ORDER

1. These cross appeals are preferred by the Revenue as well as Assessee against the orders of the DRP-2, Kolkata. Since identical facts are involved in both the appeals, they are taken up together and disposed off by this common order for the sake of convenience.

2. DISALLOWANCE U/S 14A OF THE ACT

Ground Nos. 3.1 to 3.6 of Assessee's Appeal

The brief facts of this issue is that the ld AO while framing assessment show caused the assessee as to why disallowance u/s 14A of the Act should not be made by applying Rule 8D of the Rules. The assessee in reply thereon filed a written submission stating that the assessee had suo-moto disallowed Rs 4248,850/- on account of indirect expense and Rs 496/- on account of direct expenses attributable towards earning of exempt income. The ld AO disregarded the same and worked out the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Rules in the sums of Rs 2,39,52,830/- and Rs 23,77,882/- respectively. This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following grounds:—

2.1 We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find from page 745 of the paper book that the assessee has sufficient own funds to the extent of Rs 2587,79,74,512/- for making investments. Hence there cannot be any disallowance of interest under Rule 8D(2)(ii) of the Rules by applying the ratio laid down in the decision of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 wherein it was held that the presumption would go in favour of the assessee if the interest free funds are more than the loans taken by the assessee, then it would be presumed that the investments were made out of own funds of the assessee. The said ratio would squarely apply to the facts of the instant case. Hence we hold that the disallowance made under the second limb of Rule 8D(2)(ii) of the Rules is hereby directed to be deleted.

2.2 With regard to the third limb of Rule 8D(2)(iii) of the Rules, we hold that the assessee has got investments in foreign companies, the dividend earned from which would be taxable income and hence should be outside the ambit of disallowance u/s 14A of the Act read with Rule 8D of the Rules. Similarly, investments made in subsidiary companies would have to be reckoned as strategic investments and hence the same should be excluded while working out the disallowance under Rule 8D(2)(iii) of the Rules. Similarly, the investments which had yielded dividend income alone, are to be considered while working out the disallowance under Rule 8D(2)(iii) of the Rules as has been held by the decision of this tribunal in the case of REI Agro Ltd. v. Dy. CIT [2013] 144 ITD 141/35 taxmann.com 404 (Kol. - Trib.) . But we find that if the disallowance made under second limb of Rule 8D(2) of the Rules is deleted, then the disallowance made by the ld AO would remain at Rs 23,77,882/- and whereas the assessee itself had voluntarily disallowed Rs 42,48,850/-. Hence we direct the ld AO to adopt the disallowance figure of Rs 42,48,850/- which had already been disallowed by the assessee and hence no further disallowance in that regard is to be made.

2.3 Accordingly , the ground nos. 3.1 to 3.6 raised by the assessee are allowed.

3. The Ground No. 3 raised in Revenue's Appeal is with regard to the disallowance u/s 14A of the Act while computing the book profits u/s 115JB of the Act. The ld AO added the sum of Rs 2,20,81,366/- in the draft assessment order u/s 14A of the Act read with Rule 8D of the Rules while computing the book profits u/s 115JB of the Act. The ld DRP deleted the said addition in its order on the ground that section 115JB of the Act are self contained provisions and hence disallowance u/s 14A of the Act read with Rule 8D of the Rules cannot be imputed thereon while computing book profits u/s 115JB of the Act. Aggrieved, the revenue is in appeal before us on the following ground:—

3. That on the facts and circumstances of the case and in law, the Ld. DRP erred as the provisions of section 14A r.w. Rule 8D of the Act not applicable in MAT provision.

3.1 We have heard the rival submissions and perused the materials available on record. We have already held in para 2 above that no disallowance is to be made in accordance with Rule 8D of the Rules in the facts and circumstances of the instant case under the normal provisions of the Act. However, we find that the assessee had made disallowance of Rs 42,49,346/- based on its books of accounts u/s 14A of the Act by attributing certain expenses incurred for the purpose of earning exempt income, while computing the book profits u/s 115JB of the Act. We find that the Special Bench of Delhi Tribunal in the case of Asstt. CIT v. Vireet Investment (P.) Ltd. [2017] 165 ITD 27/82 taxmann.com 415 had held that no disallowance u/s 14A of the Act could be made by resorting to computation mechanism provided in Rule 8D of the Rules. However, the ld AO would have to disallow u/s 14A of the Act having regard to the books of accounts on some rational basis as expenditure incurred for earning exempt income, in terms of clause (f) of section 115JB(2) of the Act. Hence the disallowance already made by the assessee having regard to the books of accounts of the assessee in the sum of Rs 42,49,346/- does not require to be disturbed. Hence the addition made by the ld AO u/s 115JB of the Act had been rightly deleted by the ld CITA. Accordingly, the Ground No. 3 raised by the revenue is dismissed.

4. Ad hoc disallowance of aircraft maintenance expenses including depreciation thereon

Ground no. 4.1 of Assessee's Appeal

The brief facts of this issue is that the assessee is inter alia engaged in the business of time charter of aircraft. It holds a valid license to operate non-scheduled air charter services. The assessee chartered the aircraft to outside parties, hotel guests and time to time used the aircraft for its own business purposes. It was submitted to the ld AO that the aircraft was exclusively used for the business purposes of the assessee and did not involve any element of personal use. The ld AO by following the principle of consistency flowing from the assessment of past years and the several decisions of the ld CITA in the assessee's own case on the impugned issue in relation to past years, he held that the two aircrafts were not used wholly and exclusively for the purpose of assessee's business. Accordingly , he held that 90% of the user of the aircrafts relates to business purposes and the remaining 10% relates to non-business purposes. Therefore, by applying the provisions of section 38(2) of the Act, the proportionate expenditure incurred on running , repairs & maintenance of the aircrafts and depreciation were disallowed by the ld AO as under:—

This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us on the following ground:—

4.1 On facts and circumstances of the case and in law, the Ld. Panel erred in confirming the ad-hoc disallowance made by the ld. AO of expenditure incurred on running and maintenance of aircrafts including depreciation to the extent of Rs. 68,20,321/- being 10% of the total expenditure of Rs. 6,82,03,213/- ignoring the decision of Hon'ble Kolkata Tribunal in assessee's own case in EIH Limited v. DCIT (2015) I.T.A. No. 316/Kol/2006 for A.y. 2002-03.

4.1 We have heard the rival submissions and perused the materials available on record including the paper book of the assessee. We find that the assessee owns the aircrafts and were used for providing services to the tourists of the assessee company as well as others who chartered them according to their requirements. These aircrafts were utilized for chartering flights also and assessee had derived chartering income also which are reflected as income in the profit and loss account which evidences the business nexus of use of aircrafts. We also find that the assessee had stated that sometimes the directors of the assessee company had to use the aircrafts for the purpose of urgent business meetings in different locations and no personal expenses have been charged to revenue. The chartering revenue offered by the assessee has been accepted by the revenue and hence it can safely be concluded that the aircrafts are used for the purpose of its business. We hold that assessee company being a non-natural person cannot have personal element thereon and all the expenditure incurred thereon had to be construed only for business purposes. Even if there was any personal element involved in the aforesaid expenditure, the same have to be taxed as perquisite in the hands of the directors or employees and it is only for the ld TDS officer to look into the alleged violations, if any, on the same and the ld AO cannot resort to make any disallowance of expenditure on that count on an estimated basis. We also draw support from the decision of the Hon'ble Gujarat High Court in the case of Sayaji Iron and Engg. Co. v. CIT [2002] 253 ITR 749/121 Taxman 43 in this regard. Based on these findings and judicial precedent relied upon, we hold that no disallowance of expenditure on maintenance of aircrafts need to be made on an estimated basis towards expenditure incurred for non-business purposes. Hence the issue of maintenance of aircrafts being utilized for business purposes are proved beyond doubt and there is no question of making any disallowance on that count. Once it is established that the aircrafts were used only for business purposes, there is no question of disallowance of depreciation, being proportionate or otherwise, on the same. Hence the provisions of section 38(2) of the Act are not at all applicable to the facts of the instant case. We also find that similar issue had cropped up for the Asst Years 2007-08 to 2009-10 in assessee's own case ITA Nos. 1431/1557/Kol/2011 ; ITA Nos. 932 & 866/Kol/2012 and ITA Nos. 352& 191/Kol/2013 respectively, wherein it was held that :—

4.2 Respectfully following the aforesaid decision, we hold that no disallowance could be made on an estimated basis towards running, repairs & maintenance of aircrafts including depreciation thereon. Accordingly, the Ground No. 4.1 raised by the assessee is allowed.

