TMI Blog2017 (4) TMI 1406X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, the foreign exchange contracts have been entered into for genuinely restricting its bonafide risk exposure of the assessee in respect of its exports and imports transactions. These contracts cannot, therefore, be viewed on a standalone basis as speculative transactions. These transactions are integral part of the business transactions and any loss or gains arising from these transactions, for the detailed reasons set out above, are deductible in computation of profits and gains of business. We uphold the action of the CIT (A) so far as this relief in respect of deleting the disallowance on account of loss, at the end of the year, on foreign exchange contracts. Granting the deduction u/s 80IB on duty draw back - Held that:- LR agree that this issue is required to be remitted to the file of the Assessing Officer, as similar issue in assessee's own case for the assessment year 2007-08, which is now reported as Suzlon Energy Ltd. v. Asstt. CIT [2015 (9) TMI 1115 - ITAT AHMEDABAD] has been remitted to the file of the Assessing Officer for fresh adjudication. We, accordingly, remit the matter to the file of the Assessing Officer on this issue. The same observations, as made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year before us. To this extent, learned CIT (A) does appear to be clearly in error, and the relief of ₹ 1,05,43,697 granted on account of tax credit is quite questionable. However, as this discrepancy was discovered only at the stage of finalizing this order, and as there was no occasion for us to hear the assessee on the same, we would remit this issue for fresh adjudication by the CIT (A), rather than holding it against the assessee. While deciding the matter afresh, CIT (A) will take into account our above observations, give yet another opportunity of hearing to the assessee and will deal with the matter by way of a speaking order. Disallowance u/s 14A - Held that:- So far as the disallowance of interest is concerned, there is a categorical finding to the effect that the investments have been made out of interest free funds inasmuch as the interest free funds available to the assessee are far in excess of the investments in Indian subsidiaries, dividends from which are tax exempt. As regards the administrative expenses, the issue is now settled against the assessee. However, what is relevant for this purpose is the average investments in Indian subsidiaries. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of foreign exchange, and that the assessee had computed the loss, on the basis of foreign exchange rates as at the end of the year, on discharging these obligations. The amount so computed came to ₹ 22,15,55,371. It was also explained that the assessee was maintaining its books on mercantile basis, and, therefore, even though the loss had not crystallized inasmuch as delivery was to take place in future and there may be variation in foreign exchange rates at that point of time, the loss was deductible under section 37(1). The assessee had also furnished the details of contracts and corresponding exports and imports obligations. It was also explained that the actual loss was ₹ 119.65 crore, and not simply ₹ 22.15 as was computed on the basis of foreign exchange rates as at the end of the year. Reliance was also placed on Hon'ble Supreme Court's judgment in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 in support of deductibility of this foreign exchange loss. None of these submissions, however, impressed the Assessing Officer. Relying upon CBDT Instruction No. 3 of 2010, the Assessing Officer proceeded to disallow this claim on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Condition No. 5 Whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; The answer is affirmative as the Appellant is following Accounting Standard AS-II issued by the Institute of Chartered Accountants of India. Condition No. 6 Whether-the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation The system adopted by the Appellant is fair and reasonable and is not adopted with a view to reduce the incidence of taxation. In fact the Rule 115 of the Income Tax Rules provides that that all the assessee should; convert their foreign exchange assets into Indian Rupees on the last day of the previous year. In CIT v. R.B. Construction 202 ITR 222 (AP)(FB), it has been held that if rule is not considered, the decision becomes per incuram. In as much as the Appellant has followed the accounting treatment which is in conformity with Accounting Standard 11 issued by the ICAI. Various authorities have held that while determining allowability of an expenditure, accounting standard has a great persuasive value: Chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icipated loss, even though it may not have actually fructified, in computation of profits and gains of business. To this extent, the Assessing Officer was clearly in error in treating the loss on foreign exchange as a notional loss not deductible in computation of business income. On the facts of the present case, however, not only anticipated losses have been claimed as deduction but anticipated profits have been offered to tax. The gains have been offered to tax on the basis of assessee's following mandatory accounting standards, and on the basis of same accounting standards losses on forward contracts have been recognized too. The claim of deduction of ₹ 22.15 crores represents the difference between total foreign exchange loss of ₹ 50.11 crores as at the year end date and foreign exchange gains of ₹ 27.95 crore as at the year end date. What has been done by the Assessing Officer to take into account gains on such contracts but ignore the cases in which losses are computed in respect of the forward contracts. It is against this approach that the assessee had raised the grievance. 7. In the case of Woodward Governor India (P.) Ltd. (supra), the issue rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness of the Accounting Standard followed by the assessee(s) in this batch of civil appeals. 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under s. 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory, we are now required to examine the said Accounting Standard ( AS ). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of exchange differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words monetary items are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word paid is defined under s. 43(2). This has been discussed e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of ₹ 29,49,088 being unrealized loss due to foreign exchange fluctuation. At the very outset, it may be stated that there is no dispute that in the previous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/debit. This fact is important. It indicates the double standards adopted by the Department. 11. The dispute in this batch of civil appeals centers around the year(s) in which deduction would be admissible for the increased liability under s. 37(1). 12. We quote hereinbelow s. 28(i), s. 29, s. 37(1) and s. 145 of the 1961 Act, which read as follows : Sec. 28. Profits and gains of business or profession-The following income shall be chargeable to income-tax under the head Profits and gains of business or profession , - (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Sec. 29. Income from profits and gains of business or profession, how computed-The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of expenditure is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression expenditure incurred while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word expenditure is not defined in the 1961 Act. The word expenditure is, therefore, required to be understood in the context in which it is used. Sec. 37 enjoins that any expenditure not being expenditure of the nature described in ss. 