TMI Blog2022 (5) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... of claim of deduction u/s 80IC on interest income - HELD THAT:- We find that the Hon ble Delhi High Court in the case of PCIT vs. Bharat Sanchar Nigam Ltd. [ 2016 (8) TMI 270 - DELHI HIGH COURT] and the Co- ordinate Bench of Tribunal in the case of M/ s. NHPC Ltd. [ 2019 (5) TMI 1664 - ITAT DELHI] has held that the Revenue was not justified in denying the claim of deduction on such income. Before us, Revenue has not pointed any contrary binding decision in its support. We therefore, hold that AO not justified in denying the claim of deduction u/ s 80IC of the Act and thus direct the AO to grant deduction u/ s 80 IC on the interest income earned by the assessee. - ITA No. 6509/Del/2018 - - - Dated:- 9-5-2022 - Sh. A. D. Jain, Vice President And Dr. B. R. R. Kumar, Accountant Member For the Assessee : Sh. Akshat Jain, CA And Sh. Rajat Jain, CA For the Revenue : Sh. Manvendra Goyal, CIT DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeal has been filed by the assessee against the order of ld. CIT (A)- 22, New Delhi dated 21.08. 2018. 2. Following grounds have been raised by the assessee: 1.1 That the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of provision made for sales incentive scheme for computing book profits u/ s 115JB of the IT Act, 1961 since the same is an ascertained liability. 4.01 That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in confirming the reduction of the deduction allowable u/ s 80 IC of the Act in respect of the units at Baddi and Haridwar, to the extent of Rs.2,93 ,984/, by excluding interest income earned by the said units, while computing the eligible profits. 5.01 That on the facts and in the circumstances of the case and the legal position, the learned CIT (A) has erred in not allowing the deduction of education cess and secondary and higher education cess of Rs.3 ,53,53,017/-. 3. The assessee company is engaged in the business of manufacturing of electrical items and bath fittings viz. industrial and domestic switchgears, capacitors, cable and wires, compact fluorescent lamps (CFL) and related components, electrical fans, electric motors, electrical wire accessories and luminaries lighting fixtures during the year. Adjustment u/s 92CA(3): 4. The relevant order of the TPO on the issue of corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a bank, providing the corporate guarantee is a normal business activity and they discount the losses arising out of such normal business activities in their rates of commission. However, for a company which is engaged in electrical equipment and power distribution products, providing of corporate guarantee is not a normal business activity. If the AE goes bankrupt or defaults in making the payment to the Bank, the assessee would be liable to pay the entire loan to bank and the assessee may not be in a position to recover that money from the AE. Such a situation warrants a higher price that the assessee should charge from the AE. In view of the above facts, I am of the considered view that the assessee has exposed itself to a big risk by providing the corporate guarantee for which the assessee has not charged any amount from the AE. The average fees charged by the SBI while issuing guarantee is 1.30 %. Rate to be charged by the assessee from its AE is determined accordingly. Such fees shall be chargeable on guarantee given in the AY 2013- 14 as well as outstanding guarantees of previous year. 3.4 In this regard, it may show caused why a commission of 1.30% based on the commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olly owned foreign subsidiary Companies. Hence no expense should be adjusted. f) That as aforesaid, providing guarantee is not an international transaction since the same is at par with the providing equity to Associate Enterprises. Thus it can he concluded even though the Corporate guarantee given by the parent Company is a Corporate guarantee in form' but in substance . The same is 'equity participation which does not warrant an arm' s length guarantee fee. [Unquote] 6. Before proceeding to comment upon the submission of the assessee, it is necessary to discuss the concept of Guarantee. What is a guarantee? A legally binding agreement under which the guarantor agrees to pay any or the entire amount, due on a loan instrument in the event of non- payment by the borrower. OECD Glossary of Statistical Terms A collateral agreement, for performance of another's undertaking. An undertaking or promise that is collateral to primary or principal obligation and that binds guarantor to performance in event of non-performance, by the principal obligor. Black's Law Dictionary The key factors which cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble solely to its being part of a larger concern, and not to any specific activity being performed. In addition, no service could be said to be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefited from the group s reputation deriving from global marketing and public relations campaigns. It can be seen from the facts of the present case that the assessee company had provided the Guarantees to the AE for obtaining the credit facilities/ acquisition of overseas subsidiary. This transaction has resulted into a direct benefit to the AE. Therefore, in the present case there is active promotion of the multinational group's attributes which positively enhance the profit- making potential of particular members of the group. In a situation where a borrowing company could not borrow in its own right, given its difficult financial condition, would an independent party provide a guarantee without any consideration to support die bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 2009, the Tax Court of Canada (TCC) gave a ruling relating to the years 1996 - 2000 for General Electric Capital Canada Inc. (GE Canada) on a matter pertaining to