Case: The Commissioner of Income Tax, Mumbai Vs. M/S. Everest Kento Cylinders Limited

submitted that EXIM Bank of USA has provided guarantee to Boeing Company of USA against the Hire Purchase Agreement for purchase of aircrafts by Jet Airways India. The EXIM bank has charged a commission of 3% plus commitment charges from Jet Airways as consideration for guarantee. Accordingly, he justified the bench mark in a arms length price for the bank guarantee at 3% of the amount of guarantee. In this manner Mr.Malhotra sought to justify arms length price of Rs.34,99,003/- and therefore the adjustment to the extent of Rs.28,50,353/-. As far as the order of the Tribunal issuing disallowance under section 14A of Rs.1 lac is concerned, he stated that the sum is arbitrary and unsustainable specially in view of the fact that the adjustment to the extent of Rs.4,47,649/- was offered before the Assessing Officer by the Assessee itself. He therefore submitted that three questions of law are substantial questions of law and therefore ought to considered and the appeal be admitted.8. Mr.Pardiwalla appearing on behalf of the assessee pointed out that the first issue of disallowing interest under section 14A of the I.T. Act, the order of the tribunal was prefectly justified and the disallowance of Rs.1 lakh is also justified in view of the fact that the adjustment to the extent of Rs.4,47,649/- that was offered before the Assessing Officer was not based on the original return at all. He pointed out that the original return did not contain any such concession and adhoc figure was something that the assessee submitted during the course of assessment. The admission was thus not a part of the return filed and which was before the Assessing Officer and the Assessee could not be bound by it. He therefore submitted that the qualification made by the Tribunal was appropriate considering the facts of the case. He further submitted that a sum of Rs.11.09 crores which was invested was sourced from funds raised by way of Initial public offering (IPO) to extent of Rs.90 crores. It was found to have been made out of funds raised by IPO and order of the Commissioner of Income Tax (Appeal) has been confirmed by the tribunal. He submitted that investment was made from the surplus funds and nothing was brought on record to show otherwise. The tribunal observed that after having considered fund flow statement there was no scope of supporting the views of the Commissioner of Income Tax and the Assessing Officer that the assesee has made investment out of interest bearing funds. Therefore, considering the fact that the interest bearing funds were not used and providing for some administrative costs, a fair assessment of Rs.1 lac is arrived at for the purpose of disallowance under section 14.9. Mr.Pardiwalla then assailed the TPO findings by making reference to the order of the Tribunal. He pointed out in paragraph 14(b) that the Associated Enterpise could have borrowed money as per prevailing rate in AE countries which were around 5.5 % per annum and during the said period AE had borrowed at the rate LIBOR + 0.83% for term loan for working capital purpose. Thus, if it could have borrowed at the said rate, the prevailing LIBOR rates were ranging from 5.3% and effective rate of borrowing was @ 6.13% for term loan and 5.8% for working capital loan, which was in line with normal rates prevailing in AE country. Mr.Pardiwalla further submitted that AE had obtained loan from its bankers on first charge towards the fixed asset and further hypothecation of inventory and book debts. AE has a gross fixed asset base valued at about USD 13 million and had inventory valued at USD 7.6 million, book debts of USD 5.4 million and cash and a bank balance of USD 1.8 million. He pointed out that against a loan outstanding of USD 10 million as of 31.3.2007, assets available were to the tune of USD 27.4 million. Accordingly there was no question the Associated Enterprise not being able to obtain a loan without this corporate guarantee issued by the Assessee.10. Having considered submissions of Mr.Malhotra for the revenue and Mr.Pardiwalla for the assessee, we are of the view that the order of the Tribunal as regards disallowance under section 14A and restricting the same to Rs.1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of Rs.4,47,649/- was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]10. Having considered submissions of Mr.Malhotra for the revenue and Mr.Pardiwalla for the assessee, we are of the view that the order of the Tribunal as regards disallowance under section 14A and restricting the same to Rs.1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of Rs.4,47,649/was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company.