9911796707
TMI Blog2018 (1) TMI 1372X X X X Extracts X X X X X X X X Extracts X X X X ..... ng exempt income, in terms of clause (f) of section 115JB(2) of the Act. Hence the disallowance already made by the assessee having regard to the books of accounts of the assessee in the sum of 42,49,346/- does not require to be disturbed. Hence the addition made by the ld AO u/s 115JB of the Act had been rightly deleted by the ld CITA. Accordingly, the Ground raised by the revenue is dismissed. Addition towards running, repairs 9,77,54,843/- against the deemed short term capital gain of 7,18,74,000/- in the facts of the case. The ld AO is accordingly directed to give benefit of the same to the assessee based on the correctness of the claim of brought forward loss figure made by the assessee. Ground raised by the assessee are allowed for statistical purposes as directed above. TDS u/s 195 - payments under various heads in foreign currency on which due deduction of tax at source was not made - Held that:- CIT-A had granted relief to the assessee by placing reliance on ‘make available’ clause prevailing in various tax treaties , but the same is not done by the ld AO and ld DRP in the instant case. We find that the assessee had filed various documents with detailed factual and legal s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate guarantee is in the nature of shareholder activity and hence, no TP adjustment on account of corporate guarantee is required. In the said case, this tribunal had held that “the assessee’s expectation from provision of guarantee was not that of a guarantor i.e. to earn a guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, to help it achieve the assessee’s business objective”. Thus, we agree with the contention of the assessee that the objective of the assessee for providing guarantee was not to earn guarantee fee but to earn returns in the form of appreciation in investment value and receive dividends and, therefore, no TP adjustment ought to have been made in the facts and circumstances of the case. The price for corporate guarantee should be that which would have been paid and accepted by independent enterprises in comparable circumstances. In that case transfer pricing adjustments are required. In that case, it has to be determined what will be the ALP of corporate guarantee commission paid by associate enterprise to the parent company providing corporate guarantee. Non charging of interest on loan to its AE - addition as internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons laid down under sub-section (1) of Section 14A of the Act have been satisfied. 3.3 On the facts and circumstances of the case and in law, the ld. Panel erred in confirming disallowance of ₹ 2,20,81,366/- u/s 14A made by the Ld. AO based on surmise and conjecture without having recorded any reasoned satisfaction under section 14A(2) of the Act against the suo-moto disallowance made by the assessee. 3.4 On the facts and circumstances of the case and in law and without prejudice to grounds taken herein above, the Ld. Panel as well as Ld. AO while computing alleged disallowance under Rule 8D ought to have excluded:- - investments in foreign companies deriving taxable dividend income; -investments on which no exempt dividend income was earned during the year; -strategic investments made in subsidiaries/group companies out of business exigencies; And consequently erred in confirming the disallowance of ₹ 2,20,81,366/- in the present case. 3.5 On the facts and circumstances of the case and in law and without prejudice to Grounds taken herein above, the Ld. Panel as well as the Ld. AO grossly erred in ignoring the decision of Kolkata Tribunal in assessee's own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of REI Agro Ltd reported in 144 ITD 141. But we find that if the disallowance made under second limb of Rule 8D(2) of the Rules is deleted, then the disallowance made by the ld AO would remain at ₹ 23,77,882/- and whereas the assessee itself had voluntarily disallowed ₹ 42,48,850/-. Hence we direct the ld AO to adopt the disallowance figure of ₹ 42,48,850/- which had already been disallowed by the assessee and hence no further disallowance in that regard is to be made. 2.3. Accordingly , the ground nos. 3.1 to 3.6 raised by the assessee are allowed. 3. The Ground No. 3 raised in Revenue's Appeal is with regard to the disallowance u/s 14A of the Act while computing the book profits u/s 115JB of the Act. The ld AO added the sum of ₹ 2,20,81,366/- in the draft assessment order u/s 14A of the Act read with Rule 8D of the Rules while computing the book profits u/s 115JB of the Act. The ld DRP deleted the said addition in its order on the ground that section 115JB of the Act are self contained provisions and hence disallowance u/s 14A of the Act read with Rule 8D of the Rules cannot be imputed thereon while computing book profits u/s 115JB of the Act. Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld CITA in the assessee's own case on the impugned issue in relation to past years, he held that the two aircrafts were not used wholly and exclusively for the purpose of assessee's business. Accordingly , he held that 90% of the user of the aircrafts relates to business purposes and the remaining 10% relates to non-business purposes. Therefore, by applying the provisions of section 38(2) of the Act, the proportionate expenditure incurred on running , repairs & maintenance of the aircrafts and depreciation were disallowed by the ld AO as under:- Expenditure on running, repairs & maintenance of aircrafts 2,75,56,751/- Depreciation claimed u/s 32 of the Act 4,06,46,462/- Total 6,82,03,213/- 10% proportionate disallowance thereon 68,20,321/- This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us on the following ground:- 4.1 On facts and circumstances of the case and in law, the Ld. Panel erred in confirming the ad-hoc disallowance made by the ld. AO of expenditure incurred on running and maintenance of aircrafts including depreciation to the extent of ₹ 68,20,321/- being 10% of the total expenditure of ₹ 6,82,03,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the same. Hence the provisions of section 38(2) of the Act are not at all applicable to the facts of the instant case. We also find that similar issue had cropped up for the Asst Years 2007-08 to 2009-10 in assessee's own case ITA Nos. 1431/1557/Kol/2011 ; ITA Nos. 932 & 866/Kol/2012 and ITA Nos. 352& 191/Kol/2013 respectively , wherein it was held that :- 3.3. We have heard the rival submissions and perused the materials available on record. We find that this issue is squarely convered by the decision of the coordinate bench of this tribunal in assessee's own case for Asst Year 2006-07 in ITA No. 314 & 318/Kol/2011 dated 1.6.2016 wherein it was held that :- 9.1. We have heard the rival submissions and perused the materials available on record. We find that this issue is squarely covered in assessee's own case for the Asst Years 2003-04, 2004-05 & 2005-06 in ITA No. 57/Kol/2007 ; 1846/Kol/2007 and 299/Kol/2010 dated 9.12.2015 respectively, wherein it was held that :- 6.3. We have heard the rival submissions and perused the materials available on record. We find that this issue is squarely covered by the decision of the co-ordinate bench decision of this tribunal in assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 73) 87 ITR 349 (SC) Sukhdayal Rambilas vs CIT (1982) 136 ITR 414 Madura Knitting Co vs CIT (1956) 30 ITR 764 (Mad) In view of the aforesaid facts and circumstances and respectfully following the judicial precedents thereon, we have no hesitation in deleting the addition made in the sum of ₹ 42,80,883/- on an estimated basis. Accordingly, the Ground No. 4 raised by the assessee is allowed. In view of the aforesaid facts of the case and respectfully following the co-ordinate bench decision (supra), we hold that no addition need to be made on an estimated basis towards running and maintenance of aircrafts. Accordingly, the ground nos. 6 & 7 raised by the assessee are allowed. 3.4. Respectfully following the said decision, we hold that no addition could be made on an estimated basis towards running and maintenance of aircrafts. Accordingly, the grounds raised by the assessee in this regard for various assessment years are allowed and grounds raised by the revenue in this regard are dismissed. 4.2. Respectfully following the aforesaid decision, we hold that no disallowance could be made on an estimated basis towards running, repairs & maintenance of aircrafts including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y up to computation of capital gain, however such gain being arising from transfer of long term capital assets, retained the character of long term capital gain for all other provisions and is eligible for set off u/s 74 against brought forward loss from long term capital asset. 5.1. We have heard the rival submissions and perused the materials available on record. It is not in dispute that the asset that was the subject matter of transfer was a residential property which was held by the assessee for a period exceeding 36 months. Hence the asset held was a long term capital asset in the hands of the assessee. It is not in dispute that the assessee had claimed depreciation on the said property in the returns of earlier years and hence becomes depreciable asset. We hold that merely because the depreciable asset has been sold and the sale consideration received thereon exceeds the written down value of such asset, the character of the asset (i.e being a long term capital asset) does not undergo any change. May be , it would be eligible to taxed in terms of deeming fiction u/s 50 of the Act as short term capital gains on sale of depreciable assets. We hold that the deeming fiction cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 54E of the Act. The High Court has confirmed the view of the Commissioner of Income Tax (Appeals) and dismissed the appeal of the Revenue. While doing so the High Court has relied upon its own judgment in the case of CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210/[2005]144 Taxman 855 (Born.). The High Court has observed that Section 50 of the Act which is a special provision for computing the capital gains in the case of depreciable assets is not only restricted for the purposes of Section 48 or Section 49 of the Act as specifically stated therein and the said fiction created in sub-section (l) & (2) of Section 50 has limited application only in the context of mode of computation of capital gains contained in Sections 48 and 49 and would have nothing to do with the exemption that is provided in a totally different provision i.e. Section 54E of the Act. Section 48 deals with the mode of computation and Section 49 relates to cost with reference to certain mode of acquisition. This aspect is analysed in the judgment of the Bombay High Court in the case of ACE Builders (P.) Ltd. (supra) in the following manner: "In our opinion, the assessee cannot be denied exemption unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .com 237/221 Taxman 423 ii) CIT vs. Assam Petroleum Industries (P) Ltd. [2003] 262 ITR 587/131 Taxman 699 (Gau) 4. We are also informed that against the aforesaid judgments no appeal has been filed. 5. In view of the foregoing, we do not find any merit in the instant appeal which is, accordingly, dismissed." 5.2. We find that the reliance placed by the ld AR on the decision of Hon'ble Bombay High Court in the case of CIT vs Manali Investment reported in (2013) 219 Taxman 113 (Bom) wherein it was held that short term capital gain computed u/s 50 of the Act on long term depreciable assets can be set off against long term capital loss u/s 74 of the Act. 5.3. Respectfully following the decisions of the Hon'ble Supreme Court and Hon'ble Bombay High Court supra , we hold that the assessee is indeed entitled to set off the brought forward long term capital loss of ₹ 9,77,54,843/- against the deemed short term capital gain of ₹ 7,18,74,000/- in the facts of the case. The ld AO is accordingly directed to give benefit of the same to the assessee based on the correctness of the claim of brought forward loss figure made by the assessee. Accordingly, the Ground Nos. 5.1 & 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of the tax treaty. Section 90(2) of the Act provides that a taxpayer may apply the provisions of the Act or the applicable tax treaty whichever are more beneficial to the tax payer. 6.1. The ld AO observed that the payments of Recruitment charges, Management fees, Professional / Consultancy charges , Advertisement in magazine /website listing, Inspection fees and Marketing & Development Fees would require the engagement of certain amount of skill and intellectual input of expertise and accordingly the same would partake the character of FTS and hence the assessee is liable to deduct tax at source, failure of which would result in disallowance u/s 40(a)(i) of the Act. With these observations, the ld AO proposed a disallowance of ₹ 5,10,87,110/- in the draft assessment order after listing out the details of each such expenditure party wise in his draft order. The ld DRP gave relief to the extent of ₹ 58,43,493/- out of these expenditures and sustained the balance disallowance of ₹ 4,52,43,617/- which was duly made by the ld AO in the final order passed on 30.11.2015. Aggrieved, the assessee is in appeal before us on the following grounds :- 6.1 On facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nual Subscription Annexure-7 Reimbursement of expenses at actual Annexure-8 Salary/Advance against Salary Annexure-9 Domestic Payment Annexure-10 Recruitment Charges Annexure-11 Management Fees Annexure-12 Aircraft repair & Maintenance Annexure-13 Professional/Consultancy Annexure-14 Marketing and development 6.3. Advertisement in Magazines / Website Listing The assessee explained that magazines are printed outside India and / or the Websites are listed outside India. The assessee being in the luxury hospitality, its business heavily depends on clients from the western world. Consequently, as in the past it spent a considerable sum of money on advertisements both in the print and web media. As already explained in the past years, such advertisements are printed mostly in USA and some in the UK etc. The servers of the web are also located outside India. As already explained, the target for the advertisements are the foreign tourists. Hence, in those cases, what is ensured is that these foreign advertisements are circulated in the US/ Canada and in UK and European Countries. Accordingly, the payments do not attract tax withholding u/s 9 since all activities relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the payment is considered taxable in India under the domestic law, the same is not taxable in India under the India Thailand tax treaty. As mentioned earlier, the Thai treaty does not have any exclusive FTS clause. Hence in the absence of any PE in India, these payments made to the service providers do not call for any TDS. 6.8. Marketing & Development Payments are made to the tax residents of USA / Mauritius. While USA has 'make available' clause in the 'Included Services Article' , Mauritius does not have any exclusive FTS clause. In view of the above, no tax withholding is called for. 6.9. Apart from this, the assessee had given an exclusive submission before the ld AO vide letter dated 19.11.2015 with regard to non-applicability of withholding tax under domestic law as well as DTAA of the respective countries for each of the aforesaid expenditure as under:- EIH Limited Assessment Year 2011-12 Details of inspection fees paid in foreign currency Name of the Party Country Total Taxability under DTAA Leading Quality Assurance Ltd U.K. 1,517,643 Annexure -10 Leading Quality Assurance Ltd U.K. 205,042 1,722,689 EIH Limited Assessment Year 2011-12 Details of marketi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income tax Act, 1961 The services rendered by foreign vendors in relation to advertisement/ web listing are in the nature of marketing expenses. These services are not taxable under the provision of Income tax Act, 1961 for the following reasons: • It is not received or deemed to be received in India. • The Income does not accrues or arises or deemed to accrue or arise in India as the advertisement is published/Printed/ distributed outside India , • Since all the operations of payee are carried out outside India, in accordance with clause (a) of Explanation 1 to Section 9(1)(i), the various remittances should not be considered as deemed to accrue or arise in India and accordingly such income ought not to be chargeable to tax in India under Section 9(1)(i) of the Act. • The remittances made on account of were not for any use or right to use of any equipment, copy right, scientific work etc. and hence should not qualify as Royalty under Section 9(1)(vi) of the Act. • The said remittance were also not for rendering any managerial, technical or consultancy services and hence should not qualify as Fees for Technical Service (FTS) under section 9(1)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit. Both parties had come together with their specialized information, experience and knowledge in the field of hotel business for mutual benefit. The main intention or purpose of the association between the assessee and ITC was to publisize, market and promote the hotels of the ITC and the assessee-company, had undertaken to provide all the services as enumerated in the various articles to achieve this main intention or purpose. If all the terms thereof were read together as a whole, it explicitly showed that the assessee in substance, had mainly undertaken the job of publicity, marketing and advertising of the hotels of Indian clients worldwide and all the services to be rendered by it as enumerated in the various articles of the agreement were incidental or supplementary to carrying out this job effectively and efficiently in the interest of its business of which the said activity or job formed a part. The services, therefore, were an integral part of the main work undertaken by the assessee of publicity, marketing and promotion of the Indian hot worldwide. The services described in the various articles of the agreement had not much significance independently and were an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the technical services should be such that they make the recipient able or wiser in the subject matter. Thus, where the recipient of technical services does not get equipped with the knowledge or expertise and the recipient would not be able to apply it in future independently without-support from the service provider, it will not be a case of technical service having been 'mad available'. And in such cases the concerned transaction would not be taxable in India and subject to withholding tax in India. In such cases, the income of the recipient shall be treated as business income under the Article 7. Since the entire operation of the service provider is carried outside India, there is no existence of any PE in India and in such cases the concerned transaction would not be taxable in India and subject to withholding tax in India. Reliance in this connection is placed on decision 'of ITAT Delhi in case of Sheraton International Inc Vs. Deputy Director of Income-tax reported in (2007) 293 ITR (A.T.) 68 (ITAT) (Del) b) Singapore - Article 12 The concerned services are not covered within the scope of 'fees for technical services' as defined in the Article 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation or enjoyment of the right, property or information for which a payment is received by the vendor; • Do not make: available technical knowledge, technical knowledge, experience, skill know-how or processes or consist of the development and transfer of technical plan or technical design. The concept of 'make available' has been elaborately explained herein above. Further, the protocol to the tax treaty elucidates the situation where the services can be said to be made available to the recipient of the services. As per the protocol, generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input .by the person providing the service does not per se mean that technical knowledge, skill etc. are made available to the person purchasing the service. Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. . Reliance in this connection is placed on decision of IT AT Delhi in case of Sherator International Inc Vs. Deputy Director of Income-tax repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of technical knowledge, the same is out of purview of the fees for technical services within the scope of DTAA between India and Belgium. Accordingly withholding tax is not applicable for the services pertaining to advertisements. g) France - Article 13 read with protocol of the DTAA h) Switzerland - Article 12 read With protocol of the DTAA. i) Spain - Article 13 read with protocol of the DTAA As per Article 13(4), the term "fees for technical services" means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature. Further, the clause 7 of protocol to the DTAA provides that in respect of Article 13 concerning fees for technical services, if under any Convention, Agreement or Protocol signed after 01.09.1989, between India and a third State which is a member of the GECD, India limits its taxation at source on fees for technical services to a rate lower or a scope more restricted than the rate of scope provided for in this Convention, Agreement or Protocol with effect from the date on which the present Convention or the relevant Indian Conventio Agreement or Protocol enters into force, whichever enters into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd based out of UK. This service is being availed from the same service provider in each year The vendor carries on independent audit about the quality standard of the hotels pertaining to the assessee. The abovementioned service is are not covered within the scope of 'fees for technical services' as defined in the Article 13(5) for the following reasons: Such services do not involve rendering of any technical or consultancy services which: • are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment is received by the vendor. It is understood that, in order for a service to be considered "ancillary and subsidiary" to the application or enjoyment of some right, property, or information for which a payment is received, the service must be related to the application or enjoyment of the right, property, or information. • are ancillary and subsidiary to the enjoyment of any property; make available technical knowledge, experience, skill know-how or processes or consist of the development and transfer of technical plan or technical design. The concept of 'make available' has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rangement with the assessee in order to promote the sales of the assessee. Under this scheme, when a guest stays in the hotels of the assessee, he gets complementary stay in other hotels against which the payment is claimed from the assessee by that hotel. This way it promote the business of the assessee as a whole. The payment .is towards stay charges cannot be covered under the scope of fees for technical services under section 9(1)(vii) of the Act. Since the entire operation of the vendor is carried outside India, it is not taxable under the Income tax Act as business income as well. Since tax treaty between India and Mauritius does not have any fees for technical service clause, in absence of 'permanent establishment, the concerned service is not taxable in India. Recruitment Charges Taxability under the Income tax Act The assessee had to take the services of various foreign recruitment agents (specially for SPAs, chefs etc.). The services are normally rendered outside India and the payments are made outside India as well. Further, since this does not involve any know how or technical expertise, the same is not covered within the scope of section 9(1)(vii) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l plan or design. For detailed explanation, reference may be made to annexure 2,4 and 5. 6.10. Apart from this, the assessee had even provide the certificate of tax residency of the parties to whom payments were made in foreign currency and declaration form them that no PE existed for them in India. The assessee had even fursniehd the copies of agreements entered into with those parties , copy of advertisements, copy of invoice, subscription renewal forms etc. All these documents are enclosed in pages 822 to 930 of the Paper Book. 6.11. We find that in the earlier years in assessee's own case, the ld CITA had granted relief to the assessee by placing reliance on 'make available' clause prevailing in various tax treaties , but the same is not done by the ld AO and ld DRP in the instant case. We find that the assessee had filed various documents with detailed factual and legal submissions with supporting evidences before the ld AO , which had not been appreciated by the ld AO and ld DRP in the proper perspective. Hence we deem it fit and appropriate, to remand this entire issue to the file of the ld AO , for denovo adjudication of this issue afresh in accordance with law. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act in as much as these directors had not offered the commission and sitting fees income under the head 'income from salary' in their returns of income and instead they are offered to tax by them under the head 'income from other sources'. Hence this goes to prove that they are not employees of the company and hence had rendered only professional services to the company enabling them to receive this consideration and accordingly the provisions of section 194J of the Act are attracted. The ld AO in the draft assessment order proposed to disallow the entire sum of ₹ 3,90,22,285/- u/s 40(a)(ia) of the Act for violation of provisions of section 194J of the Act. 10.1. It was submitted that the scope of section 194J of the Act after the Finance Act 2012 w.e.f. 1.7.2012 had been extended to include 'any remuneration or fees or commission by whatever name called, other than those on which tax is deductible u/s 192 of the Act to a director of the company' . This amendment is only prospective in nature and cannot be made applicable for the year under consideration. The assessee placed reliance decision of this tribunal in the case of Jahangir Biri Factory (P) Ltd vs DCIT reported in ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. But under the Income Tax At, an assessee is entitled to depreciation u/s 32 of the Act if the asset is owned by the assessee and is put to use for the purpose of its business. Since the assessee is not the legal owner of the assets, it claimed actual lease rental paid of ₹ 7,60,21,803/- beign the principal amount as a deduction in the return of income. The ld AO proposed to disallow the same on the contention that under finance lease, the lessee is the owner of the leased assets and principal repayment component of lease rental represents payment for purchase of leased assets and thus should be treated as capital expenditure. The ld DRP after considering the facts in detail and applying the ratio laid down by the Hon'ble Supreme Court in the case of ICDS Ltd vs CIT reported in 350 ITR 527 (SC) allowed the issue in favour of the assessee. Aggrieved, the revenue is in appeal before us on the following ground:- 4. That on the facts and circumstances of the case and in law, the Ld. DRP erred in deleting the addition regarding Principal Repayment of Finance Fee. 11.1. We have heard the rival submissions. We find that the issue under dispute is settled by the order of this tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the allowance of depreciation on assets under the provisions of IT Act. It is well settled that the CBDT Circulars are binding on the revenue. As per this Circular No. 2/2001 dated 9.2.2001, in a lease transaction, the owner of the assets is entitled to depreciation. In the instant case, the lessor (Orix Auto) being the owner had the right to claim depreciation and the assessee has not claimed any depreciation as per the provisions of the IT Act and instead had claimed the entire lease rental as revenue expenditure. We find that the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of I.C.D.S. Ltd vs CIT reported in (2013) 350 ITR 527 (SC) wherein it was held that :- "Held, affirming the decision of the Tribunal, (i) that the assessee was a leasing company which leased out the trucks that it purchased. Therefore, on a combined reading of section 2(13) and (24) of the Act the income derived from leasing of the trucks would be business income, or income derived in the course of business, and had been so assessed. Hence, it fulfilled the requirement of section 32 of the Act, that the asset must be used in the course of business. The assessee did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Union of India & Ors reported in (2003) 263 ITR 206 (Raj) wherein it was held that :- Held, that under the agreement there was a clause that after completion of lease period, if one per cent. of the total consideration of the trucks was paid, the lessee would be the owner of those trucks. However, the agreement dealt with the ownership of the trucks under the agreement. There was a clear provision that the said machinery shall at all times remain sole and exclusive property of the lessor and the lessee shall have no right, title or interest thereon. It further that irrecoverable undertaking of the lessee that at no time during the currency of the lease agreement, which shall be non-cancellable, would the lessee attempt to capitalise the leased assets in its balance-sheet. As per clause 8, it had been agreed that the ownership of the said assets during the tenure of the lease and inclusive of any renewal options that the lessor may concur indisputably rested with the lessor. So in clear terms, the agreement provided that during the lease period, only the lessor shall be treated as owner of the trucks and not the lessee. Moreover, the lessor had been allowed depreciation on the tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be around US$24.3 million as detailed below :- Particulars Amount (US$ mn) Kitchen Equipment, Furniture & Fixtures, Computers etc. 5.3 Building/Plant/MEP 15.0 Pre-operative expenses 1.65 Hi-Lift/Car 0.60 Architect/Project Manager's fees 0.75 Contingencies 1.00 Total 24.3 According to the assessee, its 100% subsidiary (EIH flight) was incorporated with a minimal equity capital of US$1.1 million i.e. which was only 4% of the total project cost and it was a promoter's/shareholder's strategy, to fund the start-up company through third party borrowings made available to it with the help of the parent company's corporate guarantee. Accordingly, the project was planned to start-off in the year 2009 and remaining balance of US$ 23.2 million was planned by the share holder to be funded in the following manner :- Particulars Source of funds Amount Subsequent equity funding EIH Limited US$ 4.2 million External Loan Funding with the help of shareholder's guarantee To be provided by third party bankers with the help of shareholder guarantee US$ 19 million It was submitted before the ld TPO that the provision of the said funds was for initial establishment facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the appellant as a matter of commercial prudence to protect the business interest of the group by fulfilling the shareholder's obligation as any financial incapacitation would jeopardize the investment of the appellant. 