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TMI Blog2016 (11) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... ereby set-aside. Thus, on this aspect, order of the CIT(A) is set-aside and Assessing Officer is directed to delete the addition made u/s 14A of the Act. Transfer Pricing adjustment in respect of corporate guarantee given by assessee on behalf of its Associated Enterprise (AE) to the Bank of Bhutan - arm’s length rate of 3.35% determined by the income-tax authorities for determining the Transfer Pricing adjustment - Held that:- considerations which apply for issuance of Corporate Guarantee were distinct and separate from that of Guarantee provided by the banks and, therefore, the two transactions were incomparable. In our considered opinion, similar parity of reasoning is applicable in the present case too because the considerations which weigh for raising of Bonds, that too in Indian market, are quite distinct and incomparable with the instance of providing of Corporate Guarantee to a bank abroad in connection with raising of loan from such bank by the AE of assessee outside India. Therefore, in our considered opinion, the exercise carried out by the TPO to arrive at the arm’s length rate of 3.35% suffers from an inherent misconception as the benchmarking has been done between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trade Mark 2,00,00,000 Technical Know how 3,50,00,000 MarketingNetwork 3,75,00,000 Non-Compete fees 4,02,50,000 Total 13,27,50,000 6. The learned Commissioner of Income-tax (Appeals) erred in giving several findings which are either irrelevant or incorrect for disallowing depreciation under section 32. 7. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is allowable only on those intangible assets which are protected rights. 8. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is available under section 32 only in respect of a registered trade mark' or patented know how . 9. Having regard to the facts and circumstances of the case, the Appellant submits that the Assessing Officer be directed to allow depreciation under section 32 amounting to ₹ 1,96,32,793/- on the intangible assets referred to above. 10. The learned Commissioner of lncome-tax (Appeals) erred in confirming the allocation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst which assessee is in further appeal before us. 5. On this issue, it was a common point between the parties that in the past years, the Tribunal has adjudicated the said issue in favour of the assessee. It was pointed out that in Assessment Years 2005-06 and 2006-07, the orders of Tribunal have also been affirmed by the Hon'ble Bombay High Court. In this connection, a copy of the order of Tribunal for Assessment Years 2007-08 and 2008-09 vide ITA Nos.528/Mum/2012 and 5800/Mum/2013 dated 27.7.2016 has been placed on record wherein the aforesaid fact-position has been noticed. 6. The aforesaid factual matrix has not been controverted by the ld. DR appearing before us. 7. In our considered opinion, the controversy in Grounds of appeal no. 1 to 4 is liable to be decided in terms of the judgment of Hon'ble Bombay High Court in the case of assessee itself reported in 369 ITR 717 (Bom), which has been duly noticed by our coordinate Bench in its order dated 27.7.2016 (supra) in the case of the assessee for Assessment Years 2007-08 and 2008-09 in the following words :- 4.7 The perusal of the order of the Hon ble High Court reveals that in the earlier two years i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... site arising from business or exercise of a profession, as income from business or profession. A new clause (iv) has been inserted in section 28, with effect from 1-4-1964, by section 7 of the Finance Act, 1964, under which the value of any benefit or perquisite (whether convertible in money or not) arising from business or the exercise of a profession will be chargeable to tax under the head Profits and gains of business or profession . A corresponding amendment has been made to section 2(24), including the value of such benefit or perquisite in the definition of the term income vide new sub-clause (va) inserted in section 2(24) by section 4(c)(i) of the Finance Act, 1964. The effect of the above-mentioned amendment is that in respect of an assessment for the assessment year 1964-65 and subsequent years, the value of any benefit or amenity, in cash or kind, arising to an assessee from his business or the exercise of his profession, e.g., the value of rent-free residential accommodation secured by an assessee from a company in consideration of the professional services as a lawyer rendered by him to that company, will be assessable in the hands of the assessee as his incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok no. 27 to 87 that assessee acquired Grinding Wheel Business of OAL along with its tangible and intangible assets including Goodwill, intellectual property rights e.g. patents, copyrights, past and present R D works, brands, trademark, service marks, registered design etc. and all other rights available to prevent the misuse or disclosure of trade secrets. The assessee also submitted valuation report from M/s. Anmol Sekhri and Associates, the Registered Valuers (enclosed at page no. 10 to 192 of the paper book) for ascertaining valuation of the business giving values of each and every fixed assets and other intangible assets acquired by the assessee under the aforesaid deal. It is noted by us that the lower authorities have granted the benefit of depreciation on the amount of fixed assets acquired i.e. plant and machinery etc. Thus, genuineness of transaction has not been doubted, but what has been doubted merely is the valuation of intangible assets acquired under the deal. It is to be noted here that factum of acquisition of intangible assets has also not been disputed. Thus, under these circumstances, case made out by the lower authorities is that the amount paid by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of the whole undertaking less the sum total of its parts. The 'Financial Reporting Standard 10' issued by Accounting Standard Board which is applicable in United Kingdom and by the Institute of Chartered Accountants of Ireland in respect of its application in the Republic of Ireland, explains that the accounting requirements for goodwill reflect the view that goodwill arising on an acquisition is neither an asset like other assets nor an immediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements. In view of Accounting Standard 10 as issued by the [CAI the assessee's contention was right that the consideration paid by the assessee in excess of value of tangible assets was rightly classified as goodwill. In the facts of the present case, the Tribunal has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The agreement itself does not provide for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its claim to justify the acquisition of various other intangible assets and the justification of their valuation as well as admissibility of depreciation on these assets. It is noted that the Business Transfer