TMI Blog2018 (1) TMI 1372X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestments and hence the same should be excluded while working out the disallowance under Rule 8D(2)(iii). The investments which had yielded dividend income alone, are to be considered while working out the disallowance under Rule 8D(2)(iii) of the Rules as has been held by the decision of this tribunal in the case of REI Agro Ltd. But we find that if the disallowance made under second limb of Rule 8D(2) of the Rules is deleted, then the disallowance made by the ld AO would remain at ₹ 23,77,882/- and whereas the assessee itself had voluntarily disallowed ₹ 42,48,850/-. Hence we direct the ld AO to adopt the disallowance figure of ₹ 42,48,850/- which had already been disallowed by the assessee and hence no further disallowance in that regard is to be made. Disallowance u/s 14A while computing the book profits u/s 115JB - Held that:- In the case of ACIT vs Vireet Investment (P) Ltd [2017 (6) TMI 1124 - ITAT DELHI] had held that no disallowance u/s 14A of the Act could be made by resorting to computation mechanism provided in Rule 8D of the Rules. However, the ld AO would have to disallow u/s 14A of the Act having regard to the books of accounts on some rational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue afresh in accordance with law. The assessee is also directed to co-operate with the ld AO by producing the necessary evidences in support of its contentions. Validity of levy of interest u/ 115P - delayed payment of dividend distribution tax - Held that:- The assessee stated that the dividend distribution tax had been duly paid within the time prescribed. However , he fairly agreed for this matter to be verified by the ld AO. The Ld DR also agreed for the same. Accordingly, we deem it fit and appropriate to remand this issue to the file of the ld AO with a direction to verify the date of remittance of dividend distribution tax with supporting evidence and then decide whether to levy interest u/s 115P of the Act in accordance with law. Accordingly, the Ground No. 8 raised by the assessee is allowed for statistical purposes. TDS u/s 194J OR 194H - Held that:- The assessee company paid this commission to the directors as per their terms of employment for the work done in their capacity as whole –time directors, this commission should have been treated as an incentive in addition to salary, bonus and other perquisities. Therefore, in our considered opinion, CIT-A is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rating of the assessee as well as the credit rating of the AE should be taken into account. Accordingly we deem it fit to remand the issue to the TPO to determine the basis points on the basis of the aforesaid parameters and such other relevant parameter in accordance to law. Therefore, we remand this issue for this limited purpose back to the TPO / AO and to determine the issue as directed by us. - I.T.A No. 153/Kol/2016, 110/Kol/2016 - - - Dated:- 12-1-2018 - Shri Aby. T. Varkey And Shri M.Balaganesh, JJ. For the Appellant : Shri Kanchun Kaushal,AR For the Department : Shri G.Mallikarjuna, CIT DR ORDER Per Bench: 1. These cross appeals are preferred by the Revenue as well as Assessee against the orders of the DRP-2, Kolkata. Since identical facts are involved in both the appeals, they are taken up together and disposed off by this common order for the sake of convenience. 2. DISALLOWANCE U/S 14A OF THE ACT Ground Nos. 3.1 to 3.6 of Assessee s Appeal The brief facts of this issue is that the ld AO while framing assessment show caused the assesse as to why disallowance u/s 14A of the Act should not be made by applying Rule 8D of the Rules. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(ii) without appreciating that various investments on which exempt income was earned were made in past years out of own/ surplus funds and no evidence was at all brought to prove any nexus between the borrowed funds and the amount invested. 3.6 On the facts and circumstances of the case and without prejudice to Grounds take hereinabove, the ld. AO as well as the Panel erred in not allowing netting off of interest expenditure with interest income while computing disallowance of proportionate interest cost under Section 14A read with Rule 8D(2)(ii). 2.1. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find from page 745 of the paper book that the assessee has sufficient own funds to the extent of ₹ 2587,79,74,512/- for making investments. Hence there cannot be any disallowance of interest under Rule 8D(2)(ii) of the Rules by applying the ratio laid down in the decision of the Hon ble Bombay High Court in the case of CIT vs Reliance Utilities Power Ltd reported in (2009) 313 ITR 340 (Bom) wherein it was held that the presumption would go in favour of the assessee if the interest free fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the Ld. DRP erred as the provisions of section 14A r.w. Rule 8D of the Act not applicable in MAT provision. 