ABAN OFFSHORE LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश /O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by the assessee is directed against the

assessment order dated 31.01.2017 passed u/s.143(3) r.w. section 92CA of the Act consequent to the directions of the

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Dispute Resolution Panel(DRP) dated 16.12.2016 u/s.144C(5)

of the Act.

Act .

that the expenditure was revenue in nature, as it was incurred for

the purpose of carrying out assessee’s own business including

business conducted through its various subsidiaries located

outside India and therefore, the AO was not justified in

disallowing entire interest on term loans/working capital loans

paid to banks/others treating them to be capital in nature on the

assumption that all these loans were utilized for investment in its

wholly owned foreign subsidiary i.e. Aban Holdings Pte Limited.

the similar issue was considered by the Tribunal in assesse’s

own case in ITA Nos.585/Mds/2015 & 267/Mds/2016 for the

assessment years 2010-11 and 2011-12 dated 14.9.2016

wherein Tribunal held that:-

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“31. We find that the reliance placed on by the ld. DR on the judgment of Madras High Court in the case of Trishul Investments (supra) is misplaced. The main contention of the ld. DR is that the interest expenditure on borrowings used for investment in wholly owned subsidiary cannot be allowed as deduction u/s.36(1)(iii) of the Act instead it should be added to the cost of investment, in view of the above judgment of the Madras High Court. In our opinion, when activity is undertaken as an investment activity and interest incurred upto the acquisition of the shares of subsidiary company could be considered as part of investment. Once it is acquired, then it will be a revenue expenditure. In the present case, it is an admitted fact that the wholly owned subsidiary company has already acquired shares and it is functioning.

31.2 In this case the assessee claimed the interest incurred on loan which was used for the purpose of purchase of shares as revenue expenditure, but it was not capitalized as part of the investment in shares. The contention of the DR was that it is to be added to the cost of the investment so as to increase the value of the capital asset.

31.3 In the present case, there is no dispute that the assessee has borrowed funds for the purpose of investment in shares and thereafter the assessee has incurred interest on it. In our opinion, the interest is to be considered as part of the cost of investment till date of acquisition and interest paid by the assessee commencing from the date of acquisition of shares till the date of sale would not form part of the cost of acquisition.

31.4 Further, it is a settled legal position that income of an assessee has to be computed under various heads specified under section 14 of the Act. Therefore, the deductions are to be allowed in computing the income under various heads only to the extent it is

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provided by the Legislature under that very heads. The computation of capital gain is provided in section 48 of the Act. According to this section, the only deductions which are allowable are - (1) the cost of acquisition of the asset, (2) the cost of any improvement thereto and (3) expenditure incurred wholly and exclusively in connection with the transfer of the asset. The cost of acquisition, in our opinion, means the amount paid for acquiring the asset. Once the asset is acquired, then any expenditure incurred thereafter cannot be considered as the cost of acquisition, since such expenditure would not have any nexus with the acquisition of the asset. Wherever the Legislature intended to allow such expenditure as deduction, it had specifically provided so under various heads. For example, in computing the income from house property, the assessee is allowed deduction under section 24 of the Act on account of interest paid on the borrowed funds utilised for acquiring the immovable property. Similarly, when the income is to be computed under the head "Profits and gains from business or profession", the deduction account of interest on borrowed fund is provided under section 36(1)(iii) the Act, where the business assets are acquired out of borrowed funds. At this stage, it may be pertinent to note that depreciation is also allowable as deduction under section 32 in respect of business assets on the cost of acquisition. In determining the cost of acquisition, the interest component after bringing the asset into existence is not taken into consideration as Explanation 8 to section 43 of the Act. If the interest is to be added to cost of acquisition, then the assessee would be entitled to double deduction once under section 36(1)(iii) and the other under section 32 of Act, which is not permissible in view of the decision of the Supreme Court in the case of Escorts Ltd. v. UOI[1993] 199 ITR 43. 31.6 Similarly, when the shares are purchased by way of investment, and the dividend is received in respect of such shares, the interest paid on borrowed funds has been held to be allowable as deduction against dividend income. The Supreme Court has gone a step further in the case of CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519, wherein it has been held that deduction on account of

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interest paid on borrowed funds is allowable as deduction in computing the income under the head ‘Income from other sources’, even where the dividend is not received in a particular year. If this is the legal position, then we are afraid, how the interest paid by the assessee can be considered as part of the cost of acquisition of the shares. If the contention of the assessee is accepted then it would amount to allowing double deduction i.e., under section 57 as well as under section 48 of the Act, which can never be the intention of the Legislature. As already stated, the double deduction is prohibited as laid down by the Supreme Court in the case of Escorts Ltd. (supra). The entire scheme of the Act, therefore, reveals that interest component after the date of acquisition and till the date of sale cannot be treated as the cost of acquisition. It is only allowable as a revenue deduction on year to year basis against the income generated from such asset or likely to be generated to the extent provided by the Legislature under different heads. 31.6 The above view is also fortified by the decision of the coordinate Bench of the Tribunal in the case of Macintosh Finance Estates Ltd. vs. ACIT(12 SOT 324), wherein it has been held "once we find that interest expenses is an allowable expenditure under the head "Income from other sources”, it cannot be allowed to be added to the cost of investment only because in this year no deduction is allowable because the dividend income has been made exempt’’. The following observations of Supreme Court in the case of Saharanpur Electric Supply Co. Ltd vs. CIT (1992) 194 ITR 294 (SC) were relied on by the Court:- ‘’In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets’’.