5. Non-granting of set off of long term capital loss against deemed short term capital gain

Ground Nos. 5.1 & 5.2 of Assessee's Appeal

The assessee claimed set off of Long Term Capital Loss amounting to Rs 9,77,54,843/- arising on sale of land, against the deemed short term capital gain of Rs 7,18,74,000/- arising out of sale of residential property (being a long term capital asset as the holding period of them exceeded 36 months). Based on the provisions of section 50(1) of the Act, the assessee company computed short term capital gains on sale of depreciable assets, although the assets which were sold were long term capital asset as the holding period of them exceeded 36 months. Hence only by deeming fiction in terms of section 50 of the Act, the gain was treated as short term capital gain. The ld AO in the draft assessment order denied the set off of long term capital loss with deemed short term capital gain computed u/s 50 of the Act. The ld AO placed reliance on the decision of the Hon'ble Madras High Court in the case of M. Raghavan v. Assistant Commissioner Of Income-Tax [2004] 266 ITR 145/134 Taxman 790 wherein it was held that the 'books' when treated as plant, the assessee was given the benefit of depreciation and gains received by the assessee on sale of such assets, over and above the written down value thereon, would be taxed as short term capital gain. Accordingly, the ld AO denied the benefit of set off of brought forward long term capital loss with deemed short term capital gain by applying the provisions of section 74 of the Act, which permitted set off of long term capital loss only with long term capital gains. This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us on the following grounds:—

5.1 On facts and circumstances of the case and in law, the Ld. Panel erred in confirming the action of the Ld. AO in non-granting of set-off u/s 74 of long term capital loss amounting to Rs. 9,77,54,843/- with deemed short term capital gain computed as per section 50(1) of Rs. 7,18,74,000/- in the present case.

5.2 On facts and circumstances of the case and in law, the Ld. Panel while confirming the action of Ld. AO in denying set-off u/s 74 failed to appreciate that section 50 being a deeming provision its scope extended only up to computation of capital gain, however such gain being arising from transfer of long term capital assets, retained the character of long term capital gain for all other provisions and is eligible for set off u/s 74 against brought forward loss from long term capital asset.

5.1 We have heard the rival submissions and perused the materials available on record. It is not in dispute that the asset that was the subject matter of transfer was a residential property which was held by the assessee for a period exceeding 36 months. Hence the asset held was a long term capital asset in the hands of the assessee. It is not in dispute that the assessee had claimed depreciation on the said property in the returns of earlier years and hence becomes depreciable asset. We hold that merely because the depreciable asset has been sold and the sale consideration received thereon exceeds the written down value of such asset, the character of the asset (i.e being a long term capital asset) does not undergo any change. May be, it would be eligible to taxed in terms of deeming fiction u/s 50 of the Act as short term capital gains on sale of depreciable assets. We hold that the deeming fiction created by section 50 of the Act that the capital gain arising on transfer of a depreciable asset shall be treated as capital gain arising on transfer of short term capital asset is only for the purpose of sections 48 and 49 of the Act and not for the purpose of any other section. It is well settled that the deeming fiction and the deeming provisions should be construed very strictly and to be applied in limited sense and the same cannot be imported into other sections of the Act unless otherwise specified. Section 74(1)(b) of the Act being an independent section is not bound by the deeming provisions of section 50 of the Act. The nature of capital asset, whether short term or long term, has to be determined applying the provisions of section 2(42A) and section 2(29B) of the Act. Hence we hold that the depreciable assets which had been held for more than 36 months prior to its sale, does not lose its character of being a long term capital asset, even though it might get taxed as short term capital gain in terms of deeming fiction provided u/s 50 of the Act. Reliance in this regard is placed on the decision of Hon'ble Supreme Court in the case of CIT v. V.S. Dempo Co. Ltd. [2016] 74 taxmann.com 15/242 Taxman 434/387 ITR 354 wherein it was held that :—

5.2 We find that the reliance placed by the ld AR on the decision of Hon'ble Bombay High Court in the case of CIT v. Manali Investment [2013] 219 Taxman 113 (Mag.)/39 taxmann.com 4 wherein it was held that short term capital gain computed u/s 50 of the Act on long term depreciable assets can be set off against long term capital loss u/s 74 of the Act.

5.3 Respectfully following the decisions of the Hon'ble Supreme Court and Hon'ble Bombay High Court supra , we hold that the assessee is indeed entitled to set off the brought forward long term capital loss of Rs 9,77,54,843/- against the deemed short term capital gain of Rs 7,18,74,000/- in the facts of the case. The ld AO is accordingly directed to give benefit of the same to the assessee based on the correctness of the claim of brought forward loss figure made by the assessee. Accordingly, the Ground Nos. 5.1 & 5.2 raised by the assessee are allowed for statistical purposes as directed above.

6. Disallowance of foreign currency payments u/s 40(a)(i) of the Act - Rs. 4,52,43,617/-

Ground Nos. 6.1 & 6.2 of Assessee's Appeal

The ld AO observed that the assessee had payments under various heads in foreign currency on which due deduction of tax at source was not made. A total payment of Rs 28,23,83,789/- has been made during the financial year towards various heads of expenses across various units of EIH Ltd. The ld AO observed that on perusal of the records, it is seen that the assessee has not deducted TDS on the following payments :—

Advertisement in magazine / website listing

Inspection Fees

Marketing & Development Charges

Recruitment Charges

Management Fees

Professional / Consultancy Charges

In response to the show cause notice issued by the ld AO, the assessee replied vide its submission dated 17.3.2015 that the remittances made for the aforementioned heads of expense, in terms of foreign currency, were not for any use or right to use of any equipment, copyright, scientific work etc and should not qualify as Royalty u/s 9(1)(vi) of the Act. Similarly the said remittances were not for rendering any managerial, technical or consultancy services and hence should not quality as Fees for Technical Services (FTS) u/s 9(1)(vii) of the Act. Accordingly, the remittances would not be taxable as Royalty/FTS under the Act. Further since all the operations of Payee are carried out outside India, in accordance with clause (a) of Explanation 1 to section 9(1)(i) of the Act, the proposed remittance should not be deemed to accrue or arise in India and accordingly such income ought not to be chargeable to tax in India u/s 9(1)(i) of the Act. It was further stated that without prejudice to the taxability of the said remittances under the Act, the said remittances would not fall within the definition of Royalties/FTS under Article 12 of the tax treaty. Hence the proposed remittance should not be taxable as Royalties/FTS under Article 12 of the tax treaty. Once it is concluded that the remittance does not qualify as Royalties / FTS, it would be treated as business income under Article 7 of the tax treaty. In the absence of a PE (under Article 5 of the treaty) of payees in India, the said remittance should not be taxable in India as business income under Article 7 of the tax treaty. Section 90(2) of the Act provides that a taxpayer may apply the provisions of the Act or the applicable tax treaty whichever are more beneficial to the tax payer.

