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TMI Blog2018 (11) TMI 1744X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer's action making arm's length price's (ALP) adjustment of interest on loans and corporate guarantee(s) in case of assessee's overseas associate enterprise treated as international transactions u/s 92B of the Act. Relevant to adjustment amounts qua former head of loan interest are 57,52,409/-,Rs.35,23,720/- and Rs.36,60,695/- as against the latter component of corporate guarantees(s) sums of Rs.2,47,79,679/-; Rs.3,57,20,816/- and Rs.1,96,69,635/- (assessment year-wise) respectively. The CIT(A)'s identical discussion on former limb of loan interest adjustment component in AY 2009-10 reads as follows:- "07.DECISION 1. I have carefully considered the submissions of the appellant-company in the light of the adjustments made by the Ld. TPO/AO. The international transaction in question in these grounds is the interest charged by the appellant on the loans advanced to its AE, BAMPL which was denominated in USD currency. During the relevant year the appellant had charged interest rate of 6% on the loans advanced to the AE and it was not a case of granting interest free advance/loan as discussed in the TPO's order. From the TP study report, I find that the appellant benchmar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Ld. TPO in the impugned transfer pricing order suffered from apparent infirmities & contradictions. I note that the Ld. TPO discussed in great detail as to why the method adopted by the appellant was not appropriate and why CUP Method was the most appropriate method. I however find that even the appellant had applied the CUP method for benchmarking the transaction and therefore the Ld. TPO's argument that the method applied by the appellant was not appropriate is apparently without logic and contrary to his own findings. I also note that the Ld. TPO has elaborated on the business interest argument. The Ld. TPO also observed that the appellant had argued that loans were advanced for business purposes and therefore no interest was charged thereon. This assertion of the Ld. TPPO is found to be contrary to the facts on record because undeniably the appellant did charge interest on loan given to AE and it was benchmarked applying CUP method. It was not the appellant's case that the loan advanced was a shareholder activity. I therefore find merit in the appellant's contention that the Ld. TPO framed the transfer pricing assessment without taking due note of the fact of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard are as follows:- * Cotton Naturals (I) Pvt Ltd [TS-117-HC-2015(DEL)-TP] * Tata Autocomp Systems Ltd. (TS-45-HC-2015 (BOM)-TP) * Varroc Engineering Pt. Ltd. vs., ACIT (ITAT Pune) ITA No.2482/PN/2012) * Bhansall & Co. (TS-461-ITAT-2014 (Mum)-TP) * M/s Four Soft Ltd vs DCIT (ITA No.1495/HYD/2010) * DCIT vs. Tech Mhindra Ltd (ITA No.1176/Mum/2010) * Mahindra & Mahindra Ltd. vs DCIT (ITA No.7999/Mum/2011) * Cotton Naturals (I) Pvt. Ltd. vs DCIT, Circle 3(1) (ITA No.5855/Del/2012) * Tata Autocomp Systems Ltd. vs. ACIT, (2012-(052)-SOT-0048-TBOM) * Hinduja Global Solutions Ltd. vs. Addl. CIT, (ITA No.254/Mum/2013) * Aurinopro Solutions Ltd. vs. Addl. CIT 9ITA No.7872/Mum/2011) * VVF Ltd. vs. DCIT (2010-TIOL-55-ITAT-M(UM) * M/s Ajthent Technologies Pvt. Ltd. v/s ITO (2010-TII-134-ITAT-Del-TP) 7. In view of the above and respectfully following the judgments of the High Courts & Income-tax Appellate Tribunal, I hold that the interest rate charged by the appellant from AE was required to be benchmarked against the prevailing LIBOR (US) in FY 2008-09, i.e. 1.13%. Since the interest rate charged by the appellant on the loans granted to BAMPL was 6%; I hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act 2012 covers corporate guarantee as well. We find that this tribunal's co-ordinate bench's decision in EIH Ltd. vs. DCIT/Kol/2016 holds that the said explanations applies from financial year 2012-13 only without having any retrospective effect. We are also informed that the department's special leave petition on the very issue stands admitted its honble apex court. We find no merit in the instant plea as mere admission of a special leave petition does not amounted to change in law. We therefore conclude that CIT(A) has rightly treated the corporate guarantee in question to be not in the nature of international transactions in all three assessment year(s). The Revenue failed in its corresponding substantive ground in these three appeal(s) therefrom. 6. Next comes Revenue's second substantive ground in former two assessment year(s) challenging the CIT(A)'s order deleting proportionate interest and administrative expenditure disallowance u/s 14A r.w.s. 8D involving corresponding figure(s) of Rs.1,44,25,599/- and Rs.83,52,517/- in earlier and Rs.3,92,00,128 and Rs.1,30,22,820/- latter assessment year; respectively. The CIT(A)'s findings under challenge in assessment year 2009-10 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut interest disallowance of Rs. 1,44,25,599/-. 