1.3 Without prejudice to the above, the Ld. AO/TPO and Ld. Panel failed to appreciate the corporate guarantee extended by the appellant is part and parcel of the management agreement entered into with the AE and said agreement take due care towards appropriate remuneration for corporate guarantee. 1.4 Without prejudice to the above, the Ld. Panel erred in arbitrarily confirming the arm's length guarantee commission rate of 3%, when a nominal guarantee commission rate of 0.3% - 0.5% has been accepted in various legal jurisprudence. 12.2. The ld. AR contended that the corporate guarantee was given by the assessee to the subsidiary AE M/s. EIH Mauritius herein (EIH Flight) to fund the set up of the said subsidiary company in its year of operation. According to the ld. AR, since M/s. EIH flight is a start up company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid proposition, the ld. AR relied on the co-ordinate bench decision of Delhi Tribunal in the case of Bharti Airtel Limited in ITA No.5816/Del/2012. According to the ld AR, this proposition has been followed by the co-ordinate bench of Ahmedabad Tribunal in the case of Micro Ink Limited vs ACIT in ITA No.2873/Ahd/2010 and referred to various other case laws i) Redington India Limited vs ACIT [ITA No.513/Mds/2014] ii) Videocon Industries Limited vs ACIT Range 3(3), Mumbai [ITA NO.6145/Mum/2012, 1728/Mum/2014, 1729/Mum/2014]; iii) Manugraph India Limited vs Dy. Commissioner of Income Tax (I.T.A.No.2631/Mum/2015) iv) Siro Climpharm Private Limited vs DCIT, Mumbai (I.T.A.No.1269/Mum/2015); v) Siro Clinpharm Private Limited vs DCIT, Mumbai (I.T.A.2618/Mum/2014). 12.4. In response, the ld. CIT,DR brought to our notice the decision of co-ordinate bench of Hyderabad Tribunal in the case of Prolifics Corporation Ltd vs DCIT reported in (2015) 55 taxmann.com 226 (Hyderabad-Trib.) dated 31.12.2014 for Asst Year 2009- 10, wherein the Tribunal has accepted the arguments of the revenue that after the insertion of the Explanation by Finance Act 2012 with retrospective effect from 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Act, clearly includes the corporate guarantee as an international transaction and a reading of residual clause (e) makes it abundantly clear that in case of other transactions which fall in (a) to (d) there is no requirement of bearing on the profits, incomes, losses or assets of such enterprises; and only in respect of transaction specified in (e) this requirement can be read into and in all other transactions specified in (a) to (d) no such requirement of profit/loss can be read into and, therefore, the transaction of corporate guarantee will be considered as an international transaction. Therefore, according to the ld. DR, the ld TPO was correct in not accepting the arguments of the assessee that transactions of giving corporate guarantee to the AE was not an international transaction. 12.6. The ld. AR in his rejoinder explained that the case cited in favour of Revenue on this issue by the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Limited (supra) was when the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon'ble High Court held that it is an international transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l's decision in Bharti Airtel Ltd has already been admitted by the Hon'ble Delhi High Court, therefore referring the question and convening of the Special Bench would be a futile exercise. 12.8. We have heard both the parties and perused the records. We note that the assessee company had incorporated a 100% subsidiary called M/s. EIH Flight at Mauritius for the financial year 2007-08 by investing US $1.1 million for the purpose of setting up its off-shore flight catering unit there (Mauritius). The business objective of M/s. EIH flight was to provide in-flight catering services to airline companies operating in and out of Mauritius. According to assessee, i.e. M/s. EIH has been in the industry of catering facilities for over 50 years, and has been producing 50,000 meals per day for some of the biggest names in aviation industry including Air France, Air Mauritius, British Airways, Jet Airways, Etihad Airways, Lufthansa etc., For the purpose of setting up its catering unit at Mauritius, the Airport Authority of Mauritius provided EIH Flight (100% subsidiary company of assessee) a plot of land measuring 14,000 sq. meters on a renewable lease for 20 years. The facility was to have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made an addition of ₹ 2,62,09,659/-. The ld DRP upheld the said adjustment pertaining to the receipt of corporate guarantee fee. Aggrieved by the decision of the ld. DRP and the final order of the AO, the assessee is in appeal before us. 12.10. We note that M/s. EIH flight is a startup company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee/assessee company to the lender bank is normal business practice and obligation towards a subsidiary. Since the AE was a startup