TaxTMI 
TaxTMI 
2019 (4) TMI 670
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....enditure relatable to the income under section 14A to the extent of Rs. 57,75,34,535/-. In the revised return of income, the assessee restricted the disallowance u/s 14A to Rs. 2,80,900/- as against the original disallowance of Rs. 57.75crores. The revised return was filed during the course of assessment proceedings before the end of the relevant assessment year. 4. The AO in the draft assessment order rejected the revised return of income stating that as per sub section 5 of section 139 of the Act, the assessee is permitted to file the revised return of income due to discovery of any omission or discovery of any wrong statement. Since the revised return of income is not a consequence of either discovery of any omission or discovery of any wrong statement, the AO held that the revised return of income filed by the assessee is invalid and accordingly rejected the same. 5. The AO further held that the expenses of Rs. 57,72,53,635/- relating to interest and processing charges claimed by the assessee which was debited to the Profit & Loss account are neither allowable u/s 36(i)(iii) nor u/s 14A of Act, since the expenses were not wholly and exclusively laid out for the purpose of bus....
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....dence in disposal of interest bearing funds to the subsidiary companies which are reporting losses and accumulating it and bearing financial costs for those borrowed funds and getting nothing in return. The AO further observed that the assessee is diverting the funds to the subsidiary companies and the subsidiary companies are further diverting to its subsidiary companies at free cost of interest. The Ld.AO also was of the view that interest on borrowed funds to its 100% subsidiary companies is allowable to the extent of first level, but not second level onwards since the purpose and object of the first level stands deviated from the original object after further diversion to second level. Accordingly held that the interest paid on loans on borrowed funds is not allowable when the immediate subsidiary is not earning revenue or applying it for it's regular course of business, but merely acting as a conduit for furthering the funds to step down subsidiaries. Accordingly, disallowed the interest u/s 36(1)(iii) of the Act. 5.2. The AO disallowed the interest expenditure and processing charges u/s 37(1) of the Act also. It is observed by the AO that the assessee made investments in mut....
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....llowance u/s 36(1)(iii) also. 6.2. Thirdly, the assessee also argued before the DRP that the assessee had made the investments in mutual funds for the purpose of business. One of the objectives of the company is to carry on the business of Investment Company, and the investment is in accordance with the objectives. Therefore, argued that the expenditure required to be allowed as business expenditure. The assessee further argued that the assessee had internal accruals which are interest free and share holder funds to the extent of Rs. 2478 crores in the business. The investments were only Rs. 1.89 crores, hence, argued that there is no case for disallowance u/s 37(1) of the Act. 6.3. The next contention of the assessee before the Ld.DRP is that the assessee has satisfied all the conditions u/s 139(5), hence the revised return is valid. 7. Not being convinced with the explanation of the assessee, the Ld.DRP held that the assessee had given interest bearing funds to its subsidiaries and the said subsidiaries in turn made interest free advances to the step down subsidiaries and SPVs. The DRP relied on the decision of coordinate bench of ITAT, Hyderabad in the case of GVK Airport Dev....
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....see itself, hence, argued that the revised return of income is valid return and cannot be ignored. The assessee further submitted that the similar claim made by the assessee in respect of disallowance of expenditure relatable to dividend income through revised computation of income in the immediately preceding assessment year for the F.Y. 2012-13 was rejected by the AO and DRP for the previous financial year 2012-13 relating to the A.Y. 2013-14. The said matter was travelled to the ITAT and the ITAT has directed the authorities to entertain the claim and given a ruling in favour of the assessee. The assessee argued that the disallowance of expenditure relating to the income u/s 14A was a sheer mistake of the assessee which was offered to income and it should not go against the assessee having filed the revised return within the time allowed u/s 139(5) of the Act and argued that the assessee satisfies the conditions for filing the revised return. Therefore, requested to treat the revised return as valid return. 10. The next contention of the assessee is with regard to the disallowance u/s 14A of the Act. The Ld.AR argued that though the assessee had offered the expenditure relatabl....
