Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
Acts
  • Section 144C (5) of ITA No. 2756/2017 & SP No.90/2018 :- 2 -: the Income Tax Act, 1961 (in short the Act)
  • clause (c) of Section 92B(2), through Finance Act, 2012,
  • Rule 8D of the Income Tax Rules, 1962.
  • FINANCE ACT 2012
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
Acts
  • Section 144C (5) of ITA No. 2756/2017 & SP No.90/2018 :- 2 -: the Income Tax Act, 1961 (in short the Act)
  • clause (c) of Section 92B(2), through Finance Act, 2012,
  • Rule 8D of the Income Tax Rules, 1962.
  • FINANCE ACT 2012
See more information ...
Smart Summary

Structured Summary of the Opinion (ITA No. 2756/2017 & SP No.90/2018)

Factual and Procedural Background

This is an appeal by the assessee against an order dated 30.10.2017 of the Deputy Commissioner of Income Tax (ld. DCIT), Corporate Circle 6(2), Chennai, given pursuant to directions of the Dispute Resolution Panel (DRP) under section 144C(5) of the Income Tax Act, 1961. The assessee raised thirteen grounds of appeal (grounds 1 and 2 being general). The substantive grounds addressed in the opinion concern: (a) transfer pricing adjustments — an upward adjustment of Rs.22,06,65,514 towards commission for corporate guarantees (ground 3) and upward adjustments totalling Rs.3,75,50,666 towards interest on investments made through Optionally and Fully Convertible Debentures (OFCD) (grounds 4 & 5); (b) disallowances under section 14A read with Rule 8D (grounds 6–11 and ground 12 relating to book-profit computation under section 115JB); and (c) disputed credits for TDS and advance tax (ground 13). The appeal was heard and the order was pronounced on 20 March 2018 at Chennai by a Bench comprising a Judicial Member and an Accountant Member.

Legal Issues Presented

  1. Whether providing corporate guarantees to Associated Enterprises (AEs) constitutes an "international transaction" for the purposes of transfer pricing (section 92/92B) and whether the upward adjustment of Rs.22,06,65,514 for guarantee commission is sustainable.
  2. Whether interest received on investments in OFCDs issued by Associated Enterprises, charged at a flat 2%, is at arm's length, or whether an adjustment to 2% + LIBOR (resulting in 2.95% adopted by the TPO) is warranted.
  3. Whether a large disallowance under section 14A read with Rule 8D (aggregate figure of Rs.101,96,34,654) is justified on the facts, and whether any disallowance should be limited to the exempt income actually earned (dividend income of Rs.3,94,70,844).
  4. Whether any disallowance under section 14A/Rule 8D can be made while computing book profits under clause (f) of Explanation 1 to section 115JB(2).
  5. Whether the assessee is entitled to claimed credits for TDS of Rs.5,41,97,523 and advance tax of Rs.3,50,00,000.

Arguments of the Parties

Assessee's Arguments

  • Ground 3: The assessee's counsel argued that providing corporate guarantees to Associated Enterprises is not an "international transaction" and therefore no upward transfer pricing adjustment for guarantee commission should be made. The counsel relied on the Tribunal's earlier orders in the assessee's own case (AYs 2009-10 and 2010-11) and on decisions such as Bharti Airtel Ltd. v. Addl. CIT, Micro Ink Ltd. v. Addl. CIT and a coordinate-bench Redington decision, all of which were cited to support the position that guarantee provision is not an international transaction.
  • Grounds 4 & 5: The assessee contended that interest on OFCDs at 2% was at arm's length. The TPO's adoption of LIBOR (0.95%) + 2% = 2.95% was challenged as incorrect; the assessee argued that if LIBOR of 0.95% is considered, the assessee's 2% exceeds that rate and is therefore at arm's length. The assessee relied on its own earlier Tribunal decision (ITA No.2148/Mds/2010 for AY 2006-07).
  • Grounds 6–11: The assessee argued that the AO made the section 14A disallowance without showing dissatisfaction with the assessee's own computation (which attributed only Rs.17,90,085 as expenditure attributable to exempt income). The assessee also contended that most investments were in wholly owned subsidiaries and that disallowance should be limited to the exempt dividend income of Rs.3,94,70,844. Precedents (e.g., Godrej & Boyce, Redington High Court, Joint Investments, Special Bench Vireet, EIH Associated Hotels) were relied upon.
  • Ground 12: For the book-profit computation under section 115JB, the assessee relied on the Special Bench decision in ACIT v. Vireet Investment Pvt. Ltd., arguing that clause (f) of Explanation 1 to section 115JB(2) is to be computed without resort to section 14A/Rule 8D.
  • Ground 13: The assessee claimed credit for TDS and advance tax and asked the AO to give effect if the claims are proved.

