GRABAL ALOK IMPEX LTD,MUMBAI vs. ADDL CIT RG 6(3), MUMBAI

Rival contentions have been heard and record perused. Facts in brief are that the assessee company is engaged in the business of manufacture and export of various embroidery products and accessories. For the period relevant to A.Y. 2010-11, the return of income was filed on 15.10.2010 declaring a total income of Rs.14,90,22,696 under the normal provisions of the Act and book profits of Rs.25, 11,82,337 under the 2 provisions of section 115JB of the Act. The case of assessee was selected for scrutiny and also referred to the TPO for an examination of the international transactions of the assessee. The TPO vide his order dated 31.12.2013 recommended a transfer pricing adjustment of Rs.71,05,654 on account of corporate guarantee issued by the assessee on behalf of an AE and another transfer pricing adjustment of Rs.9,60,867 on account of interest on advances given by the assessee to its AE. Both these transfer pricing adjustments were incorporated in the assessment order passed on 11.02.2014. The Assessing Officer further made certain additions and disallowances to the returned income and assessed the total income of the assessee at Rs.17,53,50,351 under the normal provisions of the Act and at Rs.26,78,15,875 u/s 115JB of the Act. Assessee’s claim of TUF subsidy being capital in nature, was also declined.

3. First transfer pricing adjustment of Rs.71,05,654 incorporated in the assessment order is on account of fees for guarantee issued by the assessee in favour of its Associated Enterprise. The relevant facts are that the assessee during the period under consideration had given various guarantees to Banks on behalf of its subsidiary company Grabal Alok UK Ltd. The assessee had not benchmarked any of these guarantees in its transfer pricing study report as international transactions on the ground that the guarantees provided by the assessee on behalf of its AE emanated out of the ownership of the concerned subsidiary and were quasi equity in nature and that the concerned guarantees had been 3 provided due to business synergies between the assessee and its subsidiary and for the business purposes of the assessee company. The TPO did not accept the assessee's contention and held that in an arms length context, any party extending a guarantee would expect financial compensation for the same in the form of an appropriate guarantee fee. The AO relied on the provisions of section 92B of the Act to hold that the expression 'international transaction' shall include capital financing including guarantee. For the computation of the arms length price of the guarantee fee receivable from such transactions, the AO used the CUP method and calculated Guarantee commission at the rate of 2.4% per annum on the outstanding balances during the year for which the corporate guarantees had been extended by the assessee to its AE was accordingly computed by the TPO at Rs.71,05,564/-.

It was argued by ld. AR that the quantum of the corporate guarantee given by the assessee was insignificant and has in no way impacted the borrowing powers of the assessee. Further, the same has not impacted the interest cost in respect of the bank borrowings and is not detrimental to the interest of the assessee. Also, the guarantee provided by the assessee has not been invoked. Accordingly, there are no real costs whatsoever incurred by the assessee for giving the said corporate guarantee and there is no case for making addition in this respect. It was further argued by ld. AR that the transaction of giving a corporate 4 guarantee to a bank is not an international transaction. In this connection, the assessee relied on the decision of Hon'ble Delhi Tribunal in case of Bharti Airtel Limited (ITA No 5816/DeI/2012) dated 11th March 2014 (AY 2008-09).

Ld. AR also placed reliance on the following decisions :- i) Videocon Industries Ltd (43 CCH 0113) (Mum Tribunal); ii) Micro Ink Limited (45 CCH 280); iii) Siro Clinpharm Pvt Limited (46 CCH 485); iv)Manugraph India Limited (ITA No.2631/Mum/2015) dated 13th April 2016.

On the other hand, ld. DR relied on the order of lower authorities and contended that the transaction of provision of bank guarantee, in the facts of the present case has a bearing on the assets of the assessee at 5 the time of the transactions and also on a future date to the extent that the banks had provided the funds to the subsidiary had obtained a charge on the assets of the assessee to the extent of such guarantee given. The argument of business expediency has no relevance to transfer pricing assessment wherein providing corporate guarantee would be a service rendered by the assessee, that had conferred a benefit to its AE, for which compensation was required to be paid by the concerned AE equivalent to the price payable in' a similar arms Iength transaction with an unrelated party.

