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TMI Blog2019 (11) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 144C r.w.s. 143(3) of the Act on 27.02.2012 determining the total income of the assessee at Rs. 132,40,54,628/- inter alia may be transfer pricing adjustments on account of interest on loan, interest on bond and fees for providing guarantee (Guarantee Commission). The AO carried the matter in appeal. The ld. first appellate authority allowed the appeal of the assessee for the AY 2008-09. 4. Aggrieved, the Revenue is before us challenging the deletion of adjustment made u/s 92CA(3) of the Act on account of interest on loan and on account of corporate guarantees. 5. For the AY 2010-11, the assessee filed a return of income on 13.10.2010 declaring nil income. The AO completed the assessment u/s 143(3) on 30.04.2014 determining the total income at Rs. 29,41,27,197/- inter alia disallowing the claim of additional depreciation on electrical installations, disallowing deduction of PF contribution by employees, making an adjustment on account of bank guarantee commission u/s 92CA(3) of the Act and an adjustment on loan advanced to AE u/s 92CA(3) of the Act. The AO also denied relief by computing profits u/s 115JB of the Act on disallowance u/s 14A r.w. Rule 8D of the Act. 6. Aggriev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee did not charge any amount from INML for the service provided to the by way of this guarantee. 36. Further, it is also seen that the SBI, Sydney Branch has also provided a loan and bar guarantee facility to M/s NRE FCGL Pty Ltd, Australia ( hereinafter GNFL), another AE of the assessee vide sanction letter dated 03.07.2007. For this credit facility also, the assessee has stood guarantee. A guarantee and indemnity bond has been signed between SBI, Sydney Branch (as financier) and the assessee (as the guarantor) on 12.10.2007. In the agreement GNFL has been mentioned as the "Debtor". However, Clause 1 of the agreement mentioned that 1. Guarantee: The Guarantor unconditionally and irrevocably guarantees (as principal debtor) the due and punctual payment of the guaranteed money to the Financier. If the Debtor does not pay the guaranteed money then the Guarantor must pay the Guaranteed money to the Financier on demand. The Financier may make this demand at any time whether or not a demand has been made by the Financier of the debtor. Thus, in the eyes of the Lender, the assessee is considered as the principal debtor and the unconditional guarantee requires the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te enterprises "AE" as proposed by the Transfer Pricing Officer and added in the course of the assessment in issue. We find that the instant as to whether a corporate guarantee amounts to an international transaction within the meaning of sec. 92B of the Act or not is no more res integra. This tribunal's co-ordinate bench's decision in assessee own case for assessment year 2012-13 ITA No.980/Kol/2017 decided on 28.09.2018 has adjudicated this very issue in it's favour as follows:- "5. Ground No. 2 is on the issue of determination of ALP on corporate guarantee on loans availed by AE. The Ld. 'CITCA) held that the TP Provisions do not apply to the transactions of providing corporate guarantee prior to the amendment brought in by way of an explanation to Section 92B of the Act, by Finance Act, 2012. Further at page 45 he held that the methodology applied by the TPO in computing the ALP of the transactions was without reasonable and justifiable basis. We find that the findings of the Ld. CITCA), are in line with the decision of the Kolkata 'C' Bench of the Tribunal in the case of M/s. EIH Ltd. vs. DCIT (supra) wherein it was held as follows:- 12.11. Coming to the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngible 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 exception wherein, the transaction thereon has been specifically mandated to be an international transaction where a transaction of business restructuring or reorganization, entered into by an enterprise with an AE irrespective of the fact that it has bearing on the profits, incomes, losses, or assets of such enterprises at the time of transaction or at any future date. 12.12. Thus, we hold that when a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company, and which does not have any bearing on its profits, income, losses or assets, it will be outside the ambit of international transaction under section 92B(1) of the Act In this regard, we woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osses, or assets of such enterprises'. Revenue, therefore, does not derive any help from the said decision. 