THE ADDL. CIT, RANGE-1,, AHMEDABAD vs. M/S. ADANI ENTERPRISES LTD.,, AHMEDABAD

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 1 of 43

IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, AHMEDABAD

[Coram: Pramod Kumar VP and Mahavir Prasad JM] ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Adani Enterprise Limited ...……………………..Appellant Adani House, Navrangpura Ahmedabad 380 009 [PAN: AABCA2804L]

Vs

Additional Commissioner of Income Tax Range 1, Ahmedabad ……………..…........Respondent

ITA Nos: 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11

Additional Commissioner of Income Tax Range 1, Ahmedabad ...……………………..Appellant

Vs

Adani Enterprise Limited ……………..…........Respondent Adani House, Navrangpura Ahmedabad 380 009 [PAN: AABCA2804L] Appearances by S N Soparkar, Bandish Soparkar and Parin Shah for the assessee Subhash Bains, MSA Khan and Lalit Jain for the revenue Date of concluding the hearing : November 13, 2018 Date of pronouncement : February 12, 2019

O R D E R Per Pramod Kumar, VP:

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 2 of 43

1.1 In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding disallowance (of Rs.2.76 crore directed to be reduced to Rs. 2.18 crore after verification) on account of Administrative Expenditure made by the learned Assessing Officer u/s. 14A read with Rule 8D(2)(iii) @ one-half per cent, of the average value of investments, income from which did not form part of the appellant's total income, in the following terms (emphasis supplied):

"3.3 I have considered the facts of the case; assessment order and appellant's written submission. Assessing Officer disallowed expenses relating to earning of exempt income under section 14A read with rule 8D since appellant did not disallow any such expense in the return of income filed. Since appellant did not disallow any expense, sub section 3 of section 14A is applicable and as per that the computation of disallowance has to be made as per rule 8D. From assessment year 2008-09, rule 8D is mandatory as held by Bombay High Court in the case of Godrej and Boyce and therefore assessing officer is justified in applying rule 8D while computing disallowance under section 14A. In view of this the decisions relied upon by the appellant, which are prior to assessment year 2008-09, are not relevant and hence not discussed."

1.2 The learned CIT(A) ought to have appreciated, inter alia,: (a) that the relevance of the authorities on which the appellant had relied being in connection with the Assessing Officer having to be satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which did not form part of his total income [as envisaged by sub-section (2) of Section 14A], it was not open to him to conclude that those authorities had ceased to be relevant with the advent of Rule 8D with effect from A.Y. 2008-09 and on that basis, to uphold the impugned disallowance merely because the appellant had itself not made any disallowance even as it had earned income which did not form part of its total income; (b) that further, the authorities on which the appellant had relied being relevant from the point of view of discharge of onus by the Assessing Officer before he could made the disallowance envisaged by Section 14A, it was only axiomatic that their relevance cannot be impaired with the advent of Rule 8D; that as the Bombay High Court had itself held in Godrej & Boyce Mfg. Co. Ltd. v. DCIT(328 ITR 81) on which the learned CIT(A) had sought to rely, the very question of taking recourse to Rule 8D can arise only after the Assessing Officer was not satisfied with the correctness of the assessee's claim in respect of expenditure in relation to income which did not form part of his income; (c) that sub-section (2) of Section 14A enjoined upon the Assessing Officer to consider the asssssee's claim in respect of expenditure in relation to income not forming part of his total income, having regard to the accounts of the assessee and other relevant factors (as elaborately explained by the Bombay High Court in its aforesaid decision) and that it is only if, after thus considering the assessee's claim, he was not satisfied with its correctness, that the mandate for making a disallowance of the expenditure in accordance with the method prescribed under Rule 8D comes into play;

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 3 of 43

(d) that as the following portion of the assessment order impugned before him showed, the impugned disallowance had been made by the learned Assessing Officer not because he was not satisfied with the appellant's claim in the manner envisaged by subsection (2) of Section 14A but after assuming that there was always some kind of indirect expenditure in relation to income not forming part of total income (emphasis supplied): "4.12 regarding the administrative expenditure 0.5% of average investments is worked out as per rule 8D(iii). Assessee argued that once the expenditure of the treasury department is disallowed, administrative expenditure as per Rule 8D cannot be disallowed. In this regard it is to be noted that there 3 items under which the disallowance under Rul3 8D has to be worked out and the 50% of treasury expenditure is disallowed under clause (i). Apart from the direct expenditure, there is always some kind of indirect expenditure in the form of unquantifiable services of Finance department personnel and the managerial personnel and Directors of the company in decision making and time and energy spent there on. Therefore the formula needs to be applied under all clauses to work out the expenditure disallowable u/s. 14Ar. w. rule 8D ---” (e) that thus, the very assumption of jurisdiction by the learned Assessing Officer under Rule 8D was without legal basis. (f) that in the peculiar facts and circumstances of the appellant's case, it was not open to the learned Assessing Officer not to be satisfied with the correctness of its claim that it had not incurred any expenditure which could be disallowed u/s. 14A; (g) that in the above connection, it was significant to consider, inter alia,: (1) that the appellant's investments producing income not forming part of its total income were in the partnership firm of M/s. Adani Exports and strategic investments in the share capital of Group Companies promoted by the appellant and/or the members of the appellant's Group; (2) that by their very nature, expenditure in relation to the above investments had to be regarded as expenses incurred wholly and exclusively for the purposes of the appellant's business (as envisaged by its Memorandum of Association); (3) that especially considering the peculiar nature of the appellant's investments in question, it was also relevant to consider that the total income of the partnership firm of M/s. Adani Exports was liable to assessment at the maximum marginal rate of tax and so also, the total income of the companies in which the appellant had made investments, apart from dividend tax payable by them as and when they distributed dividends; 4. As far as this grievance of the assessee is concerned, it is against the disallowance of 0.5% of the average investments as expenses relating to exempt income from such investments. There is no dispute that the year before us is the year in which rule 8 D has legal force, that the assessee did not offer any expenses on his own, and that, when rule 8D is taken into account, the expenses relatable to exempt income will have to be taken on that

