TMI Blog2022 (8) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 14A read with rule 8D - HELD THAT:- We delete the disallowance made by the ld. AO and upheld the findings given by the ld. CIT(A). While holding so on the given set of facts, we also find force from the decision in the case of South Indian Bank Ltd [ 2021 (9) TMI 566 - SUPREME COURT] wherein it was held that where interest free own funds available with assessee-banks exceeded their investments in taxfree securities; investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A on ground that separate accounts were not maintained by assessee for investments and other expenditure incurred for earning tax-free income. Accordingly, ground no. 2 is dismissed. Deduction u/s 80IB - Whether income from sale of scrap generated in the manufacturing process employed in the eligible unit can be taken into consideration for deduction u/s 80IB? - HELD THAT:- As decided in own case [ 2017 (4) TMI 106 - ITAT KOLKATA ] held that scrap generated in the manufacturing activity is eligible for deduction and respectfully following the same, we hold that the Assessee is entitled to claim deduction under the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmission made that the guarantee charge should be apportioned based on number of days for which the guarantee was effective and not to be charged for the full year as done by the ld. AO, we are inclined to direct the ld. AO to give effect to this submission while computing the charge of guarantee fees for both the subsidiaries (AEs) by taking recourse to the details produced in the chart placed at page 100 of the order of ld. CIT(A). This ground no. 4 is partly allowed. - ITA Nos.917 & 918/Kol/2017 And ITA Nos.2294 & 2295/Kol/2019 - - - Dated:- 29-7-2022 - Shri Sanjay Garg, Judicial Member And Shri Girish Agrawal, Accountant Member For the Assessee : Shri J. P. Khaitan, Sr. Advocate For the Revenue : Shri Tushar Dhawan Singh Shri David Z. Chawngthu, CIT, DR ORDER PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: All these cross appeals by the revenue and assessee are arising out of separate orders of ld. CIT(A)-22, Kolkata vide Appeal No. 186/CIT(A)-22/09-10/14-15/Kol and Appeal No. 231/CIT(A)- 22/10-11/14-15/Kol dated 16.02.2017 against the order of DCIT, Circle-12, Kolkata passed u/s 143(3) of the Income-tax Act,1961 (hereinafter referred to as the Act), date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed by the A.O particularly when the actual expenses are determinable on actual accounts maintained in previous year in question was not the methodology to attribute expenses on the basis of inflation incorrect? 2. Whether the Ld. CIT(A) was correct in deleting addition made u/s.14A read with Rule 8D without taking into consideration the A.O's findings that there were borrowed capital of Rs.78.05 crores and investments out of such borrowed funds were also made in making investments that yielded exempt income? 3. Whether the Ld. CIT(A) was correct in allowing the deductions claimed by the assessee u/s.8OIB on sale of scrap without appreciation the fact that other income in the form of sale of scrap credited by the assessee in the P L Account cannot be treated as having been derived from industrial undertaking on similar analogy and has also failed the appreciate the principle laid down by the Hon'ble Supreme Court in the case of Liberty India Vs. CIT 317 ITR 21B for an aggregate amount of Rs. 76,94,000/-? 4. Whether the Ld. CIT(A) was correct in deleting the addition made on account of Arm's Length Price relating to corporate guarantee provided by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as eligible for deduction under chapter VI-A. Now it remains to be seen whether the profits and gains have been correctly computed as if these units are the only source of income. These are submitted in Form 10CCB. To determine the profit gains from these units assessee has considered both direct cost and indirect cost which in principle is correct ..... Thereafter assessee submitted details of direct cost allocated and hence only allocation of indirect cost remains to be analysed. Now it remains to be seen whether the quantum of indirect cost attributed to these fiscal units are as if these units are the only source of income. Ld. AO worked out the apportionment of indirect expenses by resorting to turnover criteria according to which sales from units claiming deduction under chapter VI-A is 17.50% of the total sales of the assessee as a whole whereas only 5.84% of total indirect expenses have been apportioned to the units claiming deduction. He, therefore, proposed to apportion 17.50% of the total indirect expenses which was quantified at Rs.9,38,54,750/- after considering the amount of Rs.4,71,20,000/- already apportioned by the assessee which will result i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed by disallowing the deduction u/s 80IB to that extent. 