Bombay High Court
Principal Commissioner Of Income ... vs Aditya Birla Minacs Worldwide Ltd on 4 September, 2018
Author: B. P. Colabawalla
Bench: S.C. Dharmadhikari, B. P. Colabawalla
itxa.303.2016 (Colabawalla).doc
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 303 OF 2016
The Principal Commissioner of Income Tax-10 ]
Mumbai, Room No. 416 , 4th Floor, Aayakar ]
Bhawan, M.K.Road, Mumbai 400 020 ]...Appellant.
Vs.
Couceutrix Services India Pvt. Ltd. ]
(Formerly known as Minacs Pvt. Ltd.) 9th floor ]
Symphony I.T.Park, Chandivali Farm Road, ]
Andheri (East), Mumbai 400 072 ]...Respondent.
.....
Mr Arvind Pinto for the Appellant.
Mr Atul K. Jasani for the Respondent.
.....
Digitally
signed by CORAM : S. C. DHARMADHIKARI &
Dhanappa
Dhanappa Irappa B.P.COLABAWALLA, JJ.
Irappa Koshti
Koshti Date:
2018.09.04
17:09:28
+0530 RESERVED ON : 21st August, 2018
PRONOUNCED ON : 4th September, 2018
JUDGMENT [ Per B. P. Colabawalla J. ]:
1. This appeal filed under Section 260A of the Income Tax Act, 1961 ("I.T.Act,1961") takes exception to the order dated 25th March, 2015 passed by the Income Tax Appellate Tribunal, Mumbai, "K" Bench (for short the "ITAT"). Before the ITAT there were two Pg 1 of 9 itxa.303.2016 (Colabawalla).doc appeals that were filed for the assessment year ("A.Y.") 2007-08. The First Appeal, namely, ITA No. 7033/Mum/2012 was filed by the assessee, whereas, the Second Appeal, namely, ITA No. 7142/Mum/2012 was filed by the Deputy Commissioner of Income Tax. By the impugned order, the appeal filed by the Revenue was dismissed and the appeal filed by the assessee was partly allowed.
2. According to Mr Pinto, the learned counsel appearing on behalf of the Revenue, the impugned order gives rise to the following questions of law which read thus:
(1) "Whether in law and on the facts of the instant case, was the Tribunal justified in directing the AO/TPO to adopt 0.5% as the ALP of the guarantee commission charges provided by the Respondent Co.; without appreciating that the TPO had determined this ALP taking into consideration entity, country specific, currency risks and also considering the leveraged position taken by the Company which had an impact on its working capital?"
(2) "Whether in law and on the facts of the instant case, was the Tribunal justified in its direction that the money advanced to the AE as share application money is not to be considered as loan; unmindful of the fact that this money was being utilized as working capital and not deposited in an escrow account in cases where monies are received in cases of share application?".
(3) "Whether in law and on the facts of the instant case, was the Tribunal justified in directing the A.O. to allow the deduction under Section 10A without setting of losses of non STPI units ignoring the provisions of law that the deduction u/s 10A is in the nature of a deduction and not an exemption in view of the amendment in law?"
Pg 2 of 9 itxa.303.2016 (Colabawalla).doc (4) "Whether in law and on the facts of the instant case, was the Tribunal justified in directing the A.O. to allow the carry forward of loss of non-STPI units without appreciating that this loss was to be set off against the profits of the STPI units as per the Act?".
(5) "Whether in law and on the facts of the instant case, was the Tribunal justified in not considering CBDT Circular No.7 dated 16.07.2013 that explains the setting off of losses against the profits of the STPI units according to the provisions of the Act?".
(6) "Whether in law and on the facts of the instant case was the Tribunal right in ignoring the decision of the Karnataka High Court in CIT Vs. Himatasingike Seide Ltd. (286 ITR 255, on the issue of set off losses; that was upheld by the Apex Court in CA 1501 of 2008?".
