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TMI Blog2021 (12) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of INR 1,58,66,730 in respect of the international transactions relating to receipt of interest on loan granted to ICX Platform Pty South Africa ('ICX'), Financial Technologies Mid East ('FTME') and Singapore Mercantile Exchange Pte Ltd ('SMX') (ICX, FTME and SMX. All these concerns are collectively referred-to as Associated Enterprises ('AEs')) u/s. 92CA(3) of the IT Act, 1961 ('the Act'). a. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in rejecting the benchmarking analysis of the Appellant and further erred in imputing / upholding benchmarking which is neither specific to the facts of the case nor in accordance with Section 92C read with Rule 10B (2). b. The Ld. CIT(A) erred in following an arbitrary approach of applying an interest spread of 300 basis points on LIBOR and SIBOR rate for loan given to AEs based on the Hon'ble Mumbai Tribunal's decision in case of Firestar International Limited (ITA No. 488/Mum/2015) without appreciating the facts that the interest spread depends on various factors such as the amount of loan, tenure, credit rating of the borrower, repayment terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irit of decisions of Mumbai Tribunal quoted by the appellant. 12. Without prejudice to ground no. 8 to 11, the Learned C1T(A) failed to appreciate that the investments on which no exempt income could be earned during the year and the investments made for strategic purpose cannot be taken into consideration while calculating the amount of average investment for the purpose of computing the disallowance under section 14(2) read with rule 8D of I.T.Rules. 5. Apropos ground No.1 At the outset, Ld. Counsel of the assessee submitted that he shall not be pressing this ground. Hence, this ground is dismissed as not pressed. 6. Apropos ground No. 2-10 Ground No.2 to 10 relate to the issues of Ld.CIT(A) confirming the disallowances made by the AO for Rs. 32,41,87,313 being the proportionate claim of the premium on ZCCBs written off during the tenure of Zero Coupon Convertible Bonds. 7. The assessee company is engaged in the business of application product, software development services etc. The AO has observed that during the course of hearing it was found that the assessee has claimed a deduction on account of premium (interest) payable on maturity of Zero Coupon Convertible Bonds (Z ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed against profits over a 10 year period. As a corollary of this, where any expenditure has been included for the purpose of amortization under section 35 D on a claim being made by the assessee in that behalf, such expenditure will not qualify for deduction under any other provision of the Act for the same or any other assessment year vide sub section (6) of section 35D, It has been in following cases, that such interest / premium can be claimed in the respective year on pro-rata basis, Following the view taken by the Supreme Court in Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 225 ITR 802 (SC), the High Court held that the liability should be spread over the period of the debentures as was held in the case of National Engineering Industries Ltd, Vs.. CIT (1999) 236ITR 577 (Cal). In the case of CIT vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553, it was held that where debentures were redeemable at a premium on expiry of certain nos. of years after allotment, debenture premium was held to be allowable as revenue expenditure. In the case of National Engineering Industries Ltd, v. CIT the Question was whether, on the facts and in the circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly applicable judgment wherein the issue of payment of premium was considered. In the given case, the assessee had issued convertible debentures/ bonds and had claimed a deduction of interest, ft was held that such interest was fully allowable as deduction. * DCIT v, Gujrat Narmada Fertiliser Valley Corporation Ltd. (2013} 215 taxmann 616, Gujrat High Court viii) The provisions as per the Companies Act, 1956 are provided in section 78(2) of the Companies Act, 1956, Since the Companies Act, 1956 and the applicable provisions thereof are adhered to and since the books of account of the company are prepared as per the Companies Act, 1956, the treatment given for claiming deduction from share premium account is in consonance with the provisions of the Companies Act, 1956. We draw your attention to S, 36 (1)(iiia) which provides for deduction for the discount on a Zero Coupon bond which shall be allowed on a pro rata basis to be calculated in the manner as may be prescribed. So the discount will be treated as deferred revenue expenditure but the manner of calculation will be prescribed under the Section 36 (1)(liia), Further Rules have been provided Rule 88 & Rule 8C have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, assessee appealed before the Ld.CIT(A). Upon assessee appeal Ld.CIT(A) noted that assessee's submissions. Ld.CIT(A) reproduced the assessee's submissions, however Ld.CIT(A) was not convinced, he upheld the order of AO, which read as under:- "I have gone through the Impugned Order made by the AO and the submissions made by the appellant. The AO stated three reasons for not allowing the claim of the appellant. First of the reasons was that the assessee has not claimed these amounts of premium in the profit & loss account but adjusted against the shares premium account which according to appellant AR, is permissible under