GREAVES COTTON LTD,MUMBAI vs. ASST CIT CIR 7(1)(1), MUMBAI

These are the four appeal filed by the Greaves Cotton Limited for Ay 2011-12 to AY 2014-15 involving similar Grounds of appeal. Bothe Parties argued appeal for AY 2011-12 and stated that similar

This appeal is filed by Greaves Cotton Ltd Mumbai (the assessee/appellant) for assessment year 2011 – 12 against the assessment order passed under section 144C (13) of The Income Tax Act, 1961 (The Act) dated 25/1/2015 wherein the return filed by the assessee on 30/11/2012 declaring a total income of ₹ 1,971,204,132 is assessed at ₹ 2,053,640,240 pursuant to the order passed under section 92CA (3) of The Act by The Transfer Pricing Officer 2 (1) (1), Mumbai (The Learned TPO) dated 7/1/ 2015 under section 92CA (3) of The Income Tax Act and the direction of the learned Dispute Resolution Panel [ The ld DRP] dated 9/12/2015.

Assessee has raised following grounds of appeal

Brief facts of the case shows that assessee is a company engaged in the business of manufacturing and sale of power equipments. It is manufacturing diesel engines and infrastructure products. It filed its return of income on 30/11/2012 declaring a total income of ₹ 197,12,04,132/–. As the assessee has entered into international transactions, reference was made under section 92CA (1) of the act to the Deputy Commissioner of Income Tax, TPO – 2 (1) (1) Mumbai (the learned TPO) on 9/12/2013 referring the international transactions with the associated enterprises reported in prescribed form number 3CEB. According to form 3CEB assessee has entered into seven different kind of international transaction. One of those is issue of corporate Guarantee issued in favour of its AE. Assessee has given corporate guarantee on behalf of Greaves Ferryman Diesel GmbH of € 1,990,000 in favour of banks for the loan availed by that company. These guarantees are carried on from assessment year

The learned assessing officer made the draft assessment order on 13/2/2015 determining the total income of the assessee at ₹ 2,053,740,240/–. Over and above the transfer pricing adjustment of ₹ 2,678,899/– on account of arm’s-length price of the corporate guarantee fee, the learned AO further made the following adjustment /additions / disallowance:-

Based on this, assessment under section 143 (3) read with section 144C (1) of the act was passed as a draft assessment order on 13/2/2015 determining the total income of the assessee at ₹ 2,053,740,239/–.

The assessee preferred an objection before The Learned Dispute Resolution Panel – 1, Mumbai (the learned DRP)

Based on that the final assessment order was passed by the learned assessing officer on 25/1/2015 determining the total income of the assessee at ₹ 2,053,640,239/–. Assessee is aggrieved and is in appeal before us.

The learned departmental representative vehemently opposed the same and submitted that though in the earlier year coordinate bench has held that the 0.5% of the guarantee fee commission is at arm’s-length however he submitted that same could not be imputed in the current year for the reason that each year is a separate

We have carefully considered the rival contention and perused the orders of the lower authorities. Facts show that assessee has an associated enterprise in Germany which is wholly owned subsidiary of the assessee. For availing finance/loan by that company, assessee has issued guarantee to Royal Bank of Scotland, Mumbai on 7/8/2007 and further corporate guarantee of € 1,140,000 and further on 17/8/2007 of € 850,000 to the same bank. The total corporate guarantee was issued of € 1,990,000 to ABN Amro Bank. The German subsidiary

The learned transfer pricing officer obtained quote of the various banks for the guarantee commission. Further the information was also obtained from state bank of India. Based on this the learned TPO reached at a conclusion that the rate for financial guarantee charged by the banks vary between 2% to 3%. He further held that in case of newly formed entities when the guarantee is given not only the credit rating is very poor, there are no securities and there is no proven track record. Therefore it enhances the risk. He therefore held that the rate charged for corporate guarantee cannot be less than the rates charged by the banks for giving bank guarantee. Thereafter, he considered the several judicial precedents and stated that those judicial precedents cannot be applied. He specifically confirmed that assessee has also accepted that the credit rating of the associated enterprises is less than that of the assessee. Based on that, he held that it would be appropriate to charge 2.5% from the associated enterprises being the average guarantee commission charged by the banks.

The learned dispute resolution panel confirmed the findings of the learned assessing officer and held that arm’s-length price of the corporate guarantee provided by the assessee in favour of its associated enterprise is correctly determined at arm’s-length at the rate of 2.5% of the amount of outstanding corporate guarantee. The

On these facts, it is undisputed facts that provision of corporate guarantee by assessee to its associated enterprise is an international transaction. Assessee did not charge any guarantee fee commission from its associated enterprise. Therefore it is required to be examined whether any independent party on similar circumstances and facts of the case, having provided identical financial guarantee in favour of that party, would not have charged any guarantee fee or not.

