TaxTMI 
TaxTMI 
2017 (9) TMI 801
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.... guarantee given for the Associated Enterprise. 2. The Addl. CIT and the Dispute Resolution Panel erred in not considering the decisions of the Hon'bie Appellate Tribunal while making addition of Rs. 4,97,120/- to the income of the assessee company on the ground of interest chargeable to the Associated Enterprise in respect of interest free advance given to the Associated Enterprise. 3. The Addl.. CIT and the Dispute Resolution Panel erred in not considering the decisions of the Hon'ble Tribunal while making the addition of Rs. 3,89,564/- on the ground of guarantee commission chargeable to the Associated Enterprise in respect of the guarantee given by the assessee company on behalf of the Associated Enterprise. II. Disallowance u/s.14A 4. The Addl. CIT erred in disallowing expenses u/s. 14A of Rs. 13,48,071/- invoking Rule 81)(2)(ii) and (iii). 5. The Add!. CIT failed to appreciate that the assessee company had not made any investment in mutual funds during the year under consideration and secondly, the assessee company has interest free funds which are far in excess of the investment in mutual funds made in the earlier years. ....
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....application filed by the assessee was disposed of by the Dispute Resolution Panel (DRP) by holding that the CUP method is the most appropriate method to ascertain the ALP of international loan transactions and further the DRP also held that the assessee had not carried out any exercise for determination of ALP, hence the AO was directed to apply LIBOR plus 5% as ALP for interest on loan borrowed by AEs instead of 6.57% adopted by the A.O. After the direction of DRP, the Assessing Officer added interest of Rs. 4,97,120/- to the income of the assessee. 4. Now before us, Ld. AR appearing on behalf of assessee submitted that Section 92(1) of the Income-tax Act, 1961 provides for determination of Arm's Length Price ('ALP') in respect of any 'Income' arising from an international transactions. Thus to invoke the provisions of section 92 of the Act to determine the Arm's Length Price, the twin conditions, namely, (a) there must arise an 'Income', and (b) there must be an 'international transaction', should exist. As per Ld. AR, the transactions with the Associated Enterprises being interest free loans do not result in any income arising to the Assessee. In this context, the Ld. AR r....
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....4....... The Apex Court in CIT v. Shoorji Vallabhdas & Co. [(1962) 46 ITR 144] explained the point as under: "Income-tax is levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." "4.1 In view of the above, the Tribunal did not commit any error in dismissing the appeal of the Revenue and upholding the deletion of the addition in question. The present appeal is devoid of merits. No substantial question of law arises for consideration of this....
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....ace / substitute the charging provisions. In fact, in B.C. Srinivasa Shetti (supra), there was charging provision but the computation provision failed and in such a case the Court held that the transaction cannot be brought to tax. The present facts are on a higher pedestal as there is no charging provision to tax issue of shares at premium to a non-resident, then the occasion to invoke the computation provisions does not arise. We, therefore, find no substance in the aforesaid submission made on behalf of the Revenue." Even in the case of Maruti Suzuki India Ltd. vs. CIT (381 ITR 117, Del.), the Court held as under: "63. A reading of the heading of section 92 of Chapter X ("Special provisions relating to avoidance of tax") and section 92(1) which states that any income arising from an international transaction shall be computed having regard to the arm's length price, section 92C(1) which sets out the different methods of determining the arm's length price, makes it clear that the transfer pricing adjustment is made by substituting the arm's length price for the price of the transaction. To begin with there has to be an international transaction with a certain di....
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....ons. The Ld. AR also submitted that the guarantee has been given as a share holder activity for which the assessee company has not charged guarantee commission, hence it cannot been treated as "International Transaction". It was submitted that the TPO charged guarantee at 3% of the loan amount guaranteed which is upheld by the DRP on the ground that the definition of 'International Transaction' u/s.92B is amended by the Finance Act, 2012 and subsequent to the decision of Bharati Airtel Ltd., the tribunal in two decisions held that guarantee is an 'International Transaction'. The Ld. AR submitted that it is the duty of every shareholder to assist its investee company to raise advances in the hands of the Wholly Owned Subsidiary company. The shareholders of the assessee company have themselves given their personal guarantee to enable the assessee to raise funds. As can be seen from page 3 of the paper book, the Directors of the assessee company have given personal guarantees to enable the assessee company to raise funds from the banks for which the directors have not charged any commission to the assessee company. Thus in this way, giving guarantee....
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.... to indicate or suggest that the funds raised by the subsidiary, with the help of the guarantee given by the assessee, are not for its own business purposes. As a plain look at the details of corporate guarantees would show, these guarantees were issued to various banks in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, we are of the considered view, and are fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi-capital or shareholder activity- as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adju....
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.... "That guarantee given to the subsidiary does not constitute a corporate guarantee akin to bank guarantee. Even if it could be treated as a corporate guarantee for benchmarking purpose, it does not constitute an international transaction under section 92B of the Act." In the case of Dr Reddy's Laboratories Ltd. vs. Addl. CIT [(2017) 81taxmann.com 398 (Hyd.-Trib.)] the Hon'ble Tribunal held "That where the assessee had not incurred any cost in providing corporate guarantee on behalf of its AE, it would not constitute 'international transaction' within the meaning of sec.92B and therefore, the ALP adjustment was not warranted." 5. On the other hand, Ld. DR relied upon the order passed by revenue authorities. 6. We have heard the counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities. Since as per the facts of the present case as well as in view of the above discussions, we find that the assessee has not charged any interest from subsidiaries and therefore, in the absence of any accrual or arise of income form the lending of the money, there was no jurisdiction for invoking the prov....
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....is order that no disallowance made by the assessee is unsatisfactory. The Ld. AR drawn our attention to the order of Ld. DRP wherein in para 4.3.3 of its order, the DRP directed the A.O. as under: "4.3.3 We direct the AO to verify the facts related to interest free funds available with the assessee and decide the issue of disallowance under section 14A with regard to interest expenditure in accordance with the aforesaid judgement in the case of HDFC Bank (2014) [368 ITR 377 (Bom)]. As regards the other plea that no administrative or other expenses have been incurred, the same has not been demonstrated by the assessee. Therefore, disallowance of Rs. 12,28,142/- as per third leg of Rule 8D(2)(iii) is upheld." The A.O. in his order u/s. 143(3) r.w.sec. 144C(13) of the Act dated 28th January, 2016, computed the disallowance u/s. 14A r.w.rule 8D at Rs. 13,48,071/- and held as under: "7.2 The Hon.DRP has directed the A.O. to verify the facts related to interest free funds available with the assessee and decide the issue of disallowance u/s.1'4A with regard to interest expenditure. The section 144C(13) states that the A.O. will complete the assessment without provi....
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....d in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same." The Ld AR also relied upon the decision of the Supreme Court in the case of Godrej and Boyce Mfg. Co. Ltd. in Civil Appeal No. 7020 of 2011 dated 8th May, 2017 wherein their Lordships held as under: "37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as ....