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TMI Blog2016 (10) TMI 1264X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/Mds./2014 and 884/Mds./2015. 2. First we take common issue in all these appeals of assessee. The first common ground in all these three assessment years is with regard to disallowance u/s.14A of the Act. 3. The brief facts of the issue are that the AO found that the assessee received an amount of Rs. 1,94,75,000/-(For A.Y.2008-09), Rs. 36,68,430/- (For A.Y.2009-10) and Rs. 47,84,162/- (For A.Y.2010- 11) as dividend income which has been claimed as exempt. Further, the AO noted that the assessee company made investments in the form of shares and mutual funds. Though the assessee company was having secured loan on which, it was paying interest, in addition to incurring finance charges and interest paid to others and also incurred other routine expenditure towards establishment and administration, it has not attributed any portion of interest and other expenditures towards earning of exempt income. Hence, the AO invoked the provisions of the section 14A of the Act on the ground that the investment made by it was in the nature of strategic investment and the AO computed the disallowance u/s.14A r.w.Rule 8D. Aggrieved with the draft assessment order of AO, the assessee carried the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra, and the following principles have been shown to emerge from section 14A and the decision in Walfort Share and Stock Brokers P. Ltd.: "(a) the mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; (b) section 14A(1) ios enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) the principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business; (d) the basic principle of taxation is to tax net income. This principle applies even for the purposes of section 14A and expenses towards non-taxable income must be excluded; (e) once a proximate cause for disallowance is established - which is the relationship of the expenditure with income which does not form part of the total income- a disallowance has to be effected." As per the said decision, one of the main principles are that sec. 14A is to prevent claims of deduction of expenditure in relation to income which does not form part of the total income of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income as per sec.5 the income should be received or deemed to be received or accrued or arise or deemed to arise any income during the year or accrue or arise to him outside India during the year. A n investment which does not give rise to any income deemed to accrue or arise cannot form part of the total income and therefore cannot form income which does not form part of the total income under the Act. Thus once there is no claim of income which does not form part of the total income under the Act, there cannot be any disallowance in relation to an investment which may or may not give rise to any 0income which does not form part of the total income. In the present case it is noticed thatnone of the investments made by the assessee has generated any dividend income which has been claimed by the assessee ato be not to form part of the total income. In the circumstances, as it is noticed that the assessee does not have any income which does not form part of the total income nor has the assessee made such a claim, we are of the view that no disallowance under sec. 14A can be made on the assessee for the relevant assessment year. This view of ours also finds support from the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs. 2,03,752/- made by the Assessing Officer was in order." 8. The Gujarat High Court in the case of CIT Vs.Corrtech Energy Pvt.Ltd.(supra) held as under:- "We have given our thoughtful consideration to the facts and the decision relied upon by the Id AR. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Winsome Textile Industries Ltd. reported at (2009) 3191TR 204(P&H) has held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. In this case also, the assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Hon'ble High Court of Punjab & Haryana in the case of CIT vs. Winsome Textile Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition. Therefore, gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere used by the AssesseeCompany to invest in the Capital of another Partnership Firm and since profits derived by the AssesseeCompany from a Partnership firm were exempt from tax u/s.10(2A) of the Incometax Act, the interest expense related to such tax free profits is to be disallowed u/s.14A of the Income Tax Act? (B) Whether on the facts and in the circumstance of the case and in law the Hon'ble Tribunal was right in holding that the Assessing Officer cannot consider notional interest on deposit received by the AssesseeCompany while arriving at the fair market value u/s.23(1) (a) of the Income-tax Act?" 2. In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed would not arise." 10. Similar view has been taken by the Hon'be Punjab & Haryana High Court in the case of CIT Vs. M/s. Lakhani Marketing Incl. in ITA No.970 of 2008 dated 2.4.2014. The Hon'ble High Court while affirming the decisions of CIT(A) as well as the Tribunal in deleting the disallowance made under section 14A observed as under:- "7. After hearing learned counsel for the parties, we do not find any merit in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al is reproduced below:- 'Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assesseeand the expenditure relating to that part of income is claimed by the assesseeas deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present casethe entire income is found to be taxable, no disallowance can be made under section 14A of the Act.' 10. Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, since the investments in shares are in the years 1995-96, 1998-99 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001 -02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999, it is clear that interest bearing funds have not been utilized for investment for purchase of shares. 