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Income Tax Appellate Tribunal, MUMBAI BENCHES “F”, MUMBAI
Before: Shri Shamim Yahya, AM & Shri Amarjit Singh, JM
O R D E R
Per Shamim Yahya, AM
This appeal by the Revenue and Cross Objection by the assessee arise out of the order of the learned CIT(A) dated 01.05.2015 and pertains to assessment year 2010-2011. Revenue’s Appeal 2. The grounds of appeal
raised by the Revenue read as under:- CO. No.87/Mum/2017 M/s.Foods and Inns Limited. "1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of interest while working of disallowance U/S.14A r.w.r. 8D of the I.T. Rules and directing the AO to compute the disallowance U/S.14A as 0.5% of average investment.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by the AO, amounting to Rs.18,93,291/-, on account of corporate guarantee commission, without appreciating that fact that the assessee has not substantiated the payment of the guarantee commission by it.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.3,72,619/- u/s.2(24)(x) r.w.s.36(l)(va) of the Act, on account of employees contribution to PF which was not paid within the due date under relevant Rules."
2. Apropos ground No.1; 2.1 In this case the Assessing Officer observed that the assessee has shown an amount of Rs.48,219 as dividend income. However, he noted that the assessee has not shown any expenditure incurred for earning the dividend income. In response, the assessee submitted that it has not claimed the dividend income as exempt u/s 10(34) of the Income-tax Act and offered the same for taxation. However, the Assessing Officer did not accept the contention of the assessee. He proceeded to refer to the decision of ITAT Special Bench in the case of Cheminvest Ltd. v. ITO [317 ITR 86 (AT)]. He computed the disallowance u/s 14A r.w. Rule 8D and disallowed a sum of Rs.20,56,602. CO. No.87/Mum/2017 M/s.Foods and Inns Limited. 2.2 Against the above order, the assessee appealed before the learned CIT(A).
2.3 Considering the submissions of the assessee, the learned CIT(A) held as under:-
I have considered appellant’s submissions. The appellant’s share capital is Rs.1.41 lakhs, reserves & surplus of Rs.36.61 lakhs and investment is Rs.2.13 lakhs. The share capital, reserves & surplus is much more than the investments, hence no interest is to be disallowed in view of the Bombay High Court decision in the case of CIT v. Reliance Utilities & Power Ltd. (2009) 313 ITR 340/178 Taxman 135 (BOM) and CIT v. HDFC Bank Limited (2014) 49 taxman.com 335 (Bombay). However, the A.O. is directed to disallow 0.5% of the average investments.
2.4 Against the above order, Revenue is in appeal before us.
We have heard both the Counsel and perused the records. We find that the Assessing Officer’s reliance upon the decision of the Special Bench of ITAT in the case of Cheminvest Ltd. (supra) is misplaced. The said decision was reversed by the Hon’ble Delhi High Court. We find that the Hon’ble jurisdictional High Court has also followed the same proposition in the case of Pr.CIT v. Ballarpur Industries Ltd. (ITA No.51 of 2016). The Hon’ble High Court has held as under:-
“By this income tax appeal the appellant – Department challenges the orders of the Commissioner of Income Tax and the Income Tax Appellate Tribunal, Nagpur. CO. No.87/Mum/2017 M/s.Foods and Inns Limited.
On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression "does not form part of the total income" in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded by both the Authorities do not give rise to any substantial question of law. Since no substantial question of law arises in this income tax appeal, the income tax appeal is dismissed with no order as to costs.”
