TMI Blog2017 (9) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... . The benefit test, as we see it, does not find place in the statute as yet. Thus as per the facts of this case, does not constitute a corporate guarantee akin to bank guarantee and, even if it could be treated as a corporate guarantee for benchmarking purposes, the corporate guarantee does not constitute an international transaction under section 92B of the Act. - Decided in favour of assessee. Disallowing expenses u/s 14A by invoking Rule 8D (2) (ii) and (iii) - Held that:- As perused the material placed on record as well as the orders passed by revenue authorities. Since as per the facts of the present case as well as in view of the above discussions, we hold that since the total interest interest free funds available with the assessee in the form of share capital and reserves alone more than the investments of the assessee and the investment of the assessee was at negligible percentage of interest free funds with the assessee and while relying upon the judgment cited above as well as bearing in mind the entirety of the facts, we direct the Assessing Officer to delete the disallowance of ₹ 12,28,142/- made u/s 14A read with Rule 8D '. Accordingly, this ground raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arning dividend income therefrom and therefore, no disallowance ought to have been made under Rule 8D(2)(ii) of ₹ 12,28,142. 7. The Addl. CIT erred in observing as follows: 7.2 The Hon'ble DRP has directed the AO to verify the facts related to interest free funds available with the assessee and decide the issue of disallowance u/s. 14A with regard to interest expenditure. The section 144C(13) st,Ites that the AO will complete the assessment without providing an further opportunity of being heard to the assessee. Since the interest expenditure has b( en correctly taken from the final account of the company, no relief on this issue is given. 8. The order of the Addl. CIT computing total income of the assessee at ₹ 22,31,75,775/- i bad in law and without jurisdiction. 9. Your appellant craves leave to 4Id _to, alter, amend or delete any of the foregoing grounds of appeal. Ground No. 1 2. This ground raised by the assessee is against the order of Addl. CIT in respect of Transfer Pricing Adjustment qua making additions on the ground of interest chargeable to the Associated Enterprise in respect of interest free advance given to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come would imply the idea of receipt, actual or constructive. The Ld. AR also relied upon different judgments including the judgment of Hon ble Bombay High Court in the case of H. M. Kashiparekh Co. Ltd. v. CIT [(1960) 39 ITR 706 (Bom)] . wherein it was held as under:- H. M. Kashiparekh Co. Ltd. was acting as a managing agent of a paper mill in Ahmedabad. During the Financial Year 1949-50, H.M. Kashiparekh Co. Ltd. had accounted for a sum of ₹ 1,17,644/- as its income from agency commission in its books of account. However, in December 1950, i.e. eight months after the end of the relevant Financial Year, at the instance of the managing company, H.M. Kashiparekh Co. Ltd. decided to surrender a sum of ₹ 97,000 out of the ₹ 1,17,644 accounted by it as its commission. On the question of whether the amount of commission surrendered by H.M. Kashiparekh Co. Ltd. can be treated as income within the meaning of the Act, the Bombay High Court held that what can be brought to tax is the real income of the assessee which has actually accrued to it and no real income accrues or arises when the right to receive any sum is foregone. The above judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 347 (Delhi)] wherein, the Assessee had given interest free advances to a third party on which the Assessing Officer added notional interest and subjected it to tax. In a writ petition, setting aside the order adding notional interest to tax, the High Court observed as under: 7. In the absence of any specific provision under which the so called notional income on advances, could be brought to tax, we do not see as to how the impugned orders passed by the Commissioner of Income Tax can be sustained. As per the facts of the present case, it is an undisputed fact that the assessee company had not charged any interest to its subsidiaries and therefore, in the absence of any accrual or arising of income from the lending of money, there is no jurisdiction for invoking the provisions of Section 92 of the Act. Reliance in this regard was placed on the judgment of the Bombay High Court in the case of Vodafone India Services (P.) Ltd v UOI [(2014) 368 ITR 1 (Bom)] , wherein it is held as under: 45. Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between AEs. The substantive charging provisions are found in Sections 4, 5, 15 (Salaries) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From the aforesaid decisions, it is clearly held that in the absence of any income , the provisions of Chapter X of the Act would not apply. Hence no addition in respect of notional income that has neither nor arisen can be allowed to be added. The second arguments by Ld. AR is that the subject transaction should be compared with interest free advance received by the Assessee from its directors / shareholders. In this respect, it was argued that the transfer pricing regulations require an international transaction with the Associated Enterprise to be at Arm s Length Price. In the facts of the present case, the Arm s Length Price of the advances given by the assessee to its subsidiaries can be compared with the Arm s Length Price of advances received by the assessee from its directors and shareholders. Our attention was drawn towards page 77 of the paper book. It was argued that the Assessee had received interest free loans from its directors and shareholders of ₹ 18,06,32,500/- as on 31st March, 2007. Since, no interest was paid by the assessee to its directors and shareholders, therefore no interest was charged by the assessee from its Wholly Owned Subsidiaries. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered in shareholder s capacity. In line with this, the assessee has also given guarantee to its subsidiary company wherein the assessee company is holding 100% shares. Such shareholder s activity cannot be subject to any Transfer Pricing adjustment. The Ld. AR relied upon the following decisions: (a) In the case of Tega Industries Ltd. v. DCIT, Circle-12, [(2016) 76 taxmann.com 24 (Kolkata - Trib.)], it was held That where assessee provided corporate guarantee to ICICI bank, U.K. to fund its subsidiary for acquiring two African companies for assessee, since assessee's expectation from said loan was of a shareholder, i.e., to protect its investment interest, no T.P. adjustment on account of corporate guarantee was to be made . (b) In the case of Manugraph India Ltd. v. DCIT, Circle 3 (2), Mumbai [(2016) 69 taxmann.com 400 (Mumbai - Trib.)] it was held that Where issuance of corporate guarantee by assessee was a tripartite agreement between assessee, its AE and assessee's banker and agreement referred to services which were in nature of shareholder services, said transaction was to be excluded from scope of 'international transaction' under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ines an international transaction to mean a transaction between associated enterprises which have any bearing on the income, expenses, assets or liabilities of the assessee. In the instant case, the transaction of extending a corporate guarantee does not have any impact on the profits, income, losses or assets of the assessee. The guarantee is only a contingent liability which cannot be regarded as an international transaction. In this regard, Ld. AR relied upon the order of Bharti Airtel Limited v ACIT ITA No. 5816/Del/2012 wherein it was held as under: 31. This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1). 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92 B, and yet it may not constitute an international transaction as the condition precedent with regard to the bearing on profit, income, losses or assets set out in Section 92B(1) may not be fulfilled. These guarantees thus do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate guarantee may have an influence on the profit, income, loss and asset of an entity, in whose favour the guarantee is issued, but it has, in our understanding, no impact on the same as long as it is issued without a consideration and as long as the guarantee is not invoked by the beneficiary. To treat this phrase as implying a benefit test, will, in our considered view, stretching the things too far. The benefit test, as we see it, does not find place in the statute as yet. We are, therefore, not swayed by the arguments of the Ld. DR particularly at this stage. He has raised a number of other arguments as well but as those arguments are already dealt with in the case of Micro Ink decision reproduced above, we see no need to again deal with the same. We are, therefore, of the considered view that as per the facts of this case, does not constitute a corporate guarantee akin to bank guarantee and, even if it could be treated as a corporate guarantee for benchmarking purposes, the corporate guarantee does not constitute an international transaction under section 92 B of the Act. In view of these discussions, we are of the view that the arm's length price adjustment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned AR submitted that the AO has not recorded any satisfaction in his draft assessment order or in his final order u/s.143(3) r.w.sec.144C(13) of the Act that no disallowance u/s. 14A offered by the assessee is unsatisfactory and hence the A.O. cannot make any disallowance u/s.14A of the Act. In this respect, Ld. AR relied upon the decision of the Hon ble ITAT, Mumbai in the case of Shapporji Pallonji Co. Ltd. v. DCIT [(2017) 164 ITD 42 (Mum.)] wherein the Hon. Tribunal held as under: 3.5 .. Therefore, the Assessing Officer at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt income. If and only if the Assessing Officer is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i.e. Rule 8D of the Rules. Thus, Rule 8D is not attracted and applicable to assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D of the Rules. Where the disallowance or 'nil' disallowance made by the assessee is found to be unsatisfactory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. 38. In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and ₹ 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling rea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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