GREAVES COTTON LTD, MUMBAI V. ASST CIT 7(1)(1), MUMBAI

ITA 1745/MUM/2016

AI Insights

Greaves Cotton Ltd. appealed against various adjustments and disallowances made by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) for the assessment years 2011-12 to 2014-15. The primary issues included the transfer pricing adjustments related to corporate guarantees, the treatment of short-term capital gains as business income, and disallowances related to club expenses, research and development expenditures, and commission payments. The Tribunal examined each issue in light of the submissions made, the relevant provisions of the Income Tax Act, and precedents set in earlier cases. The Tribunal's decision involved a mix of restoration of issues for re-examination and allowance of certain claims made by the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299717 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: K
• Next Hearing Date: 27-04-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 22-03-2016
• Other Referred Cases: M/s Pooja Investments Pvt. Ltd. (ITA No. 39 of 2012), Everest Kanto Containers Ltd 375 ITR 571, Crompton Greaves Ltd versus ITO ITA number 5295 and 5390/M/2017, Aztec Software & Technology Services Ltd. [2007] 107 ITD 141 (BANG.)(SB)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AASTHA; AMOL PATANKAR
• Keywords: Business income; Transfer pricing; Business expenditure; International transaction; Wholly owned subsidiary; Capital expenditure; TDS; Rule 8D
• Section: 92C; 92; 92D; 14A; 144C; 43; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND MS KAVITHA RAJAGOPAL, JM ITA No. 1745/MUM/2016 (Assessment Year 2011-12) ITA No. 2069/MUM/2017 (Assessment Year 2012-13) ITA No. 7166/MUM/2017 (Assessment Year 2013-14) ITA No. 6560/MUM/2018 (Assessment Year 2014-15) Gra ves Cotton Ltd 3 rd F loo r, Mot i lal O s wal Cente r, Junction of Gokhal e & Sa yani Rd, Prabhade vi, Mum bai-400 025 Vs. ACIT CIR 7(1)(1) Aayakar Bhavan, Mumbai (Appellant) (Respondent) PAN No. AAACG2062M Assessee by : Ms. Aarti Vissanji, Ms. Aastha & Shri Amol Patankar, ARs Revenue by : Ms. Samruddhi Dhananjay Hande, DR Date of hearing: 28.04.2023 Date of pronouncement : 25.07.2023 O R D E R PER PRASHANT MAHARISHI, AM: 01. These are the four appeal filed by the Greaves Cotton Limited for Ay 2011-12 to AY 2014-15 involving similar Grounds of appeal. Bothe Parties argued appeal for AY 2011-12 and stated that similar Page | 2 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 arguments are raised for other Assessment Years. It was also confirmed that facts and circumstances of the case for all these assessment years in case of this assessee is similar. In view of these facts, we first decide appeal for AU 2011-12 and thereafter apply our decision of AY 2011-12 to other appeals of subsequent Assessment years. ITA number 1745/M/2016 assessment year 2011 – 12 02. This appeal is filed by Greaves Cotton Ltd Mumbai (the assessee/appellant) for assessment year 2011 – 12 against the assessment order passed under section 144C (13) of The Income Tax Act, 1961 (The Act) dated 25/1/2015 wherein the return filed by the assessee on 30/11/2012 declaring a total income of ₹ 1,971,204,132 is assessed at ₹ 2,053,640,240 pursuant to the order passed under section 92CA (3) of The Act by The Transfer Pricing Officer 2 (1) (1), Mumbai (The Learned TPO) dated 7/1/ 2015 under section 92CA (3) of The Income Tax Act and the direction of the learned Dispute Resolution Panel [ The ld DRP] dated 9/12/2015. 03. Assessee has raised following grounds of appeal “Ground No. A: Transfer Pricing Adjustments – ₹ 26,78,899/- Page | 3 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 (i) Based on the facts and in the circumstances of the case the Ld. Transfer Pricing Officer („TPO‟) and the Hon‟ble Dispute Resolution Panel (DRP) erred in making the adjustment for arm‟s length price of corporate guarantee. The adjustment is worked out by TPO on assumptions and treating the Appellant at par with Banks. The TPO erred in ignoring the provisions of section 92C(3) and Section 92F(ii) of the Income tax Act, 1961. Hence, said adjustment is invalid and bad-in-law. (ii) Without prejudice to above, (i) Appellant submits that corporate guarantee given to bank for giving financial facility to AE which is (ultimate) subsidiary of the Appellant being beneficial to the Appellant (and as such) is at arm‟s length as clarified in written submission given vide letter dated 17.12.2014 and 29.12.2014. GROUND B: SHORT TERM CAPITAL GAINS TREATED AS BUSINESS INCOME – Rs. 02,38,70,858/- (i) Based on the facts and in the circumstances of the case the Ld. Assessing Officer (A.O.) and the DRP erred in treating short term capital gain earned by the Appellant on redemption of units of mutual funds as business income following the decision of Hon‟ble Punjab and Haryana High Court in the case of M/s Pooja Investments Pvt. Ltd. (ITA No. 39 of 2012) and thereby denied set off of brought forward short term capital loss of earlier years. GROUND C: CLUB EXPENSES – Rs. 6,36,373/- Page | 4 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 (i) Based on the facts and in the circumstances of the case, the A.O. and the DRP erred in disallowing the annual subscriptions and expenditure incurred at clubs by senior employees of the Appellant as non- business expenditure. (ii) Without prejudice, the A.O. erred in disallowing ₹ 6,36,373/- instead of subscription of ₹ 51,590/- and expenditure of ₹ 3,62,913/- as reported by Tax Auditors in Tax Audit Report. GROUND D : DISALLOWANCE OF DEDUCTION U/S 35(2AB) – Rs. 2,13,96,418/- (i) Based on the facts and in the circumstances of the case, the AO and the DRP erred in not allowing relief under section 35(2AB) as certified by Tax Auditors in Tax Audit Report and restricting the allowance to ₹ 26,22,10,418/-. (ii) Without prejudice to above, the A.O. and the DRP erred in not mentioning in the assessment order to revise the deduction allowed as and when the Appellant submits rectified Form 3CL that will be issued by DSIR in response to application already filed by the Appellant with DSIR. GROUND E: DISALLOWANCE OF COMMISSION – Rs. 3,38,53,559/- (i) Based on the facts and in the circumstances of the case and A.O. and the DRP erred in disallowing 50% of commission paid to dealers as non-business expenditure. Page | 5 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 (ii) The A.O. and DRP erred in treating 50% of commission paid as non-business expenditure as the ultimate customer is government agency and assuming that no intermediary is required in supply of goods to government agencies. The A.O. and DRP erred in ignoring the factual details given by the Appellant explaining the arrangement with dealers and their role in the entire transactions. GROUND F: UNUTILISED CENVAT CREDIT – ₹ 9,32,524/- (i) Based on the facts and in the circumstances of the case the A.O. and the DRP erred in not allowing the unutilized cenvat credit added to closing stock of assessment year 2010-11 as opening stock of assessment year 2011-12. GROUND G: DISALLOWANCE U/S. 14A r.w.r. 8D (i) Considering the free reserves and profit of the Appellant, A.O. and the DRP should not have made disallowance u/s. 14A r.w.r. 8D. (ii) Without prejudice to above, the A.O. and the DRP erred in considering the interest paid, net of interest received for the purposes of working out disallowance of expenditure under rule 8D of the Income Tax Rules, 1962. (iii) Without prejudice to above, the A.O. and the DRP erred in disallowing, under section 14A r.w.r. 8D, in respect of long term strategic investment made by the Appellant in shares of subsidiary companies to Page | 6 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 have control over them, as such investments does not require any portfolio management or requires the Appellant to incur any expenditure to earn dividend from such investments. GROUND H : SHORT CREDIT FOR TDS – ₹ 4,07,910/- (i) The A.O. should have given credit for TDS of ₹ 37,16,261/- instead of giving credit only for ₹ 33,08,351/-.” 