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head Profits and gains of business . In ss. 30 to 36, the expressions expenses incurred as well as allowances and depreciation has also been used. For example, depreciation and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no. 1 is thus dismissed. 12. In ground no. 2, the Assessing Officer has raised the following grievance: 2 (a) The ld. Commissioner of Income-tax (A)-XIV, Ahmedabad has erred in law and on facts in granting the deduction under section 80IB of the Act on duty draw back ₹ 18,01,67,542/-. (b) The ld. Commissioner of Income-tax (A)-XIV, Ahmedabad has erred in law and on facts in granting the deduction under section 80IB of the Act ₹ 28,54,26,024/- on interest income on FD/ICD. (c) The ld. Commissioner of Income-tax (A)-XIV, Ahmedabad has erred in law and on facts in granting the deduction under section 80IB of the Act ₹ 2,18,97,496/- on interest income received from debtors. 13. So far as ground no. 2(a) is concerned, learned representatives agree that this issue is required to be remitted to the file of the Assessing Officer, as similar issue in assessee's own case for the assessment year 2007-08, which is now reported as Suzlon Energy Ltd. v. Asstt. CIT [2016] 156 ITD 7 (Ahd.), has been remitted to the file of the Assessing Officer for fresh adjudication. We, accordingly, remit the matter to the file of the Assessing Officer on this issue. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regardless of the finding given by CIT (A) himself that the Appellant was justified in not charging any guarantee fees since guarantee provided by the Appellant was in the capacity of stewardship/parent company and out of commercial expediency of the Appellant. 6. The ld. CIT (A) has erred in law and on the facts of the case in adopting 0.75% as guarantee fees and accordingly erred in sustaining the transfer pricing adjustment of ₹ 5,84,00,000/- out of adjustment of ₹ 47,83,93,500/- was made by the ld. AO/TPO on guarantee provided to AE. 7. The ld. CIT (A) has erred in law and on the facts of the case in confirming the action of ld. AO/TPO in making transfer pricing adjustment on account of guarantee fees, despite of the finding given by CIT (A) himself that the Appellant was justified in not charging any guarantee fees since it was joint and counter guarantee provided by the Appellant in the capacity of parent company and out of commercial expediency of the Appellant. 19. So far as these grievances of the parties are concerned, the relevant material facts are as follows. During the course of proceedings before the Transfer Pricing Officer, it was noticed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enchmarking by the assessee company at 'nil' value has direct impact on its profits. Hence, the claim made by the assessee company that transaction does not represent international transaction and does not merit benchmarking, is not found to be correct. 7.6.2 Stewardship Activity hence not service: At para 2.2, the assessee has claimed that it is performing stewardship activity by standing as a guarantor to the loans raised by the AEs. 7.6.3 Transfer Pricing Provisions are Machinery Provisions: As discussed at para 6.4, the transfer pricing provisions mandates fixing a arms' length price to the transactions between related enterprises for international transactions including rendering of service. That the assessee has chosen to benchmark such service at 'nil' and hence has not received consideration, does not render the transaction un-benchmarkable and the provisions of transfer pricing 'void' as no consideration has been received. 7.6.4 The nature and purpose of guarantee is quasi-capital: The idea of a guarantee provided for availing loan facility to be a quasi-capital appears pretty far fetched. The courts have held that a loan advanced to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of S A Builders Ltd. has been dealt with in other paras of the order relating to same issues and hence this contention is not found acceptable. 7.6.7 Wrong benchmarking of guarantee fee; The assessee has submitted that it has internal CUP in the form of guarantee fee charged by ICICI Bank at 0.70%. The CUP advanced by the assessee is not found acceptable on account of clear non-comparability of the transaction. Hence, it cannot form the basis for computation of guarantee margin in the case of the loans taken by the associate enterprises. The documents relating to the above guarantee have been perused and are discussed at para 7.6.8 and 7.6.9 below. 7.6.8 It is noticed that the assessee is wide off the issue in its attempt to compare the guarantee issued by ICICI Bank with guarantee issued by the assessee with reference to the loans taken by the associates. The document is a guarantee agreement entered into between SE Drive Technik GmbH and ICICI Bank, Singapore pursuant to the original Credit Agreement dated 9/2/2007 which has been discussed above. In this agreement, while the first four tranche relate to the loans taken by the four AEs named in the agreement, the fifth t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on sound principles of finance and does not require to be altered. 7.6.10 Incorrect allocation of risk to SEL by the TPO: The assessee has stated that attribution of 50% risk to the parent company in respect of joint and several risk liability in relation to the guarantee given by the corporations is incorrect. The assessee has also, in its letter dated 9/8/2011, at annexure-2, furnished working of the guarantee fee to be reasonably charged from the company. As discussed above, the rate of 0.70% adopted by the assessee company is wrong. It is seen that in the computation, the assessee has given a weight of only 14% to SEL while its AEs have been given much higher weightage. The logic put forth by the assessee company is that since the target company is in Germany, any default would first invite action on the German companies, then European companies, then the Mauritius based company and in the end, the Indian parent. This hypothesis is full of errors and wrong presumptions. The facility agreement has been entered in Singapore and not in Germany. Hence, the presumption that the fist risk will be faced by German companies is incorrect. In fact the entire order of risk seniority is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have examined the financial status as on the date of giving the loan and not subsequently, especially if the money introduced in the companies is out of borrowed capital. (ii) The financial statement of all the companies who are party to the agreement has been examined. The assessee has based its computation on the balance sheet of 31/3/2008 which also includes cash on accounts of loans drawn by the group companies under this agreement. The contention of the assessee that the cash balance in the bank account of the parties to the agreement should be factored in is also not found acceptable. The cash is out of the loans under the same agreement and has been withdrawn for specific use. Its presence does not reflect excess cash available but cash generated by drawing the loan tranche for purchase of shares. (iii) SEL Mauritius has a capital of E 38 million borrowings of E 160 million. In light of this fact, it is clear that the company can hardly stand guarantee for any other entity. AE Rotor Holdings has a equity of 129.44 million and debt of 471.84 million. It's position is similar to SEL Mauritius. Suzlon Windernergie GmbH, Bochum hardly has any assets or capital with wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.06 AERH Netherlands 1.54 9.75 SELM Moritious 1.21 7.66 SEL India as on 