TaxTMI 
TaxTMI 
2021 (12) TMI 989
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....nsfer Pricing Officer ('TPO') proposing an upward adjustment of INR 1,58,66,730 in respect of the international transactions relating to receipt of interest on loan granted to ICX Platform Pty South Africa ('ICX'), Financial Technologies Mid East ('FTME') and Singapore Mercantile Exchange Pte Ltd ('SMX') (ICX, FTME and SMX. All these concerns are collectively referred-to as Associated Enterprises ('AEs')) u/s. 92CA(3) of the IT Act, 1961 ('the Act'). a. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in rejecting the benchmarking analysis of the Appellant and further erred in imputing / upholding benchmarking which is neither specific to the facts of the case nor in accordance with Section 92C read with Rule 10B (2). b. The Ld. CIT(A) erred in following an arbitrary approach of applying an interest spread of 300 basis points on LIBOR and SIBOR rate for loan given to AEs based on the Hon'ble Mumbai Tribunal's decision in case of Firestar International Limited (ITA No. 488/Mum/2015) without appreciating the facts that the interest spread depends on various factors such as the....
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....t to have accepted the alternate plea taken by the appellant to calculate the disallowance u/s 14A at the rate of 1% of dividend income in spirit of decisions of Mumbai Tribunal quoted by the appellant. 12. Without prejudice to ground no. 8 to 11, the Learned C1T(A) failed to appreciate that the investments on which no exempt income could be earned during the year and the investments made for strategic purpose cannot be taken into consideration while calculating the amount of average investment for the purpose of computing the disallowance under section 14(2) read with rule 8D of I.T.Rules. 5. Apropos ground No.1 At the outset, Ld. Counsel of the assessee submitted that he shall not be pressing this ground. Hence, this ground is dismissed as not pressed. 6. Apropos ground No. 2-10 Ground No.2 to 10 relate to the issues of Ld.CIT(A) confirming the disallowances made by the AO for Rs. 32,41,87,313 being the proportionate claim of the premium on ZCCBs written off during the tenure of Zero Coupon Convertible Bonds. 7. The assessee company is engaged in the business of application product, software development services etc. The AO has observed that during the cou....
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....ision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, section 35D will not have the effect of bringing that expenditure within the scope of the expenditure to be amortized against profits over a 10 year period. As a corollary of this, where any expenditure has been included for the purpose of amortization under section 35 D on a claim being made by the assessee in that behalf, such expenditure will not qualify for deduction under any other provision of the Act for the same or any other assessment year vide sub section (6) of section 35D, It has been in following cases, that such interest / premium can be claimed in the respective year on pro-rata basis, Following the view taken by the Supreme Court in Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 225 ITR 802 (SC), the High Court held that the liability should be spread over the period of the debentures as was held in the case of National Engineering Industries Ltd, Vs.. CIT (1999) 236ITR 577 (Cal). In the case of CIT vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553, it was held that where debentures were redeemable at a premium on expiry of certain nos. of years aft....
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....ich case, no premium would be payable), the deductions so obtained in respect of such liability would become taxable in terms of sect/on 41(3.) of the Act in the year in which such conversion takes place. The following judgment is a directly applicable judgment wherein the issue of payment of premium was considered. In the given case, the assessee had issued convertible debentures/ bonds and had claimed a deduction of interest, ft was held that such interest was fully allowable as deduction. * DCIT v, Gujrat Narmada Fertiliser Valley Corporation Ltd. (2013} 215 taxmann 616, Gujrat High Court viii) The provisions as per the Companies Act, 1956 are provided in section 78(2) of the Companies Act, 1956, Since the Companies Act, 1956 and the applicable provisions thereof are adhered to and since the books of account of the company are prepared as per the Companies Act, 1956, the treatment given for claiming deduction from share premium account is in consonance with the provisions of the Companies Act, 1956. We draw your attention to S, 36 (1)(iiia) which provides for deduction for the discount on a Zero Coupon bond which shall be allowed on a....
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.... not. As such the claim of the assessee for deduction of interest on repayment of ZCCB cannot be allowed, The sum of Rs, 32,41,87/313/- is added back to the total income of the assessee. Penalty proceedings U/s 271(1)(c) initiated for furnishing inaccurate particulars of income. 9. Against the above order, assessee appealed before the Ld.CIT(A). Upon assessee appeal Ld.CIT(A) noted that assessee's submissions. Ld.CIT(A) reproduced the assessee's submissions, however Ld.CIT(A) was not convinced, he upheld the order of AO, which read as under:- "I have gone through the Impugned Order made by the AO and the submissions made by the appellant. The AO stated three reasons for not allowing the claim of the appellant. First of the reasons was that the assessee has not claimed these amounts of premium in the profit & loss account but adjusted against the shares premium account which according to appellant AR, is permissible under the provisions of companies Act and thus, claim was made in the computation of income only. I find that the appellant itself in the books of accounts, treated the impugned amount of premium as capital expenses and chooses not to debit the ex....