We have considered rival contentions, carefully gone through the orders of authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld. AR and DR during the course of hearing before us. The issue under consideration is squarely covered by the decision of ITAT Mumbai in the case of Everest Kento Cylinders Ltd. in ITA No.542/M/2012, vide order dated 23rd November, 2012, wherein the Tribunal held that guarantee commission rate of 0.5% can be said to be at arms length. This decision of Tribunal has been upheld by Hon’ble Bombay High Court, which is reported at [2015] 378 ITR 57. As the facts and circumstances in the case under consideration are same, as discussed by the Tribunal in the case of Everest Kento ITA No.542/Mum/2012, which was confirmed by the Hon’ble High Court cited above, we direct the AO to restrict bank guarantee commission at 0.5% We direct accordingly.

On the other hand, ld. DR relied on the order of lower authorities.

We have considered rival contentions and found from the record that during the year under consideration, the assessee had given advances to its Associate Enterprise Grabal Alok International Ltd ('GAlL') of Rs 81,08,748/-. The said advance were given in the normal course of business and adjusted against payables. Based on the various precedents of Courts and Tribunals, it has been held that ALP interest in the case of foreign currency loans should be arrived on the basis of LBOR. In this regard, reliance is placed on various decisions which are as follows: i) Tata Autocomp Systems Limited (ITA No. 1320 of 2012) (Bom HC); ii)Cotton Naturals (I) Pvt Ltd (ITA No 233/2014) (Delhi HC); iii) Cotton Naturals (I) Pvt Ltd (ITA No 3265/Del/2011) (Del Tribunal); iv)Everest Kanto Cylinders Limited (ITA No 7073/Mum/2012) dated 25 September 2014 (Mumbai Tribunal) v)Bharti Airtel Limited (ITA No 5816/DeI/2012) dated 11 March 2014 (AY 2008- 09) (Delhi Tribunal) 14. Respectfully following the judicial precedents, we direct the AO to restrict the disallowance in respect of notional interest adjustment towards advance granted to AE, on the basis of LIBOR. We direct accordingly.

Next grievance of the assessee relates to disallowance of expenses u/s.14A.

We have considered rival contentions and found that during the year under consideration the assessee earned dividend income of Rs.42,82,776/- and assessee suo moto disallowed Rs.8,10,663/- in the 8 computation of income. The AO computed disallowance of Rs.1,27,03,271/- under section 14A by invoking Rule 8D of Income Tax Rules, 1961. Following investment was made by the assessee :- (Rs. In corres) Investment made in As on 31 As on 31 March 2010 March 2009 Alok Industries Limited 31.34 18.30 Others(GB Co-op Bank Ltd.) 0.01 0.01 Preference shares in subsidiary 22.38 117.77 company (outside India) Equity shares in subsidiary company 0.22 0.22 (outside India) Share application money 0 7.8 Total 53.95 144.1 17. Ld. AR drew our attention to the fact that assessee was having sufficient own funds as under :- (Rs. In corres) Particulars As on 31 As on 31 March 2010 March 2009 Share Capital 22.48 21.83 Securities Premium 66.01 70.51 General Reserve 5.63 5.63 Foreign Currency Monetary Item 10.47 0 Translation Account Surplus in Profit & Loss Account 38.51 24.4 Total 143.1 122.37 Investments 53.95 144.1 Since the assessee had sufficient own funds which were far in excess of investments as observed from the aforesaid chart, a presumption may be drawn that the amount had been invested lout of own funds.

From the record we found that in the appellate order passed for AY 2008-09 and AY 2009-2010, the CIT(A) has accepted the fact of the investments (including share application money) being funded through own funds of the assessee and has deleted the disallowance of interest expenditure. Further the assessee had sufficient owned funds of Rs 144.1 9 ITA No.1776/15 crores for making incremental investments during the year of Rs 5.24 crores in Alok Industries Limited (excluding share application money converted into shares during the year. In view of the decision of Hon’ble Jurisdictional High Court in the case of HDFC Bank Ltd. 366 ITR 505 and Reliance Utilities & Power Ltd., 313 ITR 340 as well as various judicial pronouncements referred by ld. AR, no disallowance on account of interest is to be made u/s.14A, when the investments are made from own funds. Accordingly, we direct the AO not to make any disallowance on account of interest.

