AI Drafter 
TaxTMI 
TaxTMI 
2017 (4) TMI 1406
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....hat the assessee has claimed foreign exchange loss of Rs. 22,15,55,371. It was explained by the assessee that the assessee, with an export sale of Rs. 2,796 crores in the said year and raw material imports of Rs. 2,516.08 crores, was exposed to considerable foreign exchange fluctuation risk, and that the assessee, with a view to manage and control such risks, takes various steps such as use of derivatives, entering into foreign exchange contracts with bankers etc. It was also explained that in the case of forward contracts, the difference between the forward rate and the current rate, being premium or discount-as the case may be, is recognized as a revenue item over the life of the contact period, and any gains or losses on cancellation of such forward exchange contracts are also recognized on the same basis. It was then explained that as on the date of the closing of books, the assessee had some of these contacts, remaining to be settled in future by delivery of foreign exchange, and that the assessee had computed the loss, on the basis of foreign exchange rates as at the end of the year, on discharging these obligations. The amount so computed came to Rs. 22,15,55,371. It was als....
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....cts on record, the appellant is following mercantile system of accounting from the beginning and there is no change in it. Condition No.3 Whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; Yes. In fact in the year under consideration itself, the Appellant has earned foreign exchange income of Rs. 27,95,89,730/- and incurred loss of Rs. 50,11,45,101/-, and accordingly, the same treatment has been given both to the income as well as the expenditure. The detailed information about each of such transaction contained in paper book has been examined. Condition No. 4 Whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains As per details on record, the Appellant has declared foreign exchange gain in the same year under appeal. The Appellant is consistent in making entries in the books in respect of losses as well as gains. Condition No. 5 Whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; ....
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....al contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 6. It is one of the most fundamental principles of accounting that while all anticipated losses are taken into account in computing the profits and losses of business, even though such losses may not have crystallized, as long as these losses can be reasonably quantified. This approach can be contrasted with the anticipated profits being ignored, in the computation of profits and losses of an enterprise, unless the profits are actually realized. To that extent, there is a dichotomy in accounting approach but then this is what is the sound accounting policy and it has the sanction of law. As a matter of fact, it is this principle, as recognized by Hon'ble Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481, which explains the valuation of closing stock on market price or cost price whichever is less. There is thus, in principle, no difficulty is seeking a deduction in respect of a reasonably anticipated loss, even though it may not have actually fructified, in computation of profits and gains of business. To this extent, the ....
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....ally separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Sec. 145(1) enacts that for the purpose of s. 28 and s. 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with s. 28. Therefore, s. 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. (See judgment of this Court in the case of United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated,....
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....rred for the purpose of acquiring fixed assets, which topic falls under s. 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period. 10. As stated above, on facts in the case of M/s. Woodward Governor India (P) Ltd., the Department has disallowed the deduction/debit to the P&L a/c made by the assessee in the sum of Rs. 29,49,088 being unrealized loss due to foreign exchange fluctuation. At the very outset, it may be stated that t....
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....wed by any class of assessees or in respect of any class of income. (3) Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-s. (1) or accounting standards as notified under sub-s. (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in s. 144." 13. As stated above, one of the main arguments advanced by the learned Addl. Solicitor General on behalf of the Department before us was that the word "expenditure" in s. 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of paym....
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....e assessee even though the assessee is entitled to, and can legitimately ask for, any benefits granted to the assessee by such instructions or circulars. Nothing, therefore, turns on the CBDT instruction even if it is actually contrary to the claim of the assessee. 9. We have also noted that, as per the details filed by the assessee, the foreign exchange contracts have been entered into for genuinely restricting its bonafide risk exposure of the assessee in respect of its exports and imports transactions. These contracts cannot, therefore, be viewed on a standalone basis as speculative transactions. These transactions are integral part of the business transactions and any loss or gains arising from these transactions, for the detailed reasons set out above, are deductible in computation of profits and gains of business. 10. In view of the above discussions, we uphold the action of the CIT (A) so far as this relief in respect of deleting the disallowance of Rs. 22,15,55,371 on account of loss, at the end of the year, on foreign exchange contracts. We confirm the same and decline to interfere in the matter. 11. Ground no. 1 is thus dismissed. 12. In ground no. 2, the Asse....
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....on this point. 16. Ground no. 2 is thus partly allowed for statistical purposes. 17. In ground no. 3, the Assessing Officer has raised the following grievance: 3. The ld. Commissioner of Income-tax (A)-XIV, Ahmedabad has erred in law and on facts in deleting the upward adjustment u/s. 92CA(3) of the Act Rs. 53,79,38,187/- out of total Rs. 60,39,49,197/- on account of guarantee fee on loans availed by AEs of Assessee against guarantee of Assessee. 18. In connected grounds of appeals taken by the assessee in his cross appeal, i.e. ground nos. 4,5,6 and 7-which we will take up together with the above grievance of the Assessing Officer, grievances raised are as follows: 4. The ld. CIT (A) has erred in law and on the facts of the case in adopting 0.75% as guarantee fees and accordingly erred in sustaining the transfer pricing adjustment of Rs. 76,11,000/- out of adjustment of Rs. 2,02,96,000/- made by the ld. AO/TPO on guarantee provided to AE. 5. The ld. CIT (A) has erred in law and on the facts of the case in confirming the action of ld. AO/TPO in making transfer pricing adjustment on account of guarantee fees, regardless of the finding given by CIT....
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....ting as well as reciprocating manner. The assessee further clarified that standing as a guarantor for the subsidiary does not result in any provision for services which can be treated as an international transaction. It was based on these, and several other, arguments that the assessee contended that the transaction of giving corporate guarantees cannot be treated as an international transaction. Without prejudice to this stand, it was further submitted that ICICI Bank has given a guarantee to the group in consideration of guarantee commission @ 0.75% which can be treated as a CUP. None of these submissions, however, impressed the Assessing Officer. He rejected these submissions and, while doing so, gave the following reasoning: The above submission made by the assessee has been perused. These are dealt with issue-wise as below: 7.6.1 Providing Corporate Guarantee is not a service: The issue has been dealt with in detail at para 6.6 to para 6.13 in all its facets. As already discussed above "provision of service" is included in the definition of international transaction. Since providing guarantee has been held to be a service, its benchmarking by the assessee com....
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....ii) The argument that the loans were given on interest-free terms out of commercial expediency is not acceptable because this was not a case of an ordinary business transaction but was on international transaction between associated enterprises. One had to see whether the transaction was at arm's length under the transfer pricing provisions; Once the loan taken by the AEs on the strength of the guarantee are not treated quasi equity, the act of providing a service to the AE by offering corporate guarantee also does not form part of the stewardship activity of the assesses company. 7.6.5 The assessee has discussed the issue of negative TP adjustment in subsequent years as in subsequent years, the assessee has obtained guarantees from its AEs. In normal circumstances, unless the events of prior or subsequent years are linked and part of the same contract agreement, such considerations should not be factored while deciding the current year issues. In this case, there does not appear to be any such link and the assessee has not been able to demonstrate such financial linking. 7.6.6 The assessee's contention regarding commercial expediency and the reli....
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....e documents refers to guarantee fee of 0.75% for the first 12 months, 1% for the next 24 months and 1.25% for the subsequent period. The agreement is a part of the overall facility agreement meaning thereby that this transaction between SE Drive Technik and ICICI Bank has also been guaranteed by the assessee company (along with the other four companies to the transaction) as a principal guarantor. Inspite of an underlying guarantee, the bank has charged a fee of 1% (since the period is over 12 months). It has also charged a fronting fee of 0.75%. The bank would not have advanced the guarantee facility at same rates if these were not guaranteed by the assessee company. If the risk related to such underlying guarantee is added, the rate would be higher than the rate of 200 bps adopted by this office in respect of other guarantees given by the assessee. In the order relating to interest rates, it has been discussed that the risks assumed in respect of a normal rated corporates is anywhere between 4% to 4.5% in Indian context. Hence, the rate of 0.70 advocated by the assessee company is without any basis and unacceptable. The guarantee margin computed elsewhere by this office at 200 bp....
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.... At para 27.2, under 'Other indemnities', the agreement states, 'The company's liability in each case includes any loss or expense on account of funds borrowed, contracted for or utilized to fund any amount payable under any Finance Document or any credit.' (iv) The assessee or The Company has been given various powers in the agreement and is liable for various expenses related to loan. The Company may introduce or exclude guarantors from the agreement at its discretion. (v) The assessee company has been given power to act on behalf of the parties to the agreement. (vi) It is clear that the risks and responsibilities taken by the assessee are much higher than the other parties to the agreement. 7.7.2 The Financial status of AEs: The assessee has tried to argue that the net worth of the companies as on 31/3/2008 is much higher and hence the companies should be attributed higher share of the apportionment out of total guarantee fee determined. The financial status of the assessee company has been examined. (i) It is clarified that the loan agreement has been entered into on 7/2/2007. Hence, the assessee's attempt to....
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....r available cash in the hands of the related companies. As discussed in the above para, except SE Drive Technik, none of the companies have any financial standing to account for and hence can hardly be factored in while computing guarantee risks. However, the assessee has submitted following details and has claimed that the cash available in the hands of these companies should be accounted for while computing the risk level and also while computing the amount on which guarantee fee would be leviable. - While computing the amount of outstanding guarantee your honour has allowed reduction of opening balance lying in bank with SEDT of Rs. 747 Cr being cash cover available to assessee company. It may be noted that the -working of subject amount is not correct as the position of bank balance with AE and assessee company was as under: Cash and Bank Balances Name of AE Amt in Euro Ami in INR in Cr in Millions (1 Euro = Rs. 63.3417) SEDT Germany 116.01 735.21 SWEE Germany 0.01 0.06 AERH Netherlands 1.54 9.75 SELM Moritious 1.21 7.66 SEL India as on 31.03.200S 0 ....
