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TMI Blog2015 (2) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... - HIGH COURT BOMBAY) and HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT) no such disallowance under section 36(1)(iii) could be made. - Decided in favour of assessee. Disallowance u/s 14A r.w. rule 8D - Held that:- As per requirement of section 14A(2), the AO is under an obligation to determine the amount of expenditure incurred in relation to an income which is not included in the total income with the method prescribed under Rule 8D in a case where AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of the expenditure incurred by it in relation to income which does not form part of total income under the Act. Thus it would serve the interest of justice if the issue relating to these administrative expenses is restored back to the file of AO with a direction to readjudicate this issues as per provisions of law after giving the assessee a reasonable opportunity of placing all the material on record to support its contention and then after considering all the materials, if AO arrive at a conclusion that disallowance calculated by the assessee is incorrect then he will record such non-satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. TP adjustment in respect of share application money - Held that:- In respect of share application money advanced to Videocon Global Ltd. interest according to LIBOR standards should have been charged by the assessee and addition to that extent will be liable for upholding. Therefore, we direct the AO to re-compute the amount of interest applying LIBOR rates in respect of share application money advanced to M/s. Global Energy Inc. and TP adjustment should be made accordingly.So far as it relates to addition made in respect of share application money to Saffair Overseas Inc., it will serve the interest of justice if this issue to this extent is verified by the AO that whether or not the said concern is AE of the assessee. Therefore, the issue is restored back to the file of AO for re-examination in the manner aforesaid. This is being done in view of the fact that no such TP adjustment has been made in respect of A.Y 2010-11. - Decided in favour of assessee for statistical purposes. TP adjustment on account corporate guarantee provided by the assessee to its AE - Held that:- No material has been brought on record by the Revenue authorities to show that the corporate guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Appellant : Shri Arvind Sonde For the Respondent : Shri N.K.Chand ORDER PER BENCH: ITA No.6145/Mum/2012 ITA No.6662/Mum/2012 are cross appeal and are directed against order of Ld. CIT(A)-15, Mumbai dated 06.08.2012 for assessment year 2008-09. ITA No.1728/Mum/2014 and ITA No.1729/Mum/2014 are appeals filed by the assessee against two separate orders of CIT(A) dated 20.01.2014 for assessment years 2009-10 and 2010-11. Grounds of appeal in all the appeals read as under: Grounds of appeal ITA No.6145/M/2012-Assessee s Appeal : A.Y. 2008-09 1 (a) On the facts and in the circumstances of the case and in law, the learn Commissioner of Income Tax (Appeals) erred in confirming the disallowance of ₹ 2,13,74,920/- out of total interest claimed u/s.36(1)(iii) by holding that / there is no business purpose or commercial expediency in money advanced to Videocon Energy Holdings Ltd. and the reasons assigned by him for doing so are wrong and contrary to the facts of the case, the provisions of the Income Tax Act, 1961 and the Rules made there under. (b) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments yielding exempt income and hence no disallowance of proportionate interest can be made u/s. 14A of the Income Tax Act, 1961. Grounds of appeal ITA No.6662/M/2012-Revenue s Appeal: (A.Y.2008-09) 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made by the AO of ₹ 14,55,02,872/- [on account of disallowance u/s. 14A of I.T.Act , 1961 to the book profit u/s. 115JB] without appreciating the fact that the disallowance made u/s. 14A clear4 applies to clause of explanation to Section 115JB of the Act. 2 Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made by the A 0 of ₹ 14,55,02,872/- [on account of disallowance u/c. 14A of I.T.Act, 1961] to the book profit u/s. I15JB without appreciating the fact that as per clause (f) of explanation to section 115JB the amount or amounts relatable to any income to which section 10 apply has to be added to the book profit and section 14A applies to dividend income which is exempt u/s. 10(34). 3 Whether on the facts and in the circumstances of the case and in law, the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax (Appeals) for AY 2005-06, AY 2006-07 and AY 2007-08, wherein disallowance of interest made u/s 36(1) (iii) were deleted, which is wrong and contrary to the provisions of the Income Tax Act, 1961 and the Rules made there under. 2.