appellant in an appeal filed against the order of the Assessment Officer (AO) made under Section 143(3) read with Section 143(5) of the Income Tax Act, 1961.
The appellant, Bosch Rexroth ( India ) Limited, earlier appealed against the AO’s order of making an upward transfer pricing adjustment of Rs 52,91,667/- in relation to the international transaction of payment of guaranteed fee to the appellant’s Associated Enterprise ( AE ) and sought deletion of the same before the dispute resolution panel. The issue was related to the assessment year 2010-11. However, the panel confirmed the lower authority’s order and dismissed the appellant’s claim. It was later pointed out that the panel, while confirming the order, wasn’t appreciative of the prior judicial decisions made on cases with similar facts. This being an apparent mistake on record of the case, the tribunal found merit in the appeal and reconsidered the issue as well as recalled the prior order for dismissal of the appeal.
The counsel for the appellant contended that for a similar transaction in the assessment year 2009-2010, a similar adjustment made by the then AO was deleted by the tribunal and the ruling was later upheld by the High Court of Gujarat. The counsel also highlighted that the appellant availed a short-term loan of Rs 10 crore for an interest rate of 16% from a bank for the assessment year 2009-10. For further short-term fund requirements totaling RS. 100 crores, the appellant opted for extending the borrowing at 11% from the group company Bosch Limited. Lender being a listed company wanted guarantee, which it availed from its associate enterprise, by paying guarantee fee of 0.75%. Thus, the rate of interest paid by the appellant totaled to 11.75%, lower than the interest rate quoted by the bank.
The AO contended that the transaction was not of arm’s length nature, arguing that no real services were provided by the AE for the guarantee. It was further claimed that the guarantee did not result in a reduced interest rate for the appellant, and that the transaction was not comparable using the Comparable Uncontrolled Price ( CUP ) method, which justified the order for upward adjustment.
The bench comprising Ms. Suchitra Kamble and Mr Makarand V Mahadeokar observed that the effective borrowing cost, including the guarantee fee, was lower than the interest rate quoted by the bank and this justifies the payment of guarantee fee. It was also observed that the argument made by the AO which stated that “no real service were provided” was considered not compelling enough, noting that the economic benefits derived from lower interest rates supported the arm’s length nature of the transaction. The tribunal further focused on emphasizing the importance of consistency in decisions, especially given that cases of similar facts and circumstances were already judicially decided before.
By stressing on the aforementioned points, the tribunal ruled in favour of the appellant and deleted the adjustment made by the Assessing Officer.
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