SYNTHITE INDUSTRIES (P) LTD,KOLENCHERY V. DCIT, CORPORATE CIRCLE-2(1), KOCHI

ITTPA 1/COCH/2024

AI Insights

The case involves Synthite Industries (P) Ltd., which appealed against the orders of the National e-assessment centre concerning the assessment years 2020-21 and 2021-22. The primary issues revolved around transfer pricing additions related to notional guarantee commissions, interest on loans to subsidiaries, and disallowances under Section 14A of the Income Tax Act. The Tribunal considered previous decisions, the CUP method under Rule 10B(1)(a) of the Income Tax Rules, and various judicial precedents to arrive at its decision. The Tribunal's decision involved a mix of confirming some additions while remitting others back to the AO for further verification and assessment based on additional evidence and legal provisions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 471746 (ITAT-COCHIN)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 13-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2020-2021
• Other Referred Cases: CIT Vs. Kusum Healthcare (P) Ltd [398 ITR 66], Principal Commissioner of Income Tax Vs. Kusum Healthcare (P) Ltd [SLP No. 5239/2019], South Indian Bank Vs. CIT [322 CTR 465] [Civil Appeal No. 9606 of 2011], CIT Vs. Reliance Industries Ltd [410 ITR 466], CIT Vs. United Breweries, Addl. CIT Vs. Akkamamba Textiles Ltd, CIT Vs. Excel Industries Ltd [358 ITR 295]
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJIT KUMAR DAS
• Assessee Lawyers: THOMSON THOMAS
• Keywords: Set aside; Transfer pricing; International transaction; Tax effect; TDS; Earning of tax free income; Notional interest; Rule 8D; Related party transaction
• Section: 143(3); 22; 13; 92CA; 14A; 144C; 44AB; 37(1); 92B; 194C; 10B; 20

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH : COCHIN BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER IT(TP)A Nos. 01 & 04/Coch/2024 Assessment Years : 2020-21 & 2021-22 M/s. Synthite Industries (P) Ltd., Kadayiruppu P.O., Kolenchery, Kerala – 682 311. PAN: AADCS5616E Vs. The Deputy Commissioner of Income Tax, Corporate Circle – 2(1), Kochi. APPELLANT RESPONDENT Assessee by : Shri Thomson Thomas, CA Revenue by : Shri Sanjit Kumar Das, CIT-DR Date of Hearing : 19-12-2024 Date of Pronouncement : 13-03-2025 ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER These are the appeals filed by the assessee challenging the orders of the National e-assessment centre, dated 25/06/2024 and 26/10/2024 in respect of the A.Ys. 2020-21 and 2021-22 respectively and raised the following grounds: IT(TP)A No. 01/Coch/2024 (Assessment Year : 2020-21) “1. In respect of Transfer Pricing Addition towards notional guarantee commission — Rs. 1,40,94,392/-: i. The Dispute Resolution Panel has erred in applying high rate of Guarantee Commission of 1% in respect of Page 2 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 Guarantees given by the appellant company for its Subsidiary in China. ii. The DRP ought to have considered the fact that for giving Stand by Letter of Credit to Citibank (China), Citibank India has charged commission of only 0.15% on the Subsidiary in a completely unrelated arms length transaction. Hence, charging guarantee commission above 0.15% is against equity and against the CUP method prescribed under Rule 10B (1)(a) of the Income Tax Rules. iii. The amount actually recovered by the appellant company from the Subsidiary towards guarantee commission amounting to Rs. 11,33,177/- and which was allowed by the TPO in the Order u/s 92CA (3) and also by the AO in the Draft Order u/s 144C (1) ought to have been allowed by the AO in the order u/s 143(3) also. iv. The DRP has relied on 8 ITAT decisions as per paragraph 2.8.8 of its order all of which prescribes guarantee commission of 0.50% or lower rates. Hence, DRP having relied on these 8 ITAT decisions to emphasize the point that guarantee commission is to be applied, has completely erred in ignoring the rate of guarantee commission of 0.50% or lower as adopted by the ITAT in those decisions. v. Appellant's Banker, The Federal Bank Ltd had sanctioned Bank Guarantee to the appellant at a Commission of 0.50% in a completely unrelated transaction. Hence, the DRP has erred in not following the CUP Method prescribed under Rule 10B (1)(a) of the Income Tax Rules. 2. In respect of Transfer Pricing Addition of Notional interest on belated Trade Receivables — Rs. 8,91,947/-: i. The DRP ought to have considered the fact that the appellant has not charged interest on belated Trade Receivables in respect of any of its unrelated parties. Hence, charging interest only on Associated Enterprises alone is against the CUP Method prescribed under Rule 10B (1)(a). ii. Since the original sales transactions itself is benchmarked and has passed he test of transfer pricing scrutiny, the receivables generating out of the said sales cannot again be subjected to transfer pricing adjustment based on the decision of the Delhi High Court in CIT Vs. Kusum Healthcare (P) Ltd [398 ITR 66]. SLP filed before the Page 3 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 Supreme Court by the Department was also dismissed in principal Commissioner of Income Tax Vs. Kusum healthcare (P) Ltd [SLP No. 5239/2019]. iii. The DRP has erred in applying a very high rate of interest of 6.818% when appellant itself has taken foreign currency loan from Union Bank of India at rate of interest varying from 1.52% to 4.13%. 3. In respect of Transfer Pricing Addition of interest on loan to Subsidiary — Rs. 6,39,120/-: i. The DRP has erred in confirming the high rate of interest of 7.818% applied by the TPO in respect of loan given by the appellant to its Subsidiary as against 3.676% applied by the appellant. ii. The DRP ought to have considered the fact that the appellant company itself had availed foreign currency loan from Union Bank of India at a rate of interest varying from 1.52% to 4.13%. 