6.1 The ld AO observed that the payments of Recruitment charges, Management fees, Professional / Consultancy charges, Advertisement in magazine /website listing, Inspection fees and Marketing & Development Fees would require the engagement of certain amount of skill and intellectual input of expertise and accordingly the same would partake the character of FTS and hence the assessee is liable to deduct tax at source, failure of which would result in disallowance u/s 40(a)(i) of the Act. With these observations, the ld AO proposed a disallowance of Rs 5,10,87,110/- in the draft assessment order after listing out the details of each such expenditure party wise in his draft order. The ld DRP gave relief to the extent of Rs 58,43,493/- out of these expenditures and sustained the balance disallowance of Rs 4,52,43,617/- which was duly made by the ld AO in the final order passed on 30.11.2015. Aggrieved, the assessee is in appeal before us on the following grounds :—

6.1 On facts and circumstances of the case and in law, the ld. AO while giving effect to the directions of the Ld. Panel erred in confirming the disallowance u/s 40(a)(ia) of the Act to the extent of Rs. 4,52,43,617/- for alleged non-deduction of tax u/s 195 ignoring the various details/explanation filed in the course of assessment and failing to appreciate that the various remittances were not taxable in India either under the provisions of the Income Tax Act or under the beneficial provisions of Double Taxation Avoidance Agreement (DTAA).

6.2 On the facts and circumstances of the case and in law, the ld. AO while confirming disallowance to the extent of Rs. 4,52,43,617/- u/s 40(a)(ia) of the Act failed to provide proper/sufficient opportunity to the assessee to have its say or make compliance of the reasons relied upon by him in making the said disallowance in spite of the fact that the appellant filed sample invoices along with supporting evidences in support of the non-taxability of remittance.

6.2 We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find that the assessee had given unit wise details of various expenditures incurred in foreign currency vide its letter dated 12.3.2015 & 16.3.2015 with detailed write up about the each expenditure as under:—

Nature of Expenditure

6.3 Advertisement in Magazines / Website Listing

The assessee explained that magazines are printed outside India and / or the Websites are listed outside India. The assessee being in the luxury hospitality, its business heavily depends on clients from the western world. Consequently, as in the past it spent a considerable sum of money on advertisements both in the print and web media. As already explained in the past years, such advertisements are printed mostly in USA and some in the UK etc. The servers of the web are also located outside India. As already explained, the target for the advertisements are the foreign tourists. Hence, in those cases, what is ensured is that these foreign advertisements are circulated in the US/ Canada and in UK and European Countries. Accordingly, the payments do not attract tax withholding u/s 9 since all activities relating to the advertisements take place outside India and the remittances are made outside India such remittances should not call for any tax withholding. Further, even under the respective treaties, US / UK etc, with restricted FTS clause with 'make available' provision, no TDS is called for in India.

6.4 Inspection Fees

The assessee explained that fees paid to overseas parties for carrying on inspections outside India. To ensure quality assurances, inspection fees were paid to various agencies mostly from the UK. Even if it is admitted that the services to provide such Inspection requires technical expertise, under the Indo-UK tax treaty, the FTS clause is very narrow. To qualify for an amount alling under the FTS clause, there should be 'making available' of a technology. In case of inspection fees, the service provider only provides their report or only provides a quality assurance. Such services do not fall under FTS and hence in the absence of their PEs in India, there was no withholding tax requirement in India under the India UK treaty.

6.5 Recruitment Charges

Payments towards professional fees for manpower recruitment in hotels outside India. The assessee had to take the services of various foreign recruitment agents (specially for SPAs, Chefs etc). The services are rendered outside India and the payments are made outside India. Therefore under the domestic law, the remuneration for such services are not taxable in India. Even otherwise, the recruitment services providers are based in Indonesia or Thailand. Both the countries have treaties with India and do not have any FTS clause at all. None of such services providers have any PE in India. Therefore any remittance made in this regard is not taxable in India.

6.6 Professional / Consultancy Charges

The payees are mainly from the USA, UK and Australia. The professional services rendered do not fall in the category of 'Royalty' as per the India-Australia Tax Treaty. Further that treaty does not have any exclusive FTS clause. As regards the USA and UK, the FTS/ included service definitions are very narrow. Services rendered to the assessee do not fall under 'make available' category. Therefore in the absence of PE in India, the payments made to the payees outside India do not call for any TDS.

6.7 Management Fees

Management fees is paid to the Thai SPA management firm. For argument sake, even if the payment is considered taxable in India under the domestic law, the same is not taxable in India under the India Thailand tax treaty. As mentioned earlier, the Thai treaty does not have any exclusive FTS clause. Hence in the absence of any PE in India, these payments made to the service providers do not call for any TDS.

6.8 Marketing & Development

Payments are made to the tax residents of USA / Mauritius. While USA has 'make available' clause in the 'Included Services Article' , Mauritius does not have any exclusive FTS clause. In view of the above, no tax withholding is called for.

6.9 Apart from this, the assessee had given an exclusive submission before the ld AO vide letter dated 19.11.2015 with regard to non-applicability of withholding tax under domestic law as well as DTAA of the respective countries for each of the aforesaid expenditure as under:—

[not produced]

EIH Limited

Assessment Year 2011-12

Details of inspection fees paid in foreign currency

EIH Limited

Assessment Year 2011-12

Details of marketing and Development fees paid in foreign currency

EIH Limited

Assessment Year 2011-12

Details of recruitment charges paid in foreign currency

EIH Limited

Assessment Year 2011-12

Details of management fees paid in foreign currency

EIH Limited

Assessment Year 2011-12

Details of professional/consultancy charges paid in foreign currency

1. Advertisements in magazines and web site listing

The assessee being in the luxury hospitality, its business heavily depends on clients for the western world. Consequently, as in the past it spent a considerable sum of money on advertisements both in the print and web media. As already explained in the past years, such advertisements are printed mostly in USA, UK and European countries. The servers of the web are also located outside India. As already explained, the target for the advertisements are the Foreign tourists. Hence, in those cases, what ensured is that these foreign advertisements are circulated in the US; Canada and in UK and European countries.

Taxability under the Income tax Act, 1961

The services rendered by foreign vendors in relation to advertisement/ web listing are in the nature of marketing expenses. These services are not taxable under the provision of Income tax Act, 1961 for the following reasons:

"In my considered view, the payments to the foreign parties on account of advertisement outside India should not be taxable in India as per the provisions of section 9(1)(vii) of the Income tax Act, since earning through advertisement are not in nature of managerial, technical or consultancy services. In my view the income at best can be considered as business profits in the hands of the payees. However, in absence of Permanent Establishment of the payees in India, the amount would not be taxable in India. Since the income was not taxable in India, there was no obligation on part of the appellant to withhold tax on such payments. Thus, in the instant case, the provisions of section 40(a)(ia) do not apply."

(A copy of CIT(A) order for A.Y.2006-07 is attached as Annexure 15)

Further, Reliance in this connection is placed on the decision of Sheraton International Inc. v. Deputy Director of Income-Tax reported in (2007) 293 ITR (A.T.) 68 (ITAT)(Delhi). The Delhi IT AT held as follows:

Held, (i) that the payments in question made for rendering the services in question could be said to have accrued or arisen in India by invoking the deeming provisions of section' only if the sum was payable by the Indian hotels or clients to the assessee by way of "royalty" as defined in Explanation 2 below clause (vi) of section 9(1) or by way of "fees for technical services" as defined in Explanation 2 below clause (vii) of section 9(1) . The agreements had to be read as a whole. The main intention of both parties to continue their association was to develop tourism on a wide front by providing, inter alia, the best hotel facilities of international standards to tourists worldwide by promoting and advertising worldwide the Sheraton chain of hotels for mutual benefit. Both parties had come together with their specialized information, experience and knowledge in the field of hotel business for mutual benefit. The main intention or purpose of the association between the assessee and ITC was to publisize, market and promote the hotels of the ITC and the assessee-company, had undertaken to provide all the services as enumerated in the various articles to achieve this main intention or purpose. If all the terms thereof were read together as a whole, it explicitly showed that the assessee in substance, had mainly undertaken the job of publicity, marketing and advertising of the hotels of Indian clients worldwide and all the services to be rendered by it as enumerated in the various articles of the agreement were incidental or supplementary to carrying out this job effectively and efficiently in the interest of its business of which the said activity or job formed a part. The services, therefore, were an integral part of the main work undertaken by the assessee of publicity, marketing and promotion of the Indian hot worldwide. The services described in the various articles of the agreement had not much significance independently and were an integral part of the arrangement between the assessee and the Indian hotels or clients for publicity, marketing and advertising of hotel business.

