TMI Blog2019 (5) TMI 1720X X X X Extracts X X X X X X X X Extracts X X X X ..... ] wherein the definition of international transaction in view of the amendments, vide Finance Act, 2012, had been discussed and it was held that the provision of corporate guarantee is not an international transaction. Thus provision of corporate guarantee is not an international transaction. - Decided in favour of assessee Addition u/s 14A read with Rule 8D - HELD THAT:- As relying on M/S. REI. AGRO LTD. [ 2014 (4) TMI 713 - CALCUTTA HIGH COURT] we direct the assessing officer to compute the disallowance under Rule 8D (2) (iii) of the Income Tax Rules, by taking into account dividend bearing securities. Ground raised by the assessee, are treated to be allowed for statistical purposes. MAT - Increasing the book profit u/s 115JB as computed by way of disallowance u/s 14A read with Rule 8D - HELD THAT:- Since there is no mention of Section 14A in the said Explanation 1 to Section 115JB, the same cannot be added to re-determine the quantum of Book Profit . The provisions of section 115JB relating to computation of book profit are amply clear and unambiguous. These provisions do not leave any room for adjustment by the assessing officer other than those mentioned in Explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is treated to be allowed. - ITA No.2235/Kol/2017 - - - Dated:- 3-5-2019 - SHRI S. S. GODARA, JM AND DR. A.L. SAINI, AM For the Assessee : Priyanka Salarpuria, FCA For the Respondent : Dr. P. K. Srihari, CIT DR ORDER Per Dr. A. L. Saini: The captioned appeal filed by the assessee, pertaining to assessment year 2013-14, is directed against the fair assessment order passed by the Assessing Officer u/s 144C(13) read with Section 143(3) of the Income Tax Act, 1961 (in short the Act ), dated 28.07.2017, which incorporates the directions of the Dispute Resolution Panel under section 144C(5) of the Income Tax Act, order dated 08.06.2017. 2. The grievance raised by the assessee are as follows: 1. For that on the facts and in the circumstances of the case and in law, the TPO as well as the Hon'ble ORP failed to appreciate that the issuance of corporate guarantees did not have any bearing on profits, incomes, losses or assets of the appellant and therefore it was not covered within the purview of 'international transactions' under Section 92B of the Income-tax Act, 1961 and in that view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore deserves to be deleted and/or reduced. 8. For that on the facts and in the circumstances of the case and in law, the provisions of Section 115JB do not contain enabling provision for making adjustment in respect of expenditure disallowed as per Rule 8D and in that view of the matter the Hon'ble DRP as well as the AO erred on facts in law in increasing the book profit by the sum of ₹ 59,27,584/- computed by way of disallowance under Section 14A read with Rule 8D. 9. For that on the facts and in the circumstances of the case and in law, the Hon'ble DRP as well the AO failed to appreciate that the subsidy received from the Government of Bihar Orissa was in the capital field and not revenue in nature and therefore not eligible to income-tax. 10. For that on the facts and in the circumstances of the case and in law, the appellant had received incentive aggregating to ₹ 17,48,00,000/- from the Government of Bihar and Orissa for setting-up up new industries in the respective states in the form of reimbursement of VAT and in that view of Britannia Industries Ltd. the matter the subsidy so granted by the State Governments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, after hearing both the parties, we note that thereareplethora of judicial pronouncements wherein it has been held that corporate guarantee does not constitute an international transaction and accordingly there should not be a charge. We note that in assessee s case under consideration, the corporate guarantees were given by the appellant to AE for pure business considerations and it was in the nature of an owner-shareholder activity and hence no transfer pricing adjustment is warranted in this regard. We note that the assessee has extended this corporate guarantee as a shareholder activity hence the adjustment should not be made. The primary object of the assessee is to help the subsidiary company and protect its interest and there is no object of the assessee company to earn the interest income by furnishing the corporate guarantee to the associated enterprises. We note that in the judgment of the Co-ordinate Bench of ITAT Ahmadabad, in the case of Micro Ink Limited vs. ACIT [TS-568-ITAT-2015] (Ahd) wherein the Co-ordinate Bench has held that corporate guarantee does not constitute international transaction as per section 92B of the Act as amended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .... 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 corporate issue guarantees for their subsidiaries, is ill conceived. ... These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .... In the case of GE Capital Canada -vs- The Queen, the tax court of Canada has indeed dealt with ALP determination of the guarantee fees, but then it was done in the light of their domestic law provisions which are quite at variance with the Indian transfer pricing legislation ..... Similar views have been held by various coordinate benches, including jurisdictional as under: i) Tega Industries Ltd. vs. DCIT [I.T.A. No. 912/2012 dated. 