IL & FS TRANSPORTATION NETWORKS LTD.,MUMBAI vs. ADDL.CIT-14(2) (EARLIER ADDL.CIT ,RG. 10(1)), MUMBAI

Appellant by: Shri Sandeep Bhalla, A.R Respondent by: Shri Sushil Kumar Mishra, D.R Date of Hearing: 07.01.2021 Date of Pronouncement: 28.01.2021 O R D E R

PER RAVISH SOOD, JM

“1. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in setting aside the issue regarding disallowance u/s. 14A read with Rule ("r.w.r") 8D(2)(ii) regarding the disallowance of interest to the file of the Assessing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) is bad in law.

2. On the facts and in the circumstances of the case and in law, the Appellant prays that disallowance u/s.14A r.w.r 8D(2)(ii) regarding the disallowance of interest amounting to INR 9,52,55,812 be deleted.

3. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in setting aside the issue regarding disallowance u/s. 14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses to the file of the Assessing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) is bad in law.

4. On the facts and in the circumstances of the case and in law, the Appellant prays that disallowance u/s. 14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses amounting to INR 2,68,77,514 be deleted and the said disallowance be restricted to INR 88,26,166. Disallowance under Transfer pricing 5. On the facts and in the circumstances of the case and in law prevailing on the subject, the Ld. Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer/Transfer Pricing Officer in making a transfer pricing adjustment of INR 2,36,59,502 in respect of the guarantee / counter guarantee given by the Appellant to various banks and other corporate bodies for and on behalf of the associate enterprise.

6. On the facts and in the circumstances of the case and in law prevailing on the subject, the Appellant submits that the international transaction of providing guarantee / counter guarantee to various banks and other corporate bodies for and on behalf of the associate enterprise is at arm's length and no adjustment was required to be made in respect thereof and the stand taken by the Assessing Officer/ Transfer Pricing Officer is incorrect and illegal and the Ld. Commissioner of Income-tax (Appeals) ought to have held as such.

7. The ld. TPO has erred in adopting an arbitrary approach of determination of yield of BB+ bonds at 9.77% and thereafter adding an ad-hoc 20% to determine the yield of BB rated bonds. Further, the TPO has erred in determination of the arm's length corporate guarantee rate at 3.046% in respect of the guarantee / counter & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 3 guarantee given/arrange by the Appellant based on the said arbitrary approach. The Appellant submits that the said approach is arbitrary, ad- hoc & not justified.

is without prejudice to the other.

10. The appellant reserves the right to add, alter of amend to the grounds of appeal.” Further, the assessee had on two occasions raised before us the following additional grounds of appeal:

“11 Without prejudice to Ground No.1 to Ground No.4, on the facts and circumstances of the case, the Appellant prays that the disallowance under Sec. 14A of the Act should be restricted to the extent of exempt income earned during the year.” AND “12. The transfer pricing officer [TPO] / Commissioner of income-Tax [CIT(A)] has erred in not considering corporate guarantee charges recovered from its AE (Elsamex SA) amounting to Rs. 3,63,17,590 while making transfer pricing addition of Rs. 2,26,04,671 especially when charges recovered from the AE on account of stand by letter of credit (SBLC) were considered by the TPO when computing disallowances for SBLC given by ILFS Limited.

14. The CIT(A) has erred in arriving at the Guarantee Fees charges 3.046% for corporate guarantee provided in foreign currency to its overseas AE (Elsamex SA) when the transfer pricing addition on interest on foreign currency loan to another AE (situated in Singapore) was deleted by the CIT(A) on the premise that the F/MMDA rates cannot be applied to foreign currency loan, hence, a similar position should apply to foreign currency guarantee provided to its AE.

On the other hand the revenue is aggrieved with the order of the CIT(A) on the following ground of appeal before us:

1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in advising the AO to follow the decision in the case of HDFC Bank, Mumbai vs. DCIT-2(3), Mumbai & Ors Dt. 25.02.20 16 r.w. CIT vs. HDFC Bank Ltd. (2014) 366 TTR 505 (Bom.)(HC) while calculating the disallowance u/s 14A r.w.r 8D, without considering the fact that the order of HDFC Bank did not address the aspect of determination of disallowance u/s 14A as per rule 8D which was applicable from A.Y. 2008- 09 onward.