3. As far as question No.1 is concerned, namely, whether the Tribunal was justified in directing the AO/TPO to adopt 0.5% as the Arms' Length Price ("ALP") of the guarantee commission charges provided by the Respondent Co., we find that this question is squarely covered by a decision of this Court in The Commissioner of Income Tax, Mumbai Vs M/s Everest Kento Cylinders Ltd. decided on 8th May, 2015, and reported in (2015) 378 ITR 57 (Bom.). In this decision, question No.3 was, whether the ITAT Bombay was right in deleting the addition of Rs.28,50,353/- on account of Transfer Pricing Adjustment on guarantee commission. On this issue, the Division Bench of this Court held that there was a distinction between the guarantees provided by the commercial banks, namely, bank Pg 3 of 9 itxa.303.2016 (Colabawalla).doc guarantees and a corporate guarantee issued by the assessee to the effect that if the subsidiary associated enterprise does not repay the loan, then in such event the assessee would make good the amount and repay the loan. The Division Bench opined that the considerations which applied for issuance of a corporate guarantee are distinct and separate from that of a bank guarantee, and accordingly, took a view that the commission charged cannot be called in question, in the manner Transfer Pricing Officer had done. It was the view of the Division Bench that the comparison is not as between like transactions but are between guarantees issued by the commercial banks on the one hand as against the corporate guarantee issued by a holding company for the benefit of its associated enterprise on the other. The relevant portion of this decision can be found in paragraph 10 thereof which reads thus:
"10. Having considered submissions of Mr Malhotra for the revenue and Mr Pardiwalla for the assessee, we are of the view that the order of the Tribunal as regards dis-allowance under section 14A and restricting the same to Rs.1 lac was justified in view of the material before the Tribunal. Furthermore, having considered the fact that a sum of Rs.4,47,649/- was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Pg 4 of 9 itxa.303.2016 (Colabawalla).doc Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law and it is dismissed. There will be no order as to costs."
4. This decision in the case of M/s Everest Kento Cylinders Ltd. (supra) has been subsequently followed by this Court in the case of Commissioner of Income Tax Vs Glenmark Pharmaceuticals Ltd. Reported in (2017) 398 ITR 439 (Bom). Taking all this into consideration and since we find that question No.1 has already been answered in favour of the assessee and against Revenue, we do not find that the same gives rise to any substantial question of law which would require us to admit an appeal filed by the Revenue on this question.
5. As far as question Nos. 3,4,5 and 6 are concerned, Mr Pg 5 of 9 itxa.303.2016 (Colabawalla).doc Pinto, learned counsel appearing on behalf of the Revenue very fairly stated before us that these questions are covered by a recent decision of the Supreme Court in the case of Commissioner of Income-Tax and Another Vs Yokogawa India Ltd. reported in (2017) 391 ITR 274 (SC). This being the position, we find that even question Nos.3,4,5 and 6 do not give rise to any substantial question of law that would require us to admit the present appeal.
6. This now only leaves us with question No.2. As far as question No.2 is concerned, we find from the impugned order that the same has not been answered in favour of the assessee, but in fact the matter has been remanded back to the authorities below for fresh determination. This is clear from the arguments canvassed by the respective counsels and the findings given thereon by the Tribunal, which can be found from paragraphs 4.3 to 4.6 of the impugned order which read thus:-
"4.3 Before us, the Ld. AR of the assessee has submitted that the loan was given to its subsidiary at Phillipines as capital infusion in the form of fresh share capital. He has further submitted that the TBPO Phillipines was required to obtain approval regarding issue of shares from Securities and Exchange Commission, Phillipines. TBPO Phillipines received the approval from Securities and Exchange Commission Phillipines on 22.10.2007. Subsequent to the receipt of approval, the equity shares were issued on 28th May, 2008. The Ld. AR has referred the share certificate issued by TBPO Phillipines and submitted that the same has been produced before the Tribunal as additional evidence vide letter dated 13.06.2014 with a prayer for admission of additional evidence. Thus the Ld. AR has submitted that the said transaction cannot Pg 6 of 9 itxa.303.2016 (Colabawalla).doc be treated as loan given to the AE and, therefore, no TP adjustment is required in this respect. In support of his contention he has relied upon the following decisions:-
. Bharati Airtel Ltd. (ITA No. 5816/Del/2012) dated 11 March 2014 (Delhi Tribunal ) . Parle Biscuits Pvt. Ltd. (ITA No. 9010/M/2010) dated 11 April 2014 (Mumbai Tribunal) . M/s All Cargo Global Logistics Ltd. (ITA No. 4909 and 4910/ M/2012) dated 11 June 2014 (Mumbai Tribunal) . PMP Auto Components P. Ltd. (ITA No. 1484/Mum/2014) dated 22 August 2014.
4.4 On the other hand, the Ld. DR has relied upon the orders of authorities below and submitted that the TPO has specifically pointed out that the money given by the assessee was enjoyed and used by the subsidiary without issuing the shares for about more than two years, therefore, so long the money was lying with the AE without issuing the shares, the same will be deemed as loan.
4.5 We have considered the rival submissions as well as relevant material on record. Though there was a delay in issuing the shares against the share application money given by the assessee to its AE, however, the assessee has duly explained the cause of delay and it was not a deliberate delay for using the money by subsidiary in the garb of share application money or by providing the fund by the assessee in the garb of share application money. The delay was due to obtaining necessary approval from the securities and Exchange Commission, Phillipines. Finally, the shares were issued as per the share certificate dated 25.05.2008 which has been produced by the assessee as additional evidence. Since the document of issuance of equity shares in the name of the assessee by the subsidiary/AE vide share certificate were not before the authorities below, therefore, to the extent of limited purpose of considering the said document, we set aside this issue to the record of AO/TPO to consider the same. As far as the re-characterization of the share application money as loan, we note that the Hon'ble Jurisdictional High Court in the case of DIT Vs. Besix Kier Dabhol S.A. vide its decision dated 30th August, 2012 in ITA No. 776 of 2011 has considered an identical issue in para 6 to 8 as under:-
"6. In appeal, the Commissioner of Income Tax (Appeals) by an order dated 29.3.2007 upheld the order of the Assessing Officer and disallowed the deduction on account of interest of Rs. 5.73 Crores paid to Joint Venture Partners. The Commissioner of Income Tax (Appeals) held that Article 7(3)(b) of the Double Taxation Avoidance Agreement forbids Pg 7 of 9 itxa.303.2016 (Colabawalla).doc allowance of any interest paid to the head office by permanent establishment in India as a deduction. Further, the payment of interest also directly violates the conditions imposed by RBI in its letter dated 3/11/1998. Therefore, the order of the Assessing Officer was upheld.
7. However, the Tribunal allowed the respondent - assessee's appeal. During the course of the proceedings before the Tribunal the revenue contended that the borrowings on which the interest has been claimed as a deduction are in fact capital of the assessee and brought only under the nomenclature of loan for tax consideration. It was the case of the appellant-
revenue before the Tribunal that debt capital is required to be re-characterized as equity capital. However, the Tribunal held that in India as the law stands there were no rules with regard to thin capitalization so as to consider debt as an equity. It is only in the proposed Direct Tax Code Bill of 2010 that as a part of the General Anti Avoidance Rules it is proposed to introduce a provision by which a arrangement may be declared as an impermissible avoidance arrangement and may be determined by re-characterizing any equity into debt or vice versa.
8. We find no fault with the above observations of the Tribunal.
There were at the relevant time and even today no thin capitalization rules in force. Consequently, the interest payment on debt capital cannot be disallowed. In view of the above, the question (i) raises no substantial question of law and is, therefore, dismissed."
4.6 We further note that a similar view has been taken by the Tribunal in a series of decisions as relied upon by the assessee. Accordingly, subject to verification of the share capital by the AO, the share application money cannot be treated as loan amount merely because there is a delay in issuance of shares by the subsidiary in the name of the assessee, which was duly explained by the assessee. Accordingly, this ground of the assesse's appeal is allowed in above terms."
7. This being the case, we find that even question No.2 does not give any rise to any substantial question of law.
Pg 8 of 9 itxa.303.2016 (Colabawalla).doc
8. In view of the foregoing discussions, we find no merit in this appeal. It is, accordingly, dismissed. However, in the facts and circumstances of the case, there shall be no order as to costs.
( B.P.COLABAWALLA J. ) ( S.C.DHARMADHIKARI J. ) Pg 9 of 9