3.1. We have heard the rival submissions and perused the materials available on record. We have already held in para 2 above that no disallowance is to be made in accordance with Rule 8D of the Rules in the facts and circumstances of the instant case under the normal provisions of the Act. However, we find that the assessee had made disallowance of ₹ 42,49,346/- based on its books of accounts u/s 14A of the Act by attributing certain expenses incurred for the purpose of earning exempt income, while computing the book profits u/s 115JB of the Act. We find that the Special Bench of Delhi Tribunal in the case of ACIT vs Vireet Investment (P) Ltd reported in 165 ITD 27 (Delhi)(Special Bench) dated 16.6.2017 had held that no disallowance u/s 14A of the Act could be made by resorting to computation mechanism provided in Rule 8D of the Rules. However, the ld AO would have to disallow u/s 14A of the Act having regard to the books of accounts on some rational basis as expenditure incurred for earning exempt income, in terms of clause (f) of section 115JB(2) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. No. 316/Kol/2006 for A.y. 2002-03. 4.1. We have heard the rival submissions and perused the materials available on record including the paper book of the assessee. We find that the assessee owns the aircrafts and were used for providing services to the tourists of the assessee company as well as others who chartered them according to their requirements. These aircrafts were utilized for chartering flights also and assessee had derived chartering income also which are reflected as income in the profit and loss account which evidences the business nexus of use of aircrafts. We also find that the assessee had stated that sometimes the directors of the assessee company had to use the aircrafts for the purpose of urgent business meetings in different locations and no personal expenses have been charged to revenue. The chartering revenue offered by the assessee has been accepted by the revenue and hence it can safely be concluded that the aircrafts are used for the purpose of its business. We hold that assessee company being a non-natural person cannot have personal element thereon and all the expenditure incurred thereon had to be construed only for business purposes. Even if ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is seen that the net expenditure towards running and maintenance of aircrafts debited in profit and loss account is only ₹ 95,64,995/- and hence the premise of the Learned AO that a sum of ₹ 2,14,04,416/- is debited to profit and loss account is grossly incorrect. It is observed that ultimately the assessee had derived surplus of ₹ 1,07,87,457/- being the difference between the chartering income of ₹ 2,02,52,452/- and maintenance and running of aircrafts expenditure to the tune of ₹ 95,64,995/-, even though deriving surplus thereon is not a pre-requisite for allowance of expenditure incurred. We also find that complete details of the entire expenditure towards running and maintenance of aircrafts together with the log book has been filed before the Learned AO and hence there is absolutely no case for the Learned AO to reject the same and proceed to make disallowance on estimated basis to be in line with the disallowances made in earlier years. We also find that the earlier years ITAT order on this issue need not be followed for the asst year under appeal as in this year, the entire details were very much before the Learned AO. We also find lot of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GRANTING OF SET OFF OF LONG TERM CAPITAL LOSS AGAINST DEEMED SHORT TERM CAPITAL GAIN Ground Nos. 5.1 5.2 of Assessee s Appeal The assessee claimed set off of Long Term Capital Loss amounting to ₹ 9,77,54,843/- arising on sale of land, against the deemed short term capital gain of ₹ 7,18,74,000/- arising out of sale of residential property (being a long term capital asset as the holding period of them exceeded 36 months). Based on the provisions of section 50(1) of the Act, the assessee company computed short term capital gains on sale of depreciable assets, although the assets which were sold were long term capital asset as the holding period of them exceeded 36 months. Hence only by deeming fiction in terms of section 50 of the Act, the gain was treated as short term capital gain. The ld AO in the draft assessment order denied the set off of long term capital loss with deemed short term capital gain computed u/s 50 of the Act. The ld AO placed reliance on the decision of the Hon ble Madras High Court in the case of M.Raghavan vs ACIT reported in (2004) 266 ITR 145 (Mad) wherein it was held that the books when treated as plant , the assessee was given the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset shall be treated as capital gain arising on transfer of short term capital asset is only for the purpose of sections 48 and 49 of the Act and not for the purpose of any other section. It is well settled that the deeming fiction and the deeming provisions should be construed very strictly and to be applied in limited sense and the same cannot be imported into other sections of the Act unless otherwise specified . Section 74(1)(b) of the Act being an independent section is not bound by the deeming provisions of section 50 of the Act. The nature of capital asset, whether short term or long term, has to be determined applying the provisions of section 2(42A) and section 2(29B) of the Act. Hence we hold that the depreciable assets which had been held for more than 36 months prior to its sale, does not lose its character of being a long term capital asset, even though it might get taxed as short term capital gain in terms of deeming fiction provided u/s 50 of the Act. Reliance in this regard is placed on the decision of Hon ble Supreme Court in the case of CIT