2019 (5) TMI 1720 - AT - Income Tax

Tribunal rules in favor of assessee, excluding corporate guarantees as international transactions

Britannia Industries Ltd. Versus DCIT, Circle-7 (1), Kolkata

The Tribunal allowed the appeal partly, ruling in favor of the assessee on various issues. It held that corporate guarantees did not constitute ... TP Adjustment - issuance of corporate guarantees fees - whether it did not have any bearing on profits, incomes, losses or assets of the appellant and therefore it was not covered within the purview of 'international transactions' under Section 92B ? - HELD THAT:- We note that the assessee has extended this corporate guarantee as a shareholder activity hence the adjustment should not be made. The primary object of the assessee is to help the subsidiary company and protect its interest and there is no object of the assessee company to earn the interest income by furnishing the corporate guarantee to the associated enterprises. We note that in the judgment of the Co-ordinate Bench of ITAT Ahmadabad, in the case of Micro Ink Limited vs. ACIT [2015 (12) TMI 143 - ITAT AHMEDABAD] wherein has held that corporate guarantee does not constitute international transaction as per section 92B of the Act as amended by the Finance Act, 2012. We rely on the judgment of the Co-ordinate Bench of ITAT, Delhi in the case of Bharti Airtel Ltd. vs. ACIT [2014 (3) TMI 495 - ITAT DELHI] wherein the definition of international transaction in view of the amendments, vide Finance Act, 2012, had been discussed and it was held that the provision of corporate guarantee is not an international transaction. Thus provision of corporate guarantee is not an international transaction. - Decided in favour of assessee Addition u/s 14A read with Rule 8D - HELD THAT:- As relying on M/S. REI. AGRO LTD. [2014 (4) TMI 713 - CALCUTTA HIGH COURT] we direct the assessing officer to compute the disallowance under Rule 8D (2) (iii) of the Income Tax Rules, by taking into account dividend bearing securities. Ground raised by the assessee, are treated to be allowed for statistical purposes. MAT - Increasing the book profit u/s 115JB as computed by way of disallowance u/s 14A read with Rule 8D - HELD THAT:- Since there is no mention of Section 14A in the said Explanation 1 to Section 115JB, the same cannot be added to re-determine the quantum of 'Book Profit'. The provisions of section 115JB relating to computation of book profit are amply clear and unambiguous. These provisions do not leave any room for adjustment by the assessing officer other than those mentioned in Explanation 1 to section 115JB to the net profit reflected in the accounts of any assessee and adjustment by way of disallowance u/s 14A is not included in the said explanation. This tribunal’s discussion in VIREET INVESTMENT (P.) LTD. [2017 (6) TMI 1124 - ITAT DELHI] has already settled this issue in assessee’s favour. Therefore, such upward revision in the sum of ₹ 58,27,584/- to the book-profit by making disallowance section 14A read with rule 8D is not permitted, therefore we delete the addition Nature of receipt - incentive/subsidy received from the Government of Bihar and Orissa for setting up new industry in the respective states in the form of reimbursement of VAT - capital or revenue receipt - HELD THAT:- Subsidy has been provided by the Government of Bihar and Orissa to set up new project in specified area, to purchase the plant and machinery therefore the purpose and nature of subsidy should be considered.Considering the nature of the subsidy, we are of the view that it is on account of capital therefore, it should not be treated as revenue income of the assessee. See SHYAM STEEL INDUSTRIES LIMITED [2018 (5) TMI 702 - CALCUTTA HIGH COURT] wherein the 'purpose test' has been defined in the most recent judgment of the Hon`ble Supreme Courtin CIT v. Chaphalkar Brothers [2017 (12) TMI 816 - SUPREME COURT] where the subsidy in the form of exemption from payment of entertainment duty by newly set-up multiplex theatres for a certain number of years was regarded as a capital receipt by virtue of the very nature and purpose of the subsidy. In the assessee`scase being available only to new units and units which have undergone an expansion, the real purpose of the incentive in this case has to be seen as a capital subsidy and has to be regarded, as such, as a capital receipt and not a revenue receipt. Therefore, we direct the AO to treat the subsidy as a capital receipt. Undisclosed receipts - mere appearance of information in ITS data of AIR - HELD THAT:-Issue in this ground is related to reconciliation exercise. We direct the assessee to file the reconciliation statement of AIR data versus data in the books of the assessee. We also direct the assessing officer to examine the reconciliation statement of AIR data versus data in the books of the assessee and adjudicate the issue in accordance with law. Statistical purposes, this ground of the assessee is treated to be allowed. Issues Involved:1. Transfer pricing adjustment related to corporate guarantee fees.2. Disallowance under Section 14A read with Rule 8D.3. Adjustment in book profit under Section 115JB.4. Treatment of government subsidy as capital or revenue receipt.5. Treatment of undisclosed receipt based on ITS data of AIR.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment Related to Corporate Guarantee Fees:The assessee contested the transfer pricing adjustment of Rs. 2,18,77,327/- related to corporate guarantee fees, arguing that corporate guarantees did not constitute 'international transactions' under Section 92B of the Income Tax Act, 1961. The appellant claimed that extending corporate guarantees was a shareholder activity, not warranting any fee, and that bank guarantees were not comparable to corporate guarantees. The Tribunal observed that numerous judicial pronouncements, including the Coordinate Bench of ITAT Ahmedabad in the case of Micro Ink Limited vs. ACIT, had held that corporate guarantees do not constitute international transactions. The Tribunal concluded that corporate guarantees given by the appellant to its AE were for pure business considerations and were in the nature of an owner-shareholder activity, hence no transfer pricing adjustment was warranted. The Tribunal deleted the upward adjustment of Rs. 2,18,77,327/-.2. Disallowance Under Section 14A Read with Rule 8D:The assessee challenged the disallowance of Rs. 58,27,584/- made by the Assessing Officer under Rule 8D(2)(iii), arguing that there was no proximate cause between the expenditure incurred and the earning of tax-free income. The Tribunal noted that the disallowance of administrative expenses should be governed by Rule 8D(2)(iii) and should consider only dividend-bearing securities. Respecting the judgment of the Hon’ble Calcutta High Court in the case of REI Agro Ltd., the Tribunal directed the Assessing Officer to compute the disallowance by taking into account only dividend-bearing securities. The grounds were treated as allowed for statistical purposes.3. Adjustment in Book Profit Under Section 115JB:The assessee contested the increase in book profit by Rs. 58,27,584/- under Section 115JB due to disallowance under Section 14A read with Rule 8D. The Tribunal noted that the provisions of Section 115JB are explicit and do not include adjustments for disallowance under Section 14A. Referring to the Tribunal’s discussion in ACIT vs. Vineet Investment Ltd., the Tribunal held that such an upward revision is not permitted and deleted the addition of Rs. 58,27,584/-.4. Treatment of Government Subsidy as Capital or Revenue Receipt:The assessee received a subsidy of Rs. 17,48,00,000/- from the Governments of Bihar and Orissa for setting up new industries, which it claimed as a capital receipt. The Assessing Officer treated it as revenue income. The Tribunal, considering the nature and purpose of the subsidy, held that it was for setting up new projects and thus should be treated as a capital receipt. The Tribunal relied on the judgment of the Hon’ble Calcutta High Court in the case of Pr. CIT vs. Shyam Steel Industries Ltd., which emphasized the 'purpose test' to determine the nature of the subsidy. The Tribunal directed the Assessing Officer to treat the subsidy as a capital receipt.5. Treatment of Undisclosed Receipt Based on ITS Data of AIR:The assessee contested the treatment of Rs. 6,14,238/- as an undisclosed receipt based on ITS data of AIR. The Tribunal directed the assessee to file a reconciliation statement of AIR data versus the data in its books and instructed the Assessing Officer to examine this reconciliation and adjudicate the issue in accordance with the law. This ground was treated as allowed for statistical purposes.Conclusion:The appeal was partly allowed, with significant deletions and adjustments made in favor of the assessee based on judicial precedents and detailed analysis of the issues involved. The Tribunal's order emphasized adherence to established legal principles and judicial pronouncements in resolving the disputes.