TaxTMI 
TaxTMI 
2017 (6) TMI 1345
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....d in disallowing entire interest on term loans/working capital loans paid to banks/others treating them to be capital in nature on the assumption that all these loans were utilized for investment in its wholly owned foreign subsidiary i.e. Aban Holdings Pte Limited. 4. After hearing both the parties, we are of the opinion that the similar issue was considered by the Tribunal in assesse's own case in ITA Nos.585/Mds/2015 & 267/Mds/2016 for the assessment years 2010-11 and 2011-12 dated 14.9.2016 wherein Tribunal held that:- "31. We find that the reliance placed on by the ld. DR on the judgment of Madras High Court in the case of Trishul Investments (supra) is misplaced. The main contention of the ld. DR is that the interest expenditure on borrowings used for investment in wholly owned subsidiary cannot be allowed as deduction u/s.36(1)(iii) of the Act instead it should be added to the cost of investment, in view of the above judgment of the Madras High Court. In our opinion, when activity is undertaken as an investment activity and interest incurred upto the acquisition of the shares of subsidiary company could be considered as part of investment. Once it is acquired, th....
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....borrowed fund is provided under section 36(1)(iii) the Act, where the business assets are acquired out of borrowed funds. At this stage, it may be pertinent to note that depreciation is also allowable as deduction under section 32 in respect of business assets on the cost of acquisition. In determining the cost of acquisition, the interest component after bringing the asset into existence is not taken into consideration as Explanation 8 to section 43 of the Act. If the interest is to be added to cost of acquisition, then the assessee would be entitled to double deduction once under section 36(1)(iii) and the other under section 32 of Act, which is not permissible in view of the decision of the Supreme Court in the case of Escorts Ltd. v. UOI[1993] 199 ITR 43. 31.6 Similarly, when the shares are purchased by way of investment, and the dividend is received in respect of such shares, the interest paid on borrowed funds has been held to be allowable as deduction against dividend income. The Supreme Court has gone a step further in the case of CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519, wherein it has been held that deduction on account of interest paid on borrowed funds ....
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....ore, on the basis of the Supreme Court judgment, it cannot be said that expenditure incurred after the asset brought into existence, i.e., after the acquisition of the asset would form part of the actual cost. The Supreme Court laid down the proposition that interest paid on monies borrowed for acquisition of capital asset and to meet expenses connected with its installation etc. and capitalized, has to be added to the cost of asset for the purpose of deprecation. 31.8 Thus in our opinion if the money was borrowed for purchase of shares of subsidiary company for the purpose of acquiring controlling interest and acquisition of such controlling interest was of the business of the assessee and it resulted in promote the business of the assessee as well as helpful to the assessee for having management control over said such subsidiary company, then the interest expenditure should be allowed u/s.36(1)(iii) of the Act. Further if the Assessing Officer found that investment in shares of subsidiary company not for maintaining controlling interest, then the Assessing Officer should see that there cannot be any disallowance in respect of investment of assessee's own fund. This is so....
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....erefore, to argue that no portion of the interest paid relates to investment is not valid. ii) A company cannot earned dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, dayto-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares/units of mutual funds at the most appropriate time. They require huge investment in shares/mutual funds and consequential blocking of funds. It is well-known that capital has cost and that element of cost is represented interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. iii) It is logical to conclude that a portion of the routine expenditure to maintain its establishment and administration can be attributable towards the activity of making investments to earn dividend. Further, it is a fact that the managerial staff and the Directors are involved in making decisions on investments. Hence, a portion of ....