We firstly hold that the benchmarking made by the assessee as well as the learned transfer pricing officer is incorrect. The assessee has earned interest saving of 9% as stated by assessee itself. The above benefit is to be necessarily shared between the assessee and the associated enterprises. This has not been done by the assessee. This itself shows that the benchmarking made by the assessee at Rs Nil is not appropriate benchmarking.

Further the learned assessing officer has compared the bank guarantee rates with the corporate guarantee rates given by the assessee to its wholly owned subsidiary. This comparability is not justified. The learned dispute resolution panel has also followed its own direction for assessment year 2010 – 11. Mandate with the learned TPO and the learned DRP is to compute the arm’s-length price by adopting the most appropriate method under section 92CA (3) of the act and adopting one of the

Coming to the judicial precedents relied upon by the assessee in assessee’s own case in ITA number 7742/M/2014 for assessment year 2010 – 11; we find that ground A of the appeal was with respect to the transfer pricing adjustment of arm’s-length price of corporate guarantee fee of ₹ 2,742,175. The learned authorized representative stated before the coordinate bench that identical issue is decided in case of the assessee for assessment year 2008 – 09 and 2009 – 10 by ITAT by order dated 17/1/2020 wherein the corporate guarantee

In view of above facts, it is mandatory to determine the arm’s-length price of the international transaction of the corporate guarantee fee by adopting the most appropriate

We are conscious of the fact that the judicial precedent binds us, but we are also conscious of the fact that the

Coming to ground number B which is against the short- term capital gain treated as business income amounting to ₹ 23,870,858 on account of redemption of the units of the mutual fund. The fact shows that assessee is engaged in the business of manufacturing and sale of the engineering goods such as diesel engines generate onset et cetera. Out of the spare funds the assessee invested in the mutual fund and earns capital gain on the same. The learned assessing officer held that same is business income of the assessee. The claim of the assessee is that it is chargeable to tax under the head capital gains. The main reason for disallowance is that assessee has set of the above capital gain on sale of units of mutual fund against the short-term capital loss brought forward. The learned dispute resolution panel has also upheld the same.

The learned authorized representative has merely relied upon the decision of the honourable Punjab and Haryana High Court in case of puja investments private limited ITA number 39 of 2012 dated 11 April 2014. The learned departmental representative vehemently supported the order of the lower authorities.

Ground number C of the appeal is with respect to the disallowance of club expenses amounting to ₹ 636,373/–. The above sum is paid by the assessee as annual subscription and expenditure incurred at various clubs by senior employees of the assessee. The learned AO treated it as non business expenditure which is confirmed by the learned dispute resolution panel.

On careful hearing of both the parties, we find that there is no justification for disallowance of the above sum at the same is in expenditure incurred by the assessee as an annual subscription and expenditure incurred at clubs by the senior employees of the assessee for business purposes. Perhaps the minute detail as desired by the learned assessing officer may not be available however the learned assessing officer should have taken a holistic view of the whole issue looking at the nature of the business and the volume of the business carried on by the

Ground number D is with respect to the disallowance of deduction under section 35 (2AB) of ₹ 21,396,418/–. The facts of the case are that the assessee has claimed deduction of ₹ 283,606,836 being 200% of revenue expenses towards scientific research under section 35 (2AB) and further ₹ 35,694,680 towards capital expenditure on scientific research being 200% of 1,78,47,340/–. The assessee was asked to furnish the copy of form number 3CL issued by Department of scientific and industrial research which is worked out the total eligible deduction of R&D expenditure for four different R&D units. According to form number 3CL total revenue expenditure is approved of ₹ 262,210,418/– out of the claim of ₹ 283,606,836. The submission of the assessee was that assessee has incurred in how scientific research revenue expenditure of ₹ 141,803,418/–. Assessee entitled to 200% of such expenditure at ₹ 283,606,836/– the DISR has only approved the expenditure of ₹ 124,007,000. Assessee submitted that it has filed a letter before the authority seeking opportunity to justify the balance expenditure incurred on in how scientific research. Such letter was produced before the AO. Further assessee also made submissions before the authority which accepted the claim of the assessee. The

The learned departmental representative imminently supported the order of the lower authorities and submitted that when the approving authority is not above the expenditure is no question of granting deduction to the assessee of the same. 029. We have carefully considered the rival contention and perused the orders of the lower authorities. There is no denial that assessee is recognized research and development unit. It is not in dispute that assessee has

Ground number D is with respect to the disallowance of commission. The fact shows that during the year the assessee has paid brokerage and commission of ₹ 67,707,118 to various parties. The assessee was asked to give the details of the agent and corresponding sales made to the various parties. The assessee provided certain details of the corresponding party onwards transaction commission was paid. In order to verify the transaction notice under section 133 (6) were issued to the parties and whose transaction commission was paid. Out of the six parties three parties did not reply and three parties confirmed that the sales were made directly from the

The learned authorized representative submitted that all these commissions have been paid to the regular dealers. It is submitted that entire amount of commission is paid only and exclusively for the business of the applicant and it is allowed on year-on-year basis in the previous year and subsequent year. The learned authorized representative also produced the simple copy of the appointment letters/agreements and the simple copy of

The learned departmental representative vehemently supported the order of the lower authorities and submitted that assessee has failed to substantiate the payment of commission expenditure and the business purpose of such payment of commission and therefore the learned assessing officer is allowed the deduction to the extent of 50%. It was stated that there is no infirmity in the order of the lower authorities.