31.7 A bare look at the above observations reveals that actual cost would include all expenditure necessary to bring the assets into existence

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and put them in working condition. Nowhere in the above observations, the Supreme Court held that the expenditure incurred after the acquisition of asset would be included in the cost of assets. The terminal point is the time when the asset is brought into existence or when the asset is put in a working condition. Therefore, on the basis of the Supreme Court judgment, it cannot be said that expenditure incurred after the asset brought into existence, i.e., after the acquisition of the asset would form part of the actual cost. The Supreme Court laid down the proposition that interest paid on monies borrowed for acquisition of capital asset and to meet expenses connected with its installation etc. and capitalized, has to be added to the cost of asset for the purpose of deprecation.

31.8 Thus in our opinion if the money was borrowed for purchase of shares of subsidiary company for the purpose of acquiring controlling interest and acquisition of such controlling interest was of the business of the assessee and it resulted in promote the business of the assessee as well as helpful to the assessee for having management control over said such subsidiary company, then the interest expenditure should be allowed u/s.36(1)(iii) of the Act. Further if the Assessing Officer found that investment in shares of subsidiary company not for maintaining controlling interest, then the Assessing Officer should see that there cannot be any disallowance in respect of investment of assessee‘s own fund. This is so because the borrowed funds and own funds are admittedly mixed up in such cases, the disallowance of interest has to be made on proportionate basis and benefit has to be given to the assessee towards investment of own fund. It is also to be noted that while computing disallowance if any u/s.36(1)(iii) of the Act, interest considered for disallowance u/s.14A of the Act was required to be excluded. With this observation, we restore the issue

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to the file of the Assessing Officer for fresh consideration after necessary examination and after allowing opportunity of hearing to the assessee. In the result, ITA No.585/Mds/2016 is partly allowed for statistical purpose.”

we are inclined to remit the issue to the file of AO on similar

direction. Further, we direct the AO to verify whether the

investment is made in subsidiary to have a controlling interest, or

to avoid the dilution of controlling interest, or to keep the

controlling interest intact as per object clause of Memorandum of

Association of the assessee company and to decide thereupon.

Hence, this ground is partly allowed for statistical purposes.

disallowance u/s. 14 A of the Act.

shares during the year and claimed the same as exempt

u/s.10(34) of the Act. As per the provisions of sec.14A of the

Act, no deduction shall be allowed in respect of expenditure

incurred in relation to such income which does not form part of

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the total income. The assessee was asked to clarify as to why the disallowance shall not be made u/s.14A r.w. Rule 8D. The

assessee replied that it had not incurred any expenditure in connection with earning exempt income and the disallowance u/s. 14A of the Act is not called for. The contention of the

assessee is not accepted for the following reasons: The assessee has incurred an amount of ₹ 366.253 crores i) / as Finance Cost on its borrowed capital during the year. Though the assessee claimed that such borrowed funds were not utilized for making investments, it could not clearly establish the same. Funds for a company come in a common kitty and it comprises of borrowed funds, share capital and retained earnings (Reserves & Surplus). Therefore, to argue that no portion of the interest paid relates to investment is not valid. ii) A company cannot earned dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day- to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares/units of mutual funds at the most appropriate time. They require huge investment in shares/mutual funds and consequential blocking of funds. It is well-known that capital has cost and that element of cost is represented interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure.

iii) It is logical to conclude that a portion of the routine expenditure to maintain its establishment and administration can be attributable towards the activity of

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making investments to earn dividend. Further, it is a fact that the managerial staff and the Directors are involved in making decisions on investments. Hence, a portion of this managerial remuneration and Directors remuneration definitely be attributable towards earning such exempt income. iv) For the reasons stated above, the undersigned is satisfied that without any ambiguity and with certainty, it can be stated that the assessee would have definitely incurred expenses towards earning exempt income. v) To determine the expenses attributable to earning such exempt income, the Finance Act, 2006 had brought in the provisions of section 14A(2) which requires the Assessing Officer to determine the expenses relating to exempt income in accordance with Rule 8D. Reliance is placed on the decision of the Bombay High Court in the case of Godrej & Boyce vs. DCIT, wherein it has been held that disallowance under sec.14A is ‘fair and reasonable’.” Accordingly, the disallowance u/s.14A r.w. Rule 8D worked out to ₹ 71,26,655/- and added back to income under the head ‘income from business or profession’. However, since the entire interest expense has been disallowed, the disallowance under 2nd limb is ignored and the disallowance u/s.14A r.w. Rule 8D is restricted to ₹ 4,91,750/- for the purpose of tax computation.

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for the assessment years 2010-11 and 2011-12 dated 14.9.2016

wherein it was held that:-

“20. We have heard both the parties and perused the material available on record. The ld. AR placed before us about netting of interest paid with interest received. In our opinion, application of Rule 8D of the I.T. Rules does not allow for netting of any interest income with interest expenditure. If netting of interest income is allowed, it would be equivalent to adding something which is not there in the Rule book, accordingly impermissible. Thus, we uphold the AO’s application of Rule 8D(2)(ii) read with sec.14A on gross interest, through AO did not consider interest receipts as ‘income from other sources’; the treatment of interest by AO would not change the nature of transaction or character of receipts. Accordingly, we reverse the finding of the CIT(Appeals), on this issue. 20.1 However, the AO has to consider the availability of share capital, reserves and surplus while invoking the provisions of sec.14A read with Rule 8D of the Income-tax Rules, as this is the non-interest bearing own funds available with the assessee for investments. 21. With regard to the interest on borrowings used for the specific purpose, it is to be noted that this issue came for consideration before this Tribunal in the case of ACIT v. M/s. Farida Shoes Pvt. Ltd. In ITA Nos.2102 & 2103/Mds/2015 dated 8.1.2016, wherein it was held as under : “5.1 Coming to the merits of the issue regarding disallowance u/s.14A r.w. Rule 8D of the I.T.Rules, in our opinion, similar issue was considered by this Tribunal in the case of ACIT v. M/s. Best & Crompton Engineering Ltd. in ITA

