TMI Blog2019 (4) TMI 670X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has shareholder’s funds of ₹ 2478.45 crores and the investment made in mutual funds is a paltry sum of ₹ 1.89 crores. Therefore, we hold that the assessee is having sufficient interest free funds to the make the investment in mutual funds, hence, we do not see any reason to sustain the disallowance u/s 37(1). Accordingly, we set aside the orders of the lower authorities on this issue and delete the addition made by the AO In the instant case, the assessee has demonstrated the commercial expediency and corporate strategy for advancing interest bearing funds as interest free advances to subsidiary companies. The subsidiaries are 100% owned by the assessee company and step down subsidiaries are owned by the subsidiaries, therefore, the interest on borrowed capital required to be allowed as deduction and there is no case for disallowance. Accordingly, we hold that in the instant case there is no case for disallowance of interest u/s 36(1)(iii). Interest free advances given to the assessee to its subsidiary are part of corporate strategy with a business prudence and interest free funds available to the assessee are more than the advances given to the subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, we hold that the additions made in the final assessment with regard to folio maintenance and leave encashment are unsustainable, accordingly deleted. Levying of interest u/s 234A - HELD THAT:- In the instant case, the assessee filed the return of income on 28.11.2014 against the due date of 30.11.2014. Subsequently, the assessee filed the revised return of income on 16.02.2016 within the time limit allowed u/s 139(5). In the earlier paragraphs, we have held that the revised return was filed due to mistake of omission and the same was held to be valid. Since we held that the return of income filed u/s 139(5) is valid, there is no case for levying of interest u/s 234A. Accordingly, the interest charged u/s 234 A is cancelled and the appeal of the assessee is allowed. - I.T.A.No.553/VIZ/2018 - - - Dated:- 3-4-2019 - SHRI V. DURGA RAO, JUDICIAL MEMBER And SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER Appellant by: Shri G.V.N. Hari, AR Respondent by: Shri D.K. Sonowal, CIT DR ORDER PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER: This appeal is filed by the assessee against the order Assessing Officer(AO) passed u/s 143(3) r.w.s 92CA(3) 144C(13) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Though the assessee relied on the decision of S.A. Builders Ltd. Vs. CIT (2016) 74 taxmann.com 114(SC) and argued that the funds were extended to the subsidiaries due to commercial and business exigencies, the AO viewed that there is no urgency or commercial expediency in extending interest free loans to the subsidiary companies. The AO further observed from the financial statements of the subsidiaries that none of the subsidiary companies are earning the income and all the subsidiary companies are reporting losses or the nil income, hence it is an effort to reduce the taxes in the hands of the assessee. The AO downloaded the Balance Sheet and Profit Loss account of the subsidiaries for the financial year 2013-14 and made the following observations. a. Except GVK Airports Developers Pvt. Ltd, no subsidiary is earning any income from routine course of business / operating income. Four of them have reported NIL income from all sources and one has earned interest income but none of the five have earned any revenue from operations. b. Three of the six subsidiaries are receiving funds from the assessee and diverting it further to their subsidiaries. c. None of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. The AO observed that in the case of mutual fund growth plan, the expenditure takes the character of capital expenditure since the Net Asset Value is increased / decreased year after year. Hence, held that the expenditure is not wholly and exclusively incurred for the purpose of business, thus required to be disallowed. 5.3. During the assessment proceedings, the assessee submitted an explanation stating that the assessee has not received any exempt income, thus, there is no case for disallowance of any interest / expenditure relatable to exempt income and accordingly requested not to disallow the expenditure. The AO placed reliance on CBDT Circular No.5/2014 dated 11.02.2014 and rejected the contention of the assessee and the AO proposed to disallow the entire interest and processing charges to the extent of ₹ 57,72,53,635/- in the draft assessment order dated 29.12.2017. 6. Against the proposal of the AO in the Draft Assessment Order, the assessee filed objections before the DRP and argued that revised return filed u/s 139(5) is valid and there is no case of disallowance of expenditure u/s 14A since there is no dividend income earned by the assessee. 6.1. Second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5/2014 dated 11.02.2014 and the Hon ble Supreme Court s decision in the case of Max opp Investments Ltd. Vs. Commissioner of Income-Tax (Civil Appeal Nos.104-109 of 2016) and rejected the contention of the assessee on it s request not to make the disallowance u/s 14A of the Act. 7.2. Further with regard to investment in mutual funds also, the DRP upheld the proposed disallowance since the assessee failed to produce any evidence to show that the investment was made out of the reserve funds. 