We have carefully considered the rival contention and perused the orders of the lower authorities. The assessee has shown the payment of commission to various dealers and also justified the payment of dealers supported with the agreement and the invoices. The substantial activity is required to be performed as has been stated by the assessee, which was not denied by the assessing officer. Further the response received under section 133 (6) of the various parties i.e. buyers was received at the last movement of completion of the assessment and therefore it was not confronted to the assessee. Identical payments have been allowed to the assessee in earlier years as well as in subsequent years. Therefore there is no reason to deviate from the same. Further the learned assessing officer is also allowed 50% of such expenditure holding it to be for the purposes of the business, there is no sanctity involved in allowing 50% of this expenditure in disallowing

Ground number F is with respect to the unutilized Cenvat credit disallowed by the learned assessing officer and included in the closing stock of the earlier year, the ground says that it should be allowed as a deduction in the opening stock of this year. Assessee submitted that this is covered by the decision of the coordinate bench in assessee’s own case for assessment year 2010 – 11, this fact is not disputed by the learned departmental representative and therefore we direct the learned assessing officer to grant relief with respect to the above amount of ₹ 932,524/–. Accordingly ground F is allowed.

Ground number G is with respect to the disallowance under section 14 A of the act of ₹ 2,060,500 made by the assessee on its own. The claim of the assessee is that the no disallowance should have been made on account of interest expenditure without establishing the Nexus of the

The learned authorized representative submitted that though the assessee has worked out the disallowance according to rule 8D of the act however there is an error in the working of the assessee by disallowing the interest expenditure. It is submitted that the assessee has sufficient own funds more than the amount of investment therefore there could not be any disallowance on interest expenditure. Though the assessee has made an error in the working out of the disallowance, but now it has been pointed out to the authorities and therefore it should have been corrected.

The learned departmental representative relied upon the order of the lower authorities.

We carefully considered the rival contention and perused the orders of the lower authorities. The assessee itself has disallowed a sum of ₹ 2,060,500 under section 14 A of the act read with rule 8D. Now the assessee wants to submit that the interest disallowance made by it while working

Ground number H is with respect to the short credit for tax deduction at source allowed to the assessee. The claim of the assessee is that assessee has given a credit for tax deduction at source of ₹ 33,08,351 should have given the credit of ₹ 3,716,261/–. The learned authorized representative submitted that same be verified by the assessing officer and the learned departmental representative also agreed that assessee has to justify the allowability of the tax deduction at source is credit. Accordingly we set-aside this issue back to the file of the learned assessing officer with a direction to the assessee to substantiate the claim which has not been granted by the learned assessing officer. Accordingly ground number H of the appeal is allowed.

In the result appeal of the assessee is partly allowed.

This appeal is filed for the assessment year 2012 – 13 involving similar grounds as contained in appeal for assessment year 2011 – 12.

Similar is the ground for assessment year 2013 – 14 and 2014 – 15 (ground A), we also restore this ground of appeal back to the file of the learned transfer pricing officer/assessing officer with similar direction.

Ground number B is with respect to whether the profit arising to the assessee on transfer of units of mutual fund is chargeable to tax under the head business or profession or capital gain. For assessment year 2011 – 12 we have already held that such profits are chargeable to tax under the head capital gains. Accordingly, we direct the learned AO to treat the profits and gains on sale of

Ground number F for assessment year 2012 – 13 is with respect to the disallowance of expenditure under section 14 A read with rule 8D of the act. For assessment year 2011 – 12, on identical facts and circumstances we have directed the learned assessing officer to recompute the disallowance under rule 8D by deleting the interest disallowance under rule 8D (2) (ii) for the reason that the amount of investment in deleting tax free income during the year is much less than the amount of interest free capital and reserves available with the assessee. Therefore for the similar reasons, we direct the learned assessing officer to recompute the disallowance under section 14 A read with rule 8D for assessment year 2012 – 13 also. To that extent ground number F of the appeal for assessment year 2012 – 13 is allowed.

In the result appeal for assessment year 2012 – 13, 2013 – 14 and 2014 – 15 are also partly allowed as indicated above.

Accordingly, all the 4 appeal is filed by the assessee for assessment year 2011 – 12 to two