12.14. The Id CIT DR would have had a case where a fee has been charged for the infra 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 ot corporate guarantee has to.be.in accordance with Arm's Length principle. This means that 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. Since that is not the case before us, we need not go into it. 12.15. We also find that this very same issue came up for adjudication by this tribunal in assessee's own case for the Asst Year 2010-11 in ITA No. 530/Kol/2015 dated 9.6.2017 , wherein by placing reliance on the decision of co-ordinate bench of Mumbai Tribunal in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... million AUD remained outstanding throughout F.Y. 2007-08, the TPO determined the alleged Arm's Length Price of the loan advanced by the appellant to the aforesaid Associated Enterprise at BBSY + 750 basis points and made the consequent upward adjustment of the interest receivable thereon, of an amount of Rs. 35,69,109/-, which has been added back in the assessment. (b) Interest on bond: The appellant company had invested in Australian Dollar denomination fixed rate convertible bonds issues by its Associated Enterprise M/s Gujarat NRE Australia Pty Ltd. (GNAL). The interest available on these bonds was @ 6.5% (the bonds were redeemable at 100% plus the coupon rate). The TPO held that the appellant should expect a return on investment in these bonds at the rate of 13.95% (Cost of funds being 6.45% and spread should be 750 basis points). Accordingly, the TPO calculated expected interest from the bonds at the hypothetical rate of 13.95% and made an upward adjustment of Rs. 11,06,479/-. The A.O. also added back the said amount of Rs. 11,06,479/- in the assessment." 13. The ld. CIT(A) at para 3 page 28 & 29 held as follows: "3. I have carefully considered the submissions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned ALP computed by the Ld. TPO is erroneous and hence cannot be used as a benchmark. I find factual merit in the contention of the appellant that the Ld. TPO in computing the ALP has considered the average cost of borrowed funds to the assessee/ domestic interest rates and added a spread of 750 basis points to the same. However, for the case at hand, there is no dispute that loan to the AE was made out of own funds of the appellant-company and therefore there would be no cost appellant while extending such a loan. The order of the Ld. TPO has remained silent about such factual contention of the appellant, and he has held the average cost of borrowed funds as the cost of making loan to the AE, which in my considered view is without factual and legal justification. Also, the contention of the appellant-company has strength that the loan was made in Australian Dollars i.e. foreign currency and hence domestic lending rates cannot be used as a base for calculating ALP, as has beer calculated by the Ld. TPO. Such a view is well supported by the decisions of the Hon'ble ITAT discussed supra, about what rates should be used for benchmarking a case. I has also been advanced b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de a reference to the Transfer Pricing Officer [TPO] for calculation of arm's length interest rate in respect of loan advanced by the assessee company to its Associate Enterprise [AE], EuroAsian Ventures FZE. The TPO arrived at arm's length interest rate of 20.15%, by applying Comparable Uncontrolled Price (CUP] method and benchmarking the same against local interest rates and accordingly calculated the upward adjustment at Rs. 6,97,64,000/-. Before the Ld. CIT(A], the assessee submitted that it had charged interest @ 5% on the loan given to its AE i.e. EuroAsian Ventures FZE, which is at arm's length when benchmarked against LIBOR and hence no adjustment on this account was called for. He further relied on the decision of the Chennai Bench of the Tribunal in the case of Siva Industries & Holdings Ltd. vs. ACIT (145 TTJ (Chennai) 497) and other decisions of the Tribnal for the proposition that if the loan advanced to an AE is denominated in foreign currency then interest rate thereon should be benchmarked against international rates being LIBOR and not against the domestic lending rate. Further, reliance was placed on the decision of the Delhi Bench of the ITAT in the case of Koh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y paid ordinary shares of common stock of GNAL at 50 cents per share any time after 30.06.2009. On the other hand, the redemption value at maturity is stated as 100% of unpaid Principal Amount of outstanding Bonds plus the accrued interest on the maturity date (10.05.2011). The assessee in its Transfer pricing study has reported that the 'management believes that the rate of interest received from GNML (as GNAL was known at that time) is at arm's length and no further analysis is required for the same'." 19. The ld. CIT(A) at para 13.4 page 34 concluded as follows: "In my considered view in the given situation, it appears that the Ld. TPO has overlooked the fact that the said premium is payable only on redemption of bonds. It has also been factually brought on record by the appellant that the major portion of the bond issue, namely 2191 out of 2200 or 99.6% of the bonds were converted to equity as on 31.3.2008. on which no premium was payable at all, and that such a fact was well within the knowledge of the Ld. TPO at the time of passing the order since the conversion had already taken place on 31.3.2008 i.e. 2.5 years before the TP order was passed. With such a fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than 1% charged by the assessee in US markets, it can be said that the bond transaction with the AE is at arm's length. 3.6 Similarly, the assessee-company has even issued zero coupon unsecured bonds which are convertible to equity. Thus, subscription to 6.5% FCCBs issued by the AE is at arm's length. 