04. Brief facts of the case shows that assessee is a company engaged in the business of manufacturing and sale of power equipments. It is manufacturing diesel engines and infrastructure products. It filed its return of income on 30/11/2012 declaring a total income of ₹ 197,12,04,132/–. As the assessee has entered into international transactions, reference was made under section 92CA (1) of the act to the Deputy Commissioner of Income Tax, TPO – 2 (1) (1) Mumbai (the learned TPO) on 9/12/2013 referring the international transactions with the associated enterprises reported in prescribed form number 3CEB. According to form 3CEB assessee has entered into seven different kind of international transaction. One of those is issue of corporate Guarantee issued in favour of its AE. Assessee has given corporate guarantee on behalf of Greaves Ferryman Diesel GmbH of € 1,990,000 in favour of banks for the loan availed by that company. These guarantees are carried on from assessment year Page | 7 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 2010 – 11 , these are not fresh guarantees issued. As assessee has issued this corporate guarantee, German company utilized credit facilities of € 1,688,825 during the assessment year. The assessee has not charged any guarantee fees from the associated enterprise for providing this guarantee facility. Therefore assessee was issued notice stating that the corporate guarantee fee is required to be benchmarked applying CUP method. Ld AO also stated that why the guarantee fee should not be charged in assessee’s own case as charged for assessment year 2010 – 11 on similar lines. During the course of transfer pricing assessment, assessee submitted a working justifying as to why the assessee has not charged guarantee fee to its associated enterprises. The assessee’s working stated that the average financial bank guarantee charges works out at 0.91% per annum and assessee is not a banker and not in a banking business, corporate guarantee was extended as per strategic business decision and thereby to make above-mentioned average guarantee commission comparable is not correct. Assessee also submitted a detailed chart stating that even otherwise the arm’s- length price of the corporate guarantee would be Nil. The learned transfer pricing officer did not accept the explanation of the assessee and computed the arm’s- length price of the guarantee fee holding that the rates charged by the assessee while giving guarantee Page | 8 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 to a foreign bank for the facilitation of loan taken by the associated enterprises should be higher than the rates charged by the banks. The learned TPO further issued notices under section 133 (6) of the Act to the various banks and obtained the quotes. Based on this information, various judicial precedents adopted the arm’s-length price of the guarantee fee commission at the rate of 2.5%. As the outstanding guarantee amount was ₹ 107,155,972 for 12 months, he computed the arm’s-length price at the rate of 2.5% per annum on the outstanding corporate guarantee amounting to ₹ 2,678,899/–. Accordingly the above shortfall was adjusted by passing an order under section 92CA (3) of the act on 7/1/2015. 05. The learned assessing officer made the draft assessment order on 13/2/2015 determining the total income of the assessee at ₹ 2,053,740,240/–. Over and above the transfer pricing adjustment of ₹ 2,678,899/– on account of arm’s-length price of the corporate guarantee fee, the learned AO further made the following adjustment /additions / disallowance:- i During the year assessee has declared capital gain of ₹ 35,472,992/– which included short- term capital gain of ₹ 23,870,858 on purchase and sale of units of mutual funds. The learned AO was of the view that the short-term capital Page | 9 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 gain on sale of mutual fund should be treated as business income. The assessee submitted its explanation relying upon the decision of the honourable Punjab and Haryana High Court in case of puja investment which was rejected. The learned AO noted that assessee has purchased and sold six various mutual funds during the year and considering the quantum of units traded by the assessee, it is amply clear that the assessee has been actively involved in the purchase and sales of mutual fund units and therefore the gain arising from purchase and sale of these units is to be treated as business income. ii Assessee has made a payment of ₹ 1 lakh as legal and professional fees towards the consultancy fee on account of split share handling of the assessee company. The assessee was asked to explain the allowability of the above expenditure for which no explanation was submitted. The learned assessing officer reached at a conclusion that since the expenditure is capital in nature same is disallowed. Accordingly ₹ 1 lakh was disallowed. iii Assessee has debited club expenses of ₹ 636,373. The learned AO asked the assessee to justify the allowability of the above expenditure as business expenditure. The assessee submitted Page | 10 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 that similar disallowances have been deleted in assessee’s own case for AY 2001 – 02 to AY 2008 – 09, this disallowance should not be made. The assessee also relied upon the decision of the honourable Bombay High Court in case of Otis elevators Ltd. The learned assessing officer rejected explanation of the assessee stating that assessee has not explained the allowability of the above sum. iv Assessee has research and Development units recognized by DSIRC, claimed deduction under section 35 (2AB) being 200% of revenue expenses towards scientific research of ₹ 35,694,680 and towards capital expenditure on scientific research being 200% of ₹ 17,847,340. Assessee was asked to furnish the relevant documents. The assessee furnished the copy of form number 3CL issued by the Department of scientific and industrial research. The learned assessing officer on the basis of the above form found that assessee has incurred a recurring expenditure of ₹ 26,22,10,418 approved by DSIRC and therefore the excess deduction claimed by the assessee amounting to ₹ 21,396,418 was disallowed and added back to the income of the assessee. v The assessee has paid commission of ₹ 67,707,118 to various parties. The assessee was Page | 11 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 asked to give the details of the agents to who commission of ₹ 9 lakhs and above was paid. The assessee provided the details of the agents and the details of the corresponding party in whose transaction commission was paid. The learned assessing officer issued notices under section 133 (6) of the act to those parties some of the parties did not respond and some of the parties stated that sales was directly made to them. The assessee was asked to explain the same. Assessee made a detailed explanation with respect to each of the party. The learned assessing officer after considering the parties who have stated that they have directly dealt with the assessee company, he disallowed the commission expenditure to the extent of 50% of the commission paid. The disallowance is of ₹ 33,853,559/–. The learned assessing officer specifically noted that the reply was received from the enquiries under section 133 (6) of the act just before the completion of assessment and assessee could not be confronted on these reply. 06. Based on this, assessment under section 143 (3) read with section 144C (1) of the act was passed as a draft assessment order on 13/2/2015 determining the total income of the assessee at ₹ 2,053,740,239/–. 