TMI Blog2021 (2) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... ew is fortified by the judgement of the Joint Investments Pvt. Ltd. Vs. CIT [ 2015 (3) TMI 155 - DELHI HIGH COURT] We, thus, in terms of our aforesaid observations uphold the restoration of the aforesaid issue by the CIT(A) to the file of the A.O, with a rider that the disallowance be restricted to the extent of the exempt income received or receivable by the assessee during the year under consideration. Claim of the revenue that the CIT(A) was in error in directing the A.O to consider only those investments made in non-subsidiary company which had yielded dividend income for the purpose of disallowance under Sec. 14A r.w. Rule 8D(2)(iii), as the same was contrary to the CBDT Circular No. 5 of 2014, dated 11.02.2014, we are unable to persuade ourselves to accept the same. Similar reliance placed by the revenue on the aforesaid CBDT Circular No. 5 of 2014, dated 11.02.2014 was rejected by the Hon ble High Court of Madras in Redington India Ltd. Vs. Addl. CIT [ 2017 (1) TMI 318 - MADRAS HIGH COURT] and in PCIT Vs. IL FS Development Company Ltd. [ 2017 (8) TMI 732 - DELHI HIGH COURT] - At the same time, we in light of the judgment of the Hon ble Supreme Court in Maxopp Investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the payment of club membership is allowable as a revenue expenditure - also see M/S GROZ BECKERT ASIA LIMITED [ 2013 (2) TMI 375 - PUNJAB HARYANA HIGH COURT] - thus we are of the considered view that the CIT(A) had rightly allowed the assessee‟s claim for deduction of the club membership fees of ₹ 4,79,225/- as a revenue expenditure. Also, we concur with the observation of the CIT(A) that the rejection of the assessee‟s claim for deduction of club membership expenses by the A.O, de hors any verification on his part that as to whether or not the said expenditure was incurred by the assessee wholly and exclusively in the course of its business, also, cannot be sustained. Whether CIT(A) had exceeded his powers under Sec.251(1)(a) by setting aside‟ the matter to the file of the A.O/TPO for carrying out a fresh benchmarking and determining the arm‟s length price of the guarantee fees ? - We are unable to concur with the same. On a perusal of the order of the CIT(A), we find that as observed by him, instead of quashing the addition on a mere technical ground i.e a wrong basis of comparison adopted by the TPO, the CIT(A) had in all fairness rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant prays that disallowance u/s. 14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses amounting to INR 2,68,77,514 be deleted and the said disallowance be restricted to INR 88,26,166. Disallowance under Transfer pricing 5. On the facts and in the circumstances of the case and in law prevailing on the subject, the Ld. Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer/Transfer Pricing Officer in making a transfer pricing adjustment of INR 2,36,59,502 in respect of the guarantee / counter guarantee given by the Appellant to various banks and other corporate bodies for and on behalf of the associate enterprise. 6. On the facts and in the circumstances of the case and in law prevailing on the subject, the Appellant submits that the international transaction of providing guarantee / counter guarantee to various banks and other corporate bodies for and on behalf of the associate enterprise is at arm's length and no adjustment was required to be made in respect thereof and the stand taken by the Assessing Officer/ Transfer Pricing Officer is incorrect and illegal and the Ld. Commissioner of Income-tax (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SA) when the transfer pricing addition on interest on foreign currency loan to another AE (situated in Singapore) was deleted by the CIT(A) on the premise that the F/MMDA rates cannot be applied to foreign currency loan, hence, a similar position should apply to foreign currency guarantee provided to its AE. 15. Without prejudice to the above ground, the appellant contends that no show cause notice was issued for applying Fixed Income Money Market and Derivatives Association of India (FIMMDA) rates for benchmarking the guarantee transaction. 16. The appellant contends that the even if the Loss Given Default (LGD) approach is adopted for benchmarking corporate guarantee fees, as was done in AY 2011-12, no addition is warranted as total guarantee fee charges recovered by the appellant from its overseas AE ranging from 2.25% to 3.6% is higher than the rate arrived at by adopting LGD approach. 17. Without prejudice to the above grounds, the appellant contends that the judicial precedents, including the jurisdictional High Court and coordinate bench of the Tribunal in group company's case have accepted that the corporate guarantee charge, if any, should be restricted to 0.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able on record. As no new facts would be required to be looked into for the purpose of adjudicating the aforesaid issues, therefore, we admit the same in light of the judgment of the Hon ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC). 2. Briefly stated, the assessee company which is an established ISO 9000:2001 surface transportation infrastructure company had e-filed its return of income for A.Y 2010-11 on 16.09.2010, declaring a total income of ₹ 492,98,20,007/-. The return of income filed by the assessee was initially processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. Observing, that the assessee had during the year under consideration entered into international transactions with its Associate Enterprises (for short AEs‟), a reference under Sec. 92CA(1) was made by the A.O to the Addl. CIT, Transfer Pricing Officer-1(6), (for short TPO‟), Mumbai, for benchmarking the said transactions. As per order passed under Sec. 92CA(3), dated 29.01.2014 the TPO made a transfer pricing adjustment of ₹ 8,25,38,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought scaling of the same to an amount ₹ 88,26,166/- under Rule 8D(2)(iii). It was noticed by the CIT(A) that the A.O had declined to consider the aforesaid revised claim of the assessee, for the reason, that as it was not raised on the basis of any revised return of income, the same, thus, in light of the judgment of the Hon‟ble Supreme Court in the case of Goetz (India) Ltd. Vs. CIT (2006) 204 CTR 182 (SC) could not be admitted. However, the CIT(A) drawing support from the judgment of the Hon‟ble High Court of Bombay in CIT Vs. Pruthvi Brokers and Shareholders (2012) 23 taxman.com 23 (Bom) held a conviction that the assessee‟s claim for reduction of disallowance under Sec. 14A did merit consideration by the A.O. Accordingly, the CIT(A) restored the matter to the file of the A.O and directed him to consider the aforesaid claim for reduction of disallowance that was raised by the assessee. The CIT(A) while restoring the matter to the file of the A.O also issued certain specific directions/guidelines to be followed by the A.O while readjudicating the aforesaid issue, viz. (a) that the judgments of the Hon‟ble High Court of Bombay in the case of HDFC B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirmed the same. Accordingly, on the basis of his aforesaid observations the CIT(A) partly allowed the appeal of the assessee. 5. Aggrieved, both the assessee and the revenue have assailed the order of the CIT(A) in appeal before us. Adverting to the grievances of the assessee, we find that it had inter alia assailed the order of the CIT(A), on the ground, that the appellate authority instead of accepting its claim for reduction of the disallowance u/s 14A r.w Rule 8D to an amount of ₹ 88,26,166/- as against that offered by it in its return of income at ₹ 12,21,33,326/-, had erred in restoring the issue to the file of the A.O for reconsideration. In order to buttress its aforesaid claim, it was submitted by the ld. A.R that the Tribunal had in the assessee‟s own case for the immediately preceding year i.e A.Y 2009-10 in ITA No. 2393 2568/Mum/2015, dated 19.12.2018, wherein identical facts were involved, had upheld the order of the CIT(A). Alternatively, it was submitted by the ld. A.R that the disallowance under Sec. 14A was liable to be restricted only to the extent of the exempt dividend income that was received or receivable by the assessee during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto service by them to drive home their respective contentions. We shall first deal with the observation of the CIT(A), wherein, he had directed the A.O to consider the assessee‟s claim for reduction of the disallowance u/s 14A r.w Rule 8D to an amount of ₹ 88,26,166/-, as against that suo motto offered by it in its return of income at ₹ 12,21,33,326/-. As noticed by us hereinabove, the A.O was of the view that in light of the judgment of the Hon‟ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT (2006) 204 CTR 182 (SC), in the absence of a revised return of income, the seeking of reduction of the disallowance that was suo motto offered by the assessee in its return of income was not tenable. In fact, the A.O was of the view that in case the assessee wanted to raise the aforesaid claim, then, it was obligated to do so by filing a revised return of income. On the contrary, the CIT(A) relying on the judgement of the Hon‟ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers and Shareholders (2012) 23 taxman.com 23 (Bom), had observed, that as there was no embargo on considering of the aforesaid claim of the assessee in the course of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee vide its letter dated 13.03.2014 filed with the A.O had given multiple reasons for reduction of the aforesaid disallowance u/s 14A, viz. (i) that as per the terms of NHAI the assessee on being awarded a project was compelled to incorporate a separate Special Purpose Vehicle (SPV) for executing the project and being a promoter had to invest as equity holder as per the terms of the concessionaire agreement; (ii) that the investments made by the assessee company to the extent of its net worth were out of its own funds, internal accruals or opening balances of internal accruals; (iii). that the borrowings were not utilised for equity investments of domestic companies; (iv). that the capital gains from the equity investments were taxable etc. In our considered view, the exhaustive contentions that were raised by the assessee to buttress its aforesaid claim for reduction of the disallowance under Sec. 14A were required to be verified and could not have been accepted by the CIT(A) on the very face of it. Insofar support drawn by the ld. A.R on the order passed by the Tribunal in the assessee‟s own case for the immediately preceding year i.e A.Y 2009-10, ITA No. 2393/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax-free securities, it was to be presumed that investment made by the assessee was out of the interest-free funds available with it and no disallowance was warranted u/s 14A. In our considered view, the CIT(A) had rightly directed the A.O to consider the aforesaid judicial pronouncements in the course of the set aside‟ proceedings. As regards the claim of the revenue that the CIT(A) was in error in directing the A.O to consider only those investments made in non-subsidiary company which had yielded dividend income for the purpose of disallowance under Sec. 14A r.w. Rule 8D(2)(iii), as the same was contrary to the CBDT Circular No. 5 of 2014, dated 11.02.2014, we are unable to persuade ourselves to accept the same. Similar reliance placed by the revenue on the aforesaid CBDT Circular No. 5 of 2014, dated 11.02.2014 was rejected by the Hon ble High Court of Madras in Redington India Ltd. Vs. Addl. CIT (2016) 97 CCH 219 (Mad) and by the Hon ble High Court of Delhi in PCIT Vs. IL FS Development Company Ltd. (2017) 399 ITR 483 (Del). At the same time, we in light of the judgment of the Hon ble Supreme Court in Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC) are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the AE. Accordingly, it was the claim of the assessee before the lower authorities that the total guarantee charges levied on the AE, viz. Elsamex SA ranged between 2.25% to 3.60%. As is discernible from the order passed by the TPO under Sec. 92CA(3), dated 29.01.2014, we find that the assessee for the purpose of benchmarking the aforesaid international transaction of providing guarantee/counter guarantee to the various banks and the other corporate bodies for and on behalf of its AE, had used external CUP to arrive at the arm‟s length price of the guarantee charges. It was stated by the assessee before the TPO that its credit rating as per the letter received from Credit Analysis Research Ltd. (for short CARE‟) was a BBB + , while for the credit rating of its AE, viz. Elsamex SA was BB . In the course of the proceedings the TPO called for information under Sec. 133(6) from CRISIL about the average yield on the long term instruments during the year under consideration i.e F.Y. 2009-10, which was furnished, as under: Ratings F.Y. 2009-10 1-2 years 2-3 years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank, as under: Sr. No. Particulars As per TPO @ 3.046% As charged by assessee Difference Conversion Rate Amount in INR Euro Euro 1. Stand By Letter of Creidt 25,777 68,728 (42,951) 60.56 Nil 2. Letter of Comfort 8,550 53,266 (44,716) 60,56 Nil 3. Corporate Guarantee 5,55,695 1,82,434 3,73,261 60.56 2,26,04,671 Guarantee fee on L/C Given by IL FS Transportation Networks Limited 5,90,022 3,04,428 2,85,594 2,26,04,671 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 5 Mn Euro on behalf of Elsmex SA 26/02/2010 ₹ 5,38,087/- Paid to IL FS for Counter Guarantee given to the bank on behalf of Elsamex SA. 31/03/2010 ₹ 3,52,09,197/- Paid to IL FS for Additional Counter Guarantee given to the bank on behalf of Elsamex SA. 31/03/2010 ₹ 4,11,512/- Paid to IL FS for Counter Guarantee given to the bank on behalf of Elsamex SA. Total ₹ 5,67,28,794/- . In the backdrop of the aforesaid facts, it is the claim of the ld. A.R that the TPO/CIT(A) while benchmarking the aforesaid international transaction of providing of guarantee/counter guarantee by the assessee to the various foreign banks and other corporate bodies for and on behalf of its aforesaid AE, viz. Elsamex SA, had failed to take into account the aforesaid amount of ₹ 5,67,28,794/- that was recovered by the assessee from the AE by way of reimbursement of bank guarantee charges. 12. We have deliberated at length on the aforesaid issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,13,274 Other 67,701 Total 4,79,225 However, the same were disallowed by the A.O, for the reason, that as membership of the club was a personal privilege entitling the member to use and enjoy the property of the club and all other amenities, benefits and facilities provided therein, it was, thus, not allowable as a business expenditure. Apart from that, we find that the A.O drawing support from a judgement of the Hon‟ble High Court of Kerala in Framatone Connector Oen Ltd. Vs. DCIT (2007) 294 ITR 559 (Ker), had also opined, that as aforesaid expenditure was in the nature of a capital expenditure, therefore, the same resulting in an enduring benefit was not to be allowed as a deduction. On appeal, the CIT(A) observed that as the A.O had without examining as to whether or not the aforesaid expenses were incurred by the assessee wholly and exclusively for its business had disallowed the same, thus, not finding favour with the view therein taken, the CIT(A) had vacated the said disallowance. 14. Before us, the ld. D.R relied on the assessment order. It was submitted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad with Rule ( r.w.r ) 8D(2)(ii) regarding the disallowance of interest to the file of the Assessing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) is bad in law. 2. On the facts and in the circumstances of the case and in law, the Appellant prays that disallowance u/s. 14A r.w.r 8D(2)(ii) regarding the disallowance of interest amounting to INR 2848,50,067 be deleted. 3. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in setting aside the issue regarding disallowance u/s. 14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses to the file of the Assessing Officer to examine the issue a fresh. The order passed by the Id. Commissioner of Income-tax (Appeals) is bad in law. 4. On the facts and in the circumstances of the case and in law, the Appellant prays that disallowance u/s.14A r.w. r 8D(2) (iii) regarding the disallowance of administrative expenses amounting to INR 5,42,28,196 be deleted and the said disallowance be restricted INR 1,28,91,432 Disallowance under Transfer pricing 5. On the facts and in the ci rcumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us the following additional ground of appeal: 5. Without prejudice to Ground No.1 and Ground No.4, on the facts and circumstances of the case, the Appellant prays that the disallowance under Sec. 14A of the Act should be restricted to the extent of exempt income earned during the year. On the other hand the revenue is aggrieved with the order of the CIT(A) on the following ground of appeal before us: 1. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in advising the A0 to follow the decision in the case of HDFC Bank, Mumbai vs DCIT-2(3), Mumbai Ors Dt. 25.02.2016 r.w. CIT vs HDFC Bank Ltd. (2014) 366 ITR 505 (Bom.)(HC) while calculating the disallowance u/s 14A r.w.r 8D, without considering the fact that the order of HDFC Bank did not address the aspect of determination of disallowance u/s 14A as per rule 8D which was applicable from A.Y. 2008-09 onward. 2. on the facts and circumstances of the case and in law, the Ld CIT(A) erred in advising the AO to consider only those Investment made in the Non- subsidiary company which have yielded dividend income for the purpose of the disallowance u/s 14A r .w. r . 8D(2) (iii) without appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts return of income for A.Y 2011-12 on 18.09.2011, declaring an income of ₹ 4,86,67,22,043/- under the normal provisions of the Act. The return of income filed by the assessee was processed as such under Sec.143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 20. The A.O while framing the assessment inter alia made certain additions in the hands of assessee, viz. (i) transfer pricing adjustment of ₹ 3,89,69,865/- as regards the international transaction of providing of guarantee fees by the assessee to its AE, viz. Elsamex SA; and(ii) declining of the claim of the assessee that the disallowance under Sec.14A of ₹ 33,90,78,263/- that was offered on a suo motto basis in the return of income be restricted to ₹ 1,28,91,432/-. Accordingly, the A.O assessed the income of the assessee at an amount of ₹ 490,56,91,908/-. 21. Aggrieved, the assessee assailed the assessment order before the CIT(A). Observing, that the issue pertaining to the disallowance made under Sec. 14A during the year under consideration remained the same as was there in the case of the assessee for immediately pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds of appeal Nos. 1 to 4 raised by the assessee are dismissed AND Grounds of appeal Nos. 1 to 3 raised by the revenue are partly allowed in terms of our aforesaid observations. 23. We shall now deal with the grievance raised by both the parties, as regards the observation of the CIT(A) pertaining to the transfer pricing adjustment in respect of the international transaction of provisions of guarantee/counter guarantee by the assessee to various banks and other corporate bodies for and on behalf of its AE, viz. Elsamex SA. On a perusal of the order of the CIT(A), we find, that taking cognizance of the fact that the TPO had benchmarked the transaction of providing of guarantee/counter guarantee by the assessee to various banks and other corporate bodies for and on behalf of its AE, viz. Elsamex SA by adopting the average corporate guarantee fee of 2.58% charged by the banks, it was observed by the CIT(A) that the aforesaid exercise carried out by the TPO was not in conformity with the judgments of the Hon ble High Court of Bombay in the case of CIT Vs. Glenmark Pharmaceuticals (ITA No.1302 of 2014) and M/s Everest Kento Cylinder Vs. DCIT (LTU)-1, Mumbai (ITA No. 1042/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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