TaxTMI 
TaxTMI 
TaxTMI 
2014 (5) TMI 880
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....ven to wholly owned subsidiary .company MIs Technical Instruments Manufactureres (India) Ltd 3) The learned Additional Commissioner of Income Tax (L TU) Mumbai erred in treating Rs.120 lacs paid towards professional fees paid to Shri Jayram Nadkarni as capital expenditure as against the claim made by . appellant as revenue expenditure. 4) The learned Additional Commissioner of Income Tax (L TU) Mumbai erred in treating Rs. 547 lacs paid towards corporate advertisement expenditure as capital expenditure out of the total advertisement & sales promotion expenses of Rs. 9097.30 lacs claimed by appellant as revenue expenditure. 5) The learned Additional Commissioner of Income Tax (L TU) Mumbai erred in disallowing Rs. 36.27 lacs being 50% of expenditure incurred on account of gift expenses. 6) The learned Additional Commissioner of Income Tax (L TU) Mumbai erred in making an addition of Rs. 69.11 lacs u/s 14A of the Income Tax Act read with rule 8D of the Income Tax Rules. 7) The learned Additional Commissioner of Income Tax (L TU) Mumbai erred in treating Rs. 207.80 lacs being refund receivable from Andhra Pradesh Govt on account of entry tax as income u/s 41 (1) of the Income Tax....
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....giving these bank guarantees, there is a risk exposure to the assessee by this amount of guarantee given. Such a guarantee helps the A.E. in a beneficial manner and, therefore, in arm‟s length situation, how an independent enterprise would have been paid a commission to the enterprise providing similar guarantee to its bank or the credit facilities has to be benchmarked. He also held that transaction relating to provision of a guarantee and the payment of commission for such service by the A.E. to the assessee, would fall within the definition of the term "International Transaction" under section 92B and such transactions have bearing on the profits, income or assets of the assessee. Accordingly, he held that the payment of 0.20% by the A.E. towards guarantee fee commission are not at arm‟s length and external CUP method should be applied for bench marking such transactions. After making enquiry from HSBC Bank and from the website of Allahabad Bank, he has tried to bench mark the said payment of guarantee commission in the following manner:- 5.6.1 The enquiry from HSBC Ltd., Mumbai, revealed that they were charging a rate of 0.15% to 3% (Annexure-1). 5.6.2 The website....
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....widely used method for risk evaluation is by comparing the Bank rate and the PLR rate. The Bank rate is the rate at which the Reserve Bank of India lends money to the banks and PLR represents the rate at which Banks 1 end their money to customers. Lending to Customers entails a great deal of risk as against lending it to RBI, which is entirely risk free. Therefore the difference between the Bank rate and PLR rate does show the element of risk. The Bank rate during the relevant year was 6% during the relevant year while the average PLR rate was 10.5%. This shows that the return for bearing the risk was around 4.5%. 5.9 Considering the facts and circumstances and in all fairness of the assessee, I benchmark the arm's length price for the guarantee at 3% p.a. of the amount of guarantee." 4. Accordingly, he held the guarantee of 3% of the amount of guarantee given would be at ALP and made upward adjustment of Rs.2,42,06,600. The DRP also confirmed action of the TPO / AO on the ground that it cannot be denied that the A.Es are substantially benefited on account of guarantee given by the assessee for re-scheduling the loan and ALP is required to be seen on such transaction, whether the....
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....ALP. 6. On the other hand, the learned Departmental Representative submitted that the earlier years‟ orders of the Tribunal and the assessment order cannot be held to be applicable, because after the „Explanation‟ was added to section 92B by the Finance Act, 2012, with retrospective effect from 1st April 2002, the payment of guarantee fee has been included in the expression "International Transactions". Earlier, there were different views as to whether such a guarantee fee commission was international transaction or not. He further submitted that the TPO has clearly brought out the risk which has been undertaken by the assessee for giving guarantee on the loans taken by the subsidiary and also the circumstances. In such a situation, the instances of unrelated party, external CUP method has to be applied. He thus, strongly relied upon the findings recorded by the TPO. He also tried to distinguish the decision of Everest Kanto Cylinder (supra) on the ground that credit rating and risk factor as highlighted by TPO in this case cannot be compared with. In support of his contention, he has relied upon the decision in Technimount ICB Pvt. Ltd. v/s DCIT, order dated 28 ....
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.... transaction to transaction and mutual understanding between the bank and the parties. There could be instances, where on the evaluation of various parameters, of financial credibility and stakes of the client, the bank may not charge any guarantee commission which completely depends upon its evaluation, of a particular client. This is also evident from the fact that, in some of the years, in assessee‟s own case, no charges have been paid on account of guarantee commission as has been submitted by the learned Counsel for the assessee. Simply relying upon certain data from the market without carrying out any comparability analysis of the actual transactions undertaken, such an application of guarantee commission rate cannot be applied in a blanket manner in all the cases. In the present case, when there was an internal CUP in the form of bank guarantee charges, charged by the bank from the assessee, the same ought to have been first analysed and examined wherein the guarantee commission charged ranged between 0.25% to 0.35%. It is also an undisputed fact, that in the earlier years, the Tribunal has deleted the similar addition and no question of law on this score has been rais....
