TMI Blog2019 (2) TMI 2018X X X X Extracts X X X X X X X X Extracts X X X X ..... n allowed in principle and the matter has been remitted to the file of the Assessing Officer only for a factual verification, the claim for business loss is infructuous at this stage and does not need to be adjudicated upon. Similarly, we are unable to see any merits in the grievance of the Assessing Officer for CIT(A) s directing a factual verification which is so fundamental to the claim being denied as the claim for deduction was declined primarily on the ground that the assessee had not offered related income to tax. Grievances of both the parties, therefore, lack legally sustainable merits. We confirm the action of the CIT(A) on this issue as well and decline to interfere in the matter. Disallowance of 'marking to market' foreign currency forward contracts outstanding as at the end of the year - HELD THAT:- The assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assessee is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. As a matter of fact, the AO has not even r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion can be made. The addition made by the assessing officer is therefore not sustainable on facts. See ADANI ENTERPRISES LTD [ 2016 (8) TMI 163 - GUJARAT HIGH COURT] Addition u/s 14A despite the fact that the company had claimed an expenditure on its Treasury department which mainly dealt with investments related to earning exempt income - CIT-A deleted the addition - HELD THAT:- As adhoc allocation of expenses of treasury department, in addition to the disallowance under rule 8D(iii) for such indirect expenses, computed @ .5% of related investments earning tax exempt income, will indeed amount to double deduction of expenses under rule 8D. What can be disallowed under rule 8D(i) is only direct expenses and clearly the expenses on treasury function are not direct expenses to earn the tax exempt income. Even going by the stand of the Assessing Officer, treasury function includes many functions including, to some extent, investment function. The understanding of the Assessing Officer is clearly incorrect. There is no basis for allocation of 50% of expenses, on purely adhoc basis, either. There is nothing on record to even show that the expenses disallowed under rule 8D(iii) are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts represents miscellaneous income which was not derived from the undertaking itself - CIT-A deleted the addition - HELD THAT:- We have noted that the eligible business activity of the assessee is operations and maintenance of the port, and that the miscellaneous receipts represents receipts on account of activities which pertain to operations and maintenance of port. The receipts for weighment charges and token charges, and the allied activities in question, cannot be considered in isolation with the operations and maintenance of port. In view of these discussions, and in the light of well reasoned findings of the CIT(A) with which we are in considered agreement, we uphold the relief granted by the CIT(A) and decline to interfere in the matter. TP Adjustment - whether issuance of corporate guarantees does not constitute an international transaction with the meanings of section 92B? - HELD THAT:- As for the observations of the authorities below that the assessee has not produced any evidence of not incurring any costs, this observation is incorrect inasmuch as none can be expected to prove a negative. The onus of demonstrating that the costs have been incurred can only be on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ITAT AHMEDABAD] as hold inter alia that hedging contracts; in order to be out of speculative transactions, must be in respect of raw materials only in manufacturers' cases though they could be both with regard to sales and purchases, such hedging contracts need not succeed the contract for sale and actual delivery of goods manufactured, but the latter could be subsequently entered into within reasonable time not exceeding the relevant assessment year in normal circumstances and such transactions should not exceed the total stock of the raw material or merchandise on hand including existing stocks as well as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Upward adjustment on the basis of the TPO's order passed u/s.92CA(3) determining the A.L.P. in respect of transaction of export of Maize - HELD THAT:- We are not inclined to interfere in the matter. We agree with the authorities below that such an independent third party quotation, on standalone basis and without any material to establish its bonafides and without anything to show that it s contemporaneous nature and sufficient parity wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terfere in the matter. Disallowance being 10% of aircraft hire charges - HELD THAT:- We find that, in view of Hon ble jurisdictional High Court s judgment in the case of Sayaji Engg [ 2001 (7) TMI 70 - GUJARAT HIGH COURT] no disallowance can be made in the hands of a corporate entity for personal use of cars, and, by the same logic, of the aircrafts as well, by the directors. The CIT(A) was thus indeed quite justified in deleting the impugned disallowance. We uphold the action of the CIT(A) and decline to interfere in the matter on this count as well. - ITA Nos. 