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TMI Blog2024 (12) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... to be upheld. Therefore Ground No.2 of Revenue Appeal is untenable. Addition of commission on providing such corporate guarantee on behalf of its associated enterprise - said adjustment made by the AO/TPO was deleted on the ground that the issue of guarantee does not constitute an international transaction covered u/s 92 - reasons given by Ld. CIT(A) was that assessee had entered into international transaction with its associate enterprises, VDPL wherein assessee had 49.07% equity stake - HELD THAT:- Hon ble High Court of Rajsthan in Vaibhav Global Limited [ 2022 (1) TMI 1369 - RAJASTHAN HIGH COURT ] followed earlier order [ 2017 (12) TMI 583 - RAJASTHAN HIGH COURT ] and upheld order of ITAT dealing the Transfer Pricing Adjustment made in relation to Corporate Guarantee. Reliance in placed in this regard on the decision of the Hon ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT s case [ 2006 (12) TMI 82 - SUPREME COURT ] has held that where it is obvious that the holding company has deep interest in its subsidiary and the subsidiary has used the funds borrowed for its business, the loan can ordinarily be considered as given to subsidiary as a measure of commercial exped ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 proposing additions was forwarded to assessee company vide office letter dated 27/12/2010 requiring to file its objections if any u/s 144C(2) of the Act. The assessee company vide letter dated 24/01/2011 submitted objections. On completion of assessment proceedings, the assessment order dated 28/01/2011 by Addl. CIT, Range-4, New Delhi was passed. 3. The assessee preferred appeal before Ld. CIT(A) which was partly allowed, vide order dated 24/02/2012. 4. Being aggrieved Appellants, the Department of Revenue and the assessee preferred above said appeals. The Department of Revenue pleaded following grounds:- 1. The order of the learned CIT(Appeals) is erroneous contrary to facts and law. 2. On the fact and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 42,16,543/- made by the AO on the basis of order of the TPO on account of difference in interest charged on loan. 3. On the fact and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 3,11,70,093/- made by the AO on the basis of order of the TPO on account of services provided by the assessee in shape of corporate guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law in considering average of net value of assets instead of average of total value of assets while applying Rule 8D of the Rules for computing disallowance of expense under section 14A of the Act. 6. The Learned Authorized Representative for Department of Revenue submitted that Ld. CIT(A) erred in deleting addition of Rs. 42,16,543/- made by Ld. AO on the basis of order of the TPO on account of difference in interest charged on loan. 7. The Learned Authorized Representative for department of Revenue submitted that Learned CIT(A) erred in deleting addition of Rs. 3,11,70,093/- made by Ld. AO on the basis of order of the TPO on account of services provided by the assessee in shape of corporate guarantee of IL FS and Bank of India on behalf of its associate enterprises, VDPL. 8. Learned Authorized Representative for department of revenue submitted that the Ld. CIT(A) has erred in deleting the addition of Rs. 1,07,30,843/- made by the Ld. AO u/s 14A. 9. Learned Authorized Representative for department of revenue submitted that the Learned CIT(A) erred in appreciating the fact that expenditure of Rs. 10,90,37,706/- on account of interest is not directly attributable to a particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing can be invoked in respect of such a transaction-Held, yes (Paras 5 and 7 ] in favour of revenue] 10.3 The Hon ble High Court at Madras in TCA No.590 591 decided on 10/12/2020 titled as PCIT vs. M/s Readington (India) Ltd. held as under:- The concept of Bank Guarantees and Corporate Gurantees was explained in the decision of the Hydrabad Tribunal in the case of Prolifics Corporation Limited. In the said case, the Revenue contended that the transaction of providing Corporate Guarantee is covered by the definition of international transaction after retrospective amendment made by Finance Act, 2012. The assessee argued that the Corporate Guarantee is an additional guarantee, provided by the Parent company. It does not involve any cost of risk to the shareholders. Further, the retrospective amendment of Section 92B does not enlarge the scope of the term international transaction to include the Corporate Guarantee in the nature provided by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an http://www.judis.nic.in T.C.A.Nos.590 591 of 2019 inherent risk in providing guarantees and that may be a reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head profits and gains from business and profession . What happens is that, in the process, when the shares are held as stock-in-trade , certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P. Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 10.6 The Hon ble ITAT, Kolkata Special Bench in the case of Instrumentarium Corporation Ltd. vs. Assistant Director of Income Tax, International Taxation reported as [2016] 71 taxmann.com 193 has held as under:- 37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in /ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rig, the appellant had granted loan to Virtue Drilling Pvt. Ltd, ( VDPL ) and the appellant recovered interest at the rate ranging between 11% and 13% on such converted loan on different dates. The appellant has paid interest to Infrastructure Leasing Financial Services at same rate of interest on loan taken. The international transaction of interest received is therefore considered as being at arm s length applying Comparable Uncontrolled Price method. The loan was granted by the assessee to its associated enterprises, VDPL in US Dollar and in terms of agreement dated 01/08/2006 (Refer Page 223-229 @ 227 of Paper Book] entered between the parties, the in interest and repayment of loan were also to undertake in US Dollar. The Transfer Pricing Officer (TPO) however, in his order passed under section 92CA(3) of the Act, disregarded the arm s length price of the international transaction of interests charged on loan at the rate of 11% to 13% and instead imputed notional interest rate of 14% allegedly on the basis of interest charged by third parties in the corporate bond market. The adjustment made by the TPO, however, was deleted by the CIT(A) vide order dated 24/02/2012. 12. Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the subsidiary has used the funds borrowed for its business, the loan can ordinarily be considered as given to subsidiary as a measure of commercial expediency and accordingly the interest expense on the funds lent should be allowed as a deductible expense to the company. The relevant findings of the Supreme Court read as under: 20. In Madhav Prasad Jatia v. CITAIR 1979 SC 1291, this Court held that the expression for the purpose of business occurring under the provision is wider in scope than the expression for the purpose of earning income, profits or gains , and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessed borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(l)(iii) because in section 37 also the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(l)(iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression for the purpose of business is wider in scope than the expression for the purpose of earning profits vide CIT v. Malayalam Plantations Ltd. [1964] 53ITR 140, CITv. Birla Cotton Spg. Wvg. Mills Ltd. [1971] 82ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. In view of above material facts i.e. giving of Corporate Guarantee having been given without charging any commission, there could not be any addition to the income of the assessee to the assumed/notional interest in absence of any interest having been filed or received by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lationship with the income which does not form part of the total income. In the absence of such nexus being established, it is not open to the assessing officer, it is respectfully submitted, to disallow any part of the expenditure on proportionate basis. Reliance is placed on following decisions: - Godrej Boyce Manufacturing Company Ltd. v. DCIT: 394 ITR 449 (SC) - Maxopp Investment Ltd. vs. CIT: 347 ITR 272 - affirmed by SC in 402 ITR 640 - HT Media Ltd vs Pr. CIT: 399 ITR 576 (Del) - Coforge Limited (formerly know as NUT Limited) vs. ACIT 436 ITR 546 17. Learned Authorized Representative for respondent/assessee submitted that since interest free own funds available with assessee exceeded their investments; investments would be presumed to be made out of assessee's own funds. The assessee company has accumulated sufficient reserves to the tune of Rs. 213,78,55,551 [Refer Pg 74 of Paper Book] as on March, 2007 and the investments were only Rs. 27,49,93,540 as on March 2007, it is presumed that all investment have been made out of the accumulated profit and no borrowed fund have been utilized for investment in shares: therefore, no disallowance under section 14A [Refer Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable LIBOR rate at 5.4%. As such, the CIT(A) has rightly deleted the adjustment made by the Assessing Officer on basis of order of TPO on account of difference in the interest rate charged on loan deserves to be upheld. Therefore Ground No.2 of Revenue Appeal is untenable. 20. The assessee had given undertaking in Form of corporate guarantee of USD 12,270,000 equivalent to Rs. 524,542,500 to Infrastructure Leasing Financial Services and USD, 3,080,000 equivalent to Rs. 131,670,000 to Bank of India, India for stand by Letter of credit, who has provided financial assistance to VDPL in connection with the rig. This transaction has been considered closely linked to the transaction of transfer of capital work in progress to VDPL. Further, this transaction does not have any impact on Profit and Loss Account. Hence, the transaction of transfer of capital work in progress is not benchmarked in terms of section 92(1) of the Income Tax Act. However, the TPO imputed notional commission at the rate of 2.75% plus a mark-up of 200 basis points on the basis of data obtained from State Bank of India u/s 133(6) of the Act. The TPO, accordingly, made an adjustment of Rs. 3,11,70,093 in the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that Rule 8D intended to apply retrospectively. 48. Applying the principles of statutory interpretation for interpreting retrospectively of a fiscal statute and looking into the nature and purpose of sub-section (2) and sub-section (3) of Section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively. Hon ble Supreme Court in the case of Maxopp Investment Ltd.: 402 ITR 640 and the Mumbai High Court in the case of Godrej Boyce Mfg. Co. Ltd. v. CIT: 328 ITR 81 (which is now been affirmed by the Hon ble Supreme Court in Civic Appeal No.7020 of 2011), too held that Rule 8D is not retrospective and applies from assessment year 2008-09 only. In view of the above well settled position in law Rule 8D has wrongly been applied by the assessing officer. 23. In terms of sub-section (1) of section 14A of the Act, any expenditure incurred in relation to exempt income is not allowable deduction. Subsection (2) of the section empowers/ enables the assessing officer ( AO ) to determine s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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