financial guarantees. In this case, GE US had provided an explicit guarantee for the borrowings of GE Canada since 1988; however, it began charging a fee for the explicit guarantee only in 1995, equal to 1 % of the principal amount of debt securities outstanding per annum. GE Canada claimed deduction for the guarantee fees that became payable to GE US for the tax years 1996 to 2000. The deductions claimed by GE Canada were disallowed by Canada's Revenue Agency (CRA). CRA argued that the guarantee fees should be zero due to the implicit guarantee inherent in the parent subsidiary relationship between the GE US and GE Canada. TCC s Judgment TCC differed from the CRA s position that GE US controlled the capital structure of GE Canada and therefore could choose the amount of equity invested and control GE Canada's debt to equity ratio. TCC stated that this contradicts the well accepted principle that a corporation is a separate person whose existence provides limited liability protection to its sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the amount related to credit enhancement (i.e. the amount of additional capital required to obtain the targeted credit rating). 10. CUP Approach Under the CUP approach, the guarantee fee is quantified through a comparison of arm s length guarantee fee rates charged by unrelated third parties providing similar guarantees under similar terms and conditions (i.e. third party comparable rates). This approach identifies what guarantee fee the borrower would have been required to pay if it were to have secured the guarantee through an unrelated third party, such as a bank or a finance company. Under this approach, two variables are estimated: (i) the assets at risk, and (ii) the guarantee fee rate. To estimate an appropriate guarantee fee rate, the borrower's credit Worthiness is evaluated by estimating an implied credit rating using credit rating guidelines published by a third party credit rating agency. An implied credit rating is a quantitatively derived estimate of an actual credit rating. The borrower's implied credit rating is used to identify comparable guarantee fees charged by third party lenders to borrowers with similar credit ratings. This approac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred order of the Tax Court of Canada. The views of the Court are mentioned below in brief: In theory, or in corporate law, directors manage, or supervise the, management of, the business arid affairs of a corporation, while officers run the daily operations within the framework of the policies and directions set by the elected board of directors. Yet, in practice, whore economic forces' come into play, officers of large corporations determine the corporate destiny; they nave the vision; they hold the reins of the corporation; and they often select the.ir own successors. (Para 241) Shareholders elect the board of directors. However, in case of the day- to- day operations of a business, the Canada Business Corporations Act (the CBCA ) does not specifically allow for shareholders to appropriate powers of officers. (Paras 242 -43) The Court referred to the decision in case of Duha Printers (Western) Ltd. Vs. Canada, where it was held that Directors generally owe a duty not to the shareholders but to the corporation and shareholders could not therefore, control the day- to- day business decisions made by the directors and their appointed officers. In ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling with his own property. He is entitled to consider his own interests, without regard to interests of other shareholders. However, Directors are fiduciaries of the company, the shareholders. It is their duty to do what they consider best in the interests of the company (Para 22 of the order). Hon ble Court also cited several international case laws which were of the same view. Thus, running of business in the interest of the company is the task of the management It needs to be noted that several civil and criminal actions are also provided in the Companies Act, 1956 against officers' of a company for their acts of omission and commission associated with the running of the business of the company. Further, commercial expediency is not important here and this view was upheld by ITAT, New Delhi In a recent decision in the case of Perot Systems TSI (India) Ltd. Vs DCIT, wherein it was discussed and held as under: 9. Before us, the Id. Counsel of the assessee contended that income means real income and not fictitious Income and since the assessee has not earned any Income, the same cannot be taxed. Reliance in this regard has been placed upon in the case of CIT V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also an admitted proposition that the assessee has extended the loan to its AE's who are 100% subsidiaries. The Assessee' s case is that it has actually not earned any interest and it was commercially expedient to extend these interest free loans. Now it is noted that this is not a case of ordinary business transaction. The question relates to scrutiny of international transaction to determine whether or not the same is at arm' s length. The principle of transfer pricing aims at determining the pricing in the situations of cross border international transactions where two enterprises which are subject to the same centre or direction or control (associated enterprise) maintain commercial or financial relations with other. In such a situation, the possibility exists that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from those which in the same circumstances would have agreed upon between un- related parties. The aim is to examine whether there is anomaly in the transaction which arises out of special relationship between the creditor and the debtor. Hence, the contention of having actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such cases, the hypothetical arm's length prices, at which these associated enterprises, but for their relationship, would have entered into the same transaction, are taken into account Whether the funds are advanced out of interest bearing funds or out of funds on which 14 % interest is being paid, or whether such interest free advances are commercially expedient for the assessee or not, is wholly irrelevant in this context. The transaction in the present case is of lending money, In foreign currencies, co its foreign subsidiaries. The comparable transaction therefore is of foreign currency lending by unrelated parties. Thus comparable uncontrolled transaction is relevant rather than commercial expediency for determining the arm s length price. 