4. In respect of disallowance u/s 14A — Rs. 1,40,94,392/-: i. The Assessing Officer and the DRP have erred in making disallowance u/s 14A. ii. The DRP ought to have considered the fact that the appellant company had sufficient own funds to make the Investments and that no expenditure has been incurred by the appellant in earning the exempt income. iii. The Assessing Officer ought to have considered the following Supreme Court decisions wherein it was held that where sufficient own funds are available, no disallowance can be made u/s 14A:- a. South Indian Bank Vs. CIT [322 CTR 465] [Civil Appeal No. 9606 of 2011]. b. CIT Vs. Reliance Industries Ltd [410 ITR 466]. iv. The assessing officer ought to have considered the fact that Assessee is following Ind AS Accounting as mandated by the Companies Act, 2013 and hence, investments in equity instruments are to be shown in the financial results at fair value ad not at cost. Accordingly, investments in the equity shares of Cochin International Airport Ltd (CIAL) had to be revalued at market value. Hence, as against actual cost of investment amounting to Rs. 24.98crores, the revalued figure shown in the audited accounts was Rs. Page 4 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 117.67 crores. For working out disallowance u/s 14A, the assessing officer adopted the fair value of Rs. 117.67 crores as against actual cost of Rs. 24.98 crores. Hence, investments in CIAL was inflated by Rs. 92.68crores (Rs. 117.69 cr less Rs. 24.98 cr).” IT(TP)A No. 04/Coch/2024 (Assessment Year : 2021-22) 1. In respect of Transfer Pricing addition towards Corporate Guarantee Commission —Rs. 1,89,46,358:- 1.1. The Dispute Resolution Panel (DRP) has erred in adopting a high rate of corporate guarantee commission of 1%. 1.2. The DRP ought to have considered the fact that appellant's bank, M/s. Federal Bank has sanctioned Bank guarantee to the appellant at a guarantee commission of 0.50% in a completely uncontrolled transaction. Hence, under the CUP Method prescribed under Rule 10B (1)(a)(i) of the Income Tax Rules, the DRP ought to have restricted the Guarantee Commission to 0.50%. 2. In respect of Transfer Pricing addition towards interest on loan to Subsidiary – Rs. 26,51,782/-: 2.1. The DRP has erred in applying a high rate of interest of 6.186% [LIBOR 0.686% + spread of 5.50%] in respect of loan given by the appellant company to its Subsidiary Synthite Vietnam LLC. 2.2. DRP ought to have considered the fact that the appellant company had availed foreign currency loan from Standard Chartered Bank at a rate of interest of 2.33% and hence charging interest rate higher than this is against the stipulation given in Rule 10B (1)(a)(i) of the Income Tax Rules. 3. In respect of disallowance of Guarantee Commission paid to Directors for providing personal guarantee to Banks for providing loan to the appellant company — Rs. 10,85,10,000/-: 3.1. The Assessment Unit has erred in disallowing guarantee commission of Rs. 10,85,10,000/- paid by the company to directors for providing personal guarantee to the Banks for availing loans by the company. Page 5 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 3.2. The Assessment Unit ought to have considered the fact that guarantee commission is allowable as deduction u/s 37(1) of the Income Tax Act, 1961. 3.3. The contention of the assessment unit that Bank has provided loan on the basis of mortgaging the assets of the company and not on the basis of personal guarantee of directors is factually incorrect as the sanction letter of the loans clearly stipulate that personal guarantee of the directors is to be provided. 3.4. The Assessment Unit ought to have considered the fact that all the directors to whom guarantee commission has been paid have included the guarantee commission in the income returned by them and that they are taxed @ 30% + Surcharge + Education cess whereas the company is taxed only @ 22% u/s 115BAA of the Income Tax Act, 1961. 3.5. The Assessment Unit ought to have considered the fact that disallowance of guarantee commission would amount to double taxation of the same amount, once in the hands of the company @ 22% [u/s 115BAA] and again in the hands of the directors @ 30%. This is against all norms of equity. 3.6. The Assessment Unit has erred in relying on the decision of the Karnataka High Court [which is upheld by Supreme Court] in the case of CIT Vs. United Breweries. In that case, the Chairman of the Company, Shri Vijay Mallya had net worth of only Rs. 70 lakhs and he received guarantee commission of Rs. 1.15 crores. Further, High Court observed that he being an NRI, permission of RBI was required which was not taken. On the facts of the case, High Court came to the conclusion that the assessee company paid the MD commission \"on the pretext\" of paying guarantee commission and it is a clear case of \"a ploy to divert the income of the companies under his management\". Further, in that case, the guarantees were executed long back and had expired. In Assessee Company's case there is no such finding by the Assessment Unit and the Assessment Unit has blindly followed the case as if guarantee commission is not allowable at all. The Assessment Unit ought to have considered the fact that all the directors have substantial wealth and the Page 6 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 Banks have obtained CA certified copies of Net Worth Certificate. 3.7. Being a Private Limited Company, there is no restriction of payment of Managerial Remuneration unlike in the case of a public limited company. Hence, the Assessment Unit ought to have considered the fact that there is no need for the assessee company to pay remuneration to directors in the pretext of guarantee commission. 3.8. Having taken the stand that Guarantee Commission is chargeable in respect of Corporate Guarantee given to the Subsidiary, the Department cannot take a different stand when it comes to Guarantee Commission paid to Directors. 4. In respect of disallowance of write off of Obsolete Inventory — Rs. 17,97,14,722/-: 4.1. The Assessing Unit of NFAC has erred in disallowing write off of inventory of Rs. 17,97,14,722/- on the ground that Board Resolution approving write off was made on 20.04.2021. 4.2. The Assessment Unit ought to have considered the fact that the obsolete stock were identified during the financial year 2020-21 and the write off was also effected during the financial year 2020-21 though the Board Resolution for write off was dated 20.04.2021. The Assessment Unit ought to have considered the fact that the Board at its meeting held on 22.12.2020 considered the matter of write off of inventory and instead of writing off, appointed a Committee to identifying the obsolete stock and that the Committee furnished its report to the Board on 21.03.2021. Though the Board Resolution is dated 20.04.2021, it relates to the period 2020-21 financial year. 4.3. The Assessment Unit has factually erred in the contention that the write off of inventory is made through a note and not through profit & loss accounts. This is factually incorrect. 