From the above it is clear that the Hon’ble jurisdictional High Court also has upheld the decision that when no dividend income is claimed, disallowance u/s 14A is not permissible. Hence, the authorities below’s reliance upon the Special Bench decision in the case of Cheminvest Ltd. and the CBDT Circular are misplaced. Hence, we find that the appeal by the Revenue itself is misplaced. Furthermore, we note that the learned CIT(A) has held that since the assessee has adequate surplus funds, no CO. No.87/Mum/2017 M/s.Foods and Inns Limited. disallowance of interest should be done. The learned CIT(A) has directed 0.5% disallowance of the investments. Since we have already held that no disallowance was called for in this case as no exempt income is claimed, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
Apropos ground No.2; 5.1 Brief facts of the case are that the assessee had executed Corporate Guarantee in favour of Bank of Maharashtra for the borrowings made by the associate company M/s.Finns Frozen Foods India Limited and charged commission at 0.75% being Rs.6,31,097/-. However, A.O. based on Allahabad Bank commission which charges 3% for corporate guarantee had added the difference between 3% and 0.75% charged by the assessee as income of the assessee of Rs.18,93,290. 5.2 Upon assessee’s appeal, the learned CIT(A) deleted the addition holding as under:- “I have, considered appellant's submissions. Here the appellant had executed the Corporate Guarantee in favour of Bank of Maharashlra to M/s. Finns Frozen Foods India Limited and charged guarantee commission at 0.75% of Rs.6,31,097/-. However, A.O, based on the prevailing market, rate i.e. rate of Allahabad Bank raised the bank guarantee; commission to 3% and the difference between the 3% and 0.75% is added as income of the appellant for Rs. 18,93,291. The appellant in its submissions stales that this 0.75% bank guarantee commission charged by the appellant: is at normal market prevailing rate and this is similar rate charged by the Stale Bank of India. The CO. No.87/Mum/2017 M/s.Foods and Inns Limited. appellant also relied on Mumbai Tribunal decision in the ease of ACIT vs. Nimbus Communications Ltd. (2013) 24 Taxmann.
10, As regards the rate of guarantee commission, it is noted, that the arm's length price of guarantee commission was determined by the TPO by applying CUP method, and the arithmetic mean of 1.5% of the guarantee commission, charged by the HSBC Bank in the range of 0.15 to 3% was taken as arm's length price. The Id. CIT(A) upheld the CUP method applied by the TPO hut adopted the rate of 0.25% of guarantee fee as arm's length price relying on the decision of French Court in the case of Societe Carrefour. The Id. D.R., at the time of hearing before us hay relied on the decision of the co- ordinate Bench of this Tribunal in the ca.se of M/s.Everest Kanto Cylinder Ltd. (supra) wherein the fee, the Tribunal accepted 0.5% (guarantee fee/commission to be at arm’s length after taking into consideration the rates of guarantee commission charged by various banks including the guarantee commission charged by the HSHC Bank in the range of 0.15% to 3%. Since the facts involved in the present case are 1 ITA 6816/M/20 & 7105/Mum/2011 materially similar to the facts involved in the case of Everest Kanto Cylinder Ltd. (supra), we prefer to follow the decision rendered by the co-ordinate Bench of this Tribunal in the said case over the decision of French Court in the case of Societe Carrefour (supra). We accordingly modify the impugned order of the ld.CIT(A) on this issue and direct the A.O. to re-compute the commission for guarantee given by the assessee to its Associated Enterprises @ 0.5% being the arm's length, price. Ground No. I of Revenue's appeal is thus partly allowed whereas ground no.2 of assessee's appeal is dismissed.
In the above case guarantee commission 0.75% is accepted as reasonable. Further in the case of M/s.Everest Kanto Cylinder CO. No.87/Mum/2017 M/s.Foods and Inns Limited. Ltd. vs. DC1T (2013)34 Taxman 19 (Mum) in para 21 held as under: "We also find that in an independent transaction, the assessee has paid 0.6% guarantee commission to IC1CI Bank India to its credit arrangement. This could be a very good parameter and a comparable for taking it as internal CUP and comparing the same with the transaction with the AE. The charging of 0.5% guarantee commission from the AE is quite near to 0.6%, where the assessee has paid independently to the ICICI Bank and, charging of guarantee commission at the rate of 0.5% from its AE can he said to be at arm's length. The difference of 0.1% can be ignored as the rate of interest on which ICIC] Bank, Bahrain branch has given loan to AE (i.e. subsidiary company) is at 5.5% whereas the assessee is palling interest rate of more than 10% on its loan taken with ICICI Bank in India. Thus, such a minor difference can be on account of differential rate of interest. Thus, on these facts, we do not IT A No.542/2072 find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition of Rs.28,50,353/- on account of TP adjustment on guarantee commission is hereby deleted and the order of the CIT(A) is set aside. Accordingly, ground, no.2 is treated to be allowed." In the above ease, charging of 0.5% of the guarantee commission by ICIC Bank is held to be reasonable. Following the above decisions of the Mumbai Tribunal, Corporate Guarantee Commission charged by the appellant a 0.75% is held to be reasonable, hence, no further addition is required. This addition made by A.O. of Rs, 18,93,291 /- is deleted.” 5.3 Against the above order, Revenue is in appeal before us. CO. No.87/Mum/2017 M/s.Foods and Inns Limited.
We have heard both the Counsel and perused the records. We find that the assessee in this case has executed corporate guarantee in favour of Bank of Maharashtra to M/s.Finns Frozen Foods India Limited and charged guarantee commission at 0.75%. However, the Assessing Officer has referred to Allahabad Bank rate of 3% and held that the same was the prevailing market rate and hence added the difference. As against the above, the assessee has referred to the rate of State Bank of India and the learned CIT(A) has relied upon case laws from ITAT where 0.5% charge for guarantee commission by ICICI Bank was held to be reasonable. We find that in the background of these facts, it cannot be said that the assessee has not charged prevailing rate and hence on the facts and circumstances of the case 0.75% guarantee commission charged is held to be adequate. Hence, addition of notional income by the Assessing Officer has rightly been deleted by the learned CIT(A). Hence, we uphold the order of the learned CIT(A).
Apropos Ground No.3; 7.1 On this issue, the Assessing Officer disallowed Rs.3,72,619 received from employees as contribution to Provident Fund by holding that the payment is not made to the relevant fund before the due date as specified in the relevant Act. However, the assessee claimed that the payments were made before the due date of the filing of the return under the Income-tax Act. Hence, no disallowance should have been made. For this proposition, the assessee referred to several case laws as under:- (i) CIT v. AIMIL Ltd. (Delhi High Court) 312 ITR 508 (ii) Vinay Cements 213 CTR 268 (SC) CO. No.87/Mum/2017 M/s.Foods and Inns Limited. (iii) Alom Extrusions Ltd. (2009) 309 ITR 306 (SC) (iv) Dharmendra Sharma 297 ITR 320 (Del.) (v) P.M.Electronics Ltd. 313 ITR 161 (Del.) (vi) CIT v. Hindustan Organics Chemicals Ltd. 366 ITR 1 (Bom.) (vii) CIT v. Bank of Rajasthan Ltd. 233 ITR 530 (Bom.) (viii) CIT v. Magus Customers Dialog Pvt.Ltd. 371 ITR 244 (Kar)
7.2 Considering the above, the learned CIT(A) deleted the addition.
7.3 Against the above order, the Revenue is in appeal before us.
We have heard both the Counsel and perused the records. We find that the case laws referred above duly support the case of the assessee. Hence, we do not find any infirmity in the order of the learned CIT(A). Accordingly, we uphold the same.
In the result, this appeal by the Revenue stands dismissed.
Assessee’s Cross Objection 10 Grounds of appeal raised by the assessee read as under:-
On the facts and in circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in confirming- (a) The Disallowance of 0.5% of the average value of investments under the provisions of section 14A read with rule 8D (2) (iii) of the Income Tax rules and the reasons assigned for doing so are wrong and contrary to the facts and circumstances CO. No.87/Mum/2017 M/s.Foods and Inns Limited. of the case, provisions of Income Tax Act 1961 and rules made there under and disregarded the disallowance of Rs.3,442/- being 0.5% of Rs.6,88,445/- (b) The Re-computation of Book profits u/s 115JB of the Income Tax Act by directing the AO to add the disallowance of 0.5% of the average value of the investments calculated under 8D (2) (iii) of the Income Tax Rules.
11. Apropos Ground No. (a); 11.1 We find that since we have already set aside the order of the learned CIT(A) and decided the issue in favour of the assessee in Ground No.1 dealt with in Revenue’s appeal, the issue raised by the assessee in the cross objection is allowed.
12. Apropos Ground No.(b) 12.1 Since we have already deleted the disallowance u/s 14A hereinabove, no disallowance u/s 115JB is required. Hence, the learned CIT(A)’s direction to disallow 0.5% of the average investment under book profit u/s 115JB is also set aside.
In the result, the cross objection of assessee stands allowed.