07. The assessee preferred an objection before The Learned Dispute Resolution Panel – 1, Mumbai (the learned DRP) Page | 12 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 who passed the direction on 9/12/2015. The direction of the learned dispute resolution panel was as under:- i On the issue of the arm’s-length price of the corporate guarantee fee income, the learned dispute resolution panel followed its own direction for assessment year 2010 – 11 in case of the assessee where the arm’s-length price of the guarantee rate of 2.50% was considered to be appropriate accordingly the adjustment of ₹ 2,678,899/– was confirmed. ii On the issue whether the redemption of units of mutual fund amounting to ₹ 23,870,858 could be treated as income from business and profession or should be treated as short-term capital gain, the learned DRP held that that intention of the assessee for investment in mutual fund is to have better working capital management and to make profit on daily bases instead of to keep the money idle. The mutual funds were not purchased with a long-term horizon. Therefore the only motive of the assessee was to utilize the idle surplus money on a regular basis so that it would earn profits to assessee on almost daily basis without sitting idle. Accordingly the profit of ₹ 23,870,858 on purchase and sale of mutual fund was held to be correctly treated by the learned assessing officer as business income. iii With respect to the disallowance of the legal and professional fees of ₹ 1 lakh, the issue was decided Page | 13 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 in favour of the assessee and the learned AO was directed to delete the disallowance. iv With respect to the disallowance of club expenditure, view of the learned AO was confirmed as assessee failed to demonstrate that the expenditure at been incurred wholly and exclusively for the purposes of the business. The learned dispute resolution panel held that assessee failed to produce the relevant details to show that the expenditure has been incurred for the purposes of the business. Further the assessee has merely made general statement that the expenditure is allowable. v On the issue of Research and Development expenditure the learned dispute resolution panel directed that disallowance of ₹ 21,396,408 has been made by the learned assessing officer correctly. The learned dispute resolution panel noted that assessee has claimed an expenditure of ₹ 283,606,836/– being 200% of revenue expenses towards scientific research and ₹ 35,694,680/– towards capital expenditure on scientific research being 200% of ₹ 17,847,340/–. The assessee furnished the form number 3CL issued by the Department of scientific and industrial research which worked out the deduction. Accordingly assessee was allowed deduction towards revenue expenses amounting to ₹ 262,210,418 and therefore excess expenditure Page | 14 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 claimed by the assessee of ₹ 21,396,418 is correctly disallowed. vi With respect to the commission expenditure the learned dispute resolution panel held that assessee was asked by the learned assessing officer to link the commission payment to the procurement of the order and the assessee was also asked to furnish the evidence to show that the agents were in fact carrying out other services such as stated in the local markets assigned to them like awareness in promotional activities for which also the commission was paid to them. Assessee furnished the details of the orders for which commission was claimed to have been paid to the agent, however no evidence has been furnished to show that the agents were also carrying out promotional activity on behalf of the assessee and they had conducted national promotional activities allotted to them. According to the learned dispute resolution panel, the learned assessing Officer was correct in disallowing 50% of the expenses claimed on account of commission expenditure. vii The issue was raised before the learned dispute resolution panel that the unutilized cenvat credit of ₹ 932,524/– has been added by the learned assessing officer to the closing stock for assessment year 2010 – 11 and therefore same should be allowed as an opening stock of assessment year 2011 – 12, this Page | 15 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 objection of the assessee was dismissed as there was no such adjustment made by the learned assessing officer in the draft assessment order. viii The assessee also raised an objection that disallowance under section 14 A read with rule 8D should not be made in case of the assessee with respect to interest expenditure covered there in as assessee has already disallowed a sum of ₹ 2,060,500/- out of which interest expenditure is of ₹ 1,96,988 and other expenditure are of ₹ 1,862,612/–. The assessing officer has considered the entire amount of ₹ 2,060,500 as disallowable under section 14 A of the Act. It was stated that the assessee has surplus interest free funds and therefore to that extent interest expenditure could have been disallowed. The learned dispute resolution panel dismissed the objection of the assessee holding that no disallowance under section 14 A has been made by the AO in the draft assessment order and the disallowance originally made by the assessee has been accepted therefore learned dispute resolution panel cannot issue any direction. The objection of the assessee was dismissed. 08. Based on that the final assessment order was passed by the learned assessing officer on 25/1/2015 determining the total income of the assessee at ₹ 2,053,640,239/–. Assessee is aggrieved and is in appeal before us. Page | 16 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 09. Ground of appeal [A] is against transfer pricing adjustment of ₹ 2,678,899/– on account of corporate guarantee fee. Argument of the assessee is that corporate guarantee given to the bank for giving financial facility to an associated enterprise [which is an ultimate subsidiary of the appellant] is beneficial to the appellant therefore, nothing was charged by the assessee. So it is at arm’s- length as clarified in written submission given during the assessment proceedings. The learned authorized representative submitted that identical issue arose in case of the assessee for assessment year 2010 – 11 wherein based on the decision of the coordinate bench in assessee’s own case for assessment year 2008- 2009, coordinate bench has considered the arm’s-length price of the corporate guarantee fee at the rate of 0.5%. Therefore, this issue is covered in favour of the Assessee. The learned authorized representative also submitted that honourable Bombay High Court in case of Everest Kanto containers Ltd 375 ITR 571 and several other decisions of the coordinate benches, the arm’s-length price of the corporate guarantee is held to be appropriate at the 0.5%. Therefore if the same is followed, assessee does not have any objection to the same. 010. The learned departmental representative vehemently opposed the same and submitted that though in the earlier year coordinate bench has held that the 0.5% of the guarantee fee commission is at arm’s-length however he submitted that same could not be imputed in the current year for the reason that each year is a separate Page | 17 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 assessment year and the arm’s-length price of the international transaction is required to be determined on the basis of the functional profile of the assessee and of its subsidiary for each assessment year along with the economic conditions of parties to the transaction. It was further stated that 0.5% rate of guarantee commission decided by the honourable Bombay High Court in case of somebody else could not be stated to be applicable in case of the assessee for the simple reason that arm’s-length price of that other party’s international transaction could not be imputed in case of the assessee. He submitted that following the decision of the coordinate bench is not any of the most appropriate method as prescribed under the transfer pricing provisions. He therefore submitted that the learned assessing officer and the learned dispute resolution panel has correctly held that the guarantee commission rate should be considered at arm’s-length at the rate of 2.5% of the guarantee outstanding for the year. 011. We have carefully considered the rival contention and perused the orders of the lower authorities. Facts show that assessee has an associated enterprise in Germany which is wholly owned subsidiary of the assessee. For availing finance/loan by that company, assessee has issued guarantee to Royal Bank of Scotland, Mumbai on 7/8/2007 and further corporate guarantee of € 1,140,000 and further on 17/8/2007 of € 850,000 to the same bank. The total corporate guarantee was issued of € 1,990,000 to ABN Amro Bank. The German subsidiary Page | 18 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 has utilized the credit facility year end outstanding is € 1,688,825 which is equivalent to ₹ 107,155,972. Assessee did not charge any guarantee fee. However during the course of transfer pricing assessment, assessee submitted that Average rate of bank guarantee charges of 6 different banks is 0.91%. The above bank guarantee commission rate was further adjusted that had the assessee not given the guarantee to its associated enterprises, the AE who have been granted the loan at the interest rate of 3 – 4% would have been given loan at the rate of 12 to 13%. Therefore on the basis of this analysis, interest saving is 9% in the hands of the associated enterprises. This is the benefit available to the associated enterprises in form of interest savings. It was further stated that as the associated enterprises is regular in payment of interest and repayment, the risk element is nil. AE being 100% subsidiary and giving assistance for export promotion services and further providing engine technology to the assessee, this factor is also required to be discounted. The assessee also stated that the loan taken by the associated enterprise is used for the purchase of assets which are collateral security if guarantee invoked. The total assets fully cover loan amount, hence no further risk is required. The assessee also stated that allocation fee charged by the bank recovered from the associated Enterprises 0.75%. Assessee allocated 0.15% each for risk element, business consideration and 0.10% for availability of asset. The above percentage was reduced from the average rate of financial guarantee charges by the bank of 0.91%. Page | 19 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 Accordingly the assessee stated that arm’s-length price of the corporate guarantee is Rs Nil. 012. The learned transfer pricing officer obtained quote of the various banks for the guarantee commission. Further the information was also obtained from state bank of India. Based on this the learned TPO reached at a conclusion that the rate for financial guarantee charged by the banks vary between 2% to 3%. He further held that in case of newly formed entities when the guarantee is given not only the credit rating is very poor, there are no securities and there is no proven track record. Therefore it enhances the risk. He therefore held that the rate charged for corporate guarantee cannot be less than the rates charged by the banks for giving bank guarantee. Thereafter, he considered the several judicial precedents and stated that those judicial precedents cannot be applied. He specifically confirmed that assessee has also accepted that the credit rating of the associated enterprises is less than that of the assessee. Based on that, he held that it would be appropriate to charge 2.5% from the associated enterprises being the average guarantee commission charged by the banks. 013. The learned dispute resolution panel confirmed the findings of the learned assessing officer and held that arm’s-length price of the corporate guarantee provided by the assessee in favour of its associated enterprise is correctly determined at arm’s-length at the rate of 2.5% of the amount of outstanding corporate guarantee. The Page | 20 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 learned DRP upheld so for the reason that identical directions were given by them for earlier assessment year. 014. On these facts, it is undisputed facts that provision of corporate guarantee by assessee to its associated enterprise is an international transaction. Assessee did not charge any guarantee fee commission from its associated enterprise. Therefore it is required to be examined whether any independent party on similar circumstances and facts of the case, having provided identical financial guarantee in favour of that party, would not have charged any guarantee fee or not. 015. We firstly hold that the benchmarking made by the assessee as well as the learned transfer pricing officer is incorrect. The assessee has earned interest saving of 9% as stated by assessee itself. The above benefit is to be necessarily shared between the assessee and the associated enterprises. This has not been done by the assessee. This itself shows that the benchmarking made by the assessee at Rs Nil is not appropriate benchmarking. 016. Further the learned assessing officer has compared the bank guarantee rates with the corporate guarantee rates given by the assessee to its wholly owned subsidiary. This comparability is not justified. The learned dispute resolution panel has also followed its own direction for assessment year 2010 – 11. Mandate with the learned TPO and the learned DRP is to compute the arm’s-length price by adopting the most appropriate method under section 92CA (3) of the act and adopting one of the Page | 21 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 methods. Thus, both the revenue authorities and assessee has failed to show the most appropriate method as well as computation of ALP as per provisions of the Act. Provisions of the act do not allow anybody to accept what has been held in the earlier years in case of the assessee or any other assessee for any other assessment year. Each year ALP of international transaction is required to be computed based as per the most appropriate method and also the contemporaneous record maintained by the assessee delineating the transaction. Had it been the case that whatever has been held in earlier year is to be automatically followed, order whatever is been held in case of any other assessee is required to be adopted in case of every assessee, then, we do not find any justification for maintaining the contemporaneous record by the assessee for each year, compliance of preparation of TPSR and certificate of chartered Accountant in form no 3CEB by the assessee as well as requirement of transfer pricing assessment by transfer pricing officer each year. 017. Coming to the judicial precedents relied upon by the assessee in assessee’s own case in ITA number 7742/M/2014 for assessment year 2010 – 11; we find that ground A of the appeal was with respect to the transfer pricing adjustment of arm’s-length price of corporate guarantee fee of ₹ 2,742,175. The learned authorized representative stated before the coordinate bench that identical issue is decided in case of the assessee for assessment year 2008 – 09 and 2009 – 10 by ITAT by order dated 17/1/2020 wherein the corporate guarantee Page | 22 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 commission at the rate of 0.5% of the amount of guarantee was upheld. The coordinate bench thereafter following the decision for assessment year 2008 – 09 and 2009 – 10 restricted the corporate guarantee commission fee’s arm’s-length price at 0.5%. When we look at the order of the coordinate bench for assessment year 2008 – 09 and 2009 – 10 in case of the assessee dated 17/1/2020, on reading paragraph number 20 onwards wherein ITAT relying upon the decision of the honourable Bombay High Court in Everest Kanto cylinders Ltd [2015] 58 taxmann.com 254 (Bombay)/[2015] 232 Taxman 307, the AO was directed by coordinate bench to consider guarantee commission fee at the rate of 0.5% per annum as its arm’s-length price. The decision of the honourable Bombay High Court in case of Everest Kanto cylinders was for assessment year 2007 – 08 [2013] 34 taxmann.com 19 (Mumbai - Trib.). In that particular decision the coordinate bench held that the CUP is the most appropriate method for determination of the arm’s-length price of the corporate guarantee fee. We do not agree that following the decision of the courts for assessment year 2007 – 08 in some other entities case i.e. Everest Kanto Ltd, ALP of international transaction in case of assessee for assessment year 2011 – 12 can be decided for altogether different year. The assessee submits that order of ITAT in case of assessee should be followed in this year also. Therefore the logic of the assessee is that what is considered to be arm’s-length for assessment year 2007 – 08 in case of somebody else should be considered also at Page | 23 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 arm’s-length for assessment year 2011 – 12 in case of assessee. We do not agree with same, as it will violate all the principles of transfer pricing. Method of determination of the arm’s-length price of an international transaction is to be computed according to section 92C (1) & (3) of the act. Special bench in this case in Aztec Software & Technology Services Ltd. [2007] 107 ITD 141 (BANG.)(SB) affirmed by honourable Karnataka High Court in [2012] 23 taxmann.com 413 (Karnataka)/[2012] 209 Taxman 187 has clearly held as under:- “133. Having regard to the statutory provisions, particularly the mandate of sections 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of sections 92 and 92C and other rules and regulations. While Page | 24 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any material collected to be used against the taxpayer is to be put to taxpayer to explain. Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and records a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authorities (AO/TPO), addition on account of "adjustments" cannot be deleted. This is because the mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authority on the basis of material available on record has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case.” 018. In view of above facts, it is mandatory to determine the arm’s-length price of the international transaction of the corporate guarantee fee by adopting the most appropriate Page | 25 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 method out of the prescribed methods. In the present case the assessee has not charged any sum on such corporate guarantee, further the learned TPO has compared the bank guarantee rates with bank guarantee rates which cannot be upheld for the obvious reasons that there is a basic difference between both these instruments. Learned dispute resolution panel has followed its direction for earlier year, the learned authorized representative has also pressed into service the decision of the coordinate bench in assessee’s own case wherein we are impressed upon to adopt the corporate guarantee rate decided in somebody else case for assessment year 2007 – 08 to be imputed for assessment year 2011 – 12, we find that all the above arguments and facts fails for the simple reason that the arm’s-length price of an international transaction is required to be determined on the basis of the economic conditions, commercial factors, the relationship and the benefit between the two parties of the international transaction existing for each year. Corporate guarantee fee international transaction is required to be determined by adopting one of the methodologies as provided by the OECD Transfer Pricing Guidelines [2017] such as (1) Comparable Uncontrolled Price [ D.2.1] (2) Yield Approach (Interest saving approach)[ D.2.2] (3) Cost Approach, [ D.2.3] (4) Valuation of expected loss approach [D.2.4] or (5) Capital Support Method [D.2.5] or any other method. 019. We are conscious of the fact that the judicial precedent binds us, but we are also conscious of the fact that the Page | 26 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 provisions of section 92C (3) of The Act, decision of the special bench affirmed by the honourable High Court, OECD T P Guidelines has higher binding precedent then the order of ITAT in assessee’s own case. 020. We are also conscious of the fact that arm’s-length price of the corporate guarantee fee may also be less than 0.5%, therefore, imputing the same for this year also would make violence to the provisions of the income tax act and the decision of the special bench, as well as injustice to the assessee, so we refrain to adopt the same. Further, it is the mandate of the law to determine the arm’s-length price of an international transaction even by the appellate authority and not to restore it back to the lower authorities, if the requisite information is available on record. However in the present case, we do not have the requisite information before us as required for determination of the arm’s-length price including availability of databases of loan deals, the credit rating of the assessee as well as of the associated enterprises etc. For accurate delineation of Financial Guarantees. 021. In view of this, we set-aside the whole issue back to the file of the learned assessing officer/transfer pricing officer with a direction to the assessee to determine the arm’s- length price of the international transaction of the corporate guarantee by following the mandate of the provisions of the income tax act showing accurate delineation of the financial guarantee, adopt Most Appropriate method and then benchmark the transaction Page | 27 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 for its Arm’s length price. The learned TPO then examine the same and decide the issue afresh. In the result ground number A of transfer pricing adjustment of ₹ 2,678,899 is restored back to the file of the learned TPO/AO. 022. Coming to ground number B which is against the short- term capital gain treated as business income amounting to ₹ 23,870,858 on account of redemption of the units of the mutual fund. The fact shows that assessee is engaged in the business of manufacturing and sale of the engineering goods such as diesel engines generate onset et cetera. Out of the spare funds the assessee invested in the mutual fund and earns capital gain on the same. The learned assessing officer held that same is business income of the assessee. The claim of the assessee is that it is chargeable to tax under the head capital gains. The main reason for disallowance is that assessee has set of the above capital gain on sale of units of mutual fund against the short-term capital loss brought forward. The learned dispute resolution panel has also upheld the same. 023. The learned authorized representative has merely relied upon the decision of the honourable Punjab and Haryana High Court in case of puja investments private limited ITA number 39 of 2012 dated 11 April 2014. The learned departmental representative vehemently supported the order of the lower authorities. We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case assessee has earned capital gain of ₹ 35,472,992 Page | 28 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 which included short-term capital gain of Rs 2, 38,70,858. Out of this, the learned assessing officer has considered the short-term capital gain of ₹ 23,870,858 on purchase and sale of mutual funds as business income. The submission of the explanation of the assessee was that it was on six different mutual funds. The learned assessing officer merely considered the value of the transaction irrespective of the frequency of the transaction has held that the above amount of transaction is huge and therefore it cannot be an activity of investment but it is an activity of business. The learned dispute resolution panel also upheld the action of the learned AO. We find that central board of direct taxes has issued guidelines for assessing officers on tests for distinction between shares held as stock-in-trade and shares held as investment vide office memorandum, dated 13.12.2005 [F. No. 149/287/2005-TPL wherein several criteria is a been listed to determine whether a person is a trader or an investor in stocks. There are more than 15 such criteria is listed therein. The volume is only one of the criteria. The combined effects of all these 15 criteria are to be taken into consideration to determine whether the assessee has earned profit on sale of units of mutual funds as trader or as an investor. Undisputedly in the balance sheet of the assessee it has treated it as an investment. The assessee has not borrowed any funds and further has not invested in the mutual fund for the purpose of earning day-to-day income. The main source of income of the assessee is manufacturing of engineering goods. Assessee has also Page | 29 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 purchased mutual funds of only six mutual fund schemes. Out of the total income on by the assessee of ₹ 197 crores, only Rs 278 lakhs is such income of redemption of mutual funds. In view of this we do not find any justification for holding that assessee has earned business income on sale of units of mutual fund. Accordingly ground number B of the appeal is allowed and the learned assessing officer is directed to treat the gain on sale of mutual fund amounting to ₹ 23,870,858 as short-term capital gain and to allow the set of carry forward short- term capital losses of the assessee against this. 024. Ground number C of the appeal is with respect to the disallowance of club expenses amounting to ₹ 636,373/–. The above sum is paid by the assessee as annual subscription and expenditure incurred at various clubs by senior employees of the assessee. The learned AO treated it as non business expenditure which is confirmed by the learned dispute resolution panel. 025. On careful hearing of both the parties, we find that there is no justification for disallowance of the above sum at the same is in expenditure incurred by the assessee as an annual subscription and expenditure incurred at clubs by the senior employees of the assessee for business purposes. Perhaps the minute detail as desired by the learned assessing officer may not be available however the learned assessing officer should have taken a holistic view of the whole issue looking at the nature of the business and the volume of the business carried on by the Page | 30 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 assessee. It is not in dispute that assessee has incurred this expenditure. Accordingly we direct the learned assessing officer to delete the disallowance of ₹ 636,373/– on account of club expenditure. Ground number C of the appeal is allowed. 026. Ground number D is with respect to the disallowance of deduction under section 35 (2AB) of ₹ 21,396,418/–. The facts of the case are that the assessee has claimed deduction of ₹ 283,606,836 being 200% of revenue expenses towards scientific research under section 35 (2AB) and further ₹ 35,694,680 towards capital expenditure on scientific research being 200% of 1,78,47,340/–. The assessee was asked to furnish the copy of form number 3CL issued by Department of scientific and industrial research which is worked out the total eligible deduction of R&D expenditure for four different R&D units. According to form number 3CL total revenue expenditure is approved of ₹ 262,210,418/– out of the claim of ₹ 283,606,836. The submission of the assessee was that assessee has incurred in how scientific research revenue expenditure of ₹ 141,803,418/–. Assessee entitled to 200% of such expenditure at ₹ 283,606,836/– the DISR has only approved the expenditure of ₹ 124,007,000. Assessee submitted that it has filed a letter before the authority seeking opportunity to justify the balance expenditure incurred on in how scientific research. Such letter was produced before the AO. Further assessee also made submissions before the authority which accepted the claim of the assessee. The Page | 31 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 learned DRP without considering any of the observation confirmed the disallowance. 027. The learned authorized representative submitted that applicant’s claim the above expenditure based on of accounts made by the assessee. The details of expenditure have been furnished before the authority. Based on that they have made in assessment and approved part of the expenditure. However it was stated that those authorities does not have any authority to disallow any of the expenditure which has been incurred by the assessee for the purpose of research and development. The learned authorized representative also stated that auditor certificate certifying the expenses incurred by the R&D unit of the assessee is also produced. The learned authorized representative further submitted that identical issue arose in the case of sister concern in case of Crompton Greaves Ltd versus ITO ITA number 5295 and 5390/M/2017 wherein on the identical issue the claim of the assessee was allowed. 028. The learned departmental representative imminently supported the order of the lower authorities and submitted that when the approving authority is not above the expenditure is no question of granting deduction to the assessee of the same. 029. We have carefully considered the rival contention and perused the orders of the lower authorities. There is no denial that assessee is recognized research and development unit. It is not in dispute that assessee has Page | 32 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 incurred expenditure for research and development. The assessee has submitted the respective details before the DSIR. On the basis of the assessment, it has reduced the amount of expenditure incurred by the assessee. The coordinate bench ACIT V Crompton Greaves Ltd. [2019] 111 taxmann.com 338 (Mumbai - Trib.)has held that Mandate of approval of quantum of expenditure had been put in place only with effect from 1-7-2016, hence, non- approval of quantum of expenditure for assessment year 2009-10 did not entitle Assessing Officer to make disallowance under section 35(2AB). The assessment year involved before us is assessment year 2011 – 12. Therefore respectfully following the decision of the coordinate bench, we direct the learned assessing officer to delete the disallowance of deduction under section 35 (2AB) of the act of ₹ 23,096,418/–. Ground number D of the appeal is allowed. 030. Ground number D is with respect to the disallowance of commission. The fact shows that during the year the assessee has paid brokerage and commission of ₹ 67,707,118 to various parties. The assessee was asked to give the details of the agent and corresponding sales made to the various parties. The assessee provided certain details of the corresponding party onwards transaction commission was paid. In order to verify the transaction notice under section 133 (6) were issued to the parties and whose transaction commission was paid. Out of the six parties three parties did not reply and three parties confirmed that the sales were made directly from the Page | 33 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 assessee company. Therefore the learned assessing officer asked the assessee to justify the payment. The assessee submitted that in case of Maharashtra Agro industries development Corporation Ltd which are stated that it does not entered into any dealership agreement and the sale was directly made by the assessee to them, it was stated that assessee is getting tender order from this party for various farm equipment’s which are being distributed by this party through dealers network in all the district. Dealers conduct awareness in promotional activities in the reality to them. These dealers explain the quality, operating methods, sustainability et cetera to the farmers who are and customers. These dealers explain the assessee’s product to the end customer and they also had the assessee in getting the payment from these parties. The learned assessing officer disbelieved the explanation and allowed 50% of the commission. Thus the assessee was aggrieved with the 50% disallowance of brokerage and commission amounting to ₹ 33,853,559/–. The learned dispute resolution panel also confirmed the action of the learned assessing officer. 031. The learned authorized representative submitted that all these commissions have been paid to the regular dealers. It is submitted that entire amount of commission is paid only and exclusively for the business of the applicant and it is allowed on year-on-year basis in the previous year and subsequent year. The learned authorized representative also produced the simple copy of the appointment letters/agreements and the simple copy of Page | 34 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 invoices of such expenditure. Therefore it was submitted that the disallowance made by the learned lower authorities is not sustainable. 032. The learned departmental representative vehemently supported the order of the lower authorities and submitted that assessee has failed to substantiate the payment of commission expenditure and the business purpose of such payment of commission and therefore the learned assessing officer is allowed the deduction to the extent of 50%. It was stated that there is no infirmity in the order of the lower authorities. 033. We have carefully considered the rival contention and perused the orders of the lower authorities. The assessee has shown the payment of commission to various dealers and also justified the payment of dealers supported with the agreement and the invoices. The substantial activity is required to be performed as has been stated by the assessee, which was not denied by the assessing officer. Further the response received under section 133 (6) of the various parties i.e. buyers was received at the last movement of completion of the assessment and therefore it was not confronted to the assessee. Identical payments have been allowed to the assessee in earlier years as well as in subsequent years. Therefore there is no reason to deviate from the same. Further the learned assessing officer is also allowed 50% of such expenditure holding it to be for the purposes of the business, there is no sanctity involved in allowing 50% of this expenditure in disallowing Page | 35 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 50% of the same. If the learned assessing officer was not satisfied with the explanation of the assessee total hundred percent of such expenditure should have been disallowed which is not been done by the learned assessing officer. The learned assessing officer did not justify the reason for deviating from stand taken by the revenue in earlier years in subsequent years with respect to the allowability of this commission expenditure. Accordingly we direct the learned assessing officer to delete the about disallowance of commission expenditure of ₹ 33,853,559/–. Ground number E of the appeal is allowed. 034. Ground number F is with respect to the unutilized Cenvat credit disallowed by the learned assessing officer and included in the closing stock of the earlier year, the ground says that it should be allowed as a deduction in the opening stock of this year. Assessee submitted that this is covered by the decision of the coordinate bench in assessee’s own case for assessment year 2010 – 11, this fact is not disputed by the learned departmental representative and therefore we direct the learned assessing officer to grant relief with respect to the above amount of ₹ 932,524/–. Accordingly ground F is allowed. 035. Ground number G is with respect to the disallowance under section 14 A of the act of ₹ 2,060,500 made by the assessee on its own. The claim of the assessee is that the no disallowance should have been made on account of interest expenditure without establishing the Nexus of the Page | 36 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 expenditure in relation to income which does not form part of the total income. In the present case whatever is the suo moto disallowance which has been made by the assessee is accepted by the learned assessing officer. The assessee itself is disallowed the expenditure of interest as well as the other expenditure. The learned dispute resolution panel held that as there is no disallowance made by the learned assessing officer but has accepted the disallowance made by the assessee in the return of income, objection of the assessee does not arise. 036. The learned authorized representative submitted that though the assessee has worked out the disallowance according to rule 8D of the act however there is an error in the working of the assessee by disallowing the interest expenditure. It is submitted that the assessee has sufficient own funds more than the amount of investment therefore there could not be any disallowance on interest expenditure. Though the assessee has made an error in the working out of the disallowance, but now it has been pointed out to the authorities and therefore it should have been corrected. 037. The learned departmental representative relied upon the order of the lower authorities. 038. We carefully considered the rival contention and perused the orders of the lower authorities. The assessee itself has disallowed a sum of ₹ 2,060,500 under section 14 A of the act read with rule 8D. Now the assessee wants to submit that the interest disallowance made by it while working Page | 37 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 out the sumo to disallowance is not proper. We find that correct disallowance is required to be made if it is found at any stage of the assessment proceedings or appellate proceedings that same needs to be rectified. Accordingly we direct learned assessing officer to delete the disallowance of indirect interest expenditure as assessee has capital and free reserve amounting to ₹ 526 crores whereas the investment is only 83 crores while working out disallowance under section 14 A read with rule 8D. Accordingly ground G of the appeal is allowed. 039. Ground number H is with respect to the short credit for tax deduction at source allowed to the assessee. The claim of the assessee is that assessee has given a credit for tax deduction at source of ₹ 33,08,351 should have given the credit of ₹ 3,716,261/–. The learned authorized representative submitted that same be verified by the assessing officer and the learned departmental representative also agreed that assessee has to justify the allowability of the tax deduction at source is credit. Accordingly we set-aside this issue back to the file of the learned assessing officer with a direction to the assessee to substantiate the claim which has not been granted by the learned assessing officer. Accordingly ground number H of the appeal is allowed. 