TMI Blog2022 (7) TMI 1045X X X X Extracts X X X X X X X X Extracts X X X X ..... ok profit for computing the minimum alternative tax as per the provisions of section 115JB of the Act. Thus Ground No. 2 raised by the assessee is allowed. Claim of deduction of amortisation of leasehold land expenses - AO rejected the assessee s claim on the ground that the amortisation of leasehold land does not specify the conditions laid down in section 35D(2) of the Act and is also not liable to deduction under section 37 - whether the alleged expense has been expended wholly and exclusively for the purposes of business? - HELD THAT:- As it is not in dispute that the leasehold lands taken by the assessee on lease are used for carrying out business operation and the lumpsum lease money was paid as per the agreement and was required to be paid at the beginning of the lease term but the said sum is spread over the entire lease term. Now what is the mechanism to quantify the amount and how to spread the amount across the lease period. Assessee has taken guidance from the Accounting Standard 19 issued by the Institute of Chartered Accountants of India and in accordance with the procedure laid down therein and principal of accounting has debited the annual amount of lease in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew taken by the ld. CIT(Appeals), who has rightly held that the arm s length guarantee commission charge should be restricted at 0.5% of the guaranteed amount. Thus no interference is called for in the order of ld. CIT(Appeals) and the grounds raised by the revenue on the issue of Corporate Guarantee Fees are dismissed. Downward adjustment in respect of purchases made by eligible unit from non-eligible unit - assessee-company operates various units of which some units eligible for deduction u/s 80IA(10) (hereinafter called as eligible units ) and some are non-eligible units - HELD THAT:- TPO had agreed with the TNMM method adopted by the assessee. The reasons given for TPO adjustment is very general in nature merely referring to the profit margin of the eligible units to the non-eligible units. Ld. TPO has not given any analysis to demonstrate that how the purchase of any material by eligible units from non-eligible units could have yielded extra profits. We, therefore, are in conformity with the finding of the ld. CIT(Appeals) that no downward adjustment of profit of eligible units be sustained. As far as the ground raised by the Revenue on account of Rule 46A of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee pleads that the expenditure shall be allowed as a deduction in view of the following decisions:- DCIT vs.- M/s. Adani Gas Ltd. (2018) ITA No. 775/AHD/2014 (Ahmedabad Tribunal); DCIT vs.- Sun Pharmaceuticals Industries Limited (2009) 227 CTR 206 (Guj.); ACIT vs.- Balmer Lawrie Co. Ltd. (2019) ITA No. 2264/KOL/2017 (Kolkata Trib.); Balmer Lawrie Co. Ltd. vs.- SIT (2019) 111 taxmann.com 316 (Calcutta) . 3. Brief facts of the case are that the assessee is a Limited Company engaged in the business of manufacturing and trading of plywood, laminate and allied products. The assessee filed e-return of income of Rs.49,12,19,250/-on 29.11.2015. The case was selected for scrutiny through CASS under complete scrutiny category followed by serving of notices under section 143(2) and 142(1) of the Act. Various details as called for by the ld. Assessing Officer were filed by the assessee. During the course of assessment proceedings, ld. Assessing Officer observed that the assessee has entered into an international transaction of Rs.195.93 crores (approx.) and also specified domestic transaction at Rs.149.48 crores (Approx.). The case was referred to the Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see stated that the two units owned by the assessee namely Rudrapur Plywood Unit and Rudrapur MDF Unit are covered by the Excise Notification No. 50/2003 dated 10.06.2003 and the said excise duty exemption are given as the units owned by the assessee are located in the backward areas in the State of Himachal Pradesh and Uttranchal in terms of the observation of the then Hon ble Prime Minister for generation of employment opportunities and local resources. Reference was also made to the Office Memorandum of Ministry of Commerce Industry dated 07.01.2003. Referring to the decision of the Hon ble Mumbai Tribunal in the case of DCIT vs.-(ITA No. 5725/MUM/2015), it was claimed that the excise duty and sales tax exemption are capital receipt and to be excluded in computation of income. Reliance was further placed on the judgment of the Hon ble Apex Court in the case of CIT vs.- Ponni Sugars Chemicals Limited (2008) 306 ITR 392 (SC), Sahney Steel Press Works Ltd. vs.