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of ₹ 12,05,11,644/- by considering the same as incurred for earning exempt income by invoking the provisions of section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962, by rejecting the explanation given by the appellant which is wrong and contrary to the provisions of Income Tax Act, 1961, and the Rules made thereunder. (b) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that the investments have been made out of own funds, reserves and internal accruals which are much more than the investments yielding exempt income and hence no disallowance of proportionate interest can be made u/s. 14A of the Income Tax Act, 1961. 3. (a) On the facts and in the circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Allotment with M/s. Videocon Global Limited (associated enterprises of appellant) by determining the arm s length interest rate at 12% as against rate of 4.66% determined and charged by the appellant as the balance in share application money of Videocon Global Limited was transferred to loans and advances given account and the reasons assigned by him for doing so are wrong and contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder. (b) The Ld. Commissioner of Income Tax (Appeals) erred in confirming the Arm s length price of interest chargeable on the share application money pending allotment with its AEs based on interest rates specified by MCA (Ministry of Company Affairs) Notification without appreciating the fact that share application money was given to the foreign Associate Enterprises in Foreign Currencies and the same was transferred to loans and advances given and as such the price chargeable as interest on such money has to be based on LIBOR rate and also that the said notification was not relevant or applicable to the present case. (c) On the facts and in the circumstances of the case and in law, the Ld. Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g adjustment of ₹ 57,90,80,866/- u/s.92CA of the I.T. Act, 1961 in respect of Guarantee commission. (c) The Ld. Commissioner of Income Tax (Appeals) erred in confirming the credit rating of AEs at CCC for the purpose of benchmarking guarantee fee without appreciating that AE s credit rating equalled its parents rating. (d) The Ld. Commissioner of Income Tax (Appeals) erred in confirming the arm s length corporate guarantee fee at 3.247% p.a., at 4.688%, p.a. and at 3.097% p.a. on corporate guarantees provided by the appellants on behalf of its AEs at high end without considering the following factors: (i) Charging of guarantee fee is a fact - specific exercise and vary upon the facts of each individual case. (ii) The loans were fully secured by primary securities and also covered by receivables of other group concerns which were insured. (iii) Extension of corporate guarantee was a shareholder function and furtherance of appellant s global expansion of business. (e) Without prejudice to the above ground, on the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in confirming the arm s length guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the combined accounts of M/s. Sai Enterprises and M/s. Trishul Enterprises upto 151h May 2008 (i.e. before making any payment to said parties by appellant) instead of ₹ 4,85,11,463/- considered by Ld. Commissioner of Income Tax (Appeals) which is wrong and contrary to the provisions of the Income Tax Act, 1961, and the Rules made thereunder. (e) Without prejudice to the above ground no 8(a) to (d). the id. Commissioner of Income Tax (Appeals) should have considered the normal credit period available in the trade while working out the peak credit. (f) (i) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in directing id. AO to carry out exercise for working out the further additions to be made in the year if any on the basis of methodology adopted in AY 2010-1 1, which is wrong and contrary to the provisions of the Income Tax Act, 1961, and the Rules made thereunder. (ii) On the facts and in the circumstances of the case and in law, the directions of the CIT(A) amounts to enhancement and the same is done without giving any show cause notice for doing the same, which is wrong and contrary to the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Companies Act, 1956 and SEBI Regulations relating to interest on share application money even though the same are not applicable to the facts of the case. (d) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in not taking into consideration the order of the Commissioner of Income Tax (Appeals) for AY 2005-06, AY 2006-07 and AY 2007-08, wherein disallowance of interest made u/s 3 6(1) (iii) were deleted, which is wrong and contrary to the provisions of the Income Tax Act, 1961 and the Rules made there under. 2.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of ₹ 62,20,32,998/- by considering the same as incurred for earning exempt income by invoking the provisions of section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962, by rejecting the explanation given by the appellant which is wrong and contrary to the provisions of income Tax Act, 1961, and the Rules made thereunder. (b) On the facts and in the circumstances of the case and in law, the learned Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus making higher addition/adjustment of ₹ 146,70,071. 5. (a) On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in confirming upward transfer pricing adjustment of ₹ 4,68,685/- u/s. 92CA of the Income Tax Act, 1961 on account of interest on Share Application Money Pending Allotment with an associated enterprise by determining the arm s length interest rate at 12% as against rate of 4.75% determined and charged by the appellant as the balance in share application money account of the AE was transferred to loans and advances account and the reasons assigned by him for doing so are wrong and contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder. (b) The Ld. Commissioner of In come Tax (Appeals) erred in confirming the Arm s length price of interest chargeable on the share application money pending allotment with its AEs based on interest rates specified by MCA (Ministry of Company Affairs) Notification without appreciating the fact that share application money was given to the foreign Associate Enterprises in Foreign Currencies and the same was transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. BVI respectively on entire amount of guarantees outstanding without reducing the Margin money kept in the form of Fixed Deposits by Associated Enterprises themselves (USD 20 millions in case of Videocon Global Ltd. and USD 30 millions in case of Videocon Global Energy Holdings Ltd.) 7. (a) On the facts and in the circumstances of the case and in law, the lower authorities erred in making disallowance of ₹ 1,70,26,380/- being depreciation on plant and machinery and moulds by alleging that as the said plant and machinery were purchased from hawala dealers, deduction claimed on account of depreciation on said bogus purchase is not maintainable which is wrong and contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder. (b) On the facts and in the circumstances of the case and in law, the lower authorities erred in reducing the Written Down Value of Plant and Machinery and Moulds by ₹ 470,51,020/- and ₹ 399,26,540/- respectively by holding that the appellant has no evidence in respect of purchases of said plant and machinery and moulds and appellant has never procured and put to use the said assets, which is wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied forward, and not doing so is wrong and contrary to the provisions of Income Tax Act 1961 and Rules made thereunder. 10. On the facts and in the circumstances of the case and in law lower authorities erred in charging interest u/s 234C of ₹ 1,92,69,913/- which is wrong and contrary to the facts of the case, provisions of Income Tax Act 1961 and rules made thereunder. 11. On the facts and in the circumstances of the case and in law lower authorities erred in charging interest u/s 234B of ₹ 53,75,78,715/- which is wrong and contrary to the facts of the case, provisions of Income Tax Act,1961 and rules made thereunder. 2. In these appeals, as it can be seen from the grounds of appeal as well as charts filed by the A.R, grounds in respect of impugned assessment years are common. Therefore, all these appeals were argued together and for the sake of convenience all these appeals are disposed of by this consolidated order. It may also be mentioned here that grounds of appeal filed by the assessee were lengthy, narrative and argumentative raising basic issue and alternative issues with regard to impugned additions. It was submitted by Ld. AR that charts filed in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering that only 55.49% of the total funds, proportionate disallowance under section 36(1)(iii) was computed at ₹ 2,21,19,998/- which was added to the income of the assessee(All these facts are summarized by Ld. CIT(A) in para 4.2 of the impugned order and were not disputed by the Revenue). 3.3 On appeal filed before Ld. CIT(A), Ld. CIT(A) accepted the claim of the assessee with regard to advances made to Evans Frazer Co. Ltd. and Holzman Videocon Engineering Ltd. on the ground that advance made to these concerns relates to business activity of the assessee, therefore, no interest pertaining there to could be disallowed. However, with regard to advance to Videocon Energy Holdings Ltd., Ld. CIT(A) found that the said amount given by the assessee was in the shape of share application money for the purpose of investment in Videocon Global Ltd. Videocon Energy Holdings Limited hold 99,99,900 convertible preference shares and 300 out of 740 equity shares of Videocon Power Ltd., which was engaged in the project of setting up 1050 MW electric power generating facility in Tamil Nadu. Ld. CIT(A) further noticed that assessee company was engaged in the business of investment in shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to other two concerns for which relief has been granted by Ld. CIT(A). 