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No.1603/Mds/2012 dated 16.7.2013, wherein it was observed that interest on borrowings used for the business purpose cannot be considered for the purpose of computing disallowance u/s.14A r.w. Rule 8D(2)(ii) of the IT Rules and the relevant portion is reproduced as below:

“10. Heard both sides. Perused the orders of lower authorities and the decision of Calcutta Bench of this Tribunal relied on by the assessee’s counsel. This issue has been considered elaborately by the Commissioner of Income Tax(Appeals) and deleted the interest on bank loan and term loans which were not utilized for making any investments having tax free income. While holding so, the Commissioner of Income Tax (Appeals) held as under:-

“5.2.1 Having held that provisions of rule 8D are applicable, let us now examine whether the amount has been correctly quantified. The AO had calculated the disallowance at ₹ Nil, ₹1,04,38,000/- and ₹ 26,87,000/- under (i), (ii) & (iii) of rule 80 (2)respectively. There is no dispute regarding the first component, because it is Nil. With regard to the second component being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the amount at ₹ 1,04,38,000/. The AO has taken into account the entire interest expenditure of ₹ 5,79,46,000/- for computing the above disallowance. The Id.AR, in his submission, has given the break-Up of interest which includes (1) interest on bank loans: ı 67,92,000/- (2) interest on term loans ₹3,82,11,000/- and (3) interest on other accounts: ₹1,29,43,000/-. If loans have been sanctioned for specific projects/expansion and have been utilized towards the same, then obviously they could not have been utilized for making any investments having tax-free incomes. From the copy of the sanction letters from State Bank of Bikaner & Jaipur it can be seen that the loan was granted with a specific requirement that

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the loan shall be utilized for purchase of imported machinery while in the case of loan from Federal Bank, it is seen that the loan was to be utilized for expansion of projects. Sanction of both these loans prohibit utilization of funds for purposes other than for the utilization for which they are sanctioned. From the ledger extract for the year ended 31.03.2008 for both loan accounts, it is seen that no amount has been utilized for investment in subsidiaries which earns tax-free income. The loan amounts were fully disbursed and utilized in the year ended 31.03.2008 (A.Y. 2008-09) itself. Taking into all the facts as stated above, I am of the considered opinion that if loans/borrowed amounts are granted for specific projects/expansion and no amount from the same has been directly utilized for investments, then the first and second limb of rule 80 attributing the interest payments to the investments will not be applicable. Accordingly, interest on bank loan and term loan amounting to ₹67,92,000/- and ₹ 3,82,11,000/- respectively are to be excluded from the calculation to determine the disallowance under rule 8D(2)(ii). The AO is, therefore, directed to take into account only the remaining interest on other accounts amounting to ₹1,29,43,000/- for computing the proportionate disallowance under rule 8D(2)(ii).” 11. On going through the order of the Commissioner of Income Tax (Appeals), we find that the Commissioner of Income Tax (Appeals) excluded the interest on bank loan and term loans from the calculation of disallowance under Rule 8D(2)(ii) as the assessee has utilized the bank loan and term loan for the purpose of purchase of machineries and for expansion of projects and these loans were specifically sanctioned for specific project and such loans were also used for the purpose for which they were sanctioned. In the circumstances, we find that the Commissioner of Income Tax (Appeals) has rightly excluded such interest from the purview of computation of disallowance under Rule 8D(2)(ii).

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Tribunal held that such interest has to be excluded. While holding so, it has held as under:-

“11. There is no dispute about working of this method so far as rule 8D(2)(i) and (iii) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in which “ the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt” . Clearly, therefore, this sub clause seeks to allocate ‘common interest expenses’ to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is “expenditure by way of interest………..which is not directly attributable to any particular income or receipt” and the only categories of income and receipt, so far as scheme of rule 8 D is concerned, are mutually exclusive categories of ’tax exempt income and receipt’ and ‘taxable income and receipt’. No other classification is germane to the context in which rule 8 D is set out, nor does the scheme of Section 14 A leave any ambiguity about it. 12. Ironically, however, the definition of variable ‘A’ embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate “expenditure by way of interest, which is not directly attributable to any particular income or receipt” it ends up allocating “expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income” (emphasis by underlining supplied by us). This incongruity will be more glaring with the help of following simple example: In the case of A & Co Ltd, total interest expenditure is ₹ 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is ₹10,000. Out of the balance ₹ 90,000, the assessee has paid interest of ₹ 80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is “not directly attributable to any particular receipt or income” is thus only ₹ 10,000. However, in terms of the formula in

