Income Tax Appellate Tribunal - Chennai
Siva Industries And Holdings Limited, ... vs Dcit Corporate Circle 6(2), Chennai on 20 March, 2018
आयकर अपील य अ
धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH : CHENNAI
ी एन.आर.एस. गणेशन, या यक सद य एवं
ी अ ाहम पी. जॉज%, लेखा सद य के सम' ।
[BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER]
आयकर अपील सं./I.T.A. No.2756/CHNY/2017
& S.P. No.90/CHNY/2018
नधा रण वष /Assessment year : 2013-2014.
Siva Industries and Holdings Ltd, Vs. The Deputy Commissioner of
New No.32, Income Tax,
Cathedral Garden Road, Corporate Circle 6(2)
Nungambakkam, Chennai.
Chennai 600 034.
[PAN AAACS 4460M]
(अपीलाथ*/Appellant) (+,यथ*/Respondent)
अपीलाथ क ओर से/ Appellant by : Shri. T. Banusekar, C.A.
यथ क ओर से /Respondent by : Mrs. Ruby George, IRS, CIT.
सन
ु वाई क तार ख/Date of Hearing : 12-03-2018
घोषणा क तार ख /Date of Pronouncement : 20-03-2018
आदे श / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
Assessee in this appeal directed against an order dated 30.10.2017 of ld. DCIT, Corporate Circle 6(2), Chennai pursuant to directions of Dispute Resolution Panel (DRP) under Section 144C (5) of :- 2 -: ITA No. 2756/2017 & SP No.90/2018 the Income Tax Act, 1961 (in short ''the Act') has altogether raised thirteen grounds of which grounds 1 & 2 are general in nature needing no specific adjudication.
2. Grounds 3 to 5 are on transfer pricing adjustments. Out of these, ground No.3 is on upward adjustment of D22,06,65,514/- made by the ld. Assessing Officer based on the recommendation of the Transfer Pricing Officer, towards commission in respect of corporate guarantees, provided by the assessee to its Associated Enterprise. Grounds 4 & 5 are on upward adjustment of D3,75,50,666/- towards interest on investments made by the assessee through "Optionally and Fully Convertible Debentures'' (OFCD) in its Associated Enterprise.
3. Ld. Counsel for the assessee submitted that the issue regarding corporate guarantee had come up before this Tribunal in assessee's own case for assessment years 2009-10 and 2010-11 in ITA Nos.1039 & 1074/Mds/2014,and 706/Mds/2015. Contention of the ld. Authorised Representative, was that this Tribunal in its order dated 07.10.2016 in ITA Nos.1039, 1074/Mds/14 and 706/Mds/2015 had held that there could be no upward adjustment on commission for providing corporate guarantee to Associated Enterprise, since :- 3 -: ITA No. 2756/2017 & SP No.90/2018 providing corporate guarantee not an international transaction. Ld. Authorised Representative also relied on the decision of Delhi Bench of the Tribunal in the case of Bharti Airtel Ltd vs. Adl. CIT , (2014) 39 CCH 415, that of Ahmadabad Bench of the Tribunal in the case of Micro Ink Ltd. vs. Addl. CIT, 157 ITD 132 and that of co-ordinate Bench in the case of Redington (India) Ltd. vs. JCIT, (2014) 40 CCH
527.
4. Per contra, ld. Departmental Representative submitted that ld. Dispute Resolution Panel had considered a number of decisions of the Tribunal and also clause (c) of Explanation (i) to Section 92B (2) of the Act introduced through Finance Act, 2012, with retrospective effect from 01.04.2002, while upholding the adjustment for commission on corporate guarantee. Relying on the decisions of Mumbai Bench of the Tribunal in the case of Mahindra and Mahindra Ltd vs. Addl. CIT, 29 ITR (Trib) 95, Nimbus Communication Ltd vs. ACIT (2011) 43 SOT 695 and that of Hyderabad Bench in the case of Prolifics Corpn. Ltd. vs. DCIT, (2015) 68 SOT 104, ld. Departmental Representative submitted that providing corporate guarantee to Associated Enterprise abroad constituted international transaction. As per the ld. Departmental Representative, Explanation (i) to section 92B (2) of the Act introduced through Finance Act 2012, widened the :- 4 -: ITA No. 2756/2017 & SP No.90/2018 meaning of international transaction to include corporate guarantee given to an Associated Enterprise.
5. We have considered the rival contentions and perused the orders of the authorities below. What was held by the Tribunal assessee's own case in ITA No.1039/Mds/2014 for assessment year 2009-2010 at paras 13.1 to 15 is reproduced hereunder:-
''13.1. The related grounds raised by assessee in ITA No.1039/Mds./2014 is that the DRP,TPO and the AO had erred in holding that the provisions of the section 92 of the Act would be applicable to the transaction of extending guarantee by the appellant to its AE.
