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Income Tax Appellate Tribunal, AHMEDABAD D BENCH, AHMEDABAD
Per Pramod Kumar, VP: 1. These two appeals and the related cross objections pertain to the same assessee, involve some common issues and were heard together. As a matter of convenience, therefore, these two cross appeals and the two cross objections are being disposed of by way of this consolidated order.
We will first take up the appeal and the cross objection for the assessment year 2009- 10, which are directed against the order dated 10th October 2014, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2009-10.
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 2 of 21 3. In the first ground of appeal, the Assessing Officer has raised the following grievance:
The Id. CIT(A) has erred in directing the AO to exclude only the net interest income while computing the deduction u/s 80IB despite the fact that the income derived from the industrial undertaking is eligible for deduction and interest income cannot be netted off with the interest expenditure which was incurred for business. 4. In a related grievance, which is raised in ground no. 1 of the cross objection by the assessee, the following issue is raised:
On the facts and in the circumstances of the case, the CIT(A) erred in confirming the finding of the Assessing Officer that the interest income of Rs.13,86,27,839, brought to the charge of tax by him as business income, is not eligible for deduction u/s.80-IAB of the I.T. Act, in spite of the fact that there is net interest payouts. 5. So far as this grievance is concerned, the relevant material facts are like this. The assessee before us is a company engaged in the business of integrated port and SEZ development. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has claimed a deduction of Rs 401.03 crores as deduction under section 80IAB. When he examined this claim further, he found that while the assessee has debited interest and financial expenses of Rs 132.95 crores, this debit only represents a net figure and includes interest expenditure of Rs 234.23 crores and interest earned aggregating to Rs 101.28 crores. The Assessing Officer was of the view that the deduction under section 80IAB was permissible only in respect of income “derived by the undertaking from any business of developing special economic zones” and, therefore, the income earned as interest on deposits was not eligible for the deduction under section 80IAB. The Assessing Officer did not accept the plea regarding the netting of interest and examined the interest earnings on merits of each component. While, in response to the submissions made by the assessee and after a detailed analysis of the judicial precedents above, the Assessing Officer accepted the plea with respect to a part of interest earning being eligible for deduction under section 80IAB, the Assessing Officer declined the deduction in respect of interest on ICDs amounting to Rs 12.16 crores and interest on FDs amounting to Rs 1.70 crores. He was of the view that these amounts were not placed as deposits in the normal course of business income and interest income thereon could not be brought to tax under the head business income. Accordingly, the 80IAB deduction, which was claimed at Rs 401.03 crores, was restricted to Rs 387.17 crores. A disallowance of Rs 13,86,27,839 was thus made. Aggrieved, assessee carried the matter in appeal before the CIT(A) who, simply following his order dated 6th May 2011 in assessee’s own case for the assessment year 2008-09 and without assigning any other reasons, held that “the Assessing Officer is directed to exclude only the net interest income while computing the deduction under section 80IAB”. The Assessing Officer is aggrieved and is in appeal before us. The assessee is also aggrieved that in any case entire interest income was eligible for deduction under section 80IAB.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We find that the order dated 6th May 2011 passed by the CIT(A), in assessee’s own 7. case for the assessment year 2008-09, has, in the meantime, been carried in appeal before a
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 3 of 21 coordinate bench of this Tribunal, and, vide order dated 1st September 2016, has confirmed the stand of the CIT(A). A copy of the said order is placed before us at pages 1 onward of the compilation. The coordinate bench has held that the entire interest income is eligible for deduction under section 80IAB, and, for this short reason, the grievance against netting of interest is wholly academic and infructuous. The stand of the CIT(A) thus attained finality. In any case, Hon’ble jurisdictional High Court, in the case of CIT Vs Nirma Limited (367 ITR 12), has held that netting of interest for the purpose of this deduction can be allowed. Whichever way one looks at it, the issue is covered, in favour of the assessee, by the binding judicial precedents. We, therefore, have no reasons to disturb the conclusions arrived at by the learned CIT(A). In view of these discussions, as also bearing in mind entirety of the case, we uphold the relief granted by the CIT(A) and decline to interfere in the matter.
Ground no. 1 is thus dismissed, and ground no. 1 of the cross objection is allowed.
In ground no. 2, the Assessing Officer has raised the following grievance:
The Id. CIT(A) has erred in deleting the disallowance made by the AO for the wrong claim made by the assessee u/s 80G in its return of income without appreciating the fact that the AO has correctly allowed the eligible donations of Rs.2,88,20,302/- in proportion of the turnover and to that extent the deduction u/s 80IB was reduced by the AO.