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in advising the AO to consider only those Investment made in the Non- Subsidiary company which have yielded dividend income for the purpose of the disallowance u/s 14A r.w.r. 8D(2)(iii) without appreciating that the CBDT Circu1ar No. 5 of 2014 dt. 11.02.2014 clearly states that an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and "till last day of the previous year" needs to be disallowed.

3. On the facts and circumstances of the case and in law, the Ld CIT(A) erred in not appreciating that the CBDT circular does not differentiate between investment which have yielded dividend income during the year and investment which may yield divided income.

4. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the Disallowance of club expenses of Rs.4,79,225/- without appreciating the case laws relied upon by the AO, wherein it has been held that expenditure on account of payment of club expenses of the assessee company's executives is not an allowable business expenditure.

5. The appellant prays that the order of CIT(A) on the above ground be reversed and that of the assessing be restored.

2. Briefly stated, the assessee company which is an established ISO 9000:2001 surface transportation infrastructure company had e-filed its return of income for A.Y 2010-11 on 16.09.2010, declaring a total income of Rs. 492,98,20,007/-. The return of income filed by the assessee was initially processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.

Sr. No. Particulars Amount 1. Adjustment as regards the interest charged by the Rs. 5,88,79,175/-. assessee on a loan advanced to its AE viz. IIPL, Singapore.

Sr. No. Particulars Amount 1. U/rule 8D(2)(i) Nil 2. U/rule 8D(2)(ii) Rs. 9,52,55,812/- 3. U/rule 8D(2)(iii) Rs. 2,68,77,514/- Total Rs. 12,21,33,326/- It was observed by the CIT(A) that as against the aforesaid suo motto disallowance of Rs.12,21,33,326/- offered by the assessee in its return of income, it had in the course of the assessment proceedings sought scaling of the same to an amount Rs. 88,26,166/- under Rule 8D(2)(iii). It was noticed by the CIT(A) that the A.O had declined to consider the aforesaid revised claim of the assessee, for the reason, that as it was not raised on the basis of any revised return of income, the same, thus, in light of the judgment of the Hon‟ble Supreme Court in the case of Goetz (India) Ltd. Vs. CIT (2006) 204 CTR 182 (SC) could not be admitted. However, the CIT(A) drawing support from the judgment of the Hon‟ble High Court of Bombay in CIT Vs. Pruthvi Brokers and Shareholders (2012) 23 taxman.com 23 (Bom) held a conviction that the assessee‟s claim for reduction of disallowance under Sec. 14A did merit consideration by the A.O. Accordingly, the CIT(A) restored the matter to the file of the A.O and directed him to consider the aforesaid claim for reduction of disallowance that was raised by the assessee. The CIT(A) while restoring the matter to the file of the A.O also issued certain specific & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 7 directions/guidelines to be followed by the A.O while readjudicating the aforesaid issue, viz. (a) that the judgments of the Hon‟ble High Court of Bombay in the case of HDFC Bank Ltd. Vs. DCIT-2(3), Mumbai & Ors., dated 25.02.2016 r.w CIT vs. HDFC Bank Ld. (2014) 366 ITR 505 (Bom) be followed in the course of the „set aside‟ proceedings; (b) that while computing the disallowance under Sec. 14A r.w. Rule 8D (2)(iii) only the investments which were made by the assessee in its non-subsidiary company that had yielded dividend income were to be considered; and (c) that the investments earning interest income were to be eliminated while computing the disallowance under Sec.14A r.w Rule 8D(2)(ii). Also, the CIT(A) taking cognizance of the order passed by the Tribunal in the assessee‟s own case for A.Y. 2008-09, directed the A.O that while re-computing the disallowance under Sec. 14A r.w Rule 8D, the observations recorded by the Tribunal on the issue as to whether or not the investments made by the assessee on account of business exigency in different companies and not for the purpose of earning dividend income be considered. Insofar the claim of the assessee that the A.O as per the mandate of law was obligated to record reasons for making the disallowance, the same, did not find favour with the CIT(A). In terms of his aforesaid observations, the CIT(A) directed the A.O to reconsider the assessee‟s claim for reduction of disallowance u/s 14A. As regards the assessee‟s claim that the A.O had erred in disallowing its claim for deduction of club expenses of Rs. 4,79,225/-, the CIT(A) observed that as the aforesaid disallowance was made by the A.O without examining as to whether or not the aforesaid expenditure was incurred wholly and exclusively by the assessee for its business purpose, thus, the same could not be sustained. As regards the transfer pricing adjustment of Rs. 2,36,59,502/- made by the A.O/TPO in respect of the guarantee/counter guarantee given by the assessee to the various foreign banks and other corporate bodies for and on behalf of its AE, viz. Elsamex S.A, it was observed by the CIT(A) that the TPO in his order had narrated the basis for computing the arm‟s length price. Observing, that the reasoning given by the TPO was more logical and credible as in comparison to a simpliciter reliance & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 8 placed by the assessee on a letter received from “Credit Analysis And Research Ltd” (for short “CARE”), the CIT(A) finding no infirmity in the transfer pricing adjustment made by the A.O/TPO, thus, confirmed the same. Accordingly, on the basis of his aforesaid observations the CIT(A) partly allowed the appeal of the assessee.