That the payments under the agreements being entirely made by the Indian hotels to the assessee-company for the main services, the incidental or ancillary services not being independent of and separable from the main job undertaken by the assessee in the peculiar facts of the case, it was neither possible nor desirable to apportion or attribute any part of the consideration received by the assessee thereto. The various services rendered by the assessee to enable it to complete efficiently and effectively the job undertaken by it as an integrated business arrangement to provide the services relating to advertising , publicity and sales promotion including reservations of the Indian Hotels worldwide in mutual interest could not be considered in isolation to say that part of the consideration received by the assessee was in the nature of "royalties" or "fees for technical services" defined in Explanation 2 to Section 9(1)(vi) or to Section 9(1)(vii) or of "royalties" or "fees for included services" as defined in article 12(3) and 12(4) of the DTAA between India and the U.S.A.

In view of the above, it is submitted that the services provided by the foreign residents in relation to advertisement is not covered within the scope of royalties or fees for technical services under section 9(1)(vi) or 9(1)(vii) of the Income Tax Act.

The payment is towards stay charges cannot be covered under the scope of fees for technical services under section 9(1)(vii) of the Act. Since the entire operation of the vendor is carried outside India, it is not taxable under the Income tax Act as business income as well.

Since tax treaty between India and Mauritius does not have any fees for technical service clause, in absence of 'permanent establishment, the concerned service is not taxable in India.

Recruitment Charges

Taxability under the Income tax Act

The assessee had to take the services of various foreign recruitment agents (specially for SPAs, chefs etc.). The services are normally rendered outside India and the payments are made outside India as well. Further, since this does not involve any know how or technical expertise, the same is not covered within the scope of section 9(1)(vii) of the Income tax Act. Therefore under the domestic law, the remuneration for such services is not taxable in India.

Taxability under DTAA with Indonesia and Thailand

During the year under consideration, recruitment service has been availed from these vendors based out of Indonesia and Thailand. Both the treaties does not contain any FTS clause. Thus it is evident that the fee for technical services does not fall within the purview of Article 12. Obviously, the application of Article 12 is ruled out. In that view of the matter, such income would remain included under Article 7. The amount falls under Article 7 as 'Business profits' and is hence not chargeable to tax because of the absence of any PE in India. In this connection, reliance is placed on the decision of Hon'ble Mumbai ITAT in case of McKinsey & Company (Thailand) Co. Ltd. v. Deputy Director of Income-tax (International Taxation) 4(1), Mumbai in IT APPEAL NO. 7624 (MUM.) OF 2010.

Management fees paid to Banyan Tree Resorts & Spas (Thailand Co. Ltd.)

Management fees has been paid to the Thai SPA management Firm. The tax treaties between India and Thailand does not contain any FTS clause. Thus it is evident that the fee for technical services does not fall within the purview of Article 12. Obviously, the application of Article 12 is ruled out. In that view of the matter, such income would remain included under Article 7. The amount falls under Article 7 as 'Business profits' and is hence not chargeable to tax because of the absence of any PE in India. In this connection, reliance is placed on the decision of Hon'ble Mumbai ITAT in case of McKinsey & Company (Thailand) Co. Ltd. v. Deputy Director of Income-tax (International Taxation) 4(1), Mumbai in IT APPEAL NO:7624 (MUM.) OF 2010

Professional and Consultancy Services

During the under consideration, payment has been made to various foreign vendors based out of UK USA, Egypt, Australia towards professional/ consultancy services. The assessee has duly deducted tax form the payment made to Zaki Hasem & Parterners. A copy of challan is attached as Annexure 14/1 and 14/2.

For the other vendors/pertaining to USA, UK and Australia, the concerned services are not taxable in India as the service does not make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of technical plan or design. For detailed explanation, reference may be made to annexure 2, 4 and 5.

6.10 Apart from this, the assessee had even provide the certificate of tax residency of the parties to whom payments were made in foreign currency and declaration form them that no PE existed for them in India. The assessee had even furnished the copies of agreements entered into with those parties, copy of advertisements, copy of invoice, subscription renewal forms etc. All these documents are enclosed in pages 822 to 930 of the Paper Book.

6.11 We find that in the earlier years in assessee's own case, the ld CITA had granted relief to the assessee by placing reliance on 'make available' clause prevailing in various tax treaties, but the same is not done by the ld AO and ld DRP in the instant case. We find that the assessee had filed various documents with detailed factual and legal submissions with supporting evidences before the ld AO, which had not been appreciated by the ld AO and ld DRP in the proper perspective. Hence we deem it fit and appropriate, to remand this entire issue to the file of the ld AO, for denovo adjudication of this issue afresh in accordance with law. The assessee is also directed to co-operate with the ld AO by producing the necessary evidences in support of its contentions. Accordingly, the Ground Nos. 6.1. & 6.2 raised by the assessee are allowed for statistical purposes.

7. Short grant of credit for TDS and TCS

Ground No. 7 of assessee's appeal

This is an issue of factual verification of the facts as to whether the related income has been duly offered by the assessee in the year under consideration. If it is so, the assessee is entitled for due credit for TCS and TDS subject to filing of necessary proof in this regard. Accordingly, the Ground No. 7 raised by the assessee is allowed for statistical purposes.

8. Levy of interest u/s 115P of the Act

Ground No. 8 of assessee's appeal

This is a ground challenging the validity of levy of interest u/ 115P of the Act for delayed payment of dividend distribution tax by the assessee. The assessee stated that the dividend distribution tax had been duly paid within the time prescribed. However, he fairly agreed for this matter to be verified by the ld AO. The Ld DR also agreed for the same. Accordingly, we deem it fit and appropriate to remand this issue to the file of the ld AO with a direction to verify the date of remittance of dividend distribution tax with supporting evidence and then decide whether to levy interest u/s 115P of the Act in accordance with law. Accordingly, the Ground No. 8 raised by the assessee is allowed for statistical purposes.

9. The Ground Nos. 9 & 10 raised by the assessee are general in nature and does not require any specific adjudication.

10. Commission & sitting fees paid to directors without deduction of tax at source disallowed u/s 40(a)(ia) read with section 194J of the Act

Ground no. 2 of Revenue's Appeal

The brief facts of this issue is that the assessee claimed expenditure of Rs. 3,82,22,285/- towards commission to directors as below:—

The assessee debited sitting fees to non-executive directors in the sum of Rs 8,00,000/- . The assessee claimed the TDS provisions are not applicable in respect of the aforesaid payments. The ld AO observed that the aforesaid payments squarely falls under section 194J of the Act in as much as these directors had not offered the commission and sitting fees income under the head 'income from salary' in their returns of income and instead they are offered to tax by them under the head 'income from other sources'. Hence this goes to prove that they are not employees of the company and hence had rendered only professional services to the company enabling them to receive this consideration and accordingly the provisions of section 194J of the Act are attracted. The ld AO in the draft assessment order proposed to disallow the entire sum of Rs 3,90,22,285/- u/s 40(a)(ia) of the Act for violation of provisions of section 194J of the Act.

10.1 It was submitted that the scope of section 194J of the Act after the Finance Act 2012 w.e.f. 1.7.2012 had been extended to include 'any remuneration or fees or commission by whatever name called, other than those on which tax is deductible u/s 192 of the Act to a director of the company'. This amendment is only prospective in nature and cannot be made applicable for the year under consideration. The assessee placed reliance decision of this tribunal in the case of Jahangir Biri Factory (P.) Ltd. v. Dy. CIT [2009] 126 TTJ 567 (Kol. - Trib.) wherein the tribunal on identical facts held that commission to directors is not in the nature of commission or brokerage as envisaged u/s 194H of the Act nor as fees for professional or technical services u/s 194J of the Act. The ld DRP decided the issue in favour of the assessee. Aggrieved, the revenue is in appeal before us on the following ground:—

2. That on the facts and circumstances of the case and in law, the Ld. DRP erred in deleting the disallowance u/s 40(a)(ia)paid as commission to the directors and paid as sitting fees to the non-executive directors without deducting tax at source u/s 194I of the Act.