During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction under section 80 G in respect of entire donations of Rs 2,88,20,302 from the profits of the business which are eligible profits. It was noted that as the assessee company has only one undertaking and there is no other eligible business, the assessee has taken the profits of business as eligible profit. This, however, did not find favour with the Assessing Officer. He was of the view that eligible deduction has to worked separately as an enclosure to form 10CCB, where common expenses, including the donations, are allocated to eligible and non-eligible businesses. He was of the view that because of the method followed by the assessee, of taking the business income from the computation itself, the donations taken out of the working have not got allotted, and, as a result, entire donation of Rs 2,88,20,302 is incorrectly claimed against the other income being short term capital gains and interest income of the assessee. The Assessing Officer thus concluded that the eligible donation is to be allocated in the proportion of turnover and, to this extent, the 80IAB deduction is to be reduced. Accordingly, he allocated Rs 2,82,01,048 to the eligible undertaking, and, to that extent, reduced the deduction under section 80IAB. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the disallowance by observing that donation is not an expense which can be allocated in computation of income under any head. This is an adjustment to be made from adjusted gross total income. He thus upheld the claim of the assessee and reversed the stand of the Assessing Officer. The Assessing Officer is aggrieved and is in appeal before us.
Having heard the rival contentions, and having perused the material on record, we see no need to interfere in the matter. It is only in computation of total income that the deduction under section 80G is to be allowed, and, as learned CIT(A) rightly observes, it is not an expense which is to be allocated to different heads or sources of income. As a matter of fact, a donation is in the nature of allocation of income and the tax deduction for eligible deduction is a tax policy driven deduction for encouraging such public spirited application of income. The stand of the assessee was indeed correct and the learned CIT(A) was perfectly justified in
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 4 of 21 upholding the same. We approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
Ground no. 2 is thus dismissed.
In ground no. 3, the Assessing Officer has raised the following grievance:
The Id. CIT(A) has erred in directing the AO to re-compute the deduction u/s 80IAB after increasing the amount of deduction by the amount of disallowance u/s 14A.
Learned representatives fairly agree that while this relief was granted by the learned CIT(A) on the basis of Hon’ble jurisdictional High Court’s judgment in the case of ITO Vs Keval Constructions [2013] 33 taxmann.com 277 (Guj.), the issue is now covered, in favour of the assessee by the CBDT circular No..37/2016 [F.NO.279/MISC./140/2015/ITJ] dated 2- 11-2016 wherein a policy decision has been taken to accept the said decision and let the matters rest at that.
We find that in principle thus, when the profit goes up as a result of disallowances of expenses, the eligibility for deduction in respect of such profit correspondingly increases. That is the position accepted by the CBDT by stating as follows:
Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.
The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows:
(i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases: ♦ Income-tax Officer -Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.) ♦ Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.) (ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case:
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 5 of 21 ♦ Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.). The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.
In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned.
While the aforesaid circular does not specifically deal with section 14A disallowance, as the circular itself states in so many words the cases cited above are only illustrative and the principle is that “the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits”. In the light of this position, we uphold the conclusions arrived at by the CIT(A) on this point as well, and decline to interfere in the matter.
Ground no. 3 is thus dismissed.
In ground no. 4, the Assessing Officer has raised the following grievance:
The ld. CIT(A) has erred in directing the AO to re-compute the adjustment by adopting the rate of guarantee fee at 2% against the rate of 3% adopted by the TPO for non-charging of guarantee fees from the AE.
In a related grievance i.e. ground no. 4 of the cross objection filed by the assessee , which we must take up along with the above, the assessee is aggrieved as follows:
On the facts and in the circumstances of the case, the CIT(A) erred in partly confirming the upward adjustment of Rs.34,22,250 made by the Assessing Officer on the basis of the order passed by the Transfer Pricing Officer with regard to non- charging of guarantee fees from the Associate Enterprise, by holding that the quantum of upward adjustment may be recomputed by adopting the rate of guarantee fee at 2%, as against the rate of 3% adopted by the Transfer Pricing Officer.”
