ARCHEAN INDUSTRIES P LTD,CHENNAI vs. NATIONAL FACELESS ASSESSMENT CENTRE,, DELHI

आदेश / O R D E R PER MANJUNATHA.G, AM: This appeal filed by the assessee is directed against final assessment order passed by the AO u/s.143(3) r.w.s.144C(13) r.w.s.144B of the Income Tax Act, 1961, (in short “the Act") dated 29.06.2021, in pursuant to directions of the Dispute Resolution Panel-2, Bangalore, u/s.144C(5) of the Act, dated 05.03.2021,and pertains to assessment year 2016-17.

IT (TP) A No.42/Chny/2021 :: 2 ::

IT (TP) A No.42/Chny/2021 :: 3 :: 11. The NaFAC/DRP failed to appreciate that the provisions of section 14A of the Act had no application to the facts of the case and further ought to have appreciated that the mechanical notional addition made in the computation of book profit in terms of Section 115JB of the Act was Wholly unjustified and unwarranted. 12. The NaFAC/DRP erred in disallowing a sum of Rs.75,300/- by invoking the provisions of section 40A(3) of the Act and consequently erred in adding back the said sum in the computation of taxable total income without assigning proper reasons and justification. 13. The NaFAC/DRP failed to appreciate that the provisions of section 40A(3) of the Act, had no application to the facts of the case and further ought to have appreciated that having not examined the nature of payments while completely swayed by the appellant's concession as reflected in the directions / draft assessment order, the payments made were erroneously disallowed for wrong reasons. 14. The NaFAC/DRP failed to appreciate that there should not be any disallowance based on the tax audit report especially without examination of the tax independently with reference to the concerned provisions and hence ought to have appreciated that the disallowance based on Tax Audit Report should be reckoned as bad in law. 15. The NaFAC/DRP erred in adding back a sum of Rs.10,63,271/- being he presumed shortfall in offering the interest income for taxation both under normal computation and under MAT regime without assigning proper reasons and justification. 16. The NaFAC/DRP erred in denying the benefit of the carry forward of loss relating to the assessment year 2015-16 as per Para 10.1 to 10.2.1 of the impugned order without assigning proper reasons and justification. 17. The NaFAC/DRP failed to appreciate having not disputed the availability of such loss, the denial to carry forward of such loss for stated reasons was not sustainable both on facts and in law. 18. The NaFAC/DRP erred in not permitting the carry forward of long term capital loss of Rs.47,04,923/- to the subsequent assessment years for the reasons stated in Para 10.3 of impugned order and ought to have appreciated that the denial of such benefit was wrong, erroneous, unjustified, incorrect, invalid and not sustainable both on facts and in law. 19. The NaFAC/DRP failed to appreciate that the entire computation of taxable total income both under normal regime and MAT on various facets was wrong, erroneous, unjustified, incorrect, invalid and not sustainable both on facts and in law. 20. The NaFAC/DRP failed to appreciate that the order(s)/ direction under consideration were passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law. 21. The NaFAC/DRP failed to appreciate that there was no proper / reasonable opportunity of hearing before completing the orders passed and ought to have appreciated that any order passed in violation of the principles of natural justice should be reckoned as nullity in law. 22. The Appellant craves leave to file additional grounds/arguments at the time of hearing. 3. The brief facts of the case are that the assessee company is engaged in the business of export of landscape granite stones and products such as kerb stones, cobblestones, etc., filed its return of income for the AY 2016-17 on 05.05.2017 claiming total loss of

IT (TP) A No.42/Chny/2021 :: 4 :: Rs.77,04,923/-. The case has been selected for scrutiny, and during the course of assessment proceedings, a reference was made to the Transfer Pricing Officer (in short “TPO") to determine Arm’s Length Price (in short “ALP") of international transaction entered into by the assessee with its AEs. The TPO vide their order dated 30.10.2019 u/s.92CA(3) of the Act, suggested upward adjustment towards corporate guarantee fees on guarantee given by the assessee to its AEs amounting to Rs.51,92,694/- and also suggested an upward adjustment of Rs.6,21,96,435/- towards interest free loans given to AEs. In pursuant to TP adjustment as suggested by the TPO, the AO has passed draft assessment order u/s.143(3) r.w.s.92CA(3) of the Act, on 18/12/2019 and proposed TP adjustment as suggested by the TPO towards corporate guarantee fees, and interest on loans given to AE. The AO had also proposed additions towards disallowance of employee’s contribution to PF & ESI u/s.36(1)(va) r.w.s.2(24)(x) of the Act, for Rs.31,40,818/-, disallowance of expenses relatable to earning exempt income u/s.14A r.w.r.8D of the Income Tax Rules, 1962, for both normal computation and book profit computation u/s.115JB of the Act, for Rs.611/-, disallowance of cash payments u/s.40A(3) of the Act, for Rs.75,300/-, and additions towards interest income not accounted in the books of accounts of the assessee for Rs.10,63,271/-. The AO had also disallowed brought forward loss set off from AY 2015-16 on the ground that the assessee has not filed return of income on or before due date prescribed u/s.139(1) of the Act.