4.4. The Assessment Unit ought to have considered the fact that the tax rates for Assessment years 2021-22 & 2022-23 are same and if at all the write off is made during AY 2022-23, it is revenue neutral. Page 7 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 5. In respect of Addition alleging it as prior period purchases — Rs. 16,05,544/-: 5.1. The Assessing Unit has erred in disallowance of purchases amounting to Rs. 16,05,594/-on the ground that the invoices relate to the previous years. The Assessment Unit ought to have considered the fact that the assessee is a Rs. 1800 crore turnover manufacturing company engaged in the food related industry with hundreds of vendors. Due to dispute regarding quality of goods/ rates/ quantity mismatches, negotiations go on for long periods and only when a settlement is reached, the same is accounted as purchases. Hence, the Assessment Unit has erred in treating this as prior period expenses and disallowing it. 5.2. The Assessment Unit has no dispute regarding the fact that the expenses are actually incurred by the assessee. 5.3. Though the invoices bear the date of earlier years, the expenses have crystallized during the year on account of settlement of various disputes. 5.4. The Assessment Unit ought to have considered the fundamental accounting assumption of \"going concern\" concept. In any going concern, there will be some ongoing disputes and the accounting for such items is done on settlement of the disputes and the Assessment Unit has erred in treating such items as prior period expenses and disallowing it. 6. In respect of addition of 10% of expenses incurred towards Freight & Forwarding Charges, Contract Expenses, Legal & Professional Fee and Repairs & Maintenance —Rs. 8,89,03,530/-: 6.1. The Assessment Unit has erred in disallowing 10% of Freight & Forwarding Charges, Contract Expenses, Legal & Professional Fee and Repairs & Maintenance amounting to Rs. 8,89,03,530/-. 6.2. The reason for disallowance cited by the Assessment Unit in paragraph 2.4.5 of the Show Cause Notice dated 28.11.2023 issued by the Faceless Assessment Unit is that the appellant had not furnished PAN of the parties and details of TDS deducted. Page 8 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 In the course of Remand Proceedings by the DRP, the jurisdictional AO was directed to verify the particulars of TDS. Jurisdictional AO, on a random basis, conducted enquiries and gave the remand report to DRP stating that no deviations have been noticed in respect of TDS. Having called for the Remand Report and the AO having found the TDS compliances in order, the DRP has erred in sustaining the addition. 6.3. The Assessment Unit and the DRP ought to have considered the fact that the appellant company is subject to Tax Audit u/s 44AB of the Income Tax Act and that full particulars of TDS were given in the tax audit report and no deviations are reported. Hence, making blanket disallowance of 10% of the total expenses without any finding regarding non – compliance is against all norms of equity and justice.” 2. Both the appeals are heard together since the assessee is one and the same and most of the issues are also common and therefore disposed of together by this common order for the sake of convenience. 3. First we will take up the appeal relating to A.Y. 2020-21 in IT(TP)A No. 01/Coch/2024. The brief facts of the case are that the assessee is a company engaged in the business of manufacturing and export of spice oils, spice oleoresins and other value added spice products. For the A.Y. 2020-21, the assessee had reported a total income of Rs. 155,25,43,260/-. The case of the assessee was selected for complete scrutiny under CASS and a reference has been made to the TPO u/s. 92CA(1) of the Act for determination of ALP on international transactions. Thereafter, the TPO made the transfer pricing addition towards notional guarantee commission in respect of corporate guarantee given for subsidiary, addition towards national interest on belated trade receivables from subsidiaries and addition towards interest on loan to subsidiary. The AO further made an addition u/s. 14A r.w. Rule 8D of the Act. The AO sent a draft assessment order u/s. 144C(1) with the above proposed additions for which the assessee filed their objections before the DRP. The DRP had granted partial relief by reducing the rate of guarantee Page 9 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 commission from 2.24% to 1% and directed the AO to apply guarantee commission only on prorate basis for 175 days since the guarantee was given on 09/10/2019. The DRP also reduced the rate of interest applied on the trade receivables from the subsidiary beyond 270 days from 7.818% to 6.818%. In respect of the addition made u/s. 14A r.w. Rule 8D, the DRP directed the AO to exclude the taxable investments from the total investments calculation. Thereafter the AO made the final assessment order u/s. 143(3) in which the AO had made the additions based on the DRP directions. 4. Aggrieved with the order of the AO, the assessee filed this appeal before this Tribunal. 5. In respect of the A.Y. 2021-22, the assessee filed their return of income declaring a total income of Rs. 286,68,35,104/-. Thereafter this case was also selected for complete scrutiny under CASS to examine the issue of international related party transactions and accordingly a draft assessment order was passed. The assessee filed their objections as against the draft assessment order before the DRP and the DRP also disposed of the objections and gave directions u/s. 144C(5) of the Act. In the draft assessment order, the AO made the following transfer pricing additions i.e. corporate guarantee commission at 2.53% and interest on loan to subsidiary at 6.186%. The AO also made the following non-transfer pricing additions i.e. disallowance of guarantee commission paid to Directors for personal guarantee given to bankers for granting loans to the assessee, disallowance of domestic commission on the ground that agreement with all the parties were not produced, disallowance of obsolete stock written off, disallowance of purchases since the invoices related to the earlier years and finally made an addition of 10% on the freight and forwarding charges, contract expenses, legal and professional fees and repairs and maintenance since the ledger account with PAN Numbers for all the payments were not provided. After the directions given by the DRP based on the objections filed by the Page 10 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 assessee, the AO completed the assessment u/s. 143(3) in which the transfer pricing additions were reduced. In respect of the other non-transfer pricing additions, except the domestic commission, the AO has confirmed the other additions. As against the said order, the assessee is in appeal before this Tribunal in IT(TP)A No. 4/Coch/2024. 