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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: SHRI GEORGE MATHAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER :
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-1, Chennai in dated 31.10.2017 for assessment year 2013-14.
M/s. Arkay Leathers Pvt. Ltd., the assessee, is engaged in the manufacture of finished leather products and exports them. Its assessment was completed under section 143(3) after making disallowances on account of fees paid to the registrar of companies for the increase in authorised share capital and expenditure incurred for earning exempt income under section 14A. A transfer pricing adjustment on account of commission receivable on extending of corporate guarantee was also made. Aggrieved, the assessee filed appeal before the CIT(A).
The CIT(A) dismissed the appeal. Aggrieved against the order of the Ld CIT(A), the assessee filed this appeal. Therefore, he submitted that the impugned addition is correctly made.
On the TP addition made on the corporate guarantee, the Ld AR submitted, inter alia, that though as a holding company the assessee had extended corporate guarantee to Arkay Pacific Ltd., Hong Kong (AE) towards facility enjoyed by the wholly owned subsidiary with Bank of India, HongKong, it had not charged any amount towards the same; on such facts the transfer pricing adjustment cannot be made on hypothetical and notional basis. Without prejudice, in any event, the ALP of the corporate guarantee adopted as 1% of the value of the Corporate Guarantee is unrealistic and excessive and Ld the CIT(A) though has relied on the judgment of the Hon’ble Bombay High Court fixing the ALP at 0.5%, has in the impugned situation fixed the ALP at 1%. Hence, even assuming that the said adjustment is to be made, the same be limited to an ALP 0.5%. Per contra, the Ld DR submitted that the appeal relates to assessment year 2013-14. In respect of items specifically mentioned in the Explanation to sec 92B, there is a presumption under the statute that such transactions have an impact on the profits, income, losses or assets of the enterprise. Further on facts of this case, there is undoubtedly an impact on assets of the company in the light of the terms of the guarantee. Therefore, the transaction of providing guarantee by the assessee in favour of its AE is an international transaction. With regards the quantification of the ALP, the assessee’s argument that it has charged no consideration, does not hold good after the Special Bench decision in the case of M/s. Instrurnentarium Corporation Ltd v ADIT 71 taxmann.com 173 Kolkatta–Trib, wherein it is held that TP provisions would be applicable in respect of every transaction whether the assessee has charged or not. When it is charged, the value of consideration would be substituted by ALP. Where a consideration is not charged, but the transaction is such that in the normal circumstances would result in income of a certain nature, the TP provisions would be applicable to quantify the income. Therefore, he submitted that the impugned addition is correctly made.
We heard the rival submissions and gone through relevant material. We hold that the transaction of providing guarantee in favour of AE is an international transaction. Since the Ld CIT(A), respectfully following the decision of the Bombay High Court in the case of M/s.
Everest Kanto Cylinders 75 taxmann.com 288, upheld the ALP for guarantee commission at 0.5%, we confirm the same. The assessee’s corresponding appeal grounds are dismissed.
The next issue is related to the claim for a deduction at Rs.5,30,968/, being the amount paid to the Registrar Of Companies for the increase in the Authorised Share Capital of the company.
We heard the rival submissions. The Assessing Officer relying on the case of M/s. Punjab State industrial Development Corporation vs CIT (1997) 93 taxman 5 (SC) disallowed the claim. Before the Ld CIT(A) , the assessee placed place reliance upon the decision of the Hon’ble Supreme Court in the case of M/s. Shasun Chemicals And Drugs Ltd vs CIT (2016)
73 taxman.com 93 (SC). The Ld CIT (A) has held, inter alia ,that during the course of appeal, the assessee has not brought any material on record either to show that the new industrial unit has been set up in that year or there has been substantial expansion of its business and the claim falls within the 10 year holiday provided under the said section. Thus, the assessee has not brought any material on record to justify its claim u/s. 35D. The assessing officer has evaluated the claim u/s. 37(1). In the absence of any finding that the assessee has undertaken substantial expansion of its business during the relevant previous year or it has set up a new industrial unit, deduction under the provisions of section 35D is not admissible. No material in this regard was placed on record in the course of appeal proceedings either. Hence, the Ld CIT(A) dismissed this ground of appeal for want of material to show that the assessee has complied with the conditions stipulated in section 35D. Before us also, the assessee has not laid any material in support of its contentions and hence we confirm the order of the Ld CIT(A). The assessee’s corresponding appeal grounds are dismissed.
7. The next issue relates to the disallowance made u/s. 14A read with Rule 8D. The Assessing Officer has observed that during the year, the assessee had earned dividend income to the extent of Rs.8,800/. The assessee had made certain investments in shares which resulted in this exempt income. The assessee had not made any disallowance on account of expenditure incurred for the exempt income. However, before the Assessing Officer the assessee submitted that a disallowance at the rate of 2% may be considered. The Assessing Officer observed that the estimation at the rate of 2% of the dividend income was not in accordance with law, as once the provisions of section 14A became applicable, deduction or the disallowance has to be quantified in accordance with the section read with rule 8D. Accordingly, the Assessing Officer computed the disallowance of Rs.2,13,560/-. Before the Ld CIT(A) , the assessee relied on the order of the Hon’ble Tribunal in DCIT Vs Amalgamations Ltd., reported in (2015) 43 ITR (Trib) 540 (Chennai) holding that for purposes of computing disallowance u/s 14A r.w Rule 8D of the IT Rules 1962, investments made in Subsidiary Companies have to be reduced — following its own order in EIH Associated Hotels Ltd., Vs DCIT (ITA No.s.1503 & 1624/Mad/2012 dated 17-7-2013. However, the Ld CIT(A) dismissed the appeal. The Ld. AR pleaded that the ratio of the Delhi High Court decision in the case of Joint Investment Pvt. Ltd., vs CIT, reported in 372 ITR 694 (Delhi), may be applied. The Ld. DR supported the orders of the lower authorities.
8. We heard the rival submissions. Following the ratio of the Delhi High Court, supra, we direct that the disallowance be restricted to the exempt income. Thus, the assessee’s appeal is partly allowed.
9. Though the assessee challenged the order of the CIT(A) confirming the disallowance made at Rs. 1,12,408/- towards interest paid on TDS in the grounds, since the Ld AR did not press this ground, it is dismissed.
In the result, the assessee’s appeal is partly allowed.
Order pronounced in the open court on 29thOctober, 2018 at Chennai.