11. For the aforesaid reasons, we s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act." (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act." 6.1 Turning to the facts of the case, we find that undisputedly the assessee has made the investment in the shares of M/s Kailash Auto Finance Ltd. in earlier years and in the impugned assessment year the assessee has not earned any tax free income, which can form part of total income of the assessee. In the absence of tax free income, the corresponding expenditure to earn that income cannot be worked out for its disallowance. Therefore, in a situation where there is no tax free income, no disallowance u/s 14A is possible. 6.2 The similar view was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 57(iii) of the Income-tax Act. The decision relates to an assessment year where dividend income was taxable in the hands of the assessee. With the introduction of section 10(33) of the Income-tax Act from the assessment year 1998-99 the position of law in regard to taxability of dividends has been changed since such income becomes a part of income which do not form a part of total income of the assessee. The provisions of section 14A introduced by the Finance Act, 2001, with effect from April 1, 1962, retrospectively bars allowing any expenditure in respect of income which is not includible in the total income. Considering this change in the position of law the deci sion of the Supreme Court relied upon by the assessee does not apply to the assessee' s case." 6. Therefore, the dividend income is exempted from the tax liability under section 10(33) of the Act. Under section 14A of the Act, expenditure relating to exempted income is not allowable. The assessing authority has considered the above relevant factor and disallowed the claim of the assessee." 7. However, the first appellate authority decided the issue in view of the order of the Special Bench in the case of Chem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r CUP method. The comparable transaction taken by the assessee was the interest on loan from Standard Chartered Bank taken by Avis Venture Ltd(its subsidiary in Mauritius). The interest rate payable by Avis Venture Ltd on the aforesaid loan was at the rate of 1.9% + Libor. The assessee itself stated that the average Libor during the financial year 2007-08 was 4.41°h, therefore, the Arms Length Interest for the transaction of the comparable as stated by the assessee itself was 6.3l%(4.4l% + 1.9%). Therefore, the TPO accordingly has made an adjustment at the rate of 0.31%(6.31- 6%) which worked out to Rs. 47,85,606/-. In the written submissions before the DRP, it was interest rate to be adopted in respect of loan granted to the A.E in foreign currency should be bench marked to Libor Rate. The assessee relied on the decision of the ITAT in its own case for the AY 2006-07 and also of the decision of the Hyderabad Tribunal in the case of Foursoft vs DCIT and requested for deletion of the proposed addition of Rs. 47,85,606/-. The reasons given by the TPO while proposing the adjustment and the contentions raised by the assessee in its objections to the proposed adjustment have been co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culation of LIBOR is extracted as under : "Libor is calculated and published by Thomson Reuters on behalf of the British bankers' Association (BBA). It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking the question, "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?" The BBA throws out the highest 4 and lowest 4 responses, and averages the remaining middle 10, yielding a 23 percent trimmed mean. The average is reported at 11:30 a.m." 13. It can be seen that each LIBOR contributor panel bank formulates its own rate for a day which is put into the application which links directly to a rate setting team at Thomson Reuters. Then trimming is done of such rates submitted by different contributor banks. After excluding four highest and lowest rates, an average is worked out, which becomes LIBOR rate. Thus it is evident that LIBOR is not a rate in itself which is charged or paid for the user of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,24,42,500/- at the rate of 3.5% on outstanding guarantee which was adopted by TPO. 13.3. In assessee's C.O, the related ground is that the TPO had erred in not providing any basis for arriving at 3.5% as ALP commission for issuing corporate guarantee for the subject A.Y.2009-10. 13.4. The related grounds raised by Department in ITA No.706/Mds./2015 is that the DRP held that the action of the TPO's action of determining the ALP at Rs. 3,36,50,000/- is not justified and consequently the proposed upward adjustment of Rs. 3,36,50,000/- is deleted as providing of corporate guarantee will not constitute an international transaction for the purpose of determining the ALP. 13.5 Revenue's appeal in ITA No.1074/Mds./2014 for assessment year 2009-10 has been filed late by 3 days. Condonation petition has not been filed by Department. Before us, the ld.D.R explained the reasons for delay in filing the appeal due to administrative reasons. Reasons explained by the ld.D.R are justified and hence, delay is condoned and appeal admitted. 14. The facts of the issue are that TPO has made an adjustment of Rs. 8,24,42,500/- as commission income, for the same amount for the same guarantee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have any bearing on profits, income, losses or assets of the assessee company. 48. As an alternative contention, the learned senior counsel argued that guarantees are provided to the assessee on behalf of AEs as an integral business activity of the assessee relating to supply of general management and distribution of logistic business, worldwide. Therefore, the transaction must be tested under the combined transaction TNMM approach rather than on a stand-alone basis. The ITAT, Pune Bench in the case of Demag Cranes & Components (India) (P.) Ltd. v. DCIT, 56 SOT 187(Pune) and ITAT, Delhi Bench in the case of McCann Erikson India Pvt. Ltd. v. Addl.CIT (24 Taxmann.com 21) have held that TNMM applied on an entity-wide basis is the most appropriate method for Benchmarking transactions that are not independent of the business carried on by an assessee. The learned senior counsel submitted that the adjustment made against the corporate guarantee may be deleted." Accordingly this ground is decided in favour of the assessee and against the Revenue. 16. Further it is noted that the assessee has not pressed any other ground before us. Accordingly, other than above grounds argued by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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