vs V.S.Dempo Company Ltd reported in (2016) 74 taxmann.com 15 (SC) wherein it was held that :- 1. In the return filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... created in Section 50 is not only restricted to Sections 48 and 49 but also applies to other provisions. On the contrary, Section 50 makes it explicitly clear that the deemed fiction created in sub-section (I) (2) of Section 50 is restricted only to the mode of computation of capital gains contained in Section 48 and 49. Secondly, it is well established in law that a fiction created by the legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the Apex Court in the case of State Bank of India v. D. Hanumantha Rao 1998 (6) SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to 19.07.1969. The respondent therein who had joined the bank on 1.7.1972 claimed extension of service because he was deemed to be appointed in the bank with effect from 26.10.1965 for the purpose of seniority, pay and pension on account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DISALLOWANCE OF FOREIGN CURRENCY PAYMENTS u/s 40(a)(i) OF THE ACT ₹ 4,52,43,617/- Ground Nos. 6.1 6.2 of Assessee s Appeal The ld AO observed that the assessee had payments under various heads in foreign currency on which due deduction of tax at source was not made. A total payment of ₹ 28,23,83,789/- has been made during the financial year towards various heads of expenses across various units of EIH Ltd. The ld AO observed that on perusal of the records, it is seen that the assessee has not deducted TDS on the following payments :- Advertisement in magazine / website listing Inspection Fees Marketing Development Charges Recruitment Charges Management Fees Professional / Consultancy Charges In response to the show cause notice issued by the ld AO, the assessee replied vide its submission dated 17.3.2015 that the remittances made for the aforementioned heads of expense, in terms of foreign currency, were not for any use or right to use of any equipment, copyright, scientific work etc and should not qualify as Royalty u/s 9(1)(vi) of the Act. Similarly the said remittances were not for rendering any managerial, technical or consultancy se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the directions of the Ld. Panel erred in confirming the disallowance u/s 40(a)(ia) of the Act to the extent of ₹ 4,52,43,617/- for alleged non-deduction of tax u/s 195 ignoring the various details/explanation filed in the course of assessment and failing to appreciate that the various remittances were not taxable in India either under the provisions of the Income Tax Act or under the beneficial provisions of Double Taxation Avoidance Agreement (DTAA). 6.2 On the facts and circumstances of the case and in law, the ld. AO while confirming disallowance to the extent of ₹ 4,52,43,617/- u/s 40(a)(ia) of the Act failed to provide proper/sufficient opportunity to the assessee to have its say or make compliance of the reasons relied upon by him in making the said disallowance in spite of the fact that the appellant filed sample invoices along with supporting evidences in support of the non-taxability of remittance. 6.2. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find that the assessee had given unit wise details of various expenditures incurred in foreign currency vide its lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenses at actual Annexure-8 Salary/Advance against Salary Annexure-9 Domestic Payment Annexure-10 Recruitment Charges Annexure-11 Management Fees Annexure-12 Aircraft repair Maintenance Annexure-13 Professional/Consultancy Annexure-14 Marketing and development 6.3. Advertisement in Magazines / Website Listing The assessee explained that magazines are printed outside India and / or the Websites are listed outside India. The assessee being in the luxury hospitality, its business heavily depends on clients from the western world. Consequently, as in the past it spent a considerable sum of money on advertisements both in the print and web media. As already explained in the past years, such advertisements are printed mostly in USA and some in the UK etc. The servers of the web are also located outside India. As already explained, the target for the advertisements are the foreign tourists. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er make available category. Therefore in the absence of PE in India, the payments made to the payees outside India do not call for any TDS. 6.7. Management Fees Management fees is paid to the Thai SPA management firm. For argument sake, even if the payment is considered taxable in India under the domestic law, the same is not taxable in India under the India Thailand tax treaty. As mentioned earlier, the Thai treaty does not have any exclusive FTS clause. Hence in the absence of any PE in India, these payments made to the service providers do not call for any TDS. 6.8. Marketing Development Payments are made to the tax residents of USA / Mauritius. While USA has make available clause in the Included Services Article , Mauritius does not have any exclusive FTS clause. In view of the above, no tax withholding is called for. 6.9. Apart from this, the assessee had given an exclusive submission before the ld AO vide letter dated 19.11.2015 with regard to non-applicability of withholding tax under domestic law as well as DTAA of the respective countries for each of the aforesaid expenditure