TaxTMI 
TaxTMI 
TaxTMI 
2019 (5) TMI 1720
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Income-tax Act, 1961 and in that view of the matter the transfer pricing adjustment of Rs. 2,18,77,327/- was impermissible and be cancelled. 2. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the TPO as well the Hon'ble DRP failed to appreciate that the corporate guarantees were given by the appellant to AE for pure business considerations and it was in the nature of an owner-shareholder activity and hence no transfer pricing adjustment was warranted in this regard. 3. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the manner & methodology adopted by the Hon'ble DRP to ascertain the fees for corporate guarantee at 150 bps was unjustified, flawed & incorrect and therefore the upward adjustment of Rs. 2,18,77,327/- is liable to be deleted and/or reduced. 4. For that on the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the CG commission quote of 0.15% obtained by the appellant from banking institution was a good parameter to benchmark the corporate guarantee commission....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Rs. 17,48,00,000/- made by the AO deserves to be deleted in full. 11. For that on the facts and in the circumstances of the case and in law, the Hon'ble DRP as well as the A.O. failed to appreciate that mere appearance of information in ITS data of AIR cannot be the reason for treating Rs. 6,14,238/- as undisclosed receipt. 12. For that the appellant reserves the right to add, to alter or amplify the above grounds of appeal. 3.Ground Nos. 1,2,3, and 4 raised by the assessee relate to transfer pricing adjustment in relation to CorporateGuarantee fees to the tune of Rs. 2,18,77,327/-. 4. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. Counsel for the assessee, we find that the issue involved, in respect to corporate guarantee, in the present appeal is no longer res integra.We note that financial guarantee is a promise made by a person (the guarantor) to a lender(guaranteed party) promising to pay the lender the money owed to it by the borrower (obligor) on whose behalf the guarantee is given, if the borrower fails to pay back the debt due to the lender.A guarantee to a lender that a loa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....id school 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 inadequacy 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 ... " " ... 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 alien to the transfer pricing literature in general.." ".... We have noticed that the 'OECD' Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations specifically recognizes that an activity in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wherein the definition of international transaction in view of the amendments, vide Finance Act, 2012, had been discussed and it was held that the provision of corporate guarantee is not an international transaction. The relevant extract of the judgment is reproduced as under: "Para 23 .... The issue whether giving a corporate guarantee amounts to an 'international transaction' has not been raised or discussed in the cases where ALP adjustments have been upheld and therefore those decisions cannot be put against the taxpayer ..... " "Para 27.... The Explanation inserted vide Finance Act 2012 is to be read in conjunction with the main provision and in harmony with the scheme of provision under section 92B of the Act. It is essential that in order to be an 'international transaction' providing corporate guarantee should have a bearing on the profits, income losses or assets of the enterprise ...:" "Para 31.... The contents of the Explanation fortifies, rather than mitigates, the significance of expression 'having a bearing on profits, income, losses or assets' appearing in section 92B( 1) of the Act ... " "Para 33 .... The onus is on the tax authoritie....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... res integra. We note that the Assessing Officer was erred in making disallowance of Rs. 58,27,584/- by invoking Rule 8D(2)(iii), without establishing any proximate cause between such expenditure incurred and earning of tax free income. The assessee claimed that during the relevant F.Y. 2012-13, it had earned dividend income of Rs. 10,41,579/- which was claimed as exempt u/s 10(34) of the Act. The said dividend income was derived from 22 investments. In the return of income the company had disallowed sum of Rs. 5,73,416/- being expenditure incurred towards earning of dividend income. The ld DRP noted that disallowance made by the assessee was not in accordance with that under Rule 8D, and the assessee has not taken into account many indirect cost while calculating the disallowance. The ld DRP further noticed that in view of judgment of Hon'ble Delhi High court of Cheminvest Ltd. & CIT vs. Holcim India P Ltd. 272 CTR 282 (Del), the A.O. was right in computing the disallowance u/s 14A as per Rule 8D. 9. Coming to the computation aspect of assessee`s administrative expenses, we note that disallowance of administrative expenses is governed by Rule 8D (2) (iii) of the Income Tax Rul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isallowance section 14A read with rule 8D is not permitted, therefore we delete the addition of Rs. 58,27,584. 12. Grounds no. 9 and 10 raised by the assessee relate to incentive/subsidy received of Rs. 17,48,00,000/- from the Government of Bihar and Orissa for setting up new industry in the respective states in the form of reimbursement of VAT and in that view of the matter, the subsidy granted by the state Government was on capital account. 13. Brief facts qua the issue are that during the assessment proceedings, the AO noticed that assessee company in note No. 20 of profit & loss account for the A.Y. 2013-14, shown Rs. 22.21 crore as other receipts which included an amount of Rs. 17.48 towards VAT incentive for the Hajipur Factory, Bihar and Khurda Factory, Orissa received in accordance with the State industrial Policy of Bihar and Orissa. However. in computation of income, assessee company deducted the said amount of subsidy of Rs. 17.48 crores mentioning it as capital receipt, from taxable income. The assessing officer made addition and ld DRP also confirmed the action of AO, therefore, the addition of Rs. 17,48,00,000/- was made to the total income of the assessee. Aggrie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dgment of Hon'ble Calcutta High Court in the case of Pr. CIT vs. Shyam Steel Industries Ltd. wherein it was held as follows: "An interesting question is raised in this appeal as to whether a subsidy allowed by the State Government on account of power consumption, by its very nature, will make the subsidy a revenue receipt and not a capital receipt, irrespective of the purpose of the scheme under which such incentive or subsidy is made available to a business unit. The appeal is at the instance of the Department. There was a difference of opinion between the judicial member and the accountant member on the Appellate Tribunal. The judicial member relied on the dictum in the Supreme Court judgment at Sahney Steel & Press Works v. CIT [1997] 228 ITR 253/94 Taxman 368. The accountant member, however, relied on a more recent decision of the Supreme Court in CIT v. Ponni Sugars & Chemicals Ltd. [2008] 174 Taxman 87/306 ITR 392 to hold that the purpose of the grant of the subsidy would be the overwhelming consideration in ascertaining whether the subsidy or the money was to be treated as a capital receipt or as a revenue receipt. Upon the difference being referred to a referee, the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ugars and confine the test recognised therein to cases only where the quantum of incentive is used to discharge a capital debt or a term loan or some capital expenditure or the like. However, the sweep of the "purpose test" has been expanded in a recent judgment of the Supreme Court in CIT v. Chaphalkar Brothers [2017] 400 ITR 279/252 Taxman 360/[2017] 88 taxmann.com 178 where the subsidy in the form of exemption from payment of entertainment duty by newly set-up multiplex theatres for a certain number of years was regarded as a capital receipt by virtue of the very nature and purpose of the subsidy. In the present case, the terms of the scheme under which the subsidy was made available to the appellant are of some relevance. Clause B.6.1 of the scheme made it applicable "to all large scale new units and for expansion of existing units on or after July 16, 2004..." In addition, clauses B.8.4 and B.8.5 clearly indicated that certain subsidies on account of capital expenditure could not be availed of by entities opting for the incentive under the subject scheme. It is submitted on behalf of the appellant that since the incentive under the present scheme, as would be evident fro....