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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the AO passed U/s. 143(3) r.w.s. 144C dated 24.11.2016 pursuant to the directions of the Dispute Resolution Panel in F.No.31/DRP-2-BNG/2016-17 dated 19.09.2016 for ay 2012-13.
:-2-: ITA No.175/Mds/2017
TAKE Solutions Ltd (TSL) was incorporated under the companies Act on September 20, 2000 as TAKE Solutions Private Limited and pursuant to a Scheme of Amalgamation; the company was merged with Millennium Infocomm Limited w.e.f. January 1, 2013. TAKE Solutions Limited is an international business technology company whose products are focused on the Life Science (LS) and Supply Chain Management (SCM) verticals. The company’s segments include software products and services, supply chain management, e-business solutions and others. The assessee has given corporate guarantee on loans taken by TAKE Solutions Global Holdings Pte Ltd, Singapore, TAKE Global Limited, UK and CMNK Computer Systems Pte Ltd., Singapore. The TPO made an adjustment to the international transactions of Rs. 3,50,05,000/- in respect of corporate guarantee given by the assessee of Rs. 350.05 crores, being 1% of the quantum of guarantee. During the year, the assessee did not receive any income from investment in equity shares held in Indian companies, the only income received was share income from TAKE Solutions Global, LLP. The AO disallowed Rs. 94,20,520/- under 14A r.w.r. 8D (under Rule 8D(2)(ii) Rs. 47,50,420/- and Rule 8D(2)(iii) Rs. 26,70,000/-). The assessee claimed product development expenses at Rs. 59,92,000/- as revenue expenditure. The Assessing Officer treated the expenditure as capital expenditure and allowed the depreciation at the rate of 25% and disallowed the balance amount of Rs. 44,94,075/-. The Assessing Officer disallowed the interest paid on service tax at Rs. 39,987/-. Aggrieved, the assessee filed its objections before the DRP-2, Bangalore. The DRP
:-3-: ITA No.175/Mds/2017 dismissed all its objections. Aggrieved, the assessee filed this appeal against the order passed by the AO U/s. 143(3) r w 144C dated 24.11.2016.
The AR submitted that the Assessing Officer erred in making adjustment to the international transactions of Rs.3,50,05,000/-, being 1% of the quantum of Corporate Guarantee given by the assessee at Rs.350.05 crores. The Assessing Officer failed to note that giving Corporate Guarantee did not involve any payment to the other enterprises, as per the agreement with the Bank, the assessee is not allowed to receive any commission or any other payment from the borrower for giving Corporate Guarantee, it does not come within the definition of international transaction and therefore no adjustment can be made towards arms length price. In this connection, the AR relied on the following judgments:
1) Redington (lndia) Ltd., Vs. ACIT (2015) 42 ITR (Trib) 408,Chennai &Siva Industries & Holdings Ltd , ITA 1039& 1074 (MDS) of 2014 & 6877 884 (MDS) of 2014 dt 07.10.2016 for ays 2008-09 to 2010-11 2) Bharti Airtel Ltd., Vs.Addl. CIT (2014) 63 SOT 113 (Delhi) 3) Micro Ink Ltd Vs. Addl.CIT (2015) 63 Taxmann.com 353 (Ahd), Suzlon Energy Ltd v ACIT (OSD), Circle -8, Ahmedabad in &1610 (AHD) of 2013 dt 21.4.2017 for ay2008-09.
3.1 Per Contra, the DR relied on the order of the DRP and relied on the Tribunal decisions in the cases of Infotech Enterprises Ltd v Addl CIT , Range -2, Hyderabad in (HYD) of 2011 dt 16.4.2014 for ays 2006-07 & 2007-08, Profiles Corporation Ltd v DCIT, Circle 3(1) , Hyderabad in ITA No 237
:-4-: ITA No.175/Mds/2017 (HYD) of 2014 dt 31.12.2014 for ays 2009-10 & Advanta India Ltd V ACIT, Circle -1(1) , Bangalore in IT(TP) Appeal no 1643(Bang) of 2012 , dt 30.6.2015 for ay 2008-09.
