ASSOCIATED CAPSULES P.LTD,MUMBAI vs. ACIT CEN CIR 42, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND MS. KAVITHA RAJAGOPAL, JM ITA Nos. 4620/Mum/2016 (Assessment Year: 2010-11) ACG Associated Capsules Pvt. Ltd. ACIT, Central Circle-42 (Formerly known as: Associated Aayakar Bhavan, M. K. Marg, Capsules P. Ltd.) Mumbai – 400 020 Vs. 1001 Dalamal House, 10th Floor, Nariman Point, Mumbai-400 021

PAN/GIR No. AAACA 4769 K (Assessee) (Revenue) :

ITA Nos. 4713/Mum/2016 (Assessment Year: 2010-11) Dy. CIT, Central Circle-7(3) ACG Associated Capsules Pvt. Ltd. Room No. 655, 6th Floor, Aayakar (Formerly known as: Associated Bhavan, M. K. Road, Mumbai-400 020 Capsules P. Ltd.) Vs. 1001 Dalamal House, 10th Floor, Nariman Point, Mumbai-400 021

PAN/GIR No. AAACA 4769 K (Revenue) : (Assessee)

Assessee by : Shri Ketan Ved/ Shri Abdulkadir Jawadwala Revenue by : Shri Pankaj Kumar

Date of Hearing : 21.12.2023 Date of Pronouncement : 20.03.2024

O R D E R Per Kavitha Rajagopal, J M:

These are cross appeals filed by the assessee and the Revenue, challenging the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (‘NFAC’ for short) passed u/s.250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2010-11.

2 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) 2. The assessee has challenged the present appeal on the following grounds:

GROUND I: TREATING GIVING OF CORPORATE GUARANTEE AS AN INTERNATIONAL TRANSACTION UNDER SECTION 92 OF THE ACT 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Assessing Officer (AO") and Transfer Pricing Officer ("TPO") in benchmarking "corporate guarantee" given to a bank on behalf of the Appellant's subsidiary as an "international transaction" u/s 92B of the Act 2. The Appellant prays that Arm's length adjustment made by the TPO and confirmed by the AO be deleted. WITHOUT PREJUDICE TO GROUND I : GROUND II: ADDITION ON ACCOUNT OF ARM'S LENGTH ADJUSTMENT TO INCOME FROM GUARANTEE COMMISSION: 1 On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in computing the arms length price u/s 92C(3) for the corporate guarantees provided by the Appellant and thereby making an addition of notional guarantee fee at the rate of 0.7% on the availed guarantee amount. 2 The Appellant therefore prays that the AO be directed to delete the Arm's length adjustment made in the form of income from guarantee commission GROUND NO. III ADDITION ON ACCOUNT OF ARM'S LENGTH ADJUSTMENT TO INCOME FROM INTEREST ON LOANS ADVANCED TO ASSOCIATED ENTERPRISE: 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the interest charged on the loans advance to group companies is not at Arm's Length Price and making addition of notional interest at the rate of 5% of the amount advanced to the AE 2. The Appellant prays that Arm's length adjustment made by the TPO and confirmed by the AO, be deleted or, be appropriately reduced. GROUND NO. IV: DISALLOWANCE U/S. 14A OF THE ACT R.W.RULE 8D OF 1962 (“THE RULES") AMOUNTING TO RS.1,00,31,857/- 1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance made by the AO u/s 14A r.w. Rule 8D amounting to Rs.1,00,31,857/- 2. The Appellant prays that the Ld. AO be directed to delete the additional disallowance made u/s 14A amounting to Rs. 1,00,3 1,857/- and the disallowance should be restricted to the suo-moto disallowance made by the Appellant WITHOUT PREJUDICE TO GROUND IV GROUND NO. V 1. On the facts and in circumstances of the case and in law, the CIT(A) erred in considering the investment, on which no taxX-exempt income was received during the year, in computing the disallowance u/s. 14A of the Income Tax Act

