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M Suresh Company Private Limited Versus Additional Commissioner of Income-tax, Mumbai

2017 (9) TMI 801 - ITAT MUMBAI

TPA - arms length price adjustment in respect of interest charged on advances to the subsidiaries and corporate guarantee - Held that:- Since as per the facts of the present case as well as in view of the above discussions, we find that the assessee has not charged any interest from subsidiaries and therefore, in the absence of any accrual or arise of income form the lending of the money, there was no jurisdiction for invoking the provision of section 92 of the Act. Therefore, we direct the Asse .....

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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. 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 .....

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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 the assessee is allowed. - I.T.A. No. 1853/Mum/2016 - Dated:- 25-7-2017 - SHRI R. C. SHARMA AND SHRI SANDEEP GOSAIN, JM For The Appellant : Shri B. V. Javeri For The Respondent : Shri Peeyush Sonkar ORDER Per Sandeep Gosai .....

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I T Act 1961, in respect of Interest to be charged to the Associated Enterprises of ₹ 4,97,120/- on the interest free advance provided by the assessee company to the Associated Enterprises and ₹ 3,89,564/- to be charged as guarantee commission in respect of guarantee given for the Associated Enterprise. 2. The Addl. CIT and the Dispute Resolution Panel erred in not considering the decisions of the Hon'bie Appellate Tribunal while making addition of ₹ 4,97,120/- to the incom .....

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rise. II. Disallowance u/s.14A 4. The Addl. CIT erred in disallowing expenses u/s. 14A of ₹ 13,48,071/- invoking Rule 81)(2)(ii) and (iii). 5. The Add!. CIT failed to appreciate that the assessee company had not made any investment in mutual funds during the year under consideration and secondly, the assessee company has interest free funds which are far in excess of the investment in mutual funds made in the earlier years. 6. The Addl. CIT failed to appreciate that the assessee company ha .....

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hat 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. T .....

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a domestic company engaged in the business of manufacturing and export of cut and polished diamonds. The assessee company had advanced the interest free sums to its two Subsidiaries i.e. M/s. M. Suresh Company DMCC, Dubai - Dirham 5,000 (Rs. 60,447), and M/s. M. Suresh Company (SA) PTY. Ltd., South Africa - USD 199,986 (Rs. 89,29,373/-). These loans were given during financial years 2005-06 & 2006-07 respectively without charging any interest. The Transfer Pricing Officer(TPO) held that sin .....

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further the DRP also held that the assessee had not carried out any exercise for determination of ALP, hence the AO was directed to apply LIBOR plus 5% as ALP for interest on loan borrowed by AEs instead of 6.57% adopted by the A.O. After the direction of DRP, the Assessing Officer added interest of ₹ 4,97,120/- to the income of the assessee. 4. Now before us, Ld. AR appearing on behalf of assessee submitted that Section 92(1) of the Income-tax Act, 1961 provides for determination of Arm s .....

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udgment of Hon ble Supreme Court in the case of E.D. Sassoon & Co. Ltd v CIT [(1954) 26 ITR 27 (SC)] wherein the word Income 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 .....

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red 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 judgment was also approved by the Supreme Court in CIT v Birla Gwalior (P.) Ltd [(1973) 89 ITR 266 (SC)] by observing as under: ..... The assessee had given up the commission even befo .....

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st 2012, the Assessee had given certain interest free loans to its sister concern. The Assessing Officer added to the income of the assessee company notional interest on these advances. On appeal by the Assessee, the CIT(A) and the ITAT deleted the addition. The High Court, while upholding the order of the ITAT and dismissing the appeal of the Department held as under: 4....... The Apex Court in CIT v. Shoorji Vallabhdas & Co. [(1962) 46 ITR 144] explained the point as under: "Income-ta .....

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emains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. 4.1 In view of the above, the Tribunal did not commit any error in dismissing the appeal of the Revenue and upholding the deletion of the addition in question. The present appeal is d .....

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nce 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 .....

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Sources). Even Income arising from International Transaction between A.E. must satisfy the test of Income under the Act and must find its home in one of the above heads i.e. charging provisions. This the revenue has not been able to show. 46. It was next submitted that the machinery section of the Act cannot be read de-hors charging section. The Act has to be read as an integrated whole. On the aforesaid submission also, there can be no dispute. However, as observed by the Supreme Court in CIT .....

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a Shetti (supra), there was charging provision but the computation provision failed and in such a case the Court held that the transaction cannot be brought to tax. The present facts are on a higher pedestal as there is no charging provision to tax issue of shares at premium to a non-resident, then the occasion to invoke the computation provisions does not arise. We, therefore, find no substance in the aforesaid submission made on behalf of the Revenue. Even in the case of Maruti Suzuki India Lt .....