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15, ITA Nos. 1918/Ahd/12, 3480/Ahd/14 and 2531/Ahd/15 - - - Dated:- 12-2-2019 - PRAMOD KUMAR VP AND MAHAVIR PRASAD JM For the Appellant : S N Soparkar, Bandish Soparkar and Parin Shah For the Respondent : Subhash Bains, MSA Khan and Lalit Jain ORDER Per Pramod Kumar, VP: 1. These three sets of cross appeals pertain to the same assessee, involve some common and interconnected issues, and were heard together. As a matter of convenience, therefore, all the six appeals are being disposed of by way of this consolidated order. 2. We begin with the cross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had earned income which did not form part of its total income; (b) that further, the authorities on which the appellant had relied being relevant from the point of view of discharge of onus by the Assessing Officer before he could made the disallowance envisaged by Section 14A, it was only axiomatic that their relevance cannot be impaired with the advent of Rule 8D; that as the Bombay High Court had itself held in Godrej Boyce Mfg. Co. Ltd. v. DCIT(328 ITR 81) on which the learned CIT(A) had sought to rely, the very question of taking recourse to Rule 8D can arise only after the Assessing Officer was not satisfied with the correctness of the assessee's claim in respect of expenditure in relation to income which did not form part of his income; (c) that sub-section (2) of Section 14A enjoined upon the Assessing Officer to consider the asssssee's claim in respect of expenditure in relation to income not forming part of his total income, having regard to the accounts of the assessee and other relevant factors (as elaborately explained by the Bombay High Court in its aforesaid decision) and that it is only if, after thus considering the assessee's claim, he was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... envisaged by its Memorandum of Association); (3) that especially considering the peculiar nature of the appellant's investments in question, it was also relevant to consider that the total income of the partnership firm of M/s. Adani Exports was liable to assessment at the maximum marginal rate of tax and so also, the total income of the companies in which the appellant had made investments, apart from dividend tax payable by them as and when they distributed dividends; 4. As far as this grievance of the assessee is concerned, it is against the disallowance of 0.5% of the average investments as expenses relating to exempt income from such investments. There is no dispute that the year before us is the year in which rule 8 D has legal force, that the assessee did not offer any expenses on his own, and that, when rule 8D is taken into account, the expenses relatable to exempt income will have to be taken on that basis. Learned counsel, however, submits that in the light of Special Bench decision in the case of ACIT Vs Vireet Investments Private Limited [(2017) 165 ITD SB 27 (Delhi)], the computation of 0.5% of investments must remain confined to only such investments which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken into credit side of P L account, the bad debt to that extent is allowed . As the claim of bad debt itself has been allowed in principle and the matter has been remitted to the file of the Assessing Officer only for a factual verification, the claim for business loss is infructuous at this stage and does not need to be adjudicated upon. Similarly, we are unable to see any merits in the grievance of the Assessing Officer for CIT(A) s directing a factual verification which is so fundamental to the claim being denied as the claim for deduction was declined primarily on the ground that the assessee had not offered related income to tax. Grievances of both the parties, therefore, lack legally sustainable merits. We confirm the action of the CIT(A) on this issue as well and decline to interfere in the matter. 9. Ground no. 2 in the appeal of the assessee and ground no. 5 in the appeal of the Assessing Officer are, therefore, dismissed. 10. In ground no. 3, the assessee has raised the following grievances: 3.1 In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding the disallowance of loss of ₹ 73,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the CBDT contained in its Instruction No. 3/2010 dated 23.3.2010 which surprisingly had branded the marked to market losses as notional and contingent in nature, in total disregard of the fact that the prescriptions of the Institute of Chartered Accountants of India required recognition of such losses; (d) that loss arising from 'marking to market of outstanding foreign exchange forward contracts as at the end of the year was, far from being a contingent or notional loss as suggested in the aforesaid CBDT Instruction, more like the loss resulting from valuation of closing stocks by the generally accepted method of valuing stocks at 'lower of cost or market' as at the end of the year and especially when its accounting had been mandated by an Accounting Standard of the Institute of Chartered Accountants of India and also supported by decisions of the Supreme Court, there could be no question for its deduction being disallowed; (e) that the aforesaid Instruction of the CBDT was clearly contrary to the decisions of the Supreme Court [in particular, CIT v. Woodward Governor (India) P. Ltd. (312 ITR 254) and ONGC v. CIT (322 ITR 180)] and being such, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concept under which financial instruments are valued at market rate so as to report their actual value on the reporting date. However, these losses are notional losses on account of position as on 31.3.2008 . The Assessing Officer then, relying upon the CBDT instruction no. 3/2010 dated 23rd March 2010, disallowed the claim. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) simply relied upon the CBDT instructions and followed the same. The assessee is not satisfied and is in further appeal before us. 12. 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. 13. As learned representatives fairly agree, this issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of Veer Gems Vs ACIT [(2017) 77 taxmann.com 127 (Ahmedabad - Trib.)] wherein the coordinate bench has, inter alia, observed as follows: 16. The Revenue's last substantive ground pleads that the CIT(A) erred in deleting disallowance of provision of forward contract payable of ₹ 34,35,000/- by holding that the entry p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in exchange rate is required to be taken into consideration. However, contention of assessing officer to treat the same as unascertained liability is completely incorrect in as much as entry is passed on the basis of actual closing rate prevailing at the end of financial year as per MTM certificate issued by ABN Amro Bank. During the course of assessment proceedings, assessee filed copy of MTM certificate and copy of forward contract payable. As per MTM certificate, it is evident that exchange rate of USD has gone up as on 31st March as compared to the exchange rate prevailing at the time of booking of forward contracts this has resulted into exchange loss to assessee for which provision entry is passed in the books of accounts. It is further relevant to point out that in the subsequent year, when the contract has been cancelled, assessee has recognised the gain/loss based on the difference between exchange rate prevailing at the .end of the current financial year as per MTM certificate the exchange rate prevailing as on the date of cancellation of forward contract which is in line with the accrual system of accounting. As such assessee has passed entry for loss only i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision made during the year under consideration. Now, if any disallowance is made for the year under consideration, in that case corresponding deduction is required to be allowed in the subsequent year. However, there is no justifiable reason in doing such an exercise as treatment given by assessee in the books of accounts is in line with the accrual system of accounting and the same does not result into provision for any unascertained liability. Consequently, the addition made on this disallowance is hereby deleted.' 18. We have heard rival submissions. Relevant findings perused. The assessee has admittedly made the impugned provision in view of difference in exchange rate as on the date of booking of its forward contract vis-a-vis exchange rate prevailing as on 31.03.2008. It has fortified its claim in view of ABN Amro Bank's MTM certificate forming basis of the impugned provision. The Revenue fails to dispute that the assessee has followed mercantile system of accounting instead of cash system and it is accordingly supposed to account for all expenses/gains in the P L account on the said basis. It thus emerges that assessee had sufficient reason to treat the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 regarding deductibility of foreign exchange loss came up for consideration before Hon'ble Supreme Court and there was similar inconsistency in treatment to losses and gains on the forward contracts. Their Lordships, dealing with this issue and holding that such a loss will be deductible in computation of business profits, observed as follows: '. . . . . . . . it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant Accounting Standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of accounting. It is well established, that, on general principles of commercial accounting, in the P L account, the values of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower- the market value being ascertained as on the last date of the accounting year and not as on any intermediate date be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under s. 37(1), para 9 of AS-11 which deals with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits 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 income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D. Sec. 37. General-(1) Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession. Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Sec. 145. Method of accounting-(1) Income chargeable under the head Profits and gains of business or profession or Income from other sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome 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 allowances are dealt with in s. 32. Therefore, Parliament has used the expression any expenditure in s. 37 to cover both. Therefore, the expression expenditure as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a loss even though the said amount has not gone out from the pocket of the assessee. 15. For the reasons given hereinabove, we hold that, in the present case, the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act.' 8. In the present case also, the assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assessee is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. As a matter of fact, the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have considered the facts of the case; assessment order and appellant's written submission. This issue is covered by my order dated 20-12-2011 in assessment year 2007-08 in appellant's own case. The relevant extract is quoted below:- Transfer pricing officer made adjustment in respect of guarantee commission for pledging the shares of MPSEZ held by the appellant with ICICI bank Limited, Singapore for providing loan to its Singapore AE. However appellant submitted that it intended pledging the shares of MPSEZ for loan taken by its Singapore AE but RBI refused permission to pledge the shares and finally it could not provide guarantee to its AE. Since the shares were not finally pledged due to refusal of RBI permission, there is no question of making adjustment in respect of guarantee commission. Appellant submitted copy of letter written by Adani Global Pte Ltd, Singapore dated 15 January 2007 to RBI requesting approval for pledge of shares in favour of IDBI trusteeship services Ltd (Indian security trustee appointed by ICICI bank Limited, Singapore) and RBI's letter dated 21st of February 2007 refusing the permission to pledge shares of MPSEZ in favour of IDBI trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the grounds raised by the assessee on this issue. From the above it is clear that appellant's case is covered by the aforesaid decision also. Therefore even otherwise, the adjustment made by the TPO in respect of guarantee commission is not sustainable. Accordingly addition made by the assessing officer based on the TPO's order is deleted. Since assessing officer made the addition/adjustment on the identical facts and the same issue, the same is not sustainable in view of the aforesaid order. Accordingly the addition made by the assessing officer based on TPO's order is deleted 21. In the meantime, the order of the CIT(A) for the assessment year 2007-08 has been confirmed by a coordinate bench of this Tribunal, and approved by the Hon ble jurisdictional High Court- as reported in [2016] 72 taxmann.com 285 (Gujarat)/[2016] 241 Taxman 542 (Gujarat)/[2017] 396 ITR 313 (Gujarat). In this view of the matter, and respectfully following these judicial precedents, we uphold the relief granted by the CIT(A) and decline to interfere in the matter. 22. Ground no. 1 is thus dismissed. 23. In ground no. 2, the Assessing Officer has raised the following grievance: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, will indeed amount to double deduction of expenses under rule 8D. What can be disallowed under rule 8D(i) is only direct expenses and clearly the expenses on treasury function are not direct expenses to earn the tax exempt income. Even going by the stand of the Assessing Officer, treasury function includes many functions including, to some extent, investment function. The understanding of the Assessing Officer is clearly incorrect. There is no basis for allocation of 50% of expenses, on purely adhoc basis, either. There is nothing on record to even show that the expenses disallowed under rule 8D(iii) are lower than a reasonable share of common expenses incurred on earning the tax exempt income. In these circumstances, and bearing in mind entirety of the case, we approve the stand of the CIT(A) and decline to interfere in the matter. 26. Ground no. 2 is thus dismissed. 27. In ground no. 3, the Assessing Officer has raised the following grievance: 3. That the ld. CIT(A) has erred in law and on facts in deleting the disallowance of interest expense to the extent of ₹ 24,26,571/- u/s 36(1)(iii) despite comprehensible findings in the assessment order that the fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e huge purchases from these entities, and the fact that the amounts were not payable is not really relevant because the case of the assessee is that the payments were in the nature of business advances. What happens to these monies subsequently is not relevant so far as the treatment of advances in the hands of the assessee is concerned. That aspect is wholly irrelevant for our purposes. As long as the payments are made in the course of assessee s business, it does not really matter, so far as interest disallowance in the hands of the assessee is concerned, as to where these monies ultimately find its way. That s not in the control of the assessee anyway. Nothing really turns on these monies ultimately finding its way to another entity, admittedly unrelated to the assessee. The reason for making the interest disallowance is thus not sustainable in law. In any event, the availability of interest free funds is far more than interest free funds advanced to these entities. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 31. Ground no. 3 is thus dismissed. 32. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us. 40. 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. 41. We have noted that the eligible business activity of the assessee is operations and maintenance of the port, and that the miscellaneous receipts represents receipts on account of activities which pertain to operations and maintenance of port. The receipts for weighment charges and token charges, and the allied activities in question, cannot be considered in isolation with the operations and maintenance of port. In view of these discussions, and in the light of well reasoned findings of the CIT(A) with which we are in considered agreement, we uphold the relief granted by the CIT(A) and decline to interfere in the matter. 42. Ground no. 6 is also dismissed. 43. In the result, the appeal of the Assessing Officer for the assessment year 2008-09 is dismissed. 44. We now take up cross appeals for the assessment year 2009-10 which are directed against the order dated 8th October 2014 passed by the CIT(A) in the matter of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O to ₹ 3,05,70,000/- to the assessee's total income made on account of guarantee fees in respect of corporate guarantees provided by the assessee on behalf of its foreign subsidy companies. 47. The relevant material facts are like this. The assessee had extended corporate guarantees in respect of borrowings made by its associated enterprises, namely Adani Global Pte Ltd Singapore (₹ 50.95 crores) and Adani Global Limited, UAE (₹ 101.90 crores). The assessee did not charge any consideration from the AEs for issuance of these guarantees. During the course of ascertaining Arms Length Price of these guarantees transactions, the TPO was of the view that a reasonable guarantee commission ought to have been charged in respect of issuance of these guarantees. The argument of the assessee to the effect that it does not constitute an international transaction was rejected by the TPO. He held that the Arms Length Price of these guarantees should be computed @ 2.956%. The reasoning for the same was set out as follows:- 5.13. Providing guarantee by a parent with a higher rating ensures improvement in the rating or reduction in credit risk spread to the extent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) . . (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: Thus the explanation, inserted vide the retrospective amendment, makes it amply clear that the transaction of guarantee was already included in the definition of international transaction and the same has now been clarified through the retrospective amendment. Therefore the contentions of the appellant that providing corporate guarantee to AEs is outside the ambit of international transaction has to fail. This view is supported by the decision of Mumbai Tribunal in the case of Everest Kanto Cylinder [34 Taxman.Com 19 Mumbai ITAT], discussed by the TPO [after reproducing the relevant para of the order] at para-5.10 of the order u/s 92CA[3). The TPO was justified in benchmarking the transactions. The Delhi Tribunal judgement [relied on by the A.R. in the case of Bharti Airtel Ltd. is not applicable to the instant case, as the appellant is not able to prove that it has not incurred any co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent works out to ₹ 3,05,70,000/-. The adjustment made by the A.O. [ on the basis of the order of the TPO] is restricted to the said amount of ₹ 3,05,70,000/-. Balance adjustment is deleted. This ground of appeal is partly allowed. 49. The assessee is not satisfied and is in further appeal before us. 50. The Assessing Officer is also not satisfied with the quantum relief given by the CIT(A) and is in appeal before us. 51. We find that this issue is now covered, in favour of the assessee, by a series of decisions in various cases, including in the case of Micro Ink Ltd Vs ACIT (157 ITD 132), analysed the issue in great detail and taken note of decisions by various coordinate benches, and then come to the conclusion that issuance of corporate guarantees does not constitute an international transaction with the meanings of section 92B. Learned representatives fairly agree that the issue is thus covered, in favour of the assessee and in assessee s own cases, by coordinate benches of Tribunal. We may also add that Hon ble jurisdictional High Court has admitted appeal to determine the question as to whether or not issuance of corporate guarantees amounts to internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of benefit attached to the activity, in relevant definition clause of 'International transaction' under the domestic transfer pricing legislation. It is also essential to take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction' under domestic transfer pricing legislation, as is the settled legal position, it is not open to Court to infer the same. [Para 37] iv. One more thing which is clearly discernible from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get economic or commercial value to enhance its commercial position . The benefit test is interlinked with the arm's length test in the sense that it seeks an answer to the question whether under a similar situation an independent enterprise would 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, it is alien to the definition of international transaction' under the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee. viii. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred percent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. ix. Of course, when a client is so well placed in his credit rating th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually exclusive in nature. In the light of these discussions, it is opined and said view is fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of 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. [Para 41] xiii. It is thus clear that even if one accepts the contention of the revenue 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 ownerwise considerations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als with 'provision for services'. When the legislature itself does not group 'guarantees' in the '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'. xvii. Under section 92B, corporate guarantees can be covered only under the residuary head i.e. any other transaction having a bearing on the profits, income, losses or assets of such enterprise . It is for this reason that section 92B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non-chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the revenues argument that whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international and then gives an example of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by other specific segments covered by section 92B, namely borrowing or lending money. The remaining two items in the Explanation to section 92B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in section 92B(1), which covers any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises . It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. xxi. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words irrespect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 section 92B(1). [Para 44] xxiv. In the present case, as already held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B. Taking note of the insertion of Explanation to section 92B, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or assets , it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment could be made. In this view of the matter, and for b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off is found to be correct. 55. We find that this issue is covered, in favour of the assessee in assessee's own case for the assessment years 2006-07 2007-08, by a coordinate bench's decision dated 1st January 2016, which was also fortified by the judgment of Hon ble jurisdictional High Court in Tax Appeal No. 566 of 2016. In view of these discussions, and respectfully following the esteemed views of the coordinate bench (supra), we uphold the grievance of the assessee and delete the impugned disallowance with respect to prior period expenses. The assessee gets the relief accordingly. 56. Ground no. 2 is thus allowed. 57. In ground no. 3, the assessee has raised the following grievances: 3. (A) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in upholding partial disallowance U/s. 14A instead of deleting entire disallowance made by AO as appellant had a separate Investment Division for which separate books of account were maintained and audited, copies of such accounts were provided to entire AO and appellant had opted to suo moto disallowance the entitle expenditure of that division viz ₹ 1,56,62,600 U/s. 14A whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss allowable u/s.28 of the I.T. Act. 62. So far as this ground is concerned, it was made for the short reason that no evidence was furnished to demonstrate that the advances were made during the course of business. Even before us no such evidences are furnished. In this view of the matter, we see no reason to interfere in the findings of the authorities below on this point. Ground No.4 is thus dismissed. 63. In ground no. 5, the assessee has raised the following grievances: 5 (A) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in sustaining disallowance of deduction of a sum of ₹ 82,02,615 being Mark to Market losses in respect of appellant-company's Commodity and Foreign Currency Derivative Contracts for hedging, which was wholly and exclusively for business purposes. (B) Without prejudice to the above, on the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in rejecting the alternative plea of the appellant-company to restrict the aforesaid disallowance by setting off the sum of ₹ 73,06,199, being the preceding year's provision for similar losses disallowed by the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escue of the assessee. It was in this backdrop the disallowance of ₹ 1,93,55,168/- was made by invoking section 40(a)(i). The assessee carried the matter in appeal before the CIT(A), but without any success. Learned CIT(A), in his brief order, observed as follows:- 11.3 Having considered the facts of the matter, I am not inclined to accept the contentions of the AR. As observed by the AO , payment of interest to foreign Banks or their branches in India is governed by Sec. 195 [since payees are nonresidents]. No certificate as envisaged under Sec. 195(3) for non-deduction of tax has been furnished by the appellant. The contentions of the AR are devoid of merit. Impugned disallowance is upheld. This ground of appeal is dismissed. 