10.2 We have heard the rival submissions. We find that the issue is squarely covered by the decision of this tribunal in the case of Jahangir Biri Factory (P.) Ltd. (supra) wherein it was held :-

"12. After hearing the rival submissions and on careful perusal of the materials available on record and taking into consideration that the assessee company paid this commission to the directors as per their terms of employment for the work done in their capacity as whole -time directors, this commission should have been treated as an incentive in addition to salary, bonus and other perquisities. Therefore, in our considered opinion, the ld CITA is justified in recording the same as not coming within the purview of commission or brokerage as defined in s.194H nor a fee for professional or technical services as defined in s.194J of the IT Act. Therefore, we find no infirmity in the orders of the learned CIT(A) on this issue. Therefore, this ground of the Revenue is dismissed."

Respectfully following the aforesaid decision , we find no infirmity in the order of the ld DRP in this regard. Accordingly, the Ground No. 2 raised by the revenue is dismissed.

11. Disallowance of principal repayment of finance lease

Ground No. 4 of Revenue's Appeal

The brief facts of this issue is that the ld AO observed that the assessee claimed an amount of Rs 7,60,21,803/- towards principal payment of lease rental for machinery and vehicles taken on finance lease. As per Accounting Standard 19 (AS-19) issued by ICAI, the said motor cars taken in finance lease has been capitalized at net present value and depreciation and interest cost on the same has been debited to profit and loss account. But under the Income Tax At, an assessee is entitled to depreciation u/s 32 of the Act if the asset is owned by the assessee and is put to use for the purpose of its business. Since the assessee is not the legal owner of the assets, it claimed actual lease rental paid of Rs 7,60,21,803/- beign the principal amount as a deduction in the return of income. The ld AO proposed to disallow the same on the contention that under finance lease, the lessee is the owner of the leased assets and principal repayment component of lease rental represents payment for purchase of leased assets and thus should be treated as capital expenditure. The ld DRP after considering the facts in detail and applying the ratio laid down by the Hon'ble Supreme Court in the case of Icds Limited v. Deputy Commissioner Of Income Tax (Asst)* [2013] 350 ITR 527/212 Taxman 550/29 taxmann.com 129 (SC) allowed the issue in favour of the assessee. Aggrieved, the revenue is in appeal before us on the following ground:—

4. That on the facts and circumstances of the case and in law, the Ld. DRP erred in deleting the addition regarding Principal Repayment of Finance Fee.

11.1 We have heard the rival submissions. We find that the issue under dispute is settled by the order of this tribunal in assessee's own case for the Asst Year 2008-09 in ITA No. 529/Kol/2013 dated 19.2.2016 in favour of the assessee. Though this decision was rendered in the context of validity of section 263 proceedings of the ld CIT, this tribunal had adjudicated the issue on merits also and hence the reliance placed on the same is well founded. The operative portion of the said judgment is as under:-

'4.4.1. On merits of the issue, on perusal of the various clauses in the lease deed (which are not reproduced herein for the sake of brevity) forming part of the paper book vide pages 87 to 98, we find that the ownership / title on the vehicles always lies with M/s Orix Auto Infrastructure Services Limited (lessor) during the subsistence of the lease vide clause 8 of the lease deed. We find that during the subsistence of this lease arrangement and till the vehicles are delivered back to the lessor, the lessee shall insure the vehicles with the lessor's name as the owner vide clause 11 of the lease deed. Clause 15 of the Lease deed clearly specifies that upon expiration or earlier termination of the lease, the lessee shall deliver to the lessor the said vehicles at a place designated by the lessor. We hold that since the ownership does not vest with the assessee at any point of time during the subsistence of the lease, the claim of allowability of depreciation u/s 32 of the Act as owner of the vehicles, does not arise. We hold that the lease arrangement cannot be considered as one of hire purchase as per Circular No. 9/1943 No. 9 [R. Dis. No. 27(4)-IT/43] dated 23.3.1943, since the terms of the agreement does not provide that the equipments shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipments. We hold that merely because the lease arrangement has been considered as finance lease for the purpose of AS 19, that itself does not render the lessee (assessee herein) as the owner of asset for IT Act for claiming depreciation. We find that AS 19 provides for various situations in order to decide as to whether the lease can be considered as finance lease or operating lease for the limited purpose of such AS 19. We find that the assessee had duly complied with the Circulars laid down in this regard more so when the CBDT has itself clarified vide Circular No. 2/2001 dated 9.2.2001 that the AS 19 will have no implication on the allowance of depreciation on assets under the provisions of IT Act. It is well settled that the CBDT Circulars are binding on the revenue. As per this Circular No. 2/2001 dated 9.2.2001, in a lease transaction, the owner of the assets is entitled to depreciation. In the instant case, the lessor (Orix Auto) being the owner had the right to claim depreciation and the assessee has not claimed any depreciation as per the provisions of the IT Act and instead had claimed the entire lease rental as revenue expenditure.

We find that the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of I.C.D.S. Ltd. v. CIT reported in (2013) 350 ITR 527 (SC) wherein it was held that :—

"Held, affirming the decision of the Tribunal, (i) that the assessee was a leasing company which leased out the trucks that it purchased. Therefore, on a combined reading of section 2(13) and (24) of the Act the income derived from leasing of the trucks would be business income, or income derived in the course of business, and had been so assessed. Hence, it fulfilled the requirement of section 32 of the Act, that the asset must be used in the course of business. The assessee did use the vehicles in the course of its leasing business. The fact that the trucks themselves were not used by the assessee was irrelevant for the purpose of section.

Though this decision has been rendered on the allowability of depreciation on leased assets from the angle of the lessor, the principle laid down could be made very much applicable to the facts of the instant case for allowability of lease rentals in the hands of the assessee (lessee).

We also find that the issue is squarely covered by the decision of the Hon'ble Rajasthan High Court (Jaipur Bench) in the case of Rajshree Roadways v. Union of India & Ors reported in (2003) 263 ITR 206 (Raj) wherein it was held that :—

Held, that under the agreement there was a clause that after completion of lease period, if one per cent. of the total consideration of the trucks was paid, the lessee would be the owner of those trucks. However, the agreement dealt with the ownership of the trucks under the agreement. There was a clear provision that the said machinery shall at all times remain sole and exclusive property of the lessor and the lessee shall have no right, title or interest thereon. It further that irrecoverable undertaking of the lessee that at no time during the currency of the lease agreement, which shall be non-cancellable, would the lessee attempt to capitalise the leased assets in its balance-sheet. As per clause 8, it had been agreed that the ownership of the said assets during the tenure of the lease and inclusive of any renewal options that the lessor may concur indisputably rested with the lessor. So in clear terms, the agreement provided that during the lease period, only the lessor shall be treated as owner of the trucks and not the lessee. Moreover, the lessor had been allowed depreciation on the trucks. Therefore, considering the terms and conditions of the lease agreement and the fact that depreciation on these trucks had been allowed to the lessor, the lease rent was deductible as revenue expenditure"-

In the aforesaid case, there was a clause in the lease agreement giving an option to the lessee to buy back the asset on termination of the lease agreement. In the instant case, the assessee (lessee) falls in a better footing, in as much as there is no clause in the lease agreement, enabling the lessee to buy back the assets on termination of the lease arrangement.

We find that the case law relied upon by the Learned DR on the decision of Delhi Tribunal need not be discussed as the issue is squarely covered by the High Court and Supreme Court in favour of the assessee.'

Respectfully following the aforesaid decisions, we find no infirmity in the order of the ld CITA in this regard. Accordingly, the Ground No. 4 raised by the revenue is dismissed.

12. Determination of arm's length price for corporate guarantee fees

Ground 1.1 to 1.4 of Assessee's Appeal

This Ground of the assessee is in respect of benchmarking corporate guarantee as an international transaction. Facts of the case are that the assessee company had incorporated a 100% subsidiary called M/s. EIH Flight in Mauritius in the financial year 2007-08 by investing US $1.1 million for the purpose of setting up off-shore flight catering unit. The business objective of M/s. EIH flight was to provide in-flight catering services to airline companies operating in and out of Mauritius. According to assessee, i.e. M/s. EIH has been in the industry of catering facilities for over 50 years, and has been producing 50,000 meals per day for some of the biggest names in aviation industry including Air France, Air Mauritius, British Airways, Jet Airways, Etihad Airways, Lufthansa etc., For the purpose of setting up its catering unit at Mauritius, the Airport Authority of Mauritius provided EIH Flight (100% subsidiary company of assessee) a plot of land measuring 14,000 sq. meters on a renewable lease for 20 years. The facility was to have a serving capacity of 10,000 meals per day involving state-of-the-art kitchen with best equipment, latest technological innovations, practicing systems and procedures. For the purpose of setting up catering, the budgeted cost by an external consultant which was estimated to be around US$24.3 million as detailed below :—

According to the assessee, its 100% subsidiary (EIH flight) was incorporated with a minimal equity capital of US$1.1 million i.e. which was only 4% of the total project cost and it was a promoter's/shareholder's strategy, to fund the start-up company through third party borrowings made available to it with the help of the parent company's corporate guarantee. Accordingly, the project was planned to start-off in the year 2009 and remaining balance of US$ 23.2 million was planned by the share holder to be funded in the following manner:—

It was submitted before the ld TPO that the provision of the said funds was for initial establishment facilities and it was the responsibility of shareholders. According to the assessee, the shareholders are the only source of requisite funds for the newly incorporated company to set up its primary facility. Since assessee's 100% subsidiary M/s. EIH Flight was a new company, the lenders would not risk granting loans unless corporate guarantee is given by the parent company i.e. the assessee. Thus, the assessee company being the parent company gave corporate guarantee to the lender bank, so that loan could be disbursed to its 100% subsidiary i.e. M/s. EIH Flight Mauritius. It was brought to the notice of ld TPO that the assessee had not charged any fee for providing such guarantee since it was the obligation of the business. According to the assessee, since there were no fees charged by the assessee company from its 100% subsidiary for providing corporate guarantee, it was not reported as an international transaction. The aforesaid contention was not accepted by the ld TPO and according to the ld TPO, the arrangement between the company and its subsidiary was in the nature of providing services to AE and, therefore, has to be categorized as international transaction. Thereafter, the ld TPO applied the CUP method as the most appropriate method (MAM) for benchmarking the guarantee fee and held that the guarantee fee rate of 3% to be the arms length for bench marking the transactions of receipt of corporate guarantee from the subsidiary and thus made an addition of Rs.2,62,09,659/-.

12.1 The assessee filed objections before the ld DRP. The ld. DRP upheld the transfer pricing adjustment pertaining to the receipt of corporate guarantee fee. Aggrieved by the decision of the ld. DRP and the final order of the AO, the assessee is in appeal before us on the following grounds:—

12.2 The ld. AR contended that the corporate guarantee was given by the assessee to the subsidiary AE M/s. EIH Mauritius herein (EIH Flight) to fund the set up of the said subsidiary company in its year of operation. According to the ld. AR, since M/s. EIH flight is a start up company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee company to the lender bank is normal business practice. According to the ld. AR, the provision of the said funds for initial establishment was the responsibility of shareholders of M/s. EIH flight i.e. the assessee in this case and it was discharging that responsibility to its subsidiary as shareholder. As said before, since the AE was a start up company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect the interest by fulfilling the shareholders obligation. According to the ld AR, the corporate guarantee as provided by the assessee was a matter of commercial prudence to protect by fulfilling the shareholder obligation as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. He relied on the order of the Coordinate Bench of this Tribunal in the case of Tega Industries Ltd. v. Dy. CIT [2016] 76 taxmann.com 24 (Kol. - Trib.) wherein it was held that the provision of corporate guarantee is in the nature of shareholder activity and hence, no TP adjustment on account of corporate guarantee is required. Our attention was drawn to that case wherein the Tribunal after examining the facts of that case observed that "the assessee's expectation from provision of guarantee was not that of a guarantor i.e. to earn a guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, to help it achieve the assessee's business objective". Thus, according to the ld. AR, the objective of the assessee for providing guarantee was not to earn guarantee fee but to earn returns in the form of appreciation in investment value and receive dividends. Therefore he prayed that the adjustment made by the ld TPO may be deleted.

12.3 Alternatively, the ld AR also contended that the corporate guarantee is not an international transaction u/s 92B of the Act. The assessee according to him has not incurred any cost in providing corporate guarantee to its subsidiary company at Mauritius. According to him, since the issuance of corporate guarantee does not have any impact on profits, income, losses or assets of the guarantor as there is no cost associated with it, and when the transaction in question has no bearing on profits, incomes, losses or assets of such enterprise, it will be outside the ambit of expression 'International Transactions' under section 92B of the Act. For the aforesaid proposition, the ld. AR relied on the co-ordinate bench decision of Delhi Tribunal in the case of Bharti Airtel Ltd. v. Addl. CIT [2017] 84 taxmann.com 22/166 ITD 179 . According to the ld AR, this proposition has been followed by the co-ordinate bench of Ahmedabad Tribunal in the case of Micro Ink Ltd. v. Addl. CIT [2015] 63 taxmann.com 353/[2016] 157 ITD 132 (Ahd. - Trib.) and referred to various other case laws

12.4 In response, the ld. CIT,DR brought to our notice the decision of co-ordinate bench of Hyderabad Tribunal in the case of Prolifics Corpn. Ltd. v. Dy. CIT [2015] 55 taxmann.com 226/68 SOT 104 for Asst Year 2009-10, wherein the Tribunal has accepted the arguments of the revenue that after the insertion of the Explanation by Finance Act 2012 with retrospective effect from 2002, the corporate guarantee also is an international taxation. The ld. DR also contended that the Hon'ble Bombay High Court in the case of CIT v. Everest Kanto Cylinders Ltd. In IT Appeal No.1165 of 2013 where the guarantee fee transaction was bench marked and arms length price ALP was made by TPO and was upheld by the Tribunal as well as by the Hon'ble Bombay High Court in favour of the department. According to the ld. CIT DR, subsequent amendment by the insertion of Explanation by Finance Act, 2012 with retrospective effect from 2002 in section 92B(1) of the Act, the transaction in respect of lending or borrowing money has been expanded to include capital financing including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any time of advance, payments or deferred payments or receivable or any other debt arising during the course of business. So, according to the ld. CIT, DR, since the Explanation gives retrospective effect from 01.04.2002 it is abundantly clear that the act of granting corporate guarantee by the assessee to the AE is in fact an international transaction and therefore the TPO was right to hold it accordingly. The ld. CIT, DR drew our attention to the decision of Hon'ble Bombay High Court in the case Everest Kanto Cylinders Ltd. (supra) wherein the Hon'ble High Court upheld the adjustment of 0.50% made by the TPO in respect of guarantee fee in a similar case as that of assessee, and, therefore, according to him, the Tribunal decision of Bharti Airtel Ltd of Delhi Bench is not good law.

12.5 According to the ld. DR, the transaction mentioned in section 92B of the Act i.e. purchase, sale or lease of tangible or intangible property, or provision of services or lending or borrowing money has to be treated as an international transaction and the arguments of the ld. AR is not correct to say that the transaction should have a bearing on the profits, incomes losses or assets of such enterprises,. According to him, only in other transaction i.e. in sec. 92B [not falling in (a) to (d)] which is not specifically stated that is purchase, sale or lease of tangible or intangible property or provision of services or lending or borrowing money there is a requirement of bearing on profit, incomes, assets of such enterprises. According to the ld. DR, explanation below sec. 92B of the Act, clearly includes the corporate guarantee as an international transaction and a reading of residual clause (e) makes it abundantly clear that in case of other transactions which fall in (a) to (d) there is no requirement of bearing on the profits, incomes, losses or assets of such enterprises; and only in respect of transaction specified in (e) this requirement can be read into and in all other transactions specified in (a) to (d) no such requirement of profit/loss can be read into and, therefore, the transaction of corporate guarantee will be considered as an international transaction. Therefore, according to the ld. DR, the ld TPO was correct in not accepting the arguments of the assessee that transactions of giving corporate guarantee to the AE was not an international transaction.

