TMI Blog2019 (5) TMI 732X X X X Extracts X X X X X X X X Extracts X X X X ..... d, as learned CIT(A) rightly observes, it is not an expense which is to be allocated to different heads or sources of income. A donation is in the nature of allocation of income and the tax deduction for eligible deduction is a tax policy driven deduction for encouraging such public spirited application of income. The stand of the assessee was indeed correct and the CIT(A) was perfectly justified in upholding the same. We approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. Re-compute the deduction u/s 80IAB - increasing the amount of deduction by the amount of disallowance u/s 14A - HELD THAT:- When the profit goes up as a result of disallowances of expenses, the eligibility for deduction in respect of such profit correspondingly increases. Circular does not specifically deal with section 14A disallowance, as the circular itself states in so many words the cases cited above are only illustrative and the principle is that the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits . We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals and the related cross objections pertain to the same assessee, involve some common issues and were heard together. As a matter of convenience, therefore, these two cross appeals and the two cross objections are being disposed of by way of this consolidated order. 2. We will first take up the appeal and the cross objection for the assessment year 2009- 10, which are directed against the order dated 10th October 2014, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2009-10. 3. In the first ground of appeal, the Assessing Officer has raised the following grievance: The Id. CIT(A) has erred in directing the AO to exclude only the net interest income while computing the deduction u/s 80IB despite the fact that the income derived from the industrial undertaking is eligible for deduction and interest income cannot be netted off with the interest expenditure which was incurred for business. 4. In a related grievance, which is raised in ground no. 1 of the cross objection by the assessee, the following issue is raised: On the facts and in the circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2008-09 and without assigning any other reasons, held that the Assessing Officer is directed to exclude only the net interest income while computing the deduction under section 80IAB . The Assessing Officer is aggrieved and is in appeal before us. The assessee is also aggrieved that in any case entire interest income was eligible for deduction under section 80IAB. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that the order dated 6th May 2011 passed by the CIT(A), in assessee s own case for the assessment year 2008-09, has, in the meantime, been carried in appeal before a coordinate bench of this Tribunal, and, vide order dated 1st September 2016, has confirmed the stand of the CIT(A). A copy of the said order is placed before us at pages 1 onward of the compilation. The coordinate bench has held that the entire interest income is eligible for deduction under section 80IAB, and, for this short reason, the grievance against netting of interest is wholly academic and infructuous. The stand of the CIT(A) thus attained finality. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 2,82,01,048 to the eligible undertaking, and, to that extent, reduced the deduction under section 80IAB. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the disallowance by observing that donation is not an expense which can be allocated in computation of income under any head. This is an adjustment to be made from adjusted gross total income. He thus upheld the claim of the assessee and reversed the stand of the Assessing Officer. The Assessing Officer is aggrieved and is in appeal before us. 11. Having heard the rival contentions, and having perused the material on record, we see no need to interfere in the matter. It is only in computation of total income that the deduction under section 80G is to be allowed, and, as learned CIT(A) rightly observes, it is not an expense which is to be allocated to different heads or sources of income. As a matter of fact, a donation is in the nature of allocation of income and the tax deduction for eligible deduction is a tax policy driven deduction for encouraging such public spirited application of income. The stand of the assessee was indeed correct and the learned CIT(A) was perfectly justifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases: * Income-tax Officer -Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.) * Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.) ( ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case: * Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.). The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department. 3. In view of the above, the Board has acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts are like this. During the course of proceedings before the Transfer Pricing Officer, it was noted that the assessee had extended a corporate guarantee to the State Bank of India, Hong Kong branch, for acquisition of aircraft by its associated enterprises. It was explained by the assessee that the guarantee given by the assessee is a generic and non-explicit guarantee which binds the principal shareholders in general anyway, and that it did not lower the credit risk to the AE since the AE derives the same benefit by affiliation with the group. It was also submitted that the SBI Hong Kong has granted loan to the AE at LIBOR plus 145 bps which is as per the market norms, and that the AE was required to ensure that the value of security does not fall below the 1.33 times of the borrowings by the AE. All this, according to the assessee, showed that the transaction between the SBI Hong Kong and the AE was in the light of prevailing market situation and the guarantee by the assessee did not confer any benefits to the AE. These arguments did not impress the TPO. As the assessee did not charge any guarantee