as under:- EIH Limited Assessment Year 2011-12 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails of management fees paid in foreign currency Name of the Party Country Total Taxability under the Income tax Act and DTAA Banyan Tree Resorts Spas (Thailand Co. Ltd.) Thailand 3,25,800 Annexure -13 Banyan Tree Resorts Spas (Thailand Co. Ltd.) Thailand 1,075 Annexure -13 Banyan Tree Spa Co. Ltd. Thailand 1,20,241 Annexure -13 4,47,116 EIH Limited Assessment Year 2011-12 Details of professional/consultancy charges paid in foreign currency Name of the Party Country Total Taxability under the Income tax Act and OTAA Bab Communications U.K. 18,06,041 Annexure-14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax in India under Section 9(1)(i) of the Act. The remittances made on account of were not for any use or right to use of any equipment, copy right, scientific work etc. and hence should not qualify as Royalty under Section 9(1)(vi) of the Act. The said remittance were also not for rendering any managerial, technical or consultancy services and hence should not qualify as Fees for Technical Service (FTS) under section 9(1)(vii) of the Act. The activity of advertisement does not per se involve any technical expertise. It has to be treated as business income of the service provider. It is pertinent to note that the Ld CIT(A) in the case of the assessee itself in the A.Y.2006-07 followed by subsequent years has categorically held that the payments to foreign parties on account of advertisement outside India should not be taxable in India as per the provisions of section 9(1)(vii) of the Income tax Act. The relevant extract of the ClT(A) order for the assessment year 2006-07 is reproduced as follows: In my considered view, the payments to the foreign parties on account of advertisement outside India should not be taxable in India as per the provisions of section 9(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to carrying out this job effectively and efficiently in the interest of its business of which the said activity or job formed a part. The services, therefore, were an integral part of the main work undertaken by the assessee of publicity, marketing and promotion of the Indian hot worldwide. The services described in the various articles of the agreement had not much significance independently and were an integral part of the arrangement between the assessee and the Indian hotels or clients for publicity, marketing and advertising of hotel business. That the payments under the agreements being entirely made by the Indian hotels to the assessee-company for the main services, the incidental or ancillary services not being independent of and separable from the main job undertaken by the assessee in the peculiar facts of the case, it was neither possible nor desirable to apportion or attribute any part of the consideration received by the assessee thereto. The various services rendered by the assessee to enable it to complete efficiently and effectively the job undertaken by it as an integrated business arrangement to provide the services relating to advertising , publicity and sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxable in India and subject to withholding tax in India. Reliance in this connection is placed on decision 'of ITAT Delhi in case of Sheraton International Inc Vs. Deputy Director of Income-tax reported in (2007) 293 ITR (A.T.) 68 (ITAT) (Del) b) Singapore - Article 12 The concerned services are not covered within the scope of fees for technical services' as defined in the Article 12(4) for the following reasons: Such services do not involve any managerial; technical or consultancy nature. Such services do not involve application or enjoyment of the right, property or information. Does not make available technical knowledge, experience, skill, know-how or processes which enable the person acquiring the services to apply the technology contained therein. The concept of 'make available' has been elaborately explained herein above. Consist of development and transfer of a technical plan or technical design but excludes any service does not enable the service provider to apply the technology contained therein. Reliance in this connection is placed on decision of ITAT Delhi in case of Sherator International Inc Vs. Deputy Director of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical knowledge, skill etc. are made available to the person purchasing the service. Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. . Reliance in this connection is placed on decision of IT AT Delhi in case of Sherator International Inc Vs. Deputy Director of Income-tax reported in (2007) 293 ITR (A.T.) 68 (ITAT) (Del) e) Brazil In the tax treaty entered into with India and Brazil, Paras of Article 12 of the DTAA deal with the meaning of the term 'Royalties and the rate at which such income is to be taxed. Obviously, there is no reference to the Fees for technical services in Article 12 of the DTAA. Thus it is evident that the fee for technical services does not fall within the purview of Article 12. Obviously, the application of Article 12 is ruled out. In that view of the matter, such income would remain included under Article :- The amount falls under Article 7 as 'Business profits' and is hence not chargeable to tax because of the absence of any PE in India. In this connection, reliance is placed on the decision of Hon'ble