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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 ..... details in support of return as well as to the queries raised during course of assessment proceedings. The assessee is engaged in business of manufacturing of ERW pipes and tubes and trading of HR Coils, pipes zink and shocket. Draft assessment order u/s 144C r.w.s 143(3) of IT Act vide order dated 23/12/2010 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appreciating that the action of the assessing officer in applying Rule 8D of the Rules without recording to the satisfaction of the estimate of expenditure having nexus with the exempt dividend income earned by the appellant was incorrect. 1.5. Without prejudice, the Commissioner of Income-Tax (Appeals) assessing officer erred on facts and 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 reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xmann.com 226 has held as under:- "Whether transaction of providing loans to subsidiary whether a director loan or providing credit for initial expenditure, which is stated to be reimbursable, calls for transfer pricing adjustment-Held, yes-Whether transaction of providing corporate guarantee involves service rendered to AE and, therefore, provisions of transfer pricing 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 Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatistical purposes." 10.5 The Hon'ble Supreme Court in Civil Appeal No.104-109 of 2015 decided on 12/02/2008 titled as "Maxopp Investemnt Ltd. vs. CIT" has held as under:- 39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under 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 Instrume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions." 11. The Learned Authorized Representative for respondent/assessee submitted that during the relevant financial year, the appellant received interest amounting to Rs. 38,450,139 on loan arising from conversion of capital work in progress into loan. Pursuant to transfer of construction cost 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) howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed upon (BFH BSt.Bl. II 725 (1994), re. 1 § AStG). A differentiation between debt- claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled as PCIT vs. M/s Vaibhav Global Limited decided on 14/10/2022 followed earlier order in ITA No.14/2015 and upheld the order of ITAT deleting the transfer pricing adjustment made in relation to Corporate Guarantee. 14. Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT [288] ITR 1 [Refer Page 592-70 of CL-PB Vol.1], wherein it is 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 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed under section 36(1)(iii) of the Act. In Madhav Prasad Jatia's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jatia's case (supra) 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 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in terms of sub-section (1) of section 14A of the Act, any expenditure incurred in relation to exempt income is not allowable deduction. Sub-section (2) of the section empowers/ enables the assessing officer ('AO') to determine such expenditure where the AO is not satisfied with the claim of appellant or the quantum of such expenditure. The provisions of section 14A clearly postulate disallowance of expenditure only in a case where it is proved that the expenses incurred have a real relationship 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 exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egedly on the basis of interest charged by third parties in the corporate bond market. The adjustment made by TPO, however, was deleted by the CIT(A) vide order dated 24/02/2012. The Learned CIT(A) relied on the decision of Hon'ble High Court of Delhi in DCIT vs. Cotton Natural (I) Pvt. Ltd.'s case (supra), wherein, Hon'ble High Court upheld application of Libor rate of interest on foreign currency denominated loan, since, the associated enterprises had paid higher rate of interest @ 11 to 13% than the applicable 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 transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary 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. Therefore, ground No.3 of Department appeal is devoid of merit. 22. Hon'ble Supreme Court in CIT vs. Essar Tele holdings Limited, reported at 30 CTR (SC) 561, wherein, the Hon'ble Supreme Court has held: "There is no indication in Rule 8D to the effect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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