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 4 of 43 basis. Learned counsel, however, submits that in the light of Special Bench decision in the case of ACIT Vs Vireet Investments Private Limited [(2017) 165 ITD SB 27 (Delhi)], the computation of 0.5% of investments must remain confined to only such investments which have yielded tax exempt income during the relevant previous year. Learned Departmental Representative, on the other hand, relies on the judgment of Hon’ble Supreme Court in the case of Maxopp Investments Vs CIT [(2018) 402 ITR 640 (SC)] in support of the proposition that a reasonable disallowance in relation to exempt income must be made. That does not however dilute the principle laid down by the Special Bench in the case of Vireet Investments (supra). To this extent, we uphold the plea of the assessee and modify the orders of the authorities below by directing the Assessing Officer to compute the 0.5% of the investments yielding tax exempt income during the relevant previous year.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 5 of 43 9. Ground no. 2 in the appeal of the assessee and ground no. 5 in the appeal of the Assessing Officer are, therefore, dismissed.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 6 of 43

(c) that the sole reason for the learned Assessing Officer to make the impugned disallowance was the direction of the CBDT contained in its Instruction No. 3/2010 dated 23.3.2010 which surprisingly had branded the "marked to market" losses as notional and contingent in nature, in total disregard of the fact that the prescriptions of the Institute of Chartered Accountants of India required recognition of such losses; (d) that loss arising from 'marking to market’ of outstanding foreign exchange forward contracts as at the end of the year was, far from being a contingent or notional loss as suggested in the aforesaid CBDT Instruction, more like the loss resulting from valuation of closing stocks by the generally accepted method of valuing stocks at 'lower of cost or market' as at the end of the year and especially when its accounting had been mandated by an Accounting Standard of the Institute of Chartered Accountants of India and also supported by decisions of the Supreme Court, there could be no question for its deduction being disallowed;

(e) that the aforesaid Instruction of the CBDT was clearly contrary to the decisions of the Supreme Court [in particular, CIT v. Woodward Governor (India) P. Ltd. (312 ITR 254) and ONGC v. CIT (322 ITR 180)] and being such, it was invalid and, therefore, not binding either upon the Assessing Officer or upon him;

(f) that, in any case, the aforesaid CBDT Instruction could not bind him in terms of the express prohibition contained in clause (b) of the Proviso to sub-section (1) of Section 119 of the Income-tax Act, 1961; that, therefore, he had grossly erred not only in upholding the impugned disallowance on the ground that he found no fault with the Assessing Officer making the impugned disallowance in conformity with the aforesaid Instruction but further, in not deciding the appellant's ground using his own discretion in the matter of considering the appellant's elaborate submissions including the decisions of the Supreme Court and other authorities relied upon by the appellant;

(g) that his attempt at dismissing the authorities including the decisions of the Supreme Court on which the appellant had relied before him, by suggesting that they had been rendered before the issue of the aforesaid CBDT Instruction, was indeed curious and belied the approach which a semi-judicial authority such as the CIT(A) is enjoined upon to adopt under the Income-tax Act, 1961;

(h) that it was also not open to him to dismiss the appellant's contention that the CBDT Instruction on the basis of which the learned Assessing Officer had made the impugned disallowance had been issued long after the previous year corresponding to the present assessment year had ended and, therefore, the learned Assessing Officer's applying the