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....ead with Rule 8D of the Income-tax Rules, as this is the non-interest bearing own funds available with the assessee for investments. 21. With regard to the interest on borrowings used for the specific purpose, it is to be noted that this issue came for consideration before this Tribunal in the case of ACIT v. M/s. Farida Shoes Pvt. Ltd. In ITA Nos.2102 & 2103/Mds/2015 dated 8.1.2016, wherein it was held as under : "5.1 Coming to the merits of the issue regarding disallowance u/s.14A r.w. Rule 8D of the I.T.Rules, in our opinion, similar issue was considered by this Tribunal in the case of ACIT v. M/s. Best & Crompton Engineering Ltd. in ITA No.1603/Mds/2012 dated 16.7.2013, wherein it was observed that interest on borrowings used for the business purpose cannot be considered for the purpose of computing disallowance u/s.14A r.w. Rule 8D(2)(ii) of the IT Rules and the relevant portion is reproduced as below: "10. Heard both sides. Perused the orders of lower authorities and the decision of Calcutta Bench of this Tribunal relied on by the assessee's counsel. This issue has been considered elaborately by the Commissioner of Income Tax(Appeals) and deleted th....
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....nterest on bank loan and term loan amounting to Rs.67,92,000/- and Rs. 3,82,11,000/- respectively are to be excluded from the calculation to determine the disallowance under rule 8D(2)(ii). The AO is, therefore, directed to take into account only the remaining interest on other accounts amounting to Rs.1,29,43,000/- for computing the proportionate disallowance under rule 8D(2)(ii)." 11. On going through the order of the Commissioner of Income Tax (Appeals), we find that the Commissioner of Income Tax (Appeals) excluded the interest on bank loan and term loans from the calculation of disallowance under Rule 8D(2)(ii) as the assessee has utilized the bank loan and term loan for the purpose of purchase of machineries and for expansion of projects and these loans were specifically sanctioned for specific project and such loans were also used for the purpose for which they were sanctioned. In the circumstances, we find that the Commissioner of Income Tax (Appeals) has rightly excluded such interest from the purview of computation of disallowance under Rule 8D(2)(ii). 12. The decision of Calcutta Bench of this Tribunal in the case of Champion Commercial Co. Ltd. (supra)....
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....t of which interest expenditure in respect of acquiring shares from which tax free dividend earned is Rs.10,000. Out of the balance Rs. 90,000, the assessee has paid interest of Rs. 80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is "not directly attributable to any particular receipt or income" is thus only Rs. 10,000. However, in terms of the formula in rule 8D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for Rs. 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be " A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [ i.e. direct interest expenses for tax exempt income] incurred during the previous year". Let us say the assets relating to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8 D(2)(ii) will be Rs.18,000 whereas entire common interest expenditure will only be Rs. 10,000/-. 13. The incongruity arises because, as the wordings of r....
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....rticular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)............... The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'. 16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8 D(2)(ii), and based on such a stand constitutional validity is upheld by Hon'ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon'ble Bombay High Court in the case of Godrej and Boyce (supra), "amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure ....
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....or the purpose of applicability of Rule-8D. For this proposition we rely on the judgments of Tribunal in the case of Sun TV Networks in ITA No.1340 & 1341/Mds./15 & 1578 to 1579/Mds/15 wherein held that:- "12. We have considered the rival submissions on either side and perused the relevant material available on record. The main contention of the assessee is that the available share capital including reserves and surplus was Rs.2385.7 Crores as on 31.03.2010. The available share capital is Rs.1970.4 Crores and Reserves and surplus is Rs. 21,886.7 Crores. The investments made in mutual funds including subsidiary companies are only Rs. 541.11 Crores. Therefore, it cannot be said that the assessee has diverted the borrowed funds for making any investment either in the sister concerns or in the mutual funds. When the assessee has sufficient share capital, reserves and surplus, this Tribunal is of the considered opinion that there cannot be any disallowance towards the interest paid on the borrowed funds under Section 14A of the Act. For the purpose of disallowing interest income under Section 14A read with Rule 8D, there should be nexus between the borrowed funds and investment....
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....ssessee is allowed in its favour. " 21.4 In view of the above judgments, the AO has to consider the assessee's own fund i.e. capital and reserves as available on the date of investment which yields exempted income and thereafter he shall apply the Formula in Rule 8D and also exclude investments in subsidiaries as held by the above order of Co-ordinate Bench. With this observation, we remit the issue relating to disallowance u/s.14A r.w.r.8D to the file of AO for fresh consideration. Hence, this ground is allowed for statistical purposes." 7.1 Accordingly, following the aforesaid order of the Tribunal, we remit this issue to the file of the AO for fresh consideration on similar direction and this ground of appeal is allowed for statistical purposes. 8. The next ground in this appeal is with regard to disallowance of Rs. 13,32,01,184/- u/s.40(a)(i) of the Act. 9. The facts of the issue are that during the course of assessment proceedings it is seen that the assessee company has offered entire income to tax in India. Therefore, any expenses corresponding to the income offered in India is deemed to accrue or arise in India to the third party. Hence, the assessee compa....