31.03.200S 0 875.5 TOTAL 118.83 1,628.19 Thus, suitable adjustment would be required in your proposal with regard to reduction of amount lying in the bank, the rate of the guarantee fee and allocation of amount of guarantee fee after suitable division between all four guarantors. This is without prejudice to our preliminary submission and should not be taken as the admission of the fact that any guarantee fee is chargeable, 7.7.4 The submission made above has been perused. As discussed above, the cash shown in the hands of SWEE Germany, AERH, Netherlands, SELM, Mauritius are on account of the huge loans taken by these companies and these are small amounts liable to be utilized during the routine course of business and hence cannot be factored while computing guarantee. Only in the case of SEDT, Germany, it is noticed that the company does not have significant borrowings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 10%. This means that the Bank is bearing risk to the extent of 0.90% while remaining is its margin for services rendered. The average overall guarantee fee has been computed at 2%. If the bank picks up guarantee related risk to the extent of 0.90%, the remaining risk of 1.1% will be shared by the parties to the agreement, Since, the risk has been determined to being shared in the ratio of 50:50 between the assessee company and rest of the companies, the assessee's share in this comes to 0.55%. All the other AEs have availed of the facilities granted by the credit agreement except the assessee company. Hence, the company should have charged a fee equal to 0.55% in this case from the other AEs in respect of total credit/guarantee facility availed. 7.8 In light of the above discussion, the provision of services relating to guarantee is benchmarked as below: 1. Guarantee fee on loans of ₹ 4660.89 crore availed by the AEs The average value of outstanding loans during the year (related to guaranteed loans) 4660.89 crore Guarantee fee @ 2% of above 93.22 crore Less 2% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained a term loan for Guest House from ABN AMRO Bank after mortgaging the Guest House. It was further submitted that the purpose of guest house was to provide accommodation for employees of the Appellant Company only. It has been submitted by the A.Rs. of the Appellant that the guarantee of the Appellant has been obtained merely because the Appellant is a parent company. Since the assets of the AEs are mortgaged against the loan, any bank would have provided loan to the companies and the guarantee was provided by the Appellant only as a parent company. Therefore, I in principle agree with the above justification given by the Appellant for not charging guarantee fees. However, since it's an international transaction and subject matter of transfer pricing regulation, the transaction of guarantee has to be properly benched marked. In order to appreciate the benchmarking aspect of the transaction of providing guarantee to AEs, the observations made by the transfer pricing officer in paras 6 to 6.12 of the order are relevant wherein he adopted 2% as guarantee fees so as to make an addition of ₹ 2,02,96,000/. While dealing with the said addition, the TPO has made academic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication given by the A.Rs. of the Appellant for not charging guarantee fees. My attention is drawn to the Annexure-2 to the letter dated 21/10/2011 furnished the TPO, which is reproduced on pg. 102 to 112 of the written submission submitted before me. Going through the resolution passed by the Board of Directors on 09/02/2007, it is seen that the Appellant wanted to acquire 100% shareholding of leading European Wind Turbine Generator manufacturing company RE Power System AG to expand its international business by enlarging its product portfolio with higher capacity. It was accordingly decided to obtain financial facilities of Euro 1575 Million for the purpose of acquiring shares of RE Power System AG and for general corporate purposes of the Appellant and other group companies. It was further submitted that internationally it is a preferred practice to carry out international buy-outs or acquisitions through local companies, and accordingly, the Appellant Company arranged to infuse capital and also arranged financial facilities through ABN AMRO Bank whereby Its subsidiaries namely Suzion Energy Limited Mauritius, AE Rotor Holdings BV, Netherland and SE Drive Teknik GmbH, German ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... norms of long term lending of 4:1.Based on the equity commitment by management, it was quite possible that any company could have availed the said loan without any third party guarantee from the Banks at the prevailing market rates. Further I find that negative pledge of the assets of all the borrowers was created and the total assets base of all the companies put together was at ₹ 240835.79 Million, whereas, the outstanding balance of borrowed loan was at ₹ 64027.90 Million, hence the borrowed loan was secured by 3.76 times by the assets base, and therefore, in the process the loan became the least risky loan. Therefore contention of the Appellant which justifies the action of the Appellant in not charging guarantee fees, as the loan was the not at all risky since the same was secured by the net worth and net asset of the all the borrowers appears reasonable. However, since it's an international transaction and subject matter of transfer pricing regulation, the transaction of guarantee has to be properly bench marked. In order to appreciate the benchmarking aspect of the transaction of providing guarantee to AEs, the observations made by the transfer pricing off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs on the basis of Weightage Average of Net Assets of the Companies, and accordingly, the weightage of the Appellant Company comes to 14.01% towards total guarantee fees, which results info amount of ₹ 5.84 Crores. I have also seen the notes mentioned below the chart justifying the different weightage given to the co-guarantors. I am of the opinion that allocation as done by the Appellant is rational and done on logical basis since the allocation has been made on the basis of the Net Assets of the Companies which will be available in case of default committed by the borrowers in repaying the borrowed amount. Therefore, I agree with guarantee fees being allocated on the basis of net assets of the companies and hold that the contribution of the Appellant in the total guarantee fees shall be restricted to 14.01% which results into guarantee fee amount of ₹ 5.84 Crores being added in the hands of the appellant. Hence, I sustain the addition on account of guarantee fees to the extent of ₹ 5,84,00,000/- and the balance amount of ₹ 41,99,93,500/- is hereby directed to be deleted. 21. None of the parties is satisfied by the stand so taken. While the assessee is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. Explanation : - For the removal of doubts, it is hereby clarified that - (inserted by the Finance Act 2012, though with retrospective effect from 1st April 2002) (i) the expression international transaction shall include- (a) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organized workforce, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.' 22. As analyzed by a coordinate bench, in the case of Bharti Airtel Ltd. (supra) and speaking through one us, the legal position with respect to the above definition is as follows: '25. An analysis of this definition of 'international transaction' under Section 92B, as it stood at the relevant point of time, and its br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service which are anyway covered by 2(b) and 3 above in provision for services and mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises . That leaves us with two clauses in the Explanation to Section 92B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92B, namely borrowing or lending money. 