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rule 8D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for ₹ 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be “ A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [ i.e. direct interest expenses for tax exempt income] incurred during the previous year”. Let us say the assets relating to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8 D(2)(ii) will be ₹18,000 whereas entire common interest expenditure will only be ₹ 10,000/-. 13. The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded. 14. The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or construe it any other manner other than what is supported by plain words of the rule 8 D (2)(ii). 15. We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue authorities about its application, as was before Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (328 ITR 81) when constitutional validity of rule 8 D was in challenge,is that “ It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example—any aspect of the assessee's business such as plant/machinery etc.)”. Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule 6D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable ‘A’ in formula as per rule 6D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed. This is clear from the following observations made by Their Lordships of Hon’ble Bombay High Court in the case of Godrej & Boyce (supra):

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“60. In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying r. 8D. In the written submissions which have been filed by the Addl. Solicitor General it has been stated, with reference to r. 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax- free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example—any aspect of the assessee's business such as plant/machinery etc.)…………… The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'. 16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8 D(2)(ii), and based on such a stand constitutional validity is upheld by Hon’ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon’ble Bombay High Court in the case of Godrej and Boyce (supra), “amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example—any aspect of the assessee's business such as plant/machinery etc.)”. Accordingly, even by revenue’s own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). 17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8 D (2)(ii) is relaxed in actual

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implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8 D was in challenge before Hon’ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at present , in our humble understanding, revenue authorities cannot take one stand when demonstrating lack of ‘perversity, caprice or irrationality’ in rule 8D before Hon’ble High Court, and take another stand when it comes to actual implementation of the rule in real life situations. Therefore, even as we are alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice.”

21.1 In view of the above Tribunal decision (in the case of ACIT v.

M/s. Farida Shoes Pvt. Ltd. In ITA Nos.2102 & 2103/Mds/2015 dated

8.1.20160, we are of the opinion that the interest on borrowing which

are made for specific purpose of business cannot be considered for the purpose of Rule 8D of the Income Tax Rules. 21.2 Further, investments in sister concerns or subsidiaries with which the assessee is having business transactions, that investments cannot be considered for the purpose of applicability of Rule-8D. For this proposition we rely on the judgments of Tribunal in the case of Sun

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TV Networks in ITA No.1340 & 1341/Mds./15 & 1578 to 1579/Mds/15

wherein held that:-

“12. We have considered the rival submissions on either side and perused the relevant material available on record. The main contention of the assessee is that the available share capital including reserves and surplus was ₹2385.7 Crores as on 31.03.2010. The available share capital is ₹1970.4 Crores and Reserves and surplus is ₹ 21,886.7 Crores. The investments made in mutual funds including subsidiary companies are only ₹ 541.11 Crores. Therefore, it cannot be said that the assessee has diverted the borrowed funds for making any investment either in the sister concerns or in the mutual funds. When the assessee has sufficient share capital, reserves and surplus, this Tribunal is of the considered opinion that there cannot be any disallowance towards the interest paid on the borrowed funds under Section 14A of the Act. For the purpose of disallowing interest income under Section 14A read with Rule 8D, there should be nexus between the borrowed funds and investment made by the assessee in the share capital and mutual funds. In the absence of any nexus, the presumption is that the assessee has invested the available interest-free funds in share capital and mutual funds. Furthermore, making investment in sister concerns is for commercial expediency in view of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1. It is not the case of the Revenue that the sister concern or any of the Directors has misused the funds invested by the assessee. When the sister concern uses the funds only for business purpose, there was commercial expediency for making investment. Therefore, this Tribunal is of the considered opinion that there cannot be any disallowance under Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962.

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21.3 Further, we also make it clear that the own funds which is in the form of share capital and reserves and surplus, which was available to the assessee to make investments which is yielding exempted income have no cost and therefore, it is to be given due weightage while applying the formula of Rule 8D. This view of ours is fortified by the order of the co-ordinate Bench in the case of Beach Miners Co. Pvt Ltd. Vs. ACIT in ITA No.2110/Mds./14 dated 06.08.15 wherein held that: “6.1. Ground No.3 – Disallowance of expenditure by invoking the provisions of section 14A of the Act for ₹ 3,11,34,630/- since the assessee had made investments of ₹ 71,55,33,570/- for earning exempt income. At the outset, we find that there is no merit for the Revenue to make addition of ₹ 3,11,34,630/- invoking the provisions of section 14A of the Act because the investment made of ₹ 71,55,33,570/-, bears no cost in the form of interest or whatsoever, since the funds by which the investment is made is assessee’s own funds. Further, these investments are made only with sister companies of the assessee and no cost can be attributed for the management of such funds. Therefore, we hereby delete the addition of ₹ 3,11,34,630/- made by the Ld. Assessing Officer invoking the provisions of section 14A of the Act. This ground raised by the assessee is allowed in its favour. “ 21.4 In view of the above judgments, the AO has to consider the

assessee’s own fund i.e. capital and reserves as available on the date of

investment which yields exempted income and thereafter he shall apply the

Formula in Rule 8D and also exclude investments in subsidiaries as held by

the above order of Co-ordinate Bench. With this observation, we remit the

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issue relating to disallowance u/s.14A r.w.r.8D to the file of AO for fresh consideration. Hence, this ground is allowed for statistical purposes.”

7.1 Accordingly, following the aforesaid order of the Tribunal,

we remit this issue to the file of the AO for fresh consideration on

similar direction and this ground of appeal is allowed for

statistical purposes.

assessment proceedings it is seen that the assessee company

has offered entire income to tax in India. Therefore, any

expenses corresponding to the income offered in India is

deemed to accrue or arise in India to the third party. Hence, the

assessee company is not covered by the exclusion clause

provided in sec.9(1)(vii)(b) of the Act. Since the income is

offered in the books of the Indian company, the source rule as

provided in the section would not be applicable to the assessee.