Mumbai ITAT in case of McKinsey Company (Thailand) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taxation at source on fees for technical services to a rate lower or a scope more restricted than the rate of scope provided for in this Convention, Agreement or Protocol with effect from the date on which the present Convention or the relevant Indian Conventio Agreement or Protocol enters into force, whichever enters into force later. Since USA is member of OECD, the Article 12 of India-USA DTAA can be applied. The DTAA with the USA provides restricted scope of fees for technical services due to presence of 'make available' in Article-12 of the OTAA. Since in the instant case, the services do not involve make available of technical knowledge, the same is out of purview of the fees for technical services within the scope of DTAA between India and France. Accordingly withholding tax is not applicable for the services pertaining to advertisements. Reliance in .this connection is placed on the decision of Mumbai ITAT in the case of DDIT vs IATA BSP India reported in TS-367-ITAT-2014(Mum). The Hon'ble tribunal held as follows: As per clause 7 of the Protocol in the India-France tax treaty, if under any convention, agreement or Protocol signed after 1st September 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight, property, or information. are ancillary and subsidiary to the enjoyment of any property; make available technical knowledge, experience, skill know-how or processes or consist of the development and transfer of technical plan or technical design. The concept of 'make available' has been elaborately explained herein above. Broadly speaking, the term 'make available' means that the person acquiring the technical service is enabled to independently apply the technology. The word 'enable' is used in the sense that the technical services should be such that they make the recipient able or wiser in the subject matter. Thus, where the recipient of technical services does not get equipped with the knowledge or expertise and the recipient would not be able to apply it in future independently without support from the service provider, it will not be a case of technical service having been 'made available'. And in such cases the concerned transaction would not be taxable in India and subject to withholding tax in India. In such cases, the income of the recipient shall be treated as business income under the Article 7. Since the entire operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices of various foreign recruitment agents (specially for SPAs, chefs etc.). The services are normally rendered outside India and the payments are made outside India as well. Further, since this does not involve any know how or technical expertise, the same is not covered within the scope of section 9(1)(vii) of the Income tax Act. Therefore under the domestic law, the remuneration for such services is not taxable in India. Taxability under DTAA with Indonesia and Thailand During the year under consideration, recruitment service has been availed from these vendors based out of Indonesia and Thailand. Both the treaties does not contain any FTS clause. Thus it is evident that the fee for technical services does not fall within the purview of Article 12. Obviously, the application of Article 12 is ruled out. In that view of the matter, such income would remain included under Article 7. The amount falls under Article 7 as 'Business profits' and is hence not chargeable to tax because of the absence of any PE in India. In this connection, reliance is placed on the decision of Hon'ble Mumbai ITAT in case of McKinsey Company (Thailand) Co. Ltd Vs Deputy Director of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d factual and legal submissions with supporting evidences before the ld AO , which had not been appreciated by the ld AO and ld DRP in the proper perspective. Hence we deem it fit and appropriate, to remand this entire issue to the file of the ld AO , for denovo adjudication of this issue afresh in accordance with law. The assessee is also directed to co-operate with the ld AO by producing the necessary evidences in support of its contentions. Accordingly, the Ground Nos. 6.1. 6.2 raised by the assessee are allowed for statistical purposes. 7. SHORT GRANT OF CREDIT FOR TDS AND TCS Ground No. 7 of assessee s appeal This is an issue of factual verification of the facts as to whether the related income has been duly offered by the assessee in the year under consideration. If it is so, the assessee is entitled for due credit for TCS and TDS subject to filing of necessary proof in this regard. Accordingly, the Ground No. 7 raised by the assessee is allowed for statistical purposes. 