Departmental Representative's Arguments

  • Ground 3: The Departmental Representative (DR) contended that the DRP had considered a number of Tribunal decisions and also clause (c) of Explanation (i) to section 92B(2) as introduced by the Finance Act, 2012 (with retrospective effect from 01.04.2002), and had therefore upheld the transfer pricing adjustment for guarantee commission. The DR relied on decisions such as Mahindra & Mahindra Ltd., Nimbus Communication Ltd., and Prolifics Corpn. Ltd. to support the view that corporate guarantees to AEs constitute international transactions.
  • Grounds 4 & 5: The DR argued that OFCDs cannot be equated with equity and are in substance debt instruments (akin to ECB), noting that conversion terms were not fixed and there might have been non-compliance with FDI Rules; hence, the upward adjustment for interest was justified.
  • Grounds 6–11: The DR submitted that the AO had in fact expressed dissatisfaction with the assessee's suo-motu attribution of just Rs.17,90,085 as expenditure relating to exempt income (per the draft assessment order). The DR also relied on CBDT Circular No.5/2014 to submit that a section 14A disallowance could be made even when there is no exempt income under the Act.
  • Ground 12: No substantive argument was advanced by the DR on this issue (the opinion records that the DR did not advance any argument on ground 12).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Bharti Airtel Ltd. v. Addl. CIT Held that providing corporate guarantee does not involve any cost to the assessee and therefore is not an international transaction for arm's length adjustment purposes (as interpreted in the cited Tribunal decision). The Tribunal followed the Bharti Airtel view and relied on it (and on the assessee's own earlier decision that had followed Bharti) in holding that the guarantee did not attract an upward transfer pricing adjustment; the guarantee-related addition was deleted.
Redington (India) Ltd. v. JCIT / Redington India Ltd. (ITA No.513/Mds/2014 dated 07.07.2014) Used to support the proposition that corporate guarantee is not an international transaction and that such guarantees do not bear on assessee's profits/income/assets. The Tribunal reproduced and followed the reasoning in Redington (and noted that a co-ordinate Bench had followed Bharti Airtel) in holding that guarantees do not attract arm's length adjustments; the upward adjustment towards guarantee commission was deleted.
Micro Ink Ltd. v. Addl. CIT (157 ITD 132) Relied upon by the assessee in support of the proposition that corporate guarantee is not an international transaction. The decision was cited by the assessee; the Tribunal, having earlier followed Bharti and the assessee's own earlier orders, adopted the non-international-transaction view for guarantees.
Mahindra & Mahindra Ltd. v. Addl. CIT (29 ITR (Trib) 95) Relied upon by Revenue to support the proposition that corporate guarantees to AEs can constitute international transactions. The DR cited this decision; the Tribunal acknowledged that there is a "cleavage of opinion" (different views) but followed the Tribunal's earlier decisions favoring the assessee's position.
Nimbus Communication Ltd. v. ACIT (2011) 43 SOT 695 Relied upon by Revenue for the proposition that corporate guarantees can be international transactions. The DR relied on this decision; the Tribunal noted its existence but, given prior Tribunal orders in the assessee's case and Bharti, did not accept the Revenue's stance on guarantees in this appeal.
Prolifics Corpn. Ltd. v. DCIT (2015) 68 SOT 104 Relied upon by Revenue for the proposition that corporate guarantees can be international transactions. The DR relied on this decision; the Tribunal acknowledged it but followed its own earlier decisions in the assessee's case and Bharti Airtel, deleting the guarantee-related adjustment.
Demag Cranes & Components (India) (P.) Ltd. v. DCIT (56 SOT 187 Pune) Supports the proposition that where guarantees are integral to business activities, the combined/entity-wide TNMM approach may be appropriate rather than a stand-alone test. The assessee relied on this approach (entity-wide TNMM) as an alternative to a stand-alone guarantee-based adjustment; the Tribunal considered entity-wide benchmarking arguments in its analysis of guarantees.
McCann Erikson India Pvt. Ltd. v. Addl. CIT (24 Taxmann.com 21) Supports applying TNMM on an entity-wide basis for transactions that are not independent of the overall business. The assessee cited this authority in arguing for an entity-wide TNMM approach; the Tribunal considered these arguments when analyzing the guarantee issue.
Mahindra / Nimbus / Prolifics cluster (Revenue-cited cases) Taken together, these were relied upon by the Revenue to show a contrary view that guarantees may fall within the ambit of international transactions (post-amendment to section 92B). The Tribunal noted these conflicting authorities but, in view of its own prior decisions and Bharti Airtel, followed the non-international-transaction view in the assessee's case.
ITA No.2148/Mds/2010 (assessee's own earlier decision for AY 2006-07) Held that LIBOR is the appropriate reference rate for international currency transactions and that if the charged rate exceeds LIBOR, no transfer pricing addition is warranted (as applied in that earlier year). The Tribunal relied on the assessee's earlier decision to conclude that the TPO's adoption of LIBOR + 2% required reconsideration; the matter of interest on OFCDs was remitted to AO/TPO to revisit LIBOR determination and arm's length analysis.
Godrej & Boyce Mfg. Co. Ltd. v. DCIT (394 ITR 449) Cited by the assessee in connection with arguments on the scope and applicability of section 14A disallowances. The Tribunal recorded reliance by the assessee on this apex-court decision in framing its approach to section 14A issues; the Tribunal nonetheless remitted the factual determination of the section 14A disallowance to the AO for fresh consideration.
Redington (India) Ltd. v. Addl. CIT (High Court) (2016) 97 CCH 219 Cited by the assessee for matters relating to section 14A treatment (as invoked by the assessee in arguments on disallowance calculation). The Tribunal noted the authority was cited by the assessee; the Tribunal directed a fresh consideration of the section 14A disallowance by the AO, taking into account relevant precedents and factual position.
Joint Investments Pvt. Ltd. v. CIT (372 ITR 694) Cited as relevant authority in the context of section 14A and the methodology for computing disallowance. The Tribunal observed that the AO did not have the benefit of this judgment when making initial findings and remitted the section 14A issue to the AO for reconsideration.
ACIT v. Vireet Investment Pvt. Ltd. (Special Bench) (165 ITD 27) Special Bench held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resort to the computation under section 14A read with Rule 8D. The Tribunal followed the Special Bench in holding that no disallowance under section 14A could be made while computing book profits under section 115JB; ground 12 was allowed and the disallowance was deleted for book-profit computation.
M/s EIH Associated Hotels Ltd. v. DCIT (ITA Nos.1673,1674 & 1919 & 1920/Mds/2015) Cited by the assessee in relation to section 14A jurisprudence and disallowance principles. The Tribunal recorded that the assessee relied on this coordinate-bench decision; the factual section 14A issues were remitted to the AO for fresh consideration.
Cheminvest Ltd. v. CIT (2015) 378 ITR 33 Referenced as a decision followed by the Special Bench in Vireet Investment relating to computation under section 115JB and section 14A/Rule 8D. The Tribunal relied on the Special Bench's reliance on Cheminvest in concluding that no section 14A disallowance should be made while computing book profits under section 115JB.

