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TMI Blog2020 (5) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the commissions already charged by the assessee. We also accept the submission of learned AR of the assessee that guarantee commission on the operating lease must be computed on the basis of lease rental outstanding only, and not on the aggregate of all future lease rentals. Needless to direct that before fresh computation the TPO /AO shall grant a fair and proper hearing to the assessee. The assessee is also directed to provide the necessary details to the TPO/AO. In the result ground No. 1 of the appeal is partly allowed. Disallowance under section 14A read with Rule (rwr) 8D - assessee has made huge investment in equity/preference shares - HELD THAT:- AO nowhere identified/recorded that assessee earned any exempt income during the relevant financial year. Further, we have noted that the dividend income earned by the assessee from foreign subsidiaries has been offered to tax. It is now settled law that in absence of any exempt income no disallowance under section 14A is attracted. See assessee own case [ 2018 (1) TMI 398 - ITAT MUMBAI] , [ 2018 (12) TMI 1132 - ITAT MUMBAI] and [ 2017 (9) TMI 726 - ITAT MUMBAI] - Decided in favour of assessee. Disallowance of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursuance of direction of dispute resolution penal (DRP-2) dated 15.12.2015 for assessment year 2011-12. The assessee has raised the following grounds of appeal 1. Transfer Pricing Adjustment - Guarantee Fees a) The Ld. DRP/TPO/AO erred in law and facts in making addition of ₹ 27,75,3347- on account of difference in arm's length fees for Stand By Letter of Credit (SBLC) provided by the assessee for loan availed by AE from the Banks. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. b) The Ld. DRP/TPO/AO erred in law and facts in making addition of ₹ 2,09,85,206A on account of difference in arm's length fees on corporate guarantee provided by the assessee for loan availed by the AE, secured by Tangible Assets of the AE. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. c) Without prejudice to above, the Guarantee commission charged by bank @ 0.75% to the assessee ought to have been accepted as Internal Cup for the commission charged by assessee to its AE @ 1 %. d) The Ld. DRP/TPO/AO erred in law and facts in mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,85,658/- a) The Ld. DRP/A.O. erred in law and facts in disallowing ₹ 1,32,85,658/- out of interest u/s 36(1)(iii) of the Act. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. b) The Ld. DRP/A.O failed to appreciate that the assessee had sufficient internal accruals and interest free funds to make these investments and hence no part of interest can be disallowed u/s 14A of the Act. Following the decisions in the case of Reliance Utilities / HDFC of Bombay HC. c) The Ld. AO failed to appreciate that all the investments held by the assessee are strategic investments in subsidiaries promoted by it to take up its own business in different jurisdictions and not for earning exempt income. Hence disallowance u/s 14A is unwarranted and misplaced. d) The Ld. DRP/A.O erred in law and facts in disallowing interest of ₹ 1,32,85,658/- u/s 36(1)(iii) of Act which is also disallowed u/s 14A resulting in to double disallowance of same expenditure. 4. Addition on account of inclusion of cenvat credit in valuation of Closing Stock - ₹ 92,00,204/- a) The Ld. DRP / AO erred in law and facts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on open forward contracts treated as speculation loss against MTM gain (FX gain) on the same nature of transactions in the year under appeal. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law. d) Without prejudice to above, the Ld. DRP/ AO erred in law and facts in not reversing / set off speculation loss brought forward when the MTM loss is reversed and netted off against other business loss in the subsequent year. 2. Brief facts of the case are that the assessee is a company engaged in manufacturing of multi laminated collapsible and seamless plastic tubes catering to oral care, cosmetic personal care, pharmaceutical, food and industrial sector. The assessee is one of the entity of Essel Group having its head quarter in Mumbai. The assessee, while filing return of income in its Form 3CEB reported transaction with its associated enterprises (AE) that assessee has given corporate guarantee to its following associate enterprises:- No. Type of Corporate Guarantee provided by the assessee No of guarantees Corporate Guarantee Commission Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Essel Propack America LLC USA ING Vysya Bank, Mumbai 1.40% Barclays Bank PLC Mauritius USD 222,975,000 216,285,750 Secured against SBLC issued by ING India and further there is a mortgage of land owned by Aqualand India Limited. Essel Propack Limited has not given any asset as security for this loan. Loans back by tangible assets of borrower and corporate guarantee issued by the assessee Sr. No. Name of borrower AE Name of Banks / FIs Rate charged Currency Guarantee Amount (Rs) Loan Amount as on 31.03.11 Security Provided 1 Lamitube Technologies Limited, Mauritius Punjab National Bank, UK 1% USD 535,140,000 468,247,500 Pledge of shares of Essel Propack, UK Limited and EPGL China along with Fixed assets of EP UK and Corporate Guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50,724,262 Charge on machine. Corporate Guarantee for additional comfort 2 Arista Tubes INC -do- NIL USD 379,057,500 54,829,472 -do- 3 Arista Tubes Ltd, UK GE Capital Nil USD 160,943,355 160,943,355 -do- 3. Consequent upon the reference to the Transfer Pricing Officer (TPO) under section (u/s) 92CA by AO was made for computation of arm s length price (ALP). The TPO after considering the explanation suggested transfer pricing adjustment in respect of guarantee commission (s) of ₹ 3,83,02,220/-. On receipt of order of TPO dated 27.01.2015, the AO included the adjustment on account of corporate guarantee commission(s). The AO also made disallowance u/s 14A r.w.r. 8D of ₹ 1,72,03,566/- and disallowance u/s 36(1)(iii) of ₹ 1,32,85,658/-, addition on account of CENVAT credit in valuation of closing stock of ₹ 92,00,204/- and further disallowance u/s 36(1)(iii) of ₹ 25,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted the ALP at 2% and held that the assessee ought to have charged the same to its AEs. The TPO suggested TP adjustment of ₹ 39,17,295/-. On objection before the DRP, DRP directed the AO to consider 0.5% in addition to the reimbursement of 1.25% and 1.40% already received by the assessee as the ALP and directed the TPO to compute the transfer pricing adjustment accordingly. 6. With regard to the loan taken by AE backed by tangible assets, the assessee has charged guarantee commission at 1%, while in other cases the assessee has not charged any guarantee commission. The TPO computed the ALP at 2% and held that the assessee ought to have charged the same to its AEs. The TPO suggested the TP adjustment of ₹ 2,09,85,206 /-. On objections before the DRP the adjustments suggested by TPO was affirmed. The other loans taken by AEs, which were backed by corporate guarantee of the assessee that is LTL Mauritius and LTL Cyprus, the assessee charged guarantee commission of 1.5%. The TPO suggested ALP at 2.5% by taking view that the assessee ought to have charged the same to its AEs. The TPO suggested transfer pricing adjustment of ₹ 96,63,002/-. This adjustment was also u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the commission charged by assessee is it arm s length price. In case where no guarantee commission had been charged by the assessee, the adjustment made by TPO and upheld by DRP to 2-2.5% of the guarantee amount is not warranted and the adjustment to be restricted to 0.5% of the commission amount. With regard to guarantee given in relation to operating lease taken by AEs , the learned AR for the assessee submits the transfer pricing adjustment ought to be computed on the basis of lease rental outstanding lease and not the aggregate of future lease rental. Because, on default by the AE would not exceed the outstanding lease as the lessor has an option to take back the machine or equipment given on lease. Accordingly there was no justification for charging guarantee commission on the aggregate of all the future lease rentals. 10. On the other hand the learned AR for the revenue supported the order of TPO and DRP. The learned DR for the revenue submits that the DRP has already very considerate while granting partial relief to the assessee and that the assessee is not entitled for any further relief. 11. We have considered the rival submission of the parties and have gone throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the necessary details to the TPO/AO. In the result ground No. 1 of the appeal is partly allowed. 13. Ground No. 2 relates to disallowance under section 14A read with Rule (rwr) 8D. The learned AR of the assessee submits that this ground of appeal is covered in favour of assessee in assessee s own case for assessment year (AY) 2007-08 in ITA No. 1397/M/2017, for a AY 2008-09 in ITA No 4116/M/2013. The learned AR of the assessee further submits that during the relevant. The assessee earned dividend income on foreign subsidiaries of ₹ 16.77 crore which has been offered to tax, which can be seen from the computation of total income and in the return of income. Thus, the assessee has not earned any exempt income i.e. no dividend income has been and from the Indian subsidiary. Accordingly the provisions of section 14A read with Rule 8D is not applicable in absence of any exempt income. The dividend income earned from foreign subsidiary has already been offered to tax. On similar issue the tribunal in assessee s own case for assessment year 2008-09, in 2009-10 and again in AY 2010-11 deleted the similar addition under section 14A. 14. On the other hand the learned DR for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on 31st March 2011 the assessee has Share Capital of ₹ 31.31 Crore and the reserve and surplus of ₹ 612.88 Crore. Thus, total interest free funds i.e. surplus were more than ₹ 644 crore. The assessee has made total investment in foreign subsidiary of ₹ 489 crore and in Indian subsidiary of ₹ 78 crore only. In support of his submission the learned AR of the assessee relied upon the decision of Bombay High Court in CIT versus Reliance Utility Power Ltd (313 ITR 340 Bom), CIT versus Reliance Industry Ltd (410 ITR 466 SC) and HDFC Bank Versus DCIT (383 ITR 529 Bom).s 18. On the other hand the learned DR for the revenue supported the order of lower authorities. 