6. First we will take up the transfer pricing additions involved in the two A.Ys. viz., corporate guarantee commission, notional interest on belated trade receivables from subsidiary and shortfall in interest on loan to subsidiary after reducing the amount actually recovered by the appellant. Insofar as the transfer pricing additions are concerned, the said dispute involved in both the AYs are as follows: Transfer pricing addition: Sl.No. Assessment Year 2020-21 1. Corporate guarantee commission 2. Interest on delayed trade receivables from subsidiary 3. Interest on loan to subsidiary 2021-22 1. Corporate guarantee commission 2. Shortfall in interest on loan to subsidiary after reducing the amount actually recovered by the assessee. 7. At the time of hearing, the Ld.AR submitted that the issue of transfer pricing additions were already decided by this Tribunal in the assessee’s own case in respect of the A.Y. 2017-18 in IT(TP)A No. 01/Coch/2023 vide order dated 11/12/2024. The Ld.AR also furnished the copy of the said order and prayed to follow the said findings insofar as the issues covered are concerned. The Ld.AR also filed a paper book enclosing the written submissions as well as the other documents and also the judgment of Hon’ble Supreme Court and Hon’ble High Court and prayed to consider the documents and grant the benefits granted in the said orders. Page 11 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 8. The Ld.DR relied on the order of the lower authorities insofar as the transfer pricing additions are concerned. 9. We have heard the arguments of both sides and perused the materials available on record. 10. We have perused the order of the Coordinate Bench of this Tribunal in assessee’s own case in IT(TP)A No. 01/Coch/2023 in which this Tribunal had dealt with the notional corporate guarantee commission issue in which the Tribunal had considered the banker’s letter insisting for the assessee on a counter guarantee in the form of corporate guarantee by the assessee company and this Coordinate Bench had analyzed the issue in detail and also considered the order of the Bangalore Tribunal and other Tribunal orders relied on by the assessee and finally held that the corporate guarantee commission is to be taken at 1% and not at 2.20% adopted by the TPO which was confirmed by the DRP in that case. 11. The assessee had relied on the various case laws in which the other Tribunals had held that the corporate guarantee commission to be applied is varied from 0.2% to 0.53%. The Ld.DRP had also relied on the Tribunal decisions in paragraph 2.8.8 in which the guarantee commission was at a maximum of 0.5% where as the Ld.DRP in the present case had fixed the rate of guarantee commission at 1%. The assessee also relied on the said findings of the Ld.DRP. But in the case of the assessee in respect of the A.Y. 2017-18, this Tribunal had took a decision that the rate of the corporate guarantee commission could be at 1% and therefore we are of the view that the Ld.DRP had already refixed the rate of corporate guarantee commission at 1% and therefore we find that there is no reason to interfere with the order of the AO. Page 12 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 12. In both the appeals, the issue of notional corporate guarantee commission was involved and therefore the finding given above will apply to both the A.Ys. insofar as the corporate guarantee commission is concerned. The assessee in their written submissions had alleged that the amount of guarantee commission of Rs. 11,33,177/- was actually recovered by the assessee from the subsidiary which was also allowed by the TPO in the order passed u/s. 92CA(3) and also by the AO in the draft order u/s. 144C(1) but while making the final order u/s. 143(3), this amount was not allowed and prayed to allow this amount from the corporate guarantee commission. 13. In the above paragraphs, we confirmed the corporate guarantee commission at 1% but the allegation now raised by the assessee in the written submissions is to be verified by the AO and if the AO is found that the allegation is correct, we direct the Ld.AO to allow the said amount from the corporate guarantee commission. 14. The second dispute involved in the A.Y. 2020-21 is about the transfer pricing addition made on the notional interest on the belated trade receivables from subsidiary. We have considered the submission made by the assessee that the assessee had not charged interest on the belated trade receivables in respect of its unrelated parties and therefore charging interest only on the associated enterprises is against the CUP method prescribed under Rule 10B(1)(a) of the rules. We have also considered the submission that the original sales transactions itself are benchmarked and has passed the test of transfer pricing scrutiny, the receivables generating out of the said sales cannot again be subjected to transfer pricing adjustment for which proposition we have also considered the judgment of the Hon’ble Delhi High Court reported in 398 ITR 66 in the case of CIT vs. Kusum Healthcare Pvt. Ltd. We were also informed that the said judgment of the Hon’ble Delhi High Court was later on confirmed by the Hon’ble Supreme Court by dismissing the Special Leave Petition filed by the department. We Page 13 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 have also considered the submission that the DRP had applied a very high interest rate at 6.818% when the appellant has obtained foreign currency loan from the Union Bank of India at the rate of interest from 1.52% to 4.13%. 