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 7 of 43

same to the appellant's present case amounted to giving it a retrospective effect which was impermissible in law. 11. So far this grievance of the assessee is concerned, the relevant material facts are as follows. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction of Rs 1.96 crores in respect of derivates contracts. When the matter was probed further, it was found that “the said loss consists of Rs 0.73 crores in respect of forex derivates contracts” which “is in the nature of mark to market loss in respect of forward contracts entered into by the assessee company in respect of trade obligations”. The Assessing Officer, however, declined this deduction by observing that “these losses are notional losses and cannot be claimed against income of the year. ‘Mark to market’ is a concept under which financial instruments are valued at market rate so as to report their actual value on the reporting date. However, these losses are notional losses on account of position as on 31.3.2008”. The Assessing Officer then, relying upon the CBDT instruction no. 3/2010 dated 23rd March 2010, disallowed the claim. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) simply relied upon the CBDT instructions and followed the same. The assessee is not satisfied and is in further appeal before us. 12. 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. 13. As learned representatives fairly agree, this issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of Veer Gems Vs ACIT [(2017) 77 taxmann.com 127 (Ahmedabad - Trib.)] wherein the coordinate bench has, inter alia, observed as follows: 16. The Revenue's last substantive ground pleads that the CIT(A) erred in deleting disallowance of provision of forward contract payable of Rs.34,35,000/- by holding that the entry passed in the books of account in respect of difference in exchange rate cannot be said to be in the nature of notional/unascertained liability. The assessee had made the impugned provision as per MTM certificate for the impugned assessment year followed by its reversal in the succeeding assessment year 2009-10 on account of foreign exchange rate difference as on 31.03.2008. The Assessing Officer disallowed the same by calling it as unascertained liability not allowable. 17. The CIT(A) accepts assessee's arguments as follows :- '7.1. During the course of assessment proceedings, vide order sheet entry dated 01.11.2011, the assessee was required to give the full details of the provision entry of Rs. 34,35,000/- on account of forward contract payable. The assessee vide its submission dated 16.12.2011 submitted that the account shown as payable as per MTM certificate for A.Y. 2008-09 was reversed in the A.Y. 2009- 10. Assessing officer observed that this liability which is worked out as on 31.03.2008 has not crystallised as on that date. According to A.O the same represents unascertained liability & is therefore, not allowable as expenditure under the I. T Act. On the basis of these observations, provision of forward contract payable of Rs. 34,35,000/- has been disallowed and added to the total income of assessee.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 8 of 43

Submissions of the Appellant 7.2. During the course of appellate proceedings, the learned AR made various submissions; the relevant portion of the same is reproduced hereunder: "In the course of appellate proceedings, it is submitted that assessing officer has erred in making addition of Rs. 34,35,000/- to the total income of assessee on account of provision for forward contract payable. During the course of assessment proceedings, assessee submitted that account of forward contract was reflected in the books of accounts as per MTM certificate of ABN Amro Bank. Assessee is required to record forward contract transactions as per Accounting Standard 11 of ICAI & the same provides that forward contracts remaining outstanding at the end of financial year should be recorded at closing rate prevailing at the end of the year i.e. 31st March. This treatment is in line with the accrual method of accounting as profits/ losses pertaining to the year under consideration are required to be reported in P & L A/c & therefore, fluctuation in exchange rate is required to be taken into consideration. However, contention of assessing officer to treat the same as unascertained liability is completely incorrect in as much as entry is passed on the basis of actual closing rate prevailing at the end of financial year as per MTM certificate issued by ABN Amro Bank. During the course of assessment proceedings, assessee filed copy of MTM certificate and copy of forward contract payable. As per MTM certificate, it is evident that exchange rate of USD has gone up as on 31st March as compared to the exchange rate prevailing at the time of booking of forward contracts & this has resulted into exchange loss to assessee for which provision entry is passed in the books of accounts. It is further relevant to point out that in the subsequent year, when the contract has been cancelled, assessee has recognised the gain/loss based on the difference between exchange rate prevailing at the .end of the current financial year as per MTM certificate & the exchange rate prevailing as on the date of cancellation of forward contract which is in line with the accrual system of accounting. As such assessee has passed entry for loss only in respect of the balance amount & the exchange loss is divided into two years as per accrual system of accounting & the Accounting Standard of ICAI. Now, if any disallowance is made for the year under consideration in that case, deduction should be allowed of this amount in subsequent year, as assessee has claimed only balance loss i.e. loss arising on account of difference between exchange rate as on 31/03/2008 & exchange rate prevailing as on the date of cancellation. The addition made by assessing officer has thus, resulted into double taxation as after set off of provision entry of Rs. 34,35,000/- made at the end of current year, only the balance amount is claimed as deduction in subsequent year."

