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2022 (9) TMI 286 - AT - Income TaxDisallowance u/s.14A r.w.r 8D - necessity of recording satisfaction - suo motu disallowance of expenses made relatable to exempt income u/s.14A - HELD THAT - AO has recorded satisfaction as required under sub-section (2) of section 14A of the Income Tax Act, 1961, and thus, there is no merit in the arguments advanced by the learned counsel for the assessee on the issue of satisfaction and hence, ground raised by the assessee is rejected. Disallowance u/s 14A computed by the AO - AO has computed disallowances u/s.14A of the Act by invoking Rule 8D of the Income Tax Rules, 1962 for the assessment years 2008-09 to 2010-11, which is in excess of exempt income earned by the assessee for the relevant assessment years. It is well settled principle of law by decisions of various courts, including Hon'ble High Court of Madras in the case of Marg Ltd. 2020 (10) TMI 102 - MADRAS HIGH COURT has very clearly held that disallowance under section 14A w.r.Rule 8D can never exceed exempt income earned by the assessee during particular assessment year. In the case of Cheminvest 2015 (9) TMI 238 - DELHI HIGH COURT had considered very similar issue and held that disallowance contemplated u/s.14A cannot swallow entire exempt income earned for the relevant assessment year. The sum substance of ratios laid down by various High Courts are that disallowance of expenditure u/s.14A of the Act cannot exceed exempt income earned for relevant assessment year. Assessee has earned exempt income of Rs.1,95,75,000/- for the assessment year 2008-09, whereas, the Assessing Officer had disallowed expenditure u/s.14A of the Act at Rs.75,07,26,240/-, which is in excess of exempt income earned for the relevant assessment year - disallowance computed by AO cannot exceed exempt income earned for the relevant assessment year and thus, by respectfully following decision in the case of Marg Ltd. 2020 (10) TMI 102 - MADRAS HIGH COURT we direct the AO to restrict disallowances u/s.14A r.w.Rule 8D of the I.T. Rules, 1962, to the extent of exempt income earned for the relevant assessment years. TP adjustment made on account of corporate guarantee extended by the assessee to its AE - Assessee has challenged order of the Tribunal before the Hon ble High Court of Madras only on the issue of disallowances u/s.14A of the Income Tax Act, 1961, and the Hon ble High Court set aside order of the Tribunal for the assessment years 2008-09 to 2010-11 only on the issue of disallowance u/s.14A - However, while listing appeals for disposal in pursuant to direction of the Hon ble High Court, the Registry has listed appeals filed by the Revenue for very same assessment years, even though issues involved in those appeals are reached finality.Therefore, we are of the considered view that these appeals filed by the Revenue / the assessee and cross objection filed by the assessee for the assessment years 2009-10 2010-11 does not require any adjudication at this juncture and thus, these appeals and cross objection are disposed off without giving any finding on the issue as raised by both the parties. Whether extending corporate guarantee is not international transaction? - Tribunal has considered an identical issue in the case of Indian Public School Pvt. Ltd. 2022 (6) TMI 1300 - ITAT CHENNAI and held that after amendment of section 92B of the Income Tax Act, 1961, corporate guarantee given by the assessee to its AE is an international transaction. Therefore, first argument of the assessee is hereby rejected. As regards, rate at which such guarantee is required to be benchmarked, the Tribunal in the very same decision, after considering judgement of the Hon ble Bombay High Court in the case of Everest Kento Cylinders Ltd . 2015 (5) TMI 395 - BOMBAY HIGH COURT had directed the TPO/A.O. to compute guarantee commission @ 0.5% on total corporate guarantee given by the assessee to its AE. By following decision of the co-ordinate Bench of the Tribunal in the case of Indian Public School Pvt. Ltd. 2022 (6) TMI 1300 - ITAT CHENNAI we direct the Assessing Officer to impute guarantee commission @ 0.5% on total corporate guarantee given by the assessee to its AE.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. 2. Transfer pricing adjustment on account of interest receivable on loans extended to Associated Enterprises (AEs) and corporate guarantee given to AEs. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962: The primary issue is the disallowance under Section 14A read with Rule 8D concerning expenditure relatable to exempt income. The assessee contended that the Assessing Officer (AO) did not record the required satisfaction under Section 14A(2) before applying Rule 8D. The assessee cited precedents, including the Hon'ble Madras High Court in M/s. Marg Ltd. Vs. CIT and the Hon'ble Supreme Court in M/s. Maxopp Investment Ltd. Vs. CIT, asserting that the AO must record satisfaction based on the assessee's books of account. The Revenue argued that the AO did record satisfaction, evident from the assessment orders, and that disallowance under Section 14A should be computed as per Rule 8D without deviation. The Tribunal found that the AO had recorded the necessary satisfaction for the relevant assessment years, particularly noting that for AYs 2008-09 and 2009-10, the assessee did not make any suo motu disallowance. Thus, the AO's satisfaction was deemed adequate. However, the Tribunal acknowledged that disallowance under Section 14A cannot exceed the exempt income earned, citing the Madras High Court ruling in Marg Ltd. Vs. CIT and the Delhi High Court in Cheminvest Vs. DCIT. The Tribunal directed the AO to restrict disallowance to the extent of exempt income earned for AYs 2008-09 to 2010-11. 2. Transfer Pricing Adjustment on Account of Interest Receivable on Loans Extended to AEs and Corporate Guarantee Given to AEs: The Tribunal had previously addressed transfer pricing adjustments related to interest on loans and corporate guarantees in favor of the assessee, which was accepted by both parties. The appeals listed for hearing were primarily due to the High Court's remand on the Section 14A disallowance issue. For AY 2011-12, the Tribunal reiterated its stance that corporate guarantees are international transactions requiring benchmarking. Citing the ITAT Chennai's decision in M/s. Indian Public School Pvt. Ltd. Vs DCIT and the Bombay High Court in CIT Vs Everest Kento Cylinders Ltd., the Tribunal held that a 0.5% commission is reasonable for benchmarking corporate guarantees. The AO was directed to apply this rate for the corporate guarantee extended by the assessee to its AE. Conclusion: - Appeals for AYs 2008-09 to 2010-11 were partly allowed, restricting disallowance under Section 14A to the extent of exempt income earned. - Appeals and cross objections related to transfer pricing adjustments for AYs 2009-10 and 2010-11 were dismissed as the issues had reached finality. - For AY 2011-12, the appeal was partly allowed, directing the AO to benchmark the corporate guarantee at a 0.5% commission rate. Order Pronounced: The order was pronounced in the open court on 12th August 2022.
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