03.08.2016, [Kol Trib.] ii) Marico Ltd. vs. ACIT [TS-411-ITAT-2016 (Mum)-TP] iii) TVS Logistics Services Ltd. [TS-324-ITAT-2016 (CHNY)-TP] iv) Manugraph India Ltd. [TS 324-ITAT 2016 (Mum)-TP] v) Siro Clinpharm Pvt. Ltd. vs. DCIT [ITS-185- ITAT 2016 (Mum)-TP] vi) Apollo Health Street Ltd. vs. DCIT [TS-184- ITAT 2014 (HYD)-TP] Therefore, based on the above mentioned precedents, we note that the provision of corporate guarantee is not an international transaction. Hence, respectfully following the judgment of the co-ordinate benches cited above, we delete the upward adjustment of ₹ 2,18,77,327/-.12. 7. Ground nos. 5 to 7 relates to addition made by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , are treated to be allowed for statistical purposes. 10. Grounds No. 8 raised by the assessee relates to increasing the book profit u/s 115JB of the Act to the tune of ₹ 58,27,554/- computed by way of disallowance u/s 14A read with Rule 8D of the IT Rules. 11. We have given a careful consideration to the rival submissions and perused the material available on record, we note that the provisions relating to adjustments by way of increase and decrease to the net profit shown by the assessee in Profit Loss Account, are very explicit in section 115JB of the Act. The items which are to be added to the net profit have been listed out in Explanation 1 to that section. The learned AO should adhere to that list and cannot travel beyond these items. Since there is no mention of Section 14A in the said Explanation 1 to Section 115JB, the same cannot be added to re-determine the quantum of Book Profit . The provisions of section 115JB relating to computation of book profit are amply clear and unambiguous. These provisions do not leave any room for adjustment by the assessing officer other than those mentioned in Explanation 1 to section 115JB to the net profit ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to tax, and therefore reduced the same while computing the profits of the business. It further mentioned that subsidy granted by the Governments of Bihar Orissa under their respective State Industrial Schemes were for the purpose of setting up new industrial undertaking generating employment in local areas. It is the assessee's contention that subsidy was granted to motivate the company, to set-up new undertaking in the industrially less developed States and hence the subsidy was in the capital field. The incentive in the form of reimbursement of VAT was given with the clear intention of promoting industrialization in the States of Bihar and Orissa. The assessee submits that the purpose for granting subsidy was not to reduce operational costs of the company or facilitate working of the existing undertaking but to set-up new industries in the respective States; accordingly it could not be said to revenue in nature. We note that the Hon`ble jurisdictional High Court of Calcutta in case of the Rasoi Ltd (2011) (335 ITR 438) (Cal HC) held that subsidy received on account of Sales tax deferment /remission and Industrial promotional Assistance are capital receipts n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be the distinguishing feature of that case and the dictum therein not relatable to the present facts. In Ponni Sugars, the incentive was in reduced duty and in larger allocation for sale of sugar. Clearly, these would amount to revenue receipts. However, the additional amount generated by a unit by virtue of the reduced duty and larger allotment for sale of sugar was required by the applicable scheme to be exclusively utilised for the purpose of repaying the term loans obtained in setting up the unit or expanding the same. The nature of treatment of the additional revenue in the hands of the assessee, thus, made it a capital receipt since the additional money went to repay the term loans obtained for setting up the unit or expanding it. Indeed, the relevant passage from paragraph 14 of the judgment in Ponni Sugars would tempt the dictum rendered therein to be confined to the manner of use of the subsidy as the law as recognised by the Supreme Court is couched in the following words: That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he unit being a new unit or it having expanded itself. In such a scenario, the incentive would have to be invariably regarded as a revenue receipt. However, when the scheme itself makes the incentive applicable only to new and expanding units, the fact that the incentive is in the form of a rebate by way of sales tax or concessional charges on account of use of power or a lower rate of duty being made applicable would be of little or no relevance. When an entrepreneur sets up a business unit, particularly a manufacturing unit, or embarks on an exercise for expanding an existing unit, the entrepreneur factors in the cost of setting up the unit or the cost of its expansion and the costs to be incurred in running the unit or the expanded unit. It is the totality of the capital expenditure and the expenses to run it that are taken into account by the entrepreneur. The investment by an entrepreneur by way of capital expenditure is recovered over a period of time and has a gestation gap. If the running expenses are made cheaper by way of any subsidy or incentive and made applicable only to new units or expanded units, the realisation of the capital investment is quicker and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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