8. LEVY OF INTEREST U/S 115P OF THE ACT Ground No. 8 of assessee s appeal This is a ground challenging the validity of levy of interest u/ 115P of the Act for delayed payment of dividend d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or commission by whatever name called, other than those on which tax is deductible u/s 192 of the Act to a director of the company . This amendment is only prospective in nature and cannot be made applicable for the year under consideration. The assessee placed reliance decision of this tribunal in the case of Jahangir Biri Factory (P) Ltd vs DCIT reported in (2009) 126 TTJ 567 (Kolkata Trib)wherein the tribunal on identical facts held that commission to directors is not in the nature of commission or brokerage as envisaged u/s 194H of the Act nor as fees for professional or technical services u/s 194J of the Act. The ld DRP decided the issue in favour of the assessee . Aggrieved, the revenue is in appeal before us on the following ground:- 2. That on the facts and circumstances of the case and in law, the Ld. DRP erred in deleting the disallowance u/s 40(a)(ia)paid as commission to the directors and paid as sitting fees to the non-executive directors without deducting tax at source u/s 194I of the Act. 10.2. We have heard the rival submissions. We find that the issue is squarely covered by the decision of this tribunal in the case of Jahangir Biri Factory (P) Ltd vs DCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue in favour of the assessee. Aggrieved, the revenue is in appeal before us on the following ground:- 4. That on the facts and circumstances of the case and in law, the Ld. DRP erred in deleting the addition regarding Principal Repayment of Finance Fee. 11.1. We have heard the rival submissions. We find that the issue under dispute is settled by the order of this tribunal in assessee s own case for the Asst Year 2008-09 in ITA No. 529/Kol/2013 dated 19.2.2016 in favour of the assessee. Though this decision was rendered in the context of validity of section 263 proceedings of the ld CIT, this tribunal had adjudicated the issue on merits also and hence the reliance placed on the same is well founded. The operative portion of the said judgement is as under:- 4.4.1. On merits of the issue, on perusal of the various clauses in the lease deed ( which are not reproduced herein for the sake of brevity) forming part of the paper book vide pages 87 to 98 , we find that the ownership / title on the vehicles always lies with M/s Orix Auto Infrastructure Services Limited (lessor) during the subsistence of the lease vide clause 8 of the lease deed. We find that during the subsis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased out the trucks that it purchased. Therefore, on a combined reading of section 2(13) and (24) of the Act the income derived from leasing of the trucks would be business income, or income derived in the course of business, and had been so assessed. Hence, it fulfilled the requirement of section 32 of the Act, that the asset must be used in the course of business. The assessee did use the vehicles in the course of its leasing business. The fact that the trucks themselves were not used by the assessee was irrelevant for the purpose of section. (ii) That a scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer. The fact that at the end of the lease period, the ownership of the vehicle was transferred to the lessee at a nominal value did not make the assessee in effect a financier. No inference could be drawn from the registration certificate as to ownership of the legal title of the vehicle. If the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the ownership of the said assets during the tenure of the lease and inclusive of any renewal options that the lessor may concur indisputably rested with the lessor. So in clear terms, the agreement provided that during the lease period, only the lessor shall be treated as owner of the trucks and not the lessee. Moreover, the lessor had been allowed depreciation on the trucks. Therefore, considering the terms and conditions of the lease agreement and the fact that depreciation on these trucks had been allowed to the lessor, the lease rent was deductible as revenue expenditure - In the aforesaid case, there was a clause in the lease agreement giving an option to the lessee to buy back the asset on termination of the lease agreement. In the instant case, the assessee (lessee) falls in a better footing , in as much as there is no clause in the lease agreement, enabling the lessee to buy back the assets on termination of the lease arrangement. We find that the case law relied upon by the Learned DR on the decision of Delhi Tribunal need not be discussed as the issue is squarely covered by the High Court and Supreme Court in favour of the assessee. Respectfully following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s strategy, to fund the start-up company through third party borrowings made available to it with the help of the parent company s corporate guarantee. Accordingly, the project was planned to start-off in the year 2009 and remaining balance of US$ 23.2 million was planned by the share holder to be funded in the following manner :- Particulars Source of funds Amount Subsequent equity funding EIH Limited US$ 4.2 million External Loan Funding with the help of shareholder s guarantee To be provided by third party bankers with the help of shareholder guarantee US$ 19 million It was submitted before the ld TPO that the provision of the said funds was for initial establishment facilities and it was the responsibility of shareholders. According to the assessee, the shareholders are the only source of requisite funds for the newly incorporated company to set up its primary facility. Since assessee s 100% subsidiary M/s. EIH Flight was a new company, the lenders would not risk granting loans unless corporate guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arantee extended by the appellant is part and parcel of the management agreement entered into with the AE and said agreement take due care towards appropriate remuneration for corporate guarantee. 