7.3. The Ld.DRP also observed that the assessee has not satisfied the twin conditions for filing the revised return, hence held that the AO is justified in not accepting the revised return. Accordingly, rejected the ground of the assessee and directed the AO to pass orders accordingly. 8. The AO passed the assessment order u/s 143(3) r.w.s. 144C(13) on 25.09.2018 ignoring the revised return of income and rejecting the deductions claimed by the assessee amounting to ₹ 57,72,53,635/-in the revised return. 9. Against the order of the AO passed u/s 143(3) r.w.s. 144C(13), the assessee filed appeal before this Tribunal. During the appeal hearing, advancing the arguments on the validi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee relied on the decision of this Tribunal in the assessee s own case for the A.Y. 2013-14 and argued that in case of no dividend income, there is no case for disallowance u/s 14A and accordingly requested to delete the addition made by the AO relating to earning of income u/s 14A. 11. With regard to the disallowance u/s 36(1)(iii), the Ld.AR argued that the assessee is a company engaged in multi business projects and the objects of the company are as under : 1. To carry on the business of operating and maintaining electric and all other kinds of power generation projects. 2. To carry on the business of providing operating and maintaining facilities relating to electric and all other kinds of power generation projects including among other things responsibility for day to day operations, routine maintenance and management of the facilities. 3. To carry on the business of an investment company and to buy, underwrite, invest in and acquire, hold and dispose-off the shares, stock, debentures, debenture-stock, bonds; obligations and other securities by whatever name called, issued or guaranteed by any company; firm, person, financial institution, banks, ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of each vertical, transparency from regulators perspective. The assessee has formed the operating cum investment holding company for each vertical such as GVK Energy Ltd., GVK Airport Developers Ltd., GVK Transportation Private Ltd. and others and carried out the execution of projects through its immediate subsidiary company or step down subsidiaries. The said subsidiary company / step down subsidiary companies are the operating or operating cum investment holding companies, hence, the entire structure is based on commercial expediency considering the various commercial considerations involved in execution of such large infrastructure projects and associated risks thereof. The Ld.AR further submitted that availing of funds from various strategic investors or to meet the requirement of regulators are carried out through separate entities. During the year under consideration, the assessee had granted unsecured interest free advances to its subsidiary companies or group companies or made investment in such companies partly out of own funds and partly out of borrowed funds. The assessee has borrowed a sum of ₹ 530.36 crores from Axis Bank, Syndicate Bank and Yes Bank Ltd., an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome due to termination of the project. In the case of GVK Oil and Gas Ltd., the project could not be completed due to termination notice given by Govt. of India. Similarly, in the case of GVK Developers Ltd. and GVK Energy Ltd and GVK Transportation Ltd., they are operating holding companies and in the earlier years, they were earning revenue from the operations by charging project maintenance fee. In the case of GVK SEZ Project, though the company has taken SEZ project, after feasibility study, the company did not undertake development projects. Accordingly, the Ld.AR submitted the project-wise details of subsidiary companies for no return and the earning of income. Accordingly argued that the interest free loans given to the subsidiary companies and step down subsidiary companies with a commercial prudence and commercial expediency and requested to allow the expenditure and not to resort for the disallowance. The Ld.AR further argued that the Ld.DRP has heavily placed reliance on the decision of Hon ble ITAT in the case of GVK Airport Developers Ltd. for upholding the disallowance and argued that the case law relied upon by the DRP is distinguishable on facts and has no applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income was filed within the due date u/s 139(1) of the Act and the revised return was also filed within the due date specified u/s 139(5) of the Act. After filing the original return of income, the assessee found that there is no case for making disallowance u/s 14A of the Act in the absence of dividend income, hence, withdrawn the disallowance made by the assessee. On the similar issue in the immediately preceding assessment year, the assessee had withdrawn the disallowance of expenditure relating to exempt income by filing the statement of computation of income before the AO which was rejected by the AO as well as the DRP and on appeal Hon ble ITAT has remitted the matter back to the file of the CIT(A) to consider the disallowance of expenditure on merits. In the impugned assessment year, the assessee has filed the revised return withdrawing the disallowance of expenditure keeping