3.2. On this issue, the relevant portion of the order of the DRP is extracted as under :
“3.3.1 Post the retrospective amendment, the Hon’ble ITAT, Mumbai in case of Everest Knato Cylinder Ltd (34 taxmann.com 19) have held that in view of the retrospective amendment, payment of guarantee fee is included in the definition of international tranasction’ by virtue of explanation i(c) to section 92B. Issue was also decided in similar lines in following cases by various ITAT’s Mahindra & Mahindra (Mum) 24 taxmann.com 267 Nimbus Communications Ltd (Mum) 34 taxmann.com 298 Prolifics Corpn. Ltd., (Hyd) 55 taxmann.com 226 Infotech Enterprises (Hyd) 41 taxmann.com 364 Reliance Industries Ltd (Mum) ITA 4475 of 2011. 3.3.2 Transaction of providing corporate guarantee involves service rendered to AE and therefore will come under the ambit of international transaction. Since independent enterprise would have charged a fee for this service, ALP of such transaction was to be determined. 3.3.3 Corporate guarantee increases the creditworthiness of the borrower there by enhancing the profit making potential. As a clear benefit has been passed over by the assessee to the AE by providing corporate guarantee, guarantee commission should have been charged at ALP. 3.3.4 Even from a purely business point of view it is clear that any entity which provides corporate guarantee to a lender against loans taken by a borrower will charge a reasonable fee for the inherent risk in the transaction, since it is burdened with an obligation under the guarantee arrangement to pay the sum to the lender if the borrower, which in that case is the AE, defaults on the repayment of the loan. The TPO therefore, has acted within the bounds of law and reasonableness by considering the corporate guarantee
:-5-: ITA No.175/Mds/2017 transaction as an international transaction which has to be analysed with regard to arm’s length price in terms of section 92. 3.3.5 The taxpayer’s argument that bank guarantee was given in business interest, cannot be accepted. Various ITAT have held that what is relevant in TP is not commercial expediency or whether the assessee has incurred any apparent cost. The critical issue is whether an independent third party would have undertaken such a transaction with another company without any charge/compensation. As long as the test of comparability is not satisfied, an adjustment is necessary. Hence it qualifies as an international transaction between close business associates which provides a valuable commodity in the forms of taxpayer’s credit rating which benefits the AE in terms of interest rates. Compensation, therefore, was reasonably required to be imputed at arm’s length. The transaction does not fall within the scope of shareholder activities which have been broadly outlined by the OECD and do not contain any items similar to the impugned transaction. 3.3.6 The argument of assessee that asit has not paid anything for the guarantee no fee is chargeable, is not acceptable. The assessee may not have incurred any apparent cost but there was an inherent cost involved to the extent that overall risk exposure of the assessee becomes high by the quantum of guarantee. 3.3.7 On the objection regarding the rate of guarantee fee applied by the TPO at 1% the taxpayer’s objection cannot be accepted. The CBDT has issued Safe Harbour Rules, wherein a safe harbour guarantee commission of 2% (where the amount of guarantee does not exceed Rs. 1000 million) and 1.75% (where the amount guaranteed exceeds Rs. 1000 milliion) has been prescribed. Therefore, the rate applied by TPO is reasonable and the plea for lower rate is not admissible.”
We considered the rival submissions and gone through relevant material.
In view of the retrospective amendment, brought in by the Finance Act, 2012, the payment of guarantee fee is included in the definition of international transaction by virtue of explanation i(c) to section 92B. This assessment is made for the ay
:-6-: ITA No.175/Mds/2017 2012-13. As held by the DRP , transaction of providing corporate guarantee involves service rendered to AE and therefore will come under the ambit of international transaction. Since independent enterprise would have charged a fee for this service, ALP of such transaction was to be determined. The critical issue is whether an independent third party would have undertaken such a transaction with another company without any charge/compensation. As long as the test of comparability is not satisfied, an adjustment is necessary. Hence, it qualifies as an international transaction between close business associates which provides a valuable commodity in the forms of taxpayer’s credit rating which benefits the AE in terms of interest rates. Compensation, therefore, was reasonably required to be imputed at arm’s length. We find that the rate applied by TPO is reasonable and hence the assessee’s grounds are rejected .
With regard to the disallowance on the Product Development Expenses claimed at Rs.59,92,100/- , the AR submitted that the AO held that it is capital expenditure and allowed depreciation @ 25% and made an addition of Rs.44,94,075/- (59,92,100 - 14,98,025) without appreciating the fact that the Product Development Expenses claimed is revenue in nature. Without prejudice to its claim that the Product Development expenses is revenue expenditure, he submitted that the Assessing Officer erred in allowing depreciation at 25% instead of allowing depreciation at 60%.
:-7-: ITA No.175/Mds/2017 5.1 The submissions of the assessee as well as the Revenue have been considered. This issue is a recurrent one and has already been decided by the ITAT Chennai against the assessee in ays 2003-04, 2006-07 to 2008-09 in dated 23.05.2008 & ITA Nos. 457, 458, 459/Mds/2013 dated 30.09.2013. The alternative contention of allowing depreciation @ 60% has also been rejected by the ITAT upholding the decision of the AO. Therefore, respectfully following the decision of ITAT (Supra), the objections of the assessee is rejected.
