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TMI Blog2025 (5) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeal) "(i) Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) right in restricting the disallowance made u/s. 14A of the Act to Rs. 10,00,000/- giving relief of Rs. 7,27,78,541/- contrary to CBDT Circular No. 5/2014 dated 11.02.2014 which clearly states that it is not necessary to earn exempt income in a particular year in which the disallowance is made? (ii) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in relying on the judgment of decision of Hon'ble Special Bench in the case of Vireet Investments by holding that the disallowance made u/r. BD cannot be adopted while computing book profit u/s 115JB and held that the assessee has incurred expenses for earning of exempt income, hence, directed the AO to restrict the disallowance to the amount suo-moto disallowance by the assessee? (iii) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in deleting the disallowance of Rs. 19,81,00,000/- u/s 36(1)(iii) of the Income Tax Act, 1961 without appreciating the fact that interest bearing funds were advanced for non business purpose? (iv) Whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of issuing letter of comfort to 0.2% of the net asset value of subsidiary, without appreciating the fact that such letter has enabled the AE to obtain loans at a lesser interest rate and profit arising from such transaction should have been shared between the assessee and its AE? (x) The appellant prays that for this and other reasons it is submitted that order of CIT(A) on the grounds be set aside and that of the Assessing Officer be restored. (xi) The appellant craves leave to amend, alter, delete or add grounds which may be necessary." ITA No. 2026/M/2021 (Assessee's Appeal) "1.1 The learned Commissioner of Income-tax (Appeals) erred, both in law and on the facts and in the circumstances of the case, in sustaining an upward adjustment to the extent of Rs. 5,63,45,472/-towards nonrecovery of guarantee commission from Associated Enterprises ('AEs') in relation to issuance of Letter of Comfort ('LOC'), performance guarantee and financial guarantee considering the same as International transaction. 1.2 The learned Commissioner of Income-tax (Appeals) erred, both in law and on the facts and in the circumstances of the case, in not appreciating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... older activity, and it is in best interest of both AEs and the appellant to provide such LOC/performance/financial guarantee. 1.7 The learned Commissioner of Income-tax (Appeals) erred in disregarding the Safe Harbour rules issued by CBDT which states that LOC and performance guarantee is not equivalent to corporate guarantee. 1.8 The learned Commissioner of Income-tax (Appeals) erred in disregarding the definition of 'Corporate Guarantee' at Rule 10TA(c) as meaning an 'explicit corporate guarantee' extended by a Company to its wholly owned subsidiary and the explanation to the Rule which excludes a 'Letter of Comfort' or an 'implicit corporate guarantee' from the definition of 'Corporate Guarantee'. 1.9 The appellant prays that the adjustment made in respect of nonrecovery of commission from AEs on issue of LOC, performance guarantee and financial guarantee be deleted." 2. The cross-objection no. 53 filed by the assessee are as under: "A. Disallowance of expenses under section 14A of the Income-tax Act, 1961 ('the Act') r.w. Rule 8D of the Income-tax Rules, 1962 ('the Rules'): Rs. 5,60,77,316 1 erred in challe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal in the respondent's own case for earlier years has deleted the disallowance towards notional interest on loans advanced for acquisition of land and thus taking different view from that which is settled in earlier years without change in facts and circumstances is not allowed in view of the principle of Consistency 7 erred in not appreciating the fact that advances given towards acquisition of land are in the course of regular business activities and thereby, there would not be any notional disallowance of interest expenditure." Ground No. 1 of Revenue: Disallowance made u/s 14A and crossobjection no. 1 to 3 of the assessee. 3. During the course of assessment, the assessing officer noticed that assessee claimed an amount of Rs. 224,26,68,823/- as exempt u/s 10 of the I.T. Act. The AO further noticed that assessee had made suo-moto disallowance of expenditure to the amount of Rs. 5,00,000/- for earning the said exempt income. However, the assessing officer has applied Rule 8D and computed disallowance u/s 14A to the amount of Rs. 7,37,78,541/- under Rule 8D(2)(iii) of the Act. 4. The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has restricted the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has also submitted that after considering the nature of expenditure it had determined the expenditure related to earning exempt income. However, on perusal of the assessment order, it is clear that assessing officer has not recorded any specific dissatisfaction in respect of accounts of the assessee company for the direct and indirect expenses before computing the disallowance in accordance with Rule 8D of the I.T. Rule. Looking to the above facts, the ld. CIT(A) has arrived at the