In view of the above disallowance u/s.14A works out at Rs.12,44,207/- as under :- Sl. Particulars Amount in No Rupees 1 Expenditure directly attributable to exempt 2,949 income 2 Interest expenditure (As investments made NIL out of own funds) 3 0.5% of the average value of investment as 12,41,258 calculated below Total expenditure computed as per Rule 12,44,207 8D(1+2+3) Less : Amount Suo Moto Disallowed 8,10,663 14A disallowance to be restricted 4,33,544 Accordingly, disallowance should be restricted to Rs.12,44,207/-. However, since the assessee has suo-moto disallowed Rs.8,10,663/- in its Return of Income. The additional disallowance under Section 14A should be Rs 4,33,544/-.

While computing the profit u/s.115JB, we direct the AO to consider disallowance u/s.14A at Rs.12,44,207/-, as directed by us hereinabove.

Next grievance of the assessee relates to treating interest subsidy received under Technology Upgradation Fund (TUF) Scheme as revenue receipt.

We have considered rival contentions and found that assessee had availed loans from various banks under the TUF Scheme. In order to encourage the upgradation of technology so as to meet the global challenges, the Ministry of Textiles had launched the TUF Scheme from April 1, 1999. Under this scheme the lending agency would reimburse 5% interest cost to the borrowers upon satisfaction of certain conditions. The assessee had received interest subsidy under this scheme during the year which was offered to tax in the return of income. During the assessment proceedings, the assessee had made a claim for considering interest subsidy received under TUF scheme as a capital receipt not chargeable to tax and requested to exclude the interest income from the income returned by the assessee. However the AO refused to acknowledge the claim of the assessee on the ground that the claim was made otherwise than by filing a revised return of income. The AO observed that as per decision of the Supreme Court in the case of Goetze (India) Ltd vs. CIT (284 ITR 323) such claim of the assessee cannot be entertained. Accordingly the claim made by the assessee was rejected. 23. By the impugned order CIT(A) rejected the claim of the assessee. 24. We have considered rival contentions. The Hon’ble Supreme Court, in the case of National Thermal Power Company Ltd. vs CIT (229 ITR 383) (copy is enclosed at PB Page No. 516 -519), has observed that even 11 if a claim is not made before the AO, it can be made before the Appellate authority. Further the Bombay High Court in the case of CIT vs Pruthvi Brokers & Shareholders Pvt. Ltd (349 ITR 336), having considered the decisions of the Supreme Court in the case of Goetze India Ltd. (supra) and also National Thermal Power Company Ltd. v CIT (supra), held that the Appellate authorities are entitled to consider the new claim of the assessee and adjudicate upon the same on merits of the case. As all the facts are available on record, we adjudicate assessee’s claim of TUF subsidy. From the record we found that the assessee has received reimbursement of interest cost as per TUF scheme. The object of the scheme was to encourage the upgradation of technology. Therefore, the income to the extent of duty credit and reimbursement of interest cost under TUF scheme, which though credited to profit and loss account, should be treated as capital receipt, not chargeable to tax. The issue under consideration is squarely covered by the decision of Hon’ble Punjab & Haryana High Court in the case of Shri Sham Lal Bansal (200 Taxman 14)(P&H). We find that identical issue under the Technology Upgradation Fund Scheme (in short ‘TUFS’) of Ministry of Textiles was considered by the Hon’ble Punjab & Haryana High Court in ITA No. 472 of 2010 vide decision dated 17.01.2011. Hon’ble High Court has considered and held the issue as under:- “2. The assessee is engaged in manufacture and sale of woolen garments. It received subsidy for repayment of loan taken for building, plant and machinery under the Credit Linked Capital Subsidy Scheme under Technology Upgradation Fund Scheme (TUFS) of Ministry of Textiles, Government of India. The assessee claimed the said subsidy 12 to be capital receipt but the Assessing Officer did not accept the same and added back the same to the income of the assessee holding the same to be revenue receipt. On appeal, the CIT(A) upheld the plea of the assessee, which view has been affirmed by the Tribunal with the following observations:- “Having regard to the aforesaid, in our view, it is quite clear that the objective of the subsidy scheme was to enhance the technology apparatus of the assessee by assisting in acquiring machinery and further that the subsidy so received was utilized for repayment of loans taken by the assessee to set up the new unit, as was the intention of the subsidy.