29. The remaining two items in the Explanation to Section 92B are set out in clauses (c) and (e) thereto, dealing with (a) capital fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business . In view of the discussions above, the scope of these transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have a bearing on the profits, income, losses or assets or such enterprise . This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. The contents of the Explanation fortifies, rather than mitigates, the significance of expression 'having a bearing on profits, income, losses or assets' appearing in Section 92B(1). 32. There can be number of situations in which an item may fall within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osses or assets. Clearly, these conditions are not satisfied on the facts of this case.' 23. Learned Departmental Representative submits that this decision is no longer good law in the light of Everest Kanto Cylinders Ltd. decision (supra) and Vodafone India Services (P.) Ltd. decision (supra) by Hon'ble Bombay High Court. 24. As for Hon'ble High Court's judgment in the case of Everest Kanto Cylinders Ltd. (supra), it is necessary to appreciate the fact the assessee was charging a .5% commission on issuance of corporate guarantees, on behalf of the AEs, and it could not, therefore, be said that the transaction will have no impact on profits, incomes, losses or assets of such enterprise . This aspect of the matter is clear from an observations in the related Tribunal order, which is reported as Everest Kanto Cylinders Ltd. (supra), to the effect that However, in this case, the assessee has itself charged 0.5% guarantee commission from its AE and, therefore, it is not a case of not charging any kind of commission from its AE . The Tribunal did note, in the immediately following sentence in paragraph 23 itself, that the only point to be seen in this case is wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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. 25. We are unable to see, in the judgment of Hon'ble Bombay High Court, any support to the proposition that issuance of corporate guarantees is inherently within the ambit of definition of 'international transaction' under section 92B irrespective of whether or not such transactions have any bearing on profits, incomes, losses, or assets of such enterprises . Revenue, therefore, does not derive any help from the said decision. 26. Coming to Hon'ble Bombay High Court in the case of Vodafone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were absent. Further, the nature of the disposal is also expanded. It now includes the creation of any interest in any asset. Moreover, the disposal of or creation of any interest in the asset may be direct or indirect, absolute or conditional, voluntary or involuntary. It may be by way of an agreement or otherwise. Further, the concluding words constitute a non-obstante provision. It provides that the transfer contemplated therein would be notwithstanding that it has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. It would be evident, therefore, that a lot more must now be seen and considered than before while arriving at a conclusion whether the terms and conditions of the Framework agreement constituted a transfer or assignment of the call options by one party to another. 217. At the cost of repetition, we are not concerned here with whether the amendment is valid or not. One of the issues, however, that does arise is whether the amendment, albeit clarificatory, would make a difference in the construction of the provisions of the Framework agreements themselves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of the amendment would have to be considered. It cannot be brushed aside but in doing so what it overlooks is the subsequent observations highlighted above which recognize the fact that merely because a subsequent Explanation is introduced by the legislature, it is not an open and shut case against the assessee or the revenue, and that all these observations are in the context that there is no justification for withdrawing the proceedings from the channel provided by the Income-tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extraordinary jurisdiction under Article 226 . When Their Lordships have made it clear that they would not like to bypass the channels under the Income-tax Act and proceed to decide these issues in writ jurisdiction under article 226, there cannot obviously be any question of Their Lordships deciding the matter one way or the other. Any observations made by Their Lordships, while declining to decide the matter in writ jurisdiction, cannot be treated as decisive of the issue on merits. While it is true that Hon'ble Bombay High Court has observed that the effect of amendment will have to be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , however, has been the approach of the revenue authorities in placing reliance on Vodafone India Services (P.) Ltd. (supra) decision. We reject this approach. 28. For the reasons set out above, learned Departmental Representative's reliance on Hon'ble Bombay High Court's judgments in the cases of Everest Kanto (supra) and Vodafone India Services (supra) is wholly misplaced and devoid of any merits. As for coordinate bench decision in the case of Hindalco Industries (supra), all it does is to follow the Everest Kanto decision by Hon'ble Bombay High Court, but then, as we have seen earlier, that was a case in which Their Lordships were in seisin of a situation in which guarantee commission was actually charged by the assessee. That is not the case before us. The coordinate bench decisions dealing with the situations in which the guarantee commission was actually charged, and as such there was indeed a bearing on the profits of the assessee, clearly do not apply on this case. We, therefore, reject the reliance on these decisions as devoid of legally sustainable merits. 29. Let us now deal with the reliance placed by the revenue authorities on GE Capital's ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to as the parent ) in a taxation year of the parent for the provision of a guarantee to a person or partnership (in this sub-section referred to as the lender ) for the repayment, in whole or in part, of a particular amount owing to the lender by a non-resident person, if (a) the non-resident person is a controlled foreign affiliate of the parent for the purposes of section 17 throughout the period in the year during which the particular amount is owing; and (b) it is established that the particular amount would be an amount owing described in paragraph 17(8)(a) or (b) if it were owed to the parent. (http://www.fin.gc.ca/drleg-apl/ita-lrir-dec12-l-eng.pdf) 31. It is also important to bear in mind the fact that, under the Canadian law, the definition of 'international transaction', unlike an exhaustive definition under section 92B of the Indian Income-tax Act, 1961, is a very brief but inclusive and broad definition to the effect that 'transaction' includes a series of transactions, an arrangement or an event [See Section 247(1) of the Canadian Income-tax Act, 1985; http://laws-lois.justice.gc.ca/eng/acts/I- 3.3/page-419.html#h-156] coupled with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of 'shareholder activities' in the context of corporate guarantees which provides conceptual justification for exclusion of corporate guarantees, under certain conditions, from the scope of transfer pricing adjustments. Taking note of these proposed amendments, 'Transfer Pricing and Intra Group Financing - by Bakker