IT (TP) A No.42/Chny/2021 :: 5 :: 4. Being aggrieved by the draft assessment order, the assessee has filed objection before the DRP-2, Bangalore, and challenged additions made by the AO towards corporate guarantee commission and interest on loans &advances given to AE. The assessee had also challenged additions made by the AO towards disallowance of employee’s contribution to PF & ESI u/s.36(1)(va) r.w.s.2(24)(x) of the Act, disallowance of expenses u/s.37(1) of the Act, for Rs.51,077/-, disallowance of cash payment u/s.40A(3) of the Act. The DRP-2, Bangalore vide their direction dated 05.03.2021 issued u/s. 144C(5) of the Act, upheld TP adjustment made by the AO towards corporate guarantee commission given to AE and interest on loans & advances given to AE on the ground that corporate guarantee commission given to AE, is an international transaction and same needs to be bench marked to determine the commission chargeable on said guarantee. The DRP had also rejected arguments of the assessee on the issue of interest on loans & advances on the ground that the definition of international transactions also includes loans given to AE, and thus, the same needs to be bench marked, and thus, upheld the findings of the AO and rejected arguments of the assessee. Similarly, the DRP has also upheld the additions made by the AO towards disallowance of employee’s contribution to PF & ESI u/s.36(1)(va) r.w.s.2(24)(x) of the Act, and also rejected arguments of the assessee on the issue of additions towards cash payment of Rs. 75,300/- and disallowance of expenses u/s.37(1) of the Act. In pursuant to directions of the DRP, the AO has

IT (TP) A No.42/Chny/2021 :: 6 :: passed final assessment order u/s.143(3) r.w.s.144C(13) on 29.06.2021, and determined total income of Rs.7,90,67,560/- under normal provisions of the Act, and book profit of Rs.2,28,98,306/- u/s.115JB of the Act. Aggrieved by the final assessment order, the assessee preferred an appeal before the Tribunal. 5. The first issue that came up for our consideration from Ground Nos.1 to 5 of the assessee’s appeal is TP adjustment towards corporate guarantee commission on corporate guarantee given to AE amounting to Rs.51,92,694/-. The facts with regard to the impugned dispute are that the assessee has issued corporate guarantee to the extent of USD 65 million in favour of consortium of Axis Bank Ltd., and Bank of India, London, in the year 2009, to facilitate its AEs to take term loans amounting to USD 75 million borrowed by its subsidiary M/s. Senfer Investments Ltd., Cyprus. M/s. Senfer Investments Ltd., Cyprus, a subsidiary of Assessee Company incurred huge loss and the entire net worth was wiped out. The assessee had operations outside India and insolvency of its subsidiary would affect the international operations and thus, the assessee has decided to extend corporate guarantee to its subsidiary to avail term loan facility. There was a tri-party agreement between the assessee and M/s.Senfer Investments Ltd., Cyprus, a subsidiary company of the assessee and the lending banks, as per which, no monetary benefit should be payable to guarantor. Therefore, the assessee had not charged any commission on corporate guarantee given

IT (TP) A No.42/Chny/2021 :: 7 :: to banks on behalf of its subsidiary company. The TPO/AO has imputed corporate guarantee fees @ 2.56% on total corporate guarantee outstanding at the end of the year on the basis of commission charged by commercial banks and made TP adjustment of Rs.51,92,694/-.

5.1 The Ld.AR for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT, Chennai Benches in the assessee’s own case for AY 2014-15, where the Tribunal under identical set of facts, deleted addition made towards corporate guarantee commission.

5.2 The Ld. CIT-DR, Dr. S. Palani Kumar, submitted that corporate guarantee is an international transaction as per Sec.92B of the Act, and same needs to be bench marked, whether or not, the assessee has charged any commission. Further, arrangements or agreement between the assessee and its AE and the banks who provided corporate guarantee doesnot take away the right of the TPO to examine whether said transaction is an international transaction or not, and further, the same needs to be bench marked. In this regard, he filed detailed written submissions, which has been reproduced as under:

IT (TP) A No.42/Chny/2021 :: 8 :: b. It was shareholders activity (P.No: 15-18 in TP order)  On first limb it is submitted that, the law is very clear. Explanation to section 92B of the IT Act gave the list of international transaction. It was an inclusive explanation where it has included the corporate guarantee as an international transaction. Madras High Court decision in the case of Redington India is followed in plethora of Chennai ITAT orders. Law is settled on this aspect and hence the first limb of appellants argument is against the law.  On second limb, the appellant argued that it was a shareholder's activity (P.No.15- 18 of TP order) and hence there can't be any charge of corporate guarantee given by holding company to subsidiary company. However, this argument is also against Explanation to section-92B of Income Tax Act 196. Law has to be administered as per the intent of the legislature. Explanation to section 92B of the IT Act is not excluding the shareholders activity. Whether such guarantee can be given to third party without any charge is the intent of the legislation. TPO has suitably countered the arguments from P.No.32 to 38 and held that the decision of ITAT order in Redington is not applicable as the department has preferred appeal on that order. Later the High Court has over ruled the decision of ITAT rendered in case of PCIT vs Redington (India) Ltd [2021] 430 ITR 298. Prayer: As the law is settled it is prayed that Ground No. 2 to 5 may be dismissed. 1.1 Was it a covered issue? Before the TPO, the appellant has submitted that on account of certain restrictive covenants in the agreement, they did not charge any interest (P.No.21 of TP order) Appeal proceedings for the AY 2014-15 and order dated 19-10-2022: 1. Argument of appellant was that on account of certain "restricting covenants" placed by the bank no commission was charged from the AE. However, the DRP dealt this issue at paragraph 4.5.8 that the appellant had produced only unsigned agreement to prove its claim. It was also held by the DRP that even if the unsigned agreement is taken to be correct, it is seen that this document did not talk about the commission. This was a factual finding given by DRP. 2. The Hon'ble ITAT dealt this issue from paragraph 5.1 to 5.5, where it had prima facie held that corporate guarantee was under the scope of international transaction as the jurisdictional High Court in the case of PCIT vs Redington (India) Ltd [2021] 430 ITR 298. However, the ITAT heavily relied upon the tri party agreement, referred by the appellant and repeatedly observed in paragraph 5.4 and 5.5 that on account of "restrictive covenant", the appellant did not charge any guarantee commission. 3. Argument advanced by Revenue: During the course of hearing, dated 8.9.2022, the paper book submitted by the appellant before Hon'ble ITAT was examined and brought to the attention of the Hon'ble Members that the so-called tri party agreement placed in the paper book of the appellant from P.No.36 to 160 was an unsigned agreement, without any date. It was also brought to the notice of Hon'ble ITAT that the same fact was recorded by DRP at paragraph 4.5.8 of its order dated 27.6.2018. However, this crucial fact was not recorded by Hon'ble ITAT. The appellant company neither submitted the signed tri party agreement to DRP nor before Hon'ble ITAT in support of their contention. In spite of bringing that factual evidence that it was an unsigned and undated agreement, the Hon'ble ITAT did not record these facts. Hon'ble ITAT in its order dated 19-10-2022 proceeded to allow the appeal on the ground that corporate guarantee commission was not charged on account of such restrictive covenant placed at para-20 of the said agreement. 4. DRP findings in AY 2014-15: The DRP at paragraph 4.5.8 also held that, even if the unsigned document is taken to be correct, it is seen that the document does not talk about commission.

IT (TP) A No.42/Chny/2021 :: 9 :: 5. Whether the appellant was a party to the transaction? It is also to be mentioned here that the appellant Archean Industries Pvt Ltd is not a party to that unsigned agreement given in paper book. The above said facts are crucial to decide the appeal of TP adjustment on corporate guarantee. However, it was missed the attention of Hon'ble ITAT-. Hence, it can't be claimed as a covered issue. During TP study in AY 2016-17, before the TPO the appellant had referred some other clauses (clause-17) and stated that on account of restrictive covenant no commission was charged. 1.2 Whether 'restrictive covenants'' can overrule provisions of Law? If that unsigned agreement has some restrictive covenant clauses, can it over rule the provisions of section 92B of the IT Act enacted in the parliament. The law clearly explained the scope of 'international taxation'. Explanation to section 92B is as under:- For the removal of doubts, it is clarified that — (i) the expression "international transaction " shall include- (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; Hence, any such restrictive covenant clause cannot over rule the provisions of Income Tax Act discussed above. Prayer: Hence it is prayed that Ground No. 2 to 5 of the appellant may be dismissed. 5.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the ITAT, Chennai Benches in the assessee’s own case for AY 2014-15 in IT (TP) A No.37/Chny/2018, where the Tribunal by considering relevant facts and also on analysis of the decision of the jurisdictional High Court in the case of PCIT v. Redington (India) Ltd., reported in [2021] 430ITR 298, held that because of a restrictive covenant from the banks on the guarantor for charging corporate guarantee commission, the assessee is precluded from charging any kind of commission on guarantee given to its AE, and thus, the assessee has rightly not charged any commission on corporate guarantee

IT (TP) A No.42/Chny/2021 :: 10 :: given to banks on behalf of its AE. The relevant findings of the Tribunal

are as under:

5.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Although, the assessee contended that corporate guarantee given to lenders on behalf of subsidiary per se is not an international transaction, but we reject the arguments of the assessee for the simple reason that after amendment to sec.92B of the Act, by the Finance Act, 2012, “corporate guarantee were brought under the scope of the term ‘international transaction’ with retrospective effect from 01.04.2002”. Further, various decisions of Courts including the decision of the Hon’ble Madras High Court in the case of PCIT v. Redington (India) Ltd., reported in [2021] 430 ITR 298 (Madras) clearly held that corporate guarantee is an international transaction and the same needs to be bench marked to determine ALP of transaction. Therefore, we are of the considered view that corporate guarantee given by the assessee on behalf of its subsidiary to lender Banks to facilitate the subsidiary to avail term loans is an international transaction.