3.6 On the above mentioned facts, it was the foremost contention of Ld. AR that firstly; no disallowance could have been made as the advance was given out of commercial expediency and reference in this regard was made to the decision of Hon ble Supreme Court in the case of S.A. Builders vs. CIT, 288 ITR 1. , wherein it has been held that interest on borrowed funds cannot be disallowed if the assessee has advanced interest free loans to a sister concern as a measure of commercial expediency; what has to be seen business purpose and what the sister concern did with the money advanced. Secondly; it was the argument of Ld. AR that assessee company has its own capital reserves amounting to ₹ 6,174.03 crores as on 31/03/2008 and advances are only to the tune of ₹ 66.76 crores. By making reference to the decision of Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd., 313 ITR 340 (Mum), it was submitted by Ld. AR that where own funds of the assessee in the shape of share capital and reserve and surplus exceeds the amount of interest free advances then in that case it will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Evans Frazer Co. Ltd. 7,48,59,420 (ii) Holzman Videocon Energy Holdings 33,15,595 (iii) Videocon Energy Holdings Ltd. 66,38,77,364/- TOTAL 74,20,52,378/- 3.7 Thus, it was pleaded by Ld. AR that disallowance has wrongly been upheld by Ld. CIT(A) and the same should be deleted. 3.8 As against the aforementioned arguments of Ld. AR, it was submitted by Ld. DR that the order of Tribunal in earlier years should not be followed as Ld. CIT(A) has described the reasons for the same. He submitted that in view of various other provisions of law the assessee was entitled to receive interest on the advances made by it to Videocon Energy Holdings Ltd., as the advance was in the nature of share application money. Thus, it was pleaded by Ld. DR that Ld. CIT(A) has rightly confirmed the disallowance and his order on this issue should be confirmed. 3.9 We have heard both the parties and their contentions have carefully been considered. In the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps regarding such contention raised by the Revenue and rejection there of are reproduced below: 3. With reference to question (A), Mr Suresh Kumar submitted that the ITAT erred in holding that the investments of the Assessee in tax free securities / investments were from the Assessee s own funds. Since the Assessee had paid interest on borrowed funds and and the Assessee s own funds were not separately identified, the investment in Government securities had been made by the Assessee Bank from common pool of funds available with it. According to Mr Suresh Kumar, as per the provisions of section 1 4A, no deduction could be allowed in respect of expenditure incurred by the Assessee against the income claimed as exempt from tax, as apportionment of expenditure was an inherent part of section 14A. He submitted that in the absence of a direct nexus between Assessee s own funds and the investment made by it, the investment ought to be treated from the common pool having both borrowed as well as own funds of the Assessee and therefore, proportionate disallowance of interest by the Assessing Officer was fully justified. He therefore submitted that the CIT (Appeals) the ITAT had gone wron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appeal. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under :- If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected . (emphasis ours) 3.10. Applying aforementioned proposition of law laid down Hon ble Jurisdictional High Court to the facts of the present case, in view of availability of own funds of the assessee of ₹ 6174.03 crores, no interest could be disallowed on the interest free advances made to the sister concern which are to the tune of ₹ 66.75 crores. The impugned addition liable to be deleted on this ground alone. 3.11 Not only the assessee is also entitled to get this relief on the basis of above discussions but assessee is also entitled to get this relief on the basis of earlier decisions of Tribunal on similar issue. The reference to the earlier orders of the Tribunal has already been made. There is no change in the facts and circumstances of the case. Only new reasons have been assigned just to make the disallowance. The addition is mainly based on the fact that assessee is entitled to receive interest as the money advanced was in the nature of share capital and since it was not refunded to the assessee within stipulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. HDFC Bank Ltd. (supra). 4.1 For assessment year 2008-09 assessee has earned dividend income of ₹ 1,61,85,985/- and long term capital gain of ₹ 28,76,48,000/- which were claim exempt under section 10(34) and 10(38) of the Act respectively. The AO required the assessee to explain as to why disallowance under section 14A should not be calculated with reference to rule 8D. The assessee submitted that it did not invest interest bearing funds in the share and securities from where tax free income has been earned and thus, it was pleaded that disallowance on account of interest should not be made. 4.2 It was further submitted before AO that since no direct expenses were incurred no disallowance was called for on account of expenses also. However, AO did not accept these submissions of the assessee and proceeded to make the disallowance with reference to rule 8D. A sum of ₹ 12,61,00,030/- was disallowed on account of interest and % of average value of investment was computed on ₹ 1,94,02,842/-, thus, total disallowance is made at ₹ 14,55,02,872/-. Similar disallowance was made for other years and for the sake of completeness the disallowance on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16,12,156 80,000 11,12,784 Expenses pertaining to Investment department 28,04,939.53 Videocon Industries Ltd. (F.Y.2007-08; A.Y.2008-09) Working of taxfree and taxable Bonds for the year ended 31.03.2008: Particulars Amount (Rs. In Lacs) As on 31.03.08 closing Investments Yielding Taxfree Income Government and Trust Securities 4,08,445 Mutual Fund 81,93,99,417 Equity Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Reliance Utilities and Power Ltd. (supra) and in respect of other expenses the disallowance, if any, was required to be restricted to ₹ 4,72,922/- as per aforementioned chart. However, Ld. CIT(A) did not accept any of such submissions and has dismissed the ground of the assessee. The assessee is aggrieved and has raised Ground No.2 in respect of all the assessment years subject to appeal. The submissions made before AO and Ld. CIT(A) have been reiterated before us and on the otherhand, Ld. DR relied upon the order passed by AO and Ld. CIT(A). 4.5 We have heard both the parties and their contentions have carefully been considered. The submissions of the assessee that it has sufficient own funds has not been controverted by Revenue in respect of each assessment years involved in the present appeals. The figures in respect of A.Y. 2008-09 have been described in the above part of this order while deciding Ground No.1. For other assessment years also investment of the assessee in the share and securities from where tax free income has been earned does not exceed the own funds of the assessee. Therefore, in view of decision of Hon ble Jurisdictional High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter considering all the materials, if AO arrive at a conclusion that disallowance calculated by the assessee is incorrect then he will record such non-satisfaction and thereafter he will proceed to make disallowance with regard to component of expenses as per provisions of law. 4.8 In view of above discussion, since addition of component of interest disallowance is deleted as per para 4.5, this ground of the assessee for A.Y 2008-09, 2009-10 and 2010-11 is considered to be partly allowed for statistical purposes in the manner aforesaid. 5. Ground No.1 2 of Departmental appeal for assessment year 2008-09 and Ground No.3 for assessee s appeal for A.Y 2009-10 and A.Y 2010-11 raises identical issue i.e. regarding inclusion /exclusion of disallowance made under section 14A for the purpose of computing book profit under section 115JB of the Act. During the course of hearing it was submitted by Ld. AR that inclusion of disallowance under section 14A may be treated as consequential. Accordingly, he submitted that after determining the disallowance under section 14A which is subject matter of Ground No.2 of assessee s appeal for all the impugned assessment years, directions may be g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational controlled transactions. No contrary decision was brought to our notice, therefore, after careful consideration, the matter is considered to be covered by aforementioned decision of Mumbai Tribunal and we decline to interfere in the relief granted by Ld. CIT(A) and these grounds of the revenue are dismissed. 7. Now coming to Ground No.4 of assessee s appeal for A.Y 2009-10 and 2010-11 which relates to TP adjustment made on account of loans/advances given by the assessee to its AE. This addition relates to international transaction in respect of interest on amounts advanced by the assessee to its AEs as share application money which was a sum of ₹ 102,15,55,572/-, the particulars for advances made for assessment year 2009-10 are as under:- Sl.No. Name of the AEs Opening balances as on 01-04-2008(Rs.) Outstanding as on 31-03-2009(Rs.) 1 Paramount Global Ltd., Hong Kong 228,85,11,071 909,07,34,504 2 Powerking Corporation, Cayman Islands Nil 343,60,40,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, Ld. CIT(A) has held that TP adjustment was rightly made. 7.2 Similarly for assessment year 2010-11 an adjustment of ₹ 1,33,08,85,699/- is made. The assessee had charged interest @LIBOR 0.55 +420 bps i.e. 4.75%. However, TPO arrived at Arms Length interest rate of 8.43% (5.43% of average cost of operating cost + 3% for risk) and accordingly addition of ₹ 133.08 crores was made. Ld. CIT(A) upheld this addition relying upon his order for A.Y 2009-10. 7.3 The assessee is aggrieved by the decision rendered by Ld. CIT(A) on the impugned addition in respect of assessment years 2009-10 and 2010-11. 7.4 The submissions made before TPO and Ld. CIT(A) were reiterated before us and relying upon the following decisions, it was contended that Ld. CIT(A) has committed an error in confirming the addition which is liable to be deleted. (i) Shiva Industries Holdings Ltd., vs. ACIT, 145 TTJ 497 (Chennai), wherein the Tribunal in para-11 has held that on the transactions between the assesseee and its AE are in foreign currency, then transaction is an international transaction which has to be looked upon by applying the commercial principles incurred to international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the fact that interest charged by the assessee is in accordance with the LIBOR which is an accepted bench marking for such transaction, the assessee has placed reliance on various decisions which have been referred to in earlier part of this order. For the