1.4 Without prejudice to the above, the Ld. Panel erred in arbitrarily confirming the arm s length guarantee commission rate of 3%, when a nominal guarantee commission rate of 0.3% - 0.5% has been accepted in various legal jurisprudence. 12.2. The ld. AR contended that the corporate guarantee was given by the assessee to the subsidiary AE M/s. EIH Mauritius herein (EIH Flight) to fund the set up of the said subsidiary company in its year of operation. According to the ld. AR, since M/s. EIH flight is a start up company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee company to the lender bank is normal business practice. According to the ld. AR, the provision of the said funds for initial establishment was the responsibility of shareholders of M/s. EIH flight i.e. the assessee in this case and it was discharging that responsibility to its subsidiary as shareholder. As said before, since the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and referred to various other case laws i) Redington India Limited vs ACIT [ITA No.513/Mds/2014] ii) Videocon Industries Limited vs ACIT Range 3(3), Mumbai [ITA NO.6145/Mum/2012, 1728/Mum/2014, 1729/Mum/2014]; iii) Manugraph India Limited vs Dy. Commissioner of Income Tax (I.T.A.No.2631/Mum/2015) iv) Siro Climpharm Private Limited vs DCIT, Mumbai (I.T.A.No.1269/Mum/2015); v) Siro Clinpharm Private Limited vs DCIT, Mumbai (I.T.A.2618/Mum/2014). 12.4. In response, the ld. CIT,DR brought to our notice the decision of co-ordinate bench of Hyderabad Tribunal in the case of Prolifics Corporation Ltd vs DCIT reported in (2015) 55 taxmann.com 226 (Hyderabad-Trib.) dated 31.12.2014 for Asst Year 2009- 10, wherein the Tribunal has accepted the arguments of the revenue that after the insertion of the Explanation by Finance Act 2012 with retrospective effect from 2002, the corporate guarantee also is an international taxation. The ld. DR also contended that the Hon ble Bombay High Court in the case of CIT vs Everest Kanto Cylinders Ltd. In ITA NO.1165 of 2013 where the guarantee fee transaction was bench marked and arms length price ALP was made by TPO and was upheld by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in respect of transaction specified in (e) this requirement can be read into and in all other transactions specified in (a) to (d) no such requirement of profit/loss can be read into and, therefore, the transaction of corporate guarantee will be considered as an international transaction. Therefore, according to the ld. DR, the ld TPO was correct in not accepting the arguments of the assessee that transactions of giving corporate guarantee to the AE was not an international transaction. 12.6. The ld. AR in his rejoinder explained that the case cited in favour of Revenue on this issue by the Hon ble Bombay High Court in the case of Everest Kanto Cylinder Limited (supra) was when the parent company charged a fee of 0.5% on the AE for rendering this service. On this factual aspect, the Tribunal as well as the Hon ble High Court held that it is an international transaction. Since in the case in hand, the assessee has not charged a penny from the AE, the facts of the case is different and case law is distinguishable and, therefore, the Hon ble High Court s order cannot come to the rescue of the Revenue. The ld. AR pointed out that in the said case, the Hon ble Bombay High Court did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiary called M/s. EIH Flight at Mauritius for the financial year 2007-08 by investing US $1.1 million for the purpose of setting up its off-shore flight catering unit there (Mauritius). The business objective of M/s. EIH flight was to provide in-flight catering services to airline companies operating in and out of Mauritius. According to assessee, i.e. M/s. EIH has been in the industry of catering facilities for over 50 years, and has been producing 50,000 meals per day for some of the biggest names in aviation industry including Air France, Air Mauritius, British Airways, Jet Airways, Etihad Airways, Lufthansa etc., For the purpose of setting up its catering unit at Mauritius, the Airport Authority of Mauritius provided EIH Flight (100% subsidiary company of assessee) a plot of land measuring 14,000 sq. meters on a renewable lease for 20 years. The facility was to have a serving capacity of 10,000 meals per day involving state-of-the-art kitchen with best equipment, latest technological innovations, practicing systems and procedures. For the purpose of setting up catering, the budgeted cost by an external consultant which was estimated to be around US$24.3 million. We furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the decision of the ld. DRP and the final order of the AO, the assessee is in appeal before us. 12.10. We note that M/s. EIH flight is a startup company, it required funds primarily for acquisition of capital assets for setting up its operation and guarantee facilities given by the assessee/assessee company to the lender bank is normal business practice and obligation towards a subsidiary. Since the AE was a startup company, the assessee extended corporate guarantee to the third party borrowers as a matter of commercial prudence to protect its interest by fulfilling the shareholders obligation. We agree with the contention of the ld AR that the corporate guarantee as provided by the assessee was a matter of