- CIT (1997) 228 ITR 253 (SC), judgment of the Hon ble Jammu Kashmir High Court in the case of Shree Balaji Alloys ors vs.- CIT (2011) 51 DTR 217 (J K), judgment of the Hon ble Jurisdictional High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.09.2011; (iv) CIT vs.- Harinagar Sugar Mills Limited (ITA No. 1132 of 2014) order dated 04.01.2017 (Bombay High Court); (v) ACIT vs.- the Nilgiri Tea Estate Limited (2014) 65 SOT 14 (Cochin) (URO); In the following cases, the Hon ble Kolkata Tribunal held that sales tax incentives/excise subsidy to be capital in nature and needs to be excluded in computing book profit under section 115JB of the Act: (vi) Tata Metaliks Ltd. vs.- ITO (2018) ITA No. 439 478/KOL/2016); (vi) DCIT vs.- M/s. Emami Biotech Limited (2019) ITA No. 1915/KOL/2017); (vii) DCIT vs.- Sanghi Industries Limited (2018) ITA No. 999/HYD/2017; (viii) ACIT vs.- JSW Steel Limited 112 taxmann.com 55 92019) (Mumbai-Trib.); (ix) Krishi Rasayan Exports Pvt. Ltd. vs.- PCIT (2020) (ITA No. 742 743/KOL/2019). To conclude it was stated that the excise duty being capital receipt and given with the object to achieve industrialization in the backward areas of Uttaranchal and to generate employment opportunities, the same is not liable to be taxed under the normal tax Rules and under section 115JB of the Act. 9. Per contra, ld. D.R. vehemently argued supporting the order of lower authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time at which the subsidy is paid is also immaterial. It was held that the purpose of the scheme which enabled the grant of subsidy to the assessee was the only material factor in determining the taxability of such receipts. Further, placing reliance on the decision of the Hon ble Kolkata Tribunal in case of DCIT vs. M/s. Century Plvboards (I) Ltd, in ITA No. 2149/Kol/2019 (Refer Page 103-122 of the Case Law Paperbook), it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit. Relevant extract of the order of the Hon ble Tribunal is reproduced below: 24. As regards the issue relating to treatment of this VA T subsidy while computing book profit u/s 115JB of the Act, we note that this exact issue was considered by us while deciding the case of DCIT vs. M/s. Century Plyboards (!) Ltd. in ITA No. 2149/Kol/2019 (supra) and it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit. The relevant findings are as follows: 45. Now coming to the issue relating to treatment of these subsidies while computing book profit u/s 115JB, we note t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook profit under Section 115JB of the Income Tax Act, 1961 as contended by the revenue by reiving on the decision in the case of Apollo Tyres Ltd, (supra). 27. In this case since we have already held that in relevant assessment year 2010-11 the incentives 'Interest subsidy' and 'Power subsidy' is a 'capital receipt' and does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of Apollo Tyres Ltd, (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961. 26. The admitted factual and legal positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also affirmed by the Hon ble Supreme Court, that it will not form part of the income chargeable to tax u/s 4 of the Act and once the same is treated as capital receipt not chargeable to tax under the Income- tax Act, then same has to be excluded while computing the income under the MAT provisions in terms of Section 115-JB of the Act. Because Section 115-JB is also meant for the purpose of levy of tax on income and the basic things will have to be kept in mind that receipts which have to be included in the profit should be having the characteristic of income. There is a fundamental difference between the income and capital that the income is liable to tax, whereas capital is not liable to tax. In the case of Padmaraje R. Kadambande vs. CIT in 195 ITR 877, the Hon ble Supreme Court held that the capital receipts are not income within the definition of Section 2(24) of the Act and hence are not chargeable under the Income Tax Act. The learned counsel further stated that the provision of Section 115JB of the Act is alternative mechanism for computation of income based on book profit without claiming any deduction or incentive allowable under the Act, but the fact remains that taxabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. To conclude, (a) Not considering the subsequent interpretation of law through the judgment of the Hon ble Supreme Court or the Hon ble jurisdictional High court would constitute a mistake apparent from record. (b) The Excise subsidy refund is to be treated as capital receipt. (c) Capital receipts are liable to be excluded for the purpose of computation of book profit u/s 115 15. In case of ACIT -vs.