sake of brevity reference is not again made to those decisions. As against that Ld. CIT(A) has upheld the addition made by TPO on the basis of certain observations made in the case of Aurionpro Solutions Ltd. vs. Addl. CIT (supra) in which though the observation referred to by Ld. CIT(A) are there but ultimately in para 8.13 the Tribunal has accepted the applicability of LIBOR as per following observations: 8.13 Though in principle we do concur with the view of I )RP on this issue, however, since (lie issue of LI BOR has been considered and decided by the Tribunal in various cases as relied upon by the assessee (supra) therefore, to maintain the rule of consistency, we follow the decision of (he coordinate Benches of this Tribunal, and accept LIBOR for benchmarking interest on interest free loans to AEs. Since the LIBOR is a rate applicable in the transactions between the banks and further the loans advanced by the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.4 for A.Y 2010-11 are allowed and impugned additions are deleted. 8. Ground No.5 for assessment year 2009-10 and 2010-11 are common. In respect of assessment year 2009-10 the aggregate addition of ₹ 6,07,07,166/- is made on account of TP adjustment in respect of share application money. It has three components as under: (i) In respect of share application money advanced to Videocon Global Ltd. on which assessee has charged interest @ 4.68% (LIBOR 1.18% + 350bps ) addition of ₹ 5,60,03,793/- has been made. (ii) Share application money to Global Energy Inc. which is re-characterized as loan addition of ₹ 15,64,368/-*( wrongly mentioned as ₹ 9,54,265/-) has been made. (iii) Share application money to Sapphire Overseas Inc., which is also recharacterized as loan addition of ₹ 37,49,108/- is made. 8.1 In respect of A.Y 2010-11 the impugned addition is only with respect to Global Energy Inc., Cayman Island which is a sum of ₹ 4,68,685/-. This year the assessee has received intersest @ 4.75%. By applying interest @12% an amount of ₹ 7,75,755/- is computed out of which a sum of ₹ 3,07,070/- received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n entity i.e. AEs of the assessee. Therefore, the basis adopted by TPO in the shape of MCA Regulation cannot be applied to the present case. Thus, addition on the basis of aforementioned MCA Regulation cannot be made. If the very basis adopted by TPO and upheld by Ld. CIT(A) is incorrect then the transaction of the assessee with its foreign AE has to be evaluated as per international standards which is LIBOR rates. It is not disputed by the Revenue that the interest rate charged by the assessee to its AE is not in accordance with the LIBOR rates. In view of all these facts and above position of law, we are of the opinion that the interest charged by the assessee being in accordance with LIBOR standards, no further addition is called for. The impugned addition made in respect of share application advanced by the assessee to its AE namely Videocon Global Ltd. for both the years is deleted. So far as it relates to share application money advanced by the assessee to Global Energy Inc., in respect of A.Y 2009-10 though it is the contention of the assessee that no addition could be made as this is in the nature of capital account transaction and reliance in this regard is placed on the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same would not be applicable to impugned transaction. Therefore, the impugned addition for A.Y 2010-11 is liable for deletion and is deleted. 8.7 In view of above discussions Ground No.5 of the assessee s appeal for A.Y 2009-10 is partly allowed and for A.Y 2010-11 it is allowed. 9. Ground No.6 of assessee s appeal for assessment year 2009-10 and 2010-11 raises a common issue i.e. TP adjustment on account corporate guarantee provided by the assessee to its AE. The assessee provided guarantee to its three AEs namely Sky Billion Trading Ltd.,(SBTL), Videcon Global Ltd. (VGL)and Viedeocon Global Engineering Holding Ltd.,(VGEHL) and arms length price of such guarantee was taken at nil. The TPO evaluated the ALP of guarantee given to each AE separately. The TPO arrived at a conclusion that ALP of the guarantee provided by the assessee to its AEs would be 3.247%, 4.688% and ₹ 3.097% in respect of SBTL, VGL and VGEHL respectively. Accordingly, the amount of ₹ 11,52,36,030/-, ₹ 24,40,19,776/- and ₹ 21,98,25,060/- was added as TP adjustment in the hands of SBTL, VGL and VGEHL respectively. 9.1 Similarly for assessment year 2010-11 the guarantee rate was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eved. 9.4 After narrating the fact, it was submitted by Ld. AR that the addition is not warranted and has wrongly been upheld by Ld. CIT(A). He submitted that giving corporate guarantee is not an international transaction as per decision of Delhi ITAT in the case of Bharati Airtel Ltd. vs. Addl.CIT (2004) 43 taxaman.com 150 (Delhi-Trib). It was submitted that in the said decision Tribunal has analyzed the provisions of section 92B r.w. explanation inserted with retrospective effect from 1/4/2002 vide Finance Act 2012 and after analyzing the provisions, the Tribunal has ruled that since corporate guarantees do not have any impact on income, profit, losses or the assets of the assesee, therefore, they will not fall within the ambit of international transaction defined under section 92B. For raising similar proposition reliance is also placed on the decision of Chennai ITAT in the case of Redington (India) Ltd. vs. JCIT (2014) 49 taxaman.com, 146 (Chennai-Trib). 