commercial prudence to protect and by fulfilling the shareholder obligation, as any financial incapacitation of the subsidiary would jeopardize the investment of the assessee. For that we rely on the order of the Coordinate Bench of this Tribunal in the case of Tega Industries Ltd. Vs DCIT (ITA No.1912/Kol/2012 wherein it was held that the provision of corporate guarantee is in the nature of shareholder activity and hence, no TP adjustment on account of corporate guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), or provision of services, (explained by clause (d) of the Explanation), or lending or borrowing money (explained by Clause (c) of Explanation). The plain reading of provisions of sec. 92B(1) of the Act indicate that the various transactions mentioned in section 92B(1) of the Act, (i.e. purchases, sales, provision for services, lending or borrowing or any other transaction) should have bearing on the profits, incomes, losses or assets of such enterprises. In our opinion, the condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transactions namely purchase, sale, or lease of tangible or intangible property or provision of services, or lending or borrowing money or any such transaction. This understanding of ours gets further clarified by way of insertion of Explanation in section 92B(1) by the Finance Act 2012 with retrospective effect from 01.04.2002 vide clause (a) to (d). We find that in the said explanation, clause (e) alone has been carved out as an exception wherein, the transaction thereon has been specifically mandated to be an international transaction where a transaction of business restructurin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions have any bearing on profits, income, lossess or assets of such enterprises u/s. 92 B of the Act. We also note that the Ahmedabad Bench of this Tribunal supra after considering the decision of the Hon ble Bombay High Court in Everest Kanto Cylinder Ltd. (supra) observed as under: We are unable to see, in the judgment of Hon ble Bombay High Court, any support to the proposition that issuance of corporate guarantee is inherently within the ambit of definition of international transaction under section 92B irrespective of whether or not such transactions have any bearing on profits incomes, losses, or assets of such enterprises . Revenue, therefore, does not derive any help from the said decision. 12.14. The ld CIT DR would have had a case where a fee has been charged for the intra service which has been rendered (in the context of corporate guarantee), and, therefore, the assessee or the Court has treated it as an international transaction, then the charge of corporate guarantee has to be in accordance with Arm's Length principle. This means that the price for corporate guarantee should be that which would have been paid and accepted by independent enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s length interest rate from its AE for this transaction; The ld TPO divided the component of interest into two parts i.e. Base rate (being risk free rate) and credit spread. The ld TPO considered the average Indian Prime Lending rate as the risk free rate (14%). Further, the TPO determined the credit spread of by analysing the credit rating of both the assessee and EIH Flight based on country wide report published by the credit rating agency Standard Poor ( S P ) and accordingly, the ld TPO arrived at the credit spread of 350 bps and arm's length rate of 17.5%. Based on the above, the TPO computed transfer pricing adjustment amounting to INR 4,081,503/- . Aggrieved by the order of the ld TPO, the assessee filed objections before the Ld. DRP. The ld DRP upheld the decision of the ld TPO relating to interest free loan given to its AE was not in the nature of shareholder activity and the assessee should have been compensated for advancing of loan to its AE. However, the ld DRP did provide relief and directed the Ld. AO/TPO to compute the arm's length interest using LIBOR instead of prime lending rate of the banks. Based on direction of the ld DRP, the ld AO passed the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be LIBOR + 200bps. The ld AR thus contended that the correct computation of the interest on loan on the basis of LIBOR + 200bps credit spread. 13.4. We have heard the rival submissions and are of the opinion that the LIBOR and basis points should be the criteria for meeting the cost of interest on the international transaction in respect of interest to be charged on the loan advanced to AE. For this purpose the credit rating of the assessee as well as the credit rating of the AE should be taken into account. Accordingly we deem it fit to remand the issue to the ld. TPO to determine the basis points on the basis of the aforesaid parameters and such other relevant parameter in accordance to law. Therefore, we remand this issue for this limited purpose back to the ld TPO / ld AO and to determine the issue as directed by us. Accordingly, the Grounds 2.1. 2.2. raised by the assessee are allowed for statistical purposes and Ground 1 raised by the revenue is dismissed. 14. The Ground No. 5 raised by the revenue is general in nature and does not require any specific adjudication. 15. In the result, the appeal of the assessee is partly allowed for statistical purposes and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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