69. The assessee is not satisfied and is in further appeal before us. 70. 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. 71. We find that the payment has indeed been made to a non-resident and no tax has been deducted at source. The payment being in the nature of interest income which is separately covered under the respective tax tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder had already deduced interest of specific borrowings while working out the said disallowance. 79. Learned representatives fairly agree that this issue is squarely covered, in favour of the assessee, by a co-ordinate bench decision dated 1st January 2016 in assessee s own case for the assessment year 2007-08. A copy of the said decision was placed before us as well. 80. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. In any case, there is no dispute that the interest free funds available to the assessee were far more than the funds invested in securities yielding tax exempt income. On these facts, in the light of the binding judicial precedents, one has to proceed on the basis that such interest free funds in making these investments, and no part of interest can thus be disallowed under section 14A read with rule 8D. Respectfully following the same, we confirm the relief granted by the CIT(A) and decline to interfere in the matter. 81. Ground no. 3 is thus dismissed. 82. In ground no. 4, the Assessing Officer has raised following grievance: (4) The Id. CIT(A) has erred in deleting the addition of ₹ 7,27, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year will apply mutatis mutandis to this assessment year as well. 92. We find that, while dealing with identical grievance of the Assessing Officer for the assessment year 2008-09, and for the reasons set out earlier in this order vide paragraph no.8, we have upheld the conclusions arrived at by the ld. CIT(A). We see no reasons to take any other view of the matter for this assessment year as well. Respectfully following the view so taken, we approve the stand of the CIT(A) and decline to interfere in the matter. 93. Ground no. 6 is thus dismissed. 94. In ground no. 7, the Assessing Officer has raised following grievance: (7) The ld. CIT(A) has erred in deleting the disallowance of ₹ 58,31,457/- on account of loss from foreign currency swaps by relying on the decision of Ahmedabad Tribunal in the case of ACIT vs. Heavy Metal Tubes Ltd., despite the fact that the claim of the assessee is in the nature of speculative loss and not allowable as business expenditure. 95. So far as this ground of appeal is concerned, the relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevailing on the very day, it would lodge conversion claim upon payment of its consideration money by said customers, this currency settlement took time after lodgment to be realized resulting in fluctuation loss as is the case herein. We notice in this backdrop that hon'ble jurisdictional high court's decision in CIT v. Friends Friends Shipping (P.) Ltd. [2013] 35 taxmann.com 553/217 Taxman 267 (Guj.) holds losses arising from similar foreign exchange contracts to be business losses than speculative ones. Their lordships conclude that such exchange transactions are hedging transactions instead of being speculative transactions in nature. Next comes hon'ble Bombay high court's decision in CIT v. D. Chetan Co. [2016] 75 taxmann.com 300/243 Taxman 356/[2017] 390 ITR 36 (Bom.) holding that forward contracts in the nature of hedging transactions in course of normal import export activities to cover up losses on account of foreign exchange valuation difference results in business losses and not speculative one. We find that hon'ble jurisdictional high court's decision in Pankaj Oil Mills v. CIT [1978] 115 ITR 824 (Guj) (Full Bench) also holds inter alia tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al guarantee amount as against the rate of 2.98% adopted by the Transfer Pricing Officer. (C) Without prejudice to the above, on the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in adopting excessive and unreasonable rate of guarantee commission at 2%, completely ignoring the comparable case of Everest Kanto Cylinder cited before him by the appellant-company wherein the Hon'ble Mumbai ITAT had considered a rate of 0.5% as reasonable. (D) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) further erred in rejecting the factual claim made by the appellantcompany and supported by documentary evidence, that it had obtained guarantee from State Bank of India, in connection with appellantcompany's operating contract with Karnataka Power Corporation at a guarantee fee of 0.25%, and therefore, without prejudice to the claim that no adjustment can be made u/s.92CA(3) of the I.T. Act, at the most similar rate of 0.25% should be adopted for the purpose of benchmarking in the case of the appellant-company. 