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.... the business as a promoter, sponsor, developer, advisor, operator or otherwise, alone or in consortium with others, within or outside the group companies and to do all such acts as are required to participate, float or acquire through bidding or negotiated process for promoting, developing, implementing and operations all kinds of projects whether in infrastructure or not and to carry on the business of intercorporate investments, loans, guarantees etc., and also to undertake, develop, execute and implement various projects for itself or for others, whether directly or indirectly or through turnkey basis and also to act as contracts, subcontracts and to provide engineering, technical, operational and maintenance and managerial services to various projects and to lease, sub-lease, hire purchase or charter or otherwise deal with various plant and machinery, equipments apparatus including movable and immovable properties. The assessee company is also carrying on the business of an investment company, advisory, consultancy and other related services relating to infrastructure projects including implementation thereof. Carrying out infrastructure projects either directly or through S....
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....given interest free loans to subsidiary companies for the long term business plans and not for immediate returns. All the subsidiary companies are executing long term projects. Though there was no immediate benefit, the assessee company had invested the funds or advanced the loans to the subsidiary companies expecting due returns in long term. The investments were made for strategic operational convenience. The issue to be considered is the verticals of the assessee company are carrying out the major operations of various segments, thus, the structure itself is on commercial expediency. Hence, the advancement of funds also to be considered as commercial expediency. The Ld.AR further submitted that the immediate subsidiaries have utilized 50% of the interest free loans at the first level itself and the second level also, the step down subsidiaries have utilized the funds for the purpose of business and no amount was diverted for any personal benefit. The assessee further argued that the group structure is out of commercial necessity and due to business prudence. The observation of the AO that the subsidiary company did not yield any income or accumulated the losses without getting a....
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....vertical of the GVK Group to which the money was advanced by the assessee company were having operating revenues for the year under consideration. Similarly, other subsidiary companies also have operating revenues in the earlier years unlike GVK Airports Developers Ltd. Other subsidiary companies, Goriganga Hydro Power Pvt. Ltd. GVK Oil & Gas Ltd. GVK Perambalur SEZ Private Ltd., to which the money was advanced were utilized for its own business and they did not have any step down subsidiary. Nearly, 50% of the funds were utilized by the immediate subsidiary companies in tier one and tier two level, therefore, argued that the case law of Hon'ble ITAT Hyderabad has no application in the case of the assessee and the case law is distinguishable on both facts and merits. The Ld.AR relied on the decision of SA Builders Vs. CIT(A) and Anr(2006) 74 CCH 1023, decisions of Hon'ble High Court of Delhi in the case of Basti Sugar Mills Company Ltd. in I.T.A No.205/2018 , CIT vs. Modi Entertainment Ltd. (2014) 89 CCH 0014 and CIT Vs. Tulip Star Hotels Ltd. [338 ITR 0482], decision of Hon'ble ITAT, Mumbai in the case of Piramal Realty (P) Ltd and decision of this Tribunal in the case of KotuSara....
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....le delivering the above ruling, this Tribunal has followed the decision of Hon'ble Madras High Court in the case of Redington(India) Ltd. Vs. ACIT reported in (2017) 77 taxman.com 257 (Mds.). In the instant case, there is no dispute that there is no dividend income earned during the impugned assessment year. Therefore, there is no case for disallowing the expenditure relatable to dividend income. This view is also supported by the decision of this Tribunal in the assessee's own case for the A.Y. 2013-14 in I.T.A. No.530/Viz/2017 dated 18.05.2018 also. Therefore, respectfully following the view taken by this Tribunal in the case cited we hold that there is no case for disallowing the expenditure relatable to exempt income without having derived exempt income. Accordingly, the expenditure relatable to dividend income withdrawn by the assessee required to be upheld. Hence, we set aside the orders of the lower authorities and allow the appeal of the assessee on this issue. 14. The next issue is relatable to the disallowance of expenditure in respect of the investments in mutual funds. The AO observed that investment in mutual funds have increased from Rs. 3.88 crores to Rs. 5.77 crore....
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.... - 1) Wholly-owned subsidiary company The proceeds were majorly utilized to provide interest-free advances to/ investment in GVKADL. Through GVKAHPL, GVKADL utilized the proceeds for the purpose of infusing last tranche of owners' contribution towards the modernization and development of Mumbai International Airport Private Limited (refer note - 2). 199.45 Appellant itself N.A. General corporate purpose 0.55 Total 200.00 Proceeds from Syndicate Bank Limited Goriganga Hydro Power Private Limited (refer note - 3) Wholly-owned subsidiary company The proceeds were majorly utilized to provide interest-free advances which was utilized by the latter in relation to the project being developed by it. 13.74 GVK Oil & Gas Limited (refer note - 4) Wholly-owned subsidiary company The proceeds were majorly utilized to provide interest-free advances which was utilized by the latter in relation to the project being developed by it. 43.62 GVK Transportation Private Limited (refer note - 5) Wholly-owned subsidiary company The proceeds were majorly utilized to provide interest-free advances to GVK Transport which was utilized by the latter to undertake the development of road pr....
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....no business prudence in diversion of funds to the subsidiary companies and further diversion of funds to the step down subsidiary companies and the expenditure is not allowable. The Ld.DRP upheld the disallowance made by the AO mainly placing reliance on the decision of Hon'ble ITAT, Hyderabad in the case of GVK Airports Developers Ltd. supra. In the instant case, there is no dispute that the assessee had borrowed funds and utilized for the purpose of making investments or interest free advances to the subsidiary companies and step down subsidiary companies. The advances given were used for the purpose of business and not diverted for any personal purposes. As per the audit report, interest free advances were utilized for the purpose for which they were intended. As discussed earlier, the main objects as per the Memorandum of Association include carrying on the business of an investment company and carrying out advisory, consultancy and other related services relating to infrastructure projects including implementation thereof, carrying out infrastructure projects or through SPVs or JVs which can be floated directly or acquired through bidding process etc..and providing loans and g....
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....ulated pre-closing precedent that the assessee should consolidate the sub-sector asset under an operating cum investment holding company set-up for that particular sector. (iv) Further, it may also be noted that it is the requirement of regulators in terms of bidding process/ documents/ concession agreement, power purchase agreements, etc. that each project to be developed and executed through a separate SPV. (v) In the case of project financing, separate SPV's for each project helps to create separate charge on the project asset by the project lender which helps to protect interest of lenders as well as commercial feasible terms for project loan. However, in the case of multiple projects in same entity, the interest of each of project lenders gets jeopardized leading to several restriction/ conditions/ unfavorable terms for project loan and hence it is not commercially prudent to execute multiple projects in the same entity. vi) To meet the above business requirements, segment-wise operating cum investment holding company for Power, Airport and Transport vertical has been set-up by the assessee. Further, the assessee would like to submit that any major infrastructure player ....
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....see has explained the reasons for not receiving the revenue from some of the subsidiary companies such as gestation period in case of road projects, time taken for completion of projects, cancellation of licence from Govt. authorities in the case of SEZ vertical. In respect of GVK Transportation and Road infrastructure vertical although the assessee did not receive operating revenue for the year under consideration, the assessee stated that it had received operating revenue in the earlier years and the revenue was received in couple of verticals and the revenue is expected in some verticals in the coming years. Therefore, the observation of the AO that the disallowance of expenditure for non receipt of income/benefit immediately after investment is unjustifiable. Interest on borrowed funds required to be allowed as deduction representing the funds used for the purpose of business but need not necessarily to earn the income. The assessee has to satisfy the following three conditions for allowing the interest to be allowed u/s 36(1)(iii). (i) the assessee should borrow the funds (ii) the funds borrowed should be used for the purpose of business and (iii) the assessee should pay in....
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....anced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated hers). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans." This view is fortified by Hon'ble Supreme Court in the case of Hero Cycles (P.) Ltd.v. Commissioner of Income-tax (Central), Ludhiana, [2015] 63 taxmann.com 308 (SC) 16.6. The assessee also relied on the decision of Hon'ble High Court of Delhi in the case of M/s Basti Sugar Mills Company Ltd. dated 28.09.2018 in I.T.A. No.205/2018. The Hon'ble High Court held as under "Money borrowed, even when advanced to a sister concern for some business purpose, would qualify for deduction of interest. However, if the money borrowed is utilized by the assessee for personal benefit and not for business purpose, interest paid on that amount would not satisfy the test of commercial expediency." 16.7. In the case of CIT Vs. Modi Entertainment Lt....
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....were preferred to the parties connected with the business of the respondent/assessee. Money taken on loan was not diverted for non business purpose." 17. The Coordinate Bench of ITAT Mumbai in the case of DCIT Vs. Piramal Realty (P) Ltd. 100 taxmann.com 294 on identical facts held that interest paid on advances given to subsidiary companies and step down subsidiary companies is for the purpose of commercial expediency and accordingly allowed the deduction of interest on borrowed capital. 17.1. In the instant case, the assessee has demonstrated the commercial expediency and corporate strategy for advancing interest bearing funds as interest free advances to subsidiary companies. The subsidiaries are 100% owned by the assessee company and step down subsidiaries are owned by the subsidiaries, therefore, the interest on borrowed capital required to be allowed as deduction and there is no case for disallowance. Accordingly, we hold that in the instant case there is no case for disallowance of interest u/s 36(1)(iii) of the Act. 18. From the Balance Sheet, it is observed that the assessee has interest free funds of Rs. 2478.45 crores in share capital, Reserves and Surpluses which the....
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.... legal and professional expenses to the extent of Rs. 9,08,562/- to the Profit and loss account which was proposed for addition in the draft assessment order dated 29.12.2017. 20.1. Against the draft assessment order, the assessee filed objections before the Dispute Resolution Panel. The Ld.DRP found that the assessee had claimed the expenditure of Rs. 34,32,226/- and reduced the excess provision made in the earlier years to the extent of Rs. 25,23,664/- and the net amount of Rs. 9,08,562/- was claimed as deduction and the AO proposed addition in the Draft Assessment order. The DRP has observed that the assessee had claimed a sum of Rs. 24,99,139/- expenditure relating to the payment made to GVK Tech towards legal and professional services. The Ld.DRP further the observed that a sum of Rs. 20,83,089/- was the amount paid to GVK Technical and Consultancy Private Ltd., for retainer ship fee @ Rs. 6,94,363/- for the months of January to March 2014 is not allowable and accordingly directed the AO to disallow the sum of Rs. 20,83,089/-. The DRP was of the view that as per agreement, GVK Technical and Consultancy Private Limited is required to provide manpower to the assessee company. S....
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.... (j) Attending to various Government related works (k) Mail server maintenance, user ID creation, domain control operation and video conferencing facility maintenance. 23.1. Terms and conditions were also mentioned in the agreement for rendering services, the payment and period of agreement. As per the terms and conditions, the service provider required to provide the manpower to the assessee on ongoing basis, as per the requirement. The persons deployed by the service provider would be working under the supervision, instruction and control of the assessee and the agreement is valid for 5 years from the date of entering into the agreement. The agreement also specifies the terms of payment of fees which is at actual cost incurred by the service provider on manpower plus 20% service charges apart from the taxes and duties. For the sake of clarity and convenience we extract Fees and Terms of payment as per the agreement which reads as under: Fees and Terms of Payment a) In consideration for supply of the manpower as per the requirement of GVKPIL, the GVKPIL will reimburse the fees to GVK Tech as below: i) Actual cost incurred by GVK tech on such manpower ii) 20% services c....
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.... the details furnished by the assessee, the assessee made the payment of sponsorship fee to the Confederation of Indian Industry (CII) for conducting AGM 2014 for an amount of Rs. 2,80,900/- and also paid a sum of Rs. 5,61,800/- towards sponsorship for 9th Yi National Summit 2013 and received the reimbursement of Rs. 3,50,000/- and the net expenditure incurred was Rs. 4,92,700/-. This issue is squarely covered by the decision of this Tribunal in the assessee's own case for the A.Y.2013-14 in I.T.A No.530/Viz/2017 dated 18.05.2018. The Tribunal in the case cited supra held that the expenditure incurred for sponsorship is business expenditure and accordingly deleted the addition made by the AO. For the sake of clarity and convenience, we extract relevant part of the order of this Tribunal in para No.16 and 17 which reads as under: "16. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee has incurred the amount of Rs. 10,68,138/- towards sponsorship expenses and genuineness of expenses was not disputed by the A.O. As per the details furnished by the assessee the sponsorship fee was paid to Financ....
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....ly, we delete the addition made by the AO and set aside the orders of the lower authorities. The appeal of the assessee on this ground is allowed. 26. Ground No.6 is related to the corporate guarantee of Rs. 7,90,99,581/- In the instant case, the AO has referred the international transaction to the Transfer Pricing Officer(TPO), since, it exceeded the sum of Rs. 15.00 crores for determination of Arm's Length Price(ALP) u/s 92CA of the Act. The TPO found that the assessee has given corporate guarantee to it's AE for an amount of Rs. 3326,01,00,000/- as on 31.03.2014 and charged the guarantee commission of Rs. 29,94,47,328/-to its AE which is found to be not at ALP. The taxpayer has charged the guarantee commission at 0.90% on corporate guarantee provided to the AE and the TPO proposed for corporate guarantee charges at 1.30% by show cause notice and the assessee filed explanation justifying the guarantee commission charged by it and objecting for enhancement proposed by the TPO. 27. Not being satisfied with the explanation of the assessee, the TPO suggested for adjustment of Rs. 23,27,14,272/- @1.60 as per bank rates. The AO had issued the draft assessment order and the assessee f....
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....itions of the corporate guarantee were not brought on record and did not allow the necessary adjustments to various risks. If the A.O. is taking any of the comparable cases for transfer pricing study, the risk factors involved, the terms and conditions of the guarantee, the profits, etc. require suitable adjustments. In this case, the A.O. has not made any such adjustments and brushed aside the entire argument advanced by the assessee before the A.O. as well as the DRP. The DRP also brushed aside the argument of the assessee simply stating that the assessee did not demonstrate how the US bond rate is more applicable than the bank rates adopted by the TPO. Neither the A.O. nor the DRP studied the issue how the US bond rate is more applicable than the bank rate and there was no analysis of data with risk factors, financial factors, commercial interest, profits, etc., while making the transfer pricing study. The assessee has brought on record the number of case laws relied up on, but the revenue did not make out a case for rejection of the commission @ 0.25% to 0.53%, which is held to be reasonable. Neither the A.O. nor DRP brought on record any decision, which is held to be more favo....
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....the addition relating to folio maintenance charges of Rs. 3,54,405/- and provision for leave encashment of Rs. 12,90,884/- which was made addition in the final assessment order without being brought on Draft assessment order. The Ld.AR brought to our notice that the AO did not make the proposed disallowance of folio maintenance charges and provision for leave encashment in the draft assessment order, therefore, there is no case for making any addition. The Ld.AR further submitted that during the assessment proceedings, the AO has called for the explanation for which the assessee submitted the reply and no proposal was made in the draft assessment order, thus, the assessee was under the impression that the explanation of the assessee was accepted and no disallowance was proposed to be made. Therefore, argued that the scheme of assessment u/s 144C does not permit the AO to make the additions which are not proposed in the draft assessment order. Hence, requested to delete the additions and allow the appeal of the assessee. 30. On the other hand, the Ld.DR supported the orders of the lower authorities. 31. We have heard both the parties and perused the material placed on record. The ....