- Shree Cement Ltd (ITA No. 614/JP/2010) order dated 09- 09-2011. (Refer Page No. 716-751 of Paper Book), the Coordinate Jaipur Bench of ITAT was dealing with the issue as to whether subsidy received which was admittedly capital in nature can be subject to MAT. The ITAT held that there was never any intention behind introduction of section 115JB to tax something which is not taxable at all. It was held that tax incentives needs to be excluded in computing Book Profits u/s 115JB being capital receipt not having any element of income embedded therein and not representing the real working results of the company. The Tribunal further held that:- With the above discussions, the only issue left to be considered is whether exclusion of the above capital receipt is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment should be considered for the purpose of computation of book profits u/s 115JB of the Act. 19. In the case of ACIT -vs.- The Nilgiri Tea Estate Ltd. (2014) 65 SOT 14 (Cochin) (URO) (Refer Page 151 -156 of the Case Law Paperbook) wherein it was held that any income, which does not fall within the purview of Total Income u/s 5 of the IT Act, cannot be taxed under any other provisions of the Act. Further, the Hon ble Tribunal held that the provisions of Chapter Xll-B of the Act do not operate to extend the scope of Total Income but provides an alternative basis for computing the income and hence income which is not chargeable to tax cannot be included in the computation of Book Profit u/s 115JB. 20. In the case of Sutlej Cotton Mills Ltd -vs.- ACIT (1993) 45 ITD 22 (Cal) (SB) (Refer Page 157-201 of the Case Law Paperbook), it was held that according to standard accounting practice, capital receipt cannot be part of the profit. Therefore, capital receipts which do not have the character of income cannot be liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 22. In the light of above decision as well as the Memorandum issued by the Ministry of Commerce Industry, we find that the excise duty exemption is purely capital receipt and is neither chargeable to tax under the normal provisions of the Income Tax Act nor is to be included as part of the book profit for computing the minimum alternative tax as per the provisions of section 115JB of the Act. Thus Ground No. 2 raised by the assessee is allowed. 23. Apropos to the additional ground raised by the assessee for claim of deduction of amortisation of leasehold land expenses at Rs.18,73,242/- the assessee claimed the same as per the Accounting Standard 19 as deduction for amortisation of leasehold land and land development charges for various lands taken on lease by the assessee for the periods upto 99 years for carrying on the business. The ld. Assessing Officer rejected the assessee s claim on the ground that the amortisation of leasehold land does not specify the conditions laid down in section 35D(2) of the Act and is also not liable to deduction under section 37 of the Income Tax Act. This view of the ld. Assessing Officer was confirmed by the ld. CIT(Appeals). However, ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount and the lease premium paid by the assessee. It cannot be equated to preliminary expenses. Therefore, the said expense is not allowable under section 35D of the Act. The question is whether such expenses in the nature of amortisation of lease rental is allowable as revenue expenditure under section 37(1) of the Act? Section 37(1) of the Act provides that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head profits and gains of business or profession . 28. What needs to be examined whether the alleged expense has been expended wholly and exclusively for the purposes of business. In the instant case, it is not in dispute that the leasehold lands taken by the assessee on lease are used for carrying out business operation and the lumpsum lease money was paid as per the agreement and was required to be paid at the beginning of the lease term but the said sum is spread over the entire lease term. Now wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d land development charges of Rs.18,73,242/- deserves to be allowed as an expenditure under section 37 of the Act. Thus the finding of the ld. CIT(Appeals) is reversed and the additional ground raised by the assessee is allowed. 31. In the result, the appeal of the assessee is partly allowed. 32. Now we take up the Revenue s appeal, wherein the Revenue has raised the following grounds:- Corporate Guarantee (i) The Ld. CIT(A) has erred on the facts and in law by restricting the guarantee fee rate to 0.5% which is much lower than the CG rate of 1.22%, 1.69% 1.27% respectively as determined by the TPO, for a non-refund based financial assistance. (ii) The Ld. CIT(A) has erred on the facts and in law in stating that the CG fee should be benchmarked by the TPO at 0.5% without giving any scientific or logical reason for the same while the TPO had determined the rate based on the information available on record. (iii) The Ld. CIT(A) has erred on the facts and in law by restricting the CG rate 0.5% without considering the credit rating of the AE which is a vital factor while availing loan from a financial institution, and accordingly, the effective rate of interest wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal, the assessee-company had following inter-company guarantee arrangements for its Associated Enterprises:- (i) Providing a Corporate Guarantee to Standard Chartered Bank (SCB) for a term loan/letter of credit facility on behalf of Greenlam Asia Pacific Pte. Ltd. ( Greenlam Asia ) (referred to pages 446 to 461 of the paper book); (ii) Providing a Corporate Guarantee to United Overseas Bank (UOB) for a commercial property loan on behalf of Greenlam Asia (referred to pages 462 to 471 of the paper book); and (iii) Providing a standby Letter of Credit (SBLC) to City Bank N.A. for on behalf of Greenlam America Inc. ( Greenlam USA ) and Greenlam Asia (referred to pages 478 to 485 of the paper book). Ld. Assessing Officer during the course of assessment proceedings observed that international transaction has taken place and referred the matter to Transfer Pricing Officer, who after considering the submission of the assessee, held that Corporate Guarantee fees @ 1.22%, 1.69% and 1.27% of the respective loan amounts should be treated as income of the assessee. Ld. Assessing Officer accordingly made the addition of Rs.43,67,295/-. Aggrieved, the assessee preferred appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Kanto Cylinder Limited TS-714-ITAT-2012(Mum)-TP 0.50% 7. Nimbus Communication Limited TS-167-ITAT2013(Mum)- TP, ITA No. 6816/Mum/2010 and ITA No. 7105/Mum/2011 0.50% 8. Glenmark Pharmaceuticals Limited ITA No. 5013/Mum/2012 and ITA No. 5488/Mum/2012 0.53% 9. Godrej Household Products Ltd. (earlier Godrej Sara Lee Ltd.) TS-330-ITAT2013(Mum)-TP TS-68-ITAT2014(Mum)-TP 0.50% 10. Mahindra Mahindra Limited TS-324-ITAT-2013(Mum)-TP 0.20% - 0.50% 11. Prolifics Corporation Limited 55 taxmann.com 226 (Hyderabad-Trib.) 0.53% 12. Aditya Birla Minacs Worldwide Ltd. [2015] 56 taxmann.com 317 (Mumbai Trib.) 0.50% 13. Cox and Kings Ltd. vs.DCIT TS-540-ITAT- 2015(Mum)-TP 0.50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So far as the issue that the present transaction of giving corporate guarantee falls under the category of international transaction, it is not under the dispute before us, as it was held against the assessee by the ld. CIT(Appeals) and against the said view, the assessee has not filed any appeal or Cross Objection. 39. The only issue remains is the computation of quantum of Corporate Guarantee fee adjustment to be made in the hands of assessee. Transfer Pricing Officer levied the Corporate Guarantee fees @ 1.22%, 1.69% 1.27% on the above referred three loans, which has been guaranteed by the assessee. For computing the Corporate Guarantee Fees, ld. TPO selected the comparables from USA, whereas Associated Enterprises are not operating in USA but are operating in Asia Pacific Region. Ld. TPO failed to bring any comparable form to this region. Considering these facts and the non-availability of comparables in the Asia Pacific Region, the ld. CIT(Appeals) observed as under:- 5.3. I have carefully considered the matter. Assessee's contention regarding CG being beyond the pall of international transaction is not correct. Finance Act, 2014 had amended the provision of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case do not indicate that there was any such business strategy adopted by the assessee in not charging commission in respect of guarantees issued for its Associated Enterprises. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by claiming that the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future. In our opinion, such commercial expediency cannot be equated with business strategy, which is specific and well laid out. As rightly held by the Id. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which price has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, it was stated that assessee itself paid 0.6% to ICICI Bank for guaranteeing a separate loan for assessee. Hon'bie Tribunal took the view that 0.5% guarantee fee is reasonable in view of the fact that rate of interest paid by AE was much lower than interest paid by assessee itself. TP adjustment made by TPO was accordingly deleted. The rate of 0.5% was followed by Hon'bie Mumbai Tribunal in the case of Nimbus Communication (Supra). Series of decisions have been rendered by the different benches of Mumbai Tribunal wherein it is held that arm's length guarantee commission charge should be taken at 0.5%. Some of the cases decided are given below: (i) Glenmark Pharmaceuticals Ltd. (ITA No. 5031/M/2013 dated 13.11.2013) (ii) Godrej Household Products Ltd. (ITA Nos. 7369/M/2010) (iii) Prolific Corporation Ltd. (ITA No. 237/Hyd/2014 dated 31.12.2014). (iv)Manugraph India Ltd. Us. ACIT(TS-330-ITAT, 2013 (Mum)-TP) In view of substantial numbers of decisions of Hon'bie Tribunal in similar matter, CG fee should be benchmarked at 0.5% in the guarantee amount . 40. The above finding of the ld. CIT(Appeals) is duly supported by the settled judicial precedence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of purchase of eligible units from noneligible units alleging that the eligible units of the assessee has earned more than the ordinary profit than it could have actually earned had the transaction between eligible and non-eligible units were undertaken at an arm s length. In reply, the assessee filed detailed submission stating that raw material was utilized for the purpose of manufacturing finished products and these were procured from third parties also and were transferred between different units on need basis. To benchmark the said transaction, the CUP method was considered as the most appropriate method for determining the arm s length nature of the purchase/sale of raw materials and in support for this, details were filed. Details of purchase of veneer were also filed. But later on in the proceedings itself before the ld. Assessing Officer, the assessee stated that application of the CUP method becomes unviable in view of the differences in the products and the said transaction was benchmarked by application of internal TNMM instead of the CUP method in the transfer pricing report maintained by the assessee. However, ld. TPO was not satisfied for the reason that firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the relevant material available on record and carefully gone through the submissions made by the assessee before the lower authorities and before the Tribunal. Revenue is aggrieved with the finding of the ld. CIT(Appeals) deleting the arm s length price adjustment of Rs.2,48,39,215/- made by the ld. Assessing Officer on the basis of report of ld. Transfer Pricing Officer as per section 92CA(3) of the Act on account of purchase transaction of the product veneer between the assessee an eligible units and its non-eligible Associated Enterprises. 48.We observe that the eligible units run by the assessee claiming deduction of profits under section 80IA(10) of the Act, purchased raw material, namely Vineer from non-eligible units located at Kriparampur and Rajkot Unit. The assessee while furnishing the annual audited accounts along with the relevant report on Form 3CEB adopted the CUP method for computing the arm s length price of the transactions between the eligible and non-eligible units. But subsequently during the course of proceedings before the ld. TPO, the assessee has adopted TNMM method to compute the arm s length price. It is not in dispute that the percentage of total p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a analysis given, it is seen that purchases of eligible units from related parties were 5.82% and 9.33% respectively by Rudrapur Unit Tizit Unit. Therefore, statistically speaking, 94.18% and 90.67% respectively of Rudrapur Tizit Unit was attributable unit of purchases from non-related parties. The units at Rudrapur and Tizit incurred operational cost of Rs. 365.6 crore Rs. 127.52 crore respectively. In view of scale of Operation, it will not be fair to conclude that out of operational profit of Rs. 93 odd crore, Rs. 4.67 crore arose out of purchase of Rs. 17,17,16,696/-. From this angle also, the TP adjustment cannot be sustained. 6.3.2. From the above discussion, it is seen that the downward adjustment of profit of eligible cannot be sustained. The TPO had not disagreed with the TNMM method adopted by assessee. Only reason given was that eligible units were earning more profit than that of non-eligible unit. The standpoint taken by the AO on the matter had been repelled by facts and figures furnished. In view of this, the reduced adjustment of Rs. 2,92,06,510/- also cannot be sustained. Ground taken is allowed. 51. The above finding of the ld. CIT(Appeals) stands unco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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