13.2 The related grounds raised by Department in ITA No.1074/Mds./2014 is that the DRP erred in directing the TPO to adopt 1% as guarantee commission rate instead of Rs.8,24,42,500/- at the rate of 3.5% on outstanding guarantee which was adopted by TPO.
13.3. In assessee's C.O, the related ground is that the TPO had erred in not providing any basis for arriving at 3.5% as ALP commission for issuing corporate guarantee for the subject A.Y.2009-10.
13.4. The related grounds raised by Department in ITA No.706/Mds./2015 is that the DRP held that the action of the TPO's action of determining the ALP at Rs.3,36,50,000/- is not justified and consequently the proposed upward adjustment of Rs.3,36,50,000/- is deleted as providing of corporate guarantee will not constitute an international transaction for the purpose of determining the ALP.
13.5 Revenue's appeal in ITA No.1074/Mds./2014 for assessment year 2009-10 has been filed late by 3 days.
Condonation petition has not been filed by Department. Before us, the ld.D.R explained the reasons for delay in filing the appeal :- 5 -: ITA No. 2756/2017 & SP No.90/2018 due to administrative reasons. Reasons explained by the ld.D.R are justified and hence, delay is condoned and appeal admitted.
14. The facts of the issue are that TPO has made an adjustment of Rs.8,24,42,500/- as commission income, for the same amount for the same guarantee in the case of Siva Ventures Ltd., which was a wholly owned subsidiary of the assessee and is now merged with the assessee, resulting in double taxation, while passing the Transfer pricing order u/s.92CA(3) of the Act. The DRP observed that the Panel cannot given direction on an objection which is not part of Application in Form 35A filed by the assessee. Therefore, the Panel did not give any direction on this issue. Against this, both the parties are in appeal before us.
15. We have heard both the parties and perused the material on record. This issue came up for consideration before this Tribunal in the Case of Redington India Ltd. Vs. JCIT in ITA No.513/Mds./2014 dated 07.07.2014 for assessment year 2009-10 wherein held that:-
"47. Regarding the above issue, the learned senior counsel contended that corporate guarantee granted by the assessee company is not an "international transaction". The assessee has not granted any new guarantee in the previous year. Therefore, the reliance placed by the TPO on the definition of the term "international transaction" as retrospectively amended by the Finance Act, 2012, is erroneous and bad in law. The corporate guarantees provided by the assessee company to its AEs enable them to secure credit in their respective overseas jurisdictions and to comply with the laws, in those jurisdictions. Such corporate guarantees granted by the assessee to the AEs enabled them to secure funds for their working on competitive rates in the relevant jurisdictions. In the absence of such locally sourced funding, the assessee would have to support its AEs business operations by providing funds through equity or otherwise. Accordingly, the transaction can be said to be one of quasi-equity or shareholder activity. The well-being of the AEs is of deep interest to the assessee; especially, where the business of the subsidiary generates synergies for the assessee. It is in the best interest of the group that the assessee has provided corporate guarantees to its AEs. The learned senior counsel relied on the decision of the ITAT, Delhi Bench, rendered in the :- 6 -: ITA No. 2756/2017 & SP No.90/2018 case of Bharti Airtel Ltd. v. ACIT (43 taxman.com
150), wherein it has held that providing corporate guarantee does not involve any cost to the assessee and it is not an "international transaction", even under the definition of the said term as amended by the Finance Act, 2012, as it does not have any bearing on profits, income, losses or assets of the assessee company.
48. As an alternative contention, the learned senior counsel argued that guarantees are provided to the assessee on behalf of AEs as an integral business activity of the assessee relating to supply of general management and distribution of logistic business, worldwide. Therefore, the transaction must be tested under the combined transaction TNMM approach rather than on a stand-alone basis. The ITAT, Pune Bench in the case of Demag Cranes & Components (India) (P.) Ltd. v. DCIT, 56 SOT 187(Pune) and ITAT, Delhi Bench in the case of McCann Erikson India Pvt. Ltd. v. Addl.CIT (24 Taxmann.com 21) have held that TNMM applied on an entity-wide basis is the most appropriate method for Benchmarking transactions that are not independent of the business carried on by an assessee. The learned senior counsel submitted that the adjustment made against the corporate guarantee may be deleted."
Accordingly this ground is decided in favour of the assessee and against the Revenue.