9.5 Without prejudice to the above contention it was submitted by Ld. AR that if the aforementioned contention of the assessee is not accepted then according to the following decisions bench mark of guarantee rate sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued corporate guarantee to Deutsch Bank, New Delhi Branch. This corporate guarantee was issued on behalf of its AE and had guaranteed repayment for working capital facility not exceeding Euro 3.6 million. It was the contention of the assessee that since it did not incur any cost or expenses on account of issue of such guarantee and the guarantee was issued as part of shareholder activity, the same was issued for nil consideration. Based on market quote of such corporate guarantee, the assessee in its transfer pricing study determined ALP @ 0.65% per annum. However, TPO while bench marking the international transaction relying upon para 7.13 of OECD guidelines applying CUP method determined the ALP of guarantee commission income @ 2.68% plus mark up of 200 basis point on the basis of data obtained from various banks. Accordingly, ALP adjustment of ₹ 33,10,161 was made. 9.9 In the said decision Tribunal has considered the scope of section 92B. Referring to section 92B(1). It has been described that international transactions can be of following types: (a) in the nature of purchase, sale or lease of tangible or intangible Property. (b) in the nature of provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of expression having a bearing on profits, income, losses or assets appearing in Section 92 B(l). 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92 B, and yet it may not constitute an international transaction as the condition precedent with regard to the bearing on profit, income, losses or assets set out in Section 92B(l) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees do not cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded . One may have also have a situation in which there is a receivable or any other d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail. 35. When it was put to the learned Departmental Representative that there could be a view that issuance of guarantees could be outside the ambit of scope of international transaction itself he submitted that there are large number of decisions in India and abroad, notably in Canada, dealing with the determination of arm s length price of guarantees. His argument seemed to be that even such a view is to be upheld, entire transfer pricing jurisprudence will be turned upside down. There does not seem to be any legally sustainable merits in this argument either. As for the decisions dealing with quantum of ALP adjustments in the guarantee charges, in none of these cases the scope of international transactions tinder section 92B(l) has come up for examination. A judicial precedent cannot he an authority for dealing with a question which has not even come up for consideration in that case. It is only elementary that, as was also held by Hon b!e Bombay High Court in the case of CIT v. Sudhir Jayantilal Mulji [1995] 214 ITR 154 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have held that even after the amendment in Section 92 B, by amending Explanation to Section 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of international transaction to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us. 36. For the reasons set out above, and as we have held that the issuance of corporate guarantees in question did not constitute international transaction within meanings thereof under section 92B, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 33,10,161. The assessee gets the relief accordingly. (emphasis ours) 9.11 Subsequently, Chennai Bench of ITAT in the case of Redington India Ltd. vs. ACIT (supra) following the aforementioned decision has also given the relief to the assessee, copy of this decision is fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer from the aforementioned two decisions of the Co-ordinate Benches, in which it has been held that the corporate bank guarantee given to AEs which does not involve any cost and which does not have bearing on profits, income, losses or assets of the AE will be outside the purview of international transaction. The other decisions of Tribunal in which bench marking of guarantee rate is restricted 0.20 to 0.50% rendered prior to the aforementioned two decisions of the Tribunal. Applying the ratio laid down by Co-ordinate Bench in the case of Bharati Airtel Ltd. vs. Addl. CIT(supra) , we hold that no transfer pricing adjustment could be made with regard to corporate guarantee issued by the assessee to its AEs and impugned additions are deleted and these grounds of the assessee are allowed. 