3 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) 2. The Appellant, prays that the investment on which no tax-exempt income is received should be considered while computing the disallowance u/s. 14A r.w.r.8D of the Rules WITHOUT PREJUDICE TO GROUND IV&V 1. On the facts and in circumstances of the case and in law, the CIT(A) ought to have restricted the disallowance u/s. 14A of the Act to the extent of tax-exempt income generated during the year under consideration. 2. The Appellant, prays that the disallowance u/s. 14A of the Act ought to be restricted to tax-exempt income generated during the year under consideration.

manufacturing of empty hard gelatin capsules of various sizes. The assessee had filed its

return of income on 27.09.2010, declaring total income at Rs.98,96,82,091/-. The

assessee’s case was selected for scrutiny and notice u/s. 143(2) and 142(1) of the Act

were duly issued and served upon the assessee. The assessee has entered into the

following international transaction, namely:

S. No. Transaction Amount (INR) 1 Export of empty hard getatin and cellulose capsules 53,16,08,191 2 Interest charged on Loan advanced to the AE 22,58,894 3 Reimbursement of expenses by ACPL to AEs 12,54,320 4 Reimbursement of expenses by AEs to ACPL 30,63,727 Total 53,81,85,132

for short) for determining the arm's length price ('ALP' for short) pertaining to the

international transaction entered into by the assessee as per the audit report in Form No.

3CEB. The ld. TPO vide order dated 01.11.2013 passed u/s. 92CA(3) of the Act made an

adjustment of Rs.1,07,98,788/- towards guarantee commission given on behalf of the

Associated Enterprises (‘AE’ for short) aggregating to Rs.2,27,59,004/- and adjustment

to Rs.1,19,60,216/- towards the interest on the loan advanced by the assessee to the AE.

4 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) 5. The ld. Assessing Officer ('A.O.' for short) vide order dated 24.03.2014 passed the

assessment order u/s. 143(3) r.w.s 147C(1) of the Act thereby determining the total

income at Rs.102,16,86,410/- by making an adjustment proposed by the ld. TPO along

with the disallowance u/s. 14A of the Act to Rs.92,16,774/- and disallowance on account

of bogus purchase amounting to Rs.28,444/-.

30.03.2016 had partly allowed the appeal filed by the assessee.

order of the ld. CIT(A).

the ld. CIT(A) in upholding the action of the ld. A.O./TPO in bench marking the

corporate guarantee transaction given by the assessee on behalf of AE to a bank.

arm’s length adjustment to income from guarantee commission. The facts of this ground

are that the ld. A.O./TPO observed that the assessee has not reported the transaction of

the corporate guarantee given by it on behalf of its subsidiary AE to a third party namely

Zagrebacka Bank for an amount of Euro 4 million equivalent to Rs.26,79,60,000/- as on

31.03.2009 in Form No. 3CEB for which the assessee has not charged any guarantee

commission from its AE. The assessee contended that it had given the corporate

guarantee to Zagrebacka Bank for the loan availed by its 100% subsidiary Lukaps,

5 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) Europe even before the acquisition of Lukaps where the assessee has replaced the earlier

guarantor. The assessee further stated that it was for the assessee’s own benefit and,

therefore, no commission for the said guarantee was charged by the assessee to the AE. It

was also contended that the assessee post acquisition of shares of Lukaps had the benefit

of increased sales from Rs.187 million to Rs.445 million during Financial Year 2011-12

when compared to F.Y. 2007-08. As the profit earned by the assessee was much higher

than the guarantee commission which ranges from 0.5% to 1.5% there was no reason for

the assessee to charge guarantee commission to its AE. The assessee in its written

submission has stated that the said transaction is out of the purview of intra group

services as per 2010 TP Guidelines issued by the OECD. It is further submitted that the

said transactions resulted in Nil expenses for the assessee and there was no taxable

income. The assessee relied on the decision of Hon'ble Supreme Court in the case of SA

Builders 288 ITR 1 (SC) where the Revenue cannot determine the arm's length price