Decision:

7.3. I have considered the reasons given by assessing officer & also the submissions of appellant. The assessee has made provision in respect of forward contract entered into by it on the basis of difference in exchange rate prevailing as on the date on which forward contract has been booked and the exchange rate

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 9 of 43

prevailing at the end of the year i.e. on 31.03.2008 as per MTM certificate issued by ABN Amro Bank. It is not in dispute that assessee is following mercantile method of accounting and as per this method, all the expenses/gains which pertains/arises during the year under consideration is required to be considered in the Profit and Loss account for that year itself. The provision entry has been made because the exchange as on 31st day of March has gone up as compared to the exchange rate of forward contract prevailing as on the date of transaction. In my view, the entry passed in the books of account in respect of the difference amount cannot be said to be in the nature of notional/unascertained liability as said entry is passed on the basis of actual exchange rate prevailing at the end of the year. The fluctuation in exchange rate has material bearing on the P & L A/c & as forward contract has been entered into during the year under consideration, losses/gain relating to the fluctuation in exchange rate pertaining to said forward contract should also be considered in P & L A/c for the year under consideration. It is also further seen that in the immediately succeeding year when forward contract has been cancelled, assessee has recognised expense/loss only in respect of the balance amount i.e. in respect of the amount in excess of the provision made during the year under consideration. Now, if any disallowance is made for the year under consideration, in that case corresponding deduction is required to be allowed in the subsequent year. However, there is no justifiable reason in doing such an exercise as treatment given by assessee in the books of accounts is in line with the accrual system of accounting and the same does not result into provision for any unascertained liability. Consequently, the addition made on this disallowance is hereby deleted.'

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 10 of 43

market price or cost price whichever is less. There is thus, in principle, no difficulty is seeking a deduction in respect of a reasonably anticipated loss, even though it may not have actually fructified, in computation of profits and gains of business. To this extent, the Assessing Officer was clearly in error in treating the loss on foreign exchange as a notional loss not deductible in computation of business income. On the facts of the present case, however, not only anticipated losses have been claimed as deduction but anticipated profits have been offered to tax. The gains have been offered to tax on the basis of assessee's following mandatory accounting standards, and on the basis of same accounting standards losses on forward contracts have been recognized too. The claim of deduction of Rs. 22.15 crores represents the difference between total foreign exchange loss of Rs. 50.11 crores as at the year end date and foreign exchange gains of Rs. 27.95 crore as at the year end date. What has been done by the Assessing Officer to take into account gains on such contracts but ignore the cases in which losses are computed in respect of the forward contracts. It is against this approach that the assessee had raised the grievance. 7. In the case of Woodward Governor India (P.) Ltd. (supra), the issue regarding deductibility of foreign exchange loss came up for consideration before Hon'ble Supreme Court and there was similar inconsistency in treatment to losses and gains on the forward contracts. Their Lordships, dealing with this issue and holding that such a loss will be deductible in computation of business profits, observed as follows:

'. . . . . . . . it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant Accounting Standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of accounting. It is well established, that, on general principles of commercial accounting, in the P&L account, the values of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower- the market value being ascertained as on the last date of the accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word "profit" implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Sec. 145(1) enacts that for the purpose of s. 28 and s. 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with s. 28. Therefore, s. 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. (See judgment of this Court in the case of United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness

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of the Accounting Standard followed by the assessee(s) in this batch of civil appeals.

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Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/debit. This fact is important. It indicates the double standards adopted by the Department.

"Sec. 28. Profits and gains of business or profession—The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession", —

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year."

"Sec. 29. Income from profits and gains of business or profession, how computed—The income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D."

"Sec. 37. General—(1) Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession.

Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."

"Sec. 145. Method of accounting—(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-s. (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-s. (1) or accounting standards as notified under sub-s. (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in s. 144."

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 13 of 43

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 14 of 43 from these transactions, for the detailed reasons set out above, are deductible in computation of profits and gains of business. 10. In view of the above discussions, we uphold the action of the CIT (A) so far as this relief in respect of deleting the disallowance of Rs. 22,15,55,371 on account of loss, at the end of the year, on foreign exchange contracts. We confirm the same and decline to interfere in the matter.

“1. That the Id. CIT(A) has erred in law and on facts in deleting the upward adjustment made by the TPO on account of guarantee given by the assessee to its Associate Enterprise located at Singapore without any consideration.

"Transfer pricing officer made adjustment in respect of guarantee commission for pledging the shares of MPSEZ held by the appellant with ICICI bank Limited, Singapore for providing loan to its Singapore AE. However appellant submitted that it intended pledging the shares of MPSEZ for loan taken by its Singapore AE but RBI refused permission to pledge the shares and finally it could not provide guarantee to its AE. Since the shares were not finally pledged due to refusal of RBI permission, there is no question of making adjustment in respect of guarantee commission. Appellant submitted copy of letter written by Adani Global Pte Ltd, Singapore dated 15 January 2007 to RBI requesting approval for pledge of shares in favour of IDBI trusteeship services Ltd (Indian security trustee appointed by ICICI bank Limited, Singapore) and RBI's letter dated 21st of February 2007 refusing the permission to pledge shares of MPSEZ in favour of IDBI trusteeship services Ltd (These letters were stated to have been submitted to the TPO). TPO made the addition on the ground that loans were taken from ICICI bank Limited, Singapore whereas RBI's permission refusing pledge of shares was In the case of IDBI trusteeship Ltd. TPO considered these two transactions separate and held that appellant provided

