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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member)
The captioned appeal by assessee for Assessment Year [AY] 2010-2011 assails final assessment order dated 27/11/2014 of Ld. Deputy Commissioner of Income Tax [DCIT] passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 on various issues.
Briefly stated, the assessee, being resident corporate assessee, was engaged in the business of outdoor media advertising services. The return of income for impugned AY was filed declaring total loss of Rs.16,71,40,968/- Which was picked up for scrutiny assessment u/s 143(3). Since transfer pricing issues were involved, the same was referred to Transfer Pricing Officer-I (7) [TPO] u/s 92CA(1) on 08/02/2013 for determination of Arm’s Length Price [ALP] of these transactions. The TPO finalized its order on 29/01/2014 and following the same, draft assessment order dated 19/02/2014 was finalized by DCIT and sent to DRP for its directions. The assessee raised objection before DRP on 27/03/2014 and after hearing the same, DRP finalized its directions vide order dated 22/10/2014. Lastly, final assessment order was passed by DCIT u/s 143(3) r.w.s. 144C(13) of the Income Tax Act on 27/11/2014 determining total loss at Rs.10,07,49,043/- under normal provisions and Rs.19,75,98,787/- under MAT provisions. The main disallowance suffered by assessee were interest u/s 36(1)(iii) for Rs.4,92,15,062/- and TP adjustment of Rs.1,71,18,150/- as suggested by TPO with respect to ‘Corporate Guarantee’ [CG] which are the main subject matter of this appeal. 3. Ground No. 1 is general ground. Ground Nos. 2 to 13 assails TP adjustment with regard to Corporate Guarantee [CG]. Ground Nos. 14 to 16 are related with interest disallowance u/s 36(1)(iii) and Ground Nos. 17 & 18 are related with grant of TDS and refund. Ground No. 19 is related with initiation of penalty u/s 271(1)(c). We take up the issues one by one in the succeeding paragraphs.
M/s Laqshya Media Private Ltd. Assessment Year 2010-11 4. Corporate Guarantee 4.1 The assessee gave corporate guarantee of AED 53 million to its Mauritius AE namely ‘Laqshya Media International (Mauritius)’ [LMI] who in turn gave guarantee to HSBC Bank Middle East Ltd., Dubai for AED 33 million and to National Bank of Dubai, Dubai for AED 20 million for due repayment of term loan availed by ‘Right Angel Media FZ, LLC’, a step down subsidiary of the assessee company. The corporate guarantee was reduced to 51 million vide amendment to deed of guarantee dated 04/01/2010 and thus, total corporate guarantee remaining outstanding stood at INR 62.475 crores. The transaction was referred to TPO to suggest suitable adjustment. Before TPO, the assessee contended that ‘Corporate guarantee’ [CG] was not an international transaction and hence no benchmarking thereof has been done by the assessee but the same got rejected by TPO by noticing amendment made by Finance Act, 2012 which has specifically taken ‘Corporate guarantee’ in the ambit of definition of ‘international transaction’ w.e.f. 01/04/2002. On merits, it was contended that credit rating of both guarantor and guarantee was the same i.e. CARE BB+ (Is). However, TPO after analyzing the financials and risk profiles of the both companies was not convinced with the explanation of assessee and rejected the same. Thereafter, TPO proceeded to compute the ALP by adopting External ‘CUP’ method on the basis of ‘yield approach’ on unsecured bonds corresponding to credit rating of two entities after considering following judgments of foreign courts:- i. General Electric Capital Canada Inc. V. The Queen (Tax court of Canada 2009 TCC 563) ii. Container Corporation Vs. Commissioner (Tax court of USA 134 TC No. 5 2010)