in view of the legal precedents that in the absence of dividend income, there is no case for disallowance of expenditure relatable to the exempt income. Hence it is an erroneous disallowance of expenditure relatable exempt income and the assessee is free to file the revised return due to mistake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to availability of interest free funds. Perusal of the Balance Sheet shows that the assessee has shareholder s funds of ₹ 2478.45 crores and the investment made in mutual funds is a paltry sum of ₹ 1.89 crores. Therefore, we hold that the assessee is having sufficient interest free funds to the make the investment in mutual funds, hence, we do not see any reason to sustain the disallowance u/s 37(1) of the act. Accordingly, we set aside the orders of the lower authorities on this issue and delete the addition made by the AO. The assessee succeeds on this ground also. 16. The next issue is the disallowance of interest expenses u/s 36(1)(iii) of the Act. The reason for disallowance of interest expenses u/s 36(1)(iii) is diversion of interest bearing business funds for non-business purposes / subsidiaries. As stated earlier, the assessee has taken the loans from the banks and given interest free advances or made investments in the subsidiaries / step down subsidiaries/ group companies. Such advances or investments are given partly out of the own funds and partly out of the borrowed funds. From the Balance Sheet, it is found that the assessee is having own fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Limited (refer note 5) Wholly-owned subsidiary company The proceeds were majorly utilized to provide interest-free advances to GVK Transport which was utilized by the latter to undertake the development of road projects through GVK Bagodara- Vasad Expressway Private Limited and GVK Deoli Kota Expressway Private Limited (refer note 6 and 7). 24.66 GVK Perambalur SEZ Private Limited (refer note 8) Wholly-owned subsidiary company The proceeds were majorly utilized to provide interest-free advances which was utilized by the latter in relation to the project being developed by it. 3.11 Gautami Power Limited, GVK Industries Limited and GVK Coal (Tokisud) Company Private Limited (refer note 9) Step-down wholly-owned subsidiary company Proceeds were utilized to acquire shares of Gautami Power Limited from third party (Rs. 56.62 Crs); Advance/ investment in GVK Industries Limited (INR 1.10 Crs); INR 3.09 Crs were utilized by GVK Coal Tokisud for the purpose of project 60.81 Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lized for the purpose of making investments or interest free advances to the subsidiary companies and step down subsidiary companies. The advances given were used for the purpose of business and not diverted for any personal purposes. As per the audit report, interest free advances were utilized for the purpose for which they were intended. As discussed earlier, the main objects as per the Memorandum of Association include carrying on the business of an investment company and carrying out advisory, consultancy and other related services relating to infrastructure projects including implementation thereof, carrying out infrastructure projects or through SPVs or JVs which can be floated directly or acquired through bidding process etc..and providing loans and guarantees. The Ld.AR submitted that the assessee is an infrastructure conglomerate operating in various infrastructure segments i.e. power, energy, airport, road projects etc. as per the pictogram reproduced herewith. Group holding structure: 16.3. For each of the major business operations, segments for better administration and operational efficiency and other factors like business and commercial risks, bidding pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh a separate SPV. (v) In the case of project financing, separate SPV s for each project helps to create separate charge on the project asset by the project lender which helps to protect interest of lenders as well as commercial feasible terms for project loan. However, in the case of multiple projects in same entity, the interest of each of project lenders gets jeopardized leading to several restriction/ conditions/ unfavorable terms for project loan and hence it is not commercially prudent to execute multiple projects in the same entity. vi) To meet the above business requirements, segment-wise operating cum investment holding company for Power, Airport and Transport vertical has been set-up by the assessee. Further, the assessee would like to submit that any major infrastructure player operating in different kind of projects would have a similar structure/ operating model as that of it. 16.4. From the above, it is observed that the subsidiaries / step down subsidiaries are nothing but the extended arm of the assessee through which separate projects are being carried out. This is in accordance with the main objects as per the Memorandum and Articles of Associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue for the year under consideration, the assessee stated that it had received operating revenue in the earlier years and the revenue was received in couple of verticals and the revenue is expected in some verticals in the coming years. Therefore, the observation of the AO that the disallowance of expenditure for non receipt of income/benefit immediately after investment is unjustifiable. Interest on borrowed funds required to be allowed as deduction representing the funds used for the purpose of business but need not necessarily to earn the income. The assessee has to satisfy the following three conditions for allowing the interest to be allowed u/s 36(1)(iii). (i) the assessee should borrow the funds (ii) the funds borrowed should be used for the purpose of business and (iii) the assessee should pay interest on borrowed funds. 