TMI Blog2017 (6) TMI 1345X X X X Extracts X X X X X X X X Extracts X X X X ..... AI] AO has to consider the assessee s own fund i.e. capital and reserves as available on the date of investment which yields exempted income and thereafter he shall apply the Formula in Rule 8D and also exclude investments in subsidiaries. With this observation, we remit the issue relating to disallowance u/s.14A r.w.r.8D to the file of AO for fresh consideration. Hence, this ground is allowed for statistical purposes. TDS u/s 195 - expenditure incurred on account of management fees and consultancy charges paid outside India -Disallowance u/s.40(a)(i) - HELD THAT:- The Explanation incorporated in section 9 declares that where the income is deemed to accrue or arise in India under clause (v),(vi) and (vii) of sub-sec.(1), such income shall be included in the total income of the non-resident, whether or not be resident as a residence or place of business or business connection in India . The plain reading of the said provisions suggests that criterion of residence, place of business or business connection of a non-resident in India has been done away with for fastening the tax liability. However, the criteria of rendering service in India and the utilization of the service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x credit to be given. Accordingly, this ground is remitted to the AO to examine the issue in the light of our above findings. - ITA No. 450/Mds/2017 - - - Dated:- 19-6-2017 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER For the Appellant : Shri P. Murali Mohana Rao, CA For the Respondent : Shri Pathlavath Peerya, CIT ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by the assessee is directed against the assessment order dated 31.01.2017 passed u/s.143(3) r.w. section 92CA of the Act consequent to the directions of the Dispute Resolution Panel(DRP) dated 16.12.2016 u/s.144C(5) of the Act. 2. The first issue in this appeal is with regard to disallowance of interest of ₹ 366,25,30,000/- u/s.36(1)(iii) of the Act. 3. The facts of the issue are that the AO failed to appreciate that the expenditure was revenue in nature, as it was incurred for the purpose of carrying out assessee s own business including business conducted through its various subsidiaries located outside India and therefore, the AO was not justified in disallowing entire interest on term loans/working capital loans paid to banks/ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of capital gain is provided in section 48 of the Act. According to this section, the only deductions which are allowable are - (1) the cost of acquisition of the asset, (2) the cost of any improvement thereto and (3) expenditure incurred wholly and exclusively in connection with the transfer of the asset. The cost of acquisition, in our opinion, means the amount paid for acquiring the asset. Once the asset is acquired, then any expenditure incurred thereafter cannot be considered as the cost of acquisition, since such expenditure would not have any nexus with the acquisition of the asset. Wherever the Legislature intended to allow such expenditure as deduction, it had specifically provided so under various heads. For example, in computing the income from house property, the assessee is allowed deduction under section 24 of the Act on account of interest paid on the borrowed funds utilised for acquiring the immovable property. Similarly, when the income is to be computed under the head Profits and gains from business or profession , the deduction account of interest on borrowed fund is provided under section 36(1)(iii) the Act, where the business assets are acquired out of bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources , it cannot be allowed to be added to the cost of investment only because in this year no deduction is allowable because the dividend income has been made exempt . The following observations of Supreme Court in the case of Saharanpur Electric Supply Co. Ltd vs. CIT (1992) 194 ITR 294 (SC) were relied on by the Court:- In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets . 31.7 A bare look at the above observations reveals that actual cost would include all expenditure necessary to bring the assets into existence and put them in working condition. Nowhere in the above observations, the Supreme Court held that the expenditure incurred after the acquisition of asset would be included in the cost of assets. The terminal point is the time when the asset is brought into existence or when the asset is put in a working condition. Therefore, on the basis of the Supreme Court judgment, it cannot be said that expenditure incurred after the asset brought into existence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 11,53,320/- as dividend income from mutual funds / shares during the year and claimed the same as exempt u/s.10(34) of the Act. As per the provisions of sec.14A of the Act, no deduction shall be allowed in respect of expenditure incurred in relation to such income which does not form part of the total income. The assessee was asked to clarify as to why the disallowance shall not be made u/s.14A r.w. Rule 8D. The assessee replied that it had not incurred any expenditure in connection with earning exempt income and the disallowance u/s. 14A of the Act is not called for. The contention of the assessee is not accepted for the following reasons: i) The assessee has incurred an amount of ₹ 366.253 crores / as Finance Cost on its borrowed capital during the year. Though the assessee claimed that such borrowed funds were not utilized for making investments, it could not clearly establish the same. Funds for a company come in a common kitty and it comprises of borrowed funds, share capital and retained earnings (Reserves