Considered in the aforesaid light, in our view, the facts of the instant case are on all fours comparable to those considered by the Hon‟ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra) and therefore, a natural corollary is that the nature of the subsidy in question is capital. Therefore, both on the issue of the objective of the scheme and on the utilization of the funds received as subsidy, the subsidy is to be viewed as capital in nature having regard to the judgment of the Hon‟ble Supreme Court in the case of Ponni Sugars & Chemical Ltd. (supra).

Reliance placed by the Revenue on the case of Sawhney Steels and Press Works Ltd. & others (supra), in our view, is not appropriate having regard to the aforesaid features of the scheme, which are not in dispute. Moreover, in the case of Sawhney Steels and Press Works Ltd. & others (supra), it was found as a fact that the subsidy was given to meet recurring expenditure and was not for acquiring a capital asset. Whereas in the instant case, admittedly, there is no provision in the scheme to grant subsidy to meet any recurring expenditure and neither such a case has been set up by the Department. The only objections of the Department are that the subsidy has been given after commencement of production and, secondly that it was for repayment of loans. Both these factors do not distract from the nature of the subsidy being treated as capital, as explained by the Hon‟ble Supreme Court in the case of CIT vs. Ponni Sugars Chemicals Ltd. [2008] 306 ITR 392 (SC).

We have heard learned counsel for the appellant.

Learned counsel for the revenue submitted that the subsidy was not given at hte time of setting up of the industry but after commencement of production for repayment of loan. In such situation, the amount should have been treated as revenue receipt as per judgment of the Hon‟ble Supreme Court in Sahney Steel & Press Works Ltd. & Ors. v. CIT (1997) 228 ITR 253.

In view of above, the view taken in Sahney Steel & Press Works Ltd. & Ors., could not be applied in the present case, as in said case the subsidy was given for running the business. For determining whether subsidy payment was „revenue receipt‟ or „capital receipt‟, character of receipt in the hands of the assessee had to be determined with respect to the purpose for which subsidy is given by applying the purpose test, as held in Sahney Steel & Press Works Ltd. & Ors. itself and reiterated in later judgment in CIT v. Ponni Sugars & Chemicals Ltd. & ors. (2008) 306 ITR 392, referred to in the impugned order of the Tribunal.

In DCIT vs. Gloster Jute Mills Ltd (ITA 766/Kol/2010) order dated 2 July 2014, Kolkata Tribunal held that in order to sustain competitiveness in the domestic as well as international markets and overall long-term viability of the industry, the concerned Ministry adopted the TUFS scheme envisaging Technology Upgradation of the Industry. Hence the subsidy received in this regard falls into capital field.

Similar view has been taken by Delhi Bench of the Tribunal in the case of DCIT vs M/s Sutlej Textiles & Industries Ltd (ITA No 5142/Del/2013) dated 3 July 2015; and by Chennai Bench of the Tribunal M/s CNV Textiles Pvt Ltd vs OCIT (ITA746/Mds/2014) dated 21-11-2014. The issue is also covered by the decision of ITAT Mumbai Bench in the case of SVG Fashions Ltd., ITA No.8565/Mum/2010, order dated 23-12- 2015. Recently Hon’ble Supreme Court in the case of Shree Balaji Alloys held that subsidy by way of refund of excise duty and interest for setting up new industrial undertaking is capital receipt and not taxable as income. 27. In view of the above, respectfully following the decisions of Hon’ble Supreme Court, High Court and the Tribunal, as discussed above, we set aside the orders of lower authorities and direct the AO to treat the interest subsidy received under TUF Scheme as capital receipt not liable to tax. 28. In the result appeal of the assessee is allowed in part. Order pronounced in the open court on this 08/07/2016. Sd/- Sd/- (AMIT SHUKLA) (R.C.SHARMA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक Dated 08/07/2016 प्र.कु.मभ/pkm, नन.स/ PS 15 ITA No.1776/15 आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A), Mumbai. 3. आमकय आमुक्त / CIT 4. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai 5. गार्ा पाईर / Guard file. 6. आदेशाि सार/ BY सत्मावऩत प्रनत //True Copy// ORDER,