7.6 Aggrieved, assessee went in appeal before the ld. CIT(A) who by placing reliance on the decisions of the Co-ordinate bench of ITAT Kolkata in assessee s own case for earlier years held that ld. AO was not justified in his action and granted the relief to the assessee. Aggrieved, Revenue is appeal before this Tribunal. 8. Ground no. 1 (supra) is with regard to apportionment of common head office and selling expenses for the purpose of computation of profit of units eligible for deduction u/s. 80IB of the Act. 9. Before us, at the outset, Ld. Counsel for the assessee submitted that methodology followed by the assessee as stated above, was considered by this Hon'ble Tribunal in the assessee's case for preceding years holding it to be reasonable and scientific, orders of which are placed on record in the paper books. Details of the preceding years and their respective appeal nos. are listed below for ease of reference (a) AY 2000-01 and 2001-02 [Order in ITA Nos. 1889(K)/04 268(K)/05 and CO Nos. 107 65/Kol/2005 dated 17.10.2006, page 88 at pages 94-95 of the Part - A - Corporate Tax Paper Book]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate Tax Paper Book] (g) AY 2012-13 [Order dated November 14, 2018 in ITA No. 2161/Kol/2017 - Page 217 at page 225 of the Part A - Corporate Tax Paper Book] 9.1 Ld. Counsel thus emphasized that the reasons given by the ld. AO for not accepting the assessee's basis of allocation in the impugned AYs 2009-10 and 2010-11 are the same as those in the earlier and subsequent years and that this Hon ble Tribunal has accepted the assessee's basis as reasonable and scientific and this view has received the approval of the Hon'ble jurisdictional High Court of Calcutta as well. Hence, he urged before the bench to allow the claim of the assessee. 10. Per contra, the CIT, DR placed reliance on the order of the ld. AO. Through the written submission placed on record, he stated that the approach adopted by the assessee is not correct and it is stated that all common expenses ought to be allocated to the eligible unit based on its share of turnover with total turnover. He also referred to certain judicial precedents as stated in the said written submission. 11. We have heard both the sides, gone through the facts and circumstances of the case and perused the material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; arrived at the profit of the Pondicherry unit after considering apportioning all expenses related to the unit except for common HO selling expenses. Therefore the auditors' clearly stated that the profit loss account of the Pondicherry unit gives a true fair view as regard income expenditures derived by the unit except for common HO selling expenses . It was only relating to the common HO selling expenses the Auditors' gave the said note, The company as a whole has an audited account from this audited accounts common HO selling expenses attributable to the Pondicherry unit has not been considered by the auditors. We agree with the A/R that this allocation is an estimation from audited figures based on some scientific/reasonable method and not audit (as the company has an audited account). the same has been covered by way of note. The assessee itself has adopted a basis for allocation of common HO and selling expenses which may be attributed to the operations at the Pondicherry unit as stated in the foregoing paragraphs. The assessee has taken all relevant common HO selling expenses attributable to Pondicherry Unit, applied inflation rate @ 5% from F. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue in a later year. We would reiterate that in the present case the Department has accepted the basis of allocation of common head office and selling expenses in the AY 98-99 and there is no dispute as to the fact that the same basis has been adopted by the assessee in AY 2000-01 which are before us. Following the ratio laid down in the decisions rendered by the Hon ble Supreme Court, we uphold the decision of the CIT(A) on this issue and thus dismiss Ground Nos. (iii) (iv) raised by the Department. 11. On perusal of the orders for AY 2000-01 and 2001-02 in ITA No s. 1889/Kol/2004, 268 /Kol/2005 and CO No s. 107 65 /Kol)/2005 in assessee s own case placed at page no-86 of paper book shows the basis of apportionment of head office and common selling expenses is being followed by the Assessee consistently. We find the Tribunal found the basis of apportionment of common head office and common selling expenses adopted consistently by the company is scientific and reasonable and accepted and allowed deduction under Section 80IB of the Act. Respectfully following the above, we uphold the impugned order of the CIT-A and we have no hesitation to allow the deduction as claimed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial question of law is concerned, the Tribunal followed the assessee s own case for the assessment years, namely, 2000-01 and 2001-02 and allowed the deduction as claimed under Section 80IB of the Act. As against the said order of the Tribunal, the revenue preferred appeal before this Court and the appeal preferred by the revenue in ITA No. 117 of 2009 was dismissed by a judgement dated 20th November, 2009 on the ground of unexplained and inordinate delay. With regard to the assessment year 2002-03, the Tribunal granted relief to the assessee and the revenue carried the matter on appeal to this Court in ITA No.230 of 2009 which was dismissed by judgment dated 2nd September, 2019 on the ground that no questions of law arises for consideration. Thus, the decision rendered by the Tribunal does not call for any interference. The second substantial question of law concerns claim for deduction under Section 80IB on the sale of scrap. This issue is no longer res integra and there are several decisions which are in favour of the assessee and the Tribunal had followed the decision of this Court in the case of Reckitt Benckiser (India) Ltd. -vs Additional Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01.04.2008 i.e. on the opening date of the year under consideration, share capital was of Rs.63.77 crores, reserves and surplus of Rs.285.23 crores and gross turnover of Rs.1688.52 crores against which the investments were of Rs.29.52 crores only. Assessee contended before the ld. CIT(A) that since money is fungible, in a running concern it is not possible to draw adverse conclusion as done by the ld. AO. Ld. CIT(A) following the decision of Co-ordinate bench of ITAT Kolkata in the case of Integrated Coal Mining Ltd v. DCIT in ITA No. 1146/Kol/2012 dated 30.11.2015 and the decision in assessee s own case for AY 2008-09 in ITA No. 1105/Kol/2013 dated 14.12.2016 deleted the disallowance made by the ld. AO by holding that ld. AO has failed to prove any nexus of interest with the investment from which exempt income of dividend has been earned. Aggrieved, Revenue is in appeal before this Tribunal. 13. At the outset, ld. Counsel for the assessee submitted that the issue is squarely covered by the decision of Co-ordinate bench of ITAT Kolkata in the assessee s own case for AY 2008-09 (supra) wherein it was held that assessee had made the investments out of its own funds and that the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also drew our attention to page no-10 of the paper book to show the profit on sale of investments and dividend income earned from investments and further referred to page no-12 to show interest expenditure. In support of assessee s contention the AR relied on the order of the Hon ble Calcutta High Court in the case o f CIT Vs. Ashish Jhun jhunwala in GA 2190/2013 in ITAT 157/2013. 22. On the contrary, the ld.DR relied on the orders of the authorities below. 23. Heard rival submissions and perused the material evidence available in the paper book as filed by the assessee before us. It was submitted that reserve and surplus funds as available in common pool was more than the investments. It is seen from the page no-8 at para-8 it was stated that as on 11-04-07 the opening surplus was 212 crores and as on the same the share capital was at 63.77 crores. Therefore it amply proves that the Assessee has made investments from its own funds and as rightly pointed by the Ld.AR that the AO did not examine the nexus between the investments if any made from borrowed funds, without the same application o f Rule 8D to compute the expenditure for the purpose of disallowance u/section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of South Indian Bank Ltd v. CIT [2021] 130 taxmann.com 178 (SC) dated 09.09.2021 wherein it was held that where interest free own funds available with assessee-banks exceeded their investments in taxfree securities; investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A on ground that separate accounts were not maintained by assessee for investments and other expenditure incurred for earning tax-free income. Accordingly, ground no. 2 is dismissed. 15. Third ground of revenue's appeal is as to whether income from sale of scrap generated in the manufacturing process employed in the eligible unit can be taken into consideration for deduction under section 80IB of the Act. Ld. AO held the sale of scrap of Rs.76,94,000/- as other income not eligible for deduction u/s 80IB of the Act since it is not profits derived from eligible business of industrial undertakings. Ld. CIT(A) deleted the addition by respectfully following the decision of the Co-ordinate bench of ITAT Kolkata in assessee s own case for AY 2008-09 (supra) on similar fact pattern. 15.1 At the outset, ld. Counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate proceeding has brought on record that this issue was covered in order passed u/s. 263 of the I.T Act, 1961 by the Ld. CIT-IV, Kolkata in the case of assessment year 2000-01. But the order passed u/s. 263 was quashed by the Hon ble ITAT vide its order in ITA No.922(Kol)/2005 for A.Y 2000-01. I have considered the finding of the A.O and the written submission filed by the A.R. I find that this issue was there in the order passed u/s. 263 by the Ld. CIT-IV, Kolkata for A.Y 2000-01 but his order was later on quashed by the Hon ble ITAT, Kolkata. Accordingly, assessee s appeal on ground 2(a), (b) and ( c) are allowed. 15. Before us the ld.DR relied on the order of the AO. On the contrary, the ld.AR submits the issue in hand is covered by the orders of various Hon ble High Courts and referred to page no s.175 and 176 of the paper book. 16. Heard rival submissions and perused the material available on record. We find that the issue in hand is covered by various Hon ble High Courts in the cases of DClT vs Harjivandas Juthabhai Zaveri reported in 2581TR 785 (GUj), ClT vs Sundaram Clayton Ltd reported in 1331TR 34 (Mad), CIT vs Wheels India Ltd reported in 141 ITR 745 (M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entitled to claim deduction under the provisions of the section 80IB of the Act and the impugned order of the CIT-A on this issue is justified and delete the addition of Rs.57,93,000/- as made by the AO, accordingly, ground no-2 of revenue s appeal is dismissed. 16.1 Considering the factual matrix and respectfully following the judicial precedents in the assessee s own case for AY 2008-09 (supra), we direct to delete the addition of Rs.76,94,000/- made by the ld. AO which is eligible for claiming deduction u/s 80IB of the Act. Accordingly, this ground of appeal is dismissed. 17. Last and fourth ground is with regard to the transfer pricing adjustment made by ld. Transfer Pricing Officer (TPO) on account of corporate guarantee furnished by the assessee to banks on behalf of the assessee's subsidiary in Cyprus, Lusaka Trading Ltd. (Cyprus Subsidiary or Lusako) and the assessee's subsidiary in Nepal, Berger Jenson Nicholson (Nepal) Pvt. Ltd. (Nepal Subsidiary). The value of the corporate guarantee provided by the assessee in respect of Cyprus Subsidiary was Rs.207,31,27,000/- and that in respect of Nepal subsidiary Rs.3,24,70 ,000/-. 17.1 Material facts relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned. 17.4 Corporate guarantee in respect of Nepal Subsidiary was on account of borrowing made by the Nepal Subsidiary for acquisition of capital assets and meeting working capital requirements. In the case of Nepal Subsidiary also, borrowed funds were to be replaced by equity infusion by the assessee. The loan taken by Nepal Subsidiary was paid in full by AY 2015-16 and the corporate guarantee did not subsist thereafter. 17.5 In both the assessment years, ld. TPO rejected the contentions of the assessee that furnishing of corporate guarantee by the assessee was a shareholder activity and not an international transaction as defined in section 92B of the Act. In AY 2009-10, for making transfer pricing adjustment of Rs.7,58,01,892/-, ld. TPO adopted the rate of 3.6% per annum charged by Punjab National Bank for providing bank guarantee. For AY 2010-11, the rate adopted is 3% for making transfer pricing adjustment of Rs.6,62,11,596/- by assuming the credit rating of the two subsidiaries and estimating the alleged benefit on account of provision of corporate guarantee by the assessee. Aggrieved, assessee went in appeal before the ld. CIT(A). 18. Ld. CIT(A) accepted the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Tribunal in the assessee's case for AY 2011-12 in respect of rendering of the judgment by the Hon'ble Madras High Court in the case of PCIT v. Redington (India) Ltd. [2020] 122 taxmann.com 136 (Mad), copy of which is placed at page 58 of the Transfer Pricing Compendium of Case Laws, which is appreciated by us. According to him, the said judgment has not brought out any change in the legal position and that this case was decided on its own facts and does not impact the decision of this Hon'ble Tribunal in the assessee's case for the assessment year 2011-12. 20.2 Ld. Counsel also referred to the alternate plea taken without prejudice, both before the ld. CIT(A) and before this Tribunal in respect of charging of commission/fee on the corporate guarantee in the range of 0.2% and 0.5% which will meet the Arm s Length criteria. For this he referred to catena of decisions of this Tribunal including by ITAT Kolkata in the case of Britannia Industries Ltd v. DCIT in ITA No. 745/Kol/2017 dated 18.05.2018, tabulated in para 3.77 of the order of ld. CIT(A) as also of Hon ble High Court of Bombay in the case of CIT v. Everest Kanto Cylinders Ltd [2015] 58 taxmann.com 254 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee, it cannot be said that the transaction of furnishing of corporate guarantee had any bearing on the profits, income, losses or assets of the assessee. Subsequent issue of equity shares by the Cyprus Subsidiary to the assessee would add to the assessee's assets by way of investment but such issue of equity is not the transaction under consideration rather it is the issue of provision of corporate guarantee which is under consideration. 21.1 In our considered view, issue relating to whether corporate guarantee is an international transaction or not is no longer res integra. Reliance placed by ld. CIT(A) on the decision of Tega Industries Ltd (supra) to hold that it is not an international transaction, has been held to be per incuriam by the Co-ordinate bench of ITAT Kolkata in the case National Engineering Industries Ltd (supra). 21.2 Further, we are inclined to follow the recent judgment of Hon ble High Court of Madras in the case of PCIT v. Redington (India) Ltd [2020] 122 taxmann.com 136 (Mad) dated 10.12.2020 which has held that corporate guarantees are covered by the definition of international transaction after the retrospective amendment made by the Finance Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of corporate guarantee, the rate adopted has been between 0.2% and 0.5%. In this regard, we hold that guarantee fees / commission @ 0.35% will meet the arm s length criteria in the present case for which assessee has furnished the details relating to interest charged by the lenders of Cyprus and Nepal subsidiaries as reproduced in the order of ld. CIT(A) in para 3.73 to 3.75 and para 4. For this finding, we draw our force from some of the decisions listed below in the case of i) Everest Kanto Cylinders Ltd. v. DCIT [2013] 34 taxmann.com 19 (Bom) (ii) Britannia Industries Ltd. v. DCIT ITA No. 745/Kol/2017 dated 18.05.2018 (iii) Asian Paints Ltd. v. Addl. CIT [2014] 41 taxmann.com 71 (Mum) affirmed by the Hon'ble Bombay High Court in CIT v. Asian Paints (India) Ltd. [2016] 75 taxmann.com 152 (Bom) and (iv) ACIT v. Network 18 Media Investment Ltd. ITA No. 7501/Mum/2018 dated 22.09.2021 21.4 Further, on the submission made that the guarantee charge should be apportioned based on number of days for which the guarantee was effective and not to be charged for the full year as done by the ld. AO, we are inclined to direct the ld. AO to give effect to this submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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