2. In their oral & written submissions, the Ld. ARs have strongly contested the invocation of Rule 8D(2)(ii) by the Ld. AO in the impugned order. Referring to historical facts of the appellant's case, the Ld. ARs pointed out that the appellant ha consistently been investing its surplus funds in acquiring shares, securities & units of mutual funds from which the assessee has been earning dividend income. In the course of appellate proceedings, the Ld. ARs filed a comparative chart of investments made by the appellant for the period AY 2005-06 to 2008-09 and corresponding figures of the own funds, loan funds, dividend earned & interest paid. Referring to the said chart, the Ld. ARs pointed out that in the past assessments for AYs 2005-06 to 2008-09, the appellant had held substantial investments and these investments were made out of the appellant's own funds which always substantially exceeded the cost of investments. For the sake of clarity of the issue, the comparative figures are extracted below: Particulars 05-06 06-07 07-08 Assessment Year 08-09 Own funds 44,34,433 54,90,088 61,47,367 75,57,293 Investments 19,65,109 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(3) for AY 2008-09, the AO had not found any evidence that these investments were acquired out of borrowed funds and in that view of the matter no disallowance out of interest paid was made by invoking Rule 8D(2)(ii) in the assessment for AY 2008-09. In the circumstances if at the time of making of investments, no proximate cause or nexus was found between use of borrowed funds and making investments; then in the later years interest disallowance is not permissible merely on theoretical application of Rule 8D(2)(ii). I also find that the appellant's own funds as on 31.03.2009 were to the order of Rs. 824.54 crores whereas investment capable of yielding exempt income were only Rs. 367.27 crores. The appellant own funds in form of capital & reserves were thus substantially more than the investments capable of yielding dividend income and therefore presumption that had to be applied on the fact of the appellant's case is that the investments, yielding tax free income were made or acquired out of appellant's own funds. The appellant's reliance on the recent judgement of the Calcutta High Court in the case of CIT vs. Rasio Ltd (ITA No.109 of 2016) dated 15.02.2017 appeared to be very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concurrent findings of facts. We, therefore, are not satisfied that the case involves any substantial question of law. The application and appeal are thus dismissed." 6. In the light of above decision of the jurisdictional High Court which squarely applies to the appellant's facts, no disallowance of Rs. 144,25,599/- out of interest paid was called for and accordingly the same is directed to be deleted. 7. As regards disallowance of Rs. 1,53,74,495/- made Rule 8D(2)(iii), I note that the said disallowance has been made by the AO by applying it on the entire cost of investments which were capable of yielding tax free income. I note that the appellant had suo moto offered disallowance of Rs. 37,75,120/- at the time of filing of return. In the course of assessment the assessee had substantiated the basis adopted for offering the disallowance u/s.14A of the Act. I also note that the methodology adopted by the appellant for disallowing administrative expenses u/s 14A was consistently followed and accepted in the appellant's regular assessments for all the past five years including AY 2008-09, when Rule 8D came in force. In the course of assessment the assessee had supported the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, it was noted that the assessee earned dividend income only from 23 investments and average cost of investments which actually produced tax free income was Rs. 140,,43,96,000/-. Applying 0.5% to the said average cost of investments, the amount disallowable under Rule 8D(2)(iii) works out to Rs. 70,21,978/-. The AO is accordingly directed to restrict the overall disallowance under Rule 8D(2)(iii) to R.70,21,978/-. Ground No.17 is partly allowed." 7. Mr. Srihari vehement argument regarding this issue is that the Assessing Officer had rightly made the impugned disallowance as per prescribed formula under Rule 8D(2)(ii) and (iii) of the IT Rules, 1962. There can hardly be any dispute about the basic principle that sec. 14A r.w.s. Rule 8D of the IT Rules comes into play in case of assessee deriving exempt income without disallowing corresponding expenditure in its books of account. The dispute herein is that of proportionate interest and administrative expenditure. We find from the CIT(A)'s above extracted discussion that assessee had successfully proved its non interest bearing funds to be much more than investments as per the relevant compilation in preceding paragraph. The Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troubles but requested the applicant to reimburse the cost of such repairs. The request for reimbursement was initially rejected by the appellant since such cost was unforeseen and not intended to be incurred. However, in view of the extraordinary circumstances in which the expenditure was required to be incurred, joint deliberations were conducted and ultimately in December 2008; it was mutually agreed that the repairs had to be carried out due to extraordinary circumstances which were not anticipated and beyond the control. Accordingly in December 2008, the appellant agreed to reimburse the repairs cost to Vinpack (I) Pvt Ltd. 3. I find that the same explanations and supporting documents were furnished before the Ld. AO in the course of assessment. These documents provide the historical background in which the assessee had agreed to reimburse the cost of repairs to Vinpack (I) Pvt Ltd in the relevant year. The Ld. did not point out any infirmity or falsity in the contentions put forth but refused to accept the contention only on the spacious plea that the assessee did not furnish any supporting evidence. However in the impugned order the Ld. AO did not spell out as to what spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as long term capital gains (LTCG) as deleted in CIT(A)'s order as follow:- "27. DECISION: 1. I have carefully examined the submissions of the Ld. ARs and perused the assessment order wherein the Ld. AO has discussed his reasons for assessing Rs. 22.79 crores as appellant's Income by way of Long Term Capital Gains. From the Impugned order it appeared that on 14.04.2009; the appellant entered Into a Settlement Agreement with Group Danone ('GD') to settle the pending litigations relating to infringement of IP rights connected with the Trademark & Logo "TIGER" litigation was pending before the Courts at Singapore & Malaysia. Pursuant to the said Agreement, GD paid sum of Euro 3.5 million to the appellant which it claimed as capital receipt not liable to tax. In the impugned order the Ld. AO in principle accepted that the litigation between the appellant and GD pertained to the capital asset being trademark & logo connected with "TIGER" brand under which the appellant was selling glucose biscuits. The Ld. AO also admitted in principle that since the litigation pertained to the capital asset, the entire transaction was in the capital field and therefore In his opinion the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Is one of the leading biscuit manufacturer in India, was also selling Its bakery products outside India and for that purpose the appellant had contemplated of registering IP rights connected with the logo "TIGER" under which It was selling its glucose biscuits In India & abroad. When the appellant attempted to obtain IP rights connected with the logo "TIGER" In the jurisdictions of Singapore & Malaysia, Its applications were blocked by the authorities since Similar logo had been registered in the name of Generale Biscuit & Danone Singapore Pte ltd which were the affiliates of GD. As a consequence the appellant could not register its trademark TIGER and market its TIGER biscuits In South Asian markets. Aggrieved by the acts of GD, suits were filed against the GD affiliates and Individuals in the Courts of Singapore & Kuala Lumpur and the Courts were requested to grant Injunction against the use of TIGER label by GD affiliates. 3. While the disputes between the appellant and GD were pending in the Courts, GD sold Its worldwide biscuit business to Kraft Group of Companies, USA. Since GD was exiting the biscuit business, it desired to settle all pending litigations so that it could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude "Britannia" in its company name. 6. Danone (on its own behalf and on behalf of its Affiliates), agrees that neither it nor Its Affiliates will use the word "tiger" or any mnemonic depicting a tiger In India, Pakistan, Sri Lanka, the GCC countries of the Middle East or any countries contiguous with India other than the PRG (the Restricted Territories). " 5. From the foregoing clauses, it is evident that in addition to making payment of Euro 3.5 million, GD had represented that it had ceased to use TIGER logo which was the subject of IP dispute. GO had also agreed that It would not use BIL's TIGER logo anywhere In the world thereafter. In the circumstances I find that under the Agreement, the appellant had secured a concession or binding covenant from GD and Its affiliates by which they had agreed not to use TIGER logo anywhere in the world for selling the products belonging to GD. It is however pertinent to note that for accepting such restrictive covenant or granting concession, the appellant had not made any payment to GD. On the contrary, in addition to securing such restrictive covenant, the appellant had obtained settlement amount of Euro 3.5 million for agreeing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal asset". Even If it is assumed that under the Settlement Agreement, GD and Its affiliates agreed to release or relinquish their right to use TIGER logo and permitted BIL to use such logo, even then it can only lead to conclusion that such release of relinquishment resulted in transfer of a capital asset by GD and not by the appellant. Plain reading of the Settlement Agreement, shows that for releasing or relinquishing their rights in TIGER logo, the appellant did not pay any consideration. I also note that under the Settlement Agreement, the appellant did not release or relinquish his rights in any of the IP rights which the appellant held and which were connected with TIGER logo. In the circumstances when there was no release or relinquishment of any rights by the appellant in any property, there did not occur transfer of capital asset by the appellant. The Settlement Amount of Euro 3.5 million therefore did not constitute consideration received for "transferring" any capital asset by the appellant. 6. For the reasons set out In the foregoing therefore I have no hesitation in holding that the Settlement amount of Euro 3.5 million was not assessable to tax as appellant's i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al gain was chargeable to tax when the appellant received Settlement amount of Euro 3.5 million. In the said judgment the Supreme Court observed as follows: "... Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions In the Income-tax Act, where under each head of Income the charging provision is accompanied by a set of provisions for computing the Income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital asset nor taxable u/s 28 which provides specific: types or receipt to be held taxable as business Income. Relinquishment of right to sue does not find any mention therein. In this eventuality we have no hesitation to hold that the Impugned amount of Rs. 8,16,22,040/- Is a capital receipt not liable to Income Tax." 10. The same principle was again stated by the Authority for Advance Ruling in the case of Aberdeen Claims Administration Inc. (65 taxmann.com 246) wherein it held as follows: "Similar question was Involved In Lead Counsel of Qualified Settlement Fund (QSF), In re [2016J 65 taxmann.com 197 (AAR - New Delhi)] wherein venous arguments were analyzed relating to taxability of Settlement amount received from Satyam and PwC in similar circumstances, i.e., receipt of settlement amount as a result of settlement agreement and approval by the US Court after the complaints were filed In respect of fraud committed by Satyam/PwC. It was held therein that if right to sue is considered as a capital asset covered under the definition of transfer within the meaning of section 2(47), its cost of acquisition cannot be determined. In the absence of such cost of acquisition, the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger" trademark. We find no merit in Revenue's instant arguments since CIT(A)'s detailed discussion in light of the relevant agreement clause(s) has made it clear that the assessee had received the impugned settlement sum in lieu of surrendering its right to sue than former any transfer giving rise to capital receipt only as held in hon'ble Gujarat high court's decision in Baroda Cement & Chemicals Ltd. ( 158 ITR 636 (Guj) followed by various tribunals' decisions. We thus conclude that CIT(A) has rightly held the assessee to have received the impugned sum not in lieu of conceding its right to sue in foreign courts. We thus confirm the CIT(A)'s order under challenge holding the impugned receipt to be capital receipt. The Revenue fails in its instant last substantive ground as well as first appeal ITA No.1390/Kol/2017. 11. We now proceed with Revenue's remaining substantive grounds in ITA No. 1391/Kol/2017 pertaining to second assessment year 2010-11. Its next grievance therein is that the Assessing Officer had rightly disallowed assessee's payments made to the District Judge Alipore for and on behalf of Kolkata Port Trust (KTP) amounting to Rs.563.44 lacs on account of nondeduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment of Rs. 563.44 lacs had to be made to comply with the orders passed by the Hon'bre Calcutta High Court & Hon'ble Supreme Court and the payments were not made in compliance with any agreement or arrangement between the appellant and KPT. It is true that the appellant had occupied the premises belonging to KPT which were used for carrying on assessee's manufacturing business. However the appellant had continued to occupy the premises after the expiry of lease and revised terms were not agreed upon between the parties. During the relevant year KPT, a local authority, had unilaterally passed an order requiring the appellant to pay the damages for use of premises and the claim made by KPT was resisted by the appellant by filing suit. While admitting the suit, the Court had required the appellant to Irrevocably pay certain sums since the Court found that