the provisions of companies Act and thus, claim was made in the computation of income only. I find that the appellant itself in the books of accounts, treated the impugned amount of premium as capital expenses and chooses not to debit the expenses in the profit & loss account rightly, but now taking the shelter of the provisions of companies act to do so is claiming it as revenue expenses for the instant year. It is seen that, the provisions of companies act do not compel the assessee to adjust the premium payable on ZCCB against the security premium and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellant as neither the Hon'ble Supreme Court nor Bombay High Court has ever said that ZCB and ZCCB are same and there is no difference between these two items. As far as the case law relied by appellant from the Jurisdictional IT AT, Mumbai is concerned, I find that there was no case of ZCCB but was of FCCB, the premium payable of ZCCB was treated as contingent liability in the books of account accordingly the case quoted by the appellant are distinct and distinguishable. The AO stated that the appellant company has not paid the withholding tax on the amount of premium claimed as expenses in the computation of income so the expenses are other-wise disallowable u/s 40(a)(ia). In the written submission the appellant has relied upon the CBDT Circular no. Circular NO. 4/2004, DATED 13-5-2004 which prescribed that tax will be required to be deducted only at the time of redemption on bond. However this circular was issued in respect of Deep Discount Debentures and not about the ZCCB. Both the instruments are different so the circular issued in respect of Deep Discount Debentures can- not be applied automatically on the ZCCB also. In view of the above the addition made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Commissioner of Income Tax (Appeals), for following reasons: i) The premium has not been debited to profit and loss account, ii) As the bonds are optionally convertible, liability is contingent, iii) Notes to account shows that it is contingent liability, iv) TDS has not been deducted. The learned Assessing Officer has dealt with the issue on page 2 to 7 and conclusion on page 6 and 7. The learned Commissioner of Income Tax (Appeals) has dealt with the issue on page 55 to 57 of his order. The assessee submits that funds raised through ZCCB has been utilised for the purposes of business and premium on the same is allowable as deduction on proportionate basis over the period of the bond. The assessee relies on judgment of Hon'ble Supreme Court in case of Madras Industrial Investment Corporation Ltd, 225 ITR 802. (copy enclosed at page 572-580 of Paper book 2). In the said case, assessee had issued deep discount bonds and the Hon'ble Supreme Court held that discount is liability incurred and is allowable as deduction by being spread over the term of the bond. The assessee seeks to draw attention to last para of para 7 on page 578, and para 8, 9, 10 and 11 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 580 of paper book 2. As regards deduction of tax at source, the assessee submits that the bonds are listed on Singapore Stock Exchange and till redemption on maturity, the beneficiary of the premium is not known. The assessee submits that liability to tax arises when the recipient is identified and TDS deducted can be given credit for. The assessee submits that when the bonds were redeemed on maturity in previous year relevant to A Y 2012-13, tax was deducted at source in accordance with the provisions of the Act. The said fact is recorded in the assessment order u/s 143(3) for A Y 2012-13 at page 518-9 of paper book no 2. The assessee submits that the Central Board of Direct Taxes had issued a circular in the year 2004 providing that TDS in case of Deep Discount Bond is to be deducted on redemption. The circular has been extracted in written submissions to CIT(A) for A Y 2009-10 and the same can be seen at page 158 of paper book for A Y 2009-10. The assessee also relies on judgment of Hon'ble Delhi High Court in case of UCO Bank Ltd, 369 ITR 335 (Del), copy enclosed at page 602-608 of paper book 3. The Hon'ble High Court has identified the issue in para 8 and 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had debited proportionate premium on ZCCBs to Share Premium account. The assessee company, 63 Moons Technologies Ltd, was born out of merger and amalgamation of three companies during the FY:2000-01. The amalgamation has been accounted for under the 'pooling of interests method' as prescribed by AS-14 issued by ICAI. An amount of Rs. 6,75,08,670/- was credited to Share Premium account accordingly at the time of amalgamation. The assessee has prepared a detailed account of share premium account with narrations from 01.04.2000 and the same is enclosed in paper book 5 filed herewith (please refer page 831-832). As on the said date, i.e., 01.04.2000, opening balance of share premium is Rs. 10,20,000/- which has been written off by following due process of reduction of share capital in FY: 2002-03. Provisions of Companies Act as regards use of Share Premium account The assessee submits that section 78 of Companies Act, 1956 deals with share premium account and reads as follows: "Application of premiums received on issue of shares. 