Co-ordinate Bench had followed the decision of Bharti Airtel Ltd (supra). That apart, in the case of Redington (India) Ltd (supra) again decided by a Co-ordinate Bench, the issue whether providing corporate guarantee to Associated Enterprise, could be considered as an international transaction had come up. What was held at paras 5 & 6 of its is reproduced hereunder:-
:- 7 -: ITA No. 2756/2017& SP No.90/2018
''5. We have considered the rival submissions on either side and also perused the material available on record. We have carefully gone through the decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi). This Tribunal found that the corporate guarantee issued for the benefit of the associated enterprise does not involve any cost to the assessee and does not have any bearing on the profit, income or loss of assets of the assessee, therefore, it was outside the ambit of international transaction to which the arm's length price adjustment can be made. The Dispute Resolution Panel has also placed its reliance on the Explanation to section 92B of the Act. The decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi) was followed by the Chennai Bench of this Tribunal in the assessee's own case for the assessment year 2009-10.
6. In view of the above, by following the order of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi) and the order of this Tribunal in the assessee's own case for the assessment year 2009-10 and for the reasons stated therein, we hold that the corporate guarantee given by the assessee to its associated enterprise does not involve any cost to the assessee, therefore, it has no bearing on the profits, income, loss or assets of the assessee and outside the ambit of international transaction to which the arm's length price adjustment has to be made. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition of Rs.1,84,17,371/-''..
It may be true that there is a cleavage of opinion, as to the issue whether corporate guarantee to an Associated Enterprise could be considered as international transaction. Ld. Departmental Representative has pointed out to decisions of Mumbai Bench of the Tribunal in Mahindra and Mahindra Ltd (supra) and Hyderabad Bench in the case of Prolifics Corpn. Ltd (supra). However, since in assessee's own case, the Tribunal has already held that providing corporate guarantee to its Associated Enterprise could be considered :- 8 -: ITA No. 2756/2017 & SP No.90/2018 as an international transaction, which decision was rendered after considering the amendment to clause (c) of Section 92B(2), through Finance Act, 2012, we are inclined to follow this view. Accordingly the upward adjustment of D22,06,65,514/- made towards providing corporate guarantee stands deleted.
6. Coming to grounds 4 & 5, which are on upward adjustment for interest charged on "Optionally and Fully Convertible Debentures'' (OFCD). Ld. Counsel for the assessee submitted that ld. TPO had considered the investments in OFCD by the assessee in its Associated Enterprise, which carried an interest of 2% as not at Arm's Length. According to the ld. Authorised Representative, the ld. TPO had considered the LIBOR rate of 0.95% and added such LIBOR rate to 2% interest applicable on OFCD and erroneously took 2.95% as the Arms Length Interest rate. Contention of the ld. Authorised Representative was that if the LIBOR rate of 0.95% was considered, assessee's rate of interest of 2% being more than such rate, it was at Arms Length. According to him, no reason was given by the ld. TPO for adopting 2% plus LIBOR rate as the Arms Length rate of interest chargeable on OFCD. As per the ld. Authorised Representative, the ld. DRP has confirmed the upward adjustment without properly appreciating the submissions made by the assessee. Reliance was :- 9 -: ITA No. 2756/2017 & SP No.90/2018 placed on the decision of Co-ordinate Bench in assessee's own case in ITA No.2148/Mds/2010, dated 20.05.2011 for assessment year 2006-07.
7. Per contra, ld. Departmental Representative submitted that OFCD cannot be considered as equivalent to equity. According to him, it was only a debt. Contention of the ld. Departmental Representative was that even the conversion rate was not fixed upfront nor any a fixed method or formula mentioned. As per the ld. Departmental Representative, there was a clear violation of FDI Rules. Contention of the ld. DR was that the investments made by the assessee through OFCD were more like ECB. Vis-à-vis, corporate guarantee according to the ld. Departmental Representative, the upward adjustment recommended by the ld. TPO and confirmed by ld. DRP was justified.
8. We have considered the rival contentions and perused the orders of the authorities below. Relevant observation of the ld. TPO is reproduced hereunder:-
''10.1. Interest received / receivable on' investments made in OFCD issued by Siva Skylink Ltd formerly known as Avis Ventures Limited:
The interest rate on the above debentures is a flat 2%. The LIBOR rate applicable for the interest receivable / received works out to 0.95%. Interest rate must have :- 10 -: ITA No. 2756/2017 & SP No.90/2018 been charged at the rate of LIBOR plus a spread of 2 percent Applying the above rate of 2.95% the arm's length price of the interest receivable is worked out as under:
Period Interest No. Interest to be Balance
of
charged by the days charged Interest
Assessee @ 2% @ 2.95%
01.4.2012 to 6,84,82,964 365 10,10,12,372 3,25,29,408
31.3.2013
TOTAL 3,25,29,408
10.2 Interest received I receivable on
investments made in OFCD issued by Lotus
Ventures Limited:
The interest rate on the above debentures is a flat 2%. The UBOR rate applicable for the interest receivable / received works out to 0.95%. Interest rate must have been charged at the rate of UBOR plus a spread of 2 percent. Applying the above rate of 2.95% the arm's length price of the interest receivable is worked out as under:
Period Interest No.of Interest to be Balance .