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....s have not objected about the entries were made in the books of accounts about the premium payable on ZCCB, so it is difficult to assume that the accounting treatment is incorrect. This supports the findings already made in para 4.4 above. Further, none of the case law binding over the jurisdiction of Mumbai is applicable in the instant case, relied by the appellant as neither the Hon'ble Supreme Court nor Bombay High Court has ever said that ZCB and ZCCB are same and there is no difference between these two items. As far as the case law relied by appellant from the Jurisdictional IT AT, Mumbai is concerned, I find that there was no case of ZCCB but was of FCCB, the premium payable of ZCCB was treated as contingent liability in the books of account accordingly the case quoted by the appellant are distinct and distinguishable. The AO stated that the appellant company has not paid the withholding tax on the amount of premium claimed as expenses in the computation of income so the expenses are other-wise disallowable u/s 40(a)(ia). In the written submission the appellant has relied upon the CBDT Circular no. Circular NO. 4/2004, DATED 13-5-2004 which pre....
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.... assessee submits that section 78(2)(d) of Companies Act permits such a charge against share premium account. The assessee claimed the same as deduction in computation of total income. The assessee draws attention to computation and financial statements at pages la, 126, 129, 137, 143 and 156 of the paper book. The learned Assessing Officer disallowed the claim for deduction of proportionate premium on ZCCB and the same has been confirmed by the learned Commissioner of Income Tax (Appeals), for following reasons: i) The premium has not been debited to profit and loss account, ii) As the bonds are optionally convertible, liability is contingent, iii) Notes to account shows that it is contingent liability, iv) TDS has not been deducted. The learned Assessing Officer has dealt with the issue on page 2 to 7 and conclusion on page 6 and 7. The learned Commissioner of Income Tax (Appeals) has dealt with the issue on page 55 to 57 of his order. The assessee submits that funds raised through ZCCB has been utilised for the purposes of business and premium on the same is allowable as deduction on proportionate basis over the period of the bond. The assesse....
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....isallowed on the ground that the same is contingent liability. The assessee draws attention to para 5 on page 600 of paper book 3. In case of Shree Rajasthan Syntex Ltd 269 ITR 461 (Raj), copy enclosed at page 551 to 571 of paper book 2, too the contention of the department was that premium is a contingent liability. The Hon'ble High Court has discussed the issue threadbare from page bottom of page 560 to // page 580 and the assessee seeks to draw attention to conclusion in para 10 and 11 on page 579 and 580 of paper book 2. As regards deduction of tax at source, the assessee submits that the bonds are listed on Singapore Stock Exchange and till redemption on maturity, the beneficiary of the premium is not known. The assessee submits that liability to tax arises when the recipient is identified and TDS deducted can be given credit for. The assessee submits that when the bonds were redeemed on maturity in previous year relevant to A Y 2012-13, tax was deducted at source in accordance with the provisions of the Act. The said fact is recorded in the assessment order u/s 143(3) for A Y 2012-13 at page 518-9 of paper book no 2. The assessee submits that th....
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....rds are not of the assessee. The assessee submits that proportionate premium on ZCCB claimed as deduction is allowable and prays that the same may be allowed as claimed. " 12. Per contra Ld. DR relied upon orders of the authorities below. 13. Further, during the course of hearing, certain quarries were put to the Ld. Counsel of the assessee regarding compliance with provision of companies Act & change in stand in income tax computation, Ld. counsel who has submitted following written submission in this regard. "Regarding the share premium account The assessee had debited proportionate premium on ZCCBs to Share Premium account. The assessee company, 63 Moons Technologies Ltd, was born out of merger and amalgamation of three companies during the FY:2000-01. The amalgamation has been accounted for under the 'pooling of interests method' as prescribed by AS-14 issued by ICAI. An amount of Rs. 6,75,08,670/- was credited to Share Premium account accordingly at the time of amalgamation. The assessee has prepared a detailed account of share premium account with narrations from 01.04.2000 and the same is enclosed in paper book 5 filed herewith (pleas....