6. Per contra, the ld. Departmental Representative (for short „D.R‟) in order to support the disallowance made by the A.O under Sec.14A r.w. Rule 8D relied on the CBDT Circular No. 5 of 2014, dated 11.02.2014. As regards the transfer pricing adjustment made in respect of the Corporate guarantee that was given by the assessee to the various foreign banks and other corporate bodies for and on behalf of its AE, it was submitted by the ld. D.R that in the backdrop of the claim of the assessee‟s counsel that the TPO/CIT(A) had failed to consider the amount of the bank guarantee charges reimbursed by the AE, viz. Elsamex SA to the assessee company, the matter may be restored to the file of the CIT(A) for fresh adjudication after carrying out necessary verification.

7. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. We shall first deal with the observation of the CIT(A), wherein, he had directed the A.O to consider the assessee‟s claim for reduction of the disallowance u/s 14A r.w Rule 8D to an amount of Rs. 88,26,166/-, as against that suo motto offered by it in its return of income at Rs. 12,21,33,326/-. As noticed by us hereinabove, the A.O was of the view that in light of the judgment of the Hon‟ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT (2006) 204 CTR 182 (SC), in the absence of a revised return of income, the seeking of reduction of the disallowance that was suo motto offered by the assessee in its return of & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 10 income was not tenable. In fact, the A.O was of the view that in case the assessee wanted to raise the aforesaid claim, then, it was obligated to do so by filing a revised return of income. On the contrary, the CIT(A) relying on the judgement of the Hon‟ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers and Shareholders (2012) 23 taxman.com 23 (Bom), had observed, that as there was no embargo on considering of the aforesaid claim of the assessee in the course of the appellate proceedings, thus, the contention of the assessee did merit acceptance. Accordingly, the CIT(A) restored the issue to the file of the A.O, with a direction to examine the assessee‟s claim for reduction of the disallowance u/s 14A r.w Rule 8D to an amount of Rs. 88,26,166/-, as against that was suo motto offered by it in its return of income at Rs. 12,21,33,326/-. As is discernible from the order of the CIT(A), we find that he had while restoring the aforesaid issue directed the A.O to follow certain directions, viz. :

“(a) Follow decision in the case of HDFV Bank, Mumbai Vs. DCIT-2(3), Mumbai & Ors dated 25.02.2016 r.w CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom).(HC) (b) Investments made in the non-subsidiary company which have yielded dividend income can only be considered for the purpose of the disallowance under Sec. 14A r.w. rule 8D(2)(iii) (c) Investment earning interest income is to be eliminated in computation of disallowance under Sec. 8D(2)(ii).