The assessee was caused to explain, as to why disallowance

u/s.40(a)(i) of the Act should not be made in respect of expenses

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viz., management fees, consultancy fees. The assessee has

furnished the reply for non-deduction of TDS paid towards

management fees and consultancy charges. However, it is

observed that the assessee should have deducted TDS on such

payments/expenditure as per the provisions of the Act.

Accordingly, the expenditure incurred on account of

management fees and consultancy charges paid outside India to the tune of ₹ 13,32,01,184/- is disallowed u/s.40(a)(i) of the Act.

Co-ordiante Bench in the case of Ford India Ltd., Vs. DCIT in ITA

No.643 & 840/Mds,/2015 dated 31.01.2017 for the assessment

years 2011-12 & 2012-13 and it was held in para 76 to 78 as

follows:-

“76 We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

“ 6. There is no, and cannot be any, dispute with the basic legal position, as inherent in the scheme of the Indian

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Income Tax Act under section 90, that the provisions of a duly notified double taxation avoidance agreement will override the provisions of the Income Tax Act, unless, and to the extent, the latter are beneficial to the assessee. As Late Prof. Klaus Vogel, in his oft referred book 'Klaus Vogel on Double Taxation Conventions', had observed that, "the treaty acts like a stencil that is placed over the pattern of domestic law and covers over certain parts". Dr. Vogel's perception on this issue quite appropriately sums up the legal position in India as well. A tax treaty essentially restricts the rights of the source state on taxation of an income arising therein, inasmuch as residence country generally has unqualified right to tax global income of its tax subjects anyway, and, therefore, it is useful to begin by examining, from a source country's perspective, whether the income in question can at all be taxed in the source state under the applicable tax treaty. Let us, therefore, begin by examining the taxability of consultancy fee paid to GMPL in the light of applicable tax treaty provisions.

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or

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(c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein." A plain reading of this provisions makes it clear that the case of the GMPL could at best fall in 12(4)(b) but, even for this, it is a condition precedent that the services should enable the person acquiring the services to apply technology contained therein, but then it is nobody's case that services rendered by the GMPL were such that the assessee was enabled to apply technology contained therein. The services were simply consultancy services which did not involve any transfer of technology. The amounts received by the GMPL could not be taxed as 'fees for technical services either. As a matter of fact, learned Departmental Representative submits that the CIT(A) was quite justified in holding that the income in the hands of the GMPL is neither taxable as a business income under article 7 of as fees for technical service under article 12, even though learned Director of Income Tax (International Taxation) Shri Sanjay Kumar, who was present in the court room in connection with some other case, immediately got up to disown this argument and submit that the views so expressed by the learned Departmental Representative are quite at variance with the stand being taken by the directorate of international taxation in all other cases. That does not make any difference to our decision on this issue, because even without this benevolence of the learned Departmental Representative, we will still come to the same conclusion. The reason is this. There are at least two non-jurisdictional High Court decisions, namely Hon'ble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd (2012 TII 14 HC DEL INTL) and Hon'ble Karnataka High Court in the case of CIT Vs De Beers India Pvt Ltd (TS-312-HC-2012), in favour of the assessee, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. We bow before higher wisdom of Hon'ble Courts above and hold that unless there is a transfer of technology involved in technical services extended by Singapore company, the 'make available' clause is not satisfied and, accordingly, the consideration for such services cannot be taxed under Article 12(4) of India Singapore tax treaty. Learned Departmental Representative, however, proceeds to give a new twist to the case of the revenue. Learned Departmental Representative has now come up with the argument that

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even if the income embedded in payments to GMPL were not taxable in India under Article 7 (i.e. business profits) or under Article 12, these amounts were taxable under article 23 of the applicable tax treaty. He invites our attention to Article 23 which provides that " (i)tems of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States." His interpretation of the scope of this provision is that when taxability fails under all articles of the applicable tax treaty, the taxability automatically arises under this provision. In other words, for example, when a business profit is not taxable under Article 7, this non taxability is not the end of the road so far as taxability in the source state is concerned, because, according to the learned Departmental Representative, the taxability of business profit in such a situation, though not taxable under article 7, automatically shifts to the taxability under article 23, effectively under the domestic laws of the source state. He has also filed a note, though more little carefully worded than his arguments in the court room, which also lays lot of emphasis on the scope of article 23, as also the fact that the foreign company should "have approached the authority for advance ruling as per the provisions of sections 245N to 245V of the Income Tax Act, 1961 to be on the right side of the law, instead of failing to fulfil their tax obligations and presuming and assuming non applicability of certain provisions of the Income Tax Act vis- a-vis the DTAA between India and Singapore". Learned Departmental Representative goes on to state that "the assesse has preferred the tortuous (path) over the strai ght".

Learned Departmental Representative has also laid lot of emphasis about, what he perceives as, learned CIT(A)'s categorical finding that the payments made to GMPL were in the nature of 'other income' and, therefore, should be taxed under article 23 of the Indo Singapore tax treaty.