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....ovided in sub-section (1) of section 78 of Companies Act, 1956, share premium account has to be given similar treatment as share capital and the same cannot be reduced except by due process of law for reduction of share capital, sub-section (2) carves out four exceptions to the same. Clause (d) of section 78(2) clearly provides that premium payable on redemption of debentures can be provided out of share premium account. As per section 2(12), debentures includes bonds. The assessee therefore submits that accounting treatment in books of the assessee of providing premium on redemption Zero Coupon Convertible Bonds (ZCCB) out of Share Premium account is permissible under the Companies Act,1956. Assessee has not adopted shifting stand The assessee submits that since the first year of issue of ZCCB, the assessee has debited proportionate premium on ZCCB out of share premium account and in the computation of income, it has claimed proportionate premium on ZCCB as expenditure. The assessee has adopted a consistent stand over the years. The assessee further submits that, it is permissible for assessee to treat a transaction differently in its income tax return t....
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.... ITR 802(SC) ii) National Engineering Industries Ltd. vs. CIT 1236 I TR 577(Cal) iii) CIT vs Tungabhadra Industries Ltd. 207 ITR 553 iv) Taparia Tools, 260 ITR 102 (Bom) Further the submission, as regards the different treatment in books of accounts and income tax computation is that entries made by the assessee in books of accounts are not determinative of the question whether the assessee has earned any profit or suffered any loss. In his regard, decision of Hon'ble Supreme Court in the case of Suttej Cotton Mills (supra) and Kedarnath Jute Manufacturing Co.Ltd. (supra) have been referred. Further, it has been pleaded that provision of Companies Act as well as Income tax Act have been duly complied with. It has also been submitted that assessee has incidentally started repaying such ZCCB during the financial year 2009- 10 without conversion of such bonds into equity shares. That this also confirms and strengthens the view point of the assessee that the amount is repaid. Now the AO has rejected the claim firstly on the basis of the plank that amount has not been debited into profit and loss account and has been adjusted in the share premium account. N....
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....ther, though not directly on this issue the CBDT circular on deep discount bond referred above also provides that on similar issue, TDS has to be deducted on the point of redemption. Furthermore as submitted, at the time of redemption tax was deducted at source in accordance with the provisions of the Act. This submission has not been disputed. Hence, this reasoning for rejection is also not sustainable, 17. Another claim of the authorities is below is that liability is contingent as it depends whether the bonds are converted in equity or not. In this regard, the claim of the assessee is that merely because bonds could be converted into shares in certain specified circumstances, it cannot be said that liability to pay is contingent. That liability to pay premium has been incurred the moment funds were raised through bonds. It has further been submitted that even on facts the bonds have not been converted into shares, in this regard various case laws have been referred. 18. The argument of revenue that the amount has not been debited in account is also not sustainable as the assessee has very much been debited in the account to the debit of share premium account. The Companies....
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....t. Assessee claimed before the AO a spread over, Assessee claimed that the premium payable by it was Rs. 5,47,50,000 after expiry of 10 years. However, the assesses claimed deduction of Rs. 54,75,000 per annum. The said amount was debited to the P&L a/c for the accounting year ending 31st March, 1995. In the annual report, a footnote was added that premium on zero interest unsecured redeemable debentures of Rs. 100 each was redeemable after 10 years at a premium of 100 per cent. The AO disallowed the assessee's claim for deduction of Rs. 54,75,000. He added back that figure to the income of the assessee on the ground that the liability was not ascertainable during the accounting year ending 31st March, 1995. That, it was a contingent liability. This decision was confirmed by the CIT(A). However, the Tribunal overruled the case of the Department in view of the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT . Being aggrieved, the Department has come by way of the appeal to this Court. Arguments 3. None appears for respondent though served. 4. Mr. R.V. Desai, learned counsel appearing for the Department/....
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....e of factual matrix; we have no option but to confirm the judgment of the Tribunal. In our view, the judgment of this Court in the case of Taparia Tools Ltd. v. Jt CIT (supra) is applicable to this case. In our view, the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation v. CIT (supra) is also applicable. Order In the circumstances, we answer the above quoted question in the affirmative i.e., in favour of the assessee and against the Department. 6. Accordingly, both the above appeals are disposed of with no order as to costs." 19. We note that in the above case Hon'ble Jurisdictional High Court has duly taken note of Hon'ble Supreme Court decision in the case of Madras Industrial Investment Corporation (supra) and Hon'ble Bombay High Court decision in the case of Taporia Tools Ltd. (supra) and had found no fault even on the ground that the borrower had the discretion to change the terms of the issued debentures. As there was nothing in the record to show that during the assessment year in question, the borrower had exercised such a discretion. In the present case also, there is nothing on record that the borrower had exercised....