Levvy, IBFD publication (ISBN-978-90-8722-153-9)' observes that Proposed sub-section 247(7.1) of the ITA provides that the transfer pricing rules will not apply to guarantees provided by Canadian parent corporations in respect of certain financial commitments of their Canadian controlled foreign affiliates to support the active business operations of those affiliates . As to what could be conceptual support for such an exclusion, we find interesting references in a discussion paper issued by the Australian Tax Officer in June 2008 and titled as Intra-group finance guarantees and loans (http://www.transferpricing.com/pdf/Australia_Thin%20Capitalisation.pdf). The fact that this discussion paper did not travel beyond the stage of the discussion paper is not really relevant for the present purposes because all that we are concerned with right now is u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antees as a shareholder activity is not alien to the transfer pricing literature in general. On the contrary, it is recognized in international transfer pricing literature as also in the official documentation and legislation of several transfer pricing jurisdictions. The 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' itself recognizes the distinction between a shareholder activity and a provision for services, when, contrasting the shareholder activity with broader term stewardship activity and thus highlighting narrow scope of shareholder activity, it states that Stewardship activities covered a range of activities by a shareholder that may include provision for services to other group members, for example services that would be provided by a coordinating centre . It proceeded to add, in the immediately following sentence at page 207 of 2010 Guidelines, that These latter type of non-shareholder activities could include detailed planning services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day-to-day management . The shareholder activities are thus seen as conceptu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge to these services should be at an arm's length price. Dealing with the first question, which is relevant for the present purposes, these Guidelines (2010 version) state as follows: '7.6 Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm's length principle. 7.7 The analysis described above quite clearly depends on the actual facts and circumstances, and it is not possible in the abstract to set forth categorically the activities that do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; (b) Costs relating to reporting requirements of the parent company including the consolidation of reports; (c) Costs of raising funds for the acquisition of its participations. In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member. The 1984 Report also mentioned costs of managerial and control (monitoring) activities related to the management and protection of the investment as such in participations . Whether these activities fall within the definition of shareholder activities as defined in these Guidelines would be determined according to whether under comparable facts and circumstances the activity is one that an independent enterprise would have been willing to pay for or to perform for itself.' (Emphasis supplied) 36. We have noticed that the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. 38 See. e.g., Centel Communications Co. v. Commissioner, 92 T.C. 612, 632 (1989), aff d, 920 F2d 1335 (7th Cir. 1990); Bank of Am. v. United States, 680 F.2d 142, 150 (Cl. Ct. 1982). The Service's current position on the characterization of guarantee fees as payment for services under section 482 is inconsistent with its treatment of guarantee fees under other provisions. See P.L.R. 9410008 (Dec. 13, 1993). 39 But of Federal Nat'l Mortgage Ass'n v. Commissioner, 100 T.C. 541, 579 (1993) (Fannie Mae provided services by buying mortgages). 37. We are in agreement with these views. There can thus be activities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been willing to pay for the activity concerned, or would have performed the activity in-house for itself. So far as the benefit test is concerned, as we have noted earlier, it is alien to the definition of international transaction' under the Indian transfer pricing legislation. So far as arm's length test is concerned, it presupposes that such a transaction is possible in arm's length situation. However, in a situation in which the subsidiary does not have adequate financial standing of its own and is inadequately capitalized, none will guarantee financial obligations of such a subsidiary. 39. The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporates issue guarantees for their subsidiaries, is ill-conceived because while banks seek to be compensated, even for the secured guarantees, for the financial risk of liquidating the underlying securities and meeting the financial commitments under the guarantee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. Let us now compare this kind of a guarantee with a corporate guarantee. The guarantees are issued without any security or underlying assets. When these guarantees are invoked, there is no occasion for the guarantor to seek recourse to any assets of the guaranteed entity for recovering payment of defaulted guarantees. The guarantees are not based on the credit assessment of the entity, in respect of which the guarantees are issued, but are based on the business needs of the entity in question. Even in a situation in which the group entity is sure that the beneficiary of guarantee has no financial means to reimburse it for the defaulted guarantee amounts, when invoked, the group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met. We see no meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quasi-capital or shareholder activity-as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. 42. As observed by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi), a re-characterization of a transaction is indeed permissible, inter alia, in a situation (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner . The case of a corporate guarantee clearly falls in the second category as no independent enterprise would issue a guarantee without an underlying security as has been done by the assessee. We may, in this regard, refer to the observations made by Hon'ble High Court, speaking through Hon'ble Justice Easwar (as he then was), as follows: '16. The Organization for Economic Co-operation and Development ('OECD', for short) has laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.' 43. It is thus clear that even if we accept the contention of the learned Departmental Representative that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner . No bank would be willing to issue a clean guarantee, i.e. without underlying asset, to assessee's subsidiaries when the banks are not willing to extend those subsidiaries loans on the same terms as without a guarantee. Such a guarantee transaction can only be, and is, motivated by the shareholder, or ownership considerations. No doubt, under the OECD Guidance on the issue, an explicit support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. Of course, the global best practices seem to be that guarantees are sometimes included in 'services' but that is because of the extended definition of 'international transaction' in most of the tax jurisdictions. Such a wide definition of services, which can be subject to arm's length price adjustment, apart, Transfer Pricing and Intra-Group Financing - by Bakker Levvy (ibid) notes that the IRS has issued a non-binding Field Service Advice (FSA 1995 WL 1918236, 1 May 1995) stating that, in certain circumstances (emphasis supplied), a guarantee may be treated as a service . If the natural