8. As both the assessee and the revenue are aggrieved with the observations of the CIT(A) w.r.t the issue of disallowance u/s 14A r.w Rule 8D, we shall, therefore, deal with the same. On a perusal of the respective grounds of appeal raised by both the parties, we find, that the assessee is inter alia aggrieved with the order of the CIT(A) on the issue of disallowance u/s 14A, for the reason, that instead of accepting its claim for restricting the disallowance u/s 14A r.w Rule 8D to an amount of Rs. 88,26,166/- as against that which was suo motto offered in the return of income at Rs. 12,21,33,326/- , the CIT(A) had restored the matter to the file of the A.O for reconsideration. As is discernible from the records, the assessee in the course of the assessment proceedings had sought reduction of the disallowance u/s 14A on & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 11 two counts, viz. (a). that the disallowance of interest expenditure offered by the assessee in its return of income U/rule 8D(2)(ii) of Rs.9,52,55,812/- be reduced to Nil; AND (b). that the disallowance of administrative expenditure offered by the assessee in its return of income U/rule 8D(2)(iii) of Rs.2,68,77,514/- be restricted to Rs.88,26,166/-. As observed by the CIT(A), the assessee had sought for reduction of the disallowance u/s 14A on the basis of exhaustive reasons. On a perusal of the assessment order, we find that the assessee vide its letter dated 13.03.2014 filed with the A.O had given multiple reasons for reduction of the aforesaid disallowance u/s 14A, viz. (i) that as per the terms of NHAI the assessee on being awarded a project was compelled to incorporate a separate “Special Purpose Vehicle” (SPV) for executing the project and being a promoter had to invest as equity holder as per the terms of the concessionaire agreement; (ii) that the investments made by the assessee company to the extent of its net worth were out of its own funds, internal accruals or opening balances of internal accruals; (iii). that the borrowings were not utilised for equity investments of domestic companies; (iv). that the capital gains from the equity investments were taxable etc. In our considered view, the exhaustive contentions that were raised by the assessee to buttress its aforesaid claim for reduction of the disallowance under Sec. 14A were required to be verified and could not have been accepted by the CIT(A) on the very face of it. Insofar support drawn by the ld. A.R on the order passed by the Tribunal in the assessee‟s own case for the immediately preceding year i.e A.Y 2009-10, is concerned, the same being distinguishable on facts would not assist the case of the assessee in context of the issue under consideration. Accordingly, finding no infirmity in the restoring of the issue pertaining to the assessee‟s claim for reducing the disallowance under Sec. 14A r.w. Rule 8D by the CIT(A), we uphold his order to the said extent. However, before parting, we may herein observe that the claim of the assessee that the disallowance under Sec. 14A is liable to be restricted to the extent of the exempt income received or receivable by the assessee during the year in question, the same, merits acceptance. Our & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 12 aforesaid view is fortified by the judgement of the Hon’ble High Court of Delhi in Joint Investments Pvt. Ltd. Vs. CIT (2015) 372 ITR 694 (Del). We, thus, in terms of our aforesaid observations uphold the restoration of the aforesaid issue by the CIT(A) to the file of the A.O, with a rider that the disallowance be restricted to the extent of the exempt income received or receivable by the assessee during the year under consideration.

9. We shall now deal with the claim of the revenue that the CIT(A) while directing the A.O to reconsider the assessee‟s claim for reduction of disallowance u/s 14A, had erred, in directing the A.O to follow the decisions of the Hon‟ble High Court of Bombay in the case of HDFC Bank, Mumbai Vs. DCIT -2(3), Mumbai and Others, dated 25.02.2016 r.w. CIT Vs. HDFC Bank Ltd, (2014) 366 ITR SOT (Bom), for the reason, that the said judicial pronouncements did not address the aspect of determination of disallowance under Sec. 14A as per Rule 8D that was applicable only w.e.f A.Y. 2008-09. We are afraid that the aforesaid claim of the revenue does not find favour with us. At the outset, we may herein observe that the judgment of the Hon‟ble High Court in the case of HDFC Bank Ltd. Vs. DCIT (2016) 383 ITR 529 (Bom) pertains to A.Y 2008-09, and the issue before the Hon‟ble High Court was the disallowance made by the A.O in the case of the assessee before them u/s 14A r.w Rule 8D vide his order passed u/s 143(3), dated 22.12.2010. Be that as it may, the principle laid down by the Hon‟ble High Court in its aforesaid judgments was that in a case where the assessee‟s capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it was to be presumed that investment made by the assessee was out of the interest-free funds available with it and no disallowance was warranted u/s 14A. In our considered view, the CIT(A) had rightly directed the A.O to consider the aforesaid judicial pronouncements in the course of the „set aside‟ proceedings. As regards the claim of the revenue that the CIT(A) was in error in directing the A.O to consider only those investments made in non-subsidiary company which had yielded dividend & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 13 income for the purpose of disallowance under Sec. 14A r.w. Rule 8D(2)(iii), as the same was contrary to the CBDT Circular No. 5 of 2014, dated 11.02.2014, we are unable to persuade ourselves to accept the same. Similar reliance placed by the revenue on the aforesaid CBDT Circular No. 5 of 2014, dated 11.02.2014 was rejected by the Hon’ble High Court of Madras in Redington India Ltd. Vs. Addl. CIT (2016) 97 CCH 219 (Mad) and by the Hon’ble High Court of Delhi in PCIT Vs. IL & FS Development Company Ltd. (2017) 399 ITR 483 (Del). At the same time, we in light of the judgment of the Hon’ble Supreme Court in Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC) are unable to subscribe to the observation of the CIT(A), wherein he had inter alia directed the A.O to consider only those investments made in non-subsidiary companies which had yielded dividend income for the purpose of disallowance under Sec. 14A r.w Rule 8D(2)(ii). Accordingly, the aforesaid observation/direction of the CIT(A) is expunged and the latters order is modified to the said extent. In terms of our aforesaid observations the Grounds of appeal Nos. 1 to 4 raised by the assessee company are dismissed, while for the additional ground of appeal No. 12 raised by the assessee is allowed. The Grounds of appeal Nos. 1 to 3 raised by the revenue are partly allowed in terms of our aforesaid observations..