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....and this matter has also been discussed in the assessment order for the assessment year 2008-09. Thus, the loan was given for commercial expending by the assessee. 12. The assessee was also required by the assessing officer to produce a copy of bank statement through which the loan was advanced to the subsidiary company. On a perusal of the entries of the copy of statement of cash credit account with HDFC, for the month of February 2006, he noted that the assessee has advanced Rs.7.50 crores on 2nd February 2006 to the subsidiary company and on the same day, the assessee has taken cash credit of Rs.3.10 crores and Rs.7.50 crores from the bank. Therefore, the source of the loan advanced is out of the borrowed funds only and not from the assessee‟s own funds. Thus, it cannot be held that the loan has been given out of interest free funds. Further, the funds which were given to the subsidiary company which has been stated for the purchase of land, also does not serve the business purpose of the assessee company. Accordingly, he held that interest has to be charged on such an advances and he worked out the disallowable interest @ 12% on the loan of Rs.14,32,10,000 for 12 months ....
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....at the advance was given to the subsidiary company for the purpose of buying of the land for R&D purpose used for the purpose of the assessee only. Thus, there was a direct connection of payment being made for commercial and business expediency. He also submitted that the subsidiary company also got merged with the assessee company by the order of the Bombay High Court on 24 th July 2009, this also goes to show that the advance was purely for the purpose of the assessee only. Once the assessee has huge interest free funds, the normal presumption is that loans / advances have been given to the subsidiary company out of interest free funds. In support of this, reliance was placed on the decision of the Bombay High Court in Reliance Utilities and Power Ltd. (supra). 15. On the other hand, the learned Departmental Representative strongly relied upon the findings of the Assessing Officer as well as the directions of the DRP, and further submitted that, once the payment has been made from the bank account and on which date the assessee had received money from the bank in the cash credit account, then it cannot be said that the payment has been made out of interest free funds and, theref....
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....cannot be held that the assessee has given advance / loan to the subsidiary company directly out of interest bearing funds. The disallowance so made by the Assessing Officer cannot be sustained, firstly, on the ground that the advance / loan given to subsidiary was solely for the purpose of assessee‟s business and secondly, the assessee has huge interest free funds with it at the time of giving such advance and, therefore, in view of the decision of the Hon'ble Supreme Court in S.A. Builders (supra) and Reliance Utilities and Power Ltd. (supra), such a disallowance of interest is uncalled for. Accordingly, same is deleted. Thus, the ground raised by the assessee is treated as allowed. 17. In ground no.3, the assessee has challenged the disallowance of Rs. Rs.1,20,00,000 being professional fees paid to one Mr. Jayram Nadkarni, as capital expenditure. The assessee has also raised an additional ground of appeal wherein, it has been contended that if such expenditure is to be treated as capital expenditure, then depreciation should be allowed. 18. Brief facts qua this issue are that, the assessee had entered into an agreement with Mr. Jayram Nadkarni for providing technical adv....
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....as confirmed and balance Rs.36 lakhs was deleted. 20. Before us, the learned Counsel for the assessee submitted that the consultancy given by the aforesaid person was on various technical aspect fields relating to the assessee‟s business only and this does not lead to any creation of new asset. Such a technical assistance was solely for the purpose of improving the existing manufacturing process and not for any new business. Reliance was placed by him on the decision of Bombay High Court in CIT v/s Kirloskar Tractors Ltd., [1998] 231 ITR 849 (Bom.). 21. On the other hand, the learned Departmental Representative submitted that, insofar as the payment of Rs.1.20 crores, the same is clearly for acquiring of technical knowhow from the consultancy which is capital in nature and the same has rightly been disallowed by the Assessing Officer and the DRP. He strongly relied upon the reasoning of the assessing officer and also reffered to the various terms and clauses of the agreement. 22. We have heard the rival contentions, perused the findings of the Assessing Officer and the DRP as well as the material available on record. From the perusal of the scope of the work as given in th....
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....eciation as per rules. 24. In ground no.4, the assessee has challenged the disallowance of Rs.5,47,00,000 paid towards corporate advertisement expenditure as capital expenditure. 25. The assessee has incurred expenditure of Rs.29,99,30,000, on account of advertisement on TV, the captionwise details of such advertisement expenditure was given before the Assessing Officer, which has been incorporated at Page-15 of the assessment order. The Assessing Officer, from the said summary of expenditure, observed that the assessee has incurred expenditure on advertisement of product brand like, exterior paint brand, royal brand and tractor brands, which fall in the category of product advertisement and hence they are revenue in nature. However, there are certain expenditure which have been incurred for creating a brand image of the corporate and these are enduring in nature and falls in the category of capital expenditure. After calling for the detail submissions from the assessee, he held that certain expenditure incurred on TV advertising, relates to corporate brand image which is capital expenditure and for coming to this conclusion, he has relied upon the decision of the Hon'ble Supreme....
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....s it relates to enduring benefit. Such a distinction made by the Assessing Officer, in our opinion is wholly misplaced, because the expenditure on account of advertisement even for the product brands does highlight the name of the company. The brand name of the company is embedded in the product and the brand value of the product is also the brand value of the company, who owns the product. If any advertisement does not give the details of the product this does not ipso-facto means that it is not for the promotion of product. The product in the market is known by its brand which is owned by the company which creates the product. Making such kind of a distinction, that part of the advertisement is for the product which is revenue in nature and part of the advertisement for the corporate brand is capital expenditure is not appropriate. Even if there is a promotion of a corporate brand, it directly facilitates the business of the assessee and in the result has affect on the sales and profitability of assessee‟s business. The brand building of the corporate in such advertisement is inherent and it cannot be inferred that such an advertisement goes to create a fixed capital. Even ....