5.4 Having said so, let us examine whether charging commission is mandatory in the given facts and circumstances of the case. Admittedly, the assessee has not charged any commission on corporate guarantee given to banker on behalf of its subsidiary. As per the claim of the assessee, there is a restricting covenant placed by the bank on the guarantor from charging any commission without bank prior consent and as per said restriction, the assessee shall not take any kind of monetary benefit for providing corporate guarantee on behalf of its AE. We find that there is a tri-party agreement between the assessee and its subsidiary and lending bankers and as per the said tri-party agreement Clause-20, there is a restricting covenant from the lender banks for not charging any kind of monetary benefit including commission on corporate guarantee extended by the assessee on behalf of its subsidiary. Therefore, once there is tri-party agreement between the parties, then there will be a obligation on the assessee to honour the conditions of agreement and as per said agreement, the assessee cannot charge any commission on corporate guarantee given to bankers on behalf of its AEs. Further, the agreement between the parties is on the basis of need of the business and further, the Revenue cannot sit in arms chair of the businessman and decide how the business is to be conducted. In our considered view, a prudent decision taken in the normal course of business should be honoured by the tax authorities. In this case, there is a condition as to not charging commission on corporate guarantee given by the assessee to bankers and said condition is agreed between the parties in terms of tri-party agreement. In fact, the TPO as well as the DRP never disputed the fact that there is a tri-party agreement between the parties and as per the said agreement there is restricting covenants for charging guarantee commission. But, although the Revenue has accepted the fact that there is a restriction for charging commission, but the TPO gone ahead to charge notional corporate guarantee fees on corporate guarantee extended by the assessee on behalf of its AE, even though, there is a clear condition in the agreement between the parties for non-charging the commission. Therefore, we are of the considered view that the TPO/DRP was erred in charging notional commission on corporate guarantee given by the assessee to lending bankers on behalf of its AEs. 5.5 Coming back to case laws cited by ld. DR. The ld. DR relied upon ITAT Mumbai Bench decision in the case of Siro Clinpharm (P) Ltd. v. ITO [2021] 131 taxmann.com 73 (Mumbai-Trib.). We find, in the said judgment the Tribunal held that corporate guarantee constitutes an international transaction u/s.92B of the Act. In our considered view, there is no dispute with regard to the findings of the Tribunal as well as various High Courts on the issue of defining corporate guarantee as international transaction, but when it comes to charging commission, facts of each case has to be examined. In the case before Mumbai Tribunal, the assessee itself has charged guarantee commission of 1.75% on corporate guarantee given to its AE and under those facts, the TPO/DRP examined the case of the assessee and bench marked the transaction to impute 3% commission on guarantee given by the assessee. Therefore, under those facts, the Tribunal came to the conclusion that

IT (TP) A No.42/Chny/2021 :: 11 :: corporate guarantee constitutes an international transaction and same needs to be benchmarked. In case of the decision of jurisdictional high Court of Madras in the case of PCIT v. Redington (India) Ltd. (supra), we find that the Hon’ble jurisdictional High Court held that there is an inherent risk in providing guarantee and hence, adjustments are required to be made for guarantee commission. In our considered view, there is no dispute on ratio laid down by the Hon’ble High Courts, because, once a transaction between the assessee and its AE is an international transaction, the same needs to be bench marked to ascertain ALP of said transaction. In this case, on perusal of the facts available on record, we find that there is a restricting covenant from the bankers on the guarantor for charging guarantee commission and under these facts, we are of the considered view that the assessee has rightly not charged any commission on corporate guarantee given to bankers on behalf of its AEs. Therefore, we are of the considered view that the TPO/DRP were clearly erred in computing guarantee commission on corporate guarantee given by the assessee to its AEs. Hence, we direct the TPO to delete upward adjustment suggested towards corporate guarantee commission. 5.4 In this view of the matter and consistent with view taken by the co- ordinate Bench, we direct the TPO/AO to delete TP addition made towards commission charged on corporate guarantee given to AEs.

IT (TP) A No.42/Chny/2021 :: 12 :: 6.1 The Ld. Counsel for the assessee submitted that this issue is also covered in favour of the assessee by the decision of ITAT, Chennai Benches, in the assessee’s own case for AY 2014-15 in IT (TP) A No.37/Chny/2018, where the Tribunal after considering relevant facts and also by following the decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd., reported in [2019] 261 Taxmann 165 (SC),deleted the addition made towards notional interest on loans & advances given to AE.