connotations of a 'service' were to cover issuance of guarantee in general, there could not have been an occasion to give such hedged advice. This will be stretching the things too far to suggest that just because when guarantees are included in the international transactions, these guarantees are included i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . . . . . . (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. There is no dispute that this Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92B. Accordingly, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise at the time of transaction or on a future date . What is implicit in this statutory provision is that while impact on profit, income, losses or assets is sine qua non, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for contingent impact on profit, income, losses or assets but on future impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that for the removal of doubts , as we have noted earlier in this decision, clarified that international transactions include, inter alia, capital financing by way of guarantee. This legislative clarification did indeed go well beyond what a coordinate bench of this Tribunal held to be the legal position and we are bound by the esteemed views of the coordinate bench. We are, therefore, of the opinion that the Explanation to Section 92B did indeed enlarge the scope of definition of 'international transaction' under section 92B, and it did so with retrospective effect. If, for argument sake, it is assumed that the insertion of Explanation to Section 92B did not enlarge the scope of definition, there cannot obviously be any occasion to deviate from the decision that the coordinate bench took in Four Soft Ltd. case (supra), but if the scope of the provision was indeed enlarged, as is our opinion, the question that really needs to be addressed whether, given the peculiar nature and purpose of transfer pricing provision, is it at all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the case of Krishnaswamy SPD v. Union of India [2006] 281 ITR 305 (SC), wherein Their Lordships had, inter alia, observed that the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. It was for this reason that a coordinate bench of this Tribunal, in the case of Channel Guide India Ltd. v. Asstt. CIT [2012] 139 ITB 49 (Mum.), held that even though the assessee had not deducted the applicable tax at source under section 195, the disallowance could not be made under section 40(a)(i) since the taxability was under the provisions which were amended, post the payment having been made by the assessee, with retrospective effect. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest Kento Cylinders Ltd. (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific' Corp Ltd. case (supra), as indeed in any other case so far, it was not the case of the assessee that corporate guarantees are quasi-capital, or shareholder activity, in nature, and, for that reason, excludible from chargeable services, even if these are held to be services in nature. That plea has been specifically accepted in the present case. Therefore, the question whether issuance of corporate guarantee per se in general constitutes a 'international transaction' under section 92B would have been somewhat academic question on the facts of this case. In any event, in Prolific' Corp Ltd. case (supra), an earlier considered decision on the same issue by coordinate bench of equal strength was simply disregarded and that fact takes this decision out of the ambit of binding judicial precedents. We have also noted that in view of the decision a coordinate bench, in the case of JKT Fabrics v. Dy. CIT [2005] 4 SOT 84 (Mum.) and following the Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench. Learned Departmental Representative's well researched arguments do not persuade us to deviate from the stand so taken by us. Let us deal with these arguments in little detail. 8. Learned Departmental Representative, in his written note, accepts that the legislature brought in amendment (in Section 92B) by the Finance Act, 2012, after the decision of Four Soft Ltd dated 14/09/2011 . He points out that the decision of the Tribunal, in the case of Bharti Airtel (supra), is per incurium because there were two decisions of this Tribunal, in the case of Everest Kanto Cylinders Ltd. v. Dy. CIT [2012] 34 taxmann.com 19 (Mum.) and Mahindra Mahindra Ltd. v. DCIT [2012-TII-70-ITAT-Mum], which were not considered by the Bharti Airtel decision. Our attention is also invited to the rectification petition filed by the Assessing Officer, which is said to be pending for disposal before the Tribunal. We donot find merits in this plea. Mahindra Mahindra decision (supra) was passed on 6th June 2012, though at a point of time when Finance Act 2012 had just come into force i.e. post 28th May 2012, without even being aware whether or not the Finance Act 2012 was passed as it gave certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this position but that does not mean that the so far as issues of general application are concerned, the stand of the Tribunal cannot hold good. Learned Departmental Representative then takes us through the Explanation to Section 92B to explain its true scope and through Bharti Airtel decision as to how fallacious is its logic. Its emphasized that the impact of issuance of bank guarantees, on the profits, income, losses or assets of such enterprises, is 'real' and not 'contingent' as held in Bharti's case. It is also emphasized, apparently to highlight the fact that it is not only the impact on entity issuing the guarantee but also beneficiary of the guarantee that matters in this context, that the word used in section 92B is 'enterprises' and not 'enterprise'. It is thus contended that the impact on the profits, incomes, losses or assets of the entity issuing guarantee is important, but the impact on the profits, income, losses or assets of the entity, which is beneficiary of the guarantee, is also important. It is pointed out that Bharti Airtel decision has examined this aspect only from the point of view of the entity issuing the guarantee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pretation so given was certainly not the end of the road. The matter could have been carried in appeal before higher judicial forums. If the decision of a judicial body does not satisfy the tax administration, nothing prevents them from going to the higher judicial forum or from so amending the law, with prospective effect, that there is no ambiguity about the intent of legislature and it is conveyed in unambiguous words. 10. Nullifying a judicial interpretation though legislative amendment, much as many of us may abhor it, is not too uncommon an occurrence. Of course, when legislature has to take an extreme measure to nullifying the impact of a judicial ruling in taxation, it is the time for, at least on a theoretical note, introspection for the draftsman as to what went so wrong that fundamental intent of law of law could not be conveyed by the words of the statute, or, perhaps for the judicial forums, as to what went so wrong that the interpretation was so off the mark vis-a-vis fundamental principles of taxation or the sound policy considerations. However, amendment so made are generally prospective, and there is a sound conceptual foundation, as has been highlighted in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which such amendment is couched. . . . . . 