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 15 of 43 guarantee to AE by pledging its Investment in shares. However after considering these letters referred earlier, it is clear that IDBI trusteeship Ltd is security trustee of ICICI bank limited, Singapore and RBI's letter refusing the permission for pledge of shares is in respect of same shares which were provided for guarantee to ICICI bank Limited, Singapore. Thus, it is clear that entire addition is based on the misconception that these two entities represented separate transactions. In view of this it is clear that appellant did not provide guarantee services by pledging shares of MPSEZ for which any adjustment of guarantee commission can be made. The addition made by the assessing officer is therefore not sustainable on facts. Apart from this, appellant also relied upon the decision of ITAT Hyderabad in which it is held that for providing corporate guarantee in obtaining loans by AE, no adjustment can be made. ITAT in the case of Four Soft Ltd. vs. DCIT, Circle - 1(3), Hyderabad (ITA No. 1495/Hyd/10) dated 09-09-2011 held as under: "21. We have considered the rival submissions and perused the materials available on record. We find that the TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution. In view of this matter, we hold that no TP adjustment is required in respect of corporate guarantee transaction done by the assessee company. Hence, we answer this question in favour of the assessee and allow the grounds raised by the assessee on this issue." From the above it is clear that appellant's case is covered by the aforesaid decision also. Therefore even otherwise, the adjustment made by the TPO in respect of guarantee commission is not sustainable. Accordingly addition made by the assessing officer based on the TPO's order is deleted. Since assessing officer made the addition/adjustment on the identical facts and the same issue, the same is not sustainable in view of the aforesaid order. Accordingly the addition made by the assessing officer based on TPO's order is deleted 21. In the meantime, the order of the CIT(A) for the assessment year 2007-08 has been confirmed by a coordinate bench of this Tribunal, and approved by the Hon’ble jurisdictional High Court- as reported in [2016] 72 taxmann.com 285 (Gujarat)/[2016] 241 Taxman 542 (Gujarat)/[2017] 396 ITR 313 (Gujarat). In this view of the matter, and respectfully following these judicial precedents, we uphold the relief granted by the CIT(A) and decline to interfere in the matter.

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findings in the assessment order that the funds were diverted for non business purposes.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 18 of 43 32. In ground no. 4, the Assessing Officer has raised the following grievance:

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 19 of 43 activities which pertain to operations and maintenance of port. The receipts for weighment charges and token charges, and the allied activities in question, cannot be considered in isolation with the operations and maintenance of port. In view of these discussions, and in the light of well reasoned findings of the CIT(A) with which we are in considered agreement, we uphold the relief granted by the CIT(A) and decline to interfere in the matter.

1.(A) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in partly sustaining the upward adjustment of Rs.4,51,82,460 made by the Assessing Officer on the basis of the Transfer Pricing Officer's order dated 29.1.2013 passed u/s.92CA(3) of the IT. Act, on the assumption that the appellant- company should have charged guarantee commission from its wholly owned foreign subsidiaries in consideration of providing corporate guarantee aggregating to Rs.152.85 crores to the lenders providing borrowings to the said subsidiaries.

(B) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in confirming the above mentioned upward adjustment of Rs.4,51,82,460 to the extent of Rs.3,05,70,000 by adopting an arbitrary rate of 2% of the total guarantee amount as against the rate of 2.956% adopted by the Transfer Pricing Officer.

(C) Without prejudice to the above, on the facts and in the circumstances of the case, the learned C.IT. (Appeals) erred in adopting excessive and unreasonable rate of guarantee commission at 2%, completely ignoring the comparable case of Everest Kanto Cylinder cited before him by the appellant-company wherein the Hon'ble Mumbai ITAT had considered a rate of 0.5% as reasonable.

(D) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) further erred in rejecting the factual claim made by the appellant- company and supported by documentary evidence, that it had obtained guarantee from State Bank of India, in connection with appellant-company's operating contract with Karnataka Power Corporation at a guarantee fee of 0.25%, and therefore, without prejudice to the claim that no adjustment can be made u/s.92CA(3) of the I.T. Act, at the most similar rate of 0.25% should be adopted for the purpose of benchmarking in the case of the appellant-company.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 20 of 43 46. In a related grievance, raised by the Assessing Officer as first ground of appeal in his appeal for AY 2009-10 – which we will take up at this stage, the issue raised is as follows:-

1) The ld. CIT(A) has erred in law and on facts in restricting the upward adjustment worked out by the TPO to Rs.3,05,70,000/- to the assessee's total income made on account of guarantee fees in respect of corporate guarantees provided by the assessee on behalf of its foreign subsidy companies.

“5.13. Providing guarantee by a parent with a higher rating ensures improvement in the rating or reduction in credit risk spread to the extent of the rating of the parent. The parent, with its better rating, is able to provide benefit in the form of lower spread to its AE. Such risk spread is effectively measured by difference in risk spread by differently rated bonds being traded in the market. As discussed above, the credit spread in respect of the assessee and its AE is proposed to be adopted as above. On analysis of over 1200 corporate bond data publicly available on the internet (http://report.finance.yahoo.com), with 167 samples pertaining to FY 2008-09, it is seen that the average difference in coupon rate (yield or interest rate) in respect of AA rated bonds and B rated bonds comes to 2.706%age points. A copy of the working carried out has been handed over to the assessee alongwith the show cause letter in a CD. A currency risk of 25 basis points is found sufficient to cater to currency risk as Indian currency is more likely to fluctuate against dollar raising the risk assumed by the Indian company giving the guarantee, the guarantee fee would work out to 2.956% . The assessee has given guarantees to the extent of Rs 152.85 crore on behalf of the Dubai company. Accordingly, the guarantee fee is computed at Rs.4,51,82,460/-.”

“4.5 I have given my careful consideration to the observations of the TPO and the contentions of the Ld. A.R. The transaction representing the advancement of loan is covered by the definition of "international transaction" which needs to be benchmarked. Similarly providing guarantee is also covered by the definition of

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 21 of 43 "international transaction". After the Act was retrospectively amended w.e.f. 01.04.2002 by the Finance Act 2012, there is no ambiguity that providing guarantee to an associated enterprise is an international transaction which needs to be benchmarked. The following Explanation was inserted by the F.A., 2012:

"Explanation- for the removal of doubts, it is hereby clarified that – (i) The expression "international transaction" shall include - (a) …………………. …………………. (c) Capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business: Thus the explanation, inserted vide the retrospective amendment, makes it amply clear that the transaction of guarantee was already included in the definition of "international transaction" and the same has now been clarified through the retrospective amendment. Therefore the contentions of the appellant that providing corporate guarantee to AEs is outside the ambit of international transaction has to fail. This view is supported by the decision of Mumbai Tribunal in the case of Everest Kanto Cylinder [34 Taxman.Com 19 Mumbai ITAT], discussed by the TPO [after reproducing the relevant para of the order] at para-5.10 of the order u/s 92CA[3). The TPO was justified in benchmarking the transactions. The Delhi Tribunal judgement [relied on by the A.R. in the case of Bharti Airtel Ltd. is not applicable to the instant case, as the appellant is not able to prove that it has not incurred any cost for the guarantee provided [as was done in the case of Bharti Airtel Ltd.].

4.6 The next issue for the consideration is regarding the quantum of upward adjustment to be made. In this connection, it is seen that the TPO adopted the rate at 2.956% [on the total amount of the guarantee provided by the appellant of Rs. 152.85 crores]. In the case of Everest Kanto Cylinder, relied on by the A.R., Mumbai Tribunal held as under:

"We have already come to the conclusion in the foregoing paras that the rate of 3% by taking external comparable by the TPO, cannot be sustained in facts of the present case. We also find that in an independent transaction, the assessee has paid 0.6% guarantee commission to ICICI Bank India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal CUP and comparing the same with the transaction with the AE. The charging of 0.5% guarantee commission from the AE is quite near to 0.6%, where the assessee has paid independently to the ICICI Bank and charging of guarantee commission at the rate of 0.5% from its AE can be said to be at arms length."

In the instant case the appellant has furnished documentary evidence to show that it had obtained guarantee from SBI in connection with the appellant's operating contract with Karnataka Power Corporation at a guarantee fee of 0.25%. Going by

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 22 of 43 the above mentioned decision of the Mumbai Tribunal, similar rate of 0.25% can be adopted for the purposes of benchmarking in the instant case. However, it is seen that one of the group concerns of the appellant company Viz. Adani Port & SEZ Ltd. paid guarantee fee @ 0.95% to Axis bank in connection with the listing agreement with Bombay Stock Exchange. This goes to demonstrate that the guarantee fee charged by the banks is not fixed, but varies from transaction to transaction. Since the appellant has not furnished details of all such transactions of guarantee given by the banks in its case and in the group cases, it is considered reasonable to adopt the rate at 2%. In accordance with the safe-harbour rules 10TB to 10TD, applicable from A.Y. 2013-14, the rates specified are 1.75% and 2%. These rules also of help in arriving @ 2% in the instant case. Accordingly, the upward adjustment is being taken at 2% of total guarantee provided by the appellant of Rs.152.85 crores. The quantum of adjustment works out to Rs.3,05,70,000/-. The adjustment made by the A.O. [ on the basis of the order of the TPO] is restricted to the said amount of Rs.3,05,70,000/-. Balance adjustment is deleted. This ground of appeal is partly allowed.”

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

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 23 of 43 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, 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

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 24 of 43 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 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

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 25 of 43 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 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

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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, 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

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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 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.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 28 of 43 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]

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]

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 29 of 43 that onus has not been discharged. Even during the course of hearing when it was asked as to what are the costs incurred by the assessee, learned Departmental Representative did not have anything to say. 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.

(B) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in not deleting proportionate disallowance of interest expenditure U/s. 14A of the act on the ground that interest free funds available with appellant company in

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form of share capital, reserves & surpluses and other funds are far in excess of investments yieldingly tax free income.

(C) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in upholding disallowance of administrative expenditure of Rs.5,38,47,568 made by the Assessing Officer u/s.14A of the I.T. Act by applying Rule 8D(2)(iii) of the I.T. Rules

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(B) Without prejudice to the above, on the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in rejecting the alternative plea of the appellant-company to restrict the aforesaid disallowance by setting off the sum of Rs.73,06,199, being the preceding year's provision for similar losses disallowed by the Assessing Officer and reversed by the appellant-company in the books of account during the previous year relevant to the present assessment year.

“11.3 Having considered the facts of the matter, I am not inclined to accept the contentions of the AR. As observed by the AO , payment of interest to foreign Banks or their branches in India is governed by Sec. 195 [since payees are non- residents]. No certificate as envisaged under Sec. 195(3) for non-deduction of tax

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has been furnished by the appellant. The contentions of the AR are devoid of merit. Impugned disallowance is upheld. This ground of appeal is dismissed.”

(2) The ld. CIT(A) has erred in law and on facts in setting aside the issue of prior period expenditure amounting to Rs.32,53,473/-.

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(4) The Id. CIT(A) has erred in deleting the addition of Rs.7,27,036/- being the depreciation claimed by the assessee on shares held by it in Ruparelia Theatres Pvt. Ltd. Shares are not assets on which depreciation can be allowed u/s 32 r.w. depreciation schedule.

(5) The Id. CIT(A) has erred in law and on facts and circumstances of the case in deleting the disallowance of Rs.17,33,265/- u/s 36(1)(iii) on account of interest on borrowings. 87. Learned representatives submit that an identical issue has come up for adjudication before us in the immediately preceding assessment year, i.e., 2008-09, and whatever we decide in that assessment year will apply mutatis mutandis to this assessment year as well.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 34 of 43 88. We find that, while dealing with identical grievance of the Assessing Officer for the assessment year 2008-09, and for the reasons set out earlier in this order vide paragraph no.30, we have upheld the conclusions arrived at by the ld. CIT(A). We see no reasons to take any other view of the matter for this assessment year as well. Respectfully following the view so taken, we approve the stand of the CIT(A) and decline to interfere in the matter.

(6) The ld. CIT(A) has erred in deleting the business loss claimed as bad debts of Rs.1,33,43,000/- out of total disallowance of Rs.1,38,45,181/- despite the fact that the assessee has not been offered this amount to tax in earlier years or in the current year and fail to satisfy the condition laid down in section 36(2) of the Act.

(7) The ld. CIT(A) has erred in deleting the disallowance of Rs.58,31,457/- on account of loss from foreign currency swaps by relying on the decision of Ahmedabad Tribunal in the case of ACIT vs. Heavy Metal & Tubes Ltd., despite the fact that the claim of the assessee is in the nature of speculative loss and not allowable as business expenditure.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 35 of 43 Heavy Metal & Tubes Limited (ITA No. 1951/Ahd/2011; order dated 30th June 2014). The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.

…………….. The assessee's case throughout has been that it had entered into a forex contract with the State Bank of India on the basis of its foreign currency exposure in import/export transactions with public sector banks to cover fluctuation risk upto Rs. 200crores. One of the bank namely Bank of Baroda is stated to have issued a certificate dated 12.02.2015 claiming realization of Rs. 123,71,57,417/- which could be realized to the tune of Rs. 111,72,18,092/- as on 31.03.2011. Its SBI contract enabled it to book losses against the above unrealized bills. Lower authorities as well as learned Departmental Representative do not rebut this factual position. The assessee claims to have been inter alia recording its sales to overseas clients on the day of transaction in its books in Indian currency at the rate prevailing on the very day, it would lodge conversion claim upon payment of its consideration money by said customers, this currency settlement took time after lodgment to be realized resulting in fluctuation loss as is the case herein. We notice in this backdrop that hon'ble jurisdictional high court's decision in CIT v. Friends & Friends Shipping (P.) Ltd. [2013] 35 taxmann.com 553/217 Taxman 267 (Guj.) holds losses arising from similar foreign exchange contracts to be business losses than speculative ones. Their lordships conclude that such exchange transactions are hedging transactions instead of being speculative transactions in nature. Next comes hon'ble Bombay high court's decision in CIT v. D. Chetan & Co. [2016] 75 taxmann.com 300/243 Taxman 356/[2017] 390 ITR 36 (Bom.) holding that forward contracts in the nature of hedging transactions in course of normal import export activities to cover up losses on account of foreign exchange valuation difference results in business losses and not speculative one. We find that hon'ble jurisdictional high court's decision in Pankaj Oil Mills v. CIT [1978] 115 ITR 824 (Guj) (Full Bench) also holds inter alia that hedging contracts; in order to be out of speculative transactions, must be in respect of raw materials only in manufacturers' cases though they could be both with regard to sales and purchases, such hedging contracts need not succeed the contract for sale and actual delivery of goods manufactured, but the latter could be subsequently entered into within reasonable time not exceeding the relevant assessment year in normal circumstances and such transactions should not exceed the total stock of the raw material or merchandise on hand including existing stocks as well as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Learned Departmental Representative fails to indicate any distinction therein vis-à-vis those involved in the instant adjudication. We therefore direct the Assessing Officer to delete the impugned disallowance.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 36 of 43