10. We shall now deal with the claim of the assessee that the CIT(A) had erred in confirming the transfer pricing adjustment of Rs.2,36,59,502/- made by the A.O/TPO in respect of the guarantee/counter guarantee that was given by the assessee to various banks and other corporate bodies for and on behalf of its AE, viz. Elsamex SA. As observed by us hereinabove, the aforesaid AE, viz. Elsamex SA had availed various fund based/non-fund based facilities from various foreign banks outside India, to facilitate which, the assessee had given Corporate guarantee and provided Letter of Comfort and Stand By Letter of Credit to the foreign banks. In respect of the aforesaid transactions, the assessee based on the market practice and mutual agreement had charged the AE a guarantee fee @ 1% per annum. It was the & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 14 claim of the assessee before the lower authorities that as the entire equity of its AE, viz. Elsamex SA was taken over by it and its other associate concerns, it was, thus, in their best interest to ensure that the aforesaid AE had the requisite funds for carrying out its business activities. Accordingly, to facilitate funding of the AE, viz. Elsamex SA it was submitted by the assessee that it had provided guarantees, Letter of Comfort, SBLC to foreign banks for and on behalf of the said AE. In order to impress upon the lower authorities that the guarantee fees charged to the AE @ 1% was justified, it was submitted by the assessee that it had also recovered from its AE viz. Elsamex SA, the guarantee charges (ranging between 1.25% to 2.60% depending upon the nature of guarantee/letter of comfort/SBLC) of the banks that had issued the guarantee/SBLC in favour of the AE. Accordingly, it was the claim of the assessee before the lower authorities that the total guarantee charges levied on the AE, viz. Elsamex SA ranged between 2.25% to 3.60%. As is discernible from the order passed by the TPO under Sec. 92CA(3), dated 29.01.2014, we find that the assessee for the purpose of benchmarking the aforesaid international transaction of providing guarantee/counter guarantee to the various banks and the other corporate bodies for and on behalf of its AE, had used external CUP to arrive at the arm‟s length price of the guarantee charges. It was stated by the assessee before the TPO that its credit rating as per the letter received from “Credit Analysis & Research Ltd.” (for short „CARE‟) was a “BBB +”, while for the credit rating of its AE, viz. Elsamex SA was “BB”. In the course of the proceedings the TPO called for information under Sec. 133(6) from CRISIL about the average yield on the long term instruments during the year under consideration i.e F.Y. 2009-10, which was furnished, as under:

Ratings F.Y. 2009-10 1-2 years 2-3 years 5 years AAA 6.81% 7.55% 8.25% AA+ 7.20% 7.98% 8.71% AA 7.43% 8.21% 8.94% AA- 7.77% 8.49% 9.24% A+ 8.16% 8.89% 9.62% & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 15