Surplus). Therefore, to argue that no portion of the interest paid relates to investment is not valid. ii) A company cannot earned dividend withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 267/Mds/2016 for the assessment years 2010-11 and 2011-12 dated 14.9.2016 wherein it was held that:- 20. We have heard both the parties and perused the material available on record. The ld. AR placed before us about netting of interest paid with interest received. In our opinion, application of Rule 8D of the I.T. Rules does not allow for netting of any interest income with interest expenditure. If netting of interest income is allowed, it would be equivalent to adding something which is not there in the Rule book, accordingly impermissible. Thus, we uphold the AO s application of Rule 8D(2)(ii) read with sec.14A on gross interest, through AO did not consider interest receipts as income from other sources ; the treatment of interest by AO would not change the nature of transaction or character of receipts. Accordingly, we reverse the finding of the CIT(Appeals), on this issue. 20.1 However, the AO has to consider the availability of share capital, reserves and surplus while invoking the provisions of sec.14A read with Rule 8D of the Income-tax Rules, as this is the non-interest bearing own funds available with the assessee for investments. 21. With regard to the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jaipur it can be seen that the loan was granted with a specific requirement that the loan shall be utilized for purchase of imported machinery while in the case of loan from Federal Bank, it is seen that the loan was to be utilized for expansion of projects. Sanction of both these loans prohibit utilization of funds for purposes other than for the utilization for which they are sanctioned. From the ledger extract for the year ended 31.03.2008 for both loan accounts, it is seen that no amount has been utilized for investment in subsidiaries which earns tax-free income. The loan amounts were fully disbursed and utilized in the year ended 31.03.2008 (A.Y. 2008-09) itself. Taking into all the facts as stated above, I am of the considered opinion that if loans/borrowed amounts are granted for specific projects/expansion and no amount from the same has been directly utilized for investments, then the first and second limb of rule 80 attributing the interest payments to the investments will not be applicable. Accordingly, interest on bank loan and term loan amounting to ₹67,92,000/- and ₹ 3,82,11,000/- respectively are to be excluded from the calculation to determine the disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and receipt . No other classification is germane to the context in which rule 8 D is set out, nor does the scheme of Section 14 A leave any ambiguity about it. 12. Ironically, however, the definition of variable A embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate expenditure by way of interest, which is not directly attributable to any particular income or receipt it ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income (emphasis by underlining supplied by us). This incongruity will be more glaring with the help of following simple example: In the case of A Co Ltd, total interest expenditure is ₹ 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is ₹10,000. Out of the balance ₹ 90,000, the assessee has paid interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r rule 6D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed. This is clear from the following observations made by Their Lordships of Hon ble Bombay High Court in the case of Godrej Boyce (supra): 60. In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying r. 8D. In the written submissions which have been filed by the Addl. Solicitor General it has been stated, with reference to r. 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making taxfree investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.) The justification that has been offered in support of the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice. 13. In view of the decision of the Calcutta Bench of this Tribunal cited above, we uphold the order of the Commissioner of Income Tax (Appeals) in excluding the interest on bank loan and term loans for the purpose of computing disallowance under Rule 8D(2)(ii). The grounds raised by the Revenue are rejected on this issue. 21.1 In view of the above Tribunal decision (in the case of ACIT v. M/s. Farida Shoes Pvt. Ltd. In ITA Nos.2102 2103/Mds/2015 dated 8.1.20160, we are of the opinion that the interest on borrowing which are made for specific purpose of business cannot be considered for the purpose of Rule 8D of the Income Tax Rules. 21.2 Further, investments in sister concerns or subsidiaries with which the assessee is having business transactions, that investments cannot be considered for the purpose of applicability of Rule-8D. For this proposition we rely on the judgments of Tribunal in the case of Sun TV Networks in ITA No.1340 1341/Mds./15 1578 to 1579/Mds/15 wherein held that:- 12. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Beach Miners Co. Pvt Ltd. Vs. ACIT in ITA No.2110/Mds./14 dated 06.08.15 wherein held that: 6.1. Ground No.3 Disallowance of expenditure by invoking the provisions of section 14A of the Act for ₹ 3,11,34,630/- since the assessee had made investments of ₹ 71,55,33,570/- for earning exempt income. At the outset, we find that there is no merit for the Revenue to make addition of ₹ 3,11,34,630/- invoking the provisions of section 14A of the Act because the investment made of ₹ 71,55,33,570/-, bears no cost in the form of interest or whatsoever, since the funds by which the investment is made is assessee s own funds. Further, these investments are made only with sister companies of the assessee and no cost can be attributed for the management of such funds. Therefore, we hereby delete the addition of ₹ 3,11,34,630/- made by the Ld. Assessing Officer invoking the provisions of section 14A of the Act. This ground raised by the assessee is allowed in its favour. 