TaxTMI 
TaxTMI 
2023 (2) TMI 523
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....of the Appellant amounting to Rs. 3,66,17,09,400/- and enhancing the same by Rs. 3,12,83,015/-. 2. On the facts and circumstances of the case & in law, the Ld. AO/TPO grossly erred in making an adjustment of Rs. 1,07,25,333/- to the income of the Appellant on account of corporate guarantee fee and in doing so, the Ld. AO/TPO grossly erred in: 2.1. disregarding the fact that the transaction of corporate guarantee extended by the Appellant to its AE does not fall within the definition of "International transaction" under section 92B of the Income-tax Act, 1961. 2.2. disregarding the fact that the provision of corporate guarantee to the AE was intended to facilitate an acquisition by the Appellant, and consequently the guarantee was in the nature of shareholder services and thus a separate charge is not warranted; 2.3. disregarding the fact that the Appellant had been irrevocably and unconditionally indemnified by TGBIL, being the parent and controlling company of Kahatura Holdings Limited (KHL), for any liability, arising on execution by the bank through a 'counter guarantee'. 2.4. disregarding the directions of Ld. DRP to reduce the arm's length price (ALP) adjustm....
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.... of section 14A which was neither subject matter of draft order nor was subject matter of adjudication by Ld. DRP. 5. That on the facts and in the circumstances of the case, the Ld. AO erred in not granting withholding tax credit to the extent of Rs. 4,03,309/- without assigning any reasons. 6. That on the facts and in the circumstances of the case, the Ld. AO erred in not granting foreign tax credit to the extent of Rs. 10,04,025/- without assigning any reasons. 7. That on the facts and in the circumstances of the case and in law the Ld. AO erred in charging interest under section 234C of the Act which is on the basis of returned income. 8. The Ld. AO has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation. The above grounds are without prejudice to each other. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing. Assessment Year 2013-2014: 1. On the facts and circumstances of the case & in law, the Learned Assessing Officer (Ld. AO)/ Learned Transfe....
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....s of the Act. 3.1. On the facts and in the circumstances of the case & in law, the Ld. DRP as well as the Ld. AO erred in not appreciating that the provisions of section 14A of the Act can be invoked only when the conditions laid down under sub section (1) of section 14A of the Act have been satisfied. 3.2. On the facts and in the circumstances of the case & in law, the Ld. DRP erred in confirming disallowance of Rs. 3,15,04,684/- under section 14A of the Act made by the Ld. AO based on surmises and conjectures without having recorded any reasoned dissatisfaction under section 14A(2) of the Act against the suo-moto disallowance of Rs 58,78,000 made by the assessee. 3.3. Without prejudice to above mentioned grounds of appeal, the Ld. DRP as well as the Ld. AO grossly erred in making disallowance by applying Rule 8D(2)(iii) of the Rules even on strategic investments made in subsidiaries/group companies, without any intention to earn exempt income, which is pre-requisite for application of section 14A of the Act. 3.4. Without prejudice to above mentioned grounds of appeal, the Ld. DRP as well as the Ld. AO grossly erred in making disallowance by applying Rule 8D(2)(iii) of....
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.... "i. That on the facts and in the circumstances of the case and in law, the appellant is entitled to deduction of education cess and secondary higher education cess liability on income tax and dividend distribution tax during the subject financial year amounting to INR 2,27,83,684/- as a business expenditure under section 37(1) of the Act, not disallowable under section 4O(a)(ii) or section 115-O of the Act." 3. As the issues raised in these appeals are common and the facts are identical, therefore, as agreed by both the parties, they are heard together and disposed off by way of this common order for the sake of convenience and brevity. 4. The first common issue raised in ground no. 2 of the assessee's appeal for AY 2012-13 & AY 2013-14 is with regard to transfer pricing adjustment made by the Transfer Pricing Officer (in short, the 'TPO') on account of corporate guarantee furnished by the assessee to a bank on behalf of the assessee's step-down subsidiary in Cyprus namely Kahutara Holdings Limited (hereinafter referred to as 'KHL'). The value of the corporate guarantee given by the appellant is US$ 13.5 million. For the purpose of adjudication, we will take up the facts for A....
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....or did not issue direct guarantee. e. The Ld AR responded to the contentions and his rebuttal is summarized as under: I. M/s TGBIL has sufficient cash flow to offer the linked counter guarantee. Its credit rating is immaterial in view of its capacity to meet the obligations that may arise on this count. II. The corporate guarantee offered by the assessee and the counter guarantee by the AE to offset its obligation are interlinked transactions on similar plane. III. The assessee is duly covered and its liability is covered per this counter guarantee offered by TGBIL. IV. The structuring of the Guarantee conundrum is a function of corporate structuring and no adverse inference is called for. Further. M/s TGBIL has become the direct guarantor in FY 2014-15 onwards. f. The panel has considered the submissions of the Officer & the Ld AR. The activity of Corporate Guarantee is not a shareholder service as it is not an existential service nor is it a mandatory service to help the recipient entity. It is pure commercial transaction which attains nature of International transaction in view of the facts. The issue of Counter Corporate Guarantee helps the assessee mitigate its lik....
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.... TPO. Any entity independent of a binding influence of the ownership grip, shall make value out of the corporate guarantee extended for any future probable obligation arising out of loan repayment default. In view of the foregoing, the set off cannot be allowed and the action of the TPO is upheld in the specific facts of the case for this assessment period. The objection set 2.6, in respect of the add on of 200 basis points on LIBOR plus charges, will be telescoped in the directions supra. The action of the TPO is, therefore, upheld in the above terms and with the directions as supra. g. This set of objections is disposed of as above." 6. Aggrieved, the assessee is now in appeal before this Tribunal assailing the order of ld. AO framed u/s 143(3)/144C of the Act. 7. Ld. Counsel for the assessee vehemently argued referring to the detailed submissions which are reproduced below: "1. The Appellant is engaged in the business of cultivation, manufacture, blending, purchase and sale of tea, manufacturing and exporting of instant tea; purchase and sale of other goods and also deals in other beverages. The Appellant is listed on NSE and BSE and has its registered office in Kolkata.....
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....red between the Appellant and TGBIL. (Please refer to page 105 of the paperbook for AY 2012-13 and page 163 for AY 2013-14). TGBIL had adequate cash assets (as depicted below), liquid investments and other securities to provide the said counter guarantee. The cash assets of the company were a significant USD 380 million vis-a-vis the loan amount of USD 13.35 million. Thus, there is no risk involved in providing the guarantee by the Appellant. (Please refer to page 557 of the paperbook for AY 2012-13 and page 138 for AY 2013-14.) The cash and liquid investments available with TGBIL at the time of the guarantee is depicted below (the same has been extracted from the audited financial statements of the company): Cash and liquid investments Amount in GBP Amount in USD 2010 2009 2010 2009 Bank deposits 240,579,000 124,007,000 357,555,000 184,302,549 US dollar money market funds 3,102,000 44,000 4,610,276 65,394 Sterling money market funds 12,000,000 153,000 17,834,724 227,393 Total 255,681,000 124,204,000 380,000,000 184,595,336 The above schedule shows that the cash and liquid investments available with the company in the year 2010 w....
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....r 2012-13, the TPO by his order dated January 29, 2016 held the corporate guarantee to be an international transaction and proposed an adjustment at the rate of 200 bps amounting to Rs. 1,07,25,333/-. The DRP by its order dated May 27, 2016 also held the corporate guarantee to be an international transaction but directed the TPO to make a downward adjustment to the arm's length price after taking into account the counter guarantee as the same reduces the probable liability of the Appellant (Please refer to page 16 of the Appeal Set). However, the TPO in his give effect order dated June 30, 2016 failed to make any such disallowance and the order dated June 30, 2016 was incorporated by the Assessing Officer in his assessment order dated July 28, 2016. 2.9 For the assessment year 2013-14, the Transfer Pricing Officer by his order dated October 28, 2016 again regarded the corporate guarantee as an international transaction and proposed an adjustment at the rate of 200 bps aggregating to Rs. 2,64,43,540/-. The order of the TPO was confirmed by the DRP by its order dated April 28, 2017 and the adjustment was adopted by the Assessing Officer in his order dated June 15, 2017. 2.10 The ....
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....ndia) Ltd., (2020) 122 taxmann.com 136 (Madras) (hereinafter referred to as "Redington's case") case in detail, it is pertinent to mention that in Bharti Airtel's case [page 1 of the said Compendium], in paragraph 33 [pages 23-24 of the said Compendium], it was held on the facts of that case that there was no material on record to indicate that the provision of corporate guarantee had any real impact on profits, income, losses or assets. Bharti Airtel's case was considered in Prolifics Corporation Ltd. vs. Deputy Commissioner of Income Tax, (2015) 55 taxmann.com 226 (Hyderabad)(hereinafter referred as "Prolifics' case") [page 107 at 113 of the said Compendium - paragraph 3.4.11], In paragraph 6 [pages 114-115 of the said Compendium] it was held that whether a charge should be imposed for provision of a guarantee was primarily a factual enquiry. On the facts of Prolifics' case, it was held that there was an inherent risk in providing the corporate guarantee justifying a transfer pricing adjustment. 2.14 The question relating to corporate guarantee was considered by the Hon'ble Madras High Court in paragraphs 67-76 of the judgment in Redington's case[pages 100-103 of the sa....
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....nal transaction if the same has a bearing on the profits, income, losses or assets of the Appellant. In so far as profits/income/losses are concerned, the Appellant did not incur any cost for furnishing the corporate guarantee. The Appellant merely put its signature as a guarantor on the loan documents between KHL and the banks. 2.16 Further, it is not the business of the Appellant to provide guarantee against fees/commission. It is not the case that if the same corporate guarantee was provided by the Appellant to or for any other person, it would have earned income which it gave up by providing the corporate guarantee for KHL. Thus, the Appellant's profits/income/losses/assets were not in any way affected by furnishing of corporate guarantee. Even a situation of invocation of the corporate guarantee would not have any bearing on the profits/income/losses/assets of the Appellant as it was fully protected by a counter guarantee from TGBIL. The terms of the counter guarantee as mutually agreed between both the parties explicitly records that first TGBIL would pay the Appellant and then only the Appellant would pay the RABO Bank. The provision of corporate guarantee thus did not ent....
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....the share holder service. He also made submissions regarding the corporate guarantee upstream theory and stated that a counter guarantee taken by the assessee company is merely an internal arrangement since appellant is the ultimate parent company and therefore upstream guarantee is not valid as they are given to overcome structural subordination by putting the claims of parent company creditors on a pari passu basis with those of subsidiary company creditors. Ld. D/R thus, concluded that this arrangement of counter guarantee is often seen as an example of betting with other people's money, with the group's ultimate shareholders realizing the upside benefit so long as the parent entity remains solvent, but losing nothing they would not have lost anyway if the borrower defaults on its debt and liability on the guarantee is triggered and therefore, they are often regarded as fraudulent conveyance and may get voided in Court. 9. We have heard rival contentions and perused the records placed before us. The first issue for our consideration is regarding transfer pricing adjustment on account of corporate guarantee and this issue has been raised commonly in AY 2012-13 & AY 2013-14 in gr....
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....o 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 any one or more of such enterprises." 11. Now, on examining the facts and circumstances of the case under the above extracted definition, we observe that the assessee company is located in India and its wholly-owned subsidiary is located at U.K. and its step-down subsidiaries are located in other parts of the world. Since the assessee company has given a corporate guarantee for one of its step-down subsidiaries i.e. an associate enterprises there is prima facie an international transaction and now to complete the same it has been contended that there has to be a bearing on the profits, income....
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....lf of Greenlam Asia Pacific Pvt. Ltd. ("Greenlam Asia") (referred to pages 446 to 461 of the paper book); (ii) Providing a Corporate Guarantee to United Overseas Bank (UOB) for a commercial property loan on behalf of Greenlam Asia (referred to pages 462 to 471 of the paper book); and (iii) Providing a standby Letter of Credit (SBLC) to City Bank N.A. for on behalf of Greenlam America Inc. ("Greenlam USA") and Greenlam Asia (referred to pages 478 to 485 of the paper book). Ld. Assessing Officer during the course of assessment proceedings observed that international transaction has taken place and referred the matter to Transfer Pricing Officer, who after considering the submission of the assessee, held that Corporate Guarantee fees @ 1.22%, 1.69% and 1.27% of the respective loan amounts should be treated as income of the assessee. Ld. Assessing Officer accordingly made the addition of Rs.43,67,295/-. Aggrieved, the assessee preferred appeal before the ld. CIT(Appeals) firstly claiming that the said Corporate Guarantee given to the Associated Enterprises do not come under the purview of international transactions and also raising an alternative plea that in view of the settled ....
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.... Trib.) 0.50% 13. Cox and Kings Ltd. -vs.-DCIT TS-540-ITAT-2015(Mum)-TP 0.50% 14. Manugraph India Ltd. TS-463-ITAT-2015(Mum)-TP 0.50% 15. Hindalco Industries Ltd. TS-431-ITAT-2015(Mum)-TP 0.50% 16. Mylan Laboratories Ltd. TS-399-ITAT-2015(Hyd)-TP 0.53% 17. Xchanging Solutions Ltd. TS-910-ITAT-2016(Bang)-TP 0.50% 18. Laqshya Media Pvt. Ltd. -vs.-ACIT TS-20-ITAT-2018(Bang)-TP 0.50% 19. Jindal Steel Limited -vs.-ACIT TS-1231-ITAT-2018(Delhi)TP 0.50% 20. Aster Pvt. Ltd. -vs.- DCIT TS-446-ITAT-2017(HYD)-TP 0.25% 37. We have heard the rival contentions and perused the relevant records placed before us and carefully gone through the decisions referred and relied upon by the ld. counsel for the assessee. We note that the assessee-company had following inter-company guarantee arrangements for its Associated Enterprises:- (i) Providing a Corporate Guarantee to Standard Chartered Bank (SCB) for a term loan/letter of credit facility on behalf of Greenlam Asia Pacific Pte. Ltd. ("Greenlam Asia"); (ii) Providing a Corporate Guarantee to United Overseas Bank (UOB) for a commercial property loan on behalf of Greenlam Asia; and (iii) ....
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.... be stated that the lending banks to AEs had insisted on guarantee from appellant. There will be definite benefit to AEs due to guarantee given by appellant. Without the guarantee the interest rate charged will be more only. This aspect of CG had been dealt with by Hon'ble Mumbai Tribunal in the case of ACIT Vs. Nimbus Communications Ltd. (2014) 30 ITR 0349 (Mum). Para 9 of the said order is extracted as under: "9. We have considered the rival submissions and also perused the relevant material available on record. For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the Id. counsel for the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be....
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....see and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm's length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm's length price." Respectfully following the decision of Hon'ble Tribunal as noted above, it is held that CG given by assessee has a cost and TP adjustment on the issue is required. 5.3.2 Next issue to be decided is the quantum of adjustment to be made in case of assessee. According to appellant, comparables selected by it were from areas not far from Singapore and having similar economic situations, whereas cases selected by TPO were from America where AEs were not operating. Had the case selected by appellant being considered, there would have been no requirement TP adjustment. Alternative argument was put forth stating that Arm's Length guarantee fee should not exceed 0.5%. Further alternative argument given was that the adjustment should not exceed the diffe....
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....% of the guaranteed amount. Thus no interference is called for in the order of ld. CIT(Appeals) and the grounds no. 1 to 4 raised by the revenue on the issue of Corporate Guarantee Fees are dismissed." 13. We, therefore, taking a consistent view as has been taken by the Coordinate Bench of Guwahati in the case of Greenply Industries Limited (supra) direct ld. AO to compute the corporate guarantee fee @ 0.5% of the outstanding loan at the year end as against 2% charged in the assessment proceedings. Thus, ground no. 2 raised by the assessee is partly allowed. 14. As regards the remaining grounds/issues raised in the instant two appeals, ld. Counsel for the assessee vehemently argued referring to the following written submissions: "3.1 The next issue common for both the assessment years is with regard to invocation of rule 8D for the purpose of making the disallowance under section 14A. 3.2 At the outset it is stated that the aforesaid issue is squarely covered in favour of the Appellant by the order of Tribunal in the Appellant's own case for AY 2009-10. (Please refer to page no 27-28 of the Corporate Tax Case Law Compendium ('CTCL')). The Revenue filed an appeal before the Ho....
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....ve been carried forward year after year. Most of these investments are strategic investments in group companies for the purpose of expansion of business and not with the objective of earning capital gains or dividend. The time and effort involved in the case of the company was far less in comparison to any other companies engaged in regular investments activities earning exempting income. 3.5 In both the assessment years, the Assessing Officer in the assessment orders has failed to discharge his onus of recording his satisfaction, having regard to the, accounts of the Appellant, that the suo motu disallowance made by the Appellant and the computation with respect to the same is not correct and he rejected the submissions by merely stating that some infrastructure expenses would have been incurred and thereafter by invoking rule 8D made a disallowance of Rs. 3,59,55,015/- and Rs. 3,73,82,684/-, for the assessment years 2012-13 and 2013-14, respectively. Hence, basic conditions for disallowance under section 14A of the Act were not satisfied. Reliance is placed on the aforesaid decision in Appellant's own case for the assessment year 2009-10 wherein the facts were identical and it ....
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....[2020] 116 taxmann.com 875 (Mumbai -Trib.) ACIT -vs.-Indiabulls Real Estate Ltd. (ITA No. 6602/Del/2016 dated 11 March 2020) 3.7 Further, without prejudice to the above contentions, it is humbly submitted that the Assessing Officer has accepted the assessee's basis of allocating management cost incurred in earning exempt income for the purpose of disallowance u/s 14A. His limited observation was that some infrastructure costs would have been incurred in earning exempt income. However, the AO failed to substantiate the basis of the same or bring any evidence of incurrence of the said expense for the aforesaid activities. It is humbly submitted that the dividend income earned by the company is not at all significant as compared to the total turnover the company (1.38% for AY 2012-13 and 1.56% for AY 2013-14). As submitted above, the company has voluntarily identified and offered management expenses which at best can be considered as incurred in investment activities. The basis has also been accepted by the Tax Auditors. Hence, any further attribution of expenses is not at all warranted in this case. 3.8 Without prejudice to above, assuming though not admitting that Rule 8D was ....
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.... (Special Bench) wherein it has been held that computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with rule 8D. [Please refer to pages 40-72 of the CTCL] Hon'ble Bombay HC in the case of CIT -vs.- Bengal Finance & Investments Pvt. Ltd. (ITA No. 337 of 2013, vide order dated 10 February 2015). Reliance in this regard is placed on the following jurisdictional Tribunal rulings - DCIT -vs.-EIH Ltd.[2O18] 89 taxmann.com 417 (Kolkata - Trib.) Britannia Industries Ltd. -vs.- DCIT [2019] 107 taxmann.com 138 (Kolkata - Trib.) Nomura Research Institute Financial Tech (I)(P.) Ltd. -vs.- DCIT [2019] 101 taxmann.com 4 (Kolkata - Trib.) Integrated Coal Mining Ltd. (supra). Bata India Ltd. -vs.- DCIT[2020] 180 ITD 464 (Kolkata - Trib.) Gujarat State Energy Generation Ltd. -vs.- ACIT [2020] 183 ITD 590 (Ahmedabad - Trib.) K.B. Mehta Construction (P.) Ltd. -vs- DCIT [2020] 185 ITD 81 (Ahmedabad - Trib.) Zaveri & Co. (P.) Ltd. -vs.- DCIT [2020] 184 ITD 777 (Ahmedabad -ITAT) 5. The next common issue is the short grant of withholding tax credit. In assessment year 2013-14, the Assess....
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....bility and MAT credit. The Appellant states that in the tax computation sheet annexed along with the assessment order, total income has been recomputed at Rs. 2,27,14,32,058/- under the normal provisions and Rs. 3,00,24,47,218/- under the provisions of Section 115JB of the Act. However, in the said computation sheet, the MAT has been erroneously computed at 18.37% instead of 18.50 %on book profit. Thereby, tax payable under MAT provisions has been erroneously calculated at Rs. 55,17,92,481/-(excluding surcharge and cess) instead of Rs. 55,54,52,735/- (excluding « surcharge and cess). Consequentially, the amount of MAT credit allowed to the Appellant company is Rs. 4,82,10,325/- instead of Rs. 4,81,80,902/- which has resulted in lower amount of MAT credit carried forward to the next assessment year to the extent of Rs. 29,424/-. The said calculation is thus erroneous and not as per the provisions of the Act. It is humbly requested to grant appropriate directions to the Assessing Officer to compute the tax liability and grant MAT credit as per law. 11. The next issue pertaining to assessment year 2013-14 is the denial of credit for dividend distribution taxes of Rs. 19,65,2....
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....uting book profit u/s 115JB of the Act we find that the issue is well-settled by the judgment of Hon'ble Jurisdictional High Court in the case of CIT vs. Jayshree Tea & Industries Ltd. [GA No. 1501 of 2014] wherein Hon'ble Court has held that provisions of Section 115JB of the Act in the matter of computation is a complete code in itself and resort need not and cannot be made to Section 14A of the Act. Similar view was also taken by Special Bench of Delhi Tribunal in the case of ACIT vs. Vireet Investments Pvt. Ltd. [2017] 82 taxmann.com 415 (Special Bench) as well as Hon'ble Bombay High Court in the case of CIT vs. Bengal Finance & Investments Pvt. Ltd. ITA No. 337 of 2013. Respectfully following the same, common ground no. 4 raised by the assessee are allowed. 18. As regards the common issue raised in ground no. 10 for AY 2012-13 and ground no. 5 & 8 for AY 2013-14 regarding not granting foreign tax credit and not granting the withholding tax credit, these grounds have not been pressed by the assessee since relief has been given by ld. AO in the rectification order passed u/s 154 of the Act and therefore these grounds are dismissed as not pressed. 19. As regards gro....