36. A clarificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing with the same subject may throw light upon it. Yet it is not every time that the legislature characterizes an amendment as retrospective that the Court will give such effect to it. This is not in derogation of the express words of the law in question, (which as a matter of course must be the first to be given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is in its true nature one that expands the scope of the section it seeks to clarify, and resultantly introduces new principles, upon which liabilities might arise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrospective effect . . . . . . . . 37. An important question, which arises in this context, is whether a clarificatory amendment remains true to its nature when it purports to annul, or has the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal tax laws which simply impose tax on an income. 14. Legislature may describe an amendment as 'clarificatory' in nature, but a call will have to be taken by the judiciary whether it is indeed clarificatory or not. This determination, i.e. whether the amendment in indeed clarificatory or is the amendment to overcome a judicial precedent, assumes great significance because when it is found that the purpose of such interpretive statute, or clarificatory amendment, is correct a judicial interpretation of prior law, which the legislature considers inaccurate, the effect is prospective and, as in this case, it deals with transfer pricing legislation which essentially seeks a degree of compliant behavior from the assessee vis-a-vis certain norms-the norms the assessee should know at the time of entering into the transactions rather than at the time of scrutiny of his affairs at a much later stage. 15. It is very important to bear in mind the fact that right now we are dealing with amendment of a transfer pricing related provision which is in the nature of a SAAR (specific anti abuse rule), and that every anti abuse legislation, whether SAAR (specific anti abuse rule) or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istration of law must adopt that general exception in the consideration of particular cases. [See : U.P.S.R.T.C. v. Imtiaz Hussain 2006 (1) SCC 380, Shaikh Salim Haji Abdul Khayumsab v. Kumar Ors. 2006 (1) SCC 46, Mohammod Gazi v. State of MP. Ors. 2000 (4) SCC 342 and Gursharan Singh v. New Delhi Municipal Committee 1996 (2) SCC 459]. 18. It is for this reason that the Explanation to Section 92 B, though stated to be clarificatory and stated to be effective from 1st April 2002, has to be necessarily treated as effective from at best the assessment year 2013-14. In addition to this reason, in the light of Hon'ble Delhi High Court's guidance in the case of New Skies Satellite BV (supra) also, the amendment in the definition of international transaction under Section 92B, to the extent it pertains to the issuance of corporate guarantee being outside the scope of 'international transaction', cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of Hon'ble Delhi High Court, would not alter the situation, and it can only be treated as prospective in effect i.e. with effect from 1st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature cannot be treated as an intended consequence of Section 40(a)(ia). If it is not an intended consequence i.e. if it is an unintended consequence, even going by Bharti Shipyard decision (supra), removing unintended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively . Revenue, thus, does not derive any advantage from special bench decision in the case Bharti Shipyard (supra). 9. On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No 2) Act, 2004. 21. While approving this approach, and upholding the decision of the Tribunal do read these provisions as effective from 1st April 2005, Hon'ble Delhi High Court, in case of CIT v. Ansal Landmark Townships Pvt Ltd. [(2015) 377 ITR 635 (Del)], has observed as follows: 14. The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a)(ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance. 15. In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Bench, ITAT in (Rajiv Kumar Agarwal v. ACIT). 22. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any adjudication by us. 25. Ground no. 3 in the Assessing Officer's appeal is thus dismissed as infructuous, and ground nos. 4, 5, 6 and 7 in the assessee's appeal are thus allowed in the terms indicated above. 26. In ground no. 4, the Assessing Officer has raised the following grievance: The ld. Commissioner of Income-tax (A)-XIV, Ahmedabad has erred in law and on facts to direct the Assessing Officer to grant tax credit of ₹ 1,62,26,344/- 1,05,43,697/- (in respect of royalty income) not claimed in the original return of income nor claimed through revised return of income in contradiction to Apex Court decision in the case of Goetze (India) Ltd. v. CIT [2006] 284 ITR 323. 27. There are two aspects of this grievance of the Assessing Officer-whether, in principle, the assessee can only make a fresh claim only by revising, under section 139(5), the income tax return and, as such, the claim should be rejected, at the threshold, for this reason alone; and, second-whether, on the facts and in the circumstances of this case, the directions for grant of tax credit were incorrect. 28. As for the first aspect, the legal position is fairly well settled now, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on an additional ground even if not raised before the Income Tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an Appellate Authority while hearing appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations if any prescribed by the statutory provisions. In the absence of any statutory provision the Appellate Authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appears to be no good reason and none was placed before us to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income Tax Officer. 32. In case of National Thermal Power Co. Ltd. v. Commissioner of Income-tax reported in (1998) 229 ITR 383 (S.C.) when the question of law was raised for the first time before the Tribunal though facts were already on record, the Supreme Court observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Delhi High Court once again in recent judgment in the case of Commissioner of Income-tax v. Sam Global Securities Ltd. reported in [2014] 360 ITR 682 (Delhi) observed that the Courts have taken a pragmatic view and not a technical one as to what is required to be determined in taxable income. In that sense assessment proceedings are not adversarial in nature. With these observations Court confirmed the view of the Tribunal reversing the decision of the assessing officer rejecting the claim of the assessee on the ground that no revised return was filed. 37. In case of Commissioner of Income-tax, Gujarat-I v. Cellulose Products of India Ltd. reported in [1985] 151 ITR 499, full Bench of this Court held that merely because a ground has not been raised though it could have been raised in support of the relief sought in the appeal, it cannot be said that such ground cannot be raised before the Tribunal. Such ground can be raised provided it falls within the contours of the subject matter of the appeal. 38. It thus becomes clear that the decision of the Supreme Court in the case of Goetze (India) Ltd. v. Commissioner of Income-tax (supra) is confined to the powers of the assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere warranted on facts and in the circumstances of this case, we will have to deal with the matter in some detail and set out the relevant material facts. The relevant material facts are like this. The assessee had rendered certain technical services to its subsidiary in China, namely Suzlon Energy (Tianjin) Limited, and received amounts aggregating to ₹ 16,22,63,445 and ₹ 11,05,97,227-in the financial year 2007-08 and 2008-09 respectively i.e. period relevant to the assessment year 2008-09 and 2009-10 respectively, in consideration of the same.. This income was taxed in China, on gross basis @ 10%, under article 12 of the India China Double Taxation Avoidance Agreement [(1995) 214 ITR (St) 160; Indo China tax treaty, in short]. During the course of the scrutiny assessment proceedings and vide letter dated 17th November 2011, the assessee bring the related facts to the notice of the Assessing Officer, and prayed that, as admissible under article 23(2) of Indo China tax treaty, the assessee may be granted tax credit in respect of these tax withholdings in China. The assessee thus urged the Assessing Officer to grant the assessee relief from double taxation as granted (si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other tax incentives of the Contracting States for the promotion of economic development. 