10. Ground No.7 for A.Y. 2009-10 2010-11 were argued together by both the parties. These relate to addition made on account of bogus purchases made by the assessee in respect of assessment year 2009-10 from M/s. Sai Enterprises and M/s. Trishul Enterprises and in respect of A.Y 2010-11 in respect of following entities: i) M/s. Sai Enterprises, ii) M/s. Trishul Enterprises, iii) M/s. Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the raw material so purchased was used by the assessee in the manufacturing process and the finished goods, which have actually been sold by the assessee and assessee was able to prove this fact. The AO observed that the fact of sale of finished goods by the assessee cannot be doubted as the same is subject to Central Excise duty. The natural presumption which would be drawn is that goods were purchased by the assessee, not from M/s. Sai Enterprises or M/s. Trishul Enterprises and purchase of these raw materials were accounted in the name of M/s. Sai Enterprises and M/s. Trishul Enterprises. 10.2 In the light of statement of proprietors of M/s. Sai Enterprises and M/s.Trishul Enterprises, the AO observed that the payment made by the assessee through cheques/RTGS have come back in the form of cash and are being rotated outside books of accounts for actual purchase of raw material from undisclosed parties in cash. From the details the AO noticed that first cheque was issued by the assessee to these parties only on 15/5/2008 and prior to that date total purchases were made to the tune of ₹ 3,23,11,371/- which were treated to be unexplained purchases and after 15/5/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,020/- and ₹ 3,99,26,540/- respectively by holding that the assessee does not have evidence in respect of purchase of said plant and machinery and moulds and assessee has never procured and put them into use; (iii) a sum of ₹ 12,38,28,727/- was reduced from the book value of capital work-in-progress by holding that assessee could not produce cogent evidence to substantiate the claim of purchases accounted under capital work-in-progress on account of trial run and trial production . The additions so made have been confirmed by Ld. CIT(A) in the impugned orders. 10.5 It is the submission of the assessee that all these purchases were made against respective bills of the respective concerns and these were the concerns of Shri Suresh Amritlal Parekh who provided the material to the assessee as per invoices. The persons whose affidavits/statements are provided by the AO to the assessee are not known to the assessee does not have any dealing with them. In those statements the name of assessee does not appear and as per bonafide belief of the assessee Shri Suresh Amritlal Parekh was the proprietor/owner of M/s. Trishul Enterprises and M/s. Sai Enterprises. The nature of ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on him by showing purchases in the books of account, payment by way of account payee cheques and producing vouchers of sale of goods, it was held that addition was liable to be deleted. (3) M/s. Jagdamba Trading Co. vs. ITO (2007) 16 SOT 66 (Jodh). In this case, on the basis of affidavit filed in Sales Tax proceeding, a sum of ₹ 2,20,000/- was added to the income of the assessee and it was held that in view of evidence filed by the assessee to support purchases and payments made through account payee cheques addition could not be made as affidavit of the sellers were filed during the course of Sales Tax proceedings would have no evidentiary value against the assessee particularly on the fact that assessee was not given any opportunity to cross examine the said affidavits. (4) ACIT vs. G.V.Sons , ITA No,.2238,2239 2240/Mum/2012 dated 05/12/2014: In this case during the survey made under section 133A in group cases, where statements of owners of said group were recorded, according to which it was stated that the said group was providing accommodation bills to various entities. It was observed by the Tribunal that survey action was conducted on a third party; the asess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption there should be material on record to suggest that the amount paid by the assessee has again came back to the coffers of the assessee. In these circumstances, we are of the opinion that it would serve the interest of justice if the issues raised in Ground No.7 of both the impugned assessment years is restored back to the file of AO with a direction to re-adjudicate this issue in the manner aforesaid after giving the assessee a reasonable opportunity of hearing and placing all the material on record. After giving such opportunity to the assessee the AO will re-decide this issue as per provisions of law. Ground No.7 for both the years are allowed for statistical purposes in the manner aforesaid. 11. It may be mentioned here that Ground No.8, 9, 10 11 for assessment year 2009-10 and 2010-11 raise issue regarding granting of credit for TDS and levy of interest under section 234A, 234B and 234C of the Act. During the course of hearing it was submitted by Ld. AR that these are consequential in nature and AO may be directed to grant appropriate credit for tax deducted at source and levy interest under section 234A, 234B and 234C of the Act in accordance with the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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