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TMI Blog2019 (5) TMI 732X X X X Extracts X X X X X X X X Extracts X X X X ..... he net interest income while computing the deduction u/s 80IB despite the fact that the income derived from the industrial undertaking is eligible for deduction and interest income cannot be netted off with the interest expenditure which was incurred for business. 4. In a related grievance, which is raised in ground no. 1 of the cross objection by the assessee, the following issue is raised: On the facts and in the circumstances of the case, the CIT(A) erred in confirming the finding of the Assessing Officer that the interest income of Rs. 13,86,27,839, brought to the charge of tax by him as business income, is not eligible for deduction u/s.80-IAB of the I.T. Act, in spite of the fact that there is net interest payouts. 5. So far as this grievance is concerned, the relevant material facts are like this. The assessee before us is a company engaged in the business of integrated port and SEZ development. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has claimed a deduction of Rs. 401.03 crores as deduction under section 80IAB. When he examined this claim further, he found that while the assessee has debited interest and fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A copy of the said order is placed before us at pages 1 onward of the compilation. The coordinate bench has held that the entire interest income is eligible for deduction under section 80IAB, and, for this short reason, the grievance against netting of interest is wholly academic and infructuous. The stand of the CIT(A) thus attained finality. In any case, Hon'ble jurisdictional High Court, in the case of CIT Vs Nirma Limited (367 ITR 12), has held that netting of interest for the purpose of this deduction can be allowed. Whichever way one looks at it, the issue is covered, in favour of the assessee, by the binding judicial precedents. We, therefore, have no reasons to disturb the conclusions arrived at by the learned CIT(A). In view of these discussions, as also bearing in mind entirety of the case, we uphold the relief granted by the CIT(A) and decline to interfere in the matter. 8. Ground no. 1 is thus dismissed, and ground no. 1 of the cross objection is allowed. 9. In ground no. 2, the Assessing Officer has raised the following grievance: The Id. CIT(A) has erred in deleting the disallowance made by the AO for the wrong claim made by the assessee u/s 80G in its return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of allocation of income and the tax deduction for eligible deduction is a tax policy driven deduction for encouraging such public spirited application of income. The stand of the assessee was indeed correct and the learned CIT(A) was perfectly justified in upholding the same. We approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 12. Ground no. 2 is thus dismissed. 13. In ground no. 3, the Assessing Officer has raised the following grievance: 3. The Id. CIT(A) has erred in directing the AO to re-compute the deduction u/s 80IAB after increasing the amount of deduction by the amount of disallowance u/s 14A. 14. Learned representatives fairly agree that while this relief was granted by the learned CIT(A) on the basis of Hon'ble jurisdictional High Court's judgment in the case of ITO Vs Keval Constructions [2013] 33 taxmann.com 277 (Guj.), the issue is now covered, in favour of the assessee by the CBDT circular No..37/2016 [F.NO.279/MISC./140/2015/ITJ] dated 2- 11-2016 wherein a policy decision has been taken to accept the said decision and let the matters rest at that. 15. We find that in principle thus, when the profit goes up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance. 4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned. 16. While the aforesaid circular does not specifically deal with section 14A disallowance, as the circular itself states in so many words the cases cited above are only illustrative and the principle is that "the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits". In the light of this position, we uphold the conclusions arrived at by the CIT(A) on this point as well, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs. 34,22,250 was recommended. That was the ALP adjustment made by the Assessing Officer in the course of the scrutiny assessment proceedings. Aggrieved by the stand so taken by the TPO and the AO, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) upheld the ALP adjustment in principle but restricted the quantification of adjustment at 2% of the amount of guarantee provided by the assessee. None of the parties is satisfied. While the assessee is aggrieved of the ALP adjustment in respect of issuance of corporate guarantees in principle, the Assessing Officer is aggrieved of the quantum of adjustment being restricted to 2% of the value of guarantees as against 3% notional value assigned by the TPO. Both the parties are in appeal before us. 21. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 22. We find that this issue is now covered, in favour of the assessee, by a series of decisions in various cases, including in the case of Micro Ink Ltd Vs ACIT (157 ITD 132), analysed the issue in great detail and taken note of decisions by various coordinate b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislation. [Para 36] iii. There can be activities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefitted by the shareholder activities, these activities do not necessarily constitute services. There is no such express reference to the benefit test, or to the concept of benefit attached to the activity, in relevant definition clause of 'International transaction' under the domestic transfer pricing legislation. It is also essential to take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction' under domestic transfer pricing legislation, as is the settled legal position, it is not open to Court to infer the same. [Para 37] iv. One more thing which is clearly discernible from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th price of corporate guarantees. A bank guarantee is a surety that the bank, or the financial institution issuing the guarantee, will pay off the debts and liabilities incurred by an individual or a business entity in case they are unable to do so. By providing a guarantee, a bank offers to honour related payment to the creditors upon receiving a request. This requires that bank has to be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee. viii. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from these banks. The guarantees were prima facie in the nature of the shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. xii. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for services' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, it is opined and said view is fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi capital or shareholder activity - as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. [Para 41] xiii. It is thus clear that even if one accepts the contention of the revenue that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as 'arrangements made in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OECD material or even in Explanation to section 92B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to section 92B guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which specifically deals with 'provision for services'. When the legislature itself does not group 'guarantees' in the 'provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. xvii. Under section 92B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that section 92B, in a way, expands the scope of international transaction in the sense that even when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in "provision for services" and "mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises ". xx. That leaves the Tribunal with two clauses in the Explanation to section 92B which are not covered by any of the three categories discussed above or by other specific segments covered by section 92B, namely borrowing or lending money. The remaining two items in the Explanation to section 92B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in section 92B(1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92B, the transactions should be such as to have beating on profits, incomes, losses or asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmediate or on a future date. These guarantees 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. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B(1). [Para 44] xxiv. In the present case, as already held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B. Taking note o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in confirming the disallowance of Rs. 20,27,93,648 made by the Assessing Officer by invoking the provisions of section 14A of the I.T. Act. 29. Learned representatives fairly submit that, in the light of Hon'ble jurisdictional High Court's judgment in the case of CIT Vs Corrtech Energy Pvt Ltd (372 ITR 97), the disallowance under section 14A cannot exceed the amount of tax exempt income. In the present year, admittedly the dividend income is only Rs. 1,77,47,783. The disallowance under section 14A cannot, therefore, exceed the said amount. To this extent, we uphold the grievance of the assessee and restrict the disallowance under section 14A. 30. Ground no. 2 is thus partly allowed in the terms indicated above. 31. In ground no. 3, the assessee has raised the following grievance in the cross objection: 3. On the facts and in the circumstances of the case, the CIT (A) erred in confirming the upward adjustment of Rs. 27,64,950 made by the Assessing Officer on the basis of the order of the Transfer Pricing Officer, with regard to non-charging of interest on the loan provided to Associate Enterprise for purchase of Aircraft. 32. So far as this grievance of the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidiary at 7% per annum. Clearly, therefore, as long as the comparable uncontrolled price of the US $ denominated lending is less than 247 points (i.e.700-453) above the LIBOR rate, the transaction entered into by the assessee with its subsidiary cannot be said to be at less than arms length price. The Transfer Pricing Study filed by the assessee, however, does not throw much light on this aspect of the matter beyond stating, in rather vague terms, that "a study revealed that around 100 basis points increase in the LIBOR rate is considered appropriate for lending to corporates", and that "therefore, the adjusted interest percentage is to be taken the arm's length interest rate i.e. 5.53%". Such sweeping generalizations and vague justifications as inherent in the above comment in the TP study, in support of LIBOR+100 basis points as ALP, cannot meet any judicial approval. 6. What is important, however, is that even after this stated ALP of LIBOR + 100 basis points, there is still a cushion of further 147 basis points before the interest charged can be said to more than the arm's length price, and it is an old matter. It is, therefore, worth exploring whether, even within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and borrowing money, his risk is higher in advancing loan to a single customer than a bank, which spreads its risk among its various customers. Thus, the difference between banker and non-banker is to be kept in mind while arriving at the arm's length CUP rate based on bank rates. 