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....sue. The other parties to the agreement have availed of the loans/facilities granted by the agreement. The assessee has not utilized any of such facilities but is merely a guarantor. Hence, it should have charged guarantee fee at 1% of the amount of facility utilized by the other group companies. 7.7.6 Quantification of guarantee fee share in the transaction relating to providing guarantee on guarantee offered by ICICI Bank: As discussed at para 7.6.7, 7.6.8 and 7.6.9, the rate adopted by ICICI Bank cannot be used as CUP for benchmarking assessee's guarantee services to its AEs in respect of loans availed. As regards the guarantee fee computation in respect of the trache V guarantee component being given by ICICI Bank to SE Drive Technik, it is seen that in the agreement itself, the bank has started that if the company provides 100% liquid assets as guarantee, the fee would be reduced to 10%. This means that the Bank is bearing risk to the extent of 0.90% while remaining is its margin for services rendered. The average overall guarantee fee has been computed at 2%. If the bank picks up guarantee related risk to the extent of 0.90%, the remaining risk of 1.1% will be sh....
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....otor Corporation, USA is a supplier of Blades which is a key component of windmills. The said SRC caters to most of the supply needs in USA. Without SRC, the appellant would have to import the blades from India which would have increased the logistic costs and ultimately the competitive edge in terms of pricing would have been lost. Thus looking to the critical business relationship the Appellant Company had with the SRC it was also commercially beneficial to it to support the said AE to raise loans so that it can increase its sales in USA and save on logistic cost of rotor blades. It is further seen that similarly SEBV Netherlands has obtained a term loan for Guest House from ABN AMRO Bank after mortgaging the Guest House. It was further submitted that the purpose of guest house was to provide accommodation for employees of the Appellant Company only. It has been submitted by the A.Rs. of the Appellant that the guarantee of the Appellant has been obtained merely because the Appellant is a parent company. Since the assets of the AEs are mortgaged against the loan, any bank would have provided loan to the companies and the guarantee was provided by the Appellant on....
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....uarantee. Hence, I modify the addition by adopting 0.75% as guarantee fees as against the 2.00% charged by the TPO, and accordingly, the addition to the extent of Rs. 76,11,000/- (i.e 0.75% of 101.48 Crores) is sustained and the balance amount of Rs. 1,26,85,000/- is hereby directed to be deleted. Now I deal with the second issue which need to be decided i.e. upward adjustment of Rs. 47,83,93,500/- as guarantee fees on account of joint-guarantee provided to the lenders for providing finance and other arrangements to three AEs to acquire RE Power Systems AG, Germany and to refinance the debt obtained by the Appellant. I have gone through the justification given by the A.Rs. of the Appellant for not charging guarantee fees. My attention is drawn to the Annexure-2 to the letter dated 21/10/2011 furnished the TPO, which is reproduced on pg. 102 to 112 of the written submission submitted before me. Going through the resolution passed by the Board of Directors on 09/02/2007, it is seen that the Appellant wanted to acquire 100% shareholding of leading European Wind Turbine Generator manufacturing company "RE Power System AG" to expand its international business by enlarging its p....
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.... written submission, the Appellant submitted that total outstanding borrowings were at Rs. 6402.79 Crores (Rs. 4660.89 Crores + Rs. 1741.90 Crores), whereas, the total Net Worth of the all the group companies/guarantors were at Rs. 20,663.32 Crores. (PI. refer pg. no.259 of P/B). This details would show that the group companies/guarantors had capital base in form of Equity of 20553.32 Crores. Against the said equity base the banks have funded 1he required borrowings, outstanding amount of which was Rs. 6402.79 Crores Rs. 4660.89 Crores + Rs. 1741.90 Crores) resulting in to a debt to equity ratio of 0.31:1 which is well below the accepted norms of long term lending of 4:1.Based on the equity commitment by management, it was quite possible that any company could have availed the said loan without any third party guarantee from the Banks at the prevailing market rates. Further I find that negative pledge of the assets of all the borrowers was created and the total assets base of all the companies put together was at Rs. 240835.79 Million, whereas, the outstanding balance of borrowed loan was at Rs. 64027.90 Million, hence the borrowed loan was secured by 3.76 times by the assets base,....
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....e TPO has not given any cogent reasons to justify his action in attributing 50% of guarantee fees to the Appellant and balance 50% to other three ABs all together. Therefore, this action of TPO is not justified and hereby rejected. Now I must decide as to whether the allocation made is justified or not. My attention is drawn to working given on Pg. No.258-260 of P/B. Going through the said working, it is seen that the Appellant has adopted benchmark rate of 0.75% as guarantee fees and has quantified the amount of total guarantee fees at Rs. 41.77 Crores. Thereafter, the same guarantee fees has been allocated in between the co-guarantors on the basis of Weightage Average of Net Assets of the Companies, and accordingly, the weightage of the Appellant Company comes to 14.01% towards total guarantee fees, which results info amount of Rs. 5.84 Crores. I have also seen the notes mentioned below the chart justifying the different weightage given to the co-guarantors. I am of the opinion that allocation as done by the Appellant is rational and done on logical basis since the allocation has been made on the basis of the Net Assets of the Companies which will be available in case of default ....
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....o attract the arm's length price adjustment, therefore, a transaction has to be an 'international transaction' first. The expression 'international transaction' is a defined expression. Section 92B defines the expression 'international transaction' as follows: '92B - Meaning of international transaction (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction'' means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person ....
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....ss patents, patent applications, technical documentation such as laboratory notebooks, technical knowhow; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organized workforce, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easeme....