Court's Reasoning and Analysis

The Tribunal considered the rival submissions, the orders of the authorities below (AO, TPO, DRP), and a range of precedent decisions (both for the assessee and for the Revenue). The Tribunal's analysis proceeded issue-wise:

  1. Corporate guarantee (ground 3): The Tribunal examined its own earlier decisions in the assessee's case (e.g., ITA No.1039/Mds/2014 for AY 2009-10) and decisions of co-ordinate Benches (notably Bharti Airtel and Redington). Those decisions found that providing corporate guarantees did not involve an actual cost to the guarantor and did not affect the guarantor's profits, income, loss or assets; accordingly, such guarantees lay outside the ambit of "international transaction" for arm's length price adjustment. Although the DRP and Revenue relied on post-amendment explanations to section 92B (Finance Act, 2012) and other Tribunal decisions taking a contrary view (e.g., Mahindra, Nimbus, Prolifics), the Tribunal observed a cleavage of opinion and elected to follow its own earlier decisions and Bharti Airtel. On that basis, the upward transfer pricing adjustment of Rs.22,06,65,514 towards guarantee commission was held to be not sustainable and deleted.
  2. Interest on OFCDs (grounds 4 & 5): The TPO had taken LIBOR at 0.95% and added a spread of 2% to arrive at 2.95% as the arm's length rate. The assessee argued that its flat 2% was higher than LIBOR and hence at arm's length. The Tribunal found that while using an international reference rate (LIBOR) was appropriate for cross-border currency transactions, the TPO had not furnished adequate reason for adopting LIBOR + 2% (2.95%) as the ALP and, moreover, the determination of the correct LIBOR rate required verification (noting past inconsistencies in LIBOR figures used by authorities). The Tribunal therefore set aside the impugned orders on this point and remitted the matter to the AO/TPO to revisit and fix the correct LIBOR rate and then decide whether any transfer pricing adjustment is required. Grounds 4 & 5 were allowed for statistical purposes and remitted.
  3. Section 14A disallowance (grounds 6–11): The Tribunal noted factual findings recorded by the AO in the draft assessment order showing large investments (Rs.5,347,38,00,000) and dividend income of Rs.3,94,70,844, and that the AO had expressed dissatisfaction with the assessee's attribution of only Rs.17,90,085 as expenditure in respect of exempt income. Given that the lower authorities had not verified the assessee's claim that investments were wholly-owned subsidiaries or excluded investments not yielding exempt income, the Tribunal concluded that the section 14A disallowance required a fresh factual and legal examination by the AO. The issue was therefore remitted to the AO for reconsideration in accordance with law. Grounds 6–11 were partly allowed for statistical purposes (i.e., remitted for fresh consideration).
  4. Section 14A disallowance while computing book profit under section 115JB (ground 12): The Tribunal followed the Special Bench decision in ACIT v. Vireet Investment Pvt. Ltd., which held that computation under clause (f) of Explanation 1 to section 115JB(2) should be made without resort to the computation under section 14A read with Rule 8D. Applying this principle, the Tribunal held that no disallowance under section 14A could be made while computing book profits under section 115JB and deleted the disallowance for that purpose. Ground 12 was allowed.
  5. TDS and advance tax credits (ground 13): The Tribunal directed the AO to verify the assessee's claims for TDS and advance tax credits and, if the claims were found correct, to allow the credits to the extent proved. The Tribunal did not decide the credit questions substantively but directed verification.
  6. Stay petition: Having adjudicated the appeal substantively, the Tribunal noted that the assessee's stay petition had become infructuous and dismissed it as such.

