TaxTMI 
TaxTMI 
2012 (11) TMI 1099
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.....T. Act. 2. The assessee company is engaged in the business of manufacturing of high pressure seamless gas cylinder services and compressed natural gas cylinders. In the year under consideration, the assessee had filed its return of income declaring total income of Rs. 71,90,77,156/- under the normal provisions of the Income Tax Act and Rs. 70,18,79,265/- under Section 115JB of the Act. 3. The brief facts apropos ground No.1 are that the assessee had shown a dividend income of Rs. 31,98,330/- and has claimed the same as exempt from tax u/s. 10(33). In response to the show-cause notice during the course of the assessment proceedings as to why disallowance under Section 14A should not be made, the assessee submitted that most of the investments in the equity shares and mutual funds were made out surplus funds received during the financial year 2005-06 from the Initial Public Offer (in short 'IPO'), which has been accepted by the appellate orders in the assessment year 2006-07, wherein it was held that the funds raised from IPO were utilized for making the investments. It was further submitted that without prejudice if any disallowance is called for then the same should ....
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....ctly related to investments and further to exclude such interest expenses from the purview of the computation such interest which would be directly attributable to any particular income or receipt. If the appellant has invested the proceeds of IPO into the investment earning exempt income and there is no interest cost of such funds then in the given situation disallowance of interest would only relate to such other investments which are other than from the funds of IPO and from such interest costs which are not directly relatable to any income or receipt. viii. The appellant has also relied upon on certain case laws and ruling of Hon'ble ITAT. The decision in the case of Balrampur Chini is in respect of the position that section 14A and Rule 8D can be only invoked when the O is not satisfied with regard to the accounts of the assessee that the claim of expenditure made by the assessee is not correct and the claim made by the assessee that no expenditure has been made in relation to income which does not form part of total income under the Act. In the facts of the case no expenditure has been disallowed by the appellant under section 14A and it is not the case that there is n....
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....assessment year 2006-07; (ii) investment made during the assessment year 2006-07 and (iii) investment made during the year 2007-08. He drew our attention to yearwise fund flow statement appearing at page 46 of the paper book and pointed out the details of interest free fund available with the assessee right from the assessment year 2004-05 to the assessment year 2008-09 which were far more than the aggregate investments made by the assessee. He also provided us the chart giving bifurcation of the investments made in various years. From this, he submitted that the investments as on 31st March, 2005, were to the tune of Rs. 2.12 crore, whereas the assessee's interest free funds were to the tune of Rs. 41.67 crore which included the accumulated profits of Rs. 29.69 crore. Regarding investments made in the AY 2006-07, he submitted that the assessee had made investments of Rs. 11.09 crore and during the same year, the assessee had gone for public issue (IPO), wherein it has raised Rs. 90 crore and the said funds were used for investments in shares and mutual fund during that year. This fact has been accepted by the CIT(A) in the said year, who has held that investments made from IPO....
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....can be made under Section 14A on this amount. Out of the balance amount, sum of Rs. 11.09 crore which has been invested in the assessment year 2006-07, it has been held to be made out of the funds raised by way of IPO for sums aggregating to Rs. 90 crore to the interest free funds by the CIT(A). The said order of the CIT(A) has now been affirmed by the Tribunal vide order dated 21-10-2011, wherein it has been held that when the assessee was having sufficient non-interest bearing funds for making investments during the year, then there is no reason to deviate from the findings of the CIT(A). Thus, this amount also cannot be taken into consideration for making any kind of disallowance under Section 14A. Now, the remaining balance amount of investment [i.e 54.30 - (41.03+11.09) = 2.18], which was invested prior to assessment year 2006-07, it is seen from the records that the assessee has huge surplus funds, specifically out of accumulated profits and reserve surplus. In such a situation and in view of the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra), the normal presumption is that investment must have been made out of the surp....
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.... company was a branch of the assessee company and during the year it had sold all the fixed assets of its branch in Dubai to its wholly owned subsidiary EKC Dubai. The subsidiary company is also engaged in the similar business of manufacture of cylinders. It needed funds for working capital requirements and capital expenditure, for which the said company approached the ICICI Bank, Bahrain branch, which agreed to provide term loans for the working capital and capital expenditure to said subsidiary company. In order to enable the ICICI Bank, Bahrain branch to provide loans to EKC Dubai, the assessee company provided a corporate guarantee to the said bank by way of two Deeds of guarantee, one for the working capital facilities up to USD 15 million and another for capital expenditure up to USD 5 million. For providing such guarantee to the Bank in Bahrain for loan given to subsidiary, the assessee has charged 0.5% as guarantee commission from its subsidiary. The assessee also had an independent sanction letter of credit arrangement between ICICI Bank, India Branch, where a guarantee fee of 0.6% p.a is to be paid by the assessee company to ICICI Bank of India for the bank guarantee prov....
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....the risk on behalf of its AEs which in any third party situation he would not have undertaken or would have charged a consideration for the same. E. An argument that no cost has been incurred by the assessee and, therefore, there was nothing to recover, is of no consequence as the assessee (also) referred to as the taxpayer) has borne risks. There is an inherent cost in giving such a guarantee (or corporate guarantee or letter of comfort or any similar assurance). F. The AE with its resources and economic position had a very low credit rating, on a standalone basis. If at all, the AE were to be granted a loan by a third party, the loan-giver would have charged at the prime lending rate (besides the fee etc). This is because of the very high risk involved in giving loan by any lender to an entity such as your AE. Therefore, a mark-up which is indicative of risk involved needs to have been charged by you from your AE. A 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 lend their money to customers. Lending to cust....