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....bjects anyway, and, therefore, it is useful to begin by examining, from a source country's perspective, whether the income in question can at all be taxed in the source state under the applicable tax treaty. Let us, therefore, begin by examining the taxability of consultancy fee paid to GMPL in the light of applicable tax treaty provisions. 7. We find that there is no dispute with the factual position that the GMPL did not have any permanent establishment in India, and with the legal principle laid down in the applicable tax treaty that, in the absence of the PE of GMPL, its business profits could not be taxed in India. The taxability under the source state under Article 7 of the applicable tax treaty, therefore, clearly fails. We further find that so far as taxability under Article 12, i.e. with respect to 'Royalties and fees for technical services' is concerned, we find that Article 12(4) provides that, "The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personn....
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....ision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. We bow before higher wisdom of Hon'ble Courts above and hold that unless there is a transfer of technology involved in technical services extended by Singapore company, the 'make available' clause is not satisfied and, accordingly, the consideration for such services cannot be taxed under Article 12(4) of India Singapore tax treaty. Learned Departmental Representative, however, proceeds to give a new twist to the case of the revenue. Learned Departmental Representative has now come up with the argument that even if the income embedded in payments to GMPL were not taxable in India under Article 7 (i.e. business profits) or under Article 12, these amounts were taxable under article 23 of the applicable tax treaty. He invites our attention to Article 23 which provides that " (i)tems of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States." His interpretation of the scope of this provision is that when taxability fails under all articles of the applicable tax treaty, the taxabil....
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....chargeable to tax in India, the assessee did not have any tax withholding obligation. This classification of income was not in the context of treaty classification but in the context of, what he believed to be, two categories of income referred to under section 40(a)(i), i.e. 'royalties and fees for technical services' and 'other sums chargeable to tax'. As the CIT(A) did so, he missed out the expression 'interest' appearing in Section 40(a)(i) but that is hardly material in the present context. What is material is that the expression 'other income' was used in the context of mandate of Section 40(a)(i) and not in the context of treaty classification of income. Learned Departmental Representative has clearly missed out this vital fact. Let us now turn to the provisions of Article 23 of the applicable tax treaty. As we have noted earlier, this treaty provision provides that "items of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States". Learned Departmental Representative's argument is that "consultancy charges, brokerag....
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....id down in the respective articles are satisfied. 9. It is also important to bear in mind the fact that article 23 begins with the words 'items of income not expressly covered' by provisions of Article 6-22. Therefore, it is not the fact of taxability under article 6-22 which leads to taxability under article 23, but the fact of income of that nature being covered by article 6-22 which can lead to taxability under article 23. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immoveable property in a third state, and damages (other than for loss of income covered by articles 6-22) etc. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and the income from consultancy charges on is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. Learned Departmental Representative's argument, emphatic and enthusiastic as it was, lacks legally sustainab....
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.... speech, film etc. deals with a particular thing, it has that thing as its subject or is concerned with it." In Shorter Oxford Dictionary (Thumb Index Edn.) one of the meanings given is: "be concerned with (a thing) in any way; busy or occupied oneself with, esp. with a view to discuss or refutation." The following meaning given in the New Oxford American Dictionary may also be noted : "take measures concerning (someone or something) ....... take or have as a subject; discuss." .......................... 9.1 The applicant's counsel submitted that an item of income can be said to have been dealt with in an article of the Treaty only if it defines its scope as well as allocates the right to tax such income between the two Contracting States. Mere exclusion of shipping business profits from article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression 'dealt with' does not necessarily mean tha....