the appellant would ultimately be required to pay some amount for the use of the premises during the period of occupation. The amount ordered to be paid by the District Judge, Alipore 24 Paraganas South however underwent modifications when the Hon'ble Calcutta High Court & Hon'ble Supreme Court passed the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income represented by the payment. In the circumstances unless the payment received by the payee is found to be legally chargeable to tax as his Income, then the tax deduction provisions are not applicable. In the present case admittedly the disputes between the appellant and KPT were sub-judice and the Courts had required the appellant to make payments with the District Judge Alipore who was adjudicating the disputes. Although the High Court and the Supreme Court required the appellant to make payments against the demand raised by KPT, the payment was directed to be deposited with the District Judge, Alipore 24 Paraganas South and not to KPT. The said District Judge, Alipore did not have any beneficial Interest In the amount deposited nor did the payment receive constituted Income of the said District Judge. In the circumstances therefore the appellant could not have deducted the tax when it made the payment to the District Judge, Allpore 24 Paraganas South In compliance with directions of the High Court & Supreme Court. The appellant's reliance on the judgment of the Delhi High Court in the case of UCO Bank Vs UOI (51 taxmann.com 253) therefore appeared to be relevant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pter-XVII-B of the Act however prescribes TDS deduction on such amount of payments under various heads. We make it clear that there is no clarity as rightly held by the CIT(A) about the application of the TDS charging provision since the assessee has made payments in favour of district civil court registry only. We accordingly express our agreement with the CIT(A)'s findings deleting the impugned disallowance in this reason above. The Revenue's second appeal ITA No.1391/Kol/2017 is accordingly declined. 13. Mr. Damle at this invites our attention to assessee's Rule 27 of the Income Tax Appellate Tribunal Rules filed in assessment year 2010-11 seeking to uphold the CIT(A)'s order mainly for the reason for impugned assessment had been erroneously framed in absence of any draft assessment order. The assessee's claims to have raised in its corresponding substantive ground in lower appellate proceedings which was nowhere adjudicated upon. We find no merit in assessee's Rule 27 petition in hand at this stage since the CIT(A) has not decided the corresponding substantive ground. Rule 27's clinching legislature expression "the respondent though he may not have appealed, may support the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso furnished from other parties as well but in arriving at the, amount disallowable u/s 40(a)(ia), the Ld. AO had not taken cognizance of all such certificates, except in the case of Real Bakers Pvt Ltd. I therefore find force in the Ld. A.Rs submissions that the amount of short deduction of tax as computed by the Ld. AO was factually Incorrect resulting In excessive disallowance. 3. I also note from the details furnished before the Ld. AO that the appellant had furnished the PANs of the payees while furnishing the break-up of various expenses from which it was evident that In many Instances the payments were made to proprietary concerns of individual assessees where the tax rate prescribed u/s 194C was 1% but the Ld. AO computed the amount of short deduction on the plea that the tax was deductible at source @ 2%. I also note that in none of charts extracted the assessee order, the Ld. AO incorporated PAN of the payees even though in the details furnished the appellant had provided PAN of the respective payees. Due to incorrect adoption of TDS rate @ 2% Instead of 1%, the Ld. AO made the disallowance which was not permissible. 4. Section 40(a)(ia) provides for making disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered by the judgment of the Calcutta High Court In the case of CIT Vs S.K. Tekrlwal (361 ITR 432) wherein upheld the following findings of the Hon'ble ITAT, Kolkata which are now binding precedent: " ... We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, Inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay Into Government Account. There is nothing section to treat, inter alia, the assessee as defaulter where there is a shortfall in with regard to the shortfall, it cannot be assumed that there is a default as the is not as required by or under the Act, but the facts Is that this expression, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in subsection 3(1) of section 139. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments failing under various TDS provisions, the assessee can be dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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