21.4 In view of the above judgments, the AO has to consider the assessee s own fund i.e. capital and reserves as available on the date of investment which yields exempted income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 (Kol)] wherein it was, inter alia, observed as follows: 6. There is no, and cannot be any, dispute with the basic legal position, as inherent in the scheme of the Indian Income Tax Act under section 90, that the provisions of a duly notified double taxation avoidance agreement will override the provisions of the Income Tax Act, unless, and to the extent, the latter are beneficial to the assessee. As Late Prof. Klaus Vogel, in his oft referred book 'Klaus Vomgel on Double Taxation Conventions', had observed that, the treaty acts like a stencil that is placed over the pattern of domestic law and covers over certain parts . Dr. Vogel's perception on this issue quite appropriately sums up the legal position in India as well. A tax treaty essentially restricts the rights of the source state on taxation of an income arising therein, inasmuch as residence country generally has unqualified right to tax global income of its tax subjects anyway, and, therefore, it is useful to begin by examining, from a source country's perspective, whether the income in question can at all be taxed in the source state under the applicable tax treaty. Let us, therefore, begin by exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though learned Director of Income Tax (International Taxation) Shri Sanjay Kumar, who was present in the court room in connection with some other case, immediately got up to disown this argument and submit that the views so expressed by the learned Departmental Representative are quite at variance with the stand being taken by the directorate of international taxation in all other cases. That does not make any difference to our decision on this issue, because even without this benevolence of the learned Departmental Representative, we will still come to the same conclusion. The reason is this. There are at least two non-jurisdictional High Court decisions, namely Hon'ble Delhi High Court in the case of DIT Vs Guy Carpenter Co Ltd (2012 TII 14 HC DEL INTL) and Hon'ble Karnataka High Court in the case of CIT Vs De Beers India Pvt Ltd (TS-312-HC-2012), in favour of the assessee, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. We bow before higher wisdom of Hon'ble Courts above and hold that unless there is a transfer of technology involved in technical services extended by Singapore company, the 'make availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x treaty. 8. As for learned Departmental Representative's reference to the alleged finding of the CIT(A) regarding the amount having been paid to GMPL falling within category of he other sum , it is important to note that the CIT(A) h ad stated that Section 40(a)(i) of the Income Tax Act provides that in computing income of an assessee under the head 'profits and gains of business', deduction will not be allowed for any expenditure being royalty, fees for technical services and other sum chargeable under the Act, if it is payable outside India, or in India to a non resident, and on which tax is deductible at source under Chapter XVII B and such tax has not been deducted , and it wa s in this context that the CIT(A) noted that though the fee paid to GMPL was not covered by fees for technical services, it could fall under the head 'other sum' but since the said other sum was not chargeable to tax in India, the assessee did not have any tax withholding obligation. This classification of income was not in the context of treaty classification but in the context of, what he believed to be, two categories of income referred to under section 40(a)(i), i.e. 'roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions are satisfied, the source state gets the right to tax the same, but when those conditions are not satisfied, the source state does not have the taxing right in respect of the said income. When a tax treaty does not assign taxability rights of a particular kind of income to the source state under the treaty provision dealing with that particular kind of income, such taxability cannot also be invoked under the residuary provisions of Article 23 either. The interpretation canvassed by the learned Departmental Representative, if accepted, will render allocation of taxing rights under a treaty redundant. In any case, to suggest that consultancy charges, brokerage and commission can be taxed under article 23, as has been suggested by the learned Departmental Representative, overlooks the fact that these incomes can indeed be taxed under article 7, article 12 or article 14 when conditions laid down in the respective articles are satisfied. 