conclusion that assessing officer has failed to record dissatisfaction with respect to the correctness of the claim of expenditure made by the assessee after considering the various decisions of the courts. The ld. CIT(A) has also considered the decision of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT (2018) 402 ITR 640 (SC) wherein held that the assessing officer was not empowered to invoke the provisions contained u/s 14A r.w. Rule 8D in a mechanical manner without recording satisfaction that claim of the assessee is not correct. He also considered the case of Hon'ble Supreme Court in the case of Godrej Boyce Manufacturing Company Ltd. vs DCIT (Civil Appeal No. 7020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleted such disallowance of interest expenditure after following the decisions of the ITAT on this recurring issue. 11. Before us, the ld. DR supported the order of the assessing officer. On the other hand, ld. Counsel relied on the order of ITAT, Mumbai for A.Y. 2008-09 to 2011-12 and also submitted that assessee has not debited any amount in the P & L A/c and same has been shown as work-in-progress under the head current asset in the balance sheet. 12. Heard both the sides and perused the material on record. The assessee is in the business of construction and real estate business. It is undisputed fact that assessee has not debited any interest expenditure in the P&L A/c and shown the whole amount as advances towards acquisition of land in the balance sheet. We find that this is recurring issue which has been decided in favour of the assessee by the ITAT, Mumbai in assessee's own case for A.Y. 2014- 15 and earlier years. It is also undisputed fact that the interest free funds available with the assessee were more than the advances given to the aforesaid party. Looking to this fact, the ITAT in its decision in the case of the assessee for A.Y. 2014-15 vide ITA 2025/M/2021 dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Everest Kanto made downward adjustment of 0.50% to the adjustment recommended by the TPO and computed arm's length rate for guarantee fees at 1.16% after following the similar decision of his predecessor for A.Y. 2014-15 as reproduced as under: "I have carefully considered the matter. During the financial year relevant to the assessment year in question, the Appellant Assessee had given corporate guarantee to the Banks for loan given in foreign currency to its AE. The Appellant has raised various contentions, summarized as below: a) Corporate guarantee is in the nature of shareholders' activities which does not justify a charge b) Corporate guarantee does not have "bearing on profits, income, losses or assets" and thus, not an international transaction; c) Corporate Guarantee is not in the nature of 'provision of services'; d) Without prejudice to the above, corporate guarantee is distinct from bank guarantee and therefore, no benchmark is available to determine ALP, thereby leading to failure of computational provision. I do not agree with the contentions raised by the Appellant that the corporate guarantee issued in favour of the AE is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts alternative claim that Mumbai ITAT in assessee's own case for F.Y. 2014-15 has remanded the matter back to the file of the TPO for the purpose of applying any of the prescribed method for determining the ALP. 16. On the other hand, ld. DR objected the additional evidences filed by the assessee. The ld. DR also submitted that since there was no internal CUP available in the case of the assessee, therefore, the TPO has rightly applied external CUP method to determine the commission for the bank guarantee extended by the assessee for the purpose of associated enterprises. 17. Heard both the sides and perused the material on record. We find that ld. CIT(A) has restricted the rate of corporate guarantee to 0.5% or actual cost incurred by the assessee + 10% mark up after following the decision of Hon'ble Bombay High Court in the case of CIT vs Everest Kento Cylinders Ltd. (2015) 378 ITR 57 (Bom). However, the ITAT in assessee's own case for the A.Y. 2014-15 vide ITA No. 2025/Mum/2021 and C.O. No. 55/Mum/2022 has held as under: "31. From the above observation, we are of the considered view that the matter should be remanded back to the file of the Id. TPO for the purpose of applyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receive all the rights and benefits to it. The assessee claimed that while providing such performance guarantee it did not incur any charges or cost whatsoever and accordingly no commission was charged by the assessee to its AE for providing said performance guarantee. In support, the assessee has placed reliance on the decision of ITAT in the case of KEC International (ITA No. 6447/Mum/2015 dated 23rd March, 2011). 