('ALP' for short) when it cannot prove the nexus between the expenditure and the

business. Further the assessee contended that amendment to clause (c) to Explanation (i)

of section 92B is retrospective amendment which includes guarantee in the purview of

international transaction where the said amendment will not be applicable to the year

under consideration.

that the amendment to section 92B(2) brought about by Finance Act, 2012 was applicable

retrospectively w.e.f. 01.04.2002 from A.Y. 2002-03. The ld. A.O./TPO held 4.03% to be

the rate of guarantee commission after considering the interest rate for unsecured bonds

6 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) of AAA rate companies which is 8.25% and BBB rated companies @ 12.28% for a

period of five years of unsecured bonds and made an adjustment of Rs.1,07,98,788/- from

the total guarantee committee amounting of Rs.26,79,60,000/-.

amendment to section 92B of the Act applies retrospectively from A.Ys. 2002 to 2003

and disagreed with the findings of the ld. TPO on the view that the ld. TPO has

considered the rates of lending funds which is not the case of the assessee where it has

given guarantee to two bank for its own subsidiary Lukaps. The ld. CIT(A) further held

that the average rate of lending of unsecured bonds computed by the ld. TPO is not

justifiable and made comparison with the Standard Chartered Bank Guarantee

Commission which was 0.7% to be the reasonable rate for charging guarantee

commission where the prevailing Libor rate was from 1.75 to 2% which would be the rate

if Lucaps had borrowed from the European market have the assessee not given the

corporate guarantee. The ld. CIT(A) held the said transaction to be an international

transaction within the meaning of section 92B and directed the ld. A.O. to apply the rate

of 0.7% instead of 4.03% on the guarantee commission.

guarantee commission and the Revenue, on the other hand, in its cross appeal has

challenged the order of the ld. CIT(A) in restricting the said rate to 0.70%.

contended that this issue has been dealt with by the c-ordinate bench in the assessee’s

7 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) case for A.Ys. 2012-13 and 2013-14 where the Tribunal has remitted this issue back to

the file of the ld. A.O./TPO for bench marking the said transaction. The ld. AR further

stated that as the facts are identical as that of A.Ys. 2012-13 and 2013-14 and relied on

the decision of the Tribunal.

the other hand, had nothing to controvert the said fact.

commission has been dealt with by the Tribunal in ITA No. 2383 & 2384/Mum/2018 and

others vide order dated 04.12.2023. The relevant extract of the said decision is cited

hereunder for ease of ready reference:

8 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) are issued and non guaranteed loans by working out interest saving and then sharing it between transacting parties. We, therefore, direct the ld. A.O./TPO to determine the ALP on corporate guarantee commission on the basis of the interest saving approach of the said transaction. The assessee is also directed to bench mark the said transaction where it has already been held to be an international transaction and on the basis of which the ld. A.O./TPO has to determine the ALP of the corporate guarantee commission as per the provisions of section 92CA of the Act which makes it compulsory to benchmark the international transactions every year. Exception may be if no significant difference between FAR or economic circumstances exists. We, therefore, remand this issue back to the ld. A.O. on the above observation. Hence, ground nos. I & II of the assessee’s appeal are allowed for statistical purpose.

we are of the considered opinion that there is no change in facts of this present appeal,

this issue is to be remitted back to the file of the ld. A.O. with the direction to determine

the arm's length price ('ALP' for short) on corporate guarantee commission on the basis of

the interest saving approach of the international transactions by respectfully following the

above said decision. Hence, ground nos. 1 & 2 of the assessee’s appeal and ground nos.

1(a) & 1(b) of the Revenue’s appeal are hereby allowed for statistical purpose.

income on interest from loans advance to AE amounting to Rs.1,19,60,216/-. The facts of

this ground is that the assessee had given loan of Euro 6 lacs which is equivalent to

Rs.3,89,47,332/- to its AE, ACG Holding BV Netherland which was given in the earlier

financial year and had continued during the year under consideration along with another

loan of Euro 20 lacs equivalent to Rs.13,75,18,000/- lent on 24.07.2009 which again

continued during the impugned year for which the assessee had charged interest @ 2%

which the ld. A.O./TPO observed that the assessee had reduced the interest rate from 5%

to 2% for the earlier loan w.e.f. 01.04.2009 and 2% interest rate for the fresh loan

advanced on 24.07.2009 as per the report in Form No. 3CEB.