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allowed for any expenditure being royalty, fees for technical services and other sum chargeable under the Act, if it is payable outside India, or in India to a non resident, and on which tax is deductible at source under Chapter XVII B and such tax has not been deducted", and it wa s in this context that the CIT(A) noted that though the fee paid to GMPL was not covered by fees for technical services, it could fall under the head 'other sum' but since the said other sum was not chargeable to tax in India, the assessee did not have any tax withholding obligation. This classification of income was not in the context of treaty classification but in the context of, what he believed to be, two categories of income referred to under section 40(a)(i), i.e. 'royalties and fees for technical services' and 'other sums chargeable to tax'. As the CIT(A) did so, he missed out the expression 'interest' appearing in Section 40(a)(i) but that is hardly material in the present context. What is material is that the expression 'other income' was used in the context of mandate of Section 40(a)(i) and not in the context of treaty classification of income. Learned Departmental Representative has clearly missed out this vital fact. Let us now turn to the provisions of Article 23 of the applicable tax treaty. As we have noted earlier, this treaty provision provides that "items of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States".

Learned Departmental Representative's argument is that "consultancy charges, brokerage, commission, and incomes of like nature which are payments which are covered by the expression "other sums" as stated in Section 40(a)(i) and chargeable to tax in India as per the Income Tax Act, and also liable to tax as per taxation laws of Singapore" are squarely covered by Article 23 of the India Singapore tax treaty. This argument proceeds on the fallacious assumption that

'other sums' under section 40(a)(i) constitutes an income which is not chargeable under the specific provisions of different articles of India Singapore tax treaty, whereas not only this expression 'other income' is to be read in conjunction with the words immediately following the expression 'chargeable under the provisions of this (i.e. the Income Tax Act 1961) Act', it is important to bear in mind

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that this expression, i.e. 'other sums, also covers all types of incomes other than (a) interest, and (ii) royalties and fees for technical ervices. Even business profits are covered by the expression 'other sums chargeable under the provisions of the Act' so far as the provisions of Section 40(a)(i) and Section 195 are concerned and, therefore, going by this logic, even a business income, when not taxable under article 7, can always be taxed under article 23. That is clearly an absurd result. A tax treaty assigns taxing rights of various types of income to the source state upon fulfilment of conditions laid down in respective clauses of the treaty. When these conditions are satisfied, the source state gets the right to tax the same, but when those conditions are not satisfied, the source state does not have the taxing right in respect of the said income. When a tax treaty does not assign taxability rights of a particular kind of income to the source state under the treaty provision dealing with that particular kind of income, such taxability cannot also be invoked under the residuary provisions of Article 23 either. The interpretation canvassed by the learned Departmental Representative, if accepted, will render allocation of taxing rights under a treaty redundant. In any case, to suggest that consultancy charges, brokerage and commission can be taxed under article 23, as has been suggested by the learned Departmental Representative, overlooks the fact that these incomes can indeed be taxed under article 7, article 12 or article 14 when conditions laid down in the respective articles are satisfied.

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on is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. Learned Departmental Representative's argument, emphatic and enthusiastic as it was, lacks legally sustainable merits and is contrary to the scheme of the tax treaty. While dealing with the scope of residuary article of income under the tax treaties, and in support of the above conclusions, we may also refer to certain observation, with which we are in most respectful agreement, made by the Hon'ble Justice P V Reddi, articulating the views of the Authority for Advance Ruling in the case of Gearbulk AG (318 ITR 66), and in his felicitous words as follows …………The question is whether the profits from the shipping operations in international traffic can be said to be "an item of income" "not dealt with" in the previous articles of DTAA ? We do not think so. Among the various items of income in the foregoing articles, business profits into which the shipping income falls has been dealt with under article 7. Profits from the international operation of ships are only a species of business profits just as the profits from international air transport. The latter is dealt with separately in article 8 for the reason that it does not fall in line with the scheme of taxation of business profits under article 7. Exclusive right is given to the State in which the enterprise resides. Permanent Establishment test is irrelevant under article 8. Hence, a separate article. As far as the profits from international operation of ships are concerned, it is an integral part of business profits; at the same time, they are excluded from the business profits - article for the obvious reason that it is not intended to be covered by the Treaty. That income has been left to the care of domestic law under which the burden of taxation on such income has been minimized (vide section 172 of Income-tax Act). We are of the considered view that a particular species of income which is specifically referred to in article 7 and deliberately left out of its genus, namely business profits, cannot be said to be an item of income not dealt with under article 7. The expression 'deal with' is a comprehensive expression having different shades of meaning. In the New Chambers Thesaurus, the meanings of'deal with' are given thus:

"1. deal with a situation, attend to, concern, see to, manage, handle, tackle, cope with, get to grips with, take care of, look after, sort out, process."

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In Collins Cobuild English Language Dictionary, it is stated thus:

"If a book, speech, film etc. deals with a particular thing, it has that thing as its subject or is concerned with it."

In Shorter Oxford Dictionary (Thumb Index Edn.) one of the meanings given is:

"be concerned with (a thing) in any way; busy or occupied oneself with, esp. with a view to discuss or refutation."

The following meaning given in the New Oxford American Dictionary may also be noted : "take measures concerning (someone or something) ……. take or have as a subject; discuss." ……………………..

9.1 The applicant's counsel submitted that an item of income can be said to have been dealt with in an article of the Treaty only if it defines its scope as well as allocates the right to tax such income between the two Contracting States. Mere exclusion of shipping business profits from article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression 'dealt with' does not necessarily mean that there should be a detailed or elaborate treatment of the subject.

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Technology Centre Pvt Ltd Vs CIT (supra) wherein Their Lordships have categorically held that, "where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof". In view of these discussions, and bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.”

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assessee. This tax withholding demand must also, therefore, stand deleted. We order so.