6.2 The CIT-DR, Dr.S.Palani Kumar, supporting the order of the Ld.CIT(A) submitted that the assessee could not make out a case of business expediency in advancing interest free loans to foreign AE which is evident from the nature of business activity carried out by the assessee and nature of business activity carried out by AEs. The Ld.DR further submitted that as per definition of international transaction as defined u/s.92B of the Act, interest free advances given to AE is also comes under the definition of international transaction, and same needs to be bench marked. The TPO after considering relevant facts has rightly charged interest @7.5% on total outstanding loans & advances given to foreign AE. In this regard, he filed detailed written submissions on this issue, which has been reproduced as under:

IT (TP) A No.42/Chny/2021 :: 13 :: advances were given to the AE. It was reportedin the financials as well as Form 3CEB. The appellant's argument before TPO was in 3 limbs (P.No.38-59 of TP order); a. It was shareholders activity b. Commercial expediency cannot be questioned c. If at all bench marking needed, internal CUP has to be applied However, TPO analyzed this issue in detail at P.No.60-63 of the TP order and negated all these three limbs in detail. He held that internal CUP cannot be applicable for various reasons (P.No.63 of the TP order). He followed Ministry of Corporate Affairs notification and proposed upward adjustment of Rs.6,21,96,4357. It is to be mentioned here that giving interest free advance to the AE is a separate international transaction and the TPO has rightly examined this transaction. Prayer: Appellant has raised four grounds of appeal from Gr.No. 6 to 9. All these grounds were suitably addressed by TPO in his order. Hence it is prayed that Ground No. 6 to 9 may be dismissed. 2.1 Whether it was a covered issue? In the decision rendered for the AY 2014-15, Hon'ble ITAT recorded altogether new line by ignoring the TP provisions, i.e. explanation to section 92B of the I T Act discussed above. Some inconsistent findings recorded are listed below; 2.1.1 Facts argued by PR: 1. During the course of hearing on 8.9.2022 for the AY 2014-15, the paper book submitted by the assessee company was analyzed and brought to the notice of the Members that the appellant was not in the business of any financing to claim that there was commercial expediency to grant such interest free loan. It was submitted that they were in the export of land scape granite stone, such as curb stone and cobble stone. 2. It was brought to the notice of the ITAT that the company (Senfer Investments Ltd) where they had invested was located in Cyprus (Tax heaven) and it had engaged in Financing activity and not in the line of business of assessee. 3. It was also brought to the attention that during relevant year, the long-term borrowings were increased from Rs.9.07 crore into Rs.17.49 crore and the advances were increased from Rs.75.02 crore into Rs.138.62 crore. 4. It was demonstrated that out of these long-term borrowings and the fresh advances, the appellant company gave interest free advance of Rs.41.17 crore to Senfer Investments Ltd., Cyprus without charging any interest. 5. It was also argued that the financial statement itself was the evidence that source for interest free advance was fresh long-term borrowings and advance from customers. It was also argued that on account of TP provisions, the TPO rightly charged interest on this advance. 6. Page no. 173 of the paper book of the appellant contains details regarding interest charged by Axis Bank on Senfer Investment limited, Cyprus. It was demonstrated that the TPO rightly charged the interest at the rate of 12M LIBOR plus 670bps works out into 7.383%. 2.1.2. Findings given by ITAT:

IT (TP) A No.42/Chny/2021 :: 14 :: However, Hon'ble ITAT did not bring on record any of these arguments and travelled in different line completely ignoring the fact that it was a TP adjustment and not disallowance of interest by the AO. It is as under: - 1. At paragraph 6.3, the ITAT referred the argument of the appellant that the loan was given out of own funds. However, it was demonstrated that there was no surplus available and it was out of fresh loans and out of advances from customers, the appellant gave interest free advance to the subsidiaries. 2. At paragraph 6.4, the Hon'ble ITAT held that the loan advanced to subsidiary was in the normal course of business and out of commercial expediency. However, it was demonstrated that the appellant company was in different business and not in the business of financing. Though this argument was rightly captured at paragraph 6.2, ITAT had rendered different finding at paragraph 6.4. 3. At paragraph 6.4, the Hon'ble ITAT held that "it is not correct that in every case interest on borrowed loan has to be disallowed if the assessee advances loans to sister concern and it all depends upon the facts and circumstances of the respective case". In this connection, the ITAT had relied upon the decision of Supreme Court in the case of S A Builders and observed that the assessee would be entitled to deduct interest on borrowed loans. It is submitted that the Hon'ble ITAT completely ignored the TP aspects. It was not the case of disallowance of proportionate interest expenses by the A.O. It was the TP adjustment of charging of interest-on-interest free advance given to subsidiaries as per section 92B of the IT Act. 4. At paragraph 6.4, the Hon'ble ITAT relied upon the decision of Madras High Court in the case of CIT v. KEC [2020] 113 Taxmann.com 532 and held that interest paid on borrowed funds utilized for investment in group companies for strategic business purpose is allowable as deduction. It is once again reiterated that this is not the case where AO disallowed any interest expenditure. It is the case where TPO determined arm's length by charging interest as per section 92B of IT Act. Hence, it is submitted that this finding at para 6.4 is not in accordance with TP provisions. 5. At paragraph 6.4, the ITAT also observed that on account of commercial expediency, the loan was given to sister concern. However, it is to be mentioned here that, the appellant engaged in the business of export of land scape granite stone, such as curb stone and cobble stone whereas the subsidiary Senfer Investments Ltd., Cyprus to whom the borrowed funds are given as interest free loan engaged in financing. Hence question of commercial expediency cannot arise. 6. At paragraph 6.5 the Hon'ble ITAT discussed yet another decision rendered by Supreme Court in the case of CIT. v. Reliance Industries 12017] 410 ITR 466 and held that when the interest free fund was available with assessee and if it was given to meet the investment of subsidiary, disallowance of interest u/s 36(1)(iii) of the I T Act by the A.O is not correct. The Hon'ble ITAT once again ignored the fact that it is riot the case of disallowance of expenditure u/s 14A of the I T Act or disallowance of expenditure on the interest on borrowed capital claimed u/s.36(1)(iii) of the IT Act. It is the case of TP adjustment made by the TPQ as per the provisions of Act where the assessee company themselves reported the 'international transaction' duly in Form 3CEB and also mentioned that interest of 7.6% was charged on the advance given to the subsidiary. The money in form of interest free loan gone out of the country to the AE located in tax heaven country. TPO rightly invoked explanation to section 92B and charged interest as per LIBOR rate. ITAT had completely ignored this fact and treated this whole transaction in different angle. 7. High Court Decision on this aspect: In this connection the decision of Mumbai High Court in the case of Tooltech Global Engineering (P) Ltd Vs ACIT [2018] in 91 taxmann.com 357 (Bombay) is relied upon. Hon'ble High Court has given a categorical finding that loans and advances given by the assessee to AE would be an international transaction hit by chapter X in terms of Explanation 92B of the IT Act.

IT (TP) A No.42/Chny/2021 :: 15 :: It is submitted that, while deciding the case of CIT Vs Hi tech Aral Limited in Tax Case (Appeal) Nos.670 and 671 of 2009. Hon'ble Madras High court observed that tribunal need not follow its own earlier decision if such earlier decision did not reflect the correct position of the law. The relevant para in the Hon'ble HC order is as under; 8. "3. We are not in a position to appreciate either of the contentions of the learned counsel for the petitioner. As far as the first contention is concerned, when the Tribunal by the impugned order has applied Section 32(1)(iia) of the Act, to the facts involved in the case of the assessee and has found that the assessee is entitled for the additional depreciation claimed under the said provision, it cannot be held that simply because a Co- ordinate Bench of the Tribunal had earlier taken a different view, the Tribunal on this occasion also ought to have followed the same. When we find that the Tribunal has applied the law correctly in the impugned order, there is no gain saying that there was an earlier order by the Coordinate Bench and therefore, for that reason, this time also the Tribunal should have blindly followed its own earlier decision even if such earlier decision did not reflect the correct position of the law. In view of the above, it is submitted that it is not a covered issue at all. 2.1.3 Prayer to record these facts: TPO benchmarked the transaction reported in Form-3 CEB as per the TP provision. Fie had charged interest given as 'interest free advances' reported in Form 3CEB by virtue of explanation to section 92B of the IT Act. The borrowed funds/capital were diverted to subsidiary engaged in completely different business. On one hand on the borrowed capital, interest was paid by the appellant; on the other hand, the borrowed capital, was given as interest free advance to subsidiary located in Cyprus which is a tax heaven country. Hence, TP provisions are directly applicable for such profit-shifting transactions and TPO has rightly followed the law. Further corporate guarantee fee also rightly charged by TPO as per chapter X of IT Act 1961. In view of the above, it is prayed that the TPO order and the DRP finding may kindly be upheld. 6.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that the co-ordinate Bench ITAT, Chennai in the assessee’s own case for AY 2014- 15, had considered an identical issue in light of very same loans & advances given to 100% subsidiary companies and after considering relevant facts, held that there is a commercial expediency in loans & advances given to 100% subsidiary, and further, the assessee has given said loans & advances out of its own funds. Therefore, the question of charging interest on said loans does not arise. The Tribunal, while adjudicating the issue has followed the decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd. (supra), on the issue

IT (TP) A No.42/Chny/2021 :: 16 :: of disallowance of interest u/s.36(1)(iii) of the Act, and held that when the assessee was having sufficient own funds to meet loans & advances

given to subsidiary, the appellate authorities were right in allowing the assessee’s claim for deduction. The relevant findings of the Tribunal are as under:

6.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The AO has made additions towards TP adjustment on interest free loans given to subsidiary on the ground that the assessee has borrowed loans from banks and extended interest free loans to subsidiary companies without charging any interest. It was the arguments of the assessee before the TPO that loans given to subsidiary is out of commercial expediency and further, the assessee has derived business advantage, because, the subsidiaries were engaged in the business of investment in group companies and also trading in similar products dealt by the assessee in Abroad and thus, the assessee has extended financial assistance to subsidiaries to augment its business requirements which benefitted the assessee company. The assessee had also contended the issue in light of decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd.,(Supra) and argued that loans have been given to subsidiaries out of own funds. 6.4 We have given our thoughtful consideration to the reasons given by the assessee in light of observations of the AO to compute notional interest on loans given to subsidiary and we find that where the assessee has advanced loans to subsidiary in the normal course of business and out of commercial expediency to derive business advantage and said transaction results in benefit to the assessee, then there is no question of imputing interest on notional basis towards loan given to subsidiary. Further, it is not correct that in every case interest on borrowed loans has to be disallowed if the assessee advances loans to sister concern and it all depends upon the facts and circumstances of the respective case. For example, if the Directors of the sister concern utilized the amount advanced to it by the parent company for their personal benefit, obviously, it cannot be said that such money was advanced as a measure of commercial expediency. However, if money is said to have been used for commercial expediency in the normal course of business, the Revenue cannot take a stand that the assessee has diverted interest bearing funds for non-business purpose. This legal principle is supported by the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd. v. CIT [2007] 158 Taxmann.com 82 where it has been held that holding company has a deep interest in its subsidiary and hence, holding company advances borrowed money to subsidiary and the same is used by the subsidiary for some business purpose. The assessee would ordinarily be entitled to deduct interest on its borrowed loans. Further, the Hon’ble Madras High Court in the case of CIT v. KEC [2020] 113 Taxmann.com 532 held that interest paid on borrowed funds utilized for investment in group companies for strategic business purpose is allowable as deduction. In this case, the AO has imputed notional interest on interest free loans given to sister concern on the ground that the assessee is paying huge interest on borrowed funds without appreciating the fact that there is a commercial expediency in advancing loans to sister concern. Therefore, on this count, additions made by the AO cannot be sustained. 6.5. Coming back to second argument taken by the Ld. Counsel in light of the decision of Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd.,(Supra). The assessee claimed that loans given to subsidiaries is out of own funds and for this purpose, the assessee has filed a financial statement for the year 2012-13 and 2013-14 and as per said information, the own funds in the form of share capital and reserves & surplus was at Rs.114.66 Crs. and as against this, loan outstanding in the name of subsidiary companies was at Rs.83.68 Crs. The assessee claimed that loans given to subsidiary is out of own

IT (TP) A No.42/Chny/2021 :: 17 :: funds. It is a well settled principle of law by the decision of various courts including the decision of the Hon’ble Delhi High Court in the case of CIT v. Modi Rubber Ltd. (supra), where it has been held that where the assessee was having mixed pool of funds comprising own funds and loan funds, then interest free loans to sister concern would have to be considered as having given out of assessee’s own funds. The Hon’ble Supreme Court in the case of CIT v. Reliance Industries [2017] 410 ITR 466 (SC) held that where the AO reject the assessee’s claim u/s.36(1)(iii) of the Act, taking a view that interest would have been payable to banks funds were not provided to subsidiaries. In view of the fact that interest free funds available to assessee which was sufficient to meet its investments in subsidiaries, appellate authorities were justified in allowing assessee’s claim for deduction. In this case, own funds available with the assessee is more than the amount of loan given to subsidiary and thus, we are of the considered view that a presumption goes in favour of the assessee that loans to subsidiary is out of own funds and thus, the question of imputing notional interest on loans to subsidiaries does not arise. Although, the TPO/DRP has considered such transaction as an international transaction and computed ALP by imputing notional interest, but fact remains that the law laid down by the Courts of this country on the issue is very clear, as per which, in case of commercial expediency, no notional interest can be imputed on loans to subsidiaries. Further, if mixed funds are available including borrowed funds, then presumption is in favour of the assessee that loans to subsidiaries is out of own funds. Therefore, we are of the considered view that the TPO/DRP erred in computing notional interest on loans to subsidiaries and thus, we direct the TPO/DRP to delete addition towards upward adjustment on loans to subsidiaries. 6.4 In this view of the matter and consistent with view taken by theco- ordinate Bench of ITAT Chennai, in the assessee’s own case for AY 2014- 15, we direct the AO to delete TP adjustment made towards interest receivables on loans & advances given to AE.

IT (TP) A No.42/Chny/2021 :: 18 :: 7.1 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. It is a well settled principle of law by the decision of ITAT, Special Bench in the case of ACIT v. Vireet Investments Pvt. Ltd. (2017) 82 Taxmann.com 415 (ITAT Delhi) (Special Bench), where it has been clearly held that disallowance contemplated u/s.14A r.w.r.8D of the IT Rules, 1962 cannot be added to book profit computed u/s.115JB of the Act. Therefore, by following the decision of ITAT Special Bench, we direct the AO to delete additionmade towards book profit computed u/s.115JB of the Act, on disallowance of expenses relatable to exempt income u/s.14A r.w.r.8D of the IT Rules, 1962.

8.1 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. There is no dispute with regard to the fact that the Tax Auditor reported cash payment in excess of prescribed limit in Form No.3CD. The assessee

IT (TP) A No.42/Chny/2021 :: 19 :: could not explain reason why it has made cash payment in excess of prescribed limit. Therefore, we are of the considered view that there is no error in the reasons given by the AO to disallow cash payment in excess of prescribed limitu/s.40A(3) of the Act, and thus, we are inclined to upheld the findings of the AO and reject the ground taken by the assessee. 9. The next issue that came up for our consideration from Ground Nos.15-17 of the assessee’s appeal is addition towards interest income to total income computed by the assessee under normal provisions of the Act and book profit computed u/s.115JB of the Act. During the course of assessment proceedings, the assessee was asked to reconcile interest income reported in Form No.26AS and interest income offered for taxation. The AO noticed that there was a difference of Rs.10,63,271/- towards interest income reported in Form No.26AS and interest income accounted as per books of accounts of the assessee. The assessee could not reconcile the difference towards interest income. Therefore, the AO has made addition of Rs.10,63,271/- to total income under normal provisions of the Act, and has also made addition to interest income to book profit computed u/s.115JB of the Act. 9.1 The Ld. Counsel for the assessee submitted that the AO is erred in making addition towards interest income only on the basis ofForm No.26AS without appreciating the fact that the assessee is following mercantile system of accounting for interest income in the books of

IT (TP) A No.42/Chny/2021 :: 20 :: accounts, whereas the bank is deducting TDS on payment basis. The assessee had also filed reconciliation statement explaining difference between interest income as per Form No.26AS and interest income as per books of accounts, but the AO has discarded reconciliation filed by the assessee and made addition, and thus, prayed for one more opportunity to be given to the assessee to go back to AO and explain its case. 9.2 The ld.CIT-DR, Dr.S.Palani Kumar, on the other hand, supporting the order of the AO submitted that the assessee could not explain difference in interest income as per books of accounts and interest income reported in Form No.26AS. The AO after considering relevant facts has rightly disallowed interest income and their orders should be upheld.

9.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Admittedly, there is a difference of Rs.10,63,271/- towards interest income as per books of accounts of the assessee and interest income reported in Form No.26AS. The AO made addition towards interest income on the ground that the assessee could not reconcile the difference, whereas the assessee claims that it has filed reconciliation statement explaining difference. Facts are contradictory. Therefore, we are of the considered view that the issue needs to go back to the file of the AO for further verification. Thus, we set aside the issue to the file of the AO, and direct the AO to re-examine the claim of the assessee in accordance with law.

IT (TP) A No.42/Chny/2021 :: 21 :: 10. The next issue that came up for our consideration from Ground Nos.18 to 21 of the assessee’s appeal is denying set off of brought forward losses against current year income. During the course of assessment proceedings, the AO noticed that the assessee has claimed set off of brought forward losses for AYs 2015-16 & 2016-17. The AO has disallowed set off brought forward losses for AY 2015-16 on the ground that the return of income filed by the assessee is an invalid return, and thus, loss cannot be allowed to be carry forward.

10.1 The Ld. Counsel for the assessee submitted that one more opportunity may be given to the assessee to explain its case before the AO for the benefit of set off of brought forward capital loss of Rs.47,04,923/-.

10.2 The Ld.CIT-DR, Dr.S.Palani Kumar, on the other hand, submitted that as per the details available on record, the assessee is not entitled for set off of brought forward capital losses, because, the return of income filed by the assessee on 05.05.2017 is beyond the due date prescribed u/s.139(1) of the Act.

10.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The issue of set off of brought forward losses from earlier years is a factual issue, and it needs to be verified from the records to ascertain whether the claim of the assessee is allowable or not. The Ld. Counsel for the assessee

IT (TP) A No.42/Chny/2021 :: 22 :: requested for one more opportunity to explain its case before the AO. Therefore, considering facts and circumstances of the case, we set aside the issue to the file of the AO, and direct the AO to re-examine the claim of the assessee in light of materials available on record to ascertain the claim of the assessee and decide the issue in accordance with law.

Order pronounced on the 14th day of June, 2023, in Chennai. Sd/- Sd/- (वी. दुगा� राव) (मंजूनाथा.जी) (V. DURGA RAO) (MANJUNATHA.G) �याियकसद�य/JUDICIAL MEMBER लेखासद�य/ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated: 14th June, 2023. TLN आदेशक��ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 3. आयकरआयु�/CIT 5. गाड�फाईल/GF 2. ��यथ�/Respondent 4. िवभागीय�ितिनिध/DR