21. The ld. DR supported the order of TPO. 22. Heard both the sides and perused the material on record. The assessee provided performance guarantees to Qatar Petroleum on behalf of the AE. Under the performance guarantee if associated enterprise fails to execute a contract then the performance guarantee issued by the assessee get invoked then the assessee would be obliged to execute the contract on its own by using its own fund. The ld. Counsel submitted that assessee was not at risk on any financial obligation on behalf of the associated enterprises. The assessee also submitted that while providing such performance guarantee the assessee did not incur any charges or cost whatsoever and accordingly no commission was charged by the assessee to its associated enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or not is left open and no decision is given herein. Hence, the various decisions quoted by the Id. Counsel for both the sides need not be gone into. Accordingly, the addition made in the sum of Rs. 69,45,342/- is hereby directed to be deleted. Accordingly, the ground No.1(a) raised by the revenue are partly allowed." 24. We have also perused the decision of ITAT, Mumbai in the case of Afcons Infrastructure Limited vs Addl. CIT vide ITA No. 1135 & 1357/M/2014 the relevant extract is as under: "15...... Here, in this case what has to be seen that the entire functions to carry out the work either in the form of sub-contract or executing the contract work by providing entire support services through its own infrastructure, man power, management, technological support, organizational support, etc. all has been done by the assessee. The function of the AE in the execution of work was only on paper and as a legal entity to comply with the domestic laws. In substance there is negligible function performed by the AE. Apart from that, even the assets deployed belonged to the assessee. The entire risk lied upon the assessee that is the risk assumed for executing the contract and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal, the ld. CIT(A) after considering the decision of Hon'ble High Court in the case of CIT vs Everest Kento Cylinders Ltd. has restricted guarantee commission @ 0.2% to the amount of Rs. 27,80,525/-. 28. The ld. DR supported the order of TPO. On the other hand, the ld. Counsel submitted that issue of letter of comfort did not have bearing on the profit, income or assets of the assessee, therefore, the same is not an international transaction and do not attract provisions of section 92 of the Act. The assessee has also placed reliance on the decision of co-ordinate benches of the ITAT where it is held that letter of comfort is not an international transaction. 29. Heard both the sides and perused the material on record. 30. The assessee has issued letter of comfort to ICICI Bank Bahrain in F.Y. 2007-08 which was continuing in the year under consideration for performance guarantee given by ICICI Bank to the construction parties of Shapoorji Pallonji Mid-East. The TPO has applied Comparable Uncontrolled Price (CUP) method using information called from various banks u/s 133(6) of the Act since there was no internal CUP available. Thereafter, considering the decision of Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the assessee company for only providing letter of comfort for keeping the investment in its holding company. Therefore, following the findings of the ITAT in the decisions as referred supra, the addition of Rs. 27,80,525/- is deleted. Accordingly, the grounds of appeal of Revenue are dismissed and grounds of appeal of the assessee are allowed. Ground No. 2 of Revenue and Cross Objection No. 4 to 6 of the assessee: Adjustment of book profit u/s 115JB in relation to expenditure relatable to earning exempt income u/s 14A r.w. Rule 8D to the amount of Rs. 7,37,78,541/: 32. The assessee while computing the book profit in terms of section 115JB of the Act had suo moto made addition u/s 115JB(2) of the Act of an amount of Rs. 40,32,630/- towards administrative cost and interest cost for collection of dividend. However, the assessing officer while computing the book profit of the assessee in the assessment order made further adjustment of an amount of Rs. 7,37,78,541/- u/s 14A r.w. Rule 8D u/s 115JB of the Act. 33. The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) after following the decision of the ITAT for A.Y. 2014-15 in the case of the assessee itself has restricte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue as adjudicated above mutatis and mutandis both the grounds of appeal of the assessee and Revenue are allowed for statistical purpose. Ground No. 1.1, 1.2, 1.4, 1.5, 1.6 and 1.9 of assessee appeal and Ground No. 4 t 7 of Revenue appeal related to performance guarantee in an adjustment of Rs. 4,27,68,565/-: 39. The similar grounds of appeal have been adjudicated vide ITA No. 2232/M/2021 and ITA No. 2027/M/2021. Applying the same findings mutatis mutandis, the grounds of appeal of the Revenue is dismissed and grounds of appeal of the assessee are allowed. Ground No. 1.1 to 1.3 and 1.5 to 1.9 of Assessee's appeal and Ground No. 8 and 9 of Revenue appeal relating to Letter of Comfort resulting in adjustment of Rs. 44,69,215/-: 40. Since similar issue on identical facts are adjudicated vide ITA No. 2232/M/2021 and ITA No. 2027/M/2021 as supra in this order therefore the same findings mutatis mutandis, the grounds of appeal of the Revenue is dismissed and grounds of appeal of the assessee is allowed. 41. Ground No. 1 of Revenue's appeal and cross objection no. 1 of the assessee are dismissed after applying the findings of Ground No. 1 and cross objection no. 1 to 3 mutatis mu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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