10.1 Further, he relied on in the case of ABB FZ-LLC, (75

taxmann. 83) (Bang.), & in the case of Bharti Airtel Limited (67

Taxmann.com 223)(Delhi) and in the case of TUF Bayren (India)

Ltd. (23 taxmann.com 127)(Mum.).

assessment year 2007-08, this issue came for consideration in

ITA No.90/Mds./2012 and 1159/Mds./2012 vide order dated

remitted the issue to the file of Assessing Officer to examine the

issue in the light of judgment of Bombay High Court in the cast of

DIT Vs. Ishikawjima Harima Heavy Inds. Co. Ltd., in 212 Taxman

273(Bom.). However, he submitted that the said decision was

delivered before the amendment of Sec.9(1) of the Act.

According to ld. D.R, in the present assessment year the DRP

considered the amendment to Sec.9(1) and observed that tax

must be deducted which has not been done and thus the action

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of the Assessing Officer is correct in invoking the provisions of

Sec.40(a)(i) of the Act.

on record. The Explanation incorporated in section 9 declares

that “where the income is deemed to accrue or arise in India

under clause (v),(vi) and (vii) of sub-sec.(1), such income shall

be included in the total income of the non-resident, whether or

not be resident as a residence or place of business or business

connection in India”. The plain reading of the said provisions

suggests that criterion of residence, place of business or

business connection of a non-resident in India has been done

away with for fastening the tax liability. However, the criteria of

rendering service in India and the utilization of the service in

India to attract tax liability u/s.9 (i)(vii) remained untouched and

unaffected by the Explanation to Sec.9 of the Act and outside

India. Therefore, the twin criterion of rendering of services in

India and utilization of services in India become evidently

necessary condition to deduct tax However, in respect of said

payments, the rendering of services being purely off shore and

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outside India, the whatever paid towards said services does not attract tax liability.

12.1 In view of the above, we inclined to remit the issue to the file of Assessing Officer to examine the issue afresh in the light of above order along with concerned DTAA and decide thereupon. The issue is partly allowed for statistical purposes.

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the cost of capital assets on which there is no question of TDS.

For this purpose, we rely on the decision of the Tribunal in the

case of M/s. Crescent Chemsol Pvt. Ltd. vs. ACIT in ITA

No.1497/Mum/2010 for the asst. year 2006-07 dated 09.03.2011

wherein the Tribunal held that:-

“10. Aggrieved by the order of the CIT(A) the assessee has raised Ground No.3 before the Tribunal. We have heard the rival submissions. Provisions of section 40(ia) of the Income Tax Act, 1961 (the Act) reads as follows: “40. Notwithstanding anything to the contrary in section 30 to[38], the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, (ia) any interest, commission or brokerage,[rent, royalty]fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work(including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII- Band such tax has been deducted or, after deduction,[has not been paid on or before the due date specified in sub-section(1) of section 139:]” A perusal of the above provisions show that it is only when a deduction is claimed in computing the income chargeable under the head ‘profit and gains of business or profession’ that the above provision are attracted. The deduction claimed should be of

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interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services. The claim for depreciation made by the assessee does not fall within any of the categories mentioned in the aforesaid provision. Therefore, it is not possible to make the impugned disallowance by resorting to the provisions of section 40(ia) of the Act. The learned D.R. however submitted that provisions of Sec.40(a)(i) of the Act were held to apply even to capital expenditure by the ITAT Mumbai in Spaco Carburetors (I) Ltd. Vs. ACIT 2005 (3) SOT 798 (Mum). We find that the said decision was rendered in the context of deduction of capital expenditure while computing income, claimed by an Assessee u/s.35AB of the Act. We therefore do not find any relevance to the ITA NO.1486/MUM/2010(A.Y. 2005-06) 7 said decision to the present case. In that view of the matter we direct that the disallowance made be deleted. Ground No.3 raised by the assessee is accordingly allowed. 12. In the result, the appeal of the assessee is partly allowed.”

In view of the above order of Tribunal, this ground is allowed.

disallowance of FCCB expenditure.

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revised return. According to the DRP, as regards the

objections, it is important to examine as to whether the any

variation has been caused to the income or loss as returned by

the assessee during the year under consideration or not. The

scope of ‘Reference to Dispute Resolution Panel is as per sub

section 2 of sec.144C of the Act, i.e. the assessee can file his

objections only in relation to such “variation” as is referred to in

sub section 1 of sec.144C. Sub section 1 of sec.144C of the Act

refers to ‘any variation in the income or loss returned’ as made

by the Assessing Officer as is prejudicial to the interest of the

assessee. The above objections do not at all relate to any such

variation made by the AO in the income or loss as returned by

the assessee in its return for asst. year 2012-13. So the above

objections cannot be adjudicated by the Panel, being beyond its

scope of powers and not accepted the objections.

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17.1 The ld.A.R relied on the decision of co-ordinate bench of

Mumbai Tribunal in the case of Mahindra & Mahindra Limited, in

M.A. No. 397/Mum/2012 (Arising out of ITA No. 7999/Mum/2011)

Assessment Year 2007-08 vide order dated 03-10-2012 for the

proposition that the Tribunal is powered to admit the additional

ground and it is to be remitted to the file of AO for fresh

consideration.

on record. The issue raised by the assessee goes to the root of

the matter and the assessee has taken a plea before the DRP to

consider this issue, but refused to entertain it on the reason that

it was not before the TPO/AO. In our opinion, all the facts are

available on record and assessee made a claim, it is appropriate

to remit the issue to the file of AO for his consideration. In view of

the judgement of Supreme Court in the case of National Thermal

Power Co. Ltd. v. CIT (229 ITR 283), wherein it was held that a

legal ground can be raised at any stage of appeal. Further, the

Co-ordiante Bench in the case of M/s.Abhiniha Foundation Pvt

Ltd., in ITA No.281/Mds./2016 for the A.Y 2011-12 the Tribunal

vide order dated 29.04.2016 wherein admitting the additional

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ground, though it was not raised before the Assessing Officer

and observed that the assessee is entitled to raise not merely by

additional legal submissions before the appellate authorities, but

is also entitled to raise additional claims before them. The

appellate authorities have the discretion whether or not to permit

such additional claims to be raised. It cannot, however, be said

that they have no jurisdiction to consider the same. That they

may choose not to exercise their jurisdiction in a given case is

another matter. The exercise of discretion is entirely different

from the existence of jurisdiction. The judgment in the case of

Goetz reported 284 ITR 323(SC) was confined to a case where

the claim was made only before the Assessing Officer and not

before the appellate authorities. The Court did not lay down that

a claim not made before the Assessing Officer cannot be made

before the appellate authorities. The jurisdiction of the appellate

authorities to entertain such a claim has not been negated by the

Supreme Court in this judgment. In view of the above

discussion, this issue is remitted back to the file of AO, if require,

the AO should call for remand report from the TPO and decide

the issue in accordance with law and on merit, we refrain from

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commenting on merits as the lower authorities to decide it.

Hence, this ground is remitted to the file of AO for fresh

consideration.

grossly erred in not allowing credit for income tax paid outside

India u/s.90 (foreign tax) while assessing positive income of the

assessee as against loss claimed in the return of income filed

u/s.139 of the Act. According to the DRP, as regards the

objections, it is important to examine as to whether the any

variation has been caused to the income or loss as returned by

the assessee during the year under consideration or not. The

scope of ‘Reference to Dispute Resolution Panel is as per sub

section 2 of sec.144C of the Act, i.e. the assessee can file his

objections only in relation to such “variation” as is referred to in

sub section 1 of sec.144C. Sub section 1 of sec.144C of the Act

refers to ‘any variation in the income or loss returned’ as made

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by the Assessing Officer as is prejudicial to the interest of the

assessee. The above objections do not at all relate to any such

variation made by the AO in the income or loss as returned by

the assessee in its return for asst. year 2012-13. So the above

objections cannot be adjudicated by the Panel, being beyond its

scope of powers and not accepted the objections.

the similar issue was considered by the Tribunal in assesse’s

own case in ITA Nos.585/Mds/2015 & 267/Mds/2016 for the

assessment years 2010-11 and 2011-12 dated 14.9.2016

wherein Tribunal held that:-

“23. We have heard both the parties and perused the material on record. This issue came for consideration in assessee’s own case in I.T.A.No.1159/Mds/2012 challenging the action of the CIT(A) in restricting the assessee’s claim of relief u/s 90 of the Act of ₹ 224,67,411/- to the extent of tax payable in India on net income of ₹ 516,93,732/- i.e difference between interest earned from M/s AHPL and interest paid on borrowings made for advancing the loans to M/s AHPL. The Tribunal while adjudicating the grounds, placed reliance on the order of the Tribunal in the case of Bank of Baroda vs CIT in I.T.A.No.2927/Mds/2011 dated 25.7.2014 wherein the Tribunal has given a direction that the income of the branches of the assessee shall also taxable in India

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i.e it would be included in the return of income filed by the assessee in India and whatever taxes have been paid by the branches in the other contracting states i.e the source country, credit of such taxes shall be given. Thereafter, the Tribunal in this case remitted the issue to the file of the Assessing Officer to decide afresh in the light of the above order of the Tribunal in the case of Bank of Baroda in I.T.A.No.2927/Mum/2011 dated 25.7.2014. Later assessee filed MA in MA Nos. 95 & 96/Mds/2016 stating that the direction given by the Tribunal is not appropriate. Since the assessee has no income from any branches in Singapore, that decision cannot be applied to the assessee’s case. The Tribunal while adjudicating the said MA vide order dated 29.7.2016 held as follows :

“We have heard the rival submissions and perused the material on record. In our opinion, the interpretation of the order of the Tribunal by the ld. AR is misconceived. The Tribunal was of the opinion that if the income from foreign country is offered to tax by the assessee by whatever means, the assessee has to get tax credit to the extent the tax was paid in foreign country. In other words, once the income is included either in the Profit & Loss Account or in the return of income, the corresponding tax credit on the same income has to be given. Accordingly, we are of the opinion that there is no need of apprehension for the assessee that the Assessing Officer will misinterpret the order of the Tribunal. Therefore, we do not find any merit in the argument of the ld. AR. Accordingly, the miscellaneous petition is dismissed.” In view of the above, following the above order of the Tribunal, we are inclined to hold that once the interest income subject to tax in any manner in the hands of the assessee, the corresponding tax credit to be given. Accordingly, this ground is remitted to the AO to examine the issue in the light of our above findings.”

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Respectfully following the aforesaid order of the Tribunal, this issue is remitted to the file of ld. Assessing Officer and decide accordingly. Hence, this ground of appeal is partly allowed. In the result, the appeal of the assessee is partly 21. allowed for statistical purposes. Order pronounced on 19th June, 2017.

Sd/- Sd/- (जी. पवन कुमार) (चं� पूजार�) (G. Pavan Kumar) (Chandra Poojari) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member चे�नई/Chennai, �दनांक/Dated, the 19th June, 2017. K S Sundaram आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.