12.6 The ld. AR in his rejoinder explained that the case cited in favour of Revenue on this issue by the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra) was when the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon'ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, the facts of the case is different and case law is distinguishable and, therefore, the Hon'ble High Court's order cannot come to the rescue of the Revenue. The ld. AR pointed out that in the said case, the Hon'ble Bombay High Court did not answer the specific question as to whether the issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' irrespective of whether or not such transactions have any "bearing on profits, income, lossess or assets of such enterprises" u/s. 92 B of the Act. According to Ld. Counsel, the Hon'ble High court was examining whether the adjustment made by the TPO when the assessee in that case in fact had charged 0.5% on the AE as corporate guarantee commission and that was the question before the Hon'ble Court and the Hon'ble High Court did not answer as to whether the corporate guarantee given without any financial liability on the AE is an International Transaction. Thus, according to ld. AR, the decision in the case of Everest Kanto Cylinder Ltd. (supra) cannot come to the rescue of the revenue. The ld. AR cited the decision of the Hon'ble Supreme Court in the case of Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC) at page 148 to bring to our notice that a change even on a single fact may change the ratio of the entire decision and so the Hon'ble Bombay High Court decision is distinguishable and cannot be taken as a precedent to adjudicate the issue before us.

12.7 According to the ld. AR, the Hyderabad Tribunal in the case of Prolifics Corpn. Ltd. (supra) does not discuss as to whether corporate guarantee is a service or not and has not expressly dealt with the question as to whether the explanation inserted by Finance Act 2012 is retrospective or not. According to the ld. AR, the Delhi Tribunal in the case of Bharti Airtel Ltd. has gone in depth to decide the issue which was framed before it on this issue. So, according to him, the decision of Bharti Airtel Ltd is legally sustainable. For a question from the Bench that since there is a contradictory decision on the issue in hand, whether the question needs to be referred to the Special Bench of the Tribunal, the ld. Counsel drew our attention to the fact that the question of law arising from the Tribunal's decision in Bharti Airtel Ltd has already been admitted by the Hon'ble Delhi High Court, therefore referring the question and convening of the Special Bench would be a futile exercise.

12.8 We have heard both the parties and perused the records. We note that the assessee company had incorporated a 100% subsidiary called M/s. EIH Flight at Mauritius for the financial year 2007-08 by investing US $1.1 million for the purpose of setting up its off-shore flight catering unit there (Mauritius). The business objective of M/s. EIH flight was to provide in-flight catering services to airline companies operating in and out of Mauritius. According to assessee, i.e. M/s. EIH has been in the industry of catering facilities for over 50 years, and has been producing 50,000 meals per day for some of the biggest names in aviation industry including Air France, Air Mauritius, British Airways, Jet Airways, Etihad Airways, Lufthansa etc., For the purpose of setting up its catering unit at Mauritius, the Airport Authority of Mauritius provided EIH Flight (100% subsidiary company of assessee) a plot of land measuring 14,000 sq. meters on a renewable lease for 20 years. The facility was to have a serving capacity of 10,000 meals per day involving state-of-the-art kitchen with best equipment, latest technological innovations, practicing systems and procedures. For the purpose of setting up catering, the budgeted cost by an external consultant which was estimated to be around US$24.3 million. We further note that according to the assessee, its 100% subsidiary (EIH flight) was incorporated with a minimal equity capital of US$1.1 million i.e. which was only 4% of the total project cost and it was a promoter's/shareholder's strategy to fund, the start-up company through third party borrowings made available to it with the help of the parent company's corporate guarantee. Accordingly, the project was planned to start-off in the year 2009 and remaining balance of US$ 23.2 million was planned by the share holder to be funded in the following manner :—

12.9 We note that since assessee's 100% subsidiary M/s. EIH Flight was a new company, the lenders would not risk granting loans unless corporate guarantee is given by the parent company i.e. the assessee. Thus, the assessee company being the parent company gave corporate guarantee to the lender bank, so that loan could be disbursed to its 100% subsidiary i.e. M/s. EIH Flight Mauritius. It was brought to the notice of ld TPO that the assessee had not charged any fee for providing such guarantee since it was the obligation of the assessee towards its subsidiary. According to the assessee, since there was no fees charged by the assessee company from its 100% subsidiary for providing corporate guarantee, this fact was not reported as an international transaction. The aforesaid contention was not accepted by the ld TPO and according to the ld TPO, the arrangement between the company and its subsidiary was in the nature of providing services to AE and, therefore, had to be categorized as an international transaction. Thereafter the ld TPO applied the CUP method as the MAM for benchmarking the guarantee fee and held that the guarantee fee rate of 3% to be the arms length for bench marking the transactions of receipt of corporate guarantee from the subsidiary and thus made an addition of Rs.2,62,09,659/-. The ld DRP upheld the said adjustment pertaining to the receipt of corporate guarantee fee. Aggrieved by the decision of the ld. DRP and the final order of the AO, the assessee is in appeal before us.

12.10 We note that M/s. EIH flight is a startup company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee/assessee company to the lender bank is normal business practice and obligation towards a subsidiary. Since the AE was a startup company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect its interest by fulfilling the shareholders obligation. We agree with the contention of the ld AR that the corporate guarantee as provided by the assessee was a matter of commercial prudence to protect and by fulfilling the shareholder obligation, as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. For that we rely on the order of the Coordinate Bench of this Tribunal in the case of Tega Industries Ltd. (supra) wherein it was held that the provision of corporate guarantee is in the nature of shareholder activity and hence, no TP adjustment on account of corporate guarantee is required. In the said case, this tribunal had held that "the assessee's expectation from provision of guarantee was not that of a guarantor i.e. to earn a guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, to help it achieve the assessee's business objective". Thus, we agree with the contention of the assessee that the objective of the assessee for providing guarantee was not to earn guarantee fee but to earn returns in the form of appreciation in investment value and receive dividends and, therefore, no TP adjustment ought to have been made in the facts and circumstances of the case.

12.11 Coming to the alternate plea of the assessee that, in the facts and circumstances the corporate guarantee is not an International Transaction u/s. 92B of the Act, we note that term 'guarantee' was inserted in the definition of 'international transaction' in section 92B by inserting an Explanation in the Finance Act, 2012 with retrospective effect from 01/04/2002. The Explanation states that—

"For the removal of doubts, it is hereby clarified that (i) the expression "international transaction" shall include ....

(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business."

The Explanation states that it is clarificatoryin nature and is 'for the removal of doubts'. Thus, it does not alter the basic character of definition of 'international transaction' under the main section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. Clauses (a) (b) and (d) do not cover guarantee, lending or loans. Other two, (c) and (e) deal with (i) capital financing, and (ii) business restructuring or reorganization. Clause (c) refers to lending or guarantee. But the Explanation which is for removal of doubts or is clarificatory, cannot be read independent of Section 92B(1). Section 92B(1), provides those transactions as international transactions which are in the nature of purchase, sale or lease of tangible or intangible property (explained by clauses (a) and (b) of the Explanation), or provision of services, (explained by clause (d) of the Explanation), or lending or borrowing money (explained by Clause (c) of Explanation). The plain reading of provisions of sec. 92B(1) of the Act indicate that the various transactions mentioned in section 92B(1) of the Act, (i.e. purchases, sales, provision for services, lending or borrowing or any other transaction) should have bearing on the profits, incomes, losses or assets of such enterprises. In our opinion, the condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transactions namely purchase, sale, or lease of tangible or intangible property or provision of services, or lending or borrowing money or any such transaction. This understanding of ours gets further clarified by way of insertion of Explanation in section 92B(1) by the Finance Act 2012 with retrospective effect from 01.04.2002 vide clause (a) to (d). We find that in the said explanation, clause (e) alone has been carved out as an exception wherein, the transaction thereon has been specifically mandated to be an international transaction where a transaction of business restructuring or reorganization, entered into by an enterprise with an AE irrespective of the fact that it has bearing on the profits, incomes, losses, or assets of such enterprises at the time of transaction or at any future date.