78. (1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Companies Act,1956. Assessee has not adopted shifting stand The assessee submits that since the first year of issue of ZCCB, the assessee has debited proportionate premium on ZCCB out of share premium account and in the computation of income, it has claimed proportionate premium on ZCCB as expenditure. The assessee has adopted a consistent stand over the years. The assessee further submits that, it is permissible for assessee to treat a transaction differently in its income tax return than its treatment in books of accounts. The assessee submits that computation of total income has to be made as per provisions of Income Tax Act, 1961 and accounting treatment is not sacrosanct. It has been held by the Hon'ble Supreme Court in the following cases that entries in books of accounts are not determinative of its tax treatment: - Kedarnath Jute 82 ITR 363 (SC) - Godhra Electricity 225 ITR 746 (SC) - Bokara Steel 236 ITR 315 (SC) - United Commercial Bank 240 ITR 355 (SC) The assessee submits that adopting differing treatment in books of accounts and Income Tax Return cannot be equated with shifting stand. The assessee respectfully submits that it has not shifted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that assessee has incidentally started repaying such ZCCB during the financial year 2009- 10 without conversion of such bonds into equity shares. That this also confirms and strengthens the view point of the assessee that the amount is repaid. Now the AO has rejected the claim firstly on the basis of the plank that amount has not been debited into profit and loss account and has been adjusted in the share premium account. Now this plank of the AO is not sustainable on the touchstone of proposition that accounting entries are not determinative of the true nature of the transaction. The accounting treatment has been given in compliance with the companies Act provisions. There is no claim of any violation in this regard. The claim in income tax Act has to be made as per mercantile system and consistent method accounting. A liability which has been accrued has to be provided and allowed. It is not that liability is allowed only on the payment basis. Following case laws in this regard are relevant, germane and support the case of the assessee. i) Madras Industrial Investment Corporation Ltd (supra) ii) National Engineering Industries Ltd. (supra) iii) CIT vs Tungabhadra I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moment funds were raised through bonds. It has further been submitted that even on facts the bonds have not been converted into shares, in this regard various case laws have been referred. 18. The argument of revenue that the amount has not been debited in account is also not sustainable as the assessee has very much been debited in the account to the debit of share premium account. The Companies Act duly permits the same. Hence, the plea that amount is contingent and not debited is not correct, when revenue itself has accepted the debit in this regard of the amount to the share premium account. Revenue authorities cannot take a shifting stand that the amount is correctly accrued and debit to share premium account is correct, but the same is still a contingent amount. The assessee could have very well debited the amount to the profit and loss account, but it has chosen to debit the amount to share premium account in the books, which is also permitted as per Companies Act. No infraction of law in this regard was pointed out. Since revenue has accepted the debit of the premium to share premium account, it is clear that revenue has accepted that redemption premium amount has been acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruled the case of the Department in view of the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT . Being aggrieved, the Department has come by way of the appeal to this Court. Arguments 3. None appears for respondent though served. 4. Mr. R.V. Desai, learned counsel appearing for the Department/appellant, submitted that the ratio of the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation (supra) as also the judgment of this Court in the case of Tapatia Tools Ltd. v. Jt CIT (2003) 126 Taxman 544 (Bom) was not applicable as in this case the AO found alteration in the terms of issue of debentures during the life of the issued debentures. He submitted that originally the debentures were issued at 2 per cent. which was changed to 0 per cent during the life of issued debentures. That, originally the issued debenture was for 5 years which was changed to 10 years during the existence of the issued debentures. He submitted that in the case of Madras Industrial Investment Corporation (supra) as also in the case of Taparia Tools Ltd. (supra), there was no discretion vested in the assessee to alter the ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even on the ground that the borrower had the discretion to change the terms of the issued debentures. As there was nothing in the record to show that during the assessment year in question, the borrower had exercised such a discretion. In the present case also, there is nothing on record that the borrower had exercised any such discretion. In this view of the matter, the said case law is fully applicable on the facts of the case and the liability on account of debenture redemption premium is liable to be deducted from the income and cannot be treated as contingent liability. Furthermore Mumbai Tribunal in the case of Mahindra and Mahindra ITA No. 8597/Mum/2010heldas under:- "Next ground of appeal is about disallowance of pro rata premium of Rs. 5.39 crores payable on redemption of 'Foreign Currency Convertible Bonds'(FCCB).As per the AO the bonds were convertible into shares and, therefore, could not be construed as a borrowing, that