So far as these cross claims are concerned, the relevant material facts are like this. During the course of proceedings before the Transfer Pricing Officer, it was noted that the assessee had extended a corporate guarantee to the State Bank of India, Hong Kong branch, for acquisition of aircraft by its associated enterprises. It was explained by the assessee that the guarantee given by the assessee is a generic and non-explicit guarantee which binds the principal shareholders in general anyway, and that it did not lower the credit risk to the AE since the AE derives the same benefit by affiliation with the group. It was also submitted that the SBI Hong Kong has granted loan to the AE at LIBOR plus 145 bps which is as per the
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 6 of 21 market norms, and that the AE was required to ensure that the value of security does not fall below the 1.33 times of the borrowings by the AE. All this, according to the assessee, showed that the transaction between the SBI Hong Kong and the AE was in the light of prevailing market situation and the guarantee by the assessee did not confer any benefits to the AE. These arguments did not impress the TPO. As the assessee did not charge any guarantee commission, the TPO computed guarantee commission @ 3% of the amount of guarantee provided by the assessee to the AE’s banker i.e. State Bank of India. Accordingly, an adjustment of Rs 34,22,250 was recommended. That was the ALP adjustment made by the Assessing Officer in the course of the scrutiny assessment proceedings. Aggrieved by the stand so taken by the TPO and the AO, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) upheld the ALP adjustment in principle but restricted the quantification of adjustment at 2% of the amount of guarantee provided by the assessee. None of the parties is satisfied. While the assessee is aggrieved of the ALP adjustment in respect of issuance of corporate guarantees in principle, the Assessing Officer is aggrieved of the quantum of adjustment being restricted to 2% of the value of guarantees as against 3% notional value assigned by the TPO. Both the parties are in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that this issue is now covered, in favour of the assessee, by a series of decisions in various cases, including in the case of Micro Ink Ltd Vs ACIT (157 ITD 132), analysed the issue in great detail and taken note of decisions by various coordinate benches, and then come to the conclusion that issuance of corporate guarantees does not constitute an international transaction with the meanings of section 92B. Learned representatives fairly agree that the issue is thus covered, in favour of the assessee and in assessee’s own cases, by coordinate benches of Tribunal. We may also add that Hon’ble jurisdictional High Court has admitted appeal to determine the question as to whether or not issuance of corporate guarantees amounts to international transaction within meanings of section 92B. In the case of Micro Ink (supra), the coordinate bench, speaking through one of us (i.e. the Vice President), has held, as summarized by the headnotes on the taxmann.com, as follows:
i. It is only elementary that the determination of arm's length price, under the scheme of the international transfer pricing set out in the Act, can only be done in respect of an 'International transaction'. Section 92(1) provides that, "(a)ny income arising from an international transaction shall be computed having regard to the arm's length price". In order to attract the arm's length price adjustment, therefore, a transaction has to be an 'international transaction' first. The expression 'International transaction' is a defined expression. Section 92B defines the expression 'international transaction'. [Para 21]
ii. The 'OECD' Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' specifically recognises that any activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e., in the capacity as shareholder "would not justify a charge to the recipient companies". It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'Shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. It is essential to appreciate, at this stage, the distinction in a service and a benefit. One may be benefited even when no services are rendered,
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 7 of 21 and, therefore, in many a situation it's a 'benefit test' which is crucial for transfer pricing legislation. [Para 36]
iii. There can be activities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefitted by the shareholder activities, these activities do not necessarily constitute services. There is no such express reference to the benefit test, or to the concept of benefit attached to the activity, in relevant definition clause of 'International transaction' under the domestic transfer pricing legislation. It is also essential to take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction' under domestic transfer pricing legislation, as is the settled legal position, it is not open to Court to infer the same. [Para 37]
iv. One more thing which is clearly discernible from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get "economic or commercial value to enhance its commercial position". The benefit test is interlinked with the arm's length test in the sense that it seeks an answer to the question whether under a similar situation an independent enterprise would have been willing to pay for the activity concerned, or would have performed the activity in-house for itself. So far as the benefit test is concerned, it is alien to the definition of international transaction' under the Indian transfer pricing legislation. So far as arm's length test is concerned, it presupposes that such a transaction is possible in arm's length situation. However, in a situation in which the subsidiary does not have adequate financial standing of its own and is inadequately capitalized, none will guarantee financial obligations of such a subsidiary. [Para 38]
v. The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporates issue guarantees for their subsidiaries, is ill conceived because while banks seek to be compensated, even for the secured guarantees, for the financial risk of liquidating the underlying securities and meeting the financial commitments under the guarantee, the guarantees issued by the corporate for their subsidiaries are rarely, if at all, backed by any underlying security and the risk is entirely entrepreneurial in the sense that it seeks to maximise profitability through and by the subsidiaries.
vi. It is inherently impossible to decide arm's length price of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, the consideration for issuance of corporate guarantees are of a different character altogether. [Para 39]
vii. At this stage, it would be appropriate to analyze the business model of bank guarantees, with which corporate guarantees are sometimes compared, in the context of benchmarking the arm's length price of corporate guarantees. A bank guarantee is a
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 8 of 21 surety that the bank, or the financial institution issuing the guarantee, will pay off the debts and liabilities incurred by an individual or a business entity in case they are unable to do so. By providing a guarantee, a bank offers to honour related payment to the creditors upon receiving a request. This requires that bank has to be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee.
viii. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred percent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees.
ix. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. One can now compare this kind of a guarantee with a corporate guarantee. The guarantees are issued without any security or underlying assets. When these guarantees are invoked, there is no occasion for the guarantor to seek recourse to any assets of the guaranteed entity for recovering payment of default guarantees. The guarantees are not based on the credit assessment of the entity, in respect of which the guarantees are issued, but are based on the business needs of the entity in question. Even in a situation in which the group entity is sure that the beneficiary of guarantee has no financial means to reimburse it for the defaulted guarantee amounts, when invoked, the group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met.
x. There is no meeting ground in these two types of guarantees, so far their economic triggers and business considerations are concerned, and just because these instruments share a common surname, i.e., 'guarantee', these instruments cannot be said to be belong to the same economic genus. Of course, there can be situations in which there may be economic similarities, in this respect, may be present, but these are more of an exception than the rule. In general, therefore, bank guarantees are not comparable with corporate guarantees. [Para 40]
xi. There has to be something on record to indicate or suggest that the funds raised by the subsidiary, with the help of the guarantee given by the assessee, are not for its own business purposes. As a plain look at the details of corporate guarantees would show, these guarantees were issued to various banks in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of the shareholder activity as it was to provide, or compensate for
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 9 of 21 lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case.
xii. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for services' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, it is opined and said view is fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi capital or shareholder activity - as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. [Para 41]
xiii. It is thus clear that even if one accepts the contention of the revenue that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as 'arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner'. No bank would be willing to issue a clean guarantee, i.e., without underlying asset, to assessee's subsidiaries when the banks are not willing to extend those subsidiaries loans on the same terms as without a guarantee. Such a guarantee transaction can only be, and is, motivated by the shareholder, or ownerwise considerations.
xiv. No doubt, under the OECD Guidance on the issue, an explicit support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but that occasion comes only when it is covered by the scope of 'international transaction' under the transfer pricing legislation of respective jurisdiction. The expression 'provision for services' in its normal or legal connotations, as seen earlier, does not cover issuance of corporate guarantees, even though once a corporate guarantee is covered by the definition of international transaction', it is benchmarked in the service segment. In view of the above, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the corporate guarantees issued by the assessee were in the nature of quasi capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of 'international transactions' under section 92B.
xv. Of course, once a transaction is held to be covered by the definition of international transaction, whether in the nature of the shareholder activity or quasi capital or not, ALP determination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, it is held that the issuance of corporate guarantees in question was not in the nature of 'provision for services' and these corporate guarantees were required to be treated as shareholder participation in the subsidiaries. [Para 43]
xvi. As for the words 'provision for services" appearing in section 92B, and connotations thereof, this expression, in its natural connotations, is restricted to services rendered and it does not extend to the benefits of activities per se. Whether one looks at the examples given in the OECD material or even in Explanation to section 92B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design,
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 10 of 21 consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to section 92B guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which specifically deals with 'provision for services'. When the legislature itself does not group 'guarantees' in the 'provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'.
xvii. Under section 92B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that section 92B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non-chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the revenues argument that "whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international and then gives an example of brand royalty to make his point. What, in the process, he overlooks is that is that section 92B(1) specifically covers sale or lease of tangible or intangible property". The expression "bearing on the profits, income, losses or assets of such enterprises" is relevant only for residuary clause i.e. any other services not specifically covered by section 92B.
xviii. There is no dispute that Explanation to section 92B states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under section 92B. Accordingly, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by the virtue of clause (a) and (b) of Explanation to section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions 'in the nature of purchase, sale or lease of tangible or intangible property'.
xix. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service" which are anyway covered in "provision for services" and "mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises ".
xx. That leaves the Tribunal with two clauses in the Explanation to section 92B which are not covered by any of the three categories discussed above or by other
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 11 of 21 specific segments covered by section 92B, namely borrowing or lending money. The remaining two items in the Explanation to section 92B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in section 92B(1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise.
xxi. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words "irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date". What is implicit in this statutory provision is that while impact on " profit, income, losses or assets" is sine qua non, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for 'contingent' impact on profit, income, losses or assets but on 'future' impact on profit, income, losses or assets of the enterprise.
xxii. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the instant case it is an undisputed position that corporate guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to section 92B read with section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have "a bearing on the profits, income, losses or assets or such enterprise".
xxiii. This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B(1). [Para 44]
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 12 of 21 xxiv. In the present case, as already held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B. Taking note of the insertion of Explanation to section 92B, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have "bearing on profits, income, losses or assets", it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment could be made. In this view of the matter, and for both these independent reasons, the impugned ALP adjustment is set aside. [Para 48]
We are in considered agreement with the views so expressed by the coordinate bench. In the circumstances, we see no reasons to take any review of the matter then the view so taken by the coordinate benches. It cannot be open to us to revisit the conclusions arrived at by the coordinate benches, but then this issue is an open issue before the Hon’ble jurisdictional High Court and of course, whatever we say is and shall always remain subject to what Hon’ble Courts above decide on the issue. Respectfully following the views of the coordinate benches on the issue, in the case of Micro Ink (supra), we hold that issuance of guarantees, without incurring any specific costs, does not constitute an international transaction, and, accordingly, no arm’s length price adjustment can be made in respect of issuance of corporate guarantees. Once we hold so, the ALP adjustment sustained by the CIT(A) must stand deleted. Grievance of the Assessing Officer against the partial relief granted by the CIT(A), in view of the findings above, becomes infructuous and is dismissed as such.
Ground no. 4 of the assessee, taken in his cross objection, is thus allowed and ground no. 4 of the Assessing Officer’s appeal is dismissed as infructuous. 25. In the result, the appeal of the Assessing Officer for the assessment year 2009-10 is thus dismissed.
We now take up the cross objections filed by the assessee for the assessment year 2009-10.
Ground no. 1 in the cross objection has already been dealt with while dealing with ground no. 1 of the Assessing Officer’s appeal. For the detailed reasons set out therein, this ground of cross objection is allowed.
In ground no. 2, the assessee has raise the following cross objection:
On the facts and in the circumstances of the case, the CIT(A) erred in confirming the disallowance of Rs.20,27,93,648 made by the Assessing Officer by invoking the provisions of section 14A of the I.T. Act.
Learned representatives fairly submit that, in the light of Hon’ble jurisdictional High Court’s judgment in the case of CIT Vs Corrtech Energy Pvt Ltd (372 ITR 97), the disallowance under section 14A cannot exceed the amount of tax exempt income. In the present year, admittedly the dividend income is only Rs 1,77,47,783. The disallowance under section 14A cannot, therefore, exceed the said amount. To this extent, we uphold the grievance of the assessee and restrict the disallowance under section 14A.
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 13 of 21 30. Ground no. 2 is thus partly allowed in the terms indicated above.
In ground no. 3, the assessee has raised the following grievance in the cross objection:
On the facts and in the circumstances of the case, the CIT (A) erred in confirming the upward adjustment of Rs.27,64,950 made by the Assessing Officer on the basis of the order of the Transfer Pricing Officer, with regard to non-charging of interest on the loan provided to Associate Enterprise for purchase of Aircraft.
So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of the proceedings, it was noticed that the assessee had advanced a loan of US $ 345,04,000 to its AE, vide agreement dated 25th May 2007, for purchase of an aircraft. It was explained by the assessee that the loan was in the nature of quasi equity and that it was the first year of operations of the AE which made the transaction more in the nature of the shareholder activity rather than a commercial transaction. While, by way of this interest free loan, the assessee had given 25% of the cost of the aircraft, the balance 75% was met out of the SBI loan. It was also explained that this interest free loan resulted in lower aircraft lease rental and thus benefit to the assessee. None of these submissions, however, impressed the TPO. He proceeded to adopt LIBOR plus 445 bps as the arm’s length price of the interest, and, as he did so, he rejected the plea of the assessee that as AE was able to raise loans at LIBOR plus 1.45% from the State Bank of India, Hong Kong branch, the same should be taken as arm’s length price of the interest free loan taken by the AE from the assessee. The TPO observed that “this is so in view of the difference in credit risk on account of collateral and the guarantee”. Consequently, the ALP of interest free loan was taken at 7.14% and an ALP adjustment of Rs 27,64,950 was made. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that a coordinate bench of this Tribunal, in the case of UFO Movies India Ltd Vs ACIT [(2016) 175 TTJ 633 (Del)] and speaking through one of us i.e. the Vice President, had observed as follows:
We have noted that there is no dispute that the LIBOR rate, so far as the relevant previous year was concerned, is to be taken at 4.53%, as the TPO himself has, pursuant to the directions of the DRP to adopt ALP at LIBOR+4%, taken the ALP at 8.53%. The order dated 19th March 2013, a copy of which was placed before us at pages 426 and 427 of the paper-book, clearly evidences this factual position. There is also no dispute that the assessee has advanced the loan to the subsidiary at 7% per annum. Clearly, therefore, as long as the comparable uncontrolled price of the US $ denominated lending is less than 247 points (i.e.700-453) above the LIBOR rate, the transaction entered into by the assessee with its subsidiary cannot be said to be at less than arms length price. The Transfer Pricing Study filed by the assessee, however, does not throw much light on this aspect of the matter beyond stating, in rather vague terms, that "a study revealed that around 100 basis points increase in the LIBOR rate is considered appropriate for lending to corporates", and that "therefore, the adjusted interest percentage is to be taken the arm's length interest rate i.e. 5.53%". Such sweeping generalizations and vague justifications as inherent in the above comment
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 14 of 21 in the TP study, in support of LIBOR+100 basis points as ALP, cannot meet any judicial approval.
What is important, however, is that even after this stated ALP of LIBOR + 100 basis points, there is still a cushion of further 147 basis points before the interest charged can be said to more than the arm's length price, and it is an old matter. It is, therefore, worth exploring whether, even within the limitations of somewhat sketchy information available on the facts of this case, the matter can be decided one way or the other rather than sending it back to the TPO for fresh adjudication.
While exploring such possibilities, it will be useful to take note of the fact that in the case of Bharti Airtel Ltd. v. Addl. CIT [2014] 64 SOT 50 (URO)/43 taxmann.com 50 (Delhi), and a coordinate bench had deleted a similar ALP adjustment on account of interest amounting to Rs. 10,11,786 wherein the same approach of adopting 400 basis points above the LIBOR as ALP was adopted. While deleting this ALP adjustment, speaking through one of us, the Tribunal had, inter alia, observed as follows:—
'62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gathered from websites of financial institutions which, according to him, states that, "for the foreign currency denominated term loans, the maximum rate of interest is 4% over 6 months LIBOR", and then proceeded to adopt this maximum interest rate as a fair basis for his computing the arm's length price. On the other hand, the assessee has taken two specific comparables of USD borrowings, i.e. L&T and Seri Infrastructure, on the interest rate of LIBOR + 150 bps and 1.4% to 1.7% band over LIBOR respectively. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted.
. . . . . . . . . . . . . . . . . . . . . .
That leaves us with third point of difference between the assessee and the TPO and that is with regard to adjustment of 177.60 points, as balancing figure, towards lack of security and lender not being in the business of borrowing and lending money. This adjustment is justified by the TPO on the following ground:
7.10 Adjustment between a banker and non-banker
As the taxpayer is not in the business of lending and borrowing money, his risk is higher in advancing loan to a single customer than a bank, which spreads its risk among its various customers. Thus, the difference between banker and non-banker is to be kept in mind while arriving at the arm's length CUP rate based on bank rates.
7.11 Adjustment for security
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 15 of 21 Usually, bankers extending loans in foreign currency also insist on sufficient security. In this case, no security is offered by the AE. Keeping in view the financial health of the subsidiary, it may not be in a position to offer security. Thus an adjustment is required to be made for not offering a security. This may be computed as the difference between the interest rates prevailing for the bonds of equivalent credit rating of the AE and sovereign government bonds in the country in which the AE is located. This can also be considered as the guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing/rating.
We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by Underlining, Supplied by us now)'
When the matter was carried in further appeal, this time by the Commissioner, before Hon'ble Delhi High Court, Their Lordships were, vide judgment, dated 25th February 2015- a copy of which was placed before us by the learned counsel, pleased to approve the reasoning adopted by the Tribunal. In doing so, Their Lordship observed as follows:—
"8. The ITAT has also taken note of the fact that two specific comparables of USD borrowings i.e. L&T and Seri Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted.
. . . . . . . . . . . . . . . . . . . . .
The Tribunal further noticed that the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis.
This Court is of the opinion that the reasoning of the ITAT on each of the heads which went into the adjustment of Rs. 10,11,786/- is reasonable and justified and does not call for any interference. (Emphasis, by Underlining, Supplied by us)"
That was also a case in which the lender parent company was taken as the tested party, the loan was advanced to a subsidiary company without much to the credit of
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 16 of 21 its financial credentials and the loan was treated as a high risk loan resulting in adopting the maximum LIBOR rate on which dollar loans were advanced. Yet, Hon'ble High Court specifically approved the Tribunals reasoning that the "assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis". When such are the views of Their Lordships, it is futile to suggest that the loans advanced by the parents to subsidiary can indeed be taken as BB to D grade investments which refers to, as noted by the TPO himself at page 28 of the order, investments with serious risks of inadequate safety, investments of high risk, investments of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval.
Similarly, the DRPs observation to the effect that "Generally, Indian banks are charging interest rate of 2.5% to 5% above the LIBOR/EURIBOR for foreign currency loans" is not only devoid of any basis but, as our day to day experience on the bench shows, ex facie incorrect.
There are any number of decisions by the coordinate benches which show that the interest rates charged on foreign currency, say US dollars, loans are much lower than the 250 to 500 basis points above the LIBOR having been to be generally applicable rates. For instance, in the cases of Bharti Airtel Ltd. (supra), which pertains to the assessment years 2007-08 and 2008-09, the comparable cases were taken as 150 basis points above LIBOR and in the range of 140-170 basis points above LIBOR. In contrast to this comparable case, the interest charged in the present case is 247 points above the LIBOR rate. In the case of Siva Industries & Holdings Ltd. v. Asstt. CIT [2012] 26 taxmann.com 96/54 SOT 49 (Chennai), dealing with the assessment year 2006-07 and while referring to LIBOR at 4.42, interest rate on advances to subsidiary at 6%, which was thus 158 points above the LIBOR rate, was held to be an arms length price. In view of these discussions, it cannot be said that the advance to subsidiary, at 247 basis points above the LIBOR, is not at an arms length price. In any event, once DRP itself states that the Indian banks are charging 250 basis above LIBOR on similar loans, even though this interest rate could reach upto 400 basis points in some cases, there cannot be any good reason for holding that loan advanced to a subsidiary at 247 basis points above the LIBOR rate is not at an arms length price. That apart, as noted earlier in this order, once Hon'ble Delhi High Court, observes that the "assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis", it cannot be open to the transfer pricing authorities to contend that this loan should be treated as a high risk loan on which high interest rate should be charged even within the range of interest rates charged by the Indian banks generally. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and direct the Assessing Officer to delete this arms length price adjustment of Rs. 74,20,785 in respect of interest charged on advances to the subsidiaries.
The authorities below were thus clearly in error in upholding the ALP adjustment by adopting 7.14% as arm’s length interest for borrowings by the AE. When the AE itself has borrowed the monies from the SBI at LIBOR plus 145 bps and when, as noted by Hon’ble Delhi High Court above, “The Tribunal further noticed that the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 17 of 21 reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis” and that “This Court is of the opinion that the reasoning of the ITAT on each of the heads which went into the adjustment ………..is reasonable and justified and does not call for any interference” the arm’s length price of the borrowings cannot indeed be taken as more than LIBOR plus 145 bps. The additional risk adjustment for credit rating of the subsidiary is clearly unwarranted. The correct ALP interest rate, in the present case, thus works out to 2.69% plus 1.45%, i.e. 4.14%. We, accordingly, direct the Assessing Officer to restrict the ALP adjustment to 4.14%. The assessee gets the relief accordingly.
Ground no. 3 of the cross objection is thus partly allowed in the terms indicated above.
Ground no. 4 of the cross objection, while dealing with the appeal of the assessee, is already allowed.
The cross objection filed by the assessee for the assessment year 2009-10 is thus partly allowed in the terms indicated above.
We now take up the appeal and the cross objection for the assessment year 2010-11 which are directed against the order dated 17th October 2014, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2010-11.
In the first ground of appeal filed by the Assessing Officer, the Assessing Officer has raised the following grievance:
The Id. CIT(A) has erred in directing the AO to exclude only the net interest income while computing the deduction u/s 80IB despite the fact that the income derived from the industrial undertaking is eligible for deduction and interest income cannot be netted off with the interest expenditure which was incurred for business.
In the connected grievances raised by the assessee, by way of first and second ground of cross objection, the assessee has raised the following grievances:
On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of Rs.19,79,54,135/- made by the Assessing Officer while computing Profits and Gains eligible for deduction u/s.80-IAB of the I.T. Act, thereby holding that Interest Income derived by the appellant from business advances cannot be considered to be inextricably linked to the carrying on of the business eligible u/s.80-IAB of the I.T. Act. This resulted into confirmation of exclusion of total interest of Rs.19,79,54,135/- while computing deduction u/s.80-IAB of the I.T. Act in spite of the fact that there is a net pay out of interest expense.
Without prejudice to the above, on the facts and in the circumstances of the case, the learned CIT(A) erred in not appreciating that the phraseology of "business of development of SEZ" is much wider than the phraseology of "Profits and gains derived from the undertaking". Consequently interest income of Rs.19,79,54,135/- on business advances needs to be allowed as deduction u/s.80-IAB of the Act. On this ground as well the claim of the appellant may be allowed.
While dealing with the appeal and the cross objection, on the same point and for the immediately preceding assessment year, we have, inter alia, observed as follows:
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 18 of 21
We find that the order dated 6th May 2011 passed by the CIT(A), in assessee’s own case for the assessment year 2008-09, has, in the meantime, been carried in appeal before a coordinate bench of this Tribunal, and, vide order dated 1st September 2016, has confirmed the stand of the CIT(A). A copy of the said order is placed before us at pages 1 onward of the compilation. The coordinate bench has held that the entire interest income is eligible for deduction under section 80IAB, and, for this short reason, the grievance against netting of interest is wholly academic and infructuous. The stand of the CIT(A) thus attained finality. In any case, Hon’ble jurisdictional High Court, in the case of CIT Vs Nirma Limited (367 ITR 12), has held that netting of interest for the purpose of this deduction can be allowed. Whichever way one looks at it, the issue is covered, in favour of the assessee, by the binding judicial precedents. We, therefore, have no reasons to disturb the conclusions arrived at by the learned CIT(A). In view of these discussions, as also bearing in mind entirety of the case, we uphold the relief granted by the CIT(A) and decline to interfere in the matter.
Ground no. 1 is thus dismissed, and ground no. 1 of the cross objection is allowed.
We see no reasons to take any other view of the matter than the view so taken by us for the immediately preceding assessment year. Respectfully following the same, we must uphold the plea of the assessee and reject the grievance of the Assessing Officer.
Ground no. 1 of the appeal is thus dismissed and ground no. 1 and 2 of the cross objections are thus allowed.
In ground no. 2, the Assessing Officer has raised the following grievance:
The Id. CIT(A) has erred in directing the AO to recomputed the deduction u/s 80IAB after increasing the amount of deduction by the amount of disallowance u/s 14A.
Learned representatives fairly agree that while this relief was granted by the learned CIT(A) on the basis of Hon’ble jurisdictional High Court’s judgment in the case of ITO Vs Keval Constructions [2013] 33 taxmann.com 277 (Guj.), the issue is now covered, in favour of the assessee by the CBDT circular No..37/2016 [F.NO.279/MISC./140/2015/ITJ] dated 2- 11-2016 wherein a policy decision has been taken to accept the said decision and let the matters rest at that.
We find that in principle thus, when the profit goes up as a result of disallowances of expenses, the eligibility for deduction in respect of such profit correspondingly increases. That is the position accepted by the CBDT by stating as follows:
Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 19 of 21 such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.
The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows:
(i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases: ♦ Income-tax Officer -Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.) ♦ Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.) (ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case: ♦ Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.). The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.
In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned.
While the aforesaid circular does not specifically deal with section 14A disallowance, as the circular itself states in so many words the cases cited above are only illustrative and the principle is that “the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits”. In the light of this position, we uphold the conclusions arrived at by the CIT(A) on this point as well, and decline to interfere in the matter.
Ground no.2 is thus dismissed.
In ground no. 3, the Assessing Officer has raised the following grievance:
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 20 of 21 3. The Id. CIT(A) has erred in deleting the disallowance with regard to the claim of deduction in respect of donations u/s 80G of Rs.6,70,525/-. The Id. CIT(A) has failed to appreciate that the assessee has taken the income from business as the income of the undertaking and claimed deduction u/s 80IAB.
Learned representatives fairly agree that whatever we decide for the assessment year 2009-10 on this issue will apply mutatis mutandis on this assessment year as well. Vide our order above, we have rejected the grievance of the Assessing Officer on this issue and we have upheld the stand of the CIT(A). We see no reasons to take any other view of the matter for the present assessment year. We, accordingly, uphold the conclusions arrived at by the CIT(A) on this point as well and decline to interfere in the matter. 52. Ground no. 3 is thus dismissed. 53. In the result, the appeal of the Assessing Officer for the assessment year 2010-11 is dismissed. 54. We now take up the cross objections filed by the assessee for the assessment year 2010-11. 55. While dealing with the appeal of the Assessing Officer earlier in this order, we have already allowed ground nos. 1 and 2 of the cross objection. 56. In ground no. 3, the assessee has raised the following cross objection:
On the facts and in the circumstances of the case, the learned CIT[A] erred in confirming disallowance of Rs.6,11,72,420/- made by the Assessing Officer u/s.14A of the I.T. Act.” 57. Learned representatives fairly submit that, in the light of Hon’ble jurisdictional High Court’s judgment in the case of CIT Vs Corrtech Energy Pvt Ltd (372 ITR 97), the disallowance under section 14A cannot exceed the amount of tax exempt income. In the present year, admittedly the dividend income is only Rs1,33,91,149. The disallowance under section 14A cannot, therefore, exceed the said amount. To this extent, we uphold the grievance of the assessee and restrict the disallowance under section 14A.
Ground no. 3 is thus partly allowed in the terms indicated above. 59. In the result, cross objection of the assessee for the assessment year 2010-11 is partly allowed in the terms indicated above. Pronounced in the open court today on the 12th day of February, 2019.
Sd/- Sd/- Mahavir Prasad Pramod Kumar (Judicial Member) (Vice President) Ahmedabad, dated the 12th day of February, 2019
CO Nos. 25 and 26/Ahd/ 2015 ITA No.: 3481 and 3482/Ahd/14 Assessment year: 2009-10 and 2010-11 Page 21 of 21
Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File
By order