15. We have also perused the judgment of the Hon’ble Delhi High Court cited supra in which the Hon’ble Delhi High Court has held as follows: “Held: The inclusion in the Explanation to section 92B of the expression 'receivables' does not mean that dehors the context every item of 'receivables' appearing in the accounts of an entity, which may have dealings with foreign associate enterprise would automatically be characterized as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors, which will have to be investigated on a case-to-case basis. Importantly, the impact this would have on the working capital of the assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analyzing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an associate enterprise, the arrangement reflects an international transaction intended to benefit the associate enterprise in some way. The entire focus was on just one assessment year and the figure of receivables in relation to that assessment year could hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re- characterized the transaction. This was clearly impermissible in law.” 16. In addition to the above judgment of the Hon’ble Delhi High court, the assessee also filed a report from the Union Bank of India about the rate of interest charged by them towards the foreign currency loan obtained by the assessee in which the rate of interest was fixed from 1.52% to 4.13%. It seems that the assessee had not submitted the said details before the lower Page 14 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 authorities and therefore we are remitting this issue to the file of the AO to consider the submission made by the assessee in the light of the Hon’ble Delhi High Court judgment and also on the basis of the report from the Union Bank of India and arrived the correct interest rate. With the above observations, we remit this issue that arose in the A.Y. 2020-21 to the assessing officer to consider the same and pass fresh orders accordingly. 17. Now the third dispute is about the transfer pricing addition towards the interest on loan to subsidiary which finds place in the A.Y. 2020-21. We have considered the submission made by the assessee that the DRP had fixed a higher rate of interest at 7.818% as against the interest adopted by the assessee at 3.676%. In this connection, the assessee submitted that they have availed the foreign currency loan from the Union Bank of India at a rate of interest from 1.52% to 4.13% and therefore the interest now fixed by the DRP at 7.818% is an abnormal one and it is against the rate of interest charged by the banks. We have also considered the fact that the assessee had followed CUP method prescribed u/s. 92CA(1)(a) of the Act and therefore we are of the opinion that the rate of interest adopted at 7.818% by the DRP is on the higher side and it requires an interference. Even though the assessee had submitted that the Union Bank of India had charged the rate of interest varied from 1.52% to 4.13% for availing the foreign currency loan, the assessee had adopted an interest rate of 3.67% which seems to be a reasonable one since the loan is given to the assessee’s subsidiary only. In order to fix the interest rate at 7.818%, we have not found any justification by the DRP and therefore we are refixing the rate of interest at 3.67% as adopted by the assessee and ordered accordingly. 18. The other dispute raised by the assessee in the A.Y. 2021-22 is about the transfer pricing addition of interest on loan to subsidiary at the rate of 6.186%. We have considered the fact that the TPO as well as the DRP had applied a rate of interest at 6.186% (LIBOR 0.686% + spread 5.50%) as against the rate of interest charged by the assessee, on the loan given to its Page 15 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 subsidiary, Synthite Vietnam LLC, which are at 2.952% and 2.211%. We have also perused the loan sanction letter given by the Standard Chartered Bank in which the assessee had availed the foreign currency loan at the rate of 2.33% whereas in the present dispute, the authorities had fixed the rate of interest at 6.186%. Further, we have also gone through the section 92CA(1)(a) of the Act which prescribed the method for arriving the arms length price under the Comparable Uncontrolled Price method. We have also considered the fact that the assessee had charged the interest at 2.952% as against the interest charged at 2.33% by the Standard Chartered Bank. When we compare all the details furnished by the assessee and the computation of arms length price u/s. 92CA(1) of the Act, we are of the opinion that the assessee’s contention could not be simply ignored when the facts available before us shows a different picture. We therefore set aside the order of the DRP and AO insofar as this issue is concerned and remit the issue to the file of the AO to decide the issue afresh by taking into consideration the loan sanction letter issued by Standard Chartered Bank and the provision 92CA(1) of the Act which prescribed the method for determining the computation of arms length price in the Comparable Uncontrolled Price method. 19. The last ground raised by the assessee for the A.Y. 2020-21 is in respect of the disallowance made u/s. 14A of the Act. We have considered the submission made by the Ld.AR in which the Ld.AR submitted that the assessee company has sufficient own funds and the investments were made out of its own funds. The Ld.AR also in support of this argument had filed a statement, which is extracted as below. Page 16 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 20. As seen from the above statement filed by the assessee, it is clear that there is a net deduction in borrowings to the extent of Rs. 48.57 crores during the year. Therefore it is clear that the assessee has not obtained any borrowings in order to make the investments. The Ld.AR also filed the copy of the audited accounts along with the paper book and also relied on the judgments of the Hon’ble Supreme Court reported in 322 CTR 465 in the case of South Indian Bank Ltd. vs. CIT and another judgment reported in 410 ITR 466 in the case of CIT vs. Reliance Industries Ltd. and submitted that the disallowance made u/s. 14A r.w.Rule 8D is not correct. 