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Facts
The Revenue appealed an order where the CIT(A) partly allowed the assessee's appeal against an assessment order concerning transfer pricing adjustments and disallowances under Section 14A. The primary issue revolves around the arm's length price (ALP) for corporate guarantee fees and the disallowance of expenses under Section 14A.
Held
The Tribunal upheld the CIT(A)'s deletion of transfer pricing additions related to corporate guarantee fees, finding that the assessee's determined ALP of 0.43% was reasonable and consistent with previous tribunal decisions. The Tribunal also upheld the CIT(A)'s deletion of disallowances under Section 14A, noting that the Assessing Officer failed to record dissatisfaction with the assessee's methodology and that the CIT(A) correctly followed precedent.
Key Issues
Whether the CIT(A) erred in deleting the transfer pricing addition for corporate guarantee fees and whether the CIT(A) erred in deleting the disallowance of expenses under Section 14A.
Sections Cited
250, 144, 144C(3), 10B, 92CA(1), 92F(ii), 14A, 8D, 92CA(3), 10(35)
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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Appearance For the Appellant/ Department : Shri Kiran Unavekar For the Respondent/ Assessee : Shri Jeet Kamdar Date Conclusion of hearing : 08.01.2025 Pronouncement of order : 30.01.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member:
1. 1. The present appeal preferred by the Revenue is directed against the order, dated 19/12/2023, passed by the Commissioner of Income Tax (Appeals)-56, Mumbai [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had partly allowed the appeal against the Assessment Order, dated 28/01/2020, passed under Section 144 read with Section 144C(3) of the Act for the Assessment Year 2016-2017.
2. The Revenue has raised following grounds of appeal : “1. (a) "Whether on the facts and circumstances of the case and Assessment Year 2016-2017 in law, the Ld. CIT(A) erred in restricting the Arm's length price of guarantee fee in respect of international transactions of corporate guarantee given by the assessee to AEs to 0.41% as against 1.25% in the case of Greatship Global Offshore Services Pte, and. Greatship Global Energy Services Pte Ltd, Singapore [GGES] as held by the Transfer Pricing Officer (TPO)/Assessing Officer (AO) (b) Without prejudice to the above, the relief granted by the Ld. CIT(A) is excessive
2. (a) Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in applying the ruling in the assessee's own case for earlier years which in turn are based on the judgements in the case of Everest Kanto Cylinders Limited (ERC) of Ld. CIT(A) Mumbai (34 Taxmann.com 19 (Mum Trib) dtd. 23.11.2012) and decision of Hon'ble Bombay High Court (ITA No. 1165 of 2013 dated 8.05.2015 for A.Y. 2007-08) without appreciating and ignoring certain important facts having bearing on the benchmarking such as: (i) The quotation obtained by the Everest Kanto Cylinders Ltd. India (EKC-India) was in respect of transaction of a guarantee obtained by the Indian entity having strong financial and asset base and not in respect of Everest Kanto Dubai - the foreign entity with weaker financial strength and thereby impacting the comparability in view of difference in the credit rating of the entitles which admittedly form basis for guarantee rates/quotations. (ii) Ignoring the facts that the EKC rulings (34 Taxmann.com 19 (Mum Trib) dtd. 23.11.2012 and (ITA No. 1165 of 2013 dated 08.05.2015 (Bom HC)] ignored the fact that entity obtaining loan in foreign jurisdiction for which EKC India stood as guarantor had lower credit rating. (iii) That the starting point for benchmarking in the case of EKC case was obtaining of bank guarantee quote by the EKC India, which was used for benchmarking corporate guarantee and therefore, it was not appropriate to hold that bank guarantee and corporate guarantee are different.
(iv) That decision in the case of Everest Kanto Cylinders Ltd. cannot be standard for every assessee as benchmarking for different assessees is a factual exercise dependent upon number of factors including credit rating, financial strength, 2 Assessment Year 2016-2017 country of AE, attendant risks etc. (v) That recently the Ld. CIT(A) Kolkata in the case of DCIT vs. National Engineering ITA 986 and 987/Kol/17 has held that decision in Everest Kanto Cylinders Limited cannot be a standard for every case. (vi) That the CIT(A) failed to fully appreciate that the corporate guarantee transaction acts as important function for the AEs consequently enabling the AEs to raise funds generally at a favorable rates and enhance their asset base simultaneously exposing the guarantor to risk in the event of failure of AE to repay or service loan which is always contingent in nature.
3. Whether on the facts and circumstances of the case and in low, the Ld. CIT(A) erred in holding that the fee for the guarantee issued by the assessee for the Inane availed by the AR Dom banks should be charged at 0.41%, based on judicial pronouncements and without realizing the fact that the transfer pricing study is highly fact-based and it differs from case to case and that all the factors in Rule 10B have to be considered for every case and every year independently and that a rate decided in a different case for different set of facts and for different year cannot be adopted as such to the instant assessee, which would be violative of the specific provisions in Rule 10B? 4. Whether on the facts and circumstances of the case and in law, the CIT(A) erred in failing to recognize the facts of the case that the assessee has given corporate guarantee to its Ads, thereby exposing itself to a lending business risk se well as the single customer risk by charging fee for such guarantee below the comparable ALP rate, which the assurance would have done, had it stood guarantee to any third party is uncontrolled conditions as in section 92F(ii)? 5. Whether on the facts and circumstances of the case and in law, the CIT(A) erred in failing to see that AE had no credit- worthiness and financial capacity to service its own loan and in such a situation assessee standing guarantee for the loan, it had to be remunerated at arm's length as per section 92F(ii)? 6. Whether on the facts and circumstances of the case and in law, the CIT(A) has erred in not appreciating that the Assessing Officer has recorded the dissatisfaction as mandated under section 14A(2) of the Art which does not have any prescribed 3 Assessment Year 2016-2017 format? 7. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in restricting the disallowance u/s 14A to the suomoto disallowance of Rs.9,93,001/-made by the assessee as against computed by the AO at Rs.31,62,500/-u/s 14A r.w.r 8D of the IT Rules, 1962.
8. Whether on the facts and under the circumstances of the case and in Law, the CIT(A) is justified in restricting the disallowance u/s 14A of the Income Tax Act, 1961 to the suomoto disallowance of Rs. 9,93,001/-made by the assessee thereby overlooking the computational procedure laid down in Rule 8D of the IT Rules, 1962 which has to be necessarily followed whenever a disallowance u/s 14A has to be made? 9. The appellant prays that the order of the CIT(A)-56, Mumbai on the grounds be set aside and confirm the order of the AO.
10. The appellant craves leaves to add, amend or alter all or any of the grounds of appeal
.”
3. Brief facts of the case are that the Assessee is a shipping company, provides offshore oilfield services. The Assessee operates a fleet of offshore support vessels and jack-up rigs for providing marine logistics and drilling services to its clients for supporting their offshore oil & gas exploration and production services.
The Assessee filed its return of income for the Assessment Year 2016-17 on 30/11/2016 declaring total income of INR 241,87,61,850/-. The case of the Assessee was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Assessee had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm’s Length Price (ALP) under Section 92CA(1) of the Act.
The TPO noted that during the Assessment Year 2016-2017, the Appellant had provided financial guarantee to DNB Nor Bank ASA, 4 Assessment Year 2016-2017 Singapore Branch, DVB Group Merchant Bank (Asia) Pte, and Bank of Nova Scotia Asia Ltd., Singapore, (Now Axis Bank) on behalf of its AEs [namely, Greatship Global Offshore Services Pte. Ltd., Singapore (GGOS) and Greatship Global Energy Services Pte. Ltd., Singapore (GGES)] in respect of loans availed by the aforesaid AEs from the said banks. Though the Assessee had charged 0.30% per annum as Guarantee Commission from his AEs, in the return of income the Appellant had computed ALP at 0.41% per annum following internal CUP being average rate of guarantee commission paid by the Appellant to the banks for giving guarantee to third parties on behalf of the Appellant. Thus, making suo-moto transfer pricing adjustment of INR.1,87,92,470/- on account of Guarantee Commission. However, the TPO, following the order of Dispute Resolution Panel (DRP) for the Assessment Year 2015-2016 arrived ALP guarantee commission rate of 1.25% using external CUP method and proposed upwards transfer pricing adjustment of INR.14,35,86,295/- vide order, dated 01/11/2019, passed under Section 92CA(3) of the Act.
On 13.12.2019, the Assessing Officer passed Draft Assessment Order under Section 143(3) read with Section 144C(1) of the Act proposing aforesaid transfer pricing adjustment of INR.14,35,86,295/-. Further, the Assessing Officer also proposed a disallowance of INR 9,93,001/- under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 [for short ‘IT Rules’] in addition to the suo-moto disallowance of INR 21,69,499/- made by the Appellant in the return of income.
The Appellant did not file reference before the Dispute Resolution Panel and therefore, Final Assessment Order was passed on 28/01/2020 making the above additions proposed in the Draft Assessment Order.
5 Assessment Year 2016-2017
The Assessee preferred appeal before the CIT(A) against the Final Assessment Order. Vide order dated 19/12/2023, the CIT(A) disposed off the aforesaid appeal as partly allowed deleting the transfer pricing addition of INR 14,35,86,295/- and disallowance of INR 9,93,001/- under Section 14A read with Rule 8D of the IT Rules.
Being aggrieved by the above relief granted by the CIT(A), the Revenue has preferred the present appeal before the Tribunal raising the grounds reproduced in paragraph 2 above.
Ground No.1 to 5 10. Ground No. 1 to 5 raised by the Revenue are directed against the order of the CIT(A) deleting the transfer pricing additions of INR.14,35,86,295/- made by the Assessing Officer.
We have heard both the sides on this issue and have perused the material on record. The Learned Departmental Representative relied upon the order passed by the TPO and the Assessing Officer while the Learned Authorised Representative of the Assessee supported the order passed by the CIT(A) and placed reliance upon the orders passed by the Tribunal in the case of the Assessee wherein identical issues had come up for consideration before the Tribunal.
We note that during the assessment proceedings the Assessee was asked to show cause why Transfer Pricing Adjustment in Guarantee Commission in the preceding Assessment Year 2015-2016 should not be repeated in the Assessment Year 2016-2017. In response the Assessee filed reply letter dated 16/09/2019. However, the TPO was not convinced with the submissions made by the Assessee. The TPO rejected the ALP determined by the Assessee by placing reliance on the order passed by the DRP for the Assessment Year 2015-2016 to arrive at ALP Guarantee Commission rate of 1.25%. During the course of hearing the Assessee had placed on record the order, 6 Assessment Year 2016-2017 dated 27/06/2022, passed by the Tribunal in appeal preferred by the Assessee for the Assessment Year 2015-2016 [ITA No.7001/Mum/2019] whereby the Tribunal had rejected the reasoning given by the DRP and had deleted the transfer pricing additional made by the Assessing Officer in the final assessment order holding as under:
“11. We have considered the rival submission and perused the material on record. The DRP has while reducing the rate of guarantee commission from 2.07% as determined by the TPO to 1.25% relied upon the order of DRP for the Assessment Year 2013-14 and 2014-15. However, we note that in appeal filed by the Appellant against the order of DRP for the Assessment Years 2013-14 (ITA No.7151/Mum/2017) and 2014-15 (ITA No.6083/Mum/2018), the Tribunal accepted and deleted the transfer pricing addition. We note that same view has been taken by the co-ordinate bench of the Tribunal in the case of the Appellant for the assessment years 2008-09 (ITA No.7673/Mum/2012), 2009-10 (ITA No.1703/Mum/2014), 2011- 12 (ITA No.1457/Mum/2016) and 2012-13 (ITA No.1287/Mum/2017).
12. The relevant extract of the decision of the Tribunal for Assessment Year 2012-13 (ITA No.1287/Mum/2017) and 2014- 15 (ITA No.6083/Mum/2018) reads as under:
“9. We have heard.....................................................In fact, involving identical facts the Tribunal in the assessee’s own case for A.Y 2008-09, and A.Y 2009-10, vide a consolidated order dated 21.06.2019 had approved the determination of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loans by its foreign AE on the basis of the Internal CUP i.e guarantee commission that was paid by the assessee to a bank for standing guarantee on its behalf for a third party. Further, the Tribunal after drawing support from the 7 Assessment Year 2016-2017 order of the Hon‟ble High Court of Bombay in the case of CIT Vs. Everest Kanto Cylinders Ltd. (2015) 378 ITR 57 (Bom), had approved the determination of ALP of the corporate guarantee given by the assessee to the bank in order to facilitate raising of loan by its AE i.e on the basis of the aforesaid Internal CUP applied by the assessee. In its aforesaid order the Tribunal had observed as under:
“17. We have carefully considered the rival submissions. In the present case, the assessee has made a suo-motto transfer pricing adjustment on Corporate Guarantee fee @0.55% from its AE, and such transaction has been considered as an ‘’international transaction‟ within the meaning of Sec. 92B of the Act. Accordingly, the arm’s length price of such transaction has been determined by the TPO at 3.00% which has resulted in enhancement of assessee’s income, and the same was restricted by the DRP at 1.50%. The issue before us is restricted to whether the arm’s length rate of the Corporate Guarantee is to be taken at 0.55%, which has been suo- motto taken as transfer pricing adjustment by the assessee, or the rate of 1.50% determined by the income-tax authorities. Notably, the TPO has benchmarked the instant transaction of provision of Corporate Guarantee on the basis of respective abilities of the assessee and AE to raise Bonds in the Indian domestic market. The TPO asserted that based on the debt-equity ratio, the credit rating of the assessee company was higher in comparison to that of the AE and, therefore, the rate of interest payable by the AE to raise bonds in the Indian market would be higher than the rate payable by the assessee-company. Such differential has been used to determine the Corporate Guarantee fee that should have been charged by the assessee company from its AE so as to determine the arm’s length price of the instant transaction. In our considered opinion, the aforesaid approach of the TPO is clearly inconsistent with the ratio laid down by the Hon‟ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra). Notably, in the case of Everest Kanto Cylinder Ltd. (supra), the dispute was relating to the adjustment made by the TPO in the matter of Guarantee commission earned for providing a Corporate Guarantee to the Bank 8 Assessment Year 2016-2017 in connection with the borrowings made by the AE of the assessee therein. The TPO determined the arm’s length price of such transaction based on the instance of commercial banks providing Guarantee on behalf of their clients. The Hon‟ble High Court held that the considerations which apply for issuance of Corporate Guarantee were distinct and separate from that of Guarantee provided by the banks and, therefore, the two transactions were incomparable. In our considered opinion, similar parity of reasoning is applicable in the present case too because the considerations which weigh for raising of bonds, that too in Indian market, are quite distinct and incomparable with the instance of providing of Corporate Guarantee to a bank abroad in connection with raising of loan from such bank by the AE of assessee outside India. Therefore, in our considered opinion, the exercise carried out by the TPO to arrive at the impugned arm’s length rate suffers from an inherent misconception as the benchmarking has been done between two incomparable situations. Therefore, we are unable to uphold the stand of the income-tax authorities.
18. Insofar as the adequacy of 0.55% rate charged by the assessee is concerned, we find enough reasonableness in the same. In this context, the learned representative for the assessee referred to various decisions of the Tribunal, viz. Hindalco Industries Ltd. (supra), Thomas Cook (India) Ltd. (supra) and Godrej Consumer Products Ltd. (supra), wherein the arm‟ length rate of 0.5% has been approved in the matter of benchmarking Guarantee commission fee chargeable from AE. Thus, considering the entirety of the facts and circumstances of the case, in our view, Corporate Guarantee fee charged by the assessee @0.55% is well-founded and does not require any Transfer Pricing Adjustment. Thus, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs.42,97,821/-. Thus, Ground of appeal nos. 6 to 9 are allowed.”
9 Assessment Year 2016-2017 As the Tribunal in its aforesaid order passed in the assessee’s own case for the preceding years had approved the determining of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loan by its AE by applying of Internal CUP by the assessee i.e the guarantee commission paid by the assessee to a bank for guarantee stood by it on behalf of the assessee for a third party thus, we respectfully follow the view therein taken. Accordingly, we find no infirmity in the adoption of internal CUP i.e the average guarantee fees that was paid by the assessee to, viz. RBS (formerly known as ABN Amro Bank); Kotak Mahindra Bank and Yes Bank, for standing guarantee on its behalf of the assessee in case of third parties, viz. ONGC, BG Exploration etc.
Insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% of the amount of loan is concerned, the same, as observed by us hereinabove is the average of the guarantee fees that was paid by the assessee to various banks for standing guarantees on its behalf for certain third parties. As observed by the Hon’ble High Court in the case of Everest Kento Cylinders Ltd. (supra), higher commission is to be paid for obtaining bank guarantee, as they are easily encashable in the event of default as in comparison to corporate guarantee provided by an assessee company to a bank for facilitating raising of loan by its AE. Accordingly, we are of the considered view that insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% is concerned, the same in the backdrop of the aforesaid facts cannot be called in question. Apart from that, we find that it was also the claim of the assessee before the lower authorities that Kotak Mahindra Bank (as per its sanction letter) had expressed its willingness to give guarantee on behalf of the AEs at a commission rate of 0.40% p.a/0.50% p.a. In the backdrop of the aforesaid fact, we find substantial force in the claim of the ld. A.R that the aforesaid credit sanction letter too would constitute a CUP for benchmarking the transaction of providing of corporate guarantee by the assessee to the banks for facilitating raising of loans by its AEs. Be that as it may, the adequacy of the ALP of corporate guarantee fee at 0.43% can also safely be gathered by 10 Assessment Year 2016-2017 drawing support from the following judicial pronouncements as had been relied upon by the assessee before the lower authorities as well as before us: Particulars Guarantee Commission rate 1 Everest Kento Cylinder Ltd. Vs. ACIT (2012) 34 0.5 CCH 0528 (Mum) [Note : Order of Tribunal upheld by the Hon‟ble High Court of Bombay : CIT Vs. Everest Kento Cylinder Ltd. Vs. CIT (2015) 378 ITR 57 (Bom). 2 Reliance Industries Ltd. Vs. Addl. CIT (ITA No. 0.38% 4475/Mum/2007) 0.38% 0.38% 3 Asian Paints Ltd. Vs. Addl. CIT (2014) 149 ITD .20% 511 (Mumbai) 0.20% 4 Aditya Birla Minacs Worldwide Ltd. Vs. JCIT .5% (2016) 47 CCH 760 (Mum) 5 Godrej Household Products Ltd. Vs. Addl. CIT 41 .5% taxmann.com 386 (Mum) 6 Nimbus Communications Limited Vs. Addl. CIT .5% (2014) 149 ITD 0508 (Mumbai) 7 Hindalco Industries Ltd. Vs. Addl. CIT (62 .5% taxmann.com 181)(Mum) 8 Manugraph India Ltd. Vs. DCIT (2015) 43 CCH .5% 348 (Mum) 9 Prolific Corporation Ltd. Vs. DCIT (55 .5% taxmann.com)(Hyd) 10 Glenmark Pharmaceuticals Ltd. Vs. Addl. CIT .5% Addl. CIT Vs. Glenmark Pharmaceuticals Ltd. (43 taxmann.com 191)(Mum) 11 Thomas Cook (India) Limited (2016) 47 CCH 0162 .5% (Mum) Accordingly, in terms of our aforesaid observations we find no reason to dislodge the ALP of corporate guarantee determined by the assessee at 0.43% p.a by adopting Internal CUP method. In the backdrop of our aforesaid observations we are unable to persuade ourselves to subscribe to the determination of the ALP of the corporate guarantee at 2% p.a by the A.O/TPO. We, thus, uphold the ALP of corporate guarantee as determined by the assessee at 0.43% p.a and direct the A.O/TPO to vacate the upward transfer pricing adjustment of Rs. 28,69,70,745/- made in the hands of the assessee. The Grounds of appeal Nos. 1 to 7 are allowed in terms of our aforesaid observations.”
13. In view of the above, we are not persuaded to depart from a view consistently taken by the Tribunal in the case of the 11 Assessment Year 2016-2017 Appellant for preceding assessment years. Respectfully following the above said decisions of the co-ordinate benches of the Tribunal in the case of the Appellant for the Assessment Years 2011-12, 2012-13, 2013-14 and 2014-15, we hold that corporate guarantee commission determined by the Appellant at the rate of 0.40 per cent per annum is at arm’s length not requiring any transfer pricing adjustment. Consequently, the transfer pricing additions of INR.33,50,97,840/- made by the Assessing Officer to the extend confirmed by the DRP is deleted, and Ground No.3 to 7 of the Appeal are allowed. Ground No.8 is disposed off as being infructuous.” (Emphasis Supplied)
13. Thus, the very basis on which the transfer pricing addition was made by the TPO/Assessing Officer stands demolished by the above decisions of the Tribunal. Further, we note that the Assessee had supported the ALP Guarantee Commission Rate of 0.41% per annum determined by the Assessee with the Facility Sanction Letter, dated 18/11/2016, (placed at Page 72 to 79 of the paper book) issued from Kotak Mahindra Bank to the Assessee expressing its willingness to give guarantee on behalf of the AEs concerned in consideration of guarantee commission of 0.30% per annum, whereas the Assessee had determined ALP Guarantee Commission Rate at 0.41% per annum. On the other hand, we note that the TPO had not brought on record any material to support Guarantee Commission Rate at 1.25% per annum and has merely placed reliance upon the order passed by the DRP for the Assessment Year 2015-2016 (which has since been overturned by the Tribunal). While the Revenue has pleaded that determination of ALP is a factual exercise which needs to be carried out on yearly basis, we find that the TPO has failed to follow this approach and had rejected the ALP determined by the Assessee for the Assessment Year 2016-2017 by following the DRP order for the Assessment Year 2015-2016.
14. In view of the above, we decline to interfere with the order passed by the CIT(A) deleting the transfer pricing addition of 12 Assessment Year 2016-2017 INR.14,35,86,295/-. Accordingly, Ground No.1 to 5 raised by the Revenue are dismissed.
Ground No. 6 to 8
Ground No. 6 to 8 pertain to disallowance of INR 9,93,001/- made under Section 14A of the Act read with Rule 8D of the Income Tax Rules 1962 (for short ‘the Rules’).
The relevant facts in brief are that the Assessee has earned exempt dividend income of INR.1,38,67,351/- during the relevant previous year by investing its surplus funds in units of Liquid Mutual Funds. In its return of income the Respondent has suo-moto disallowed expenditure of INR.21,69,499/- under Section 14A of the Act as under in terms of the following computation: Total income from Investments of surplus funds Amount (INR) Interest Income (taxable) 1,84,72,287/- Exempt Dividend income 1,38,67,351/- Gain on redemption of units of mutual funds 3/- Total 3,23,39,641/- Percentage of Exempted Income to Total Income from 42.88% Investments Total Cost allocated to treasury function Staff Cost 35,51,141/- Other Expenses 15,08,284/- Total 50,59,425/- Suo moto disallowance u/s.14A 21,69,499/- (42.88% of total cost allocated to treasury function) 17. On perusal of record, we find that during the assessment proceedings, the Assessee was asked to show-cause why disallowance should not be made under Section 14A of the Act in the case of the Assessee. The Assessee filed following submissions, vide letter, dated 15/11/2019, before the Assessing Officer:
“7. Your Honour has requested our clients to show cause as to why disallowances made in the earlier assessment years should not be repeated in the current assessment year.
13 Assessment Year 2016-2017 For the assessment year 2015-16, the only disallowance made by the AO (other than transfer pricing adjustments), was on account of section 14A r.w.r. 8D. Our submissions as to why the disallowance made in the Assessment Year 2015-2016 should not be repeated in the current Assessment Year are as under: a. During the year under consideration, the assessee company has earned dividend income of Rs.1,38,67,351/- from Mutual Fund investments which has been claimed as exempt under Section 10(35) of the Income Tax Act. b. In the Return of Income, Income, the assessee company has suo-moto disallowed an amount of Rs.21,69,499/- under Section 14A as expenditure incurred towards the earning of dividend income. c. The assessee company submits that the disallowance of Rs.21,69,499/-has been worked out methodically in the following manner: ➤ The assessee company has taken loans for acquiring qualifying ships, therefore the entire interest expenditure incurred by the assessee company during the financial year under consideration relates to tonnage activity and has been treated as such. The assessee company has not claimed the interest expenditure as a deduction while computing its taxable income. Therefore the assessee company submits that no part of interest expenditure is disallowable under section 14A. ➤ Employee Costs of common employees (common to both tonnage and non-tonnage activities of the assessee company) who are engaged in functions like Accounts, Finance, HR, etc are bifurcated between tonnage activities and non-tonnage activities in the ratio of operating revenue from the said activities-33 (tonnage): 67 (non-tonnage). ➤ The common administration expenses aggregating to Rs.27,79,55,232/-have been 14 Assessment Year 2016-2017 initially treated as tonnage, non-tonnage and common expenses on the basis of the number of on-shore employees working for tonnage and non-tonnage activities and also common employees. The statement giving details of allocation made between tonnage, non- tonnage and common expenses is enclosed marked Annexure 5. ➤ Thereafter, the common administration expenses related to common employees of the assessee company were allocated between tonnage and non-tonnage activity in the operating revenue 33 (tonnage): 67 (non- tonnage). The statement of segmental profit and loss account is enclosed marked Annexure 6. ➤ The employee costs and common administration expenses which are allocated in the aforesaid manner to non-tonnage activity have been further bifurcated between Treasury and Drilling activity. ➤ The expenses allocated to Treasury activity on the above basis aggregate to Rs.50,59,425/- whereas the Treasury Income comprises of dividend income, interest on term deposits, interest on inter-company loans, gain on sale of mutual funds and other miscellaneous income ➤ The assessee company has suo-moto disallowed pro-rata expenditure of Rs.21,69,499/-out of the total expenditure relating to the treasury activity of Rs.50,59,425/- (being percentage of exempt income to the total income from investments i.e. income earned by the Treasury department). Working of disallowance under section 14A forms part of the Tax Audit Report. Relevant annexure of the Tax Audit Report is enclosed marked Annexure 7 for your reference.
15 Assessment Year 2016-2017 The assessee company submits that Rule 8D should not be applied to compute disallowance under Section 14A as done in the Assessment Year 2015- 16 for the following reasons:-
➤ The assessee company has methodically identified actual expenses which can be reasonably treated as relatable to the exempt income and disallowed such expenses under Section 14A. ➤ The assessee company submits that Rule 8D cannot be applied in all cases. It can be applied only in those cases where the AO, having regard to the accounts of the assessee is of the view that the suo-moto disallowance is incorrect. We submit that the suo-moto disallowance methodically identifies the expenses relating to dividend income, therefore there is no need to apply Rule 8D.”
The Assessing Officer was not convinced with the submissions made by the Assessee and therefore, proceeded to make disallowance under Section 14A of the Act by resorting to the computation mechanism given under Rule 8D of the Rules holding as under:
“5. Disallowance u/s. 14A r.w.s Rule 8D: 5.1 It is seen from the perusal of Balance sheet that the assessee company is having investment in equities and mutual funds amounting to Rs.100,40,00,000/- as on 31.03.2015 and Rs.26,10,00,000/-/- as on 31.03.2016. Further, during the year, the assessee has shown exempt dividend income of Rs.1,38,67,351/- in its computation of income and has claimed the same as exempt. The assessee has in its Return of Income, suo-moto disallowed Rs.21,69,499/- under section 14A of the Income Tax Act, 1961. However, the assessee has not followed Rule 8D for the purpose of computing the disallowance under section 14A. During the course of the assessment proceedings, the assessee was asked to show cause as to why Rule 8D should not be applied to compute the disallowance under section 14A r.w. Rule 8D of the Income Tax Rules.
16 Assessment Year 2016-2017 5.2. The assessee has made its submissions on this issue vide letter dated 15.11.2019 and furnished explanation. 5.3 The contention of the assessee has been duly considered, however, the same is not accepted for the following reasons. 5.4. At the outset it needs to be mentioned that vide annexure 5 of Report u/s 44AB of the Income Tax Act 1961, the Auditors have worked out disallowance at Rs.21,69,499/- by applying the formula of their own i.e. Percentage of exempted come to total Income from Investment. This formula not being in conformity with the provisions of Rule 8D of the Income Tax Rules, 1962, cannot be accepted. As a result the working of disallowance u/s 14A of the Income Tax Act, 1961 is made in accordance with the provisions of Rule 8D of the Income Tax Rules, 1962 xx xx 5.5. In view of the above, it is held that the amount disallowable under section 14A r.w.r.8D works out to Rs.31,62,500/-. The assessee has already made a disallowance of Rs.21,69,499/- Therefore, a further disallowance of Rs.9,93,001/- (31,62,500-21,69,499) is made u/s. 14A of the Income Tax Act, 1961 read with the provisions of Rule 8D of the Income Tax Rules, 1962 and the same is added to the total income of the assessee.”
In appeal preferred by the Assessee on this issue, the Learned CIT(A) granted relief by deleting the disallowance made under Section 14A of the Act by placing reliance on the decisions in the case of the Assessee for the Assessment Year 2011-2012 [ITA No.1457/Mum2015 & dated 31/08/2021], Assessment Year 2015-2016 [ITA No.7001/Mum/209 dated 27/06/2022], Assessment Year 2017-2018 [ITA No.650/Mum/2022 07/12/2022] and Assessment Year 2018-2019 [ITA dated No.2422/Mum/2022 dated 20/06/2023] holding as under:
7.6. I have perused the assessment order and the other documents on record such as the past orders of the Hon'ble ITAT in the Appellant's own case, the order giving effect to ITAT orders passed by the Assessing Officer for A.Ys. 2012- 17 Assessment Year 2016-2017 13, 2013-14 and 2014-15 wherein the Assessing Officer has accepted the methodology of computing the disallowance under section 14A of the Act, methodology of computing the disallowance under section 14A applied by the Appellant in the current financial year. I find that the Appellant has been consistently applying the same methodology for calculating the disallowance under section 14A and the methodology applied by the Appellant for computing the disallowance under section 14A in the current F.Y.2015-16 (Α.Υ.2016-17) is the same as was applied in the preceding financial / assessment years. Thus, the facts of the assessment year being identical to the facts of the preceding subsequent assessment years. Respectfully following the decision of the Hon'ble ITAT on the issue for the A.Ys.2011-12, 2015-16, 2017-18 and 2018-19 and order giving effect to the order of the ITAT passed by the Assessing Officer in the preceding assessment years, I hold that the Appellant has methodically calculated the disallowance u/s. 14A of the Act. The Assessing Officer is directed to delete the disallowance uis 14A of of the Act of Rs.9.93,001/-. Ground Nos. 10 to 12 of the appeal are therefore allowed.
(Emphasis Supplied) 20. Being aggrieved by the above relief granted by the CIT(A), the Revenue has carried the issue in appeal before the Tribunal.
Having given thoughtful consideration to the rival submissions, we find that it is admitted position that there is no change in the facts and circumstances of the present case. We note that the Assessing Officer has proceeded to invoke provisions contained in Rule 8D of the IT Rules without recording his dissatisfaction regarding the computation/methodology adopted by the Assessee to arrive at the suo moto disallowance of INR.21,69,499/- under Section 14A of the Act. The CIT(A) had granted relief to the Assessee by following the decisions of the Tribunal in the case of the Assessee for the Assessment Year 2012-13 & 2014-15 [ITA No.1287/Mum/2017 & dated 05/04/2021], Assessment Year 2013-14 [ITA No.7151/Mum/2017 dated 05/10/2021], Assessment Year 2015-2016 [ITA No.7001/Mum/209 dated 27/06/2022], Assessment Year 2017- 18 Assessment Year 2016-2017 2018 [ITA No.650/Mum/2022 dated 07/12/2022] and Assessment Year 2018-2019 [ITA No.2422/Mum/2022 dated 20/06/2023] which was binding upon the CIT(A) since there was neither any change in facts or in law. In view of the aforesaid, we do not find any infirmity in the order passed by the CIT(A). Accordingly, we declined to interfere with the order passed by the CIT(A) on this issue. Hence, Ground No. 6 to 8 raised by the Revenue are dismissed.
In terms of above, the appeal preferred by the Revenue is dismissed.