company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect its interest by fulfilling the shareholders obligation. We agree with the contention of the ld AR that the corporate guarantee as provided by the assessee was a matter of commercial prudence to protect and by fulfilling the shareholder obligation, as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. For that we rely on the order of the Coordinate Bench of this Tribunal in the case of Tega Industries Ltd. Vs DCIT (ITA No.1912/Kol/2012 wherein it was held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions which are in the nature of purchase, sale or lease of tangible or intangible property (explained by clauses (a) and (b) of the Explanation), or provision of services, (explained by clause (d) of the Explanation), or lending or borrowing money (explained by Clause (c) of Explanation). The plain reading of provisions of sec. 92B(1) of the Act indicate that the various transactions mentioned in section 92B(1) of the Act, (i.e. purchases, sales, provision for services, lending or borrowing or any other transaction) should have bearing on the profits, incomes, losses or assets of such enterprises. In our opinion, the condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transactions namely purchase, sale, or lease of tangible or intangible property or provision of services, or lending or borrowing money or any such transaction. This understanding of ours gets further clarified by way of insertion of Explanation in section 92B(1) by the Finance Act 2012 with retrospective effect from 01.04.2002 vide clause (a) to (d). We find that in the said explanation, clause (e) alone has been carved out as an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' irrespective of whether or not such transactions have any "bearing on profits, income, lossess or assets of such enterprises" u/s. 92 B of the Act. We also note that the Ahmedabad Bench of this Tribunal supra after considering the decision of the Hon'ble Bombay High Court in Everest Kanto Cylinder Ltd. (supra) observed as under: "We are unable to see, in the judgment of Hon'ble Bombay High Court, any support to the proposition that issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' under section 92B irrespective of whether or not such transactions have any 'bearing on profits' incomes, losses, or assets of such enterprises'. Revenue, therefore, does not derive any help from the said decision." 12.14. The ld CIT DR would have had a case where a fee has been charged for the intra service which has been rendered (in the context of corporate guarantee), and, therefore, the assessee or the Court has treated it as an international transaction, then the charge of corporate guarantee has to be in accordance with Arm's Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee and EIH Flight as an international transactions and according to him, the assessee should have earned an arm's length interest rate from its AE for this transaction; The ld TPO divided the component of interest into two parts i.e. Base rate (being risk free rate) and credit spread. The ld TPO considered the average Indian Prime Lending rate as the risk free rate (14%). Further, the TPO determined the credit spread of by analysing the credit rating of both the assessee and EIH Flight based on country wide report published by the credit rating agency Standard & Poor ("S&P") and accordingly, the ld TPO arrived at the credit spread of 350 bps and arm's length rate of 17.5%. Based on the above, the TPO computed transfer pricing adjustment amounting to INR 4,081,503/- . Aggrieved by the order of the ld TPO, the assessee filed objections before the Ld. DRP. The ld DRP upheld the decision of the ld TPO relating to interest free loan given to its AE was not in the nature of shareholder activity and the assessee should have been compensated for advancing of loan to its AE. However, the ld DRP did provide relief and directed the Ld. AO/TPO to compute the arm& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit spread, whereas the spread based on the rulings such as Soma Textile & Industries Limited vs ACIT (I.T.A. No.: 262 (Ahd) of 2012) should be LIBOR + 200bps. The ld AR thus contended that the correct computation of the interest on loan on the basis of LIBOR + 200bps credit spread. 13.4. We have heard the rival submissions and are of the opinion that the LIBOR and basis points should be the criteria for meeting the cost of interest on the international transaction in respect of interest to be charged on the loan advanced to AE. For this purpose the credit rating of the assessee as well as the credit rating of the AE should be taken into account. Accordingly we deem it fit to remand the issue to the ld. TPO to determine the basis points on the basis of the aforesaid parameters and such other relevant parameter in accordance to law. Therefore, we remand this issue for this limited purpose back to the ld TPO / ld AO and to determine the issue as directed by us. Accordingly, the Grounds 2.1. & 2.2. raised by the assessee are allowed for statistical purposes and Ground 1 raised by the revenue is dismissed. 14. The Ground No. 5 raised by the revenue is general in nature and does no ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