With regard to the disallowance of Rs. 94,20,520/- made under section 14A read with Rule 8D, the AR submitted that the Assessing Officer erred in disallowing Rs.67,50,420/- under Rule 8D (2) (ii) as a component of overall amount of RS.94,20,520/- without appreciating the fact that the interest payment made by the assessee during the year does not relate to any loan taken which has been utilized for making investments, the income from which is exempt from tax , the assessee has not received any dividend income during the year and that the only income received was share income from Take Solutions LLP and therefore no expenditure was incurred towards collection of income and without stating having regard to the accounts of the assessee as to why he was not satisfied with the appellant's claim that no expenditure was incurred in relation to the income which does not form part of total income. In this connection, the assessee relied on the Delhi High court judgments in the case of CIT Vs. Taikisha Engineering India Ltd., (229 Taxman 143) and in the case of CIT vs. I.P. Support
:-8-: ITA No.175/Mds/2017 Services (India) P. Ltd., (378 ITR 240). Without prejudice to its grounds that disallowance under section 14A read with Rule 8D is not attracted, the AR submitted that the Assessing Officer erred in taking value of the investments in subsidiary companies in computing the amount of disallowance under Rule 8D 2(ii) and 2(iii). In this connection the appellant rely on the following judgments:
(i) ITAT Delhi decision in and 1032 I Dell 2013 in the case of Interglobe Enterprises Ltd., dated 04.04.2014. (ii) IT AT, Chennai Bench "B" in the case of L&T Infrastructure Development Projects Ltd., Vs. ITO and (iii) ITAT, "C" Bench, Chennai in the case of EIH Associated Hotels Ltd., Vs. DCIT in ITA No. 1503/Mds/2012.
6.1. We heard the rival contentions. We find that the assessee has admitted share of profit from TAKE Solutions Global LLP at Rs. 276.90Mn. From the above pleas, it is clear that the relevant facts have not been examined. In the facts and circumstances, we deem it fit to remit this issue back to the AO for re- examination, afresh, and for passing a due order in accordance with law. The AO, before deciding this issue, shall afford adequate opportunity to the assessee.
With regard to disallowance on the interest on service tax at Rs. 39,987/- the AR submitted that it is an allowable deduction u/s. 37 as the interest paid on service tax is compensatory in nature. Per contra, the DR relied on the order of that DRP which relied on the cases of Bharat Steels Tubes Ltd., 226 ITR 750 Delhi, Bharat Commerce and Industry Ltd., 230 ITR 733 (SC), jurisdictional High Court decision in the case of Chennai Properties & Investments Ltd., 239 ITR 439.
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We have considered the rival contentions and gone through the relevant material. The fact involved with the decision of the Delhi High Court, supra, was on the penalty paid for the delayed payment of sales tax. The fact involved in the decision of Supreme Court, supra, was on the interest paid for committing a default in respect of the statutory liability to pay advance tax (on income). The Supreme Court held that this is not expenditure which is incurred and which had to be taken into account before the profits of the business are calculated. The liability in the case of payment of income tax and interest for delayed payment of income tax or advance tax arises on the computation of profits and gains of business. The tax which is payable is on the assessee’s income after the income is determined. This cannot, therefore, be considered as an expenditure for the purpose of earning any income or profits. Under the Income tax Act, the payment of such interest is inextricably connected with the assessee’s tax liability. If income tax itself is not a permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory obligation under the income-tax Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction. The fact involved with the decision of the Madras High Court was on the claim of interest paid on the amount not deducted u/s. 201 or on the amount deducted u/s. 201 but failed to remit the amount.
:-10-: ITA No.175/Mds/2017 8.1 In the assessee’s case, it is seen from the assessment order that the AO held that “the assessee has incurred an expenditure of Rs. 39,987/- towards late payment of service tax, which is not an allowable expenses”. It is clear that neither the AO nor the DRP found that the impugned interest was in connection with infraction of law, if any. In view of the above, the ratios relied on by the DRP is not applicable to the facts of this case. The service tax is an indirect tax payable by the assessee in the course of its business and is admissible as business expenditure. The interest on the late payment of service tax incurred by the assessee has to be regarded as compensatory in nature and hence, allowable as business expenditure. The AO is directed to allow the interest paid on the service tax.
In the result, the assessee’s appeal is partly allowed.
Order pronounced on Tuesday, the 05th day of December, 2017 at Chennai.