9. It is also important to bear in mind the fact that article 23 begins with the words 'items of income not expressly covered' by provisions of Article 6-22. Therefore, it is not the fact of taxability under article 6-22 which lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not intended to be covered by the Treaty. That income has been left to the care of domestic law under which the burden of taxation on such income has been minimized (vide section 172 of Income-tax Act). We are of the considered view that a particular species of income which is specifically referred to in article 7 and deliberately left out of its genus, namely business profits, cannot be said to be an item of income not dealt with under article 7. The expression 'deal with' is a comprehensive expression having different shades of meaning. In the New Chambers Thesaurus, the meanings of'deal with' are given thus: 1. deal with a situation, attend to, concern, see to, manage, handle, tackle, cope with, get to grips with, take care of, look after, sort out, process. In Collins Cobuild English Language Dictionary, it is stated thus: If a book, speech, film etc. deals with a particular thing, it has that thing as its subject or is concerned with it. In Shorter Oxford Dictionary (Thumb Index Edn.) one of the meanings given is: be concerned with (a thing) in any way; busy or occupied oneself with, esp. with a view to discuss or refutation. The followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le jurisdictional High Court s decision in the case of Bangkok Glass Industry (supra) has been discussed at length in dealing with ground of appeal no. 2 of the appeal by the Assessing Officer for the assessment year 2011-12. We rely upon the said analysis in this context as well. As the issue regarding approaching the residuary income clause, in a case in which the FTS tests fail, is covered by the decision of Hon ble jurisdictional High Court, it is not even necessary to deal with how other Hon ble High Courts have dealt with the issue. In view of Hon ble jurisdictional High Court s aforesaid decision on the issue, and in the absence of any Hon ble Supreme Court decision to the contrary, the view so take by the coordinate bench decision holds good in law. Respectfully following the view so taken by the coordinate bench, which is also in harmony with Hon ble Delhi High Court in the case of Guy Carpenter (supra), Hon ble Karnataka High Court in the case of De Beers India (supra) and Hon ble jurisdictional High Court decision on this issue in the case of Bangkok Glass Industries (supra), we uphold the grievance of the assessee. This tax withholding demand must also, therefore, stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The issue is partly allowed for statistical purposes. 13. The next issue in this appeal is with regard to Disallowance of depreciation of ₹ 7,33,13,900/- u/s.32 of the Act, for non deduction of TDS. 14. The facts of the issue are that the during the year, the assessee has claimed depreciation @ 20% amounting to ₹7,33,13,900/- towards Dry Docking Expenses, which was capitalized to the tune of ₹ 36,65,69,501/- for which the assessee should have deducted TDS u/s.195 of the Act. According to the assessee, it is not subjected to TDS. 15. After hearing both the parties, we are of the opinion that the depreciation cannot be disallowed which is to be granted on the cost of capital assets on which there is no question of TDS. For this purpose, we rely on the decision of the Tribunal in the case of M/s. Crescent Chemsol Pvt. Ltd. vs. ACIT in ITA No.1497/Mum/2010 for the asst. year 2006-07 dated 09.03.2011 wherein the Tribunal held that:- 10. Aggrieved by the order of the CIT(A) the assessee has raised Ground No.3 before the Tribunal. We have heard the rival submissions. Provisions of section 40(ia) of the Income Tax Act, 1961 (the Act) reads as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the any variation has been caused to the income or loss as returned by the assessee during the year under consideration or not. The scope of Reference to Dispute Resolution Panel is as per sub section 2 of sec.144C of the Act, i.e. the assessee can file his objections only in relation to such variation as is referred to in sub section 1 of sec.144C. Sub section 1 of sec.144C of the Act refers to any variation in the income or loss returned as made by the Assessing Officer as is prejudicial to the interest of the assessee. The above objections do not at all relate to any such variation made by the AO in the income or loss as returned by the assessee in its return for asst. year 2012-13. So the above objections cannot be adjudicated by the Panel, being beyond its scope of powers and not accepted the objections. 17.1 The ld.A.R relied on the decision of co-ordinate bench of Mumbai Tribunal in the case of Mahindra Mahindra Limited, in M.A. No. 397/Mum/2012 (Arising out of ITA No. 7999/Mum/2011) Assessment Year 2007-08 vide order dated 03-10-2012 for the proposition that the Tribunal is powered to admit the additional ground and it is to be remitted to the file of AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts of the issue are that the Assessing Officer has grossly erred in not allowing credit for income tax paid outside India u/s.90 (foreign tax) while assessing positive income of the assessee as against loss claimed in the return of income filed u/s.139 of the Act. According to the DRP, as regards the objections, it is important to examine as to whether the any variation has been caused to the income or loss as returned by the assessee during the year under consideration or not. The scope of Reference to Dispute Resolution Panel is as per sub section 2 of sec.144C of the Act, i.e. the assessee can file his objections only in relation to such variation as is referred to in sub section 1 of sec.144C. Sub section 1 of sec.144C of the Act refers to any variation in the income or loss returned as made by the Assessing Officer as is prejudicial to the interest of the assessee. The above objections do not at all relate to any such variation made by the AO in the income or loss as returned by the assessee in its return for asst. year 2012-13. So the above objections cannot be adjudicated by the Panel, being beyond its scope of powers and not accepted the objections. 21. After ..... X X X X Extracts X X X X X X X X Extracts X X X X
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