15. Following the discussion above, by the application of CUP which is the most appropriate method in the facts circumstances of the case, the arm's length price of providing service of corporate guarantee is computed in the subsequent paragraphs. The information received from State Bank of India u/s 133 (6) of the I.T. Act was compiled and supplied to the assessee as annexure to the Show Cause Notice. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of corporate guarantee must he analyzed and an arm' s length charge must be assigned to it and income of the assessee should be computed accordingly. 7.6 The AE is a distinct company and it cannot be said that it has no existence of its own apart from the relationship with the assessee. Obtaining the loan was crucial to the business of the AE and hence the guarantee provided by the assessee certainly benefits the AE when viewed in an arm s length scenario. We are of the view that the assessee is incorrectly clouding its perspective by looking at the controlled situation in which it is place, without realizing that the TP analysis must be made in an uncontrolled situation. 7.9 We are not in agreement with the assessee that only 50% of the above differential of 139 bps should be taken as the guarantee fee. The assessee s argument that no independent concern would agree to bear the entire guarantee fee does not hold goods in a normal situation involving the giving of corporate guarantee. It is only because the valuation of the guarantee is being made in a particular manner. In this case that the question of sharing an interest differential has arises. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 1.86 Crs. 16.2 An adjustment u/ s 92 CA of Rs.1.86 Crores is to be made to the income of the assessee, being the arm s length price of the services provided by the assessee in the shape of bank guarantee to AE. Thus, the above amount of Rs.1,86,00,000/- is treated as transfer pricing adjustment for the FY 2013 -14. 5. The amount guarantee provided by Havells Holdings Ltd. was Rs.143.13 crores against which the TPO has calculated guarantee fee @ 1.3 % amounting to Rs.1.86 crores. 6. At the outset, the ld. AR argued that providing corporate guarantee is in the nature of shareholders activities and is not an international transaction as investment in subsidiary company is not an international transaction as held in the case of Vodafone India Services Pvt. Ltd. and Shell India Markets Pvt. Ltd. It was argued that the assessee has not incurred any cost for issuing corporate guarantee and such transaction has no bearing on the profits, income, losses or assets of the assessee and it cannot be considered as an international transaction in terms of Section 92 B of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect to the said scheme and Rs.58, 43, 713/- was written back and credited to Excess Provisions of bad debts/ sales incentive written back. The assessee also pointed to the relevant features to the Shahenshah Scheme and it was further submitted that the provision made for the scheme is not a contingent liability but rather a contractual liability which is legally enforceable by the dealers and distributors. The submissions made by the assessee were not found acceptable to AO. AO considering the fact that as against the provision of Rs. 5,67,26,847/-, the actual payment made by the assessee was Rs.2 ,61, 14,170/- and Rs.58, 43,713/- was written back, concluded that the provision made by the assessee was not based on any scientific method but was in the nature of contingent liability. He also noted that CIT(A) while deciding the issue in assessee s own case for A. Y. 2008- 09 had analyzed scheme and had confirmed the addition made by the AO. He therefore disallowed Rs. 2,47,68,964/- [5,67,26,847 2,61,14, 170 (5843713/-)]. 17. Aggrieved by the order of AO, assessee carried the matter before the CIT(A), who following the order of his predecessor in assessee s own case fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and following the order of the Co-ordinate bench in the assessee s own case and for similar reasons, we hold that the Revenue was not justified in making the addition. We therefore set aside the action of AO. Thus the ground of the assessee is allowed. 10. As a result, the appeal of the assessee on this ground is allowed and it is to be kept outside the purview of Section 115 JB. Deduction u/ s 80IC: 11. This issue stands covered in the case of the assessee by the order of the Co- ordinate Bench of the Tribunal in ITA No. 6194/ Del/ 2015 and ITA No. 463/Del/ 2016 vide order dated 19.01.2021. The relevant part of the said order is reproduced for ready reference: 21. Ground No. 4 is with respect to the denial of claim of deduction u/ s 80IC on interest income. 22. AO noticed that assessee had credited Rs. 16, 725/- and Rs.6, 334/- on account of interest income in the accounts of Baddi Unit and Haridwar Unit. The assessee was asked to show cause as to why the deduction u/s 80 IC not be disallowed on such interest income as it was not derived from the business activity of the industrial undertaking. Assessee made the submissions which were not foun ..... 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