they increased capital base of the company and that the expenditure incurred was capital in nature. The AR submitted that FCCB were a form of borrowing thai they were shown in the balance- sheet under loans that premium payable on redemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the AO. The appellant has earned dividend of Rs. 36,99,61, 927/- which has been claimed exempt from tax. Further the total investment outstanding as on 31st March 2016 were to the tune of Rs. 2,001,94,74,908. So I am inclined to accept the contention of the AO that it is difficult to accept that the appellant has incurred only Rs. 32,85,993/- to maintained such a huge portfolio. Rule 8D provide the mechanism to compute the disallowance u/s 14A and the Hon'ble Bombay high court in the case of Godrej and Boyce Mfg. Co. Ltd 328 ITR 81 held that form A.Y 2008-09 onward disallowance should be computed under rule 8D. However, in the recent decision of the Bombay High Court it was held that when if the assessee's own fund is more than the investment made it will be presumed that the investment were made our of own fund and no disallowance for interest will be made u/s 14A. Following the binding decision of the Hon'ble Bombay High Court in the case of HDFC Bank Ltd the AO is directed to delete the disallowance of Rs. 29,864/- being the proportionate amount of interest disallowed. In the light of the decision of Hon'ble Bombay High Court in the case of Godrej and Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment order. The assessee submits that disallowance made is based on actual reality and of expenses incurred and debited in books of accounts. The assessee submits that the reasons assigned by both the lower authorities can be ground for enquiry but cannot be ground for rejection. Sub-section 2 of section 14A is very specific as to grounds on which method of the assessee can be rejected and those conditions for rejection are not satisfied in the present case. The assessee relies on judgment of Hon'ble Supreme Court in case of Maxopp 402 ITR 640 (SC) that method cannot be lightly rejected. The assessee also relies on judgment of Hon'ble Bombay High Court in case of Bombay Stock Exchange Ltd (2020) 113 taxmann.com 303 (Bom), copy enclosed at page 667 to 672 of paper book 3." 26. Without prejudice to the above submission, Ld. Counsel of the assessee has given following submission:- Without prejudice to above, the assessee has reworked disallowance of 0.50% of average investments by excluding investments on which no income has been earned in the impugned year. The working is enclosed in paper book 5(please refer page 833- 834). The same can be summarised as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow. This ground is allowed. ITA No.4775/Mum/2016 for AY 2009-10 29. Grounds of appeal read as under:- 1. The Learned Commissioner of Income Tax Appeals ('Ld. CIT(A)') erred in partly confirming the action of the Learned Assessing Office ('Ld. AO') / Learned Transfer Pricing Officer ('Ld. TPO') of proposing an upward adjustment of INK 2,32,65,9657- in respect of the international transactions of receipt of interest on loan granted to its Financial Technologies Mid East ('FTME') (INR 85,13,398) and issuance of corporate guarantee facility to FT Group Investment Private Limited ('FTGIPL') (FTME and FTGIPL together referred to as 'Associated Enterprises' or 'AEs') (INR 22,90,845) u/s. 92CA(3) of the Income Tax Act, 1961 ('the Act'). 2. The Ld. CIT(A) erred in partly confirming the adjustment of Rs. 85,13,3987- in respect of the international transactions of receipt of interest from FTME u/s. 92CA(3) of the Act. 2.1. The Ld. CIT(A) failed to appreciate the fact that the loan granted by the appellant to FTME were in nature of advances given with the intention of converting the same into equity subsequently and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le particularly when none of the bonds were converted into equity. 6. The Ld. CIT(A) erred in holding that the assessee is treating provision of proportionate premium of Redemption of ZCCB as capital expenses. 7. The Ld. CIT(A) failed to follow the various judgments quoted before him including the judgment of Supreme Court and Mumbai Tribunal in their true spirit. 8. The Ld. CIT(A) erred in confirming the action of the AO that the claim of premium/ interest cannot be allowed u/s 40(a)(ia) since tax was not deducted at source. 9. The Learned CIT(A) failed to follow the binding CBDT's circulars in respect of TDS on interest on Deep Discount Debentures in its true spirit and also failed to appreciate that both instrument Deep Discount Bonds and the ZCCBs are of the same nature, and as such accordingly the CBDT circular in the matter of TDS on Deep Discount Debenture mutatis-mutandi applies to the ZCCBs also. 10. The Ld. CIT(A) has erred in confirming the disallowance made by the AO u/s 14A up to the extent of Rs. 4,26,34,850/-. 1 1. The Id. CIT(A) failed to appreciate that when the appellant itself calculated the disallowances in a scientific manner u/s 14A(1 ) then he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as ita1165.13 between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law and it is dismissed." Hence, following the precedent, we direct that disallowance should be restricted @0.5% 33. Ground No.4 to 9 relate to the issue of disallowance with respect to premium of ZCCB written off. Since facts are identical and Ld.CIT(A) has followed this order for AY 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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