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....ified the other expenses which were incurred to earn exempt Income. The assessee also provided details of interest expenses and corresponding income for which such Interest expenses were incurred. The assessee has identified interest payment and the cause for such payment of interest and corresponding income or receipt thereof." 22. The AO was not satisfied, he was of the opinion that disallowances should be made as per section 14A. The AO reproduced the assessee's submissions, however he was not satisfied, he proceeded to make the disallowances as per Rule 14A r.w. Rule 8D resulting in disallowance of further sum of Rs. 4,57,08,856/-. 23. Upon assessee's appeal Ld.CIT(A) confirmed the order of AO giving only a small relief on account of proportionate interest disallowances, the order of Ld.CIT(A) in this regard is as under:- " I have carefully gone through the submission of the appellant as well the order of the AO. The appellant has earned dividend of Rs. 36,99,61, 927/- which has been claimed exempt from tax. Further the total investment outstanding as on 31st March 2016 were to the tune of Rs. 2,001,94,74,908. So I am inclined to accept the contention of the AO t....
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....rred to earn exempt income. The assessee submits that over a last few years, it had generated lot of liquidity and a specified treasury department was assigned with the job to invest surplus funds in low risk funds. It will be appreciated that there are many mutual fund schemes where funds are invested in bonds and money market and they are lowest risk funds with very low returns. As can be seen from schedule of investment at page 132 - 136 of paper book, all the outside investments are either in Government Bonds or debt or liquid mutual funds. They are low risk and their credit rating and other data is available on public domain. Not much decision making is required as the risk is predefined and the same is Nil or very low. Further, investment in mutual fund does not require any expenses as distributor of mutual fund renders such services free to the investor. The assessee seeks to draw your Honours attention to submission made before AO and extracted at page 7 to 9 of the assessment order. The assessee submits that disallowance made is based on actual reality and of expenses incurred and debited in books of accounts. The assessee submits that the reasons assigne....
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.... criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper. In fact, the Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 1TR 640 while upholding the view of the Delhi High Court has held that the Assessing Officer needs to record his nonsatisfaction having regard to the sou motu disallowances claimed by the assessee in the context of its accounts. It is only thereafter, the occasion to apply rule 8D of the Rules for apportionment of expenses can arise. In the present facts, the Tribunal has correctly come to the conclusion that nonsatisfaction as recorded by the Assessing Officer for rejecting the sou motu disallowances claimed by the assessee is not done as required under section 14A(2) of the Act. On facts, the view taken by the Tribunal is a possible view and calls for no interference." 28. We find that facts in the present case are identical and following the precedent, we set aside the order of authorities below. This ground is allowed. ITA No.4775/Mum/2016 for AY 2009-10 29. Grounds of appeal read as under:- 1. The Learned Commissioner of....
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....e guarantee facility is given by the appellant to expand the business operations and achieve overall growth in the business of the appellant itself, the ultimate parent of the group and hence should be considered as a part of its shareholder activity, 3.3 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in imputing the corporate guarantee fee at the rate of 2% relying on the Safe Harbour rules, which itself is in the nature of presumptive taxation and not an arm's length price and hence cannot be applied. 4. The Ld. CIT(A) erred in confirming the disallowance made by the AO for Rs. 56,72,69,087/- being the proportionate claim of the premium on ZCCBs written off during the tenure of Zero Coupon Convertible Bonds which is in the nature of interest with out appreciating the facts and written submission made before him 5. The Ld. CIT(A) erred in holding that the claim of provision of proportionate premium of Redemption of ZCCB is a contingent liability and failed to appreciate that liability to pay premium(interest) at the time of redemption was always ascertainable particularly when none of the bonds were converted into ....
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....pressed. 31. Ground No.3 relates to the issue of corporate guarantee commission. On this issue, the TPO has calculated the ALP @ 6.67. Ld.CIT(A) upon assessee's appeal reduced the same 2% following his decision for AY 2010-11. Against this assessee is in appeal before the ITAT. The plea of the assessee is that adjustment on account of corporate guarantee should be restricted @0.50% in accordance with the Hon'ble Bombay High Court decision in this regard. 32. Upon careful consideration and after hearing both the parties, we note that Hon'ble Bombay High Court in CIT vs.Everest Kento Cylinders Ltd. Kanto, order dated 08.05.2018 has confirmed the ITAT order of 0.5% corporate guarantee commission by observing as under:- "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 f....