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....by the coordinate bench, which is also in harmony with Hon'ble Delhi High Court in the case of Guy Carpenter (supra), Hon'ble Karnataka High Court in the case of De Beers India (supra) and Hon'ble jurisdictional High Court decision on this issue in the case of Bangkok Glass Industries (supra), we uphold the grievance of the assessee. This tax withholding demand must also, therefore, stand deleted. We order so. 79. Ground no. 4 is thus allowed." 10.1 Further, he relied on in the case of ABB FZ-LLC, (75 taxmann. 83) (Bang.), & in the case of Bharti Airtel Limited (67 Taxmann.com 223)(Delhi) and in the case of TUF Bayren (India) Ltd. (23 taxmann.com 127)(Mum.). 11. The ld. DR submitted that in earlier year for the assessment year 2007-08, this issue came for consideration in ITA No.90/Mds./2012 and 1159/Mds./2012 vide order dated remitted the issue to the file of Assessing Officer to examine the issue in the light of judgment of Bombay High Court in the cast of DIT Vs. Ishikawjima Harima Heavy Inds. Co. Ltd., in 212 Taxman 273(Bom.). However, he submitted that the said decision was delivered before the amendment of Sec.9(1) of the Act. According to ld. D.R, in the prese....
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....al in the case of M/s. Crescent Chemsol Pvt. Ltd. vs. ACIT in ITA No.1497/Mum/2010 for the asst. year 2006-07 dated 09.03.2011 wherein the Tribunal held that:- "10. Aggrieved by the order of the CIT(A) the assessee has raised Ground No.3 before the Tribunal. We have heard the rival submissions. Provisions of section 40(ia) of the Income Tax Act, 1961 (the Act) reads as follows: "40. Notwithstanding anything to the contrary in section 30 to[38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession", (ia) any interest, commission or brokerage,[rent, royalty]fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work(including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII- Band such tax has been deducted or, after deduction,[has not been paid on or before the due date specified in sub-section(1) of section 139:]" A perusal of the above provisions show that it is only when a deduction is claimed in computing the income ....
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....epted the objections. 17.1 The ld.A.R relied on the decision of co-ordinate bench of Mumbai Tribunal in the case of Mahindra & Mahindra Limited, in M.A. No. 397/Mum/2012 (Arising out of ITA No. 7999/Mum/2011) Assessment Year 2007-08 vide order dated 03-10-2012 for the proposition that the Tribunal is powered to admit the additional ground and it is to be remitted to the file of AO for fresh consideration. 18. We have heard both the parties and perused the material on record. The issue raised by the assessee goes to the root of the matter and the assessee has taken a plea before the DRP to consider this issue, but refused to entertain it on the reason that it was not before the TPO/AO. In our opinion, all the facts are available on record and assessee made a claim, it is appropriate to remit the issue to the file of AO for his consideration. In view of the judgement of Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (229 ITR 283), wherein it was held that a legal ground can be raised at any stage of appeal. Further, the Co-ordiante Bench in the case of M/s.Abhiniha Foundation Pvt Ltd., in ITA No.281/Mds./2016 for the A.Y 2011-12 the Tribunal vide order date....
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....e by the Assessing Officer as is prejudicial to the interest of the assessee. The above objections do not at all relate to any such variation made by the AO in the income or loss as returned by the assessee in its return for asst. year 2012-13. So the above objections cannot be adjudicated by the Panel, being beyond its scope of powers and not accepted the objections. 21. After hearing both the parties, we are of the opinion that the similar issue was considered by the Tribunal in assesse's own case in ITA Nos.585/Mds/2015 & 267/Mds/2016 for the assessment years 2010-11 and 2011-12 dated 14.9.2016 wherein Tribunal held that:- "23. We have heard both the parties and perused the material on record. This issue came for consideration in assessee's own case in I.T.A.No.1159/Mds/2012 challenging the action of the CIT(A) in restricting the assessee's claim of relief u/s 90 of the Act of Rs. 224,67,411/- to the extent of tax payable in India on net income of Rs. 516,93,732/- i.e difference between interest earned from M/s AHPL and interest paid on borrowings made for advancing the loans to M/s AHPL. The Tribunal while adjudicating the grounds, placed reliance on the order....