9 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) 18. During the assessment proceeding, the assessee contended that the loan was

granted out of the own funds through ODA – direct investments to its AE under

automatic route that has been duly noted by the RBI for the purpose of financing the

working capital requirements of Lukapsd.o.o which was the step down subsidiary

company of the assessee as per FEMA Regulation. The assessee has not bench marked

the said transaction for the reason that the transaction of lending money to its 100%

subsidiary company would not come under the purview of arm's length price ('ALP' for

short). The assessee further stated that 2% interest rate was more than the prevailing

Libor rate of 1.28% where the additional charge of 0.72 basis point over average Libor

rate converts into a markup of 56% over and Libor. The assessee reiterated that the loans

advanced to AE be out of interest free reserves where the interest and the principal was

receivable in Foreign Currency (Euros). It had also stated that the said loan was utilized

to invest in Lukaps Croatia which was for the business expansion of the assessee and not

merely to earn interest out of the said loan making the risk factor of repayment for the

assessee is much lesser. The assessee without prejudice had compared the lending rate of

Standard Chartered Bank to its subsidiary at Libor + 50 basis points and stated that on the

above mentioned reasons, the said transaction was at arm’s length and warranted no

adjustment. The assessee relied on the decision of the Tribunal in the case of Siva

Industries & Holdings Ltd., Cotton Naturals (India) Pvt Ltd. and the Hon'ble Apex Court

decision in the case of S A Builders (supra).

assessee advanced fund to third party such huge amount, it would be entitled for interest

10 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) as return for such investment. The ld. TPO determined the arm’s length @ 10.68% by

taking the rate of crisil bonds as comparable for the investment made by the assessee in

the absence of data pertaining to the credit rating of AE. The ld. A.O/TPO relied on the

decision of the co-ordinate bench in the case of Perot System TSI (India) Ltd. vs. DCIT

[2010] TIOL ITAT (Del) which has held that even interest free loans given to AEs has to

be charged at arm’s length interest and also relied on the decision of the Hon'ble Apex

Court in the case of S A Builders (supra) as not applicable for Chapter X provisions

dealing with the transfer pricing. The ld. A.O./TPO rejected the thin capital rule as having

no relevance and also stated that mere RBI’s approval is not sufficient and the same has

to be determined at arm’s length. The ld. A.O./TPO has held that the assessee has not

charged the interest as per the prevailing rate as per the provision of section 92C(1) read

with Rule 10B of the Rules.

be reasonable rate after duly considering the earlier years rate of interest charged by the

assessee from its subsidiary. The ld. CIT(A) further held that the assessee had charged

2% rate of interest including foreign exchange currency which according to the ld.

CIT(A) was if the investment in India was made then it would have fetched higher rate of

interest, thereby restricting the rate of interest to 5%.

CIT(A).

11 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) 22. From the above factual matrix, it is observed that neither the assessee nor the

lower authorities have bench marked the transaction of the assessee lending money to its

AE. The ld. A.O./TPO has considered 10.68% to be a reasonable estimation on the

notional interest to be levied by the assessee on the basis of the crisil bonds and made an

adjustment of Rs.1,19,60,216/- for the loan advanced by the assessee during the earlier

financial year and during the year under consideration. The ld. TPO/A.O. has also

without prejudice considered the safe Harbour Rules notified on 18.09.2013 for the loan

transaction upto Rs.50 crores where the interest rate to be applied has to be the base rate of State Bank of India as on 30th June which is 12.28% + 150 basis point during the year

under consideration and held that 10.68% to be at arm’s length rate would be reasonable.

