TaxTMI 
TaxTMI 
2023 (2) TMI 523
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....nel (Ld. DRP)), erred in not accepting the returned income 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'. ....
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.... farts and in the circumstances of the case & in law, the Ld. AO has exceeded his jurisdiction in making disallowance while making MAT computation on account 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 c....
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....ic basis; 3. On the facts and in the circumstances of the case & in law, the Ld. AO erred in disallowing Rs. 3,15,04,684/- under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 ('the Rules') in computing income under normal provisions 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 subsidiari....
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....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." Additional Ground for Assessment Year 2013-14: "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 adjustm....
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....nature of international transaction. Secondly, ld. DRP confirmed the action of ld. TPO observing as follows: "Ld Addl. CIT (TP- Kolkata) made submissions which are summarized in the following points: I. M/s TGBIL has a lower credit rating, hence cannot issue counter guarantee; II. The inter se set off is not allowable; III. There is no benefit flowing to the assessee; IV. Why the counter guarantor 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 ....
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....ng of the AE extending the counter guarantee and (ii) adoption of tedious route of the counter corporate guarantee indicate adoption of a devious route to side track the taxation on this count, further supporting the case pleaded by the TPO. As both these factors sans 'demonstrable determination of ALP' indicate that the Counter Corporate Guarantee shall not have enough valuation to completely offset the arm's length valuation of the Corporate Guarantee determined correctly by the 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....
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....th of only USD 114 million and the said transaction was dubbed as an acquisition of a global shark. (Please refer to Page 592 of the paperbook for AY 2012-13). 2.4 The Appellant states that there was no cost or risk associated with the said acquisition as the Appellant had been indemnified (unconditionally and irrevocably) by TGBIL, being the parent and controlling company of KHL, for any liability, arising on execution by the bank through a counter guarantee. The same has been stated in the counter guarantee agreement entered 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....
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....letter dated 23 March 2010 enclosed to the affidavit. 2.6 The Appellant states that the aforesaid corporate guarantee has been released by the Bank with effect from financial year 2014-15 and a fresh corporate guarantee has been provided by TGBIL to Rabo Bank (please see page 421 of the paperbook for the financial year 2012-13). 2.7 Furthermore, without prejudice to the aforesaid submissions, the Appellant submitted that in the event the TPO intended to treat the corporate guarantee as an international transaction then the addition ought to be limited to 0.25%. 2.8 For the assessment year 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 ord....
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....ng on the profits, income, losses or assets of the Appellant. 2.12 Further, the Hon'ble Income Tax Appellate Tribunal in the case of Bharti Airtel vs. ACIT (I.T.A. No.: 5816/Del/2012) (hereinafter referred as "Bharti Airtel's case") has also held that a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the Appellant, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of 'international transaction' to which ALP adjustment can be made." 2.13 Before referring to the judgment of the Hon'ble Madras High Court in PCIT vs. Redington (India) 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 In....
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....ry same transaction for the previous assessment year was subject matter of transfer pricing adjustment was not dealt with or disputed in the order of the Hon'ble Tribunal rendering the findings perverse [Please see paragraph 69 at page 101-102 of the said Compendium], 2.15 As enumerated above, for a transaction between two associated enterprises to be treated as an international transaction within the meaning of section 92B of the Act, it must have a bearing on the profits, income, losses or assets of such enterprises. Clause (c) of Explanation (i) to section 92B covers, inter alia, "guarantee". Thus, the provision of a corporate guarantee by an Appellant will be treated as an international 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....
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.... the said Compendium)." 8. On the other hand, ld. D/R vehemently argued relying on the finding of both the lower authorities and also took us to the written submissions dated 16.07.2021 stating that there is an international transaction carried out between the assessee and the associate enterprises and since the assessee has not charged the corporate guarantee fee for the guarantee given to a bank for giving loan to one of its step-down subsidiaries, there is a cost to the enterprise and the adjustment for the same has rightly been made by the Transfer Pricing Officer. Ld. D/R also made submissions regarding the charge of guarantee fee, cost to the enterprise, valuation of charge on service, corporate guarantee and 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....
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....ents has made two-fold contentions, firstly that the said transaction do not come under the purview of international transaction since there is no bearing on profits or losses because the assessee has taken a counter guarantee and secondly even if it is considered as an international transaction there are plethora of decisions wherein corporate guarantee under similar set off circumstances have been estimated at 0.25%. 10. A regards the first contention is concerned, we observe that international transaction has been defined in Section 92B(1) of the Act and the same reads as follows: "92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two 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 contr....
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....ng 0.25% rate. We, however, find that under similar set of facts and circumstances of the case, we have sustained the addition for corporate guarantee fee applying 0.5% rate. We draw support from the decision of coordinate Bench, Guwahati in the case of Greenply Industries Limited vs. ACIT in ITA No. 232/GAU/2019 order dated 21.06.2022 wherein the issue has been examined at length and Arm's Length fee has been restricted @ 0.5%. "34. Brief facts relating to this issue are that during the year under appeal, 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 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 Asi....
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....ndium to TP) TS-260-ITAT-2013(Mum) -TP, 2013-TII-185-ITAT Mum-TP 0.38% 5. Asian Paints Limited ITA No. 408/Mum/2010 and ITA No. 1937/Mum/2010 0.25%, 0.35% 6. Everest Kanto Cylinder Limited TS-714-ITAT-2012(Mum)-TP 0.50% 7. Nimbus Communication Limited TS-167-ITAT-2013(Mum)- TP, ITA No. 6816/Mum/2010 and ITA No. 7105/Mum/2011 0.50% 8. Glenmark Pharmaceuticals Limited ITA No. 5013/Mum/2012 and ITA No. 5488/Mum/2012 0.53% 9. Godrej Household Products Ltd. (earlier Godrej Sara Lee Ltd.) TS-330-ITAT-2013(Mum)-TP TS-68-ITAT-2014(Mum)-TP 0.50% 10. Mahindra & Mahindra Limited TS-324-ITAT-2013(Mum)-TP 0.20% - 0.50% 11. Prolifics Corporation Limited 55 taxmann.com 226 (Hyderabad-Trib.) 0.53% 12. Aditya Birla Minacs Worldwide Ltd. [2015] 56 taxmann.com 317 (Mumbai 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.....
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....e assessee. For computing the Corporate Guarantee Fees, ld. TPO selected the comparables from USA, whereas Associated Enterprises are not operating in USA but are operating in Asia Pacific Region. Ld. TPO failed to bring any comparable form to this region. Considering these facts and the non-availability of comparables in the Asia Pacific Region, the ld. CIT(Appeals) observed as under:- "5.3. I have carefully considered the matter. Assessee's contention regarding CG being beyond the pall of international transaction is not correct. Finance Act, 2014 had amended the provision of Section 92B with retrospective effect. Present position of law is that Corporate Guarantee is part of international transaction consequent to amendment introduced by Finance Act, 2014. Hence the objection has not basis. 5.3.1. Appellant's argument that the CG given by it to AE did not bring any benefit to AEs is fallacious. In this regards, it may 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 ....
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....ency cannot be equated with business strategy, which is specific and well laid out. As rightly held by the Id. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which "price" has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise. We, therefore, find ourselves in agreement with the contention of the Id. D.R. that there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee 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 ....
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.... guarantee commission charge should be taken at 0.5%. Some of the cases decided are given below: Glenmark Pharmaceuticals Ltd. (ITA No. 5031/M/2013 dated 13.11.2013) Godrej Household Products Ltd. (ITA Nos. 7369/M/2010) Prolific Corporation Ltd. (ITA No. 237/Hyd/2014 dated 31.12.2014). (iv)Manugraph India Ltd. Vs. ACIT(TS-330-ITAT, 2013 (Mum)-TP) In view of substantial numbers of decisions of Hon'bie Tribunal in similar matter, CG fee should be benchmarked at 0.5% in the guarantee amount". 40. The above finding of the ld. CIT(Appeals) is duly supported by the settled judicial precedence and the ld. D.R. failed to bring before us any other binding precedence in favour of the revenue. Therefore, respectfully following the decision of the Coordinate Bench, Mumbai in the case of Everest Kento Cylinder Ltd. (supra), we confirm the view taken by the ld. CIT(Appeals), who has rightly held that the arm's length guarantee commission charge should be restricted at 0.5% 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....
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....on on the part of the Assessing Officer and the appeal filed by the revenue was also dismissed by the Hon'ble High Court. The comparison of the observation made by the Assessing Officer in the assessment order for assessment year 2009-10 and the observation made in the assessment orders for assessment years 2012-13 and AY 2013-14 is enclosed as Annexure 1 with this submission. 3.3 In the instant case, the Appellant has suo motu disallowed Rs. 46,72,000/- and 58,70,000/- for assessment years 2012-13 and 2013-14 respectively, as expenditure incurred for earning exempt income which comprises of direct expenditure and portion of salary of such employees which could at best be attributable to management of these investments, as expenses incurred in earning exempt dividend income. (Please see pages 1110-1112 of the paperbook for the assessment year 2012-13 and pages 846-853 of the paperbook for the assessment year 2013-14). 3.4 It may further be noted that majority of the investments have been made by the assessee in past years and have been carried forward year after year. Most of these investments are strategic investments in group companies for the purpose of expansi....
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....ed 23-12-03 - Cat HC], wherein the order of Tribunal in DCIT -vs.- R.E.I. Agro Ltd. of ITA No. 1811/Kol/2012 for AY 2009-10 dated 14.05.2013 was confirmed which stated that while rejecting the claim of the Appellant with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the Ld. AO has to indicate cogent reasons for the same. Further, reliance is also placed on the following judicial pronouncements - - Maxopp Investment Ltd. -vs.- CIT [2018] 91 taxmann.com 154 (SC) Godrej & Boyce Manufacturing Company Ltd. -vs.- DCIT [2017] 394 ITR 449 (SC) CIT-vs.- Ashish Jhunjhunwala [G.A. No. 2990 of 2013] (Cal. HC) PCIT-vs.- Britannia Industries Limited [ITAT no. 45 of 2017 dated 19 July 2018] H.T. Media -vs.- PCIT (ITA no 548 & 549 of 2015 dtd 23-08-2017 (Del. HC) CIT-vs.- Taikisha Engineering India Ltd [2015] 370 ITR 338 (Del. HC) Integrated Coal Mining Ltd -vs.- DCIT [2016] 67 taxmann.com 260 (Koi) Damodar Valley Corporation -vs.- ACIT [2016] 157ITD 415 (Koi) RatanlalGaggar -vs.- DCIT (ITA no.1512 /Kol/2018 dt. 10 May 2019) Tata Industries Ltd. -vs.- DCIT [2020] 116 taxmann.com 875 (Mumba....
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....uired to be made. Clause (f) of the said Explanation provides that any expenditure incurred for earning dividend income, if debited to the profit & loss account, it to be added back. Further, clause (ii) of the said Explanation provides to reduce any exempt income (other than by virtue of 10(38) or 11 or 12) credited to the profit and loss account. 4.3 The provisions of subsection (2) & (3) of Section 14A which prescribe for estimated disallowance by the Assessing Officer do not find place in clause (f) of Section 115JB. Hence, no estimated disallowance as computed under subsection (2) & (3) for the purpose of Section 14A can be applied while making adjustment under clause (f) of Section 115JB. Reliance in this regard can be placed on the following decisions: Hon'ble Jurisdictional High Court in the case of CIT -vs.- Jayshree Tea & Industries Ltd. [G.A. No. 1501 of 2014 dated 19-11-2014] wherein it has been held that provision of Section 115JB 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. [Please refer to pages 36-39 of the CTCL] Hon'ble Delhi Tribunal (Special Bench) in the cas....
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....234C has been computed at Rs. 13,09,692/-. In this light it is prayed that appropriate directions may be issued to the Assessing Officer to re-compute the interest under section 234C of the Act. 8. For the assessment year 2013-14, the appellant had raised an issue of capital gains being computed twice in the computation made in the assessment order. However, the said issue has been addressed by the rectification order dated December 29, 2017 and as such the said issue is not being pressed. 9. The next issue pertaining to assessment year 2013-14 is denial of deduction under section 80G of the Act of the donation of Rs. 1,00,00,000/- made by the Appellant to Assam Investment Advisory Society (hereinafter referred to as the "Donee"). The Appellant states that it has been informed by the Donee that the said donation is eligible for deduction u/s 80G of the Act and that the Donee is in the process of getting the required eligibility certificate this regard, the Appellant prays that appropriate directions may kindly be given to the Assessing Officer to allow the deduction on account of donation of Rs. 1,00,00,000/- under section 80G of the Act on verification of the req....
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....its investment portfolio by using the common establishment/infrastructure and therefore, it is not possible to justify the working adopted for computing the disallowance without applying the provision of Rule 8D of Income Tax Rules, 1962. We, further observe that similar issue came up before this Tribunal in assessee's own case for AY 2006-07 to AY 2009-10 wherein also similar observation was made by ld. AO and this Tribunal after considering the facts of the case and also considering the judgment of Hon'ble Delhi High Court in the case of H.T. Media Ltd. vs. PCIT reported in [2017] 85 taxmann.com 113 (Delhi) deleted the disallowance made by ld. AO applying Rule 8D of the Rules and accepted the suo moto disallowance made by ld. AO. Since the issue remains the same and the facts are identical, we therefore, taking the consistent view and also considering the fact that most of the investments held by the assessee are brought forward from preceding year and also the major portion of the investment is in the sister/group concerns of the assessee and thus, reverse the finding of ld. CIT(A) and delete the disallowance made by ld. AO and accept the suo moto disallowance offered by the....