102. In a related grievance, raised by the Assessing Officer as first ground of appeal in his appeal for AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the claim of the assessee that AE had sold the goods to the third party could not be verified by examining books and accounts of the assessee. The ALP adjustment was thus confirmed. The assessee is aggrieved and is in further appeal before us. 107. Having heard the rival contentions and having perused the material on record, we are not inclined to interfere in the matter. We agree with the authorities below that such an independent third party quotation, on standalone basis and without any material to establish its bonafides and without anything to show that it s contemporaneous nature and sufficient parity with actual transaction, cannot be accepted as a valid CUP input. The plea regarding back to back transaction was also not proved before us. In view of these discussions, and bearing in mind entirety of the case, we uphold the stand of the authorities below and decline to interfere in the matter. 108. Ground no 2 is thus dismissed. 109. In ground no. 3, the assessee has raised the following grievance: 3. On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in upholding the disallowance of prior period expenses of ₹ 1,03,75,36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en off- namely Aangi Agencies for ₹ 1,21,65,921, Custom Department Deposit of ₹ 1,27,86,555 and National Bulk Handling Co for ₹ 2,53,520. The Assessing Officer declined the claim of business loss on the ground that something for which a specific provision for bad debts is available, general provisions of business loss could not be invoked. It was also noted that these amounts were not admissible as bad debts. When matter was carried in appeal before the CIT(A) and it was pointed out that the credit entry for refund claim for customs deposit was already made in the year of claim, this plea was also rather summarily rejected. The claim of the assessee that these amounts were advanced in the course of business was also rejected. The findings of the Assessing Officer were thus rather summarily and casually discussed by the CIT(A). The assessee is aggrieved and is in further appeal before us. 118. 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. 119. We find that as long as a loss is incurred in the course of a business, and in legitimate furtherance of its bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly. 124. Ground no.6 is thus allowed. 125. In the result, the appeal of the assessee for the assessment year 2010-11 is partly allowed in the terms indicated above. 126. We now take up appeal of the Assessing Officer for the assessment year 2010-11. 127. Ground no. 1 is already dealt with, in the course of dealing with the appeal filed by the assessee earlier in this order, and we need not repeat our findings thereon. Suffice to say, for the reasons set out earlier, this ground is also dismissed. 128.. In ground no. 2, the Assessing Officer has raised the following grievance: (2) The Id. CIT(A) has erred in law and on facts in partly deleting the addition made u/s 14A of the Act. 129. Learned representatives fairly agree that this issue is squarely covered, in favour of the assessee, by a co-ordinate bench decision dated 1st January 2016 in assessee s own case for the assessment year 2007-08. A copy of the said decision was placed before us as well. 130. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. In any case, there is no dispute that the interest free funds available to the assessee were far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e coordinate bench. Respectfully following the same, we confirm the action of the CIT(A) and decline to interfere in the matter. 139. Ground no. 5 is thus dismissed. 140. In ground no. 6, the Assessing Officer has raised the following grievance: (6) The Id. CIT(A) has erred in law and on facts in deleting the disallowance made of depreciation on office equipment after treating the same as furniture and fittings for ₹ 13,84,895. 141. So far as this grievance is concerned, we find that the assessee had granted depreciation on office equipment as furniture and fittings, and thus declining the claim of the assessee for 15% depreciation. In appeal, it was pointed out by the assessee that the equipment were in the nature of electric fan, electric machine, LCD, TV, projector, water purifiers etc which must be included in the definition of plant. The judicial precedents in support of this proposition were also cited. It was in this backdrop, and following the judgment of Hon ble Bombay High Court in the case of CIT Vs Park Davis India Ltd (214 ITR 587), learned CIT(A) held the office equipment to be eligible for 15% depreciation. Accordingly, depreciation disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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