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....#39;, and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92B. Clearly, therefore, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. 28. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by the virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provision of services, inc....
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....It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for "contingent" impact on profit, income, losses or assets but on "future" impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the Deutsche Bank did not even have any such implication because no borrowings were resorted to by the subsidiary from this bank. 31. In this light now, let us revert to the provisions of clause (c) of Explanation to Section 92B which provides that the expression 'international transaction' shall include "capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business". In view of the discussions above, the scope o....
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....h does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act. 33. In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this case.' 23. Learned Departmental Representative submits that this decision is no longer good law in the light of Everest Kanto Cylin....
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....ests that Their Lordships had any occasion to address themselves to the question as to whether the issuance of corporate guarantee amounts to international transaction. The operative portion of the judgment is reproduced below for ready reference: ". . . . . . . . . In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are o....
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....tion 2 to section 247 broadly has four elements. Disposal or parting with or creating any interest in an asset. The asset or any interest in the asset. The disposing of or parting with the asset or creating any interest therein may be: (a) Direct or indirect. (b) Absolute or conditional. (c) Voluntary or involuntary. (d) By amendment or otherwise. (iv) A non-obstante provision regarding the nature of a transfer. If an act, arrangement, transaction etc. constitutes a transfer as defined in the section it would be so notwithstanding the transfer of rights having been categorised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. 216. Two aspects of a transfer are clarified - the asset itself and the manner in which it is dealt with. The asset is no longer restricted to the asset per se or a right therein, but also extends to "any interest therein". Prior to the amendment, the words "any interest therein" were absent. Further, the nature of the disposal is also expanded. It now includes the creation of any interest in any asset. Moreover, the ....
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....preciated or realized the actual ambit of the term "transfer" which are now clarified by the amendment. Even assuming that the Revenue cannot re-open the Vodafone case, it cannot be barred from relying upon the true ambit of the term "transfer" in future cases, including the proceedings in respect of the petitioner. Thus, even assuming that the judgment of the Supreme Court remains unaffected by the clarificatory amendment, the Revenue would be entitled hereafter in other cases, at least, to appreciate, analyze and construe the transactions relating to call options, including the Framework agreements in a proper perspective which it may not have done earlier. 220. These are important issues. There is no justification for withdrawing the proceedings from the channel provided by the Income-tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extraordinary jurisdiction under Article 226.' (Emphasis Supplied) 27. Revenue's emphasis is on the last two sentences in paragraph No 213 which state that "The effect of the amendment would have to be considered. It cannot be brushed aside" but in doing so what it overl....
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....d treat it to be the complete "law" declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court" Their Lordships further noted that "A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning" It was also recalled that in Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530, Hon'ble Supreme Court had cautioned that "It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment." That precisely, however, has been the approach of the revenue authorities in placing reliance on Vodafone India Services....
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....udicial precedents in India, does not even deal with the fundamental question as to whether issuance of a corporate guarantee is an international transaction at all-which is what we are concerned with at present. This TCC decision dealt with a situation in which the assessee was denied, in computation of its business income, tax deduction for payment of guarantee fees on the ground that there was no effective benefit to the assessee, in obtaining the said guarantee. Aggrieved by denial of deduction, assessee carried the matter in appeal before the Canadian Tax Court, and the plea of the assessee was eventually upheld. It is also interesting to note that as a sequel to this Tax Court of Canada decision, the transfer pricing legislation was amended, to bring greater clarity on the issue and as a measure of abundant caution, and section 247 (7.1), granting specific exemption to guarantee fees, was introduced. This amendment is as follows: (7.1) Sub-section (2) does not apply to adjust an amount of consideration paid, payable or accruing to a corporation resident in Canada (in this sub-section referred to as the "parent") in a taxation year of the parent for the provision of a....
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....ring on the profits, income, losses or assets of such enterprises". Our transfer pricing provisions, perhaps being in the quest of comprehensive coverage, have ended up in a limited scope of the transactions being covered by the arm's length price adjustments for transfer pricing. In any event, as emphasized earlier as well, the decision was in the context of the deduction, and, post this decision, a specific amendment was introduced in the Canadian transfer pricing law to clarify the position that all corporate guarantees issued by the assessee, in support of its subsidiaries, are not necessarily international transactions. Revenue, therefore, does not derive any advantage from the Tax Court of Canada's decision in the case of GE Capital Canada. There are many more aspects which make this decision wholly irrelevant in the present context but suffice to say that relevant legal provisions and context being radically different, the reliance of this decision must be rejected for this short reason alone. 32. As we take note of the above legal position in Canada, it is appropriate to take note of the concept of 'shareholder activities' in the context of corporat....
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.... of thought that the corporate guarantees can indeed be a mode of ownership contribution, particularly when, as is often the case, "where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds". There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution. It is significant, in this context, that the case of the assessee has all along been, as noted in the assessment order itself, that "said guarantees were in the form of corporate guarantees/quasi-capital and not in the nature of any services". In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee's claim of the guarantees being in the nature of quasi-capital, and thus being in the nature of a shareholder's activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity is not ....
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....ned intact from legislative or judicial guidance. There is no scope for parallel or conflicting guidance by such forums. Legislation is an exclusive domain of the sovereign, and, therefore, as long as an area is adequately covered by the work of legislation, things like guidance of the OECD, or for that purpose any other multilateral forum, are not decisive. While we are alive to the school of thought that when the domestic transfer pricing regulations do not provide any guidelines, it may have to be decided having regard to international best practices, we do not quite agree with it inasmuch as, in our considered view, Revenue cannot seek to widen the net of transfer pricing legislation by taking refuge of the best practices recognized by the OECD work. 35. While dealing with "special consideration for intra-group services", the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' has noted that there are two fundamental issues with respect to the intra-group services-first, whether intra-group services have indeed been provided, and, second-if the answer to the first question is in positive, that charge to these services should....
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....embers do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a "shareholder activity", distinguishable from the broader term "stewardship activity" used in the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members, for example services that would be provided by a coordinating centre. These latter types of non-shareholder activities could include detailed planning services for particular operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management. 7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: (a) Costs of activities relating....
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....rement of economic or commercial value that enhances the recipient's commercial position, or that may be reasonably anticipated to do so". The expression "activity", in turn is defined, as "including the performance of functions; the assumption of risks; the use by a rendered of tangible or intangible property or other resources capabilities or knowledge (including knowledge of and ability to take advantage of a particularly advantageous situation or circumstances); and making available to the recipient any property or other resources of the rendered" [Regulation 1.482-9(1)(2)]. The issuance of guarantees is not within the ambit of transfer pricing in United States because it is a service but because it is covered by the specific definition discussed above. As a matter of fact, David S Miller, in a paper titled 'Federal Income Tax Consequences of Guarantees; A Comprehensive Framework for Analysis' published in the 'The American Lawyer Vol. 48, No. 1 (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/20771688), has stated that a guarantee is not a service. The following observations, at pages 114, are important: The position that guarantees are serv....
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....for importing into the statute the words which are not there. Such importation would be not to construe but to amend the statute". Their Lordships noted that "Even if there be casus omissus, the defect can be remedied only by legislation and not by judicial interpretation". The benefit test, which is set out in the OECD Guidance and which finds its place in the international best practices, does not find its place in the main definition of international transaction, even though there is a reference to the expression 'benefit' in the context of cost or expense sharing arrangements but that is a different aspect of the matter altogether. In the absence of benefit test being mentioned in the definition for the present purposes, we cannot infer the same. 38. One more thing which is clearly discernible from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get "economic or commercial value to enhance its commercial position". The benefit test is interlinked with the an arm's length test in the sense that it seeks an answer to the que....
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....an individual or a business entity in case they are unable to do so. By providing a guarantee, a bank offers to honour related payment to the creditors upon receiving a request. This requires that bank has to be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred per cent deposits, the bank charges a guarantee fees. In a situation....
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....sidiaries to raise funds for their own needs, the corporate guarantees are to be treated as shareholder activity. The use of borrowed funds for own use is a reasonable presumption as it is a matter of course rather than exception. There has to be something on record 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 ....
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....actions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below:- "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises wh....
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.... been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." 17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i....
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....ination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, we hold that the issuance of corporate guarantees in question was not in the nature of 'provision for services' and these corporate guarantees were required to be treated as shareholder participation in the subsidiaries. 44. As for the words 'provision for services" appearing in Section 92B, and connotations thereof, our humble understanding is that this expression, in its natural connotations, is restricted to services rendered and it does not extend to the benefits of activities per se. Whether we look at the examples given in the OECD material or even in Explanation to Section 92B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92B-which we will deal with a little later, guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd....
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....uld not be the deciding factor to determine whether it is an international and then gives an example of brand royalty to make his point. What, in the process, he overlooks is that Section 92B(1) specifically covers sale or lease of tangible or intangible property". The expression "bearing on the profits, income, losses or assets of such enterprises" is relevant only for residuary clause i.e. any other services not specifically covered by Section 92B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something which was not even raised before us. In the written submission, it was stated that "Hon'ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether the provision of guarantee was a service or not". That's not factually correct. We are unable to see any merits in learned Departmental Representative's contention, particularly as decision categorically noted that not only before the Tribunal, but this issue was also raised before the DRP-as evident from the text of DRP decision. We now take up the issue with respect to specific mention of the words in Explanation to Sect....
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....ies discussed above or by other specific segments covered by Section 92B, namely borrowing or lending money. The remaining two items in the Explanation to Section 92B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B (1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92B, the transactions should be such as to have bearing on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the wo....
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....arly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act. 45. Before we part with this issue, there are a couple of things that we would like to briefly deal with. 46. The first issue is this. We find that in the case of Four Soft Ltd. v. Dy. CIT [2011 142 TTJ 358 (Hyd.), a co-ordinate bench had, vide order dated 9th September 2011, observed as follows: "We find that the TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very mu....
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....effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-a-vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail." 48. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities-as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have "b....
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....his case, it would not really be necessary to deal with that aspect of the matter. 49. The second issue is this. We must deal with the question whether in this case the matter should have been referred to a larger bench. The parties before us were opposed to the matter being sent for consideration by the special bench, and at least one of the reasons for which the grievance of the assessee is upheld, i.e. guarantees being in the nature of shareholder activity and excludible from the scope of services for that reason alone, is an area which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft Ltd. decision (supra) had decided the issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post-amendment law and the impact of amendment in the defini....
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....e detailed reasons set out above, we uphold the grievance raised by the assessee. The impugned ALP adjustment of Rs. 2,23,62,603, thus stands deleted. As we do so, however, we must add that, in our considered view, the way forward, to avoid such issues being litigated and to ensure satisfactorily resolution of these disputes, must include a clear and unambiguous legislative guidance on the transfer pricing implications of the corporate guarantees as also on the methodology of determining its ALP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assessees, can never be over emphasized The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately both....
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....m its AE. The only point which has to be seen in this case is whether the same is at ALP or not". Learned Departmental Representative has invited our attention to a decision of the Bangalore benches, in the case of Advanta India Limited v. ACIT [(2015) TII-294-ITAT-BAN], which is in favour of the assessee. While learned Departmental Representative is indeed right, that is a case in which the assessee did infact recover charges, which included more than the cost incurred, from the beneficiary, and, as such, it clearly had an impact on the profits of the assessee. That is a case distinct from the present situation in which there is no impact on the profits or losses or assets or income of the assessee. In Advanta decision (supra), this aspect of the matter and the distinguishing feature has been discussed at considerable length. Learned Departmental Representative has then invited our attention to the fact a substantial question of law has been admitted by Hon'ble Delhi High Court in ITA No. 607/2014 against the order passed by the Tribunal in the case of Bharti Airtel (supra). While no doubt the matter is now pending before Hon'ble High Court for the judicial scrutiny by The....
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....ot swayed by the arguments, though extremely well researched and thought provoking, of the learned Departmental Representative-particularly at this stage. He has raised a number of other arguments as well but as those arguments are already dealt with in the case of Micro Ink decision reproduced above, we see no need to again deal with the same. 9. In the Micro Ink decision (supra), we had, amongst other things, taken not of the judicial developments leading to the insertion of Explanation to Section 92B and how within four months of Four Soft decision (supra) being announced, it was nullified by a legislative amendment. This aspect of the matter has been dealt with in paragraph 46 and 47 of this decision, which has been reproduced earlier in this order, at considerable length. It assumes even more significance in the light of a new judicial development that we will deal with in a short while now. In the present case, we are dealing with a situation in which the amendment was made with retrospective effect and it covered certain issues which were already subjected to a judicial interpretation in a particular manner. Learned Departmental Representative does not even dispute ....
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....ia provided that powers under section 263 could also be invoked in the cases where "the order is passed without making inquiries or verification which should have been made", all ratio of all these decisions was nullified. That, however, is done with prospective effect, i.e. with effect from 1st June 2015. As a matter of fact, it is a laudable policy of the present tax administration to stay away from making the retrospective amendments, and thus contribute to greater certainty and congenial business climate. Nothing evidences it better than this subtle, but easily discernible, paradigm shift in the underlying approach to the amendments made in Section 263 in the very first full budget of the present Government. 11. What has, however, been done in the case before us is to amend the law with retrospective effect. Of course, it happened much before the current awareness about the evils of retrospective taxation having been translated into action. 12 Dealing with such a situation, Hon'ble Delhi High Court has, in the case of DIT v. New Skies Satellite BV [TS-64-HC -DEL (2016)], observed as follows: 30. Undoubtedly, the legislature is competent to amend a....
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....orrect, however to respect the separation of legal powers and to avoid making a legislature a court of last resort, the amendments can be made prospective only [Ref County of Sacramento v. State (134 Cal App 3d 428) and In re Marriage of Davies (105 III App 3d 66)] (Emphasis, by underlining, supplied by us) 13. Quite clearly, in view of the law so laid down by Their Lordships also, just because a provision is stated to be clarificatory, it does not become entitled to be treated as 'clarificatory' by the judicial forums as well. The view taken by Hon'ble Delhi High Court support this line of reasoning. Even without the benefit of guidance of Their Lordships, the views articulated by a coordinate bench of this Tribunal, in the case of Bharti Airtel (supra) were of a somewhat similar opinion when it was observed that, "Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-a-vis certain norms, and these norms cannot be given effect from a date earlier....
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....t as to how the transfer pricing legislation can be expected to have a retrospective amendment, which is almost like telling people how they should have benchmarked their international transactions in past and thus expecting them to do the impossible, his stock reply is that the amendment only clarifies the law, it does not expand the law. 17. Well, if the 2012 amendment does not add anything or expand the scope of international transaction defined under section 92B, assuming that it indeed does not-as learned Departmental Representative contends, this provision has already been judicially interpreted, and the matter rests there unless it is reversed by a higher judicial forum. However, if the 2012 amendment does increase the scope of international transaction under section 92B, as is our considered view, there is no way it could be implemented for the period prior to this law coming on the statute i.e. 28th May 2012. The law is well settled. It does not expect anyone to perform an impossibility. Reiterating this settled legal position, Hon'ble Supreme Court has, in the case of Krishnaswamy S Pd v. Union of India [(2006) 281 ITR 305 (SC)], observed as follows: ....
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.... to do so. There is no escape from this call of duty. Of course, whatever we do is, and shall always remain, subject to the approval by Hon'ble Courts above. 20. There are a number of decisions in which our so tinkering with the specific words in the statute have been upheld, as long as this has been so done in accordance with the judicial principles and guidance in the judge made law. In the case of Rajeev Kumar Agarwal v. Addl. CIT [2014] 149 ITD 363 (Agra), insertion of second proviso to Section 40(a)(ia), though specifically stated to be with effect from 1st April 2013, was read to be effective from 1st April 2005. The reasoning adopted by the bench, speaking through one of us, was as follows: 8. With the benefit of this guidance from Hon'ble Delhi High Court, in view of legislative amendments made from time to time, which throw light on what was actually sought to be achieved by this legal provision, and in the light of the above analysis of the scheme of the law, we are of the considered view that section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non deduction of tax at source from payments for expendi....
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....dded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provis....
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....of transfer pricing legislation which, as we have observed earlier, being an anti-abuse legislation, seeks a degree of compliant conduct by the taxpayers rather than being primarily a source of revenue." 24. We are in respectful agreement with the views so expressed by the coordinate bench. Having said that, we may add that while it is true that an appeal against the said order, on the same issue, is admitted by Hon'ble jurisdictional High Court but then it is not, and it cannot be, anybody's case that mere admission of appeal can vitiate binding nature of this judicial precedent. In any case, whatever we hold is, and shall always remain, subject to whatever Hon'ble jurisdictional High Court has to hold on the issue, and Hon'ble High Court, though in the case of another assessee i.e. Micro Ink (supra) is already seized of the matter. Respectfully following the views expressed by the coordinate bench, we hold that the assessee extending corporate guarantees to its AEs, particularly on the facts and in the circumstances of this case and when the assessee has done so in the course of its stewardship activities for its subsidiaries, does not constitute an internation....
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....69 (Guj)] and decided this issue in favour of the assessee. In the case of Mitesh Impex (supra), Their Lordships had made the following important observations: '30. In what manner and to what extent, a ground, a legal contention or a fresh claim can be made at an appellate stage are vexed questions and have occupied the minds of the Courts in numerous occasions. 31. In the case of Jute Corporation of India Ltd. v. Commissioner of Income-tax and another reported in 187 ITR 688 the Supreme Court noted with approval observation of the Court in the case of CIT v. Kanpur Coal Syndicate reported in [1964] 53 ITR 225 (SC) to the effect that " The Appellate Assistant Commissioner, therefore, has plenary powers in disposing of appeal. The scope of his power is co-terminus with that of the Income Tax Officer. He can do what the Income Tax Officer can do and also direct him to do what he has failed to do." It was observed that there was no reason why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income Tax Officer. The Act does not place any restriction or limitation on the exercise of appellate power. It was observe....
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....w for the first time and commented that such decision does not relate to the power of the assessing officer to entertain a claim for deduction otherwise than by filing a revised return. In the process the Supreme Court recognized that a new claim could not be entertained by the assessing officer without the assessee revising the return. While doing so it was clarified that:- "4. . . . However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs." 34. In the case of Commissioner of Income-tax v. Jai Parabolic Springs Ltd. reported in (2008) 306 ITR 42 (Delhi), the Delhi High Court held that there is no prohibition on the powers of the Tribunal to entertain an additional ground which according to the Tribunal arose in the matter and for just decision of the case. 35. In case of Commissioner of Income-tax v. Pruthvi Brokers and Shareholders P. Ltd. reported in [2012] 349 ITR 336 (Bom.) the Bombay High Court considered the issue at considerable length and ....
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....ional ground or contention, the Courts have also, as noted above, recognized the powers of the Appellate Commissioner and the Tribunal to entertain a new claim for the first time though not made before the assessing officer. Income Tax proceedings are not strictly speaking adversarial in nature and the intention of the Revenue would be to tax real income. 39. This is primarily on the premise that if a claim though available in law is not made either inadvertently or on account of erroneous belief of complex legal position, such claim cannot be shut out for all times to come-merely because it is raised for the first time before the appellate authority without resorting to revising the return before the assessing officer. 40. Therefore, any ground, legal contention or even a claim would be permissible to be raised for the first time before the appellate authority or the Tribunal when facts necessary to examine such ground, contention or claim are already on record. In such a case the situation would be akin to allowing a pure question of law to be raised at any stage of the proceedings. This is precisely what has happened in the present case.' 30. Clearly, therefore, the....
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....its of the claim, and the claim is rejected only on the technical ground". After rejecting the Assessing Officers objections with respect relating to admissibility of claim, even when the same is not made in, or by revising, the income tax return-which we have upheld earlier in this order, learned CIT (A) proceeded to conclude that "I accept the fresh claim made by the appellant before me and give direction to the Assessing Officer to allow the claim as made by the appellant as per law" The Assessing Officer is aggrieved and is in appeal before us. 32. As we deal with the issue regarding admissibility of relief under section 90, let us first take a look at the relevant enabling provision in the Indo China treaty: ARTICLE 23 - METHODS FOR THE ELIMINATION OF DOUBLE TAXATION . . . . . . . . . 2. In India, double taxation shall be eliminated as follows: Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in China, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in China whether directly or by deduction. Such deduction s....
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....gainst the MAT payment. The treaty does not distinguish between a normal tax liability and a MAT liability. All that we are emphasizing is that the matter has not been examined in sufficient detail. The Assessing Officer has not dealt with the correctness of the claim at all, and the CIT (A) has proceeded on the basis that this non examination of claim, which was rejected at threshold-rather than on merits, amounts to acceptance of claim on merits. Learned CIT (A) was clearly in error in not examining the matter and proceeding on the basis that the Assessing Officer has not doubted correctness of the claim on merits, since, quite clearly, the Assessing Officer saw no need to deal with the merits as the claim was inadmissible in law at the stage of the Assessing Officer in the light of law laid down by Hon'ble Supreme Court in Goetze (India) Ltd. case (supra). In the light of these discussions, as particularly as part of this ground of appeal is anyway being remitted to the file of the CIT (A) for adjudication de novo, we deem it fit and proper to remit the matter to the file of the CIT (A) for fresh adjudication in respect of this claim of tax credit of Rs. 1,62,26,344 as well.....
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....edings, the Assessing Officer noticed that though the assessee has claimed exemption of dividend income amounting to Rs. 6,31,52,914 from investments made in the subsidiaries, the assessee has not offered any disallowance under section 14A of the Act. When the Assessing Officer probed the matter further, it was explained to him that total investments in Indian subsidiaries aggregates to Rs. 381.20 crores and total investments in foreign subsidiaries and group companies aggregates to Rs. 3,733.02 cores, taking the total investments in subsidiaries and group companies to Rs. 4,114.22 crores. It was the explained, with reference to the funds flow position, that the investments have been made out of interest free funds. It was also submitted that the investments have been made on the basis of commercial expediency. The assessee pointed out that dividends have been received from Suzlon Generators Pvt Ltd-Equity (Rs. 2,46,79,419), Suzlon Structures Pvt Ltd-Equity (Rs. 2,59,73,495), Suzlon Structures Pvt Ltd-Preference (Rs. 60,00,000) and Suzlon Towers and Structures Pvt Ltd-Preference (Rs. 65,00,000), and that the related investments have been made out of internal accruals and capital in....
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....0 ITR (Trib.) 391 @ 400 (Ahmedabad). According to learned Authorized Representative, Assessing Officer made disallowance u/s. 14A as per Rule 8D for the reasons similar to those in A.Y. 2006-07. Working of disallowance u/s. 14A as per Rule 8D is placed at page no.146 of the paper book. Disallowance of Rs. 2,66,38,938/- comprises of two elements viz. (a) out of interest - Rs. 1,85,03,081/- and (b) out of other expenses - Rs. 81,35,856/-. With regards to disallowance out of interest expenses, stand of assessee has been that investments were made by assessee in its Indian subsidiaries for the purposes of promoting, supporting and protecting business interest of assessee out of commercial expediency and business prudence. Banks lending money to assessee monitor the use of funds so as to ensure that borrowed funds were utilized for the purpose of financing working capital. Working capital limits are sanctioned subject to a condition that borrowed funds shall not be utilized for the purpose of subscription of shares or debentures. Sample copy of sanction letter issued by IDBI is placed at page nos. 134 to 145 of paper book. Rule 8D prescribed for working out disallowanc....
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.... those in A.Y. 2006-07. Disallowance of Rs. 2,66,38,938/- comprises of two elements viz. (a) out of interest - Rs. 1,85,03,081/- and (b) out of other expenses - Rs. 81,35,856/-. With regards to disallowance out of interest expenses, stand of assessee has been that investments were made by assessee in its Indian subsidiaries for the purposes of promoting, supporting and protecting business interest of assessee out of commercial expediency and business prudence. Banks lending money to assessee monitor the use of funds so as to ensure that borrowed funds were utilized for the purpose of financing working capital. Working capital limits are sanctioned subject to a condition that borrowed funds shall not be utilized for the purpose of subscription of shares or debentures as detailed above. Rule 8D prescribed for working out disallowance u/s. 14A is not applicable for assessment years prior to A.Y. 2008-09. Hence, for A.Ys. prior to A.Y. 2008-09 (as in the present case), Assessing Officer has to prove the nexus that borrowed funds have been used for making investments which generate tax free income prior to making disallowance u/s. 14A. Assessing Officer has not recorde....
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....missions of the assessee that no disallowance is called for out of administrative expenditure because dividend income is exempt and hence, proportionate disallowance out of administrative expenses is justified. On this aspect, we do not find any reason to interfere in the order of learned Commissioner of Income-tax (Appeals). Accordingly ground No.2 of the assessee's appeal is also rejected." Nothing contrary was brought to our knowledge. Facts being similar, so following same reasoning we hold that: (a) With regard to disallowance of interest expenditure made by Assessing Officer u/s. 14A specially to invest in Indian subsidiaries. We find that interest free own funds of the assessee is many times more than this investment because interest free funds available with assessee as on March 31, 2006. There is nothing on record to suggest that any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. In such facts and circumstances, according to us, no disallowance under Section 14A can be made out on interest expenditure. Assessing Officer is directed accordingly. (b) Regarding direction to Assessing Officer to allocate dir....