A 8.63% 9.38% 10.15% A- 9.46% 10.38% 11.06% BBB+ 9.77% 10.73% 11.43% BBB 10.68% 11.60% 12.28% BBB- 11.86% 12.69% 13.37% On the basis of the aforesaid details, it was gathered by the TPO that the yield from “BBB” grade corporate bond i.e “Investment grade bonds” was 9.77% for the year under consideration i.e F.Y. 2009-10. However, as the yield rates for “BB” and “D” ratings were not available, therefore, the same was derived by the TPO by applying the following principles:

“As per the FIMMDA (Fixed Income Money Market and Derivatives Association of India), bonds and debentures, which are not rated by a rating agency or have become „unrated‟ during their tenor, but a corresponding rated bond of the issuer exists ,then: “1. The unrated bonds will be valued by marking up the credit spread by a minimum of 20% over the equivalent rated bond of similar tenure.

2. For the above purpose, ”corresponding” would mean, if the unrated bond has maturity of „t‟ years, the rated bond should have a maturity not less than to – 0.5 years.”

Accordingly, the yield on “BB” rated bonds were taken at 20% more than the BBB rated bonds [120% of 10.68 = 12.816%]. The benefit of 3.046% per annum [12.816% minus 9.77%] that had accrued to the AE was treated by the TPO as the arm‟s length price. In the backdrop of his aforesaid deliberations, the TPO made the transfer pricing adjustment for the aforesaid transaction after considering the difference between 3.046% and the actual cost borne by the AE i.e the cost payable to the assessee as well as to the bank, as under:

Sr. Particulars As per TPO @ As charged Difference Conversion Amount in No. 3.046% by assessee Rate INR Euro Euro 1. Stand By Letter of 25,777 68,728 (42,951) 60.56 Nil Creidt 2. Letter of Comfort 8,550 53,266 (44,716) 60,56 Nil 3. Corporate Guarantee 5,55,695 1,82,434 3,73,261 60.56 2,26,04,671 Guarantee fee on L/C Given 5,90,022 3,04,428 2,85,594 2,26,04,671 by IL & FS Transportation Networks Limited 4. Stand By Letter of 81,205 63,787 17,418 60.56 10,54,831 Credit Given by IL & FS Limited Total Bank Guarantee Fee 6,71,227 3,68,214 3,03,012 2,36,59,502 & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 16

In the backdrop of the aforesaid facts, it is the claim of the ld. A.R that the TPO/CIT(A) while benchmarking the aforesaid international transaction of providing of guarantee/counter guarantee by the assessee to the various foreign banks and other corporate bodies for and on behalf of its aforesaid AE, viz. Elsamex SA, had failed to take into account the aforesaid amount of Rs.5,67,28,794/- that was recovered by the assessee from the AE by way of reimbursement of bank guarantee charges. & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 17

Nos. 5 to 8. AND additional grounds of appeal no(s). 12 to 17 are allowed for statistical purposes in terms of our aforesaid observations.

13. We shall now advert to the claim of the revenue that the CIT(A) had erred in deleting the disallowance of club expenses of Rs.4,79,225/- made by the A.O, without appreciating that the said expenditure was not allowable as a business expenditure. On a perusal of the assessment order, we find that the assessee had claimed deduction of club expenses aggregating to Rs.4,79,225/- incurred by it during the year under consideration, as under: & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 18

Nature of expenditure Amount (Rs.) Bombay President Gold Club 2,98,250 The Gaekwad Baroda Club 1,13,274 Other 67,701 Total 4,79,225 However, the same were disallowed by the A.O, for the reason, that as membership of the club was a personal privilege entitling the member to use and enjoy the property of the club and all other amenities, benefits and facilities provided therein, it was, thus, not allowable as a business expenditure. Apart from that, we find that the A.O drawing support from a judgement of the Hon‟ble High Court of Kerala in Framatone Connector Oen Ltd. Vs. DCIT (2007) 294 ITR 559 (Ker), had also opined, that as aforesaid expenditure was in the nature of a capital expenditure, therefore, the same resulting in an enduring benefit was not to be allowed as a deduction. On appeal, the CIT(A) observed that as the A.O had without examining as to whether or not the aforesaid expenses were incurred by the assessee wholly and exclusively for its business had disallowed the same, thus, not finding favour with the view therein taken, the CIT(A) had vacated the said disallowance.

15. We have deliberated at length on the aforesaid issue, and find, that the issue pertaining to allowability of club expense as a revenue expenditure is squarely covered by the Judgment of the Hon’ble High Court of Bombay in the case of Otis Elevator Company India Ltd. Vs. CIT (1992) 195 ITR 682 (Bom). In the said case, the Hon‟ble High Court had approved the view taken by the Tribunal that the payment of club membership is allowable as a revenue expenditure. Also, we find, that a similar view had been arrived at by & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 19 the Hon’ble High Court of Punjab and Haryana in the case of CIT Vs. Patyala Vs Groz Beckert Asia Limited (2013) 351 ITR 196 (P&H) and by the Hon’ble High Court of Karnataka in CIT vs. Infosys Technologies (No.1)(2012) 349 ITR 582 (Kar). Accordingly, on the basis of our aforesaid observations, we are of the considered view that the CIT(A) had rightly allowed the assessee‟s claim for deduction of the club membership fees of Rs.4,79,225/- as a revenue expenditure. Also, we concur with the observation of the CIT(A) that the rejection of the assessee‟s claim for deduction of club membership expenses by the A.O, de hors any verification on his part that as to whether or not the said expenditure was incurred by the assessee wholly and exclusively in the course of its business, also, cannot be sustained. The Ground of appeal No. 4 raised by the revenue is dismissed.

16. The Grounds of appeal Nos. 9 and 10 raised by the assessee AND Grounds of appeal Nos. 5 & 6 raised by the revenue being general in nature are dismissed as not pressed.

17. The appeal of the assessee and that of the revenue are partly allowed for statistical purposes.

A.Y. 2011-12 – (Assessee’s appeal) ITA No. 3146/Mum/2018 – (Revenue’s appeal) 18. We shall now take up the cross-appeals for A.Y. 2011-12. The assessee had raised before us the following grounds of appeal: “1. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in setting aside the issue regarding disallowance u/s. 14A read with Rule ("r.w.r") 8D(2)(ii) regarding the disallowance of interest to the file of the Assessing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) is bad in law.

2. On the facts and in the circumstances of the case and in law, the Appellant prays that disallowance u/s. 14A r.w.r 8D(2)(ii) regarding the disallowance of interest amounting to INR 2848,50,067 be deleted.

3. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in setting & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 20 aside the issue regarding disallowance u/s. 14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses to the file of the Assessing Officer to examine the issue a fresh. The order passed by the Id. Commissioner of Income-tax (Appeals) is bad in law.

4. On the facts and in the circumstances of the case and in law, the Appellant prays that disallowance u/s.14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses amounting to INR 5,42,28,196 be deleted and the said disallowance be restricted INR 1,28,91,432 Disallowance under Transfer pricing 5. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in setting aside the issue of determination of arm's length price in respect of international transaction of provision of guarantee / counter guarantee by Appellant to various banks and other corporate bodies for and on behalf of the associate enterprise to the file of the Ld. Assessing Officer/ Transfer Pricing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) is had in law.

6. On the facts and in the circumstances of the case and in law prevailing on the subject. the Appellant submits that the international transaction of' providing guarantee / counter guarantee to various banks and other corporate bodies for and on behalf of the associate enterprise is at arm's length and no adjustment was required to be made in respect thereof and the stand taken by the Assessing Officer/Transfer Pricing Officer is incorrect and illegal and the Ld. Commissioner of Income-tax (Appeals) ought to have held as such.

8. On the facts and in the circumstances of the case and in law, the Appellant prays that no addition by way of adjustment in respect of the international transaction is warranted and that the addition made by the Ld. Assessing Officer amounting to INR 3,89,69,865 is not justified and be deleted.

is without prejudice to the other.

11. The Appellant reserves the right to add, alter of amend to the grounds of appeal.”

& 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 21 Further, the assessee had raised before us the following additional ground of appeal:

“5. Without prejudice to Ground No.1 and Ground No.4, on the facts and circumstances of the case, the Appellant prays that the disallowance under Sec. 14A of the Act should be restricted to the extent of exempt income earned during the year.” On the other hand the revenue is aggrieved with the order of the CIT(A) on the following ground of appeal before us:

1. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in advising the A0 to follow the decision in the case of HDFC Bank, Mumbai vs DCIT-2(3), Mumbai & Ors Dt. 25.02.2016 r.w. CIT vs HDFC Bank Ltd. (2014) 366 ITR 505 (Bom.)(HC) while calculating the disallowance u/s 14A r.w.r 8D, without considering the fact that the order of HDFC Bank did not address the aspect of determination of disallowance u/s 14A as per rule 8D which was applicable from A.Y. 2008-09 onward. 2. on the facts and circumstances of the case and in law, the Ld CIT(A) erred in advising the AO to consider only those Investment made in the Non- subsidiary company which have yielded dividend income for the purpose of the disallowance u/s 14A r.w.r. 8D(2)(iii) without appreciating that the CBDT Circular No. 5 of 2014 dt. 1102.2014 clearly states that an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and till last day of the previous year" needs to be disallowed.

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that the CBDT circular does not differentiate between investment which have yielded dividend income during the year and investment which may yield divided income.

4. On the facts and circumstance of the case and in law, the ld. CIT(A) erred in going beyond his power u/s 251(1)(a) by setting aside the case to AO/TPO to conduct fresh benchmarking for determination of arm's length price of fee for corporate guarantee, letter of comfort, standby letter of credit provided to banks on behalf of AE, Elsamex SA, after giving opportunity of being heard to the assessee.

5. On the facts and circumstance of the case and in law, the Ld. CIT(A) erred in directing the AO/TPO to conduct fresh benchmarking for determination of arm's length price of fee for corporate guarantee, letter of comfort, standby letter of credit provided to banks on behalf of AE, Elsamex SA, ignoring the fact that for similar guarantees provided by the assessee on behalf of its AE, Elsamex S.A. in A.Y. 2012-13, the CIT(A) has upheld methodology used by the TPO to & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011-12 IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 22 benchmark Corporate Guarantee fee using bank guarantee rates with discount and restricted fee 1.80% instead of 2% proposed by the TPO.

6. On the facts and circumstance of the case and in law, the Ld. CIT(A) erred in directing the AO/TPO to conduct fresh benchmarking for determination of arm‟s length price of fee for corporate guarantee, letter of comfort, standby letter of credit provided to banks on behalf of AE, Elsamex SA, ignoring the fact that for similar guarantees provided by the assessee on behalf of its AE, Elsamex SA in A.Y. 2010-11, the CIT(A) has upheld action of TPO of charging of fee @ 3.046%.

7. The appellant prays that the order of CIT(a) on the above ground be reversed and that of the assessing be restored.

8. The appellant craves leave to amend or alter any grounds which may be necessary.”

11. As regards the transfer pricing adjustment in respect of the international transaction of providing of guarantee/counter guarantee by the assessee to the various banks and other corporate bodies for and on behalf of its AE, viz. Elsamex SA, it was observed by the CIT(A) that the assessee had explained the basis for charging 1% guarantee fees from the AE, however, the TPO on the basis of the corporate guarantee fee that was charged by the banks, which worked out at 2.58%, had made an adjustment towards the arm‟s length price of the aforesaid transaction under consideration. Observing, that the Hon’ble High Court of Bombay in the case of CIT(A) Vs. Glenmark Pharmaceuticals (ITA No.1302 of 2014) and M/s Everest Kento Cylinder Vs. DCIT (LTU)-1, Mumbai (ITA No. 1042/ Mum/2015), had observed, that for computing the arm‟s length price of guarantee commission, no comparison can be made between guarantee issued by commercial banks as against the corporate guarantee issued by a holding company for the benefit of its AE, as subsidiary company, thus, observed that the comparison made by the TPO was in conflict with the aforesaid orders of the jurisdictional High Court. In the backdrop of the aforesaid facts, the CIT(A) restored the matter to the file of the AO/TPO, with a direction to conduct fresh benchmarking keeping in view the aforesaid judicial pronouncements.

Nos. 1 to 4 raised by the assessee are dismissed AND Grounds of appeal Nos. 1 & 2928, 3145 & 3146/Mum/2018, A.Ys. 2010-11 & 2011

12. IL & FS Transportation Networks Limited Vs. Addl. CIT, Range 14(2) 24 to 3 raised by the revenue are partly allowed in terms of our aforesaid observations.