TPO adopted 5 years annualized average yield data obtained from CRISIL. The TPO assigned rating of CARE BB+ to assessee company and CARE B+ to its AE i.e. one notch below the assessee. After making suitable adjustments for these ratings, TPO arrived at TP M/s Laqshya Media Private Ltd. Assessment Year 2010-11 adjustment of 2.74% which came to Rs.1,71,18,150/- and following the same, DCIT passed draft assessment order. The assessee assailed benchmarking by TPO before DRP and raised various contentions in his support but rejecting the same, DRP affirmed the stand of TPO. Aggrieved, the assessee is in appeal before us. 4.2 The initial contention of the Ld. Senior counsel for assessee [AR], Sh. Rajan Vora was that the said transaction was not an international transaction but fairly conceded that in view of amendment in Section 92B and jurisdictional Bombay High Court judgment in CIT Vs. Everest Kento Cylinders Ltd. 378 ITR 57, the said transaction constitutes international transaction. On merit, is was stated that the CG has been provided to its AE under overall financing structuring arrangement where over and above the share capital invested, funds were provided and CG was also given. Moreover, the assessee was not in the business of financing / giving guarantees and the same has been given solely for its own benefit to protect its goodwill, reputation and expand its business operations abroad and to safeguard its economic and strategic business relationship with its AE. Hence, CG without charging commission was at Arm’s Length considering overall financing arrangement. Further, the credit rating of both the entities was similar and hence, no adjustment was called for in these circumstances. Moreover, the benchmarking done by TPO was erroneous by taking 5 years average annualized yield whereas the guarantee given by assessee was for a shorter period of less than 4 years. In number of judgments, the rate ranging from 0.20% to 0.50% has been found to be acceptable by judicial authorities at various levels and therefore, the same should be applied and that too on the amount of actual loan availed by the AE. Per contra, Ld. DR supported the TP adjustment on the ground that AE stands benefitted by obtaining the guarantee and had rating of both the companies been similar, there would have been no requirement to give the said CG.
M/s Laqshya Media Private Ltd. Assessment Year 2010-11 4.3 We have heard rival contentions and perused material available on record. It is observed that the assessee company proposed to charge 0.5% guarantee fees from its AE but waived it subsequently on account of poor financial health of the AE. Further, the assessee’s contention is that both entities enjoyed similar ratings and hence no TP adjustment thereof is called for, with which we are not convinced as had that been the position, there would have been no requirement to provide the said guarantee. The assessee considering the same to be a benefit to its AE, had proposed to charge guarantee fees of 0.5%. Hon’ble Bombay High Court in CIT Vs. Everest Kento Cylinders Ltd. (supra) has affirmed guarantee adjustment of 0.50% as upheld by the Tribunal. In various other judicial pronouncements, CG has been benchmarked in the range of 0.20% to 0.50%. Therefore, keeping in mind the overall facts and circumstances of the case, we restrict TP adjustment against bank guarantee to 0.50% on CG given by the assessee. Further, we are of the considered opinion that CG stood in force at all time and the assessee was contingently liable for the Gross amount of CG provided to its AE notwithstanding the amount of actual loan availed by the AE and further, AE, at all times, got insulated to the extent of guarantee provided by the assessee and therefore, the adjustment has to be calculated on Gross value of CG provided by the assessee. We direct so. This ground is partly allowed.
Disallowance of Interest u/s 36(1)(iii) 5.1 Ground Nos. 14 to 16 assails interest disallowance u/s 36(1)(iii) for Rs.492.15 Lacs. DCIT noted that the assessee claimed interest expenditure of Rs.690.95 Lacs u/s 36(1)(iii) whereas it has advanced certain interest free loans to its subsidiary companies, the details of which are as follows:- No. Name of the Concern Balance As on 31/03/2010 (Rs. in Lacs) 1. Laqshya Digital Media Pvt. Ltd. 6201.84 2. Laqshya OOH Media Pvt. Ltd. 21.07 M/s Laqshya Media Private Ltd. Assessment Year 2010-11 3. Laqshya Hyderabad Airport Media Pvt. Ltd. 3979.36 Total 10202.27 Lacs DCIT further noted that Secured Loans and Unsecured Loans stood at Rs.6423.22 Lacs on which interest expenditure of Rs.690.95 Lacs has been claimed in the Profit & Loss Account and since interest bearing funds were used to make interest free loans, the same called for full disallowance u/s 36(1)(iii). Before DRP, Assessee contended that the assessee and its AE, being in the same line of business, the said loans are out of commercial expediency and business interest of the assessee. Further, these loans were quasi-equity in nature as out of Rs.102.02 crores, an amount of Rs.69.14 crores was finally converted into equity investment in subsidiary companies in subsequent year. Further, the assessee contended that sufficient interest free own funds were at the disposal of the assessee to make these interest free investments. Rejecting the same, DRP allowed part relief to the assessee qua interest on term loans amounting to Rs.20.59 crores but upheld the disallowance qua interest against working capital loan of Rs.42.40 crores. Following the same, DCIT provided relief to the extent of Rs.198.80 Lacs being interest on term loans but disallowed balance interest component of Rs.492.15 Lacs. The same has been assailed before us. 5.2 First of all, the Ld. AR drew our attention to rectification application dated 09/12/2014 filed by assessee u/s 154 against the said order to contend that the disallowance has wrongly been computed by DCIT and the same should actually be Rs.427.57 Lacs as against Rs.492.15 made by DCIT and the break-up of interest component was as follows:- Nature of Interest Amt. (Rs. in Lacs) On Fixed Term Loans 248.17 On working capital loans 427.58 Other interest 15.20 Total 690.95 Our attention was further drawn to computation of Income for impugned AY where we find that out of ‘Other interest’ of Rs.15.20 Lacs, assessee had already made suo-moto M/s Laqshya Media Private Ltd. Assessment Year 2010-11 disallowance of Rs.11.23 Lacs comprising of ‘Interest on TDS’ and ‘Interest provision to MSME’. The balance amount mainly represents Interest on Service Tax. This being the factual position, we conclude that amount of Rs.15.20 Lacs has wrongly been disallowed by DCIT. 5.3 Further, DCIT has computed interest of Rs.198.80 Lacs on Term Loan whereas, as per the above break-up the same stood at Rs.248.17 Lacs giving rise to further difference of Rs.49.37 Lacs. At this juncture, it would be prudent to take up the matter on merits. 5.4 The Ld. AR has contended that assessee and its AE are into same line of business viz. display / hoardings advertisement. The separate subsidiaries have been floated for the purpose of business exigencies and getting business contracts and licenses at various places. To achieve the common objective, quasi-equity has been introduced in these concerns as a part of overall financial arrangement. A major portion of these loans have been converted into equity in subsequent years. Subsidiaries have carried out common business and have not made any further investments. These subsidiaries are engaged in the business of providing out of home advertising solutions, through media assets across the verticals, bill boards or hoarding and other media asset like steel furniture, transit media, ambient media, digital media and airport media etc. which is nothing but extension of business of the assessee. Moreover, the assessee has sufficient owned funds to make these investments and a presumption has to be drawn that investment are out of owned funds as per various judicial pronouncements. Also, on the principle of commercial expediency the interest cannot be disallowed as the loans to subsidiaries are for business purposes. Further, disallowance against working capital loan of Rs. 42.40 crores has been made but the working capital loans were meant to carry out day to day operations of the company and as per sanctioned terms, the same could not be used for the purpose of granting of loans to subsidiaries. Thus, the impugned loans were out of own funds and there was clear nexus between funds advanced to M/s Laqshya Media Private Ltd. Assessment Year 2010-11 subsidiaries and free funds internally generated by assessee and hence impugned additions deserves to be deleted. Reliance has been placed upon following judicial pronouncements for various contentions:- i. S.A.Builders Vs. CIT [Supreme Court 288 ITR 1] ii. Hero Cycles Pvt. Ltd. Vs. CIT [Supreme Court] [Civil Appeal No. 514 of 2008] iii. CIT Vs Reliance Communication Infrastructure [207 Taxmann 219 Bombay High Court] iv. CIT Vs Reliance Utilities [313 ITR 340 Bombay High Court] v. CIT Vs Ashok Commercial Enterprises [Bombay High Court] [ITA-L No. 2985 of 2009)] vi. CIT Vs. HDFC Bank Ltd [Bombay High Court][ITA No, 330 of 2012] Per Contra, Ld. DR justified the disallowances made by lower authorities on the ground that deduction thereof could be allowed only if the funds were used wholly and exclusively for the purpose of the business of the assessee but here, the funds have been diverted to subsidiaries and that too without charging any interest. 5.5 We have heard various contentions and perused relevant material including cited case laws. After analyzing the various judicial pronouncements, we find strength in the various arguments of Ld. AR. The perusal of Net worth statements reveals that as on 31/03/2010, the assessee’s capital structure stood as follows:- Liabilities Amount (Rs. in Crores) Assets Amount (Rs. in Crores) Shareholders’ Fund 249.00 Fixed Assets 27.45 Loan Funds 64.22 Investments 12.60 Loans & Advances 143.23 Net Current Assets 4.82 Profit & Loss A/c 125.12 TOTAL 313.22 313.22 It can be observed that against Share Holders’ funds of Rs.249.00 crores, the loans & advances stood at Rs.143.23 Crores out of which impugned interest free loans are Rs.102.02 Crores and hence owned funds are sufficient to cover the said loans. It is well settled by catena of judgments that in such a scenario, it is to be presumed that the investment made in subsidiary were out of own funds and not out of borrowed funds. Hon’ble jurisdictional Bombay High Court in CIT Vs. HDFC Bank Ltd.(supra) have observed that if assessee’s capital, profits reserves and surplus were higher than the investment in tax free securities M/s Laqshya Media Private Ltd. Assessment Year 2010-11 then it would have to be presumed that investment made by assessee would be out of interest free funds available with the assessee. Further, we find that the assessee and its subsidiaries are in the same line of business and the said loans are out of commercial expediency. The funds advanced to subsidiaries have been used for its business and this fact is nowhere disputed by the revenue. The Hon’ble Apex court in S.A.Builders Vs. CIT (supra) has concluded that interest on borrowed funds cannot be disallowed if the assessee has advanced interest free loan to a sister concern as a measure of commercial expediency. What is to be seen is business purpose and what the sister concern did with the money. The expression ‘commercial expediency’ is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Further, the expression ‘for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profits’. Once it is established that there was nexus between the expenditure and the purpose of the business which need not necessarily be the business of the assessee itself, the revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the role to decide how much s reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look the matter from their own viewpoint but that of a prudent businessman. 5.6 Keeping all these factors in mind and on the facts and circumstances of the case, we are inclined to delete impugned additions. The ground of assessee’s appeal succeeds.
Grant of TDS and Refund M/s Laqshya Media Private Ltd. Assessment Year 2010-11 Ground Nos. 17 & 18 is related with Grant of TDS credit & Refund. The assessee had claimed TDS credit of Rs.1,57,53,775/- in the return of income whereas before DRP, it claimed the same for Rs.1,64,11,584/- on the strength of physical TDS certificates. DRP directed DCIT to grant the full TDS credit on the strength of physical TDS certificates even if the entries were not being reflected in Form 26AS. Misapplying the same, DCIT granted TDS credit for Rs.1,57,53,775/- only which was being reflected in Form 26AS. Before us, the Ld. AR has stated that the assessee is entitled for full TDS credit on the strength of physical TDS certificates. Therefore, reiterating the stand of DRP and following Hon’ble Bombay High Court judgment in Yashpal Sahni Vs. Rekha Hajarnavis (2007)293 ITR 539 , DCIT is directed to grant full TDS credit of Rs.1,64,11,584/- after verifying the physical TDS certificates and grant refund, to which assessee is entitled. Both grounds of assessee’s appeal stand allowed for statistical purposes.
Initiation of penalty u/s 271(1)(c) In Ground No. 19, the assessee has assailed initiation of penalty u/s 271(1)(c). The same, being too premature at this stage, calls for no interference at present. The ground is dismissed.
All the grounds of appeal are disposed off in the above manner and resultantly, the appeal of the assessee stands partly allowed.
Order pronounced in the open court on 04th January, 2017.