16.5. The Ld.DRP relied on the decision of GVK Airports Developers which is distinguishable on facts of the case and have no application in the assessee s case. From the above facts, it is established that interest free loans were given or amounts are advanced by the company as per the objects of the Memorandum and Articles of Association a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. This view is fortified by Hon ble Supreme Court in the case of Hero Cycles (P.) Ltd.v. Commissioner of Income-tax (Central), Ludhiana, [2015] 63 taxmann.com 308 (SC) 16.6. The assessee also relied on the decision of Hon ble High Court of Delhi in the case of M/s Basti Sugar Mills Company Ltd. dated 28.09.2018 in I.T.A. No.205/2018. The Hon ble High Court held as under Money borrowed, even when advanced to a sister concern for some business purpose, would qualify for deduction of interest. However, if the money borrowed is utilized by the assessee for personal benefit and not for business purpose, interest paid on that amount would not satisfy the test of commercial expediency. 16.7. In the case of CIT Vs. Modi Entertainment Ltd. (2014) 89 CCH 0014 Delhi HC held as under : 3. According to the Tribunal, advancing of such monies to the subsidiaries was driven by commercial expediency. In support of this view the Tribunal relied upon the following judgments : (1) SA Builders v. CIT : 288 ITR 1 (SC) (2) CIT V. Dalmia Cement (P) Ltd. : 254 ITR 37 (Del.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid on advances given to subsidiary companies and step down subsidiary companies is for the purpose of commercial expediency and accordingly allowed the deduction of interest on borrowed capital. 17.1. In the instant case, the assessee has demonstrated the commercial expediency and corporate strategy for advancing interest bearing funds as interest free advances to subsidiary companies. The subsidiaries are 100% owned by the assessee company and step down subsidiaries are owned by the subsidiaries, therefore, the interest on borrowed capital required to be allowed as deduction and there is no case for disallowance. Accordingly, we hold that in the instant case there is no case for disallowance of interest u/s 36(1)(iii) of the Act. 18. From the Balance Sheet, it is observed that the assessee has interest free funds of ₹ 2478.45 crores in share capital, Reserves and Surpluses which the assessee is free to make investment with or without charging interest. In the instant case, though the assessee had borrowed the sum of ₹ 530.36 crores from the banks, the advances given to the subsidiary companies are much lesser than the interest free funds available to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute Resolution Panel. The Ld.DRP found that the assessee had claimed the expenditure of ₹ 34,32,226/- and reduced the excess provision made in the earlier years to the extent of ₹ 25,23,664/- and the net amount of ₹ 9,08,562/- was claimed as deduction and the AO proposed addition in the Draft Assessment order. The DRP has observed that the assessee had claimed a sum of ₹ 24,99,139/- expenditure relating to the payment made to GVK Tech towards legal and professional services. The Ld.DRP further the observed that a sum of ₹ 20,83,089/- was the amount paid to GVK Technical and Consultancy Private Ltd., for retainer ship fee @ ₹ 6,94,363/- for the months of January to March 2014 is not allowable and accordingly directed the AO to disallow the sum of ₹ 20,83,089/-. The DRP was of the view that as per agreement, GVK Technical and Consultancy Private Limited is required to provide manpower to the assessee company. Since, the expenditure of ₹ 20,83,089 represented the retainership fee paid @Rs.6,94,363 for the months of January, 2014 to March, 2014 the DRP held that the expenditure cannot be allowed. The AO completed the assessment making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns were also mentioned in the agreement for rendering services, the payment and period of agreement. As per the terms and conditions, the service provider required to provide the manpower to the assessee on ongoing basis, as per the requirement. The persons deployed by the service provider would be working under the supervision, instruction and control of the assessee and the agreement is valid for 5 years from the date of entering into the agreement. The agreement also specifies the terms of payment of fees which is at actual cost incurred by the service provider on manpower plus 20% service charges apart from the taxes and duties. For the sake of clarity and convenience we extract Fees and Terms of payment as per the agreement which reads as under: Fees and Terms of Payment a) In consideration for supply of the manpower as per the requirement of GVKPIL, the GVKPIL will reimburse the fees to GVK Tech as below: i) Actual cost incurred by GVK tech on such manpower ii) 20% services charges towards the expenses incurred on managing the compliance requirements of such manpower and any other incidental matter. b) Any taxes, duties and other levies levied/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000) Net Liability 492,700 As per the details furnished by the assessee, the assessee made the payment of sponsorship fee to the Confederation of Indian Industry (CII) for conducting AGM 2014 for an amount of ₹ 2,80,900/- and also paid a sum of ₹ 5,61,800/- towards sponsorship for 9th Yi National Summit 2013 and received the reimbursement of ₹ 3,50,000/- and the net expenditure incurred was ₹ 4,92,700/-. This issue is squarely covered by the decision of this Tribunal in the assessee s own case for the A.Y.2013-14 in I.T.A No.530/Viz/2017 dated 18.05.2018. The Tribunal in the case cited supra held that the expenditure incurred for sponsorship is business expenditure and accordingly deleted the addition made by the AO. For the sake of clarity and convenience, we extract relevant part of the order of this Tribunal in para No.16 and 17 which reads as under: 16. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee has incurred the amount of ₹ 10,68,138/- towards sponsorship expenses and genuineness of expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view taken by the Tribunal in the assessee s own case, we hold that the expenditure is allowable expenditure and accordingly, we delete the addition made by the AO and set aside the orders of the lower authorities. The appeal of the assessee on this ground is allowed. 26. Ground No.6 is related to the corporate guarantee of ₹ 7,90,99,581/- In the instant case, the AO has referred the international transaction to the Transfer Pricing Officer(TPO), since, it exceeded the sum of ₹ 15.00 crores for determination of Arm s Length Price(ALP) u/s 92CA of the Act. The TPO found that the assessee has given corporate guarantee to it s AE for an amount of ₹ 3326,01,00,000/- as on 31.03.2014 and charged the guarantee commission of ₹ 29,94,47,328/-to its AE which is found to be not at ALP. The taxpayer has charged the guarantee commission at 0.90% on corporate guarantee provided to the AE and the TPO proposed for corporate guarantee charges at 1.30% by show cause notice and the assessee filed explanation justifying the guarantee commission charged by it and objecting for enhancement proposed by the TPO. 27. Not being satisfied with the explanation of the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , though the Ld. A.O. adopted the bank guarantee commission as a comparable and at ALP, the terms and conditions of the bank guarantee and the terms and conditions of the corporate guarantee were not brought on record and did not allow the necessary adjustments to various risks. If the A.O. is taking any of the comparable cases for transfer pricing study, the risk factors involved, the terms and conditions of the guarantee, the profits, etc. require suitable adjustments. In this case, the A.O. has not made any such adjustments and brushed aside the entire argument advanced by the assessee before the A.O. as well as the DRP. The DRP also brushed aside the argument of the assessee simply stating that the assessee did not demonstrate how the US bond rate is more applicable than the bank rates adopted by the TPO. Neither the A.O. nor the DRP studied the issue how the US bond rate is more applicable than the bank rate and there was no analysis of data with risk factors, financial factors, commercial interest, profits, etc., while making the transfer pricing study. The assessee has brought on record the number of case laws relied up on, but the revenue did not make out a case for rejecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee@0.90% is reasonable. Accordingly, we set aside the orders of the lower authorities and delete the addition made by the AO. 29. Ground No.5 is related to the addition relating to folio maintenance charges of ₹ 3,54,405/- and provision for leave encashment of ₹ 12,90,884/- which was made addition in the final assessment order without being brought on Draft assessment order. The Ld.AR brought to our notice that the AO did not make the proposed disallowance of folio maintenance charges and provision for leave encashment in the draft assessment order, therefore, there is no case for making any addition. The Ld.AR further submitted that during the assessment proceedings, the AO has called for the explanation for which the assessee submitted the reply and no proposal was made in the draft assessment order, thus, the assessee was under the impression that the explanation of the assessee was accepted and no disallowance was proposed to be made. Therefore, argued that the scheme of assessment u/s 144C does not permit the AO to make the additions which are not proposed in the draft assessment order. Hence, requested to delete the additions and allow the appeal of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in subsection (5), after considering the following, namely:- (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. 13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. 32. From plain reading of section, it is observed that the AO is not permitted to make any addition which is not contained in the draft assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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