19. We have considered the rival contention of the parties and have gone through the orders of lower authorities. We have also deliberated on the various case laws relied by learned AR of the assessee. The ld. DRP while confirming the interest disallowance under section 14A [Rule 8D (2)(ii)] held that in any case the interest of ₹ 1.32 Crore computed by AO is disallowable under section 36(1)(iii). Before us the ld AR for the assessee vehemently submitted that the reserve and surplus a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r made adhock adjustment only with respect to closing stock of the assessee and made addition to the total income of ₹ 92,00,204/-. The action of assessing officer was confirmed by DRP. The learned AR of the assessee further submits that similar addition was made against assessee for assessment year 2007-08 and in AY 2008-09, on appeal before Tribunal the additions were deleted by holding that whether the assessee follows inclusive method of accounting or exclusive, the same is tax neutral and therefore no addition to the total income should be made in that count. 22. On the other hand the learned DR for the revenue supported the order of lower authorities. 23. We have considered the submission of both the parties and have gone through the orders of authorities below. We have noted that similar addition was made in assessment year 2007-08 and again in 2008-09. The appeal of AY 2008-09 in ITA No. 4116/Mum/2013 was adjudicated first vide order dated 11th September 2017, wherein similar addition was deleted. Following the order for AY 2008-09, the identical addition in appeal for AY 2007-08 were also deleted in ITA No. 1397/Mum/2017 in order dated 28 September 2018 by pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of CIT vs. Berger Paints India Ltd. 264 ITR 503. The Hon'ble Bombay High Court in the case of CIT vs. Mahalaxmi Glass Works (P) Ltd. 318 ITR 116 following the Hon'ble Delhi High Court decision in the case of Mahavir Alluminimum Limited 297 ITR 77 held that to give effect to section 145A if there is a change in the closing stock at the end of the year, there must necessarily be a corresponding adjustment made in the opening stock of that year. This does not amount to giving total benefit to the assessee. It would be necessary to compute the true and correct profit for the purpose of the assessment. Facts being identical, we follow the above order of the Coordinate Bench and allow the 2nd ground of appeal. 24. Considering the similarity of fact and the decision of coordinate bench of tribunal on identical issue and respectfully following the same this ground of appeal is allowed. No contrary fact or law is brought to our notice to take other view. 25. Ground No. 4 relates to disallowance of interest of ₹ 2501460/- under section 36(1)(iii).The AR of the assessee submits that assessee incurred expenditure on behalf of its subsidiary f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se companies, but these amount represents various debits in the nature of sale of spares, royalty receivable, service charges and the expenses incurred on their behalf such as traveling expenses, establishment expenses, financial guarantees, communications expenses, etc. The assessee does not have system of charging interest on such debits of expenses incurred on their behalf. Such advances did not attract any adjustment in Transfer Pricing order also. However, the Ld. AO considered these debit balances as advances without interest and disallowed ₹ 1,07,54,398/- out of interest u/s 36(1)(iii). We do not find any merit for the disallowance so made by the AO. 28. We have further noted that the coordinate bench by following the order for AY 2009-10, allowed similar relief in ITA No. 642/Mum/2016 dated 12.04.2018. As the learned DR for the revenue has not disputed the factual matrix related to this ground of appeal, therefore respectfully following the decision of tribunal for earlier years on identical set of facts, this ground of appeal is also allowed. No contrary fact or law is brought to our notice to take other view. 29. Ground No. 5 relates to set off of brought f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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