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....ks giving such kind of guarantee. He, accordingly, worked out the ALP at 3% of commission at Rs. 34,99,003/- and made upward adjustment of Rs. 28,50,353/-. 14. Before the CIT(A), the assessee made detail submissions, which have been summarized in para 6.3 of the CIT(A), reading as under :- "6.3 In respect of this ground of appeal the submission of the appellant are summarized as under: i. During the year, the assessee had a subsidiary': company in Dubai namely EKC International FZE. Earlier the subsidiary company was a branch of the assessee company. The subsidiary company is also engaged in the business of manufacture of cylinders. ii. The subsidiary co. needed funds for working capital requirements. The subsidiary company approached ICICI Bank, Bahrain branch and the said bank agreed to provide working capital requirements to the subsidiary company. In terms of the sanction, corporate guarantee had to be given by the assessee company. iii. The assessee company has given the corporate: guarantee and charged guarantee commission iv. The Assessing Officer has benchmarked the arm's length price for the bank guarantee @ 3% of the amount of guarantee. Th....
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....03.2007 AE had inventories valued at cost worth USD 7.6 million. Book Debts of 5.4 million and cash and bank balance of USD 1.8 million. In a nutshell against the loan outstanding as at 3 1.03.2007 of USD 10 million, Assets available in case of any default was to the tune of USD 27.4 million. From above it can be deduced that the said loan for which corporate guarantee was issued was secured by 2.7 times of 'the loan value, thus categorizing the said loan at the least risk loan: (e) That the corporate guarantee given by the assessee was an international transaction and hence the transaction would have to be looked upon the principles with regard to international transactions. The assessee company relies on the following decisions: (a) ITAT Bench A Chennai in the case of Siva Industries & Holdings Ltd. v. (b) ITAT Mumbai Bench E in the case of DCIT v. Tech Mahindra Ltd. 46 SOT 141 (MUM) (c) ITAT Hyderabad A Bench in the case of M/s. Four Soft Ltd. v. DCIT (f) That the Assessing Officer has benchmarked the rate by drawing comparisons of the rate charged by Allahabad Bank and the rate charged by Rabo India Finance Ltd; that the rate charged by Allahabad Bank is Indi....
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....e as it has incurred no cost as entire hypothecation of assets was done by the subsidiary only. Even though the assessee was not required to recover the guarantee commission from its subsidiary being wholly a business strategic decision, still it had charged 0.5%. 16.1 His other limb of argument was that there is no method prescribed under the statute to benchmark such a transaction of guarantee commission and in such a case, the entire charging provisions under Section 92B gets failed. Even the comparables given by the TPO would not be applicable as the same are instances of independent dealing of the banks directly with the clients. The other plank of argument was that in such type of transaction, one has to see the economic and business interest also because such kind of corporate comfort by the assessee for its wholly owned subsidiary is a strategic investment for increasing the volume of the business, sales and profit, which is in the nature of business interest and no benchmarking is required for determining the ALP in providing corporate comfort in the form of guarantee for which assessee has not incurred any real cost. In support of his contentions that application of 3%....
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....en brought in rule 10AB with effect from May, 2012, which cannot be held to be applicable for this year. Regarding applicability of CUP method, he submitted that in case of the assessee, internal CUP was available i.e. ICICI Bank India was charging the rate of 0.6% of guarantee commission from the assessee, then there was no need for looking at the external CUPs. IN CUP method, one has to see like to like and there is no reason as to why 3% is being applied in the case of the assessee and why not 0.15% as rates available in the external CUP ranges between 0.15% to 3%. In case of the assessee, no risk has been taken while providing guarantee for its subsidiary and, therefore 0.5% charged by it should be considered at ALP. Further, the assessee is not a banking company, therefore, the examples given by the TPO are not applicable. 19. We have carefully considered the rival submissions, perused the material on record and gone through the orders of the CIT(A) as well as the TPO. The only issue before us is the upward adjustment of arms length price in relation to corporate guarantee given by the assessee to the ICICI Bank, Bahrain Branch for loan taken by its subsidiary in Dubai. Ear....
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....f a guarantee commission depends upon transaction to transaction and mutual understanding between the parties. There may be a case where the bank may not charge any guarantee commission, depending upon its evaluation of relationship with a particular client. Even otherwise also the TPO himself has noted that guarantee commission ranges between 0.15% to 3% in case of HSBC. The universal application of rate of 3% for guarantee commission cannot be upheld in every case as it is largely dependent upon the terms and conditions, on which loan has been given, risk undertaken, relationship between the bank and the client, economic and business interest are some of the major factors which has to be taken into consideration. In the present case, when the assessee has specifically stated that neither it has incurred any cost for providing the guarantee to the bank for loan taken by its subsidiary nor has undertaken any kind of risk, as it was the subsidiary company which has hypothecated its assets against the loan, the TPO has not brought anything on the record to controvert the same. He has proceeded on the premise that there is always a risk in providing the guarantee and some kind of secu....