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ce for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm s length price. 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 .....

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e 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 was submitted that in view of above no adju .....

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s wholly owned subsidiary company. The AO after taking into consideration the DRP Order has added ₹ 3,89,564/- to the assessee company income as guarantee commission chargeable. In this respect Ld. AR argued that since the assessee has not charged any commission to its WOS on issuance of corporate guarantee and therefore, no income arises from the said transaction of issuance of corporate guarantee and hence no adjustment could be made invoking the Transfer Pricing provisions. The Ld. AR a .....

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isions held that guarantee is an International Transaction . The Ld. AR submitted that it is the duty of every shareholder to assist its investee company to raise advances in the hands of the Wholly Owned Subsidiary company. The shareholders of the assessee company have themselves given their personal guarantee to enable the assessee to raise funds. As can be seen from page 3 of the paper book, the Directors of the assessee company have given personal guarantees to enable the assessee company to .....

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ares. 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 in .....

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#39; under section 92B. (c) In the case of M/s. Micro Ink Ltd. v. Addl. CIT [(2016) 157 ITD 132 (Ahd.)], the Hon. Appellate tribunal held as under: 41. As evident from the OECD observation to the effect "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", it is also to be clear that when the corporate guarantees ar .....

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ecord to indicate or suggest that the funds raised by the subsidiary, with the help of the guarantee given by the assessee, are not for its own business purposes. As a plain look at the details of corporate guarantees would show, these guarantees were issued to various banks in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raisi .....

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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. The last arguments raised by Ld. AR on this ground is that giving Guarantee is not an international transaction. In this respect, it was argued by Ld. AR that Section 92B of the Act defines an international transaction to mean a transaction between associated enterprises whi .....

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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 inc .....

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dment in Section 92B, by amending Explanation to Section 92B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of international transaction to which ALP adjustment can be made. The Ld. AR relied upon the decision of the Mumbai Tribunal in the case of Manugraph India Ltd. vs. DCIT [(2016) 69 taxmann.com 400 (Mumbai - Tri .....

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behalf of its AE, it would not constitute international transaction within the meaning of sec.92B and therefore, the ALP adjustment was not warranted. 5. On the other hand, Ld. DR relied upon the order passed by revenue authorities. 6. We have heard the counsels for both the parties and we have also 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 find that the as .....

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set 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. .....

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section 92 B of the Act. In view of these discussions, we are of the view that the arm's length price adjustment of ₹ 3,89,564/- is unsustainable in law. We, therefore, direct the AO to delete the same. Hence this ground raised by the assesee is allowed. Ground No. 2. 7. This ground raised by the assessee is against the order of Addl. CIT in disallowing expenses u/s 14A of the I T Act 1961 of ₹ 12,48,071/- by invoking Rule 8D (2) (ii) and (iii). As per the facts of the present ca .....

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ule 8D of the Rules. The Ld. AR submitted that the A.O. has not recorded the satisfaction in his order that no disallowance made by the assessee is unsatisfactory. The Ld. AR drawn our attention to the order of Ld. DRP wherein in para 4.3.3 of its order, the DRP directed the A.O. as under: 4.3.3 We direct the AO to verify the facts related to interest free funds available with the assessee and decide the issue of disallowance under section 14A with regard to interest expenditure in accordance wi .....

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on.DRP has directed the A.O. to verify the facts related to interest free funds available with the assessee and decide the issue of disallowance u/s.1 4A with regard to interest expenditure. The section 144C(13) states that the A.O. will complete the assessment without providing any further opportunity of being heard to the assessee. Since the interest expenditure has been correctly taken from the final account of the company, no relief on this issue is given. The Learned AR submitted that the A .....

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ssessing 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 asse .....

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s of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to su .....

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oyce Mfg. Co. Ltd. in Civil Appeal No. 7020 of 2011 dated 8th May, 2017 wherein their Lordships held as under: 37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Asse .....

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hereafter that the provisions of Section 14A(2) and (3) read 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 ear .....

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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 reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case....... The Ld. AR drawn our attention to page no. 1 of the paper book in order to show that the total interest free funds available wit .....

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T v. HDFC Bank [(2014) 368 ITR 377 (Bom)] wherein it has categorically held That no dis-allowance on account of interest can be made under section 14A of Act read with Rule 8D of the Rules when the interest free funds available with the assessee was higher than the investments that earn tax free income. It is, therefore, prayed that no dis-allowance can be made under section 14A of the Act on account of interest expenses. The Ld. AR also relied upon the case of CIT v. Hero Cycles Ltd. [2010] 323 .....

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