commission, the TPO computed guarantee commission @ 3% of the amount of guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing regard to the arm's length price . In order to attract the arm's length price adjustment, therefore, a transaction has to be an 'international transaction' first. The expression 'International transaction' is a defined expression. Section 92B defines the expression 'international transaction'. [Para 21] ii. The 'OECD' Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' specifically recognises that any activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e., in the capacity as shareholder would not justify a charge to the recipient companies . It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'Shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. It is essential to appreciate, at this stage, the distinction in a service and a benefit. One may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporates issue guarantees for their subsidiaries, is ill conceived because while banks seek to be compensated, even for the secured guarantees, for the financial risk of liquidating the underlying securities and meeting the financial commitments under the guarantee, the guarantees issued by the corporate for their subsidiaries are rarely, if at all, backed by any underlying security and the risk is entirely entrepreneurial in the sense that it seeks to maximise profitability through and by the subsidiaries. vi. It is inherently impossible to decide arm's length price of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, the consideration for issuance of corporate guarantees are of a different character altogether. [Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not based on the credit assessment of the entity, in respect of which the guarantees are issued, but are based on the business needs of the entity in question. Even in a situation in which the group entity is sure that the beneficiary of guarantee has no financial means to reimburse it for the defaulted guarantee amounts, when invoked, the group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met. x. There is no meeting ground in these two types of guarantees, so far their economic triggers and business considerations are concerned, and just because these instruments share a common surname, i.e., 'guarantee', these instruments cannot be said to be belong to the same economic genus. Of course, there can be situations in which there may be economic similarities, in this respect, may be present, but these are more of an exception than the rule. In general, therefore, bank guarantees are not comparable with corporate guarantees. [Para 40] xi. There has to be something on record to indicate or suggest that the funds raised by the subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; in its normal or legal connotations, as seen earlier, does not cover issuance of corporate guarantees, even though once a corporate guarantee is covered by the definition of international transaction', it is benchmarked in the service segment. In view of the above, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the corporate guarantees issued by the assessee were in the nature of quasi capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of 'international transactions' under section 92B. xv. Of course, once a transaction is held to be covered by the definition of international transaction, whether in the nature of the shareholder activity or quasi capital or not, ALP determination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, it is held that the issuance of corporate guarantees in question was not in the nature of 'provision for services' and these corporate guarantees were required to be treated as shareholder participation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92B. xviii. There is no dispute that Explanation to section 92B states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under section 92B. Accordingly, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by the virtue of clause (a) and (b) of Explanation to section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. xix. The only additional expression in the clarification is 'use& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for 'contingent' impact on profit, income, losses or assets but on 'future' impact on profit, income, losses or assets of the enterprise. xxii. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the instant case it is an undisputed position that corporate guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to section 92B read with section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the view so taken by the coordinate benches. It cannot be open to us to revisit the conclusions arrived at by the coordinate benches, but then this issue is an open issue before the Hon ble jurisdictional High Court and of course, whatever we say is and shall always remain subject to what Hon ble Courts above decide on the issue. Respectfully following the views of the coordinate benches on the issue, in the case of Micro Ink (supra), we hold that issuance of guarantees, without incurring any specific costs, does not constitute an international transaction, and, accordingly, no arm s length price adjustment can be made in respect of issuance of corporate guarantees. Once we hold so, the ALP adjustment sustained by the CIT(A) must stand deleted. Grievance of the Assessing Officer against the partial relief granted by the CIT(A), in view of the findings above, becomes infructuous and is dismissed as such. 24. Ground no. 4 of the assessee, taken in his cross objection, is thus allowed and ground no. 4 of the Assessing Officer s appeal is dismissed as infructuous. 