Holding and Implications

Final disposition as pronounced on 20 March 2018, Chennai:

  • Corporate guarantee adjustment (Rs.22,06,65,514) — DELETED. The Tribunal held that, following its own prior decisions and Bharti Airtel, the provision of corporate guarantees by the assessee to its AEs did not constitute an international transaction attracting an arm's length commission adjustment.
  • Interest on OFCDs (aggregate adjustments Rs.3,75,50,666) — REMITTED. The Tribunal set aside the impugned orders on transfer pricing adjustment for OFCD interest and remitted the matter to the AO/TPO to determine the correct LIBOR rate and reassess arm's length pricing in accordance with law. Grounds 4 and 5 were allowed for statistical purposes.
  • Section 14A disallowance (regular assessment) — REMITTED for fresh consideration. The Tribunal remitted the section 14A issues (grounds 6–11) to the AO for verification of facts (which investments yielded exempt income, whether investments were in wholly owned subsidiaries, etc.) and fresh computation in accordance with law.
  • Section 14A disallowance for book-profit computation under section 115JB — DELETED. Following the Special Bench in Vireet Investment, the Tribunal held that no section 14A disallowance is to be made while computing book profits under section 115JB and allowed ground 12.
  • TDS and advance tax credits — DIRECTED FOR VERIFICATION. The AO was directed to verify the assessee's claim for TDS credit of Rs.5,41,97,523 and advance tax of Rs.3,50,00,000, and to give credit if the claims are established.
  • Overall case outcome: The appeal of the assessee was partly allowed (with deletions and remittals as above) for statistical purposes; the stay petition was dismissed as infructuous.

Implications: The decision directly affects the parties by deleting the guarantee-related transfer pricing addition, remitting interest- and section 14A-related factual issues for fresh consideration, and directing verification of tax credits. The Tribunal applied and followed existing Tribunal and Special Bench authorities (as recorded), and did not purport to lay down a new overarching precedent in this opinion — it applied prior rulings to the facts before it and remitted issues where factual determinations or further reasoned analysis was required.

Order pronounced: 20 March 2018, Chennai.
Bench: (N.R.S. Ganesan) — Judicial Member; (Abraham P. George) — Accountant Member.

Show full summary ...
To access the original judgment, please Sign In or Subscribe.

    SVS Oil Mills, CHENNAI v. ACIT Non Corporate Circle 6(1), CHENNAI

    PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER Assessee in this appeal directed against an order dated 30.10.2017 of ld. DCIT, Corporate Circle 6(2), Chennai pursuant to directions of Dispute Resolution Panel (DRP) under section 144c (5) of ita no. 2756/2017 & sp no.90/2018 :- 2 -: the income tax act, 1961 (in short the act) has altogether raised thirteen grounds of which grounds 1 & 2 are general in nature needing no specific adjudication.

    2. Grounds 3 to 5 are on transfer pricing adjustments. Out of these, ground No.3 is on upward adjustment of D22,06,65,514/- made by the ld. Assessing Officer based on the recommendation of the Transfer Pricing Officer, towards commission in respect of corporate guarantees, provided by the assessee to its Associated Enterprise. Grounds 4 & 5 are on upward adjustment of D3,75,50,666/- towards interest on investments made by the assessee through Optionally and Fully Convertible Debentures (OFCD) in its Associated Enterprise.

    3. Ld. Counsel for the assessee submitted that the issue regarding corporate guarantee had come up before this Tribunal in assessees own case for assessment years 2009-10 and 2010-11 in ITA Nos.1039 & 1074/Mds/2014,and 706/Mds/2015. Contention of the ld. Authorised Representative, was that this Tribunal in its order dated 07.10.2016 in ITA Nos.1039, 1074/Mds/14 and 706/Mds/2015 had held that there could be no upward adjustment on commission for providing corporate guarantee to Associated Enterprise, since ITA No. 2756/2017 & SP No.90/2018 :- 3 -: providing corporate guarantee not an international transaction. Ld. Authorised Representative also relied on the decision of Delhi Bench of the Tribunal in the case of Bharti Airtel Ltd vs. Adl. CIT , (2014) 39 CCH 415, that of Ahmadabad Bench of the Tribunal in the case of Micro Ink Ltd. vs. Addl. CIT, 157 ITD 132 and that of co-ordinate Bench in the case of Redington (India) Ltd. vs. JCIT, (2014) 40 CCH

    527.

    4. Per contra, ld. Departmental Representative submitted that ld. Dispute Resolution Panel had considered a number of decisions of the Tribunal and also clause (c) of Explanation (i) to Section 92B (2) of the Act introduced through Finance Act, 2012, with retrospective effect from 01.04.2002, while upholding the adjustment for commission on corporate guarantee. Relying on the decisions of Mumbai Bench of the Tribunal in the case of Mahindra and Mahindra Ltd vs. Addl. CIT, 29 ITR (Trib) 95, Nimbus Communication Ltd vs. ACIT (2011) 43 SOT 695 and that of Hyderabad Bench in the case of Prolifics Corpn. Ltd. vs. DCIT, (2015) 68 SOT 104, ld. Departmental Representative submitted that providing corporate guarantee to Associated Enterprise abroad constituted international transaction. As per the ld. Departmental Representative, Explanation (i) to section 92B (2) of the Act introduced through Finance Act 2012, widened the ITA No. 2756/2017 & SP No.90/2018 :- 4 -: meaning of international transaction to include corporate guarantee given to an Associated Enterprise.

    5. We have considered the rival contentions and perused the orders of the authorities below. What was held by the Tribunal assessees own case in ITA No.1039/Mds/2014 for assessment year 2009-2010 at paras 13.1 to 15 is reproduced hereunder:- 13.1. The related grounds raised by assessee in ITA No.1039/Mds./2014 is that the DRP,TPO and the AO had erred in holding that the provisions of the section 92 of the Act would be applicable to the transaction of extending guarantee by the appellant to its AE. 13.2 The related grounds raised by Department in ITA No.1074/Mds./2014 is that the DRP erred in directing the TPO to adopt 1% as guarantee commission rate instead of Rs.8,24,42,500/- at the rate of 3.5% on outstanding guarantee which was adopted by TPO. 13.3. In assessees C.O, the related ground is that the TPO had erred in not providing any basis for arriving at 3.5% as ALP commission for issuing corporate guarantee for the subject A.Y.2009-10. 13.4. The related grounds raised by Department in ITA No.706/Mds./2015 is that the DRP held that the action of the TPOs action of determining the ALP at Rs.3,36,50,000/- is not justified and consequently the proposed upward adjustment of Rs.3,36,50,000/- is deleted as providing of corporate guarantee will not constitute an international transaction for the purpose of determining the ALP. 13.5 Revenues appeal in ITA No.1074/Mds./2014 for assessment year 2009-10 has been filed late by 3 days. Condonation petition has not been filed by Department. Before us, the ld.D.R explained the reasons for delay in filing the appeal ITA No. 2756/2017 & SP No.90/2018 :- 5 -: due to administrative reasons. Reasons explained by the ld.D.R are justified and hence, delay is condoned and appeal admitted.

    14. The facts of the issue are that TPO has made an adjustment of Rs.8,24,42,500/- as commission income, for the same amount for the same guarantee in the case of Siva Ventures Ltd., which was a wholly owned subsidiary of the assessee and is now merged with the assessee, resulting in double taxation, while passing the Transfer pricing order u/s.92CA(3) of the Act. The DRP observed that the Panel cannot given direction on an objection which is not part of Application in Form 35A filed by the assessee. Therefore, the Panel did not give any direction on this issue. Against this, both the parties are in appeal before us.

    15. We have heard both the parties and perused the material on record. This issue came up for consideration before this Tribunal in the Case of Redington India Ltd. Vs. JCIT in ITA No.513/Mds./2014 dated 07.07.2014 for assessment year 2009-10 wherein held that:-

    47. Regarding the above issue, the learned senior counsel contended that corporate guarantee granted by the assessee company is not an international transaction. The assessee has not granted any new guarantee in the previous year. Therefore, the reliance placed by the TPO on the definition of the term international transaction as retrospectively amended by the Finance Act, 2012, is erroneous and bad in law. The corporate guarantees provided by the assessee company to its AEs enable them to secure credit in their respective overseas jurisdictions and to comply with the laws, in those jurisdictions. Such corporate guarantees granted by the assessee to the AEs enabled them to secure funds for their working on competitive rates in the relevant jurisdictions. In the absence of such locally sourced funding, the assessee would have to support its AEs business operations by providing funds through equity or otherwise. Accordingly, the transaction can be said to be one of quasi-equity or shareholder activity. The well-being of the AEs is of deep interest to the assessee; especially, where the business of the subsidiary generates synergies for the assessee. It is in the best interest of the group that the assessee has provided corporate guarantees to its AEs. The learned senior counsel relied on the decision of the ITAT, Delhi Bench, rendered in the ITA No. 2756/2017 & SP No.90/2018 :- 6 -: case of Bharti Airtel Ltd. v. ACIT (43 taxman.com 150), wherein it has held that providing corporate guarantee does not involve any cost to the assessee and it is not an international transaction, even under the definition of the said term as amended by the Finance Act, 2012, as it does not have any bearing on profits, income, losses or assets of the assessee company.

    48. As an alternative contention, the learned senior counsel argued that guarantees are provided to the assessee on behalf of AEs as an integral business activity of the assessee relating to supply of general management and distribution of logistic business, worldwide. Therefore, the transaction must be tested under the combined transaction TNMM approach rather than on a stand-alone basis. The ITAT, Pune Bench in the case of Demag Cranes & Components (India) (P.) Ltd. v. DCIT, 56 SOT 187(Pune) and ITAT, Delhi Bench in the case of McCann Erikson India Pvt. Ltd. v. Addl.CIT (24 Taxmann.com 21) have held that TNMM applied on an entity-wide basis is the most appropriate method for Benchmarking transactions that are not independent of the business carried on by an assessee. The learned senior counsel submitted that the adjustment made against the corporate guarantee may be deleted. Accordingly this ground is decided in favour of the assessee and against the Revenue. Co-ordinate Bench had followed the decision of Bharti Airtel Ltd (supra). That apart, in the case of Redington (India) Ltd (supra) again decided by a Co-ordinate Bench, the issue whether providing corporate guarantee to Associated Enterprise, could be considered as an international transaction had come up. What was held at paras 5 & 6 of its is reproduced hereunder:- ITA No. 2756/2017 & SP No.90/2018 :- 7 -:

    5. We have considered the rival submissions on either side and also perused the material available on record. We have carefully gone through the decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi). This Tribunal found that the corporate guarantee issued for the benefit of the associated enterprise does not involve any cost to the assessee and does not have any bearing on the profit, income or loss of assets of the assessee, therefore, it was outside the ambit of international transaction to which the arm's length price adjustment can be made. The Dispute Resolution Panel has also placed its reliance on the Explanation to section 92B of the Act. The decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi) was followed by the Chennai Bench of this Tribunal in the assessee's own case for the assessment year 2009-10.

    6. In view of the above, by following the order of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL

    475 (Delhi) and the order of this Tribunal in the assessee's own case for the assessment year 2009-10 and for the reasons stated therein, we hold that the corporate guarantee given by the assessee to its associated enterprise does not involve any cost to the assessee, therefore, it has no bearing on the profits, income, loss or assets of the assessee and outside the ambit of international transaction to which the arm's length price adjustment has to be made. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition of Rs.1,84,17,371/-.. It may be true that there is a cleavage of opinion, as to the issue whether corporate guarantee to an Associated Enterprise could be considered as international transaction. Ld. Departmental Representative has pointed out to decisions of Mumbai Bench of the Tribunal in Mahindra and Mahindra Ltd (supra) and Hyderabad Bench in the case of Prolifics Corpn. Ltd (supra). However, since in assessees own case, the Tribunal has already held that providing corporate guarantee to its Associated Enterprise could be considered ITA No. 2756/2017 & SP No.90/2018 :- 8 -: as an international transaction, which decision was rendered after considering the amendment to clause (c) of Section 92B(2), through Finance Act, 2012, we are inclined to follow this view. Accordingly the upward adjustment of D22,06,65,514/- made towards providing corporate guarantee stands deleted.

    6. Coming to grounds 4 & 5, which are on upward adjustment for interest charged on Optionally and Fully Convertible Debentures (OFCD). Ld. Counsel for the assessee submitted that ld. TPO had considered the investments in OFCD by the assessee in its Associated Enterprise, which carried an interest of 2% as not at Arms Length. According to the ld. Authorised Representative, the ld. TPO had considered the LIBOR rate of 0.95% and added such LIBOR rate to 2% interest applicable on OFCD and erroneously took 2.95% as the Arms Length Interest rate. Contention of the ld. Authorised Representative was that if the LIBOR rate of 0.95% was considered, assessees rate of interest of 2% being more than such rate, it was at Arms Length. According to him, no reason was given by the ld. TPO for adopting 2% plus LIBOR rate as the Arms Length rate of interest chargeable on OFCD. As per the ld. Authorised Representative, the ld. DRP has confirmed the upward adjustment without properly appreciating the submissions made by the assessee. Reliance was ITA No. 2756/2017 & SP No.90/2018 :- 9 -: placed on the decision of Co-ordinate Bench in assessees own case in ITA No.2148/Mds/2010, dated 20.05.2011 for assessment year 2006-07.

    7. Per contra, ld. Departmental Representative submitted that OFCD cannot be considered as equivalent to equity. According to him, it was only a debt. Contention of the ld. Departmental Representative was that even the conversion rate was not fixed upfront nor any a fixed method or formula mentioned. As per the ld. Departmental Representative, there was a clear violation of FDI Rules. Contention of the ld. DR was that the investments made by the assessee through OFCD were more like ECB. Vis--vis, corporate guarantee according to the ld. Departmental Representative, the upward adjustment recommended by the ld. TPO and confirmed by ld. DRP was justified.

    8. We have considered the rival contentions and perused the orders of the authorities below. Relevant observation of the ld. TPO is reproduced hereunder:- 10.1. Interest received / receivable on' investments made in OFCD issued by Siva Skylink Ltd formerly known as Avis Ventures Limited: The interest rate on the above debentures is a flat 2%. The LIBOR rate applicable for the interest receivable / received works out to 0.95%. Interest rate must have ITA No. 2756/2017 & SP No.90/2018 :- 10 -: been charged at the rate of LIBOR plus a spread of 2 percent Applying the above rate of 2.95% the arm's length price of the interest receivable is worked out as under: Period Interest No. Interest to be Balance charged by the days charged Interest Assessee @ 2% @ 2.95% 01.4.2012 to 6,84,82,964 365 10,10,12,372 3,25,29,408 31.3.2013 TOTAL 3,25,29,408 10.2 Interest received I receivable on investments made in OFCD issued by Lotus Ventures Limited: The interest rate on the above debentures is a flat 2%. The UBOR rate applicable for the interest receivable / received works out to 0.95%. Interest rate must have been charged at the rate of UBOR plus a spread of 2 percent. Applying the above rate of 2.95% the arm's length price of the interest receivable is worked out as under: Period Interest No.of Interest to be Balance . charged by the days charged Interest Assessee @ 2% @ 2.95% 01.4.2012 to 3,16,23,701 365 4,66,44,959 1,50,21,258 31.3.2013 TOTAL 1,50,21,258 Though the ld. TPO had given a clear finding that LIBOR rate applicable for interest was 0.95%, he had adopted the Arms Length interest rate as 2.95%. No reason whatsoever has been given by the considered the interest rate at LIBOR plus 2%. Though adoption of LIBOR as the appropriate rate cannot be faulted, in our opinion ld. TPO erred in adopting 2+ LIBOR. At this juncture it is apposite to have a look at para 11 of the decision of this Tribunal in assessees ITA No. 2756/2017 & SP No.90/2018 :- 11 -: own case for assessment year 2006-07 in ITA No.2148/Mds/2010, dated 25.05.2011. 11.We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0% optional convertible preferential shares. Thus it IS noticed that the funds . raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1.4.2005 to 31.03.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted. Once assessee had charged rate of interest more than the LIBOR rate, there could be no question of any Transfer pricing adjustment. Nevertheless, how the ld. TPO had arrived at the LIBOR rate of 0.95% ITA No. 2756/2017 & SP No.90/2018 :- 12 -: is not clear. LIBOR rate for assessment year 2006-07 was 4.42% whereas what was considered by the ld. TPO as LIBOR rate for the impugned assessment year is 0.95%. We are therefore of the opinion that ld. Assessing Officer/TPO has to revisit the issue to fix the correct LIBOR rate, before deciding whether any adjustment for Arms Length Pricing is required. We set aside the orders of the lower authorities on the Arms Length Price adjustment, if any, required on interest on OFCD, and remit it back to the file of the ld. Assessing Officer/ld. TPO for consideration afresh in accordance with law. Ground 4 & 5 of the assessee are allowed for statistical purpose.

    9. Through its grounds 6 to 11, grievance raised by the assessee is on a disallowance of D101,96,34,654/- u/s.14A of the Act r.w.r.8D.

    10. Ld. Counsel for the assessee submitted that such disallowance was made by the ld. Assessing Officer without expressing any dissatisfaction as to why assessees own disallowance of D17,90,085/- was incorrect. According to him, there was no compliance with Section 14A of the Act. As per the ld. Authorised Representative, whole of the investments made by the assessee, were in subsidiaries wholly owned by it. According to him, ld. Assessing Officer did not exclude those investments which did not yield any ITA No. 2756/2017 & SP No.90/2018 :- 13 -: exempt income, while working out the disallowance u/s.14A of the Act. In any case, as per the ld. Authorised Representative, disallowance u/s.14A of the Act had to be restricted to the amount of exempt income which came to D3,94,70,844/- only. Reliance was placed on the judgment of Honble Apex Court in the case of Godrej and Boyce Manufacturing Company Ltd vs. DCIT, 394 ITR 449 that of Honble Jurisdictional High Court in the case of Redington (India) Ltd vs. Addl. CIT, (2016) 97 CCH 219 that of Honble Delhi High Court in the case of Joint Investments Pvt. Ltd vs. CIT, 372 ITR 694, that of Special Bench decision of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd, 165 ITD 27 and that of Co-ordinate Bench decision in the case of M/s. EIH Associated Hotels Ltd. vs. DCIT, ( ITA Nos.1673, 1674 & 1919 & 1920/Mds2015).