21. We have considered the said arguments made by the assessee and also perused the statement which we have extracted in the earlier paragraph Page 17 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 and also we have perused the audited accounts filed by the assessee and we are of the view that the argument made by the assessee is a reasonable one when the authorities below had not pointed out any other materials, in order to apply the disallowance u/s. 14A of the Act. We have also perused the Hon’ble Supreme Court judgments cited supra in which the Hon’ble Supreme Court has held as under “27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.” 22. It is also not pointed out by any of the authorities that the assessee had incurred any expenditure for earning the exempt income. In such circumstances, the disallowance made u/s. 14A is not in accordance with the principles laid down by the Hon’ble Supreme Court. We therefore inclined to set aside the disallowance made u/s. 14A of the Act. 23. The Ld.AR also made an alternative submission that the assessee had shown the investments in equity instruments at fair value and not at the cost and therefore the investments made in the equity shares of Cochin International Airport Ltd. which were shown in the financial statements at fair value has to be revalued and the cost of investments in equity shares of Cochin International Airport Ltd. has to be taken as Rs. 24.98 crores as against the fair value mentioned in the audited accounts at Rs. 117.67 crores. The Ld.AR further submitted that since the company is following Ind-AS method as mandated by the Companies Act, the investments in equity were shown in the financial statements at the fair value. Page 18 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 24. We have considered the alternate argument made by the Ld.AR and satisfied ourselves that the argument may be good enough but this argument is not required to be adjudicated since in the earlier paragraphs, we have held that disallowance made u/s. 14A itself is not warranted. In the result, the disallowance made u/s. 14A is deleted. 25. Now we will take up the other non-transfer pricing additions made by the AO in respect of the A.Y. 2021-22 which are as follows: 26. First we will take up the disallowance of the guarantee commission paid to Directors. The Ld.AR submitted that for the purpose of its working capital requirements, the assessee company borrowed funds from banks for which the banks insisted for the personal guarantee of the Directors. Apart from the personal guarantee, the bank also insisted on the net worth statement of the Directors duly certified by the Chartered Accountant. The Directors were also required to furnish the details of the properties which were offered as collateral security in order to get the loan amount. The assessee also filed the necessary documents in the paper book and submitted that the judgment of the Hon’ble Karnataka High Court in the case of CIT vs. United Breweries Ltd. in ITA No. 404/2009 dated Page 19 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 15/10/2011 are distinguishable and prayed to allow the appeal in respect of this disallowance. 27. We have considered the audited accounts of the assessee filed in page 20 of the paper book in which the total borrowings are Rs. 356.08 crores. We have also perused the sanction letter issued by the bank dated 24/08/2020 enclosed in page 21 of the paper book in which the bankers had insisted the personal guarantee of the Directors and in fact in the same letter, the bankers had mentioned the collateral security offered by the Directors in order to avail the credit facilities offered by the bank. In pages 40-45, the assessee also filed the net worth certificate issued by the Chartered Accountant in respect of the Directors since the bank had sought for such certificate while sanctioning the loan amount. 28. The ld AR submitted the fact that there are six Directors who has received the guarantee commission from the assessee company and the TDS was also deducted while making the payments and the Directors were also included the said income in their return of income and paid the tax at the maximum slab of 30%. Therefore there is no loss of revenue to the department since the assessee is assessed to tax u/s. 115BAA at 22% whereas all the Directors who have received the guarantee commission were paying the tax at the maximum rate of 30%. The Ld.AR further submitted that since the assessee is a private limited company, there is no restrictions under the Companies Act for the payment of remuneration to the Directors and therefore there is no need for the assessee company to pay the Directors remuneration in the pretext of guarantee commission. The AO had disallowed the guarantee commission in the hands of the assessee and subjected the same to tax at 22%. Further the guarantee commission received by the Directors were shown in their return of income and they have paid the tax at the rate of 30% and therefore the very same income was subjected to tax twice in the hands of the assessee as well as in the hands of the Directors. Page 20 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 29. The Ld.DR relied on the order of the lower authorities and also relied on the judgment of Hon’ble Karnataka High Court which was also relied on by the AO and prayed to dismiss the appeal. 30. We have also considered the arguments advanced by both the parties and also the documents filed in support of their arguments and it is a fact that the assessee company had obtained loan from the bank for which the bankers had issued sanction letters in which the bankers insisted for the personal guarantee of the Directors and also treated the properties of the Directors as collateral security. We have also perused the net worth certificate issued by the Chartered Accountants inorder to get the bank loan. 31. We have also perused the judgment of the Hon’ble Karnataka High Court cited supra in which the Hon’ble High Court had held that “From the aforesaid undisputed material on record, it is clear that the assessee has paid his Chairman Mr. Vijaya Mallya guarantee commission on the basis of the loan which they have obtained from the Banks. The aforesaid material also discloses that none of the bankers had obtained the details of the assets and liabilities of Mr. Mallya in India and outside India. His net wealth on 31-3- 1990 is Rs. 70.47 lakhs. He has stood as a guarantor in respect of his companies and the total amounts borrowed from the bankers is Rs. 115.32 crores. He has been paid in all a sum of Rs. 1.15 crores as guarantee commission from 1-5-1988 to 31-3-1990. The Circular of RBI dated 29-7- 1999 and in June, 1986 mandates that the banks were required to ensure that the practice of giving guarantees was not used by the directors as a source of remuneration from the borrowing company and the banks were also advised to obtain such an undertaking from the borrowing company. In fact as per the exchange Control Manual, prior permission of RBI was required to accept the guarantees of NRIs. The position of Mr. Mallya has changed from the status of a resident to NRI. The payment of guarantee commission is not a remuneration under section 309 of the Companies Act.” Page 21 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 32. The facts involved in the Hon’ble Karnataka High Court judgment is that the Director simply received the commission by putting his signature but in the present case, as seen from the records, it is clear that the Directors had not only affixed their signatures but also offered their properties as collateral security and therefore the said judgment cannot be relied on by the AO for disallowing the said guarantee commission paid to the Directors. As rightly argued by the Ld.AR, there is no necessity for the assessee company to pay the remuneration under the pretext of guarantee commission when the Companies Act does not fix the ceiling about the Directors remuneration. Further, we have also seen that there is no loss of revenue to the department since the Directors are paying the tax at 30% on the commission received by them whereas, at the maximum, the company would pay tax at 22% as per section 115BAA of the Act. We are also in agreement with the argument made by the Ld.AR to the effect that the disallowance in the hands of the assessee would amount to double taxation one in the hands of the assessee and another in the hands of the Directors and therefore we accept the argument submitted by the Ld.AR that the guarantee commission given to the Directors would not be disallowed by the AO. We have also gone through the judgment of the Hon’ble Delhi High Court reported in 254 ITR 691 in the case of Mahalakshmi Sugar Mills Co. Ltd. vs. CIT in which the Hon’ble Delhi High Court has held that the payment of guarantee commission to the Director was eligible for deduction by following the judgment of Hon’ble Supreme Court reported in 227 ITR 464 in the case of Addl. CIT vs. Akkamamba Textiles Ltd. In such circumstances, we are of the view that the guarantee commission paid to the Directors are eligible for deduction otherwise it amounts to double taxation. Even though we are agreeing with the assessee on merits, in order to ascertain the fact that whether the Directors had included the said commission received as income in their return of income, we remit this issue to the AO for proper verification and if the AO finds that the Directors had included the said income in their return of income, then the assessee is Page 22 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 entitled for the relief insofar as the guarantee commission paid to the Directors are concerned. 33. Insofar as the next ground raised by the assessee against the disallowance of write off of non-saleable obsolete inventory, the Ld.AR submitted that during the A.Y. 2021-22, it was noticed that many items were either deteriorated or obsolete which cannot be sold / used. Therefore the assessee company constituted a committee to conduct a detailed valuation of the said stocks and on the basis of the report filed by the committee, the assessee had claimed the value of the goods which could not be sold / used. The Ld.AR also furnished the copy of the report of the committee dated 21/03/2021 and also the Board Resolution appointing the committee and the Board Resolution to write off the said inventories in the paper book and prayed that the said disallowance made by the AO is not correct. 34. The A.O. based on the fact that the Board Resolution was passed on 20.04.2021 i.e. in the A.Y. 2022-23 and therefore the write off can be effected only during the A.Y. 2022-23. The AO further stated that some inventories are less than 365 days whereas the Board had approved only the inventories above 365 days. 35. The Ld.AR submitted that even though the Board had approved to write off the obsolete inventories on 20/04/2021, the Committee gave its report on 21.03.2021. The Board had formed the committee on 22.12.2020 in order to find out the obsolete inventories and the Committee also after conducting proper study, had given its report on 21.03.2021, recommending to write off the inventories given in the report. Therefore the write off of inventories were related to the A.Y. 2021-22 only. The Ld.AR further submitted that the rate of tax for the two A.Ys. are one and the same, there submitted that there is no need to dispute the year of liability. In support of his proposition, the Ld.AR relied on the judgment of the Hon’ble Supreme Page 23 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 Court reported in 358 ITR 295 in the case of CIT vs. Excel Industries Ltd. The Ld.AR further submitted that the AO had erred in observing that the Board had approved the write off of inventory which are less than 365 days old, whereas the Board had stated that most of these materials are more than 365 days old. 36. We have considered the submissions made by the Ld.AR as well as the Ld.DR and we are satisfied ourselves, that the inventories were segregated on 21.03.2021 itself and the Committee also recommended to write off the same. Therefore it is clear that the inventories are related to the A.Y. 2021- 22 and it should become obsolete during the A.Y. itself and therefore the expenses claimed by the assessee as an expenditure during the A.Y. 2021- 22 is correct. Even though the Board Resolution was made in the A.Y. 2022-23, the inventories became obsolete during the A.Y. 2021-22 and therefore the assessee had rightly claimed the expenses during the A.Y. 2021-22. Further we have perused the Board Resolution and in the resolution it was mentioned only as “Moreover, most of these materials are more than 365 days”, which does not mean that the Board had approved only the inventories which are more than 365 days. The number of days is irrelevant when the Committee found that the inventories are obsolete and cannot be used. 37. We have also gone through the judgment of the Hon’ble Supreme Court reported in 358 ITR 295 in the case of CIT vs. Excel Industries, wherein it was held as follows: “32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at Page 24 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.” 