and had merely restricted the rate of interest to be 5% keeping in view the earlier interest

rate charged by the assessee and by stating that 5% would be a reasonable rate had the

assessee advanced loan within India. The assessee, on the other hand, has also not bench

marked the said transaction and had charged 2% notional interest on the loan advanced to

its AE. It is evidenced that to determine the arm’s length price of any international

transaction, there has to be a reasonable bench marking conducted by both the sides. Here

the assessee and the Revenue in the present case has not carried out the same. In the

absence of such bench marking, we are not justified in upholding either the interest rate

considered by the assessee nor by the ld. A.O./TPO and the ld. CIT(A). For this purpose,

we deem it fit to remand this issue back to the file of the ld. CIT(A) for the purpose of

12 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) bench marking the said transaction. Hence, ground no. 3 raised by the assessee and

ground no. 2(a) & 2(b) of the Revenue are allowed for statistical purpose.

by the ld. CIT(A) u/s. 14A read with Rule 8D of the Rules amounting to Rs.1,00,31,857/-

It is observed that the assessee has earned dividend income of Rs.1,54,53,187/- which

was claimed as exempt u/s. 10(34) of the Act. The assessee had made suo moto

disallowance of Rs.8,15,083/- being the salary of two employees of treasury division

which was attributable to the earning of the tax free income and further during the

assessment proceeding worked out Rs.24,41,004/- as disallowance computed under Rule

8D(2)(ii) of the Act. The ld. A.O. then worked out the disallowance under Rule 8D(2) at

Rs.1,31,00,857/- and made an addition of Rs.92,16,774/- after reducing the suo moto

disallowance made by the assessee.

assessee’s contention.

Rs.123,16,27,498/- as on 01.04.2009 to Rs.176,27,96,352/- as on 31.03.2010 and the

borrowings has also increased from Rs.59,21,27,417/- to Rs.78,24,58,634/- for which

interest of Rs.6,34,73,013/- was paid during the year under consideration. The assessee

13 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) has made a suo moto disallowance only towards the salary of two employees who are

incharge of the treasury funds pertaining to the assessee’s investment. Both the lower

authorities have rejected the assessee’s contention that its own funds were more than the

borrowed funds for which disallowance ought not to have been made and also the

contention that only the investments which has yielded exempt income has to be

considered while determining the average value of investment.

High Court in the case of CIT vs Reliance Utilities & Power Ltd [2009] 313 ITR 340

(Bom) for the proposition that when own funds are more than borrowed funds, no interest

disallowance is warranted and the Special Bench decision of ITAT Delhi in the case of

ACIT vs. Vireet Investment Pvt. Ltd. (in ITA No. 502/Del/2012 and CO NO.68/Del/2014

vide order dated 16.06.2017), wherein it was held that only those investments which has

yielded income are to be considered for computing the average value of the investment.

more than the borrowed fund during the year under consideration. As there are various

judicial precedence on the proposition that when there are mixed funds, then the

presumption would be that the assessee has made investment out of the own funds and

not borrowed fund for the purpose of investment which has yielded exempt income. It is

also pertinent to point out that the decision relied upon by the assessee in the case of

Vireet Investment Pvt. Ltd. (supra) has held that while computing the average value of

investments only those investments which has yielded income are to be considered and

14 ITA Nos. 4620 & 4713/Mum/2016 (A.Y. 2010-11) ACG Associated Capsules Pvt. Ltd. (Formerly known as : Associated Capsules P. Ltd.) not the investments which has not earned exempt income during the year. Hence, we

deem it fit to remand the issue back to the file of the ld. A.O. for restricting the

disallowance to the extent of the investment which has yielded the exempt income during

the year under consideration and also to verify that the assessee had sufficient interest

free funds during the relevant year where the assessee has made investment which had

yielded the exempt income. Hence, ground nos. 4 & 5 raised by the assessee are allowed

for statistical purpose.

statistical purpose.

Order pronounced in the open court on 20.03.2024.

Sd/- Sd/-

(Prashant Maharishi) (Kavitha Rajagopal) Accountant Member Judicial Member Mumbai; Dated : Roshani, Sr. PS

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT - concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai