Income Tax Appellate Tribunal - Mumbai
Addl Cit 2(1), Mumbai vs Bombay Dyeing & Mfg Co. Ltd, Mumbai on 2 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH "K", MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND
SHRI PAWAN SINGH, JUDICIAL MEMBER
ITA No.557/Mum/2012 (Assessment Year- 2007-08)
ACIT -2(1) M/s Bombay Dyeing & Mfg. Co.
Aayakar Bhavan, M.K. Road, Ltd. Neville House, J N Heredia
Room No. 575, 5th Floor, M.K. Vs. Marg, Ballard Estate,
Road, Mumbai-20. Mumbai-400001
PAN:AAACT2328K
(Appellant) (Respondent)
ITA No.588/Mum/2012 (Assessment Year- 2007-08)
M/s Bombay Dyeing & Mfg. Co. ACIT -2(1)
Ltd. Neville House, J N Heredia Aayakar Bhavan, M.K. Road,
Marg, Ballard Estate, Vs. Mumbai-20.
Mumbai-400001
PAN:AAACT2328K
(Appellant) (Respondent)
ITA No.6055/Mum/2014 (Assessment Year- 2008-09)
ACIT -2(1) M/s Bombay Dyeing & Mfg. Co.
Room No. 561, 5th Floor, Ltd. Neville House, J N Heredia
Vs.
Aayakar Bhavan, M.K. Road, Marg, Ballard Estate,
Mumbai-20. Mumbai-400001
PAN:AAACT2328K
(Appellant) (Respondent)
ITA No.6131/Mum/2014 (Assessment Year- 2008-09)
M/s Bombay Dyeing & Mfg. Co. ACIT -2(1)
Ltd. Neville House, J N Heredia Aayakar Bhavan, M.K. Road,
Marg, Ballard Estate, Vs. Mumbai-20.
Mumbai-400001
PAN:AAACT2328K
(Appellant) (Respondent)
ITA No. 557 to 588 M 12 & 6055 to 6131 Mum 14
Ms Bombay Dyeing & Mfg. Co. Ltd.
Revenue by : Shri Saurabh Deshpande (DR)
Assessee by : Shri Yogesh A. Thar with Ms
Ayushi Modani &Chaitanya Joshi
(AR)
Date of hearing : 02.04.2018
Date of Pronouncement : 02.04.2018
Order Under Section 254(1) of Income Tax Act
PER BENCH:
1. These group of four appeals under section 253 of Income Tax Act are
directed against the order of Ld. Commissioner of Income-Tax (Appeals)-
15, Mumbai, [for short the ld. CIT(A)] dated 30.11.2011 & 28.03.2014
respectively for Assessment Years 2011-2012 & 2012-2013. In appeal
appeals, the parties have raised common grounds of appeal. Thus, all
appeals were heard together and are decided by a consolidated order. The
assessee in its appeal ITA No. 588/Mum/2012 raised the following grounds
of appeal:
GOUND I:
Disallowance u/s 14A: Rs 24,58,395/-
1. On the facts and circumstances of the case and in law, the Commissioner of
Income Tax (Appeals)-15 ("the CIT(A)-15") erred in upholding part
disallowance of a sum of Rs. 24,58,395/- u/s. 14A of the Income Tax Act, 1961
("the Act").
2. He failed to appreciate and ought to have held that:
- Investments had been made out of own funds and internal cash accruals and has
not incurred any expenditure in relation to tax -free income
- That own funds were sufficient to cover tax - free investments.
- No other expenses were incurred in relation to earning the dividend income.
3. The Appellant prays that the aforesaid disallowance u/s 14A be deleted.
Without Prejudice to Ground I
Ground II
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1. The appellant also prays that on the basis of reasonableness the disallowances u/s
14A to be restricted to the extent of 1 % of exempt income.
2. The above view has been accepted by Commissioner of Income Tax (Appeals)'s
in appellant's own case in the past years.
GROUND III:
Disallowances of interest on share holders deposits amounting to Rs. 1,37,70,563/-
as it not at arms length
1. On the facts and circumstances of the case and in law, the CIT(A)-15 erred in
confirming the action of Assessing Officer ("the AO") by making adjustment in
adding interest @ 9.05% amounting to Rs 1,37,70,563/- with regards to
shareholder deposits of Rs.15,21,60,920/- kept with associate company.
2. He failed to appreciate and ought to have held that:
- The following amount was receivable from associate company for royalty on
technical know how and as per restructuring agreement it was converted into
non interest bearing shareholders deposit.
- Non interest bearing shareholder's deposits made in earlier years is not an
international transaction
- RBI and Government of Indonesia have given approval and accordingly, the same
cannot be regarded as not being at Arm's length.
3. The Appellant prays that the aforesaid disallowance be deleted.
Without prejudice to GROUND III
GROUND IV:
1. The appellant also prays that ad hoc rate of interest charged is excessive and
ought to be reduced having regard to international practices.
GROUND V:
Taxation of Long Term Capital Gain:
1. On the facts and circumstances of the case and in law, the CIT(A)-15 erred in
confirming the action of AO in not assessing the long term capital gains arising
on sale of capital asset which was converted to stock in trade on the alleged
ground that the capital gain has not arisen during year under consideration based
on the finding of the last assessment order for AY 2006-07 on the year of
taxability of profit/gain on land conversion
2. He further erred in doubting the genuineness of agreement entered into with Scal
Services Limited (SSL) for sale of asset on the alleged ground that SSL was a
group company and not in the business of real estate.
3. He further erred in not assessing tax on capital gain and confirming the action of
AO who has only taxed the business income relating to the same capital asset.
4. He failed to appreciate and ought to have held:
- The capital gain on sale of capital asset which is converted into stock in
trade is taxable in the year in which it is sold.
- The Appellant had entered into valid legally enforceable agreement with
SSL which was acted upon by both the parties.
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5. The Appellant, therefore, prays that the AO be directed to assess the aforesaid
capital gain in the year under consideration and allow the set off of brought
forward capital loss against the same.
GROUND VI:
Long term capital loss on sale of investment not considered
1. On the facts and circumstances of the case and in law, the CIT (A)-15 erred in
not directing the AO, to allow the long term capital loss amounting to Rs
1,90,49,831/- on sale of investments.
2. The Appellant prays that the AO be directed to allow the said long term capital
loss and grant set off and/or carry forward thereof as per law.
2. The Revenue in its cross appeal has raised the following grounds of appeal:
On the facts and in the circumstances of the case and in law, the learned
CIT(A) has erred in allowing relief to the assessee to the extent impugned in
the grounds enumerated below:
1. On the facts and in the circumstances of the case and in law, the Learned
CIT(A) erred in directing that the expenses disallowed under section 14A
amounting to Rs.2,96,54,962/- be not added to the book profit u/s.115JB of the
Act under Clause 'f' of Explanation 1 to that section, contrary to the expressed
provision to add any expenses relating to income u/s.10 of the Act.
2. Without prejudice to the fact that a sum of Rs.24,58,359/- has been upheld
for disallowance under section 14A by the CIT(A), he has erred in directing to
not add any amount in the computation of book profit under section 115JB by
relying on the decision of the ITAT, Delhi in the case of Goetze (India) Ltd.
Vs. CIT (32 SOT 101), the facts and context of which are different from the
present case.
3. For these and other grounds that may be urged at the time of hearing, the
decision of the CIT(A) may be set aside and that of the AO restored.
3. At the outset of hearing, the Ld. Authorized Representative (AR) of the
assessee submits that all the grounds of appeal raised by assessee as well as
by Revenue in its cross appeal are covered by the decision of Tribunal in
assessee's own case for earlier years or by various decisions of jurisdictional
High Court. The Ld. AR of the assessee furnished a chart narrating the
grounds of appeal and the preposition of law in favour of assessee in
assessee's own case for A.Y. 2012-13. On going through the chart and the
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decision of Tribunal in assessee's own case for A.Y. 2006-07 and 2012-13,
the Ld. Departmental Representative (DR) for the Revenue fairly conceded
that all the grounds of appeal are covered in favour of assessee and against
the Revenue.
4. We have considered the submission of both the parties and perused the
material available on record. Ground No. I & II relates to disallowance
under section 14A r.w. Rule 8D. The Ld. AR of the assessee submits that
Rule 8D cannot apply with the A.Y. prior to A.Y. 2008-09 in support of his
submission, the Ld. AR of the assessee relied upon the decision of
jurisdictional High Court in case of Godrej & Boyce Manufacturing Co. Ltd.
(328 ITR 81) and decision of Hon'ble Delhi High Court in case of Maxopp
Investments Ltd. (203 Taxman 364). In alternative, the Ld. AR of the
assessee submits that the assessee has sufficient interest free fund available
with it. The assessee on interest free fund of Rs. 402.68 Crore (share capital
and reserve). The assessee made tax free investment only Rs. 7.57 Crore.
Therefore, no interest disallowance under Rule 8D(ii) is warranted in
support of his submission, the Ld. AR of the assessee relied upon the
decision of Hon'ble Bombay High Court in case of HDFC Bank Vs. DCIT
383 ITR 529) (Bombay High Court) and CIT Vs. Reliance Utility and
Power Ltd. [313 ITR 340 (B)]. In other alternative submission, the Ld. AR
of the assessee submits that the disallowance under section 14A should not
be restricted to exempt income. The assessee earned exempt income of Rs.
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28,000/- only. Therefore, the disallowance under section 14A should not
exceed to exempt income. In support of its submission, the Ld. AR of the
assessee relied upon the decision of Joint Investment P. Ltd. Vs. CIT [372
ITR 694 (Del.) and Daga Global Chemicals Pvt. Ltd. Vs. ACIT in ITA No.
5592/Mum/2012 (Mum. Trib.) The Ld. DR for the Revenue relied upon the
order of authorities below. However, the Ld. DR not disputed the amount of
exempt income of Rs. 28,380/- earned by assessee during the relevant
Financial Year. The Ld. DR for the Revenue also conceded that Rule 8D is
not applicable for the A.Y. under consideration.
5. We have considered the rival submission of the parties and gone through the
orders of authorities below. We have noted that the assessee earned exempt
income of Rs. 28,380/- in the form of dividend income. The Hon'ble Delhi
High Court in case of Joint Investment Pvt. Ltd. (supra) held that the
window for disallowance indicated in section 14A is only to the extent of
disallowing expenditure incurred by assessee in relation to tax exempt
income. These proposition or portion of tax exempt income surely cannot
swallow the entire amount. Thus, respectfully following the decision of
Hon'ble Delhi High Court in Joint Investment Pvt Ltd (supra) the
disallowance under section 14A is restricted to the exempt income/dividend
income of Rs. 28,830/-. The Assessing Officer is directed accordingly.
6. In the result, Ground No. I & II of the appeal are allowed.
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7. Ground No. III & IV relates to addition on account of Transfer Pricing
Adjustment in relation to non-interest bearing shareholder deposit of Rs.
1,50,94,363/-. The Ld. AR of the assessee submits that this ground of appeal
is covered in favour of assessee in assessee's own case for A.Y. 2012-13 in
ITA No. 1617/Mum/2017 reported in 87 taxmann.com 213 (Mum.Trib.).
The Ld. DR for the Revenue conceded the contention of Ld. AR of the
assessee.
8. We have considered the submission of the parties. We have noted that
similar ground of appeal was raised by assessee in appeal for A.Y. 2012-13.
The Tribunal passed the following order on identical grounds of appeal:
7. In view of these facts, it is clear that the technical know-how fees are
recoverable for the period 1981 to 1995 by both the joint venture partners
namely The Bombay dyeing & Mfg Co Ltd and Common Wealth textiles. The
RBI has given its approval on treating the Outstanding entitlements on account
of technical know-how fees for the period Jan 1981 to Dec 1995 estimated to
US $ 32,00,692.48 (INR 15.22 Crores) as a shareholder deposit. RBI has given
permission vide approval to obtain repayment of the said deposits on or before
2010 or earlier as the case may be. This repayment date is extended to 2015 by
RBI. Copy of relevant letters issued by RBI is enclosed at Annexure-4 of the
assessee's paper book. Under the facts of the case, we appreciate the argument
of the assessee that the said interest free deposit cannot be considered as an
international transaction for the previous year ended 31st March 2012 as the
said transaction was entered into during the previous year ended 31 March
1998 with the approval of statutory authorities. The statutory permissions
required under the foreign exchange laws of India, are equally applicable to
controlled and uncontrolled enterprises i.e. they are universally applicable and
hence the very restrictions for permissions would be deemed to encompass the
principle of neutrality and hence, the standard of arms length is inherent in the
provision of law. Hence the company has a contractual and statutory obligation
with the PTFSI for not charging any interest on the shareholder deposits and
thereby it cannot take any recourse for charging interest till the year 2015 by
which PTFSI is required to make payment to the company. There has been no
inflow or outflow relating to the above deposit during the Previous Year 2011-
12 and hence it is outside the purview of transfer pricing provisions. We are of
the view that the assessee cannot be asked to do something which is
impermissible in law and expenditure incurred in compliance of law or the
direction of the statutory authorities, the same is allowable. This view is
supported by the case law relied on by the assessee of Hon'ble Bombay High
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court in the case of CIT v. Hukumchand Mills Ltd. [1993] 202 ITR 474 .
Further, another aspect argued by the learned Counsel is that interest and
principal amount itself is doubtful of recovery, the question of taxing
hypothetical interest does not arise. This view is also supported by the decision
of Hon'ble Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR
889/104 Taxman 547. In view of the above discussion, we are of the
considered opinion that no addition on account of transfer pricing adjustment
can be made in relation to interest @ 8.39% amounting to Rs. 1,27,66,301/- in
relation to non-interest bearing shareholder's deposits amounting to Rs.
15,21,60,920/- with an associate company. We reverse the orders of DRP and
AO/TPO on this issue and allow this issue of the appeal of assessee.
9. Considering the decision of Tribunal in assessee's own case in identical
grounds of appeal was allowed in favour of assessee on the same amount of
share-holder deposits the Associate Company. Thus, respectfully following
the decision of Tribunal in assessee's own case, Ground No. III & IV of
appeal are allowed in favour of assessee with similar observation.
10.Ground No. V relates to taxation on Long Term Capital Gain. The Ld. AR
of the assessee submits that he is not pressing this ground of appeal.
Considering the submission of Ld. AR of the assessee, this ground of appeal
is dismissed as not pressed.
11.Ground No. VI relates to Long Term Capital Gain on sale of investment not
considered. The Ld. AR of the assessee submits that the Assessing Officer
has not considered the Long Term Capital Gain on sale of investment. The
assessee filed application under section 154 before the Assessing Officer for
rectification of order. The assessee also raised ground of appeal before the
Ld. CIT(A). The Ld. CIT(A) directed the Assessing Officer to dispose the
application of the assessee filed under section 154 in accordance with law.
However, the Assessing Officer has not passed any order despite direction
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of the First Appellate Authority. On the other hand, the Ld. DR for the
Revenue has no objection, if the Assessing Officer is directed to comply the
direction of Ld. CIT(A).
12.We have considered the submission of the parties. Keeping in view that the
Ld. CIT(A) has already given direction to the Assessing Officer for
disposing of the application under section 154 of the Act, filed by assessee
which has not been disposed of so far. The Assessing Officer is directed to
consider the claim of assessee and pass the order in accordance with law.
Needless to say that the Assessing Officer shall grant necessary opportunity
of hearing before passing the order.
In the result, appeal of the assessee is allowed.
ITA No. 557/Mum/2012 for AY 2007-08.
13.The Revenue has raised the sole ground of appeal which relates to addition
on disallowance under section 14A r.w.Rule 8D to the computation of book
profit under section 115JB of Rs. 2,96,54,962/-. At the outset of hearing, the
Ld. AR of the assessee submits that the ground of appeal raised by Revenue
is also covered in assessee's own case for A.Y. 2012-13 in ITA No.
