TaxTMI 
TaxTMI 
2018 (1) TMI 1372
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....f exempt income. The ld AO disregarded the same and worked out the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Rules in the sums of Rs. 2,39,52,830/- and Rs. 23,77,882/- respectively. This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following grounds:- 3.1 On the facts and circumstances of the case and in law, the Ld. Panel erred in confirming the disallowance of Rs. 2,20,81,366/- made by the Ld. AO under Section 14A of the Act read with Rule 8D of the Income Tax Rules in computing income under normal provisions of the Act. 3.2. On the facts and circumstances of the case and in law, the Ld. Panel as well as the ld. AO erred in not appreciating that the provisions of section 14A of the Act can be invoked only when the conditions laid down under sub-section (1) of Section 14A of the Act have been satisfied. 3.3 On the facts and circumstances of the case and in law, the ld. Panel erred in confirming disallowance of Rs. 2,20,81,366/- u/s 14A made by the Ld. AO based on surmise and conjecture without having recorded any reasoned satisfaction under section 14A(2) of the Act against the su....
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.... the instant case. Hence we hold that the disallowance made under the second limb of Rule 8D(2)(ii) of the Rules is hereby directed to be deleted. 2.2. With regard to the third limb of Rule 8D(2)(iii) of the Rules, we hold that the assessee has got investments in foreign companies , the dividend earned from which would be taxable income and hence should be outside the ambit of disallowance u/s 14A of the Act read with Rule 8D of the Rules. Similarly, investments made in subsidiary companies would have to be reckoned as strategic investments and hence the same should be excluded while working out the disallowance under Rule 8D(2)(iii) of the Rules. Similarly , the investments which had yielded dividend income alone , are to be considered while working out the disallowance under Rule 8D(2)(iii) of the Rules as has been held by the decision of this tribunal in the case of REI Agro Ltd reported in 144 ITD 141. But we find that if the disallowance made under second limb of Rule 8D(2) of the Rules is deleted, then the disallowance made by the ld AO would remain at Rs. 23,77,882/- and whereas the assessee itself had voluntarily disallowed Rs. 42,48,850/-. Hence we direct the ld AO to a....
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....O u/s 115JB of the Act had been rightly deleted by the ld CITA. Accordingly, the Ground No. 3 raised by the revenue is dismissed. 4. ADHOC DISALLOWANCE OF AIRCRAFT MAINTENANCE EXPENSES INCLUDING DEPRECIATION THEREON Ground no. 4.1 of Assessee's Appeal The brief facts of this issue is that the assessee is inter alia engaged in the business of time charter of aircraft. It holds a valid license to operate non-scheduled air charter services. The assessee chartered the aircraft to outside parties, hotel guests and time to time used the aircraft for its own business purposes. It was submitted to the ld AO that the aircraft was exclusively used for the business purposes of the assessee and did not involve any element of personal use. The ld AO by following the principle of consistency flowing from the assessment of past years and the several decisions of the ld CITA in the assessee's own case on the impugned issue in relation to past years, he held that the two aircrafts were not used wholly and exclusively for the purpose of assessee's business. Accordingly , he held that 90% of the user of the aircrafts relates to business purposes and the remaining 10% relates to non-business ....
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....er to look into the alleged violations, if any, on the same and the ld AO cannot resort to make any disallowance of expenditure on that count on an estimated basis. We also draw support from the decision of the Hon'ble Gujarat High Court in the case of Sayaji Iron and Engineering Co vs CIT reported in 253 ITR 749 (Guj) in this regard. Based on these findings and judicial precedent relied upon, we hold that no disallowance of expenditure on maintenance of aircrafts need to be made on an estimated basis towards expenditure incurred for non-business purposes. Hence the issue of maintenance of aircrafts being utilized for business purposes are proved beyond doubt and there is no question of making any disallowance on that count. Once it is established that the aircrafts were used only for business purposes, there is no question of disallowance of depreciation , being proportionate or otherwise, on the same. Hence the provisions of section 38(2) of the Act are not at all applicable to the facts of the instant case. We also find that similar issue had cropped up for the Asst Years 2007-08 to 2009-10 in assessee's own case ITA Nos. 1431/1557/Kol/2011 ; ITA Nos. 932 & 866/Kol/2012 and ITA ....
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....to be construed only for business purposes . To this extent, the reliance on the Gujarat High Court decision in 253 ITR 749 is well placed and supports the case of the assessee. We also find lot of force in the arguments of the Learned AR that if at all there is any personal element involved in the aforesaid expenditure, the same have to be taxed as perquisite in the hands of the directors and it is only for the TDS officer to look into the violations, if any, on the same and hence on that ground also, no disallowance of expenditure could be appreciated. We find that the Learned AO had made the entire addition based on surmises and conjectures and made on ad hoc basis . It is well founded proposition that what is apparent is real and the allegation to prove the contrary is on the person making such allegation. The following decisions support our view in this regard:- CIT vs Daulat Ram Rawatmull (1973) 87 ITR 349 (SC) Sukhdayal Rambilas vs CIT (1982) 136 ITR 414 Madura Knitting Co vs CIT (1956) 30 ITR 764 (Mad) In view of the aforesaid facts and circumstances and respectfully following the judicial precedents thereon, we have no hesitation in dele....
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....capital gain. Accordingly, the ld AO denied the benefit of set off of brought forward long term capital loss with deemed short term capital gain by applying the provisions of section 74 of the Act, which permitted set off of long term capital loss only with long term capital gains. This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us on the following grounds:- 5.1 On facts and circumstances of the case and in law, the Ld. Panel erred in confirming the action of the Ld. AO in non-granting of set-off u/s 74 of long term capital loss amounting to Rs. 9,77,54,843/- with deemed short term capital gain computed as per section 50(1) of Rs. 7,18,74,000/- in the present case. 5.2 On facts and circumstances of the case and in law, the Ld. Panel while confirming the action of Ld. AO in denying set-off u/s 74 failed to appreciate that section 50 being a deeming provision its scope extended only up to computation of capital gain, however such gain being arising from transfer of long term capital assets, retained the character of long term capital gain for all other provisions and is eligible for set off u/s 74 against brought forwar....
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....sum of Rs. 1,37,25,0001- on which it had earned some capital gains. On the said capital gains the .assessee had also claimed that it was entitled for exemption under Section 54E of the Income Tax Act. Admittedly, the asset was purchased in the year 1972 and sold sometime in the year 1989. Thus, the asset is almost 17 years old. Going by the definition of long term capital asset contained in Section 2(29B) of the Income Tax Act, 1995 (hereinafter referred to as 'the Act'), it was admittedly a long-term capital asset. Further the Assessing Officer rejected the claim for exemption under Section 54E of the Act on the ground that the assessee had claimed depreciation on this asset and, therefore, provisions of Section 50 were applicable. Though this was upheld by the Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal allowed the appeal of the assessee herein holding that the assessee shall be entitled for exemption under Section 54E of the Act. The High Court has confirmed the view of the Commissioner of Income Tax (Appeals) and dismissed the appeal of the Revenue. While doing so the High Court has relied upon its own judgment in the case of CIT v. ACE Build....
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....tal gains only and cannot be extended beyond that. Thirdly, Section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under Section 54E cannot be denied by referring to the fiction created under Section 50. Section 54E specifically provides that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under Section 54E of the LT. Act cannot be denied to the assessee on account of the fiction created in Section 50." 2. We are in agreement with the aforesaid view taken by the High Court. 3. We are informed that the Gujrat High Court as well as Guahati High Court have also taken the same view in the following cases: i) CIT vs. Polestar Industries [2014] 41 taxmann.com 237/221 Taxman 423 ii) CIT vs. Assam Petroleum Industries (P) Ltd. [2003] 262 ITR 587/131 Taxman 699 (Gau) 4. We are also informed that against the aforesaid judgments no appeal has been filed. ....
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....ces would not be taxable as Royalty / FTS under the Act. Further since all the operations of Payee are carried out outside India, in accordance with clause (a) of Explanation 1 to section 9(1)(i) of the Act, the proposed remittance should not be deemed to accrue or arise in India and accordingly such income ought not to be chargeable to tax in India u/s 9(1)(i) of the Act. It was further stated that without prejudice to the taxability of the said remittances under the Act, the said remittances would not fall within the definition of Royalties / FTS under Article 12 of the tax treaty. Hence the proposed remittance should not be taxable as Royalties / FTS under Article 12 of the tax treaty. Once it is concluded that the remittance does not qualify as Royalties / FTS, it would be treated as business income under Article 7 of the tax treaty. In the absence of a PE (under Article 5 of the treaty) of payees in India, the said remittance should not be taxable in India as business income under Article 7 of the tax treaty. Section 90(2) of the Act provides that a taxpayer may apply the provisions of the Act or the applicable tax treaty whichever are more beneficial to the tax payer. 6.1.....
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....s Professional, Consultancy & Other matters [Clause 25(a) of Schedule 24 to Annual Accounts] Name of the Hotel/Division Amount (Rs.) The Oberoi Grand 4,625,991 The Oberoi, New Delhi 65,397,301 The Oberoi Mumbai/Tident Nariman Point 35,607,111 Trident Bandra Kurla, Mumbai (Operations) 9,260,223 Oberoi Flight Services, Mumbai 1,081,847 Oberoi Airport Services, Mumbai 169,761 The Oberoi, Bangalore 9,805,671 The Oberoi Vanyavilas, Ranthambore 2,113,523 Maidens Hotel, Delhi 3,806 OFS New Delhi (New Project) 63,794,695 Oberoi Centre for Learning & Development 10,765 Oberoi Flight Services, Chennai 5,000 The Oberoi Udaivilas, Udaipur 13,647,420 Oberoi Contact Centre 3,738,353 Head Office, Kolkata 73,122,322 Total 282,383,789 Nature of Expenditure Annexure -1 Room Reservation commission Annexure-2 Participation/Listing Fees Annexure-3 Inspection Fees Annexure-4 Advertisement i....
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....UK treaty. 6.5. Recruitment Charges Payments towards professional fees for manpower recruitment in hotels outside India. The assessee had to take the services of various foreign recruitment agents (specially for SPAs , Chefs etc) . The services are rendered outside India and the payments are made outside India. Therefore under the domestic law, the remuneration for such services are not taxable in India. Even otherwise, the recruitment services providers are based in Indonesia or Thailand. Both the countries have treaties with India and do not have any FTS clause at all. None of such services providers have any PE in India. Therefore any remittance made in this regard is not taxable in India. 6.6. Professional / Consultancy Charges The payees are mainly from the USA , UK and Australia. The professional services rendered do not fall in the category of 'Royalty' as per the India-Australia Tax Treaty. Further that treaty does not have any exclusive FTS clause. As regards the USA and UK, the FTS/ included service definitions are very narrow. Services rendered to the assessee do not fall under 'make available' category. Therefore in the absence of PE in India, the payments m....
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.... 10,69,447 EIH Limited Assessment Year 2011-12 Details of management fees paid in foreign currency Name of the Party Country Total Taxability under the Income tax Act and DTAA Banyan Tree Resorts & Spas (Thailand Co. Ltd.) Thailand 3,25,800 Annexure -13 Banyan Tree Resorts & Spas (Thailand Co. Ltd.) Thailand 1,075 Annexure -13 Banyan Tree Spa Co. Ltd. Thailand 1,20,241 Annexure -13 4,47,116 EIH Limited Assessment Year 2011-12 Details of professional/consultancy charges paid in foreign currency Name of the Party Country Total Taxability under the Income tax Act and OTAA Bab Communications U.K. 18,06,041 Annexure-14 Pure Indulgence Catering U.K. 81,052 Annexure-14 Torys LLP U.S.A. 1,35,968 Annexure-14 ZAXI HASEM & PARTERNERS, EGYPT 2,85,295 Challan for WHT - Annexure - 14/2 ZAKI HASEM & PARTERNERS, EGYPT 1,14,831 Challan for WHT - Annexure - 14/2 Financial Service Authority U.K. ....
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....t the payments to foreign parties on account of advertisement outside India should not be taxable in India as per the provisions of section 9(1)(vii) of the Income tax Act. The relevant extract of the ClT(A) order for the assessment year 2006-07 is reproduced as follows: ""In my considered view, the payments to the foreign parties on account of advertisement outside India should not be taxable in India as per the provisions of section 9(1)(vii) of the Income tax Act, since earning through advertisement are not in nature of "managerial, technical or consultancy services. In my view the income at best can be considered as business profits in the hands of the payees. However, in absence of Permanent Establishment of the payees in India, the amount would not be taxable in India. Since the income was not taxable in India, there was no obligation on part of the appellant to withhold tax on such payments. Thus, in the instant case, the provisions of section 40(a)(ia) do not apply." (A copy of CIT(A) order for A.Y.2006-07 is attached as Annexure 15) Further, Reliance in this connection is placed on the decision of SHERATON INTERNATIONAL INC vs DEPUTY DIRECTOR OF ....
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.... being independent of and separable from the main job undertaken by the assessee in the peculiar facts of the case, it was neither possible nor desirable to apportion or attribute any part of the consideration received by the assessee thereto. The various services rendered by the assessee to enable it to complete efficiently and effectively the job undertaken by it as an integrated business arrangement to provide the services relating to advertising , publicity and sales promotion including reservations of the Indian Hotels worldwide in mutual interest could not be considered in isolation to say that part of the consideration received by the assessee was in the nature of "royalties" or "fees for technical services" defined in Explanation 2 to Section 9(1)(vi) or to Section 9(1)(vii) or of "royalties" or "fees for included services" as defined in article 12(3) and 12(4) of the DTAA between India and the U.S.A. In view of the above, it is submitted that the services provided by the foreign residents in relation to advertisement is not covered within the scope of royalties or fees for technical services under section 9(1)(vi) or 9(1)(vii) of the Income Tax Act. a) In....
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....knowledge, experience, skill, know-how or processes which enable the person acquiring the services to apply the technology contained therein. The concept of 'make available' has been elaborately explained herein above. * Consist of development and transfer of a technical plan or technical design but excludes any service does not enable the service provider to apply the technology contained therein. Reliance in this connection is placed on decision of ITAT Delhi in case of Sherator International Inc Vs. Deputy Director of Income-tax reported in (2007) 293 ITR (A. T.) 68 (ITAT) (Del). c) UK - Article -13 The concerned services are not covered within the scope of 'fees for technical services' as defined in the Article 13(5) for the following reasons: . * Such services do not involve rendering of any technical or consultancy services; * Such services are not ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment is received by the vendor. It is understood that, in order for a service to be considered "ancillary and subsidiary" tothe application or enjoyment ....
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....which such income is to be taxed. Obviously, there is no reference to the "Fees for technical services" in Article 12 of the DTAA. Thus it is evident that the fee for technical services does not fall within the purview of Article 12. Obviously, the application of Article 12 is ruled out. In that view of the matter, such income would remain included under Article :- The amount falls under Article 7 as 'Business profits' and is hence not chargeable to tax because of the absence of any PE in India. In this connection, reliance is placed on the decision of Hon'ble Mumbai ITAT in case of McKinsey & Company (Thailand) Co. Ltd Vs Deputy Director of Income-tax (International Taxation) 4(1), Mumbai in IT APPEAL NO. 7624 (MUM.) OF 2010 f) Belgium - Article 12 read with protocol of the DTAA As per Article 12(3)(b), the term "fees for technical services" means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel Further. the protocol to the DTAA provides that if under any Convention or Agreement between India and a third State being a m....
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....le' in Article-12 of the OTAA. Since in the instant case, the services do not involve make available of technical knowledge, the same is out of purview of the fees for technical services within the scope of DTAA between India and France. Accordingly withholding tax is not applicable for the services pertaining to advertisements. Reliance in .this connection is placed on the decision of Mumbai ITAT in the case of DDIT vs IATA BSP India reported in TS-367-ITAT-2014(Mum). The Hon'ble tribunal held as follows: * As per clause 7 of the Protocol in the India-France tax treaty, if under any convention, agreement or Protocol signed after 1st September 1989 between India and a third state which is a member of the OECD, India limits its taxation at source inter alia on FTS to a rate lower or a scope more restricted than the rate or scope provided for in the India-France tax treaty, the same scope as provided for in that convention, agreement or Protocol on the said items of income shall also apply under the India- France tax treaty. * On 12 September 1989, India has entered into a tax treaty with USA, which is a member of OECD and as per Article 12(4)(b) th....
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....he technical service is enabled to independently apply the technology. The word 'enable' is used in the sense that the technical services should be such that they make the recipient able or wiser in the subject matter. Thus, where the recipient of technical services does not get equipped with the knowledge or expertise and the recipient would not be able to apply it in future independently without support from the service provider, it will not be a case of technical service having been 'made available'. And in such cases the concerned transaction would not be taxable in India and subject to withholding tax in India. In such cases, the income of the recipient shall be treated as business income under the Article 7. Since the entire operation of the service provider is carried outside India, there is no existence of any PE in India and in such cases the concerned transaction would not be taxable in India and subject to withholding tax in India. Reliance in this connection is placed on decision of IT AT Delhi in case 01 Sheraton International Inc Vs. Deputy Director of Income-tax reported in (2007) 293 ITR (A.T.) 68 (ITAT) (Del) Marketing and Developm....
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....mestic law, the remuneration for such services is not taxable in India. Taxability under DTAA with Indonesia and Thailand During the year under consideration, recruitment service has been availed from these vendors based out of Indonesia and Thailand. Both the treaties does not contain any FTS clause. Thus it is evident that the fee for technical services does not fall within the purview of Article 12. Obviously, the application of Article 12 is ruled out. In that view of the matter, such income would remain included under Article 7. The amount falls under Article 7 as 'Business profits' and is hence not chargeable to tax because of the absence of any PE in India. In this connection, reliance is placed on the decision of Hon'ble Mumbai ITAT in case of McKinsey & Company (Thailand) Co. Ltd Vs Deputy Director of Income-tax (International Taxation) 4(1), Mumbai in IT APPEAL NO. 7624 (MUM.) OF 2010. Management fees paid to Banyan Tree Resorts &Spas(Thailand Co. Ltd.) Management fees has been paid to the Thai SPA management Firm. The tax treaties between India and Thailand does not contain any FTS clause. Thus it is evident that the fee for technic....
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....ssee is also directed to co-operate with the ld AO by producing the necessary evidences in support of its contentions. Accordingly, the Ground Nos. 6.1. & 6.2 raised by the assessee are allowed for statistical purposes. 7. SHORT GRANT OF CREDIT FOR TDS AND TCS Ground No. 7 of assessee's appeal This is an issue of factual verification of the facts as to whether the related income has been duly offered by the assessee in the year under consideration. If it is so, the assessee is entitled for due credit for TCS and TDS subject to filing of necessary proof in this regard. Accordingly, the Ground No. 7 raised by the assessee is allowed for statistical purposes. 8. LEVY OF INTEREST U/S 115P OF THE ACT Ground No. 8 of assessee's appeal This is a ground challenging the validity of levy of interest u/ 115P of the Act for delayed payment of dividend distribution tax by the assessee. The assessee stated that the dividend distribution tax had been duly paid within the time prescribed. However , he fairly agreed for this matter to be verified by the ld AO. The Ld DR also agreed for the same. Accordingly, we deem it fit and appropriate to remand this issue to the file of the ld....
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....rted in (2009) 126 TTJ 567 (Kolkata Trib)wherein the tribunal on identical facts held that commission to directors is not in the nature of commission or brokerage as envisaged u/s 194H of the Act nor as fees for professional or technical services u/s 194J of the Act. The ld DRP decided the issue in favour of the assessee . Aggrieved, the revenue is in appeal before us on the following ground:- 2. That on the facts and circumstances of the case and in law, the Ld. DRP erred in deleting the disallowance u/s 40(a)(ia)paid as commission to the directors and paid as sitting fees to the non-executive directors without deducting tax at source u/s 194I of the Act. 10.2. We have heard the rival submissions. We find that the issue is squarely covered by the decision of this tribunal in the case of Jahangir Biri Factory (P) Ltd vs DCIT reported in (2009) 126 TTJ 567 (Kolkata Trib) wherein it was held :- "12. After hearing the rival submissions and on careful perusal of the materials available on record and taking into consideration that the assessee company paid this commission to the directors as per their terms of employment for the work done in their capacity as whole ....
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....is settled by the order of this tribunal in assessee's own case for the Asst Year 2008-09 in ITA No. 529/Kol/2013 dated 19.2.2016 in favour of the assessee. Though this decision was rendered in the context of validity of section 263 proceedings of the ld CIT, this tribunal had adjudicated the issue on merits also and hence the reliance placed on the same is well founded. The operative portion of the said judgement is as under:- "4.4.1. On merits of the issue, on perusal of the various clauses in the lease deed ( which are not reproduced herein for the sake of brevity) forming part of the paper book vide pages 87 to 98 , we find that the ownership / title on the vehicles always lies with M/s Orix Auto Infrastructure Services Limited (lessor) during the subsistence of the lease vide clause 8 of the lease deed. We find that during the subsistence of this lease arrangement and till the vehicles are delivered back to the lessor, the lessee shall insure the vehicles with the lessor's name as the owner vide clause 11 of the lease deed. Clause 15 of the Lease deed clearly specifies that upon expiration or earlier termination of the lease, the lessee shall deliver to the lessor the....
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....sset must be used in the course of business. The assessee did use the vehicles in the course of its leasing business. The fact that the trucks themselves were not used by the assessee was irrelevant for the purpose of section. (ii) That a scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer. The fact that at the end of the lease period, the ownership of the vehicle was transferred to the lessee at a nominal value did not make the assessee in effect a financier. No inference could be drawn from the registration certificate as to ownership of the legal title of the vehicle. If the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Tribunal, was not the case. (iii) That the entire lease rent received by the assessee was assessed as business income in its hands and the entire lease rent paid by the lessee been treated as deductible revenue expenditure in the hands of the lessee. This reaffirmed t....
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....wner of the trucks and not the lessee. Moreover, the lessor had been allowed depreciation on the trucks. Therefore, considering the terms and conditions of the lease agreement and the fact that depreciation on these trucks had been allowed to the lessor, the lease rent was deductible as revenue expenditure"- In the aforesaid case, there was a clause in the lease agreement giving an option to the lessee to buy back the asset on termination of the lease agreement. In the instant case, the assessee (lessee) falls in a better footing , in as much as there is no clause in the lease agreement, enabling the lessee to buy back the assets on termination of the lease arrangement. We find that the case law relied upon by the Learned DR on the decision of Delhi Tribunal need not be discussed as the issue is squarely covered by the High Court and Supreme Court in favour of the assessee." Respectfully following the aforesaid decisions, we find no infirmity in the order of the ld CITA in this regard. Accordingly, the Ground No. 4 raised by the revenue is dismissed. 12. DETERMINATION OF ARM'S LENGTH PRICE FOR CORPORATE GUARANTEE FEES Ground 1.1 to 1.4 of Assessee's Appeal ....
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.... party bankers with the help of shareholder guarantee US$ 19 million It was submitted before the ld TPO that the provision of the said funds was for initial establishment facilities and it was the responsibility of shareholders. According to the assessee, the shareholders are the only source of requisite funds for the newly incorporated company to set up its primary facility. Since assessee's 100% subsidiary M/s. EIH Flight was a new company, the lenders would not risk granting loans unless corporate guarantee is given by the parent company i.e. the assessee. Thus, the assessee company being the parent company gave corporate guarantee to the lender bank, so that loan could be disbursed to its 100% subsidiary i.e. M/s. EIH Flight Mauritius. It was brought to the notice of ld TPO that the assessee had not charged any fee for providing such guarantee since it was the obligation of the business. According to the assessee, since there were no fees charged by the assessee company from its 100% subsidiary for providing corporate guarantee, it was not reported as an international transaction. The aforesaid contention was not accepted by the ld TPO and according to the ld TP....
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....eration. According to the ld. AR, since M/s. EIH flight is a start up company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee company to the lender bank is normal business practice. According to the ld. AR, the provision of the said funds for initial establishment was the responsibility of shareholders of M/s. EIH flight i.e. the assessee in this case and it was discharging that responsibility to its subsidiary as shareholder. As said before, since the AE was a start up company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect the interest by fulfilling the shareholders obligation. According to the ld AR, the corporate guarantee as provided by the assessee was a matter of commercial prudence to protect by fulfilling the shareholder obligation as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. He relied on the order of the Coordinate Bench of this Tribunal in the case of Tega Industries Ltd. Vs DCIT (ITA No.1912/Kol/2012) wherein it was held that the provision of corporate guaran....
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....s DCIT reported in (2015) 55 taxmann.com 226 (Hyderabad-Trib.) dated 31.12.2014 for Asst Year 2009- 10, wherein the Tribunal has accepted the arguments of the revenue that after the insertion of the Explanation by Finance Act 2012 with retrospective effect from 2002, the corporate guarantee also is an international taxation. The ld. DR also contended that the Hon'ble Bombay High Court in the case of CIT vs Everest Kanto Cylinders Ltd. In ITA NO.1165 of 2013 where the guarantee fee transaction was bench marked and arms length price ALP was made by TPO and was upheld by the Tribunal as well as by the Hon'ble Bombay High Court in favour of the department. According to the ld. CIT DR , subsequent amendment by the insertion of Explanation by Finance Act, 2012 with retrospective effect from 2002 in section 92B(1) of the Act, the transaction in respect of lending or borrowing money has been expanded to include capital financing including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any time of advance, payments or deferred payments or receivable or any other debt arising during the course of business. So, according to th....
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....gh Court in the case of Everest Kanto Cylinder Limited (supra) was when the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon'ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, the facts of the case is different and case law is distinguishable and, therefore, the Hon'ble High Court's order cannot come to the rescue of the Revenue. The ld. AR pointed out that in the said case, the Hon'ble Bombay High Court did not answer the specific question as to whether the issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' irrespective of whether or not such transactions have any "bearing on profits, income, lossess or assets of such enterprises" u/s. 92 B of the Act. According to Ld. Counsel, the Hon'ble High court was examining whether the adjustment made by the TPO when the assessee in that case in fact had charged 0.5% on the AE as corporate guarantee commission and that was the question before the Hon'ble Court and the Hon'ble High Court did not answer as to whether the....
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....ansa etc., For the purpose of setting up its catering unit at Mauritius, the Airport Authority of Mauritius provided EIH Flight (100% subsidiary company of assessee) a plot of land measuring 14,000 sq. meters on a renewable lease for 20 years. The facility was to have a serving capacity of 10,000 meals per day involving state-of-the-art kitchen with best equipment, latest technological innovations, practicing systems and procedures. For the purpose of setting up catering, the budgeted cost by an external consultant which was estimated to be around US$24.3 million. We further note that according to the assessee, its 100% subsidiary (EIH flight) was incorporated with a minimal equity capital of US$1.1 million i.e. which was only 4% of the total project cost and it was a promoter's/shareholder's strategy to fund, the start-up company through third party borrowings made available to it with the help of the parent company's corporate guarantee. Accordingly, the project was planned to start-off in the year 2009 and remaining balance of US$ 23.2 million was planned by the share holder to be funded in the following manner :- Particulars Source of funds Amount Subsequent equity ....
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....by fulfilling the shareholder obligation, as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. For that we rely on the order of the Coordinate Bench of this Tribunal in the case of Tega Industries Ltd. Vs DCIT (ITA No.1912/Kol/2012 wherein it was held that the provision of corporate guarantee is in the nature of shareholder activity and hence, no TP adjustment on account of corporate guarantee is required. In the said case, this tribunal had held that "the assessee's expectation from provision of guarantee was not that of a guarantor i.e. to earn a guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, to help it achieve the assessee's business objective". Thus, we agree with the contention of the assessee that the objective of the assessee for providing guarantee was not to earn guarantee fee but to earn returns in the form of appreciation in investment value and receive dividends and, therefore, no TP adjustment ought to have been made in the facts and circumstances of the case. 12.11. Coming to the alternate plea of the assessee that, in the facts and circumstances the corporate guarantee i....
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....ney or any such transaction. This understanding of ours gets further clarified by way of insertion of Explanation in section 92B(1) by the Finance Act 2012 with retrospective effect from 01.04.2002 vide clause (a) to (d). We find that in the said explanation, clause (e) alone has been carved out as an exception wherein, the transaction thereon has been specifically mandated to be an international transaction where a transaction of business restructuring or reorganization, entered into by an enterprise with an AE irrespective of the fact that it has bearing on the profits, incomes, losses, or assets of such enterprises at the time of transaction or at any future date. 12.12. Thus, we hold that when a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company, and which does not have any bearing on its profits, income, losses or assets, it will be outside the ambit of international transaction under section 92B(1) of the Act. In this regard, we would like to hold that issuance of corporate guarantee by the assessee to....
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....CIT DR would have had a case where a fee has been charged for the intra service which has been rendered (in the context of corporate guarantee), and, therefore, the assessee or the Court has treated it as an international transaction, then the charge of corporate guarantee has to be in accordance with Arm's Length principle. This means that the price for corporate guarantee should be that which would have been paid and accepted by independent enterprises in comparable circumstances. In that case transfer pricing adjustments are required. In that case, it has to be determined what will be the ALP of corporate guarantee commission paid by associate enterprise to the parent company providing corporate guarantee. Since that is not the case before us, we need not go into it. 12.15. We also find that this very same issue came up for adjudication by this tribunal in assessee's own case for the Asst Year 2010-11 in ITA No. 530/Kol/2015 dated 9.6.2017 , wherein by placing reliance on the decision of co-ordinate bench of Mumbai Tribunal in the case of a) Marico Ltd vs ACIT reported in (2016) 70 taxmann.com 214 (Mumbai Trib) wherein it was held that corporate guarantee was not an in....
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....s before the Ld. DRP. The ld DRP upheld the decision of the ld TPO relating to interest free loan given to its AE was not in the nature of shareholder activity and the assessee should have been compensated for advancing of loan to its AE. However, the ld DRP did provide relief and directed the Ld. AO/TPO to compute the arm's length interest using LIBOR instead of prime lending rate of the banks. Based on direction of the ld DRP, the ld AO passed the final order reducing the adjustment to INR 10,40,026. Aggrieved by the final order of the AO, the assessee is before us. 13.2. The Ld. AR submitted that the loan was advanced by the assessee in the capacity of a shareholder/promoter and was advanced out of its own funds and since it has not incurred any cost in granting the loans to its AE, no adjustment should be made on this behalf. The Ld. AR drew our attention to pages 986 to 1047 of the paper book which is the financial projection report prepared by external consultant wherein it was forecasted that M/s. EIH Flight would start earning positive cash flow from its business activities (after the first year of operation i.e. FY 2010-11 onwards). He also drew our attention to the....
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....and this issue for this limited purpose back to the ld TPO / ld AO and to determine the issue as directed by us. Accordingly, the Grounds 2.1. & 2.2. raised by the assessee are allowed for statistical purposes and Ground 1 raised by the revenue is dismissed. 14. The Ground No. 5 raised by the revenue is general in nature and does not require any specific adjudication. 15. In the result, the appeal of the assessee is partly allowed for statistical purposes and the appeal of the revenue is dismissed. Order pronounced in the Court on 12.01.2018 ============= Document 1 EIH Limited Assessment Year 2011-12 Details of foreign Advertisement in Magazine/Website listing Name of the Party A&K Travel Abercrombie & Kent Carlson Wagonlit Australia Pty Ltd Albe Elite Resorts Asia Pacific Pvt Ltd Peter Knipp Holdings Pte Ltd. Country Australia Australia Australia Australia Singapore Singapore Singapore Singapore American Express Europe Ltd U.K U.K. U.K. Trip Advisor Lle 35 Asia Media Pte Ltd Absolute Publish Brunel Carriage Ele C Vent Inc Total 191,975 79.935 339.104 8,991 40,099 Ta....