7.11 Adjustment for security Usually, bankers extending loans in foreign currency also insist on sufficient security. In this case, no security is offered by the AE. Keeping in view the financial health of the subsidiary, it may not be in a position to offer security. Thus an adjustment is required to be made for not offering a security. This may be computed as the difference between the interest rates prevailing for the bonds of equivalent credit rating of the AE and sovereign government bonds in the country in which the AE is located. This can also be considered as the guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also a case in which the lender parent company was taken as the tested party, the loan was advanced to a subsidiary company without much to the credit of its financial credentials and the loan was treated as a high risk loan resulting in adopting the maximum LIBOR rate on which dollar loans were advanced. Yet, Hon'ble High Court specifically approved the Tribunals reasoning that the "assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis". When such are the views of Their Lordships, it is futile to suggest that the loans advanced by the parents to subsidiary can indeed be taken as BB to D grade investments which refers to, as noted by the TPO himself at page 28 of the order, investments with serious risks of inadequate safety, investments of high risk, investments of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval. 10. Similarly, the DRPs observation to the effect that "Generally, Indian banks are charging interest rate of 2.5% to 5% above the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries. 35. The authorities below were thus clearly in error in upholding the ALP adjustment by adopting 7.14% as arm's length interest for borrowings by the AE. When the AE itself has borrowed the monies from the SBI at LIBOR plus 145 bps and when, as noted by Hon'ble Delhi High Court above, "The Tribunal further noticed that the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis" and that "This Court is of the opinion that the reasoning of the ITAT on each of the heads which went into the adjustment ...........is reasonable and justified and does not call for any interference" the arm's length price of the borrowings cannot indeed be taken as more than LIBOR plus 145 bps. The additional risk adjustment for credit rating of the subsidiary is clearly unwarranted. The correct ALP interest rate, in the present case, thus works out to 2.69% plus 1.45%, i.e. 4.14%. We, accordingly, direct the Assessing Officer to restrict the ALP adjustment to 4.14%. The assessee gets the relief accordingly. 36. Ground n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same point and for the immediately preceding assessment year, we have, inter alia, observed as follows: 7. We find that the order dated 6th May 2011 passed by the CIT(A), in assessee's own case for the assessment year 2008-09, has, in the meantime, been carried in appeal before a coordinate bench of this Tribunal, and, vide order dated 1st September 2016, has confirmed the stand of the CIT(A). A copy of the said order is placed before us at pages 1 onward of the compilation. The coordinate bench has held that the entire interest income is eligible for deduction under section 80IAB, and, for this short reason, the grievance against netting of interest is wholly academic and infructuous. The stand of the CIT(A) thus attained finality. In any case, Hon'ble jurisdictional High Court, in the case of CIT Vs Nirma Limited (367 ITR 12), has held that netting of interest for the purpose of this deduction can be allowed. Whichever way one looks at it, the issue is covered, in favour of the assessee, by the binding judicial precedents. We, therefore, have no reasons to disturb the conclusions arrived at by the learned CIT(A). In view of these discussions, as also bearing in mind entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: (i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases: * Income-tax Officer -Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.) * Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.) (ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case: * Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.). The above views have attai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal of the Assessing Officer for the assessment year 2010-11 is dismissed. 54. We now take up the cross objections filed by the assessee for the assessment year 2010-11. 55. While dealing with the appeal of the Assessing Officer earlier in this order, we have already allowed ground nos. 1 and 2 of the cross objection. 56. In ground no. 3, the assessee has raised the following cross objection: On the facts and in the circumstances of the case, the learned CIT[A] erred in confirming disallowance of Rs. 6,11,72,420/- made by the Assessing Officer u/s.14A of the I.T. Act." 57. Learned representatives fairly submit that, in the light of Hon'ble jurisdictional High Court's judgment in the case of CIT Vs Corrtech Energy Pvt Ltd (372 ITR 97), the disallowance under section 14A cannot exceed the amount of tax exempt income. In the present year, admittedly the dividend income is only Rs. 1,33,91,149. The disallowance under section 14A cannot, therefore, exceed the said amount. To this extent, we uphold the grievance of the assessee and restrict the disallowance under section 14A. 58. Ground no. 3 is thus partly allowed in the terms indicated above. 59. In the result, cross ..... X X X X Extracts X X X X X X X X Extracts X X X X
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