Agreement was quite exhaustive having elaborate schedules and annexures containing item wise description of each and every tangible and intangible assets acquired by the assessee. The assessee acquired entire plant and machinery, various trademarks, commercial list of customers and dealers, entire data and information in relation to sales and distribution network, of technical know-how, Goodwill of Grinding Wheel Business, rights of non-competition etc were described in the said agreement. It is further noted that proper break-up and justification for the consideration has been narrated in the said agreement. The said agreement also contains lists of employees of OAL to be taken-over by the assessee company. It also containing the list of trademarks, particulars of goodwill of business of the OAL in the form of business data, customer details, specifications and quality requirement for the products, trade secrets and other confidential information, software process and si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 14A of the Act. The Assessing Officer, however, computed the total disallowance at ₹ 21,12,722/- and accordingly made an additional disallowance of ₹ 4,55,230/-, which is the subject matter of appeal before us. It has been explained that the disallowance of ₹ 4,55,230/- in appeal is out of interest expenditure and has been computed by applying Rule 8D(2)(ii) of the Income Tax Rules, 1962 (in short the Rules ). In this context, the limited plea of the assessee is that the Share capital plus Reserves Surplus available with the assessee is more than enough to cover the investments which have yielded exempt income and, therefore, in terms of the ratio laid down by the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom) a presumption arises that the investments have been made out of such interest-free funds. It is pointed out that the proposition laid down by the Hon'ble Bombay High Court in the case of Reliance Utility (supra) has been also applied in the context of Sec. 14A of the Act by the Hon'ble Bombay High Court in the case of HDFC bank Limited v. DCIT, 383 ITR 529 (Bom). On this basis, it is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds. Of course, the decision of the Hon'ble High Court has been rendered in the context of Sec. 36(1)(iii) of the Act, as contended by the Revenue before us. So however, that is not a ground to defeat its applicability in the context of disallowance u/s 14A of the Act because the proposition approved in Reliance Utilities and Power Ltd. (supra) has been applied by the Hon'ble Bombay High Court in the case of HDFC bank Limited (supra) while dealing with the provisions of Sec. 14A of the Act. Therefore, in our view, the plea of Revenue that the decision of Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra) cannot be applied in the context of Sec. 14A of the Act is not merited. Factually speaking, the learned representative for the assessee had referred to the Balance-sheet to point out that the Share capital plus Reserves and Surplus amounts to ₹ 318.21 crores as against investment of ₹ 41.65 crores, to point out that sufficient interest-free funds are available to cover the level of investments in question. Under these circumstances, in our view, the disallowance of ₹ 4,55,230/- out of interest expenses by applying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable to raise Bonds in Indian market) and the credit rating of the AE (and the corresponding interest rate payable for raising Bonds in Indian market) and such difference, according to him, reflected the benefit in the form of Corporate Guarantee given by the assessee. The Assessing Officer accordingly added a sum of ₹ 2,12,397/- to the returned income for the purpose of determining the arm s length rate of the income by way of Guarantee commission. Such an action of the Assessing Officer has since been affirmed by the CIT(A) also. 19. Before us, the only point of dispute relates to the arm s length rate of 3.35% determined by the income-tax authorities for determining the Transfer Pricing adjustment. The learned representative for the assessee pointed out that the TPO has not adopted any of the recognized methods for determining the arm s length rate of the Guarantee commission and that even the determination of the credit rating of the assessee-company and that of the AE is based on conjectures. It is also pointed out that the TPO has made a fundamental mistake by adopting the borrowing rate of interest in the Indian/domestic Bonds market because the transaction in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest rates. The ld. DR defended the selection of interest rates prevailing in the domestic bond market by pointing out that such data was more reliable, though it related to the Indian context. 22. We have carefully considered the rival submissions. In the present case, AE of the assessee, M/s. Saint-Gobain Ceramic Materials Bhutan Pvt. Ltd., which is based in Bhutan, raised a term loan from Bank of Bhutan Ltd., Bhutan in the month of January, 2009 and the amount outstanding as on 31st March was ₹ 6,29,32,450/-. The assessee-company provided Corporate Guarantee to the Bank of Bhutan in connection with the said borrowing on behalf of its AE. The provision of such Corporate Guarantee is quite well understood and it means that if the AE was to default in the repayment of loan availed from the Bank, assessee would step in and make good the dues owned to the Bank. The assessee-company has charged Corporate Guarantee fee @ 1% from its AE and such transaction has been considered as an international transaction within the meaning of Sec. 92B of the Act. Accordingly, the arm s length price of such transaction has been determined by the TPO at 3.35%, which has resulted in enhanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marking has been done between two incomparable situations. Therefore, we are unable to uphold the said stand of the income-tax authorities. 24. Insofar as the adequacy of 1% rate charged by the assessee is concerned, we find enough reasonableness in the same. In this context, the learned representative for the assessee referred to various decisions of the Tribunal, viz., Hindalco Industries Ltd. v. ACIT (62 taxmann.com 181) (Mum Trib.), Thomas Cook (India) Ltd. v. ACIT (69 taxmann.com 443) (Mum Trib.) and Godrej Consumer Products Ltd. v ACIT (69 taxmann.com 436) (Mum Trib.), wherein the arm s length rate of 0.5% has been approved in the matter of benchmarking Guarantee commission fee chargeable from Associated Enterprises. On this aspect, we may observe that each case would have to be decided in the light of the prevailing facts and circumstances. In the present case, a point which has been consistently made by assessee is to the effect that there is no concept of credit rating in Bhutan and that the banks charge a uniform rate of interest on the term loans, which is 12%. Secondly, it is pointed out with reference to the Balance-sheet of AE that it has adequate debt-equity ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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