DCIT 3(3) (1), MUMBAI vs. M/S. SHAPOORJI PALLONJI AND CO. PVT. LTD, MUMBAI

The cross-objection no. 53 filed by the assessee are as under:

During the course of assessment, the assessing officer noticed that assessee claimed an amount of Rs. 224,26,68,823/- as exempt u/s 10 of the I.T. Act. The AO further noticed that assessee had made suo-moto disallowance of expenditure to the amount of Rs. 5,00,000/- for earning the said exempt income. However, the assessing officer has applied Rule 8D and computed disallowance u/s 14A to the amount of Rs. 7,37,78,541/- under Rule 8D(2)(iii) of the Act.

The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has restricted the disallowance to the extent of Rs. 10,00,000/- under administrative expenses after following the decision of ITAT in the case of the assessee for the A.Y. 2010-11 which was also affirmed by the Hon’ble Bombay High Court.

The ld. DR supported the order of assessing officer and contended that assessing officer has made disallowance without any scientific basis to the amount of Rs. 5,00,000/-. He further submitted that the assessing officer has clearly pointed out his dissatisfaction in the assessment order as per para 5.5.

On the other hand, ld. Counsel contended that assessing officer has not recorded his dissatisfaction in respect of the claim made by the assessee computed u/s 14A r.w. Rule 8D. The ld. Counsel also submitted that this is a recurring issue which has already been decided by the ITAT Mumbai in the case of the assessee and affirmed by the Bombay High Court as reported in the finding of the ld. CIT(A). The ld. Counsel has also referred the decision of ITAT Mumbai and decision of Hon’ble Supreme Court and Hon’ble High Courts on the issue that no disallowance u/s 14A is warranted when no satisfaction is recorded by the assessing officer.

Heard both the sides and perused the material on record. Sub- section (2) of section 14A provides that assessing officer shall determine the expenditure incurred in relation to the exempt income in accordance with Rule 8D if the assessing officer, having regard to the accounts of the assessee, is not satisfied that the correctness of claim of assessee in respect of such expenditure in relation to exempt income. Such dissatisfaction should be recorded by the assessing officer after examining the accounts of the assessee. Further, Rule 8D(i) of the Income Tax Rule 1962 also provides that where the assessing officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of expenditure made by the assessee, he shall determine the amount of expenditure in relation to exempt income as per sub-rule (2) of Rule 8D. In the case of the assessee, it holds share mostly in the group companies from where it had earned exempt income. In assessee’s own case, the ITAT on similar facts and circumstances for A.Y. 2008-09 vide ITA 4418/M/2018 has restricted the disallowance of administrative expenditure to the extent of Rs. 10 lakh u/s 14A of the Act. During the year under consideration, the assessee has also submitted that after considering the nature of expenditure it had determined the expenditure related to earning exempt income. However, on perusal of the assessment order, it is clear that assessing officer has not recorded any specific dissatisfaction in respect of accounts of the assessee company for the direct and indirect expenses before computing the disallowance in accordance with Rule 8D of the I.T. Rule. Looking to the above facts, the ld. CIT(A) has arrived at the conclusion that assessing officer has failed to record dissatisfaction with respect to the correctness of the claim of expenditure made by the assessee after considering the various decisions of the courts. The ld. CIT(A) has also considered the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT (2018) 402 ITR 640 (SC) wherein held that the assessing officer was not empowered to invoke the provisions contained u/s 14A r.w. Rule 8D in a mechanical manner without recording satisfaction that claim of the assessee is not correct. He also considered the case of Hon’ble Supreme Court in the case of Godrej Boyce Manufacturing Company Ltd. vs DCIT (Civil Appeal No. 7020 of 2011) wherein held that the onus is squarely on the assessing officer to conclude his dissatisfaction regarding the assessee’s claim and only thereafter applies provisions of section 14A r.w. Rule 8D. Similarly, the ld. CIT(A) has considered the decision of Hon’ble Bombay High Court in the case of PCIT vs Bombay Stock Exchange Ltd. (2020) 113 taxmann.com 303. We have also considered that in the case of the assessee itself, the ITAT vide has restricted the disallowance of administrative expenditure to the extent of Rs. 10 lakh u/s 14A of the Act which has been also affirmed by the Hon’ble Bombay High Court vide dated 16.03.2019.

Before us, the ld. Counsel has also referred the decision of ITAT Mumbai in the case of Trent Limited vs DCIT vide wherein after following the decision of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. & others, it is held that disallowance u/s 14A cannot be made where no satisfaction has been recorded by the assessing officer. Looking to the above facts and circumstances, we do not find any reason to interfere in the decision of ld. CIT(A). Therefore, ground no. 1 of the appeal of the Revenue are dismissed and cross objections no. 1 to3 of the assessee are also dismissed.

The assessee is in business of construction and real estate business. The assessee has paid aggregating amount of Rs. 141.50 crores as accumulated amounts for A.Y. 2007-08 to A.Y. 2009-10 to M/s. PRS Enterprises, proprietorship concern of Shri N.J. Thakur and M/s. Acecard Infrasol Pvt. Ltd. in which Shri N.J. Thakur was having shareholding of 80%. The assessee explained that these amounts were in the nature of advance payments made towards acquisition of land with clear and marketable tile in an around Alibaug and other areas of Raigad District. The AO in the earlier assessment years, disallowed the interest expenditure at an average rate of 14% on the advance of Rs. 141.50 crores by treating the said advances were in the nature of regular business advance. Similarly during this year also, the assessing officer has made disallowance of interest expenses to the amount of Rs. 19,81,00,000/-.

On appeal, the ld. CIT(A) has deleted such disallowance of interest expenditure after following the decisions of the ITAT on this recurring issue.

Before us, the ld. DR supported the order of the assessing officer. On the other hand, ld. Counsel relied on the order of ITAT, Mumbai for A.Y. 2008-09 to 2011-12 and also submitted that assessee has not debited any amount in the P & L A/c and same has been shown as work-in-progress under the head current asset in the balance sheet.

Heard both the sides and perused the material on record. The assessee is in the business of construction and real estate business. It is undisputed fact that assessee has not debited any interest expenditure in the P&L A/c and shown the whole amount as advances towards acquisition of land in the balance sheet. We find that this is recurring issue which has been decided in favour of the assessee by the ITAT, Mumbai in assessee’s own case for A.Y. 2014- 15 and earlier years. It is also undisputed fact that the interest free funds available with the assessee were more than the advances given to the aforesaid party. Looking to this fact, the ITAT in its decision in the case of the assessee for A.Y. 2014-15 vide ITA 2025/M/2021 dated 28.03.2024 after considering the decision of Hon’ble Jurisdictional High Court, Mumbai in the case of CIT vs Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) has deleted the addition on the ground that if the interest free funds of the assessee are in the excess of the loan advance then it can be presumed that the funds invested by the said entities are not out of the borrowed fund. Looking to the above fact and finding, we do not find any infirmity in the decision of ld. CIT(A). Therefore, this ground of appeal of the Revenue and cross objections of the assessee are dismissed.

During the course of assessment, the assessing officer has noticed that it has entered into certain transactions with its associate enterprises therefore the case was referred to the Transfer Pricing Officer for determining the Arm’s Length Price for the international transactions carried out by the assessee with its associated enterprises. The assessee had issued financial guarantees to various banks towards facilities availed by the associated enterprises of the assessee. The assessee submitted that it is a universal practice in the construction industry that contracts/agreements may be backed by a Stand-by Letter of Credit (SBLC) / performance guaranteed by the parent company. The TPO has mentioned that assessee has not benchmarked the transaction properly. Since the internal CUP was not available therefore, external CUP was applied. The TPO mentioned various factors considered by the banks while charging fees like-fees charged decreases with the increase in the guarantee amount, discounts or concessions given when there is cash margin, security or credit rating, track record with bank, market reputation of the customer, package of other working facility, timing of the guarantee etc. The TPO applied Comparable Uncontrolled Price (CUP) method using information called from various banks u/s 133(6) of the Act which is summarized as under:

The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) after considering the decision of Hon’ble Bombay High Court in the case of Everest Kanto made downward adjustment of 0.50% to the adjustment recommended by the TPO and computed arm’s length rate for guarantee fees at 1.16% after following the similar decision of his predecessor for A.Y. 2014-15 as reproduced as under:

Before us, the assessee submitted that issuance of financial guarantee is a general practice in the construction industry and it is provided by the parent company to reduce the risk of default by the subsidiary company executing the contract. The assessee also submitted that TPO has not considered the guarantee fees charged by the assessee which was kind of internal CUP available for the TPO. The assessee also submitted that TPO has not examined the various factors which were there before the TPO since the assessee was not in the business of banking and some of the factors considered by the banks were not applicable to the assessee. The assessee also submitted that transaction of giving a corporate guarantee was not an international transaction. The assessee also referred the various judicial pronouncements. In its alternative submission, the assessee submitted that guarantee commission to be restricted to 0.5% based on decision of Hon’ble Bombay High Court in the case of CIT vs Everest Kento Cylinders Ltd. The assessee also referred various decisions of ITAT wherein after following the decisions of Hon’ble High Court/Tribunal, the guarantee commission was restricted to 0.5%. The assessee also submitted in its alternative claim that Mumbai ITAT in assessee’s own case for F.Y. 2014-15 has remanded the matter back to the file of the TPO for the purpose of applying any of the prescribed method for determining the ALP.

On the other hand, ld. DR objected the additional evidences filed by the assessee. The ld. DR also submitted that since there was no internal CUP available in the case of the assessee, therefore, the TPO has rightly applied external CUP method to determine the commission for the bank guarantee extended by the assessee for the purpose of associated enterprises.

Heard both the sides and perused the material on record. We find that ld. CIT(A) has restricted the rate of corporate guarantee to 0.5% or actual cost incurred by the assessee + 10% mark up after following the decision of Hon’ble Bombay High Court in the case of CIT vs Everest Kento Cylinders Ltd. (2015) 378 ITR 57 (Bom). However, the ITAT in assessee’s own case for the A.Y. 2014-15 vide and C.O. No. 55/Mum/2022 has held as under:

The assessee had issued performance guarantee on behalf of Shapoorji Palanji Qatar WLL(SP Qatar). The TPO applied CUP method using information called from various banks u/s 133(6) of the Act since there was no internal CUP available. The average bank guarantee rate was computed at 1.66%. Further, based on the decision of Hon’ble Bombay High Court in the Everest Kento Cylinder Ltd. and Mumbai ITAT in Glenmark Pharmaceuticals Ltd., the TPO made downward adjustment of0.5% to the amount quoted to the average bank guarantee rate and computed the arm’s length guarantee fees at 1.16% and made adjustment to the amount of Rs. 9,33,24,172/-.

In appeal, the ld. CIT(A) after considering the decision of Hon’ble Bombay High Court in the case of CIT vs Everest Kento Cylinder Ltd. restricted the adjustment made by the TPO to the rate of 0.5% or actual cost incurred by the assessee + 10% mark up whichever is more. Therefore, the arm’s length margin was fixed in the case of the assessee at 0.50% and the adjustment amount computed at Rs. 4,02,25,936/-.

Before us, the ld. Counsel submitted that assessee provide performance guarantee to Qatar Petroleum on behalf of its associate enterprises guaranteeing the performance of duties and obligation that would be done by its AE and in the event of any such failure of performance by the AE, the assessee shall on written request of Qatar Petroleum perform the unfulfilled obligations and shall receive all the rights and benefits to it. The assessee claimed that while providing such performance guarantee it did not incur any charges or cost whatsoever and accordingly no commission was charged by the assessee to its AE for providing said performance guarantee. In support, the assessee has placed reliance on the decision of ITAT in the case of KEC International (ITA No. 6447/Mum/2015 dated 23rd March, 2011).

The ld. DR supported the order of TPO.

Heard both the sides and perused the material on record. The assessee provided performance guarantees to Qatar Petroleum on behalf of the AE. Under the performance guarantee if associated enterprise fails to execute a contract then the performance guarantee issued by the assessee get invoked then the assessee would be obliged to execute the contract on its own by using its own fund. The ld. Counsel submitted that assessee was not at risk on any financial obligation on behalf of the associated enterprises. The assessee also submitted that while providing such performance guarantee the assessee did not incur any charges or cost whatsoever and accordingly no commission was charged by the assessee to its associated enterprises for providing said performance guarantee.

Before us, the assessee has also referred the Safe Harbour Rule informed by the CBDT dated 18.09.2013 which clearly distinguished between a corporate guarantee and performance guarantee. It is submitted that said rule does not include performance guarantee or any other guarantee of similar nature. The assessee also submitted that under the performance guarantee in case the associated enterprises failed to perform then then the contract which was awarded to the associate enterprise gets assigned in favour of the assessee. We have also perused the decision of ITAT, Mumbai in the case of KEC International Ltd. vide dated 23.03.2021 referred by the ld. Counsel wherein it is held as under:

We have also perused the decision of ITAT, Mumbai in the case of Afcons Infrastructure Limited vs Addl. CIT vide & 1357/M/2014 the relevant extract is as under:

The Revenue has not brought any material on record to controvert the fact that in case an associate enterprise failed to execute a contract then by invoking the performance guarantee issued by the assessee, the assessee would be executing the contract on its own by using its own fund without any requirement of paying any fees. Therefore, following the findings of the ITAT as laid down in the decisions cited supra in this order, we inclined with the submission of the assessee that no adjustment is required in respect of performance guarantee as discussed. Therefore, ground of appeal of the assessee is allowed and grounds of appeal of Revenue are dismissed.

The assessee has issued letter of comfort towards credit facilities sanctioned by bank to its subsidiary AE. The assessee explained that letter of comfort does not constitute guarantee however, the TPO has adopted the average bank guarantee rate of 1.66%. Further, based on the decision of Hon’ble Bombay High Court in the case of Everest Kanto and Mumbai ITAT in Glenmark Pharmaceuticals Ltd. made downward adjustment of 0.50% to the aforesaid average bank guarantee rate and computed the arm’s length guarantee fees rate at 1.16% and the adjustment was made to the amount of Rs. 5,34,87,269/-.

In the appeal, the ld. CIT(A) after considering the decision of Hon’ble High Court in the case of CIT vs Everest Kento Cylinders Ltd. has restricted guarantee commission @ 0.2% to the amount of Rs. 27,80,525/-.

The ld. DR supported the order of TPO. On the other hand, the ld. Counsel submitted that issue of letter of comfort did not have bearing on the profit, income or assets of the assessee, therefore, the same is not an international transaction and do not attract provisions of section 92 of the Act. The assessee has also placed reliance on the decision of co-ordinate benches of the ITAT where it is held that letter of comfort is not an international transaction.

Heard both the sides and perused the material on record.

The assessee has issued letter of comfort to ICICI Bank Bahrain in F.Y. 2007-08 which was continuing in the year under consideration for performance guarantee given by ICICI Bank to the construction parties of Shapoorji Pallonji Mid-East. The TPO has applied Comparable Uncontrolled Price (CUP) method using information called from various banks u/s 133(6) of the Act since there was no internal CUP available. Thereafter, considering the decision of Bombay High Court in the case of Everest Kanto and Mumbai ITAT in Glenmark Pharmaceuticals Ltd., the TPO has determined arm’s length rate for performance guarantee at 1.16%. The ld. CIT(A) after considering the decision of Asian Paints of ITAT, Mumbai vide and CIT vs Everest Kento Cylinders Ltd. restricted the arm’s length to the amount of Rs. 27,80,525/- after adopting rate of 0.2% of the investment blocked by the assessee. Before us, the assessee has placed reliance on the decision of ITAT, Mumbai in the case of the assessee itself for A.Y. 2014-15 vide and CO No. 55/Mum/2022 wherein it is held that letter of comfort is not international transaction. It is also held that letter of comfort given by the assessee on behalf of its AE does not come under the purview of an international transaction and the provisions also clearly excludes letter of comfort within the expression of international transaction. The assessee has also submitted that letter of comfort does not have bearing on the profit, income, assets or losses of the assessee and the same was of the nature of shareholder activity. It is also submitted that in the Safe Harbour Rules – Rule 10sTA it is referred as under:

The assessee has also referred the decision of ITAT, Mumbai in the case Tata International Ltd. vs ACIT (ITA No. 4376/Mum/2010 & Others) wherein it is held that in letter of comfort, the party issues only a letter that a subsidiary or group company would comply term of financial transaction and have no obligation to indemnify, also ITAT, Mumbai in the case of Asian Paints Ltd. vs CIT vide held that in the letter of comfort the only promise made by the assessee is, it will not made any disinvestment of the shares during the pending of the loan and there is no financial implication of the assessee. On the similar proposition, the assessee has also referred the decision of ITAT, Mumbai in the case of The Indian Hotels Co. Ltd. vs Addl. CIT vide & Others). Looking to the above facts and findings, we consider that nowhere the TPO and the ld. CIT(A) establish that letter of comfort create any contractual financial obligation on the assessee company for only providing letter of comfort for keeping the investment in its holding company. Therefore, following the findings of the ITAT in the decisions as referred supra, the addition of Rs. 27,80,525/- is deleted. Accordingly, the grounds of appeal of Revenue are dismissed and grounds of appeal of the assessee are allowed.

The assessee while computing the book profit in terms of section 115JB of the Act had suo moto made addition u/s 115JB(2) of the Act of an amount of Rs. 40,32,630/- towards administrative cost and interest cost for collection of dividend. However, the assessing officer while computing the book profit of the assessee in the assessment order made further adjustment of an amount of Rs. 7,37,78,541/- u/s 14A r.w. Rule 8D u/s 115JB of the Act.

The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) after following the decision of the ITAT for A.Y. 2014-15 in the case of the assessee itself has restricted the disallowance u/s 115JB to the extent of suo moto disallowance made by the assessee.

Heard both the sides and perused the material on record. The assessee while computing difference book profit in terms of section 115JB of the Act had suo moto made adjustment u/s 115JB(2) of the Act of an amount of Rs. 40,32,630/- towards administrative cost and interest cost for collection of dividends. The assessing officer while computing the book profit in the assessment order had made further adjustment of an amount of Rs. 7,37,78,541/- (disallowance computed by the assessing officer under Rule 8D of the I.T. Rule). We find that Special Benches of ITAT in the case of Vireet Investment (P) Ltd. held that disallowance made under Rule 8D cannot be added while computing book profit u/s 115JB of the Act. Therefore, we consider merit in the decision of ld. CIT(A) in restricting the addition u/s 115JB to the extent of suo moto disallowance made by the assessee. Accordingly, the appeal of the Revenue is dismissed and cross objection of the assessee is dismissed.

Ground No. 1 of Revenue and Cross-Objection No. 1 of the assessee are dismissed after applying the findings of Ground No. 1 and Cross Objection No. 1 to 3 mutatis mutandis as adjudicated vide (Revenue) and C.O. No. 54/M/2022 supra in this order.

Applying the findings of the Ground No. 2 of the appeal of the Revenue vide and Cross Objection No. 4 to 6 of 54/M/2022 of the assessee mutatis mutandis as supra, the appeal of the Revenue and Cross Objection of the assessee are also dismissed.

Applying the findings of the Ground No. 3 of the Revenue Appeal vide and Cross Objection No. of 54/M/2022 as supra grounds of Revenue and Cross Objections of the assessee are dismissed.

Applying the findings of the (Revenue) and (Assessee) on the similar issue as adjudicated above mutatis and mutandis both the grounds of appeal of the assessee and Revenue are allowed for statistical purpose.

The similar grounds of appeal have been adjudicated vide and ITA No. 2027/M/2021. Applying the same findings mutatis mutandis, the grounds of appeal of the Revenue is dismissed and grounds of appeal of the assessee are allowed.

Since similar issue on identical facts are adjudicated vide and as supra in this order therefore the same findings mutatis mutandis, the grounds of appeal of the Revenue is dismissed and grounds of appeal of the assessee is allowed.

Applying the findings of Ground No. 2 of the appeal of the Revenue vide and cross objection no. 4 to 6 of 54/Mum/2022 of the assessee mutatis mutandis as supra, the appeal of the Revenue and cross objections of the assessee also dismissed.

Applying the findings of Ground No. 3 of the Revenue appeal vide and cross objection no. 54/Mum/2022 as supra, the appeal of the Revenue and cross objections of the assessee are dismissed.

Applying the findings of (Revenue) and (Assessee) on the similar issue as adjudicated above mutatis mutandis both the grounds of appeal of the assessee and Revenue are allowed for statistical purpose.

The similar grounds of appeal have been adjudicated vide and ITA No. 2027/Mum/2021. Applying the same findings mutatis mutandis, the grounds of appeal of the Revenue is dismissed and grounds of appeal of the assessee are allowed.

Since similar issue on identical facts are adjudicated vide and as supra in this order therefore applying the same findings mutatis mutandis, the ground of appeal of the Revenue are dismissed and grounds of appeal of the assessee is allowed.

In the result, both the appeals of the assessee are partly allowed and cross objections are dismissed. The Revenue appeals are dismissed and allowed for statistical purpose.