    11. Per contra, ld. Departmental Representative submitted that ld. Assessing Officer in the draft assessment order dated 30.12.2016 clearly expressed his dissatisfaction on the suo-motu disallowance of expenditure relatable to the exempt income, made by the assessee. Further according to her, there was nothing on record to show what were the investments which yielded exempt income and whether the investments were made in fully owned subsidiaries. Viz-a-viz restriction of disallowance to the exempt income, ld. Departmental ITA No. 2756/2017 & SP No.90/2018 :- 14 -: Representative relying on Circular No.5/2014, dated 11.02.2014 of CBDT, submitted that even when there was no income which was exempt under the Act, a disallowance u/s. 14A of the Act could be made.

    12. We have considered the rival contentions and perused the orders of the authorities below. Assessee was having investment D5347,38,00,000/- as on 31.03.2013. It had earned dividend income of D3,94,70,844/- and claimed it as exempt. Expenditure attributed by the assessee for earning such dividend income was D17,90,085/-. Ld. Assessing Officer had mentioned as under in his draft assessment order dated 30.12.2016: 7.1 It is seen from the P&L account that the assessee has received an amount of Rs.3, 94,70,844/ - as dividend during the year under consideration, which has been claimed as exempt, in the statement of total income. As on 31.3.2013, the assessee company is having 'Investments' in the form of shares & Mutual funds to the tune of 5347,38,00,000/- from which the assessee company earns dividend income. However, the assessee company has not attributed only Rs.17,90,085/- as expenditure towards exempt income. In such circumstances, the undersigned having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee that there are no expenditure attributable towards these investments. The AR of the assessee was asked to explain why disallowance u/s 14A should not be made. In our opinion, ld. Assessing Officer clearly expressed his dissatisfaction on the suo-motu disallowance of D17,90,085/- made by the assessee as expenditure incurred for earning exempt income. ITA No. 2756/2017 & SP No.90/2018 :- 15 -: Invocation of Section 14A of the Act r.w.r. 8D of the Rules, in our opinion, cannot be faulted. Nevertheless, none of the lower authorities had verified the claim of the assessee that its investments were all in wholly owned subsidiaries and investments which did not yield any exempt income had to be excluded, for the purpose of computing the disallowance u/s.14A of the Act. Ld. Assessing Officer also did not have the benefit of the judgment of Honble Delhi High Court in the case of Joint Investments Pvt. Ltd (supra) when he was considering the issue. In the fitness of the things, we are of the opinion that disallowance, if any, required under Section 14A of the Act needs a fresh look by the ld. Assessing Officer. We set aside the orders of the authorities below and remit the issue back to the file of the ld. Assessing Officer for consideration afresh in accordance with law. Ground No.6 to 11 of the assessee are partly allowed for statistical purpose.

    13. Vide its ground No.12, grievance raised by the assessee is on a disallowance of D101,96,34,654/- made u/s.14A of the Act, while computing its book profits for applying Section 115JB of the Act.

    14. Ld. Authorised Representative submitted that this issue was squarely covered in favour of the assessee by virtue of decision of Special Bench in the case of Vireet Investment Pvt. Ltd (supra). ITA No. 2756/2017 & SP No.90/2018 :- 16 -:

    15. Ld. Departmental Representative did not advance any argument on this issue.

    16. We have perused the orders and heard the contentions. What was held by the Special Bench of the Tribunal in case of Vireet Investment Pvt. Ltd (supra) at para 6.22 is reproduced hereunder:- 6.22 In view of above discussion, we answer the question referred to us in fvour of assessee by holding that the computation under clause(f) of Explanation 1 to Section 115JB (2) is to be made without resorting to the computation as contemplated u/s.14A read with Rule 8D of the Income Tax Rules, 1962. Special Bench had followed the judgment of Honble Delhi High Court in the case of Cheminvest Ltd. vs. CIT, (2015) 378 ITR 33. Considering the above decision of the Special Bench, we are of the opinion that no disallowance could have been made u/s.14A of the Act, while computing book profit u/s.115JB. Such disallowance is deleted. Ground No.12 of the assessee stands allowed.

    17. Vide its ground No.13, grievance raised by the assessee is that credit for TDS D5,41,97,523/- and advance tax D3,50,00,000/- were not given to it. Ld. Assessing Officer is directed to verify the claim of the assessee on these and if found correct allow credit to extent proved by the assessee. Ordered accordingly. ITA No. 2756/2017 & SP No.90/2018 :- 17 -:

    18. The appeal having been adjudicated, Stay Petition filed by the assessee has become infructuous.

    19. In the result, appeal of the assessee is partly allowed for statistical purpose whereas its stay petition is dismissed as infrutuous. Order pronounced on Tuesday, the 20th day of March, 2018, at Chennai. Sd/- Sd/- (... )) (N.R.S. GANESAN) /JUDICIAL MEMBER ( . %) (ABRAHAM P. GEORGE) /ACCOUNTANT MEMBER $/Chennai %/Dated: 20th March, 2018. () *)/Copy to:

    1. /Appellant 3. + ()/CIT(A) 5. ) //DR

    2. /Respondent 4. +/CIT 6. /GF

    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    SVS Oil Mills, CHENNAI v. ACIT Non Corporate Circle 6(1), CHENNAI
    (Mar 20, 2018)