3.7 Further, it is submitted that proceeds from the 1% FCCB have been utilized in subscribing to the bond issue. Thus, following the cost plus method (as done by the TPO) also, the said bond transaction is at arm's length. The assessee has clearly earned a spread of 5.5% by investing the funds raised at 1% interest in 6.5% convertible bonds issued by the AE. 3.8 Coming to the cost of 6.45% computed by the TPO, it is submitted that the same is erroneous and is clearly contrary to the facts of the case. The TPO, while recomputing cost at 6.5% (as opposed to 1%) has spread the premium of 27.25% over the life of 5 years. He has completely disregarded the fact that the said premium is payable only on redemption of bonds. However, a major portion of the bond issue (i.e. 2191 out of 2200 or 99.6% of the bonds) were converted to equity as on 31.3.2008 on which no premium was payable at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w electrical installations installed during the year. The issue is whether the assessee is entitled to additional depreciation on this electrical installations u/s 32(1)(iia) of the Act. The AO's case is that, the various items of electrical equipment as claimed by the assessee do not fall under the definition of "Plant and Machinery" for claiming additional depreciation. Hence he disallowed the claim of additional depreciation. The ld. CIT(A) allowed the claim of the assessee by holding as follows: "3. I have carefully examined the factual matrix emanating in the case. I have also weighed the arguments and submissions of the Ld. A.R for the assessee-company as against the findings of the Ld. AO, as recorded in the impugned assessment order. I find that the Ld. AO has contended that the various items of electrical equipment as claimed by the assessee would not qualify as Plant, and therefore they do not qualify for any additional depreciation. On the other hand, it is the contention of the appellant that the electrical equipment that was installed was an integral and integrated part and parcel of the Plant, and was incidental to the manufacturing activities. It is observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee electrical installation was not a prohibited item. However, the Ld. AO held that plant and machinery by its very nature did not include electrical installation and accordingly disallow the additional depreciation claimed by the assessee. The assessee filed an appeal before the Ld.CIT(Appeals) which was allowed wherein it was held that electrical installation which formed a part of plant and machinery was also eligible for claim of additional depreciation. Aggrieved by the order of the CIT(A), Revenue filed an appeal before the ITAT wherein dismissing the appeal of the Revenue, it was held that, "There is no dispute that assessee was engaged in manufacture of jute and paper related goods. Items on which depreciation is not allowable have been specifically set out in the proviso. Electrical installation does not fall within any of the provisos. Further definition of 'plant' given in section 43(3) of the Act is inclusive and even ships, vehicles, and books are considered as plant. If that be so, electrical installation is definitely part of a plant. In our opinion, Ld. CIT(Appeals) was justified in allowing this claim of assessee. Grounds No. 1 & 2 of the Revenue stand di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of a guest-house; or (C) any office appliances or road transport vehicles; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year." 29. Applying the Section to the facts of the case we hold as follows: "A close observation of the aforementioned provision implies that an assessee is entitled to additional depreciation of a further sum equal to twenty percent of the actual cost of such plant & machinery under Income fax Act, 1961 when: * A new machinery or plant (other than ships and aircraft), is acquired and installed after 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, * The machinery or plant which, before its installation by the assessee, was not used either within or outside India by any other person; or * The machinery or plant is not installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house. * The plant or machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that the ld. CIT(A) has followed the judgement of the Hon'ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd. [2010] 319 ITR 306 (SC) and judgement of the jurisdictional High Court in the case of ACIT vs. M/s. Vijay Shree Ltd. [Calcutta High Court, ITA No. 245 of 2011] and the decision of Hon'ble Calcutta High Court in the case of CIT, Central II vs. M/s. R.E.I. Agro Ltd. [GA No. 3022of 2013] and deleted the disallowance. We find no infirmity in the same. 32. Computation of book profit u/s 115JB of the Act with respect to disallowance u/s 14A Rule 8D of the Act. 33. This issue as to whether the disallowance u/s 14A r.w. Rule 8D of the Act has to be made while computing book profits u/s 115JB of the Act is covered by the decision of the special Bench of the ITAT (Delhi) in the case of ACIT vs. Vireet Investments Pvt. Ltd. [2017] 82 taxmann.com 415 wherein it was held that: "The computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the Income Tax Rules 1962." 34. Respectfully following the same we uphold the order of the ld. CIT(A) and dismiss this ground of the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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