1716/Mum/2017 and by the decision of Special Bench in ACIT Vs. Vireet
Investment (P.) Ltd. [82 taxmann.com 415 (Del. SB). On the other hand, the
Ld. DR for the Revenue fairly conceded that this ground of appeal is
covered in favour of assessee.
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Ms Bombay Dyeing & Mfg. Co. Ltd.
14.We have considered the rival submission of the parties and gone through the
order of authorities below. We have noted that identical ground of appeal
was raised by assessee in appeal for A.Y. 2012-13. The Tribunal passed the
following order:
57. The next issue in this appeal of assessee is against the order of DRP
confirming the action of the AO/TPO making addition of disallowance under
section 14A of the Act r.w.r 8D of the Rules, while computing book profit
under section 115JB of the Act. For this assessee has raised following grounds:
-
GROUND NO. 9: ADDITION OF RS. 2,73,960/- BEING AMOUNT
DISALLOWED U/S. 14A OF THE ACT WHILE COMPUTING BOOK
PROFITS U/S.115JB OF THE ACT
On the facts and in the circumstances of the case and in law the IA. AO,
pursuant to the directions of the ld. DRP. erred in adding the disallowance
made u/s. NA to the book profits on the alleged ground that expenditure
pertains to earning exempt income.
58. At the outset, the learned Counsel for the assessee stated that this issue is
covered in favour of assessee and against Revenue by the decision of Special
Bench of this Tribunal in the case of Asstt. CIT v. Vireet Investments (P.)
Ltd. [2017] 165 ITD 27/82 taxmann.com 415 (Delhi - Trib.) (SB) wherein the
Tribunal has clearly held that no disallowance under section 14A of the Act
r.w.r 8D of the Rules can be made while computing book profit under section
115JB of the Act. The learned CIT Departmental Representative could not
controvert the above proposition. Accordingly, we are of the view that this
issue is covered by the special bench decision of this Tribunal in the case
of Vireet Investments (P.) Ltd.(supra), respectfully following the same, we
delete the disallowance and allow this issue of assessee's appeal.
15.Considering the decision of Tribunal in assessee's own case for A.Y. 2012-
13 as refereed above and the decision of Special Bench in Vireet Investment
(P.) Ltd. (supra), the Assessing Officer is directed to re-compute the book
profit by following the decision of Special Bench in case of Vireet
Investment (P.) Ltd. (supra).
16.In the result, appeal of the Revenue is dismissed.
ITA No. 6131/Mum/2014 AY 2008-09
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17.Ground No. I relates to disallowance under section 14A r.w.Rule 8D. We
have noted that this ground of appeal is identical to the ground no. I & II of
the appeal for A.Y. 2007-08. We have already allowed the appeal for A.Y.
2007-08 on identical grounds directing the Assessing Officer to restrict the
disallowance under section 14A to the extent of exempt income.
Considering our decision for earlier year, this ground of appeal is also
allowed with similar direction.
18.In the result, ground no. I of the appeal is allowed.
19.Ground No. II & III relates to addition on account of Transfer Pricing
Adjustment in relation to non-interest bearing shareholders deposits of Rs.
1,50,94,363/-. These ground of appeal are identical to the ground of appal
for A.Y. 2007-08. We have already allowed the identical ground of appeal
for A.Y. 2007-08. Thus, following the principle of consistency, these
grounds of appeal are allowed with similar direction.
20.In the result, ground no. II & III are allowed.
21.Ground No. IV relates to addition on account of Transfer Pricing
Adjustment towards interest on outstanding balances of the Associate
Enterprises for Rs. 44,21,973/-. The Ld. AR of the assessee submits that this
ground of appeal is covered in favour of assessee in assessee's own case for
A.Y. 2012-13. On going through the order of Tribunal for A.Y. 2012-13.
The Ld. DR for the Revenue conceded that this ground of appeal is covered
in favour of assessee.
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22.We have considered the submission of both the parties and noted that
similar ground of appeal was raised by assessee in appeal for A.Y. 2012-13.
The co-ordinate bench of Tribunal passed the following order:
24. We find from records that the AO has treated the debit balance outstanding
on the year end as an "International Transaction" and have made proposed
addition of notional interest. Now the question arises whether outstanding debit
balance with the associate company cannot be regarded as an 'International
Transaction' within the meaning of section 92B of the Act. Further, Ld Counsel
drew our attention to section 92B of the Act which defines the term
"international transaction" used in section 92(1) of the Act as under:--
"International transaction means a transaction between two or more
associated enterprises, either or both of whom are non-residents, in the
nature of purchase, sale or lease of tangible or intangible property, or
provision of services or lending or borrowing money, or any other
transaction having a bearing on the profits, income, losses or assets of such
enterprises and shall include a mutual agreement or arrangement between
two or more associated enterprises for the allocation or apportionment of or
any contribution to, any cost or expense incurred or to be incurred in
connection with a benefit, service or facility provided or to be provided to
any one or more enterprises."
As will be observed from the above provision the outstanding debit balances
with the associates is not directly covered within the ambit of 'international
transaction'. Also, the terms "any other transaction having a bearing on the
profits, income, losses or assets of such enterprises" must be interpreted
ejusdem generis with the transactions mentioned in the preceding clause or at
least analogous to it and therefore would not include the provision of guarantee
for loans taken by associate enterprises. In view of the above, we are of the
view that it is the real income and not the hypothetical income which is to be
taxed and real income is to be ascertained from the realistic and practical point
of view as held by Hon'ble Supreme Court in the case of UCO Bank (Supra).
Hence, we delete the disallowance and reverse the orders of the lower
authorities.
23.Thus, considering the decision of Tribunal in assessee's own case on
identical ground of appeal for A.Y. 2012-13. Therefore, respectfully
following the decision of co-ordinate bench, this ground of appeal raised by
assessee is allowed.
24.Ground No. V & VI relates to Long Term Capital Gain and Business
Income. The Ld. AR of the assessee submits that he is not pressing these
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grounds of appeal. Considering the submission of Ld. AR, Ground No. V &
VI are dismissed as not pressed.
25.In the result, appeal of the assessee is partly allowed.
ITA No. 6055/Mum/2014 for A.Y. 2008-09 by Revenue
26.Ground No. 1 relates to deleting the addition on account of Transfer Pricing
Adjustment towards this involve in guarantee on loan and advances to
Associate Enterprises for Rs. 60,48,000/-. At the outset of hearing, the Ld.
AR of the assessee submits that this ground of appeal is also covered in
favour of assessee in assessee's own case for A.Y. 2012-13. The Ld. AR of
the assessee further submits that corporate guarantee given to third party in
favour of Associate Enterprises is not an international transaction as
envisaged under section 92 of the Act. In support of his submission, the Ld.
AR of the assessee relied upon the decision of Bharti Airtel Ltd. v. Addl
CIT (63 SOT 113( (Del.), Siro Clinpharm Private Ltd. v DCIT (ITA No.
2618 of 2014)(Mum.), Marico Ltd. v. ACIT (70 taxmann.com 214) (Mum.)
& Videocon Industries Ltd. v. Addl. CIT (55 taxmann.com 263)(Mum.).On
the other hand, the Ld. DR for the Revenue fairly conceded to the
submission of Ld. AR of the assessee.
27.We have considered the submission of the parties and find that similar
ground of appeal was raised by assessee before the Tribunal in appeal for
A.Y. 2012-13. The co-ordinate bench of the Tribunal passed the following
order:
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16. We find that Delhi Tribunal in the case of Bharti Airtel Ltd. v. Addl.
CIT [2014] 63 SOT 113/43 taxmann.com 150, held as under:
"There can be number of situations in which an item may fall within the
description set out in clause (c) of Explanation to Section 92B, and yet it
may not constitute an international transaction as the condition precedent
with regard to the 'bearing on profit, income, losses or assets' set out in
Section 92B(1) may not be fulfilled. For example, an enterprise may
extend guarantees for performance of financial obligations by its
associated enterprises. These guarantees do not cost anything to the
enterprise issuing the guarantees and yet they provide certain comfort
levels to the parties doing dealings with the associated enterprise. These
guarantees thus do not have any impact on income, profits, losses or
assets of the assessee. There can be a hypothetical situation in which a
guarantee default takes place and, therefore, the enterprise may have to
pay the guarantee amounts but such a situation, even if that be so, is only
a hypothetical situation, which is, as discussed above, excluded.
In any event, the onus is on the revenue authorities to demonstrate that
the transaction is of such a nature as to have "bearing on profits, income,
losses or assets" of the enterprise, and there was not even an effort to
discharge this onus. Such an impact on profits, income, losses or assets
has to be on real basis, even if in present or in future, and not on
contingent. or hypothetical basis, and there has to be some material on
record to indicate, even if not to establish it to hilt, that an intra AE
international transaction has some impact on profits, income, losses or
assets. Clearly, these conditions are not satisfied on the facts of this case.
We have held that even after the amendment in Section 92 B'by
amending Explanation to Section 92 B, a corporate guarantee issued for
the benefit of the AEs, which does not involve any costs to the assessee,
does not have any bearing on profits, income, losses or assets of the
enterprise and, therefore, it is outside the ambit of 'international
transaction' to which ALP adjustment can be made. As we have decided
the matter in favour of the assessee on this short issue, we see no need to
address ourselves to other legal issues raised by the assessee and the
judicial precedents cited before us.
For the reasons set out above, and as we have held that the issuance of
corporate guarantees in question did not constitute ' international
transaction' within meanings thereof under section 92B, we uphold the
grievance of the assessee and direct the Assessing Officer to delete the
impugned ALP adjustment of Rs 33,10,161. The assessee gets the relief
accordingly."
17. We further notice that the decision of Ahmedabad Tribunal in the case
of Micro Ink Ltd. v. Addl. CIT [2016] 157 ITD 132/[2015]
63 taxmann.com 353 (Ahd. - Trib.), which has followed the decision
of Bharti Airtel (supra) held that issuance of corporate guarantees was in the
nature of shareholder's activity/quasi capital, thus, could not be included in
the ambit of international transaction u/s. 92(1) of the Act. Further,
Ahmedabad Tribunal has distinguished the decision of Hon'ble Bombay
High Court in the case of CIT v. Everest Kento Cylinders Ltd. [2015] 378
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ITR 57/[2015] 232 Taxman 307/58 taxmann.com 254, wherein the assessee
had actually charged for corporate guarantee fee, unlike in the case of the
assessee as well as in the case of Micro Ink Ltd. (supra), for providing
corporate guarantee. The Mumbai Tribunal in the case of Siro Clinpharm
(P.) Ltd. v. Dy. CIT (in ITA No. 2618/M/2014) dated 31-03-2016 for AY
2009-10 following the decision of Mirco Ink Ltd. (supra) has, inter alia, held
that issuance of corporate guarantees will not fall within the ambit of
international transaction u/s. 92(1) of the Act. Thus, following the decisions
of the co-ordinates benches of the Tribunal (supra), we in the present case
are of the view that the above transaction does not fall within the purview of
international transaction as defined under section 92B of the Act.
18. Further, we are in agreement with the argument of the assessee that even
if providing corporate guarantee falls within the definition of "international
transaction", in our view, providing such corporate guarantee by a parent
company to its wholly owned subsidiary without charging any
commission/fees would still be regarded as being at arm's length price, if
such corporate guarantee was provided by the parent company for the
overall benefit of the business of the group and therefore, ultimately
benefiting the parent company itself. Having regard to the direct or indirect
commercial interest of the Company, corporate guarantee is given with a
view to safeguard and to further business interest. Hence, relying on the
Hon'ble Supreme Court's decision in case of S.A. Builders
Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74, wherein it has been held that
once it is established that there was nexus between the expenditure and the
purpose of the business (which need not necessarily be the business of the
assessee itself), the Revenue cannot justifiably claim to put itself in the arm-
chair of the businessman or in the position of the board of directors and
assume the role to decide how much is reasonable expenditure and having
regard to the circumstances of the case.
19. Further we have also gone through the decision of the Mumbai Tribunal
in the case of Asstt. CIT v. Nimbus Communications Ltd. [2013] 145 ITD
582/34 taxmann.com 298 (Mum. - Trib.), wherein it was held as under:
"For the guarantee given to the bank against the financial assistance
given to its AEs, no commission was charged by the assessee-company
on the ground that the said AEs were not benefited by the guarantee so
given and it was the assessee who benefited as a result of commercial
benefits secured for future. In support of this stand of the assessee, the
assessee has contended that business strategy should be taken into
consideration while making any TP adjustments in respect of such
transactions and has relied on the OECD Transfer Pricing Guidelines
issued in 2010. As stated in para 1.59 of the said guidelines, the business
strategies should also be examined in determining comparability for
transfer pricing purposes and certain illustrations of such business
strategies are also given therein. As stated in para 1.60 of the said
guidelines which has been relied upon by the assessee, business strategies
also could include market penetration schemes and taxpayer seeking to
penetrate a market or to increase its market share might temporarily
charge a price for its product that is lower than the price charged for
otherwise comparable products in the same market. As explained further,
15
ITA No. 557 to 588 M 12 & 6055 to 6131 Mum 14
Ms Bombay Dyeing & Mfg. Co. Ltd.
a taxpayer seeking to enter a new market or expand (or defend) its market
share might temporarily incur higher costs and hence achieve lower
profit levels than other taxpayers operating in the same market. The
relevant facts of the present case do not indicate that there was any such
business strategy adopted by the assessee in not charging commission in
respect of guarantees issued for its AEs. As a matter of fact, there is
nothing to suggest that any such business strategy was adopted by the
assessee with specific intention or motive and the case has been sought to
be made out merely on the basis of commercial expediency by claiming
that the assessee was benefited as a result of giving the guarantees in the
form of commercial benefits secured for future."
20. Thus, the above decision of the Mumbai Tribunal reiterates the
proposition of the assessee that when the guarantee has been given by the
assessee results in a direct or indirect benefit to the assessee itself, then there
arises no need to charge any commission on the same. Thus, following the
decisions of the co-ordinates benches of the Tribunal (supra), we, in the
present case are of the view that the above transaction does not fall within
the purview of international transaction as defined under section 92B of the
Act and hence, the orders of the lower authorities are reversed. This issue of
assessee's appeal is allowed.
28.Considering the decision of Tribunal in assessee's own case, we do not find
any illegality or infirmity in the order passed by Ld. CIT(A) in deleting the
adjustment in guarantee on loans and advances to Associate Enterprises.
29.In the result, ground of appeal raised by Revenue is dismissed.
30.Ground No.2 relates to directing the Assessing Officer to re-compute the
addition based on average LIBOR method. The Ld. AR of the assessee
submits that as the entire addition on interest on shareholder deposit is
deleted by Tribunal in assessee's own case for A.Y. 2012-13. Hence, this
ground of appeal raised by Revenue is liable to be dismissed by following
the said order.
31.We have considered the submission of the parties. We have noted that we
have already allowed the ground of appeal relates to addition on account of
Transfer Pricing Adjustment in relation to non-interest bearing shareholder
16
ITA No. 557 to 588 M 12 & 6055 to 6131 Mum 14
Ms Bombay Dyeing & Mfg. Co. Ltd.
deposit on the basis of decision of Tribunal in assessee's own case for A.Y.
2012-13. Thus, we do not find any merit in the ground of appeal raised by
Revenue as the same has become infructuous.
32.In the result, this ground of appeal is dismissed.
33.Ground No. 3 & 4 relates to deleting the addition of disallowance under
section 14A r.w.r 8D to the computation of book profit under section 115JB
of the Act. We have noted that this ground of appeal is identical to the
ground of appeal raised by Revenue in appeal for A.Y. 2007-08. As we have
already dismissed the identical ground of appeal. Therefore, considering the
principle of consistency, the Assessing Officer is directed to re-compute the
book profit as per direction on ground no. 1 & 2 in ITA No. 557/Mum/2012
for A.Y. 2007-08.
34.In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 2nd day of April 2018.
Sd/- Sd/-
(R.C. SHARMA) (PAWAN SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai; Dated 02/04/2018
S.K.PS
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. ािपत ित //True C
BY ORDER
(Asstt.Registrar) ITAT, Mumbai 17