12.12 Thus, we hold that when a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company, and which does not have any bearing on its profits, income, losses or assets, it will be outside the ambit of international transaction under section 92B(1) of the Act. In this regard, we would like to hold that issuance of corporate guarantee by the assessee to its AE would have 'influence on the profits , incomes, losses or assets of enterprise' but not necessarily have 'any impact on the profits, incomes, losses or assets' as admittedly no consideration was received by the assessee in respect of this corporate guarantee from its AE. We find that the Ahmedabad Tribunal in the case of Micro Ink Ltd. (supra) had observed that if a subsidiary (AE in the instant case) could not borrow money from third party sources on its own standing and the guarantee provided by the parent (assessee in the instant case) enables it to make such borrowing, then the guarantee could be said to be a shareholder function, not warranting a guarantee fee. This ratio would squarely be applicable to the facts of the instant case before us.

12.13 The Ld. CIT, DR's reliance in the case of Everest Kanto Cylinder Ltd. (supra) would not come to the rescue of Revenue because in that case, the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon'ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, so the facts of the case are different and case law is distinguishable and, therefore, the Hon'ble High Court's order cannot come to the rescue of the Revenue. We find that the ld. AR pointed out that in the said case, the Hon'ble Bombay High Court did not answer the specific question as to whether the issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' irrespective of whether or not such transactions have any "bearing on profits, income, lossess or assets of such enterprises" u/s. 92 B of the Act. We also note that the Ahmedabad Bench of this Tribunal supra after considering the decision of the Hon'ble Bombay High Court in Everest Kanto Cylinder Ltd. (supra) observed as under:

"We are unable to see, in the judgment of Hon'ble Bombay High Court, any support to the proposition that issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' under section 92B irrespective of whether or not such transactions have any 'bearing on profits' incomes, losses, or assets of such enterprises'. Revenue, therefore, does not derive any help from the said decision."

12.14 The ld CIT DR would have had a case where a fee has been charged for the intra service which has been rendered (in the context of corporate guarantee), and, therefore, the assessee or the Court has treated it as an international transaction, then the charge of corporate guarantee has to be in accordance with Arm's Length principle. This means that the price for corporate guarantee should be that which would have been paid and accepted by independent enterprises in comparable circumstances. In that case transfer pricing adjustments are required. In that case, it has to be determined what will be the ALP of corporate guarantee commission paid by associate enterprise to the parent company providing corporate guarantee. Since that is not the case before us, we need not go into it.

12.15 We also find that this very same issue came up for adjudication by this tribunal in assessee's own case for the Asst Year 2010-11 in ITA No. 530/Kol/2015 dated 9.6.2017 , wherein by placing reliance on the decision of co-ordinate bench of Mumbai Tribunal in the case of

12.16 Moreover, we find that though the Explanation was introduced by Finance Act 2012, the rules were notified only on 10.6.2013. Hence the assessee cannot be expected to report this transaction also as an international transaction in its transfer pricing study and the audit report thereon.

12.17 In view of the aforesaid findings and respectfully following the various judicial precedents, we allow the Grounds 1.1. to 1.4 raised by the assessee.

13. Determination of arm's length price towards interest rate for loan provided to AE

Grounds 2.1 & 2.2. of Assessee's Appeal

Ground 1 of Revenue's Appeal

Brief facts of this issue are that the assessee advanced a loan to its AE M/s. EIH Flight, Mauritits to help fund the start-up company in its initial year of operation. M/s. EIH i.e. the assessee did not charge any interest on the loan, as it was advanced in the capacity of shareholder to protect the investment of its AE. The ld TPO rejected the contention of assessee and considered the transaction entered into by assessee and EIH Flight as an international transaction.

13.1 The ld TPO, vide his order dated 30 January 2015, rejected the contention of the assessee that the loan was in the nature of shareholder service; considered the transaction entered into by the assessee and EIH Flight as an international transactions and according to him, the assessee should have earned an arm's length interest rate from its AE for this transaction; The ld TPO divided the component of interest into two parts i.e. Base rate (being risk free rate) and credit spread. The ld TPO considered the average Indian Prime Lending rate as the risk free rate (14%). Further, the TPO determined the credit spread of by analysing the credit rating of both the assessee and EIH Flight based on country wide report published by the credit rating agency Standard & Poor ("S&P") and accordingly, the ld TPO arrived at the credit spread of 350 bps and arm's length rate of 17.5%. Based on the above, the TPO computed transfer pricing adjustment amounting to INR 4,081,503/- . Aggrieved by the order of the ld TPO, the assessee filed objections before the Ld. DRP. The ld DRP upheld the decision of the ld TPO relating to interest free loan given to its AE was not in the nature of shareholder activity and the assessee should have been compensated for advancing of loan to its AE. However, the ld DRP did provide relief and directed the Ld. AO/TPO to compute the arm's length interest using LIBOR instead of prime lending rate of the banks. Based on direction of the ld DRP, the ld AO passed the final order reducing the adjustment to INR 10,40,026. Aggrieved by the final order of the AO, the assessee is before us.

13.2 The Ld. AR submitted that the loan was advanced by the assessee in the capacity of a shareholder/promoter and was advanced out of its own funds and since it has not incurred any cost in granting the loans to its AE, no adjustment should be made on this behalf. The Ld. AR drew our attention to pages 986 to 1047 of the paper book which is the financial projection report prepared by external consultant wherein it was forecasted that M/s. EIH Flight would start earning positive cash flow from its business activities (after the first year of operation i.e. FY 2010-11 onwards). He also drew our attention to the fact that since EIH Flight is a start-up company after considering the external project report, the banker also provided a repayment moratorium of one year to EIH Flights as it would not have generated adequate funds to repay the loans from the first day itself. The Ld. AR brought to our knowledge the fact that the business of EIH Flight did not take of as expected, however the repayment of bank loan started and, therefore, the assessee had to continue funding the struggling company in FY 2011-12 and 2012-13. Thus, it was pointed out by the Ld. AR that the provision of funds by the assessee to EIH Flight was purely for commercial purpose and the action of the assessee was primarily to protect its investment and was in the nature of shareholding activity and he relied on the following decisions of Hon'ble High Courts.

13.3 Without prejudice to the aforesaid submission, the Ld. AR made an alternate plea that since loan was advanced in the capacity of the shareholder, the assessee contended that since ld DRP accepted that LIBOR should be used as the rate of interest to determine the arm's length interest rate for the loan. The ld AO/TPO computed notional interest on loan by taking 400 basis points as mark up for risk premium i.e. credit spread, whereas the spread based on the rulings such as Soma Textile & Industries Ltd. v. Addl. CIT [2015] 59 taxmann.com 152/154 ITD 745 (Ahd. - Trib.) should be LIBOR + 200bps. The ld AR thus contended that the correct computation of the interest on loan on the basis of LIBOR + 200bps credit spread.

13.4 We have heard the rival submissions and are of the opinion that the LIBOR and basis points should be the criteria for meeting the cost of interest on the international transaction in respect of interest to be charged on the loan advanced to AE. For this purpose the credit rating of the assessee as well as the credit rating of the AE should be taken into account. Accordingly we deem it fit to remand the issue to the ld. TPO to determine the basis points on the basis of the aforesaid parameters and such other relevant parameter in accordance to law. Therefore, we remand this issue for this limited purpose back to the ld TPO / ld AO and to determine the issue as directed by us. Accordingly, the Grounds 2.1. & 2.2. raised by the assessee are allowed for statistical purposes and Ground 1 raised by the revenue is dismissed.

14. The Ground No. 5 raised by the revenue is general in nature and does not require any specific adjudication.

15. In the result, the appeal of the assessee is partly allowed for statistical purposes and the appeal of the revenue is dismissed.

jyoti