1.(A) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in partly sustaining the upward adjustment of Rs.4,36,97,230 made by the Assessing Officer on the basis of the Transfer Pricing Officer's order dated 28.1.2014 passed u/s.92CA(3) of the I.T. Act, on the assumption that the appellant-company should have charged guarantee commission from its wholly owned foreign subsidiaries in consideration of providing corporate guarantees to the lenders providing borrowings to the said subsidiaries. (B) On the facts and in the circumstances of the case, the learned C.I.T. [Appeals) erred in confirming the above mentioned upward adjustment of Rs.4,36,97,230 to the extent of Rs.2,88,27,000/- by adopting an arbitrary rate of 2% of the total guarantee amount as against the rate of 2.98% adopted by the Transfer Pricing Officer.

(C) Without prejudice to the above, on the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in adopting excessive and unreasonable rate of guarantee commission at 2%, completely ignoring the comparable case of Everest Kanto Cylinder cited before him by the appellant-company wherein the Hon'ble Mumbai ITAT had considered a rate of 0.5% as reasonable.

(D) On the facts and in the circumstances of the case, the learned C.I.T. (Appeals) further erred in rejecting the factual claim made by the appellant- company and supported by documentary evidence, that it had obtained guarantee from State Bank of India, in connection with appellant- company's operating contract with Karnataka Power Corporation at a

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 37 of 43 guarantee fee of 0.25%, and therefore, without prejudice to the claim that no adjustment can be made u/s.92CA(3) of the I.T. Act, at the most similar rate of 0.25% should be adopted for the purpose of benchmarking in the case of the appellant-company.

(1) The ld. CIT(A) has erred in law and on facts in deleting the addition made of Rs.4,36,97,230/- on account of upward revision made by TPO on account of free of charge corporate guarantee given to Associated enterprises.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 38 of 43

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 39 of 43 115. Ground no. 4 is partly allowed.

(B) Without prejudice to the above, on the facts and in the circumstances of the case, the learned C.I.T. (Appeals) erred in rejecting the alternative plea of the

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 40 of 43 appellant-company to restrict the aforesaid disallowance by setting off the sum of Rs.82,02,615, being the preceding year's provision for similar losses disallowed by the Assessing Officer and reversed by the appellant-company in the books of account during the previous year relevant to the present assessment year.

122 Learned representatives submit that an identical issue has come up for adjudication before us in the immediately preceding assessment year, i.e., 2008-09, and whatever we decide in that assessment year will apply mutatis mutandis to this assessment year as well.

128.. In ground no. 2, the Assessing Officer has raised the following grievance:

(2) The Id. CIT(A) has erred in law and on facts in partly deleting the addition made u/s 14A of the Act.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 41 of 43

(3) The Id. CIT(A) has erred in law and on facts in deleting the disallowance of depreciation of Rs.6,54,333/- in respect of office premises.

(4) The Id. CIT(A) has erred in law and on facts in deleting the disallowance u/s 80IA in respect of operating income of weighment charges and port entry for Rs.1,41,00,000/-.

(5) The Id. CIT(A) has erred in law and on facts in deleting the disallowance made of depreciation on vehicle for Rs 39,64,672.

(6) The Id. CIT(A) has erred in law and on facts in deleting the disallowance made of depreciation on office equipment after treating the same as furniture and fittings for Rs 13,84,895.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 42 of 43 141. So far as this grievance is concerned, we find that the assessee had granted depreciation on office equipment as furniture and fittings, and thus declining the claim of the assessee for 15% depreciation. In appeal, it was pointed out by the assessee that the equipment were in the nature of electric fan, electric machine, LCD, TV, projector, water purifiers etc which must be included in the definition of plant. The judicial precedents in support of this proposition were also cited. It was in this backdrop, and following the judgment of Hon’ble Bombay High Court in the case of CIT Vs Park Davis India Ltd (214 ITR 587), learned CIT(A) held the office equipment to be eligible for 15% depreciation. Accordingly, depreciation disallowance of Ts 13,84,895 was deleted. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.

(7) The Id. CIT(A) has erred in law and on facts in deleting the disallowance of depreciation on UPS for Rs.8,14,103/-.

(8)The Id. CIT(A) has erred in law and on facts in deleting the disallowance made of Rs.2,78,404/- being 10% of aircraft hire charges for Rs.27,84,038/-.

ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and 2305/Ahd/15 and 1918/Ahd/12,3480/Ahd/ 14 and 2531/Ahd/15 Assessment years: 2008-09, 2009-10 and 2010-11 Page 43 of 43

Sd/- Sd/- Mahavir Prasad Pramod Kumar (Judicial Member) (Vice President) Ahmedabad, dated the 12th day of February, 2019.

Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File By order etc True Copy Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad