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TMI Blog2022 (8) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. Shri J. P. Khaitan, Sr. Advocate represented the assessee. A brief note on the submissions made along with paper books in nine volumes and charts are placed on record to substantiate the claims made by the assessee in the two assessment years under appeal. 3. In respect of both the appeals of assessee in ITA Nos. 2294 & 2295/Kol/2019 for AY 2009-10 and AY 2010-11, Ld. Counsel submitted that their filing is delayed by 893 and 913 days respectively for which a petition for condonation of delay along with affidavit is placed on record. He further submitted that the solitary issue involved in both the appeals of the assessee is against the action of Ld. CIT(A) in upholding the action of the Ld. AO on account of deduction of education cess. Ld. Counsel for the assessee did not press this ground of appeal against which ld. CIT, DR did not raise any objection. After hearing both the sides, we condone the delay for adjudication and dismiss these two appeals as not pressed. 4. Accordingly, both the appeals of the assessee are dismissed. 5. Now, we take up the two appeals by the Revenue in ITA Nos. 917 & 918/Kol/2017 for AY 2009-10 and AY 2010-11. Both the parties agree that in both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in the business of manufacture and sale of paints having its works located at various places. Assessee filed its return of income on 30.09.2009 reporting total income of Rs. 93,30,91,670/- computed under the normal provisions of the Act. During the year, assessee claimed deduction u/s 80IB of the Act of Rs. 23,49,63,237/- with respect to profits derived from its industrial undertakings located at Jammu, which is tabulated as under: S. No. Industrial Undertaking Amount of deduction claimed (Rs.) 1 Jammu (Solvent based) 2,37,99,835 2 Jammu (Water based) 7,71,11,289 3 Jammu (Rajdoot) 13,40,52,113 Total 23,49,63,237 There is one more unit viz. Jammu (Powder based) eligible for deduction u/s 80IB, however, owing to loss in the said unit, no deduction is claimed in the return in respect of this unit. 7.1 During the assessment proceedings, ld. AO called for details and explanation in respect of deduction claimed by the assessee u/s 80IB of the Act, all of which were complied by furnishing all the necessary details and relevant documents as noted in the order itself. It was submitted that assessee maintains separate books of account for the units eligible for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d operating (let us say this figure is 100). (c) Then it adjusts the value in (b) by inflation index of the country and calculate the inflation adjusted expense of head office. For this it uses the Inflation index of the year previous to year in which the units claiming deduction under chapter-IVA started operating and Inflation index of AY 2008-09. Say the figure calculated is 120. (d) It then applies a logic saying that this inflated adjusted expense of head office would have taken place even if the units claiming deduction under chapter-VIA have not started operation. Then it takes the total head office expense for year in consideration (in this case AY 2008-09) (say 150). It then states that out of this 150 the figure of 120 (which was 100 adjusted by inflation) will be expense of head office in AY 2008-09 even if the units claiming deduction under chapter-VIA have not started operation. It thus consider the difference of 150 less 120, which is 30 as expense for units claiming deduction under chapter-VIA. This figure of 30 is then apportioned amongst units claiming deduction under chapter-VIA on basis of turnover." This principle is applied to selling depot expenses also. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said order, revenue preferred an appeal before the Hon'ble Calcutta High Court, being ITA No. 230 of 2009, which was dismissed by the Hon'ble High Court on 02.09.2019 [Page 1 of the Corporate Tax Compendium of Case Laws]. (c) AY 2005-06 The Hon'ble Calcutta High Court by a judgment dated May 20, 2011 in WP No. 858 of 2008 [Page 127 at 141-142 of the Part A - Corporate Tax Paper Book]. Ld. CIT sought to direct special audit under section 142(2A) of the Act, inter alia, with regard to allocation of the common head office and selling expenses. The assessee instituted writ proceeding against such direction for special audit. The Hon'ble Calcutta High Court held that this Hon'ble Tribunal having found the allocation of the said expenses as based upon scientific and reasonable basis, which was followed for several years, the Commissioner should not have disregarded such view of this Tribunal and directed special audit. (d) AY 2006-07 ITA No. 2112/Kol/2013 [Page 172 at pages 179- 180 of the Part A - Corporate Tax Paper Book]. Revenue's appeal, being ITAT/223/2017 against the said order was dismissed by the Hon'ble Calcutta High Court by an order da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Co-ordinate of ITAT Kolkata or that of Hon'ble jurisdictional High Court of Calcutta in assessee's own case have been referred and relied upon. The methodology adopted by the assessee for apportionment of common head office expenses and selling expenses has consistently been followed year-on-year basis which has been held to be reasonable and scientific. It is thus noted that the issue in hand before us is no longer res integra considering the decisions in assessee's own case. Relevant extracts from one of the several decisions referred above in assessee's own case are reproduced hereunder for ease of reference from AY 2008-09 in ITA Nos. 1105 & 1403/Kol/2013, dated 14.12.2016 by ITAT Kolkata: "10. Heard rival submissions and perused the material available on record. We find that the assessee submitted before the CIT-A that the Tribunal has accepted the method of allocating the Head office and common selling expenses. Considering the above, the CIT-A in the present case allowed the deduction claimed u/s. 80IB of the Act in respect of 'common expenses'. Therefore, it is also pertinent to reproduce the relevant finding of the ITAT, C Bench, Kolkata in assessee's own case in ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission, repacking expenses, HRA, incentive salesman, other expenses, canteen, staff welfare, donation & subscription, directors fees, gratuity, machine accounting. sec. off expenses, insurance, training & developments, professional fees.. brokerage & commission, in-house Xerox, ESI, shifting expenses, ARB, internal audit expenses' etc.) including expenses on salaries, advertisement and sales promotion etc. have been duly considered by the assessee for allocation to the unit eligible for deduction u/s. 80ID and thus there cannot be any question of inflated profits as raised by the Department in Ground No. (iv). On going through the basis of allocation of the said common head office and se1Jing expenses adopted by the assessee consistently from the AY 98-99, we are of the considered view that the said basis adopted by the assessee for allocation of common expenses is a reasonable and scientific basis and does not call for any modification. The basis accepted by the AO is arbitrary as he has not stated the reason for rejection of the assessee's method, he has not stated how he arrived at 20% for allocating common HO exp. Which shows he has taken an adhoc figure & we accept that pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the order dated 14th December, 2016 passed by the Income Tax Appellate Tribunal, A-Bench, Kolkata (the 'Tribunal') in ITA Nos. 1105/Kol/2013 for the Assessment Year 2008-09. The revenue has raised the following substantial questions of law for consideration: i) Whether on the facts and in the circumstances of the case the Learned Tribunal has erred in law in upholding the order of CIT(Appeal) in allowing deduction under Section 80IB of Income Tax Act, 1961 in respect of "common expenses" of Rs. 10,21,06,200/- in respect of its Units at Pandicharry, Goa and Jammu by disregarding that it was not correctly apportioned ? ii) Whether on the facts and in the circumstances of the case the Learned Tribunal has erred in law in upholding the order of CIT (Appeal) in allowing deduction under Section 80IB of Income Tax Act, 1961 in respect of "interest income" of Rs. 57,93,000/- on sale of scrap by treating it as income derived from profits and gains of industrial undertaking? iii) Whether on the facts and in the circumstances of the case the Learned Tribunal has erred in law in deleting the addition of Rs.38,07,778/- made by the Assessing Officer under Section 14A of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no error in the order passed by the Tribunal. In the result, the appeal fails and the same stands dismissed. The substantial questions of law are answered against the revenue." [emphasis supplied by us by underline] 11.2 Admittedly, it is a fact that this is a recurring issue from preceding assessment years. By adopting judicial consistency in the given facts and circumstances, we affirm the order of ld. CIT(A) and direct to delete the addition made by the ld. AO of Rs. 9,38,54,750/-. Thus, ground no. 1 is dismissed. 12. Second ground of revenue's appeal is with regard to deletion of disallowance made u/s 14A read with rule 8D of the Income Tax rules, 1962 (hereinafter referred to as the "Rules"). 12.1 Briefly stated, facts for this issue are that during the year assessee earned dividend income of Rs.20,53,923/- against which assessee suo motto made a disallowance u/s 14A of the Act of Rs.1,51,117/- apportioned out of salary and other establishment expenses, details of which are placed on record at page 239 of the paper book. Ld. AO invoked and applied rule 8D of the Rules by observing that assessee has investment of Rs.29.52 crores against the total loan fund of Rs.78.05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o f Rs.20,53,923/- and offered Rs.21,921/- as expenditure incurred towards earning such exempt income. According to AO , the assessee invested Rs.29.52 crores against total loan fund of Rs.78.05 crores and observed that investment is made only 37.82%. The AO not satisfied with the correctness of claim of assessee in respect of determined expenditure as incurred in relation to exempt income and applying Rule 8D disallowed Rs.38,07,778/- for the purpose of computation of expenditure u/s. 14A o f the Act. 20. Before the CIT-A the assessee contended that all the details relating to said expenditure were filed before the AO and without satisfying the precondition as required to be followed before application o f Rule 8D, disallowed the impugned addition arbitrarily. The CIT-A observed that the AO rightly applied the Rule 8D as he was not satisfied with the expenditure as offered by the Assessee on its own and confirmed the impugned addition made by the AO. 21. Before us the ld.AR submits that the assessee on its own disallowed to an extent of Rs.21,921/- which involves electricity, corporation tax and telephone charges. The AO did not examine the workings of assessee as offered by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound o f as raised in this appeal is allowed." 13.1 Ld. CIT, DR opposed the contentions of the Ld. Counsel and relied on the order of ld. AO. 13.2 Per contra, the Ld. Counsel for the assessee submitted that there is no doubt that the assessee's own funds far exceeded its investments in each of the two years. Assessee's own funds as on March 31, 2008 comprising of share capital and reserves and surplus amounted to Rs. 349.01 crores whereas the investments made by it as on March 31, 2009 were only to the tune of Rs.29.52 crores (Page 1 of Part A - Corporate Tax Paper Book for assessment year 2009-10). Further, assessee's own funds as on 31.02.2009 were Rs. 425.14 crores whereas the investments as on 31.03.2010 were to the tune of Rs. 170.20 crores (Page 1 of Part A - Corporate Tax Paper Book for assessment year 2010-11). It was further submitted that ld. AO did not specify any reason whatsoever as to why the assessee's claim of proportionate expenditure was not satisfactory and mechanically invoked and applied rule 8D of the Rules. 14. We have heard rival submissions, gone through the facts and circumstances of the case. After perusing the order of Coordinate bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed against the revenue and in favour of the assessee. 15.2 Ld. CIT, DR placed reliance on the order of ld. AO. 16. We have heard the rival submissions and gone through the facts and circumstances of the case. We note that there is no change in the factual matrix and applicable law on the issue before us when compared with the preceding years. We have perused the order of Co-ordinate bench of ITAT Kolkata in assessee's own case for AY 2008-09 (supra), relevant extracts of which are reproduced as under: "12. Ground no.2 is relating to disallowance of deduction u/s. 80IB of the Act in respect of income of Rs.57,93,000/- on account of sale of scrap. 13. During the assessment proceedings the AO found that the assessee credited an amount of Rs.57,93,000 to its P & L account and claimed the same as deduction u/s. 80IB of the Act on account of sale of scrap. According to AO, it cannot be treated as derived from profit and gains of industrial undertaking being eligible for business. 14. In first appeal, the CIT-A allowed the ground of appeal as raised by the assessee before him by relying on the order of the Tribunal in assessee's own case supra by finding as under:- "5. Appeal on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production process employed by the company at its Unit at Pondicherry the profit derived from which is eligible for deduction under sect/on 80-IB of the Act. The generation of scrap has therefore a direct nexus with the goods produced by the company at the said eligible Unit and the profit derived therefrom is incidental to the activity of the industrial undertaking. The provision of section 80-IB under which the impugned deduction has been allowed by the Assessing Officer is in pari material to section 80-I and 80IA. It is submitted that in the under noted decisions which have been rendered in the context of section 80-I of the Act by various High Courts, it has been inter alia held that scrap generated in the manufacturing activity carried on by the assessee is eligible for deduction under the provisions of the said section- DClT vs Harjivandas Juthabhai Zaveri [2581TR 785 (Guj) CIT vs Sundaram Ciayton Ltd [1331TR 34 (Mad)] CIT vs Wheels India Ltd [141 ITR 745 (Med)] Arati Industries Ltd Vs DCIT [95 TTJ 14 Ahm) "The submissions of the assessee have been examined and the copies of the invoices submitted have been carefully checked. It is seen that the invoices have been raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling the loans by Cyprus subsidiary. Corporate guarantee was given by the assessee to the foreign banks over and above the said security for the loans availed by the Cyprus subsidiary. Thus, Cyprus Subsidiary was the borrower and the assessee was the guarantor for the loans borrowed from BNP Paribas and Standard Chartered Bank. 17.2 Loan agreements were made between BNP Paribas, Cyprus Subsidiary and the assessee as also between Standard Chartered Bank, Cyprus Subsidiary and the assessee. Aggregate amount borrowed was US $40.69 million equivalent to Rs.204.29 crores. The equity infusion by the assessee was US $2,290. Assessee intended to infuse equity into the Cyprus Subsidiary so that borrowings from the Banks could be paid off. Till 2020, the assessee infused equity into the Cyprus Subsidiary to the extent of US $24.57 million which was used to repay the loans taken from the banks and such loans stood reduced to $22.72 million. There was no default in repayment of the bank loans at any point of time. 17.3 The case of the assessee is that the loans may have been granted to the Cyprus Subsidiary but the same were in substance loans granted to the assessee for enabling the acquisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that corporate guarantee is indeed an international transaction amenable to transfer pricing provisions contained in Chapter X of the Act. Ld. CIT, DR further referred to the decision of this Tribunal in Electrosteel Castings Ltd v. DCIT in IT(SS)A No. 47 to 60/Kol/2014 and others dated 25.11.2016 wherein ALP has been determined on the corporate guarantee provided. 19.1 According to the ld. CIT, DR, with the insertion of Explanation to section 92B by Finance Act, 2012 with retrospective effect from 01.04.2002, this issue is now well settled. He stated that the guarantee provided by the assessee, which provides a benefit to the Associated Enterprise (AE), is in the nature of a service to the AE and constituted an international transaction. He submitted that the crux of the issue lies in establishing that the recipient of guarantee has benefitted financially from the arrangement, in other words, it is to be shown that the loan was obtained by it at a lower cost of finance. According to him, this benefit is considered to be equivalent to the enhancement of credit rating of the recipient due to its association with the AE which has provided the guarantee when compared with its stand-a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and estimating the alleged benefit on account of provision of corporate guarantee by the assessee. 20.3 Ld. Counsel also submitted without prejudice that the charge for guarantee fees should be apportioned based on number of days for which the guarantee was effective and not be charged for the full year as has been done by the ld. AO. For this, he referred to detailed working on loan disbursement to the AEs placed at page 101 of the order of ld. CIT(A). 21. We have heard the rival contentions, perused the material placed on record and given our thoughtful consideration to the submissions made before us. Admittedly, it is a fact that assessee has given corporate guarantee to its subsidiaries at Cyprus and Nepal which enabled them to avail loans to fulfill the business objectives. Ld. Counsel emphasized on the submission that in the present facts and circumstances of the case, the transaction cannot be covered in the definition of international transaction to hold it chargeable for corporate guarantee commission / fees for which he explained the objective behind the transaction undertaken by the assessee with its Cyprus and Nepal AEs. According to him, when the assessee embarked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee in the nature provided by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist on non-charging any commission from Associated Enterprise as a commercial principle. Further, it has been observed that this position indicates that provision of guarantee always involves risk and there is a service provided to the Associate Enterprise in increasing its creditworthiness in obtaining loans in the market, be from Financial institutions or from others. There may not be immediate charge on P & L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise. 76. In the light of the above decisions, we hold that the Tribunal committed an error in deleting the additions made against Corporate and Bank Guarantee and restore the order passed by the DRP." 21.3 Having ..... X X X X Extracts X X X X X X X X Extracts X X X X
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