25. In the result, the appeal of the Assessing Officer for the assessment year 2009-10 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... craft, the balance 75% was met out of the SBI loan. It was also explained that this interest free loan resulted in lower aircraft lease rental and thus benefit to the assessee. None of these submissions, however, impressed the TPO. He proceeded to adopt LIBOR plus 445 bps as the arm s length price of the interest, and, as he did so, he rejected the plea of the assessee that as AE was able to raise loans at LIBOR plus 1.45% from the State Bank of India, Hong Kong branch, the same should be taken as arm s length price of the interest free loan taken by the AE from the assessee. The TPO observed that this is so in view of the difference in credit risk on account of collateral and the guarantee . Consequently, the ALP of interest free loan was taken at 7.14% and an ALP adjustment of ₹ 27,64,950 was made. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us. 33. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 34. We find that a coordinate benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same approach of adopting 400 basis points above the LIBOR as ALP was adopted. While deleting this ALP adjustment, speaking through one of us, the Tribunal had, inter alia, observed as follows:- '62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gathered from websites of financial institutions which, according to him, states that, for the foreign currency denominated term loans, the maximum rate of interest is 4% over 6 months LIBOR , and then proceeded to adopt this maximum interest rate as a fair basis for his computing the arm's length price. On the other hand, the assessee has taken two specific comparables of USD borrowings, i.e. L T and Seri Infrastructure, on the interest rate of LIBOR + 150 bps and 1.4% to 1.7% band over LIBOR respectively. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by Underlining, Supplied by us now)' 8. When the matter was carried in further appeal, this time by the Commissioner, before Hon'ble Delhi High Court, Their Lordships were, vide judgment, dated 25th February 2015- a copy of which was placed before us by the learned counsel, pleased to approve the reasoning adopted by the Tribunal. In doing so, Their Lordship observed as follows:- 8. The ITAT has also taken note of the fact that two specific comparables of USD borrowings i.e. L T and Seri Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest rates charged on foreign currency, say US dollars, loans are much lower than the 250 to 500 basis points above the LIBOR having been to be generally applicable rates. For instance, in the cases of Bharti Airtel Ltd. (supra), which pertains to the assessment years 2007-08 and 2008-09, the comparable cases were taken as 150 basis points above LIBOR and in the range of 140-170 basis points above LIBOR. In contrast to this comparable case, the interest charged in the present case is 247 points above the LIBOR rate. In the case of Siva Industries Holdings Ltd. v. Asstt. CIT [2012] 26 taxmann.com 96/54 SOT 49 (Chennai), dealing with the assessment year 2006-07 and while referring to LIBOR at 4.42, interest rate on advances to subsidiary at 6%, which was thus 158 points above the LIBOR rate, was held to be an arms length price. In view of these discussions, it cannot be said that the advance to subsidiary, at 247 basis points above the LIBOR, is not at an arms length price. In any event, once DRP itself states that the Indian banks are charging 250 basis above LIBOR on similar loans, even though this interest rate could reach upto 400 basis points in some cases, there cannot be any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38. The cross objection filed by the assessee for the assessment year 2009-10 is thus partly allowed in the terms indicated above. 39. We now take up the appeal and the cross objection for the assessment year 2010-11 which are directed against the order dated 17th October 2014, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2010-11. 40. In the first ground of appeal filed by the Assessing Officer, the Assessing Officer has raised the following grievance: 1. The Id. CIT(A) has erred in directing the AO to exclude only the net interest income while computing the deduction u/s 80IB despite the fact that the income derived from the industrial undertaking is eligible for deduction and interest income cannot be netted off with the interest expenditure which was incurred for business. 41. In the connected grievances raised by the assessee, by way of first and second ground of cross objection, the assessee has raised the following grievances: 1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decline to interfere in the matter. 8. Ground no. 1 is thus dismissed, and ground no. 1 of the cross objection is allowed. 43. We see no reasons to take any other view of the matter than the view so taken by us for the immediately preceding assessment year. Respectfully following the same, we must uphold the plea of the assessee and reject the grievance of the Assessing Officer. 44. Ground no. 1 of the appeal is thus dismissed and ground no. 1 and 2 of the cross objections are thus allowed. 45. In ground no. 2, the Assessing Officer has raised the following grievance: 2. The Id. CIT(A) has erred in directing the AO to recomputed the deduction u/s 80IAB after increasing the amount of deduction by the amount of disallowance u/s 14A. 46. Learned representatives fairly agree that while this relief was granted by the learned CIT(A) on the basis of Hon ble jurisdictional High Court s judgment in the case of ITO Vs Keval Constructions [2013] 33 taxmann.com 277 (Guj.), the issue is now covered, in favour of the assessee by the CBDT circular No..37/2016 [F.NO.279/MISC./140/2015/ITJ] dated 2- 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken by the court in the following case: * Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.). The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department. 3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance. 4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned. 48. While the aforesaid circular does not specifically deal with section 14A disallowance, as the circular itself states in so many words the cases c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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