33. As a plain look at the above provision would show, the tax credit can be relevant only in respect of the assessment year in which related income is included in the taxable income. So far as the receipts of fees for technical services during the financial year 2006-07, which can only be relevant for the assessment year 2007-08, are concerned, the related tax withholding in China cannot be subject matter of tax credit in the assessment year 2008-09 i.e. the assessment year before us. To this extent, learned CIT (A) does appear to be clearly in error, and the relief of ₹ 1,05,43,697 granted on account of tax credit is quite questionable. However, as this discrepancy was discovered only at the stage of finalizing this order, and as there was no occasion for us to hear the assessee on the same, we would remit this issue for fresh adjudication by the CIT (A), rather than holding it against the assessee. While deciding the matter afresh, learned CIT (A) will take into account our above observations, give yet another opportunity of hearing to the assessee and will deal with the matter by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 35. Ground no. 4 is thus rejected on the legal principle but the quantification of tax credit claim is remitted to the file of learned CIT (A) for fresh adjudication in accordance with the law, by way of a speaking order on merits, and after giving an opportunity of hearing to the assessee. 36. Ground nos. 5 and 6 are general in nature and do not call for any specific adjudication. Dismissed in limine as such. 37. The appeal of the Assessing Officer is thus partly allowed for statistical purposes in the terms indicated above. 38. We now take up the appeal filed by the assessee. 39. In ground nos. 1, 2 and 3-which we will take up together, the assessee has raised the following grievances: 1. The ld. CIT (A) has erred in law and on the facts of the case in confirming the action of ld. AO in invoking provisions of S.14A of the Act read with Rule 8D and accordingly erred in making disallowance of ₹ 7,28,27,148/- u/s. 14A of the Act. 2. The ld. CIT (A) has erred in law and on the facts of the case in confirming the action of ld. AO in applying formula of Rule 8D without appreciating that the ld. AO has failed to establish nexus with the expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions, the Assessing Officer was urged to drop the matter regarding disallowance under section 14A. However, following his stand in the immediately preceding assessment year i.e. 2007-08, the Assessing Officer computed, under section 14A read with rule 8D, the disallowance of ₹ 7,28,27,148. It was on the basis of 0.5% of average investments taken at ₹ 437,90,58,785 and interest payment (Rs. 124,10,29,664) divided in the ratio of average of investments (Rs. 437,90.58,785) to average of total assets (Rs. 9483,17,09,958), which came to ₹ 5,09,31,854. Aggrieved by the disallowance so made, assessee carried the matter in appeal before the CIT (A) but without any success. Following his order for the immediately preceding year, i.e. assessment year 2007-08, as also for the other reasons set out in his order, learned CIT (A) upheld the action of the Assessing Officer and declined to interfere in the matter. The assessee is not satisfied, and is in further appeal before us. 41. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 42. As learned counsel rightly points ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest bearing borrowed funds and investment in subsidiaries. Further, stand of assessee has been that assessee was having substantial interest free funds for making such investments. Assessee's total investments in Indian subsidiaries were only ₹ 176.25 crores whereas its share capital and reserves and surplus aggregated to ₹ 3,713.31 crores which is sufficient for investment in Indian subsidiaries. Further, according to learned Authorized Representative, assessee's own funds have increased by ₹ 891.06 crores (i.e. ₹ 3713.31 crores - ₹ 2,822.25 crores) during year under consideration which is more than in pursuant to the investments in Indian subsidiaries. Learned Authorized Representative further contended that assessee's cash profits were to the tune of ₹ 1,134.63 crores (N.P. ₹ 1061.14 crores + Depreciation ₹ 73.49 crores) during year under consideration which is more than in respect of investments in Indian subsidiaries. Hence, the presumption has to be that investments have come out of capital and reserves and not from borrowed funds. Where investments are made out of non-interest bearing funds, disallowance u/s. 14A o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or A.Y. 2005-06 2006-07 reported in [2013] 32 taxmann.com 349 (Ahmedabad - Trib.) has dealt with similar issue and decided as under: 14. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. Regarding the grounds raised by the revenue in respect of disallowance of interest expenditure made by the Assessing Officer under section 14A and deletion made by learned Commissioner of Income-tax (Appeals), we find that no interference is called for in the order of the learned Commissioner of Income-tax (Appeals). We hold so because we find that with regard to the investment of ₹ 5907.18 lakhs in foreign subsidiaries, no disallowance can be made under section 14A because dividend income from foreign subsidiaries is taxable in India. Regarding balance investment of ₹ 38 crores approximately in Indian subsidiaries, we find that interest free own funds of the assessee is many times more than this investment because interest free funds available with the assessee as on March 31, 2005 as per the balance-sheet as on that date is of ₹ 929.57 crores. There is no finding given by the Assessing Officer re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance is called for out of administrative expenditure because dividend income is exempt and hence, proportionate disallowance out of administrative expenses is justified. Accordingly, we do not find any reason to interfere in the order of CIT (A) to that extent. Same is upheld.' 43. So far as the disallowance of interest is concerned, there is a categorical finding to the effect that the investments have been made out of interest free funds inasmuch as the interest free funds available to the assessee are far in excess of the investments in Indian subsidiaries, dividends from which are tax exempt. As regards the administrative expenses, the issue is now settled against the assessee. However, what is relevant for this purpose is the average investments in Indian subsidiaries. That is precisely what has been done in this case. Learned representatives do not dispute that the facts and circumstances of the present year are materially the same as in the earlier year decided by the Tribunal, as above. We, therefore, confirm the disallowance under section 14A to the extent of administrative expenses (i.e. ₹ 2,18,95,294) and delete the disallowance under section 14A to the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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