Tribunal decision: partial allowance of appeals, limits disallowance to exempt income, vacates transfer pricing adjustment, allows education cess deduction.

The Tribunal partially allowed both the assessee's and the revenue's appeals. Regarding the disallowance under Section 14A, the Tribunal restricted it to the exempt income earned and directed consideration only of investments yielding dividend income. For the transfer pricing adjustment, the Tribunal vacated the upward adjustment for corporate guarantees. Additionally, the Tribunal allowed the deduction for Education Cess and Secondary and Higher Education Cess under Section 37.

---

---

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D regarding administrative expenses.
2. Disallowance under Transfer Pricing for corporate guarantee/counter guarantee.
3. Allowability of Education Cess and Secondary and Higher Education Cess as a deduction under Section 37.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of administrative expenses under Section 14A read with Rule 8D(2)(iii). The assessee argued that the disallowance should be restricted to INR 1,46,90,230 instead of INR 8,17,52,359. The CIT(A) had set aside the issue to the Assessing Officer (A.O) for re-examination, which the assessee contested. The Tribunal upheld the CIT(A)'s decision to re-examine the issue but directed that the disallowance under Section 14A should be restricted to the extent of the exempt income earned during the year, in line with the Delhi High Court's judgment in Joint Investments Pvt. Ltd. vs. CIT. The Tribunal also directed the A.O to consider only those investments which yielded dividend income for computing the disallowance under Rule 8D(2)(iii).

2. Disallowance under Transfer Pricing for Corporate Guarantee/Counter Guarantee:
The assessee contested the upward adjustment made by the Transfer Pricing Officer (TPO) for providing corporate guarantees to its Associate Enterprises (AEs). The TPO had used the average bank guarantee rate of 2% per annum for benchmarking, which was reduced to 1.80% by the CIT(A). The assessee argued that the corporate guarantee provided to its AEs was at arm's length and no adjustment was required. The Tribunal agreed with the assessee, citing the Bombay High Court's decision in CIT vs. Everest Kento Cylinders Ltd., which differentiated between corporate guarantees and bank guarantees. The Tribunal directed the A.O/TPO to vacate the upward adjustment of Rs. 6,19,73,996.

3. Allowability of Education Cess and Secondary and Higher Education Cess as a Deduction:
The assessee claimed that Education Cess and Secondary and Higher Education Cess should be allowed as a deduction under Section 37. The Tribunal referred to the Bombay High Court's decision in Sesa Goa Limited vs. Joint Commissioner of Income-tax, which held that "cess" is not included in the term "any rate or tax levied" under Section 40(a)(ii) and thus, is allowable as a deduction. The Tribunal directed the A.O to allow the deduction for Education Cess and Secondary and Higher Education Cess.

Conclusion:
The Tribunal partly allowed both the assessee's and the revenue's appeals. For the disallowance under Section 14A, the Tribunal restricted it to the exempt income earned and directed the A.O to consider only those investments yielding dividend income. For the transfer pricing adjustment, the Tribunal vacated the upward adjustment for corporate guarantees. Lastly, the Tribunal allowed the deduction for Education Cess and Secondary and Higher Education Cess under Section 37.

---