charged by the days charged Interest
Assessee @ 2% @ 2.95%
01.4.2012 to 3,16,23,701 365 4,66,44,959 1,50,21,258
31.3.2013
TOTAL 1,50,21,258
Though the ld. TPO had given a clear finding that LIBOR rate applicable for interest was 0.95%, he had adopted the Arms Length interest rate as 2.95%. No reason whatsoever has been given by the considered the interest rate at LIBOR plus 2%. Though adoption of LIBOR as the appropriate rate cannot be faulted, in our opinion ld.
TPO erred in adopting 2+ LIBOR. At this juncture it is apposite to have a look at para 11 of the decision of this Tribunal in assessee's :- 11 -: ITA No. 2756/2017 & SP No.90/2018 own case for assessment year 2006-07 in ITA No.2148/Mds/2010, dated 25.05.2011.
'11.We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0% optional convertible preferential shares. Thus it IS noticed that the funds . raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1.4.2005 to 31.03.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted''.
Once assessee had charged rate of interest more than the LIBOR rate, there could be no question of any Transfer pricing adjustment. Nevertheless, how the ld. TPO had arrived at the LIBOR rate of 0.95% :- 12 -: ITA No. 2756/2017 & SP No.90/2018 is not clear. LIBOR rate for assessment year 2006-07 was 4.42% whereas what was considered by the ld. TPO as LIBOR rate for the impugned assessment year is 0.95%. We are therefore of the opinion that ld. Assessing Officer/TPO has to revisit the issue to fix the correct LIBOR rate, before deciding whether any adjustment for Arms Length Pricing is required. We set aside the orders of the lower authorities on the Arms Length Price adjustment, if any, required on interest on OFCD, and remit it back to the file of the ld. Assessing Officer/ld. TPO for consideration afresh in accordance with law. Ground 4 & 5 of the assessee are allowed for statistical purpose.
9. Through its grounds 6 to 11, grievance raised by the assessee is on a disallowance of D101,96,34,654/- u/s.14A of the Act r.w.r.8D.
10. Ld. Counsel for the assessee submitted that such disallowance was made by the ld. Assessing Officer without expressing any dissatisfaction as to why assessee's own disallowance of D17,90,085/- was incorrect. According to him, there was no compliance with Section 14A of the Act. As per the ld. Authorised Representative, whole of the investments made by the assessee, were in subsidiaries wholly owned by it. According to him, ld. Assessing Officer did not exclude those investments which did not yield any :- 13 -: ITA No. 2756/2017 & SP No.90/2018 exempt income, while working out the disallowance u/s.14A of the Act. In any case, as per the ld. Authorised Representative, disallowance u/s.14A of the Act had to be restricted to the amount of exempt income which came to D3,94,70,844/- only. Reliance was placed on the judgment of Hon'ble Apex Court in the case of Godrej and Boyce Manufacturing Company Ltd vs. DCIT, 394 ITR 449 that of Hon'ble Jurisdictional High Court in the case of Redington (India) Ltd vs. Addl. CIT, (2016) 97 CCH 219 that of Hon'ble Delhi High Court in the case of Joint Investments Pvt. Ltd vs. CIT, 372 ITR 694, that of Special Bench decision of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd, 165 ITD 27 and that of Co-ordinate Bench decision in the case of M/s. EIH Associated Hotels Ltd. vs. DCIT, ( ITA Nos.1673, 1674 & 1919 & 1920/Mds2015).
11. Per contra, ld. Departmental Representative submitted that ld. Assessing Officer in the draft assessment order dated 30.12.2016 clearly expressed his dissatisfaction on the suo-motu disallowance of expenditure relatable to the exempt income, made by the assessee. Further according to her, there was nothing on record to show what were the investments which yielded exempt income and whether the investments were made in fully owned subsidiaries. Viz-a-viz restriction of disallowance to the exempt income, ld. Departmental :- 14 -: ITA No. 2756/2017 & SP No.90/2018 Representative relying on Circular No.5/2014, dated 11.02.2014 of CBDT, submitted that even when there was no income which was exempt under the Act, a disallowance u/s. 14A of the Act could be made.
12. We have considered the rival contentions and perused the orders of the authorities below. Assessee was having investment D5347,38,00,000/- as on 31.03.2013. It had earned dividend income of D3,94,70,844/- and claimed it as exempt. Expenditure attributed by the assessee for earning such dividend income was D17,90,085/-. Ld. Assessing Officer had mentioned as under in his draft assessment order dated 30.12.2016:
''7.1 It is seen from the P&L account that the assessee has received an amount of Rs.3, 94,70,844/ - as dividend during the year under consideration, which has been claimed as exempt, in the statement of total income. As on 31.3.2013, the assessee company is having 'Investments' in the form of shares & Mutual funds to the tune of ₹5347,38,00,000/- from which the assessee company earns dividend income. However, the assessee company has not attributed only Rs.17,90,085/- as expenditure towards exempt income. In such circumstances, the undersigned having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee that there are no expenditure attributable towards these investments. The AR of the assessee was asked to explain why disallowance u/s 14A should not be made.'' In our opinion, ld. Assessing Officer clearly expressed his dissatisfaction on the suo-motu disallowance of D17,90,085/- made by the assessee as expenditure incurred for earning exempt income.:- 15 -: ITA No. 2756/2017 & SP No.90/2018
Invocation of Section 14A of the Act r.w.r. 8D of the Rules, in our opinion, cannot be faulted. Nevertheless, none of the lower authorities had verified the claim of the assessee that its investments were all in wholly owned subsidiaries and investments which did not yield any exempt income had to be excluded, for the purpose of computing the disallowance u/s.14A of the Act. Ld. Assessing Officer also did not have the benefit of the judgment of Hon'ble Delhi High Court in the case of Joint Investments Pvt. Ltd (supra) when he was considering the issue. In the fitness of the things, we are of the opinion that disallowance, if any, required under Section 14A of the Act needs a fresh look by the ld. Assessing Officer. We set aside the orders of the authorities below and remit the issue back to the file of the ld. Assessing Officer for consideration afresh in accordance with law.
Ground No.6 to 11 of the assessee are partly allowed for statistical purpose.
13. Vide its ground No.12, grievance raised by the assessee is on a disallowance of D101,96,34,654/- made u/s.14A of the Act, while computing its book profits for applying Section 115JB of the Act.
14. Ld. Authorised Representative submitted that this issue was squarely covered in favour of the assessee by virtue of decision of Special Bench in the case of Vireet Investment Pvt. Ltd (supra). :- 16 -: ITA No. 2756/2017 & SP No.90/2018
15. Ld. Departmental Representative did not advance any argument on this issue.
16. We have perused the orders and heard the contentions. What was held by the Special Bench of the Tribunal in case of Vireet Investment Pvt. Ltd (supra) at para 6.22 is reproduced hereunder:-
''6.22 In view of above discussion, we answer the question referred to us in fvour of assessee by holding that the computation under clause(f) of Explanation 1 to Section 115JB (2) is to be made without resorting to the computation as contemplated u/s.14A read with Rule 8D of the Income Tax Rules, 1962''.
Special Bench had followed the judgment of Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT, (2015) 378 ITR 33. Considering the above decision of the Special Bench, we are of the opinion that no disallowance could have been made u/s.14A of the Act, while computing book profit u/s.115JB. Such disallowance is deleted.
Ground No.12 of the assessee stands allowed.
17. Vide its ground No.13, grievance raised by the assessee is that credit for TDS D5,41,97,523/- and advance tax D3,50,00,000/- were not given to it. Ld. Assessing Officer is directed to verify the claim of the assessee on these and if found correct allow credit to extent proved by the assessee. Ordered accordingly. :- 17 -: ITA No. 2756/2017 & SP No.90/2018
18. The appeal having been adjudicated, Stay Petition filed by the assessee has become infructuous.
19. In the result, appeal of the assessee is partly allowed for statistical purpose whereas its stay petition is dismissed as infrutuous. Order pronounced on Tuesday, the 20th day of March, 2018, at Chennai.
Sd/- Sd/-
(एन.आर.एस. गणेशन)) (अ ाहम पी. जॉज%)
(N.R.S. GANESAN) (ABRAHAM P. GEORGE)
या यक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
चे$नई/Chennai
%दनांक/Dated: 20th March, 2018.
KV
आदे श क त(ल)प अ*े)षत/Copy to:
1. अपीलाथ /Appellant 3. आयकर आयु+त (अपील)/CIT(A) 5. )वभागीय त न/ध/DR
2. यथ /Respondent 4. आयकर आयु+त/CIT 6. गाड फाईल/GF