38. In the above judgment of the Hon’ble Supreme Court, even though directly not applicable to the facts of the present case, the Hon’ble Supreme Court made a passing remark about the non-deprival of any tax to the Revenue since the rate of tax remained the same in the present A.Y. as well as in the subsequent assessment year. In the case on hand also the tax rate remains the same in the A.Ys. 2021-22 and 2022-23 and the Revenue is not deprived of any tax. 39. In view of the above discussions, we are allowing the claim made by the assessee in respect of the write off of Non-Saleable obsolete inventory in the A.Y. 2021-22 and ordered accordingly. 40. In respect of the addition on the ground that the purchases are related to the earlier years, we have perused grounds raised by the assessee and the order of the lower authorities. The assessee had not filed any documents in support of their contention but raised a general ground. We have considered the fact that the purchase invoices related to the earlier years and therefore the AO had rightly disallowed the said expenses in the current year and made the addition. Therefore we are dismissing this ground raised by the assessee. 41. The last addition made by the A.O. is in respect of the expenses incurred towards Freight & Forwarding charges, Contract Expenses, Legal & Professional Fee and Repairs & Maintenance. The Ld.AR submitted that the AO had wrongly subjected the 10% of the above expenses as the assessee had not submitted the PAN details of the parties and the details of TDS deducted. For the sake of clarity, the Ld.AR take us through the reply filed by the assessee to the show cause notice, which reads as follows: Page 25 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 Page 26 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 Page 27 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 42. It was submitted by the Ld.AR that the assessee had supplied the details of the most of the parties and informed the AO that the list is very lengthy and therefore filed the details of the parties which are readily available and undertook to file the balance, on hearing from the A.O. The Ld.AR also pointed out that the Statute also not prescribed that the said details should be furnished even for the amount credited below Rs.30,000/-. The Ld.AR also relied on the Audit Report and submitted that no deficiency was pointed out about the non-compliance of TDS provisions. The Ld.AR submitted that the total number of line items are more than 2000 and undertook to produce all the details on hearing from the AO. The Ld.AR submitted that instead of calling for the details, the AO had confirmed the disallowance at 10% for which the AO has no basis. 43. The Ld.DR submitted that since the assessee had not furnished the details, the AO had confirmed his proposals. 44. We heard the arguments of both sides. We have also gone through the show cause notice issued by the AO as well as the reply filed by the assessee. In the show cause notice the AO sought for the details of the expenses with PAN of each of the payee. As seen from the reply, the assessee had submitted most of the details including the Ledger copy of expense heads. The assessee had also explained that as per section 194C of Page 28 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 the Act, TDS need not be deducted if the payment does not exceed Rs. 30,000/- and the aggregate payment for the year does not exceeds Rs. 1 Lakh. We have considered the said submissions and found that the same is in accordance with the provisions. The Ld.AO ought to have verified each and every invoice raised in favour of the payee and if it is found that the payment is below the limit, then the assessee need not deduct the TDS as well as not obliged to file details. Further, in this case the assessee had almost furnished the details irrespective of the payment and the only requirement is that the payments should be verified in order to allege that there is a violation. No such exercise was done by the A.O. Infact in the remand report the AO accepted that there is no deviation noticed in respect of TDS. Further the assessee in their reply submitted that, the details of the other payees would be supplied, if the A.O. not satisfied with the reply. But unfortunately, the A.O. without calling for the details and also without conducting any verification, had arbitrarily disallowed the 10% of the expenses for which the AO has no basis. We are of the view that if the TDS provisions are complied with by the assessee, then the details of the payee would be verified based on the same. Unfortunately the A.O. without calling for further details and also without conducting any enquiry had arbitrarily restricted the claim. Therefore we are setting aside the order of the AO insofar as this issue is concerned and remit this issue to the AO with a direction to verify the transaction details in respect of the various expenses claimed. We also direct the assessee to co-operate with the A.O. and demonstrate before the A.O. that there is no violation committed by the assessee under the TDS provisions. In such event, we direct the AO to allow the expenses claimed by the assessee. In the result, this dispute is remitted to the AO on the above terms. Page 29 of 29 IT(TP)A Nos. 01 & 04/Coch/2024 45. In the result, both the appeals filed by the assessee are partly allowed for statistical purposes. Order pronounced in the open court on 13th March, 2025. Sd/- Sd/- (INTURI RAMA RAO) (SOUNDARARAJAN K.) Accountant Member Judicial Member Cochin, Dated, the 13th March, 2025. /MS / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Cochin 5. Guard file 6. CIT(A) By order Assistant Registrar, ITAT, Cochin "