040. In the result appeal of the assessee is partly allowed. ITA No. 2069/MUM/2017 Page | 38 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 (Assessment Year 2012-13) 041. This appeal is filed for the assessment year 2012 – 13 involving similar grounds as contained in appeal for assessment year 2011 – 12. “Ground No. A: Transfer Pricing Adjustments – ₹ 32,25,134/- (i) Based on the facts and in the circumstances of the case the Ld. Transfer Pricing Officer („TPO‟) and the Hon‟ble Dispute Resolution Panel (DRP) erred in making the adjustment for arm‟s length price of corporate guarantee. The adjustment is worked out by TPO on assumptions and treating the Appellant at par with Banks. The TPO erred in ignoring the provisions of section 92C(3) and Section 92F(ii) of the Income tax Act, 1961. Hence, said adjustment is invalid and bad-in-law. (ii) Without prejudice to above, (i) Appellant submits that corporate guarantee given to bank for giving financial facility to AE which is (ultimate) subsidiary of the Appellant being beneficial to the Appellant (and as such) is at arm‟s length as clarified in written submission given vide letter dated 17.12.2015 and 19.01.2016. GROUND B: SHORT TERM CAPITAL GAINS TREATED AS BUSINESS INCOME – Rs. 75,68,646/- Page | 39 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 (i) Based on the facts and in the circumstances of the case the Ld. Assessing Officer (A.O.) and the DRP erred in treating short term capital gain earned by the Appellant on redemption of units of mutual funds as business income following the decision of Hon‟ble Punjab and Haryana High Court in the case of M/s Pooja Investments Pvt. Ltd. (ITA No. 39 of 2012) and thereby denied set off of brought forward short term capital loss of earlier years. GROUND C: CLUB EXPENSES – Rs. 2,53,452/- (i) Based on the facts and in the circumstances of the case, the A.O. and the DRP erred in disallowing the annual subscriptions and expenditure incurred at clubs by senior employees of the Appellant as non- business expenditure. GROUND D : DISALLOWANCE OF DEDUCTION U/S 35(2AB) – Rs. 74,53,064/- (i) Based on the facts and in the circumstances of the case, the AO and the DRP erred in not allowing relief under section 35(2AB) as certified by Tax Auditors in Tax Audit Report and restricting the allowance to ₹ 14,37,10,000/-. (ii) Without prejudice to above, the A.O. and the DRP erred in not mentioning in the assessment order to revise the deduction allowed as and when the Appellant submits rectified Form 3CL that will be issued by DSIR in response to application already filed by the Appellant with DSIR. Page | 40 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 GROUND E: DISALLOWANCE OF COMMISSION – Rs. 3,78,62,418/- (i) Based on the facts and in the circumstances of the case and A.O. and the DRP erred in disallowing 50% of commission paid to dealers as non-business expenditure. (ii)Without prejudice to above, the A.O. and DRP erred in treating 50% of commission paid as non- business expenditure as the ultimate customer is government agency and assuming that no intermediary is required in supply of goods to government agencies. The A.O. and DRP erred in ignoring the factual details given by the Appellant explaining the arrangement with dealers and their role in the entire transactions. GROUND F: DISALLOWANCE U/S 14A R.W.R. 8D – ₹ 48,00,000/- (i) Based on the facts in the circumstances of the case, the A.O. and the DRP erred in disallowing u/s. 14A r.w.r. 8D. (ii) Without prejudice to above, the A.O. and the DRP erred in not considering the interest paid, net of interest received for the purpose or working out disallowance of expenditure under rule 8D of the income tax Rules, 1962. (iii) Without prejudice to above, the A.O. and the DRP erred in disallowing u/s. 14A r.w.r. 8D, in respect of long term strategic investment made by the Applicant Page | 41 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 in shares of subsidiary companies to have control over them, as such investments does not require any portfolio management or requires the Applicant to incur any expenditure to earn dividend from such investment.” 042. Ground number A is with respect to the transfer pricing adjustment on account of the corporate guarantee issued by the assessee for the financing arrangement benefiting to the associated enterprise. For assessment year 2011 – 12 we have set-aside this ground back to the file of the learned TPO/AO with certain direction to the assessee as well as to the assessing officer, with similar direction we restore this ground of appeal to the file of AO/TPO. 043. Similar is the ground for assessment year 2013 – 14 and 2014 – 15 (ground A), we also restore this ground of appeal back to the file of the learned transfer pricing officer/assessing officer with similar direction. 044. Ground number B is with respect to whether the profit arising to the assessee on transfer of units of mutual fund is chargeable to tax under the head business or profession or capital gain. For assessment year 2011 – 12 we have already held that such profits are chargeable to tax under the head capital gains. Accordingly, we direct the learned AO to treat the profits and gains on sale of Page | 42 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 units of mutual fund chargeable to tax under the head of capital gain. 045. Ground number C is with respect to the disallowance of club expenses which is identical to ground number C in appeal of the assessee for assessment year 2011 – 12. Identical ground has raised for assessment year 2012 – 13 and ground number B for assessment year 2013 – 14. For assessment year 2011 – 12 we have allowed that particular ground. Therefore, for the similar reasons, we also allow ground number C for assessment year 2012 – 13 and ground number B for assessment year 2013 – 14 directing the learned assessing officer to delete the disallowance of club expenses. 046. Ground number D is with respect to the disallowance of research and development expenditure under section 35 (2AB) of the act for assessment year 2012 – 13 based on form number 3CL issued by DSIR. Similar is ground number C for assessment year 2013 – 14. The facts and circumstances are stated to be identical to the ground decided by us in case of the appeal of the assessee for assessment year 2011 – 12 wherein we have held that for the impugned assessment year such disallowance cannot be made. We have deleted the disallowance of research and development expenditure for that year. For the Page | 43 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 similar reasons, as there is no change in the facts, circumstances and law for this year as well as for assessment year 2013 – 14, we direct the learned AO to delete the disallowance of weighted deduction of research and development expenditure. Accordingly ground number D for assessment year 2012 – 13 and ground number C for assessment year 2013 – 14 are allowed. 047. Ground number E is with respect to the disallowance of commission expenditure which is similar to ground number D of the appeal of the assessee for assessment year 2011 – 12. The fact shows that the assessee has claimed the commission expenditure which was disallowed by the learned assessing officer to the extent of 50% of the total commission expenditure. We have deleted the disallowance for assessment year 2011 – 12. For the similar reasons we allow ground number E of the appeal of the assessee for assessment year 2012 – 13. 048. Ground number D of the appeal of the assessee for assessment year 2013 – 14 and ground number B for assessment year 2014 – 15 is also against the disallowance of commission expenditure. Parties confirmed that the facts circumstances and the law prevailing for these years are also similar to the assessment year 2011 – 12. Therefore, based on the reasons given by us for deleting the Page | 44 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 disallowance for that year, we direct the learned assessing officer to delete the disallowance of commission expenditure. Accordingly ground number D for assessment year 13 – 14 and ground number B for assessment year 2014 – 15 is allowed. 049. Ground number F for assessment year 2012 – 13 is with respect to the disallowance of expenditure under section 14 A read with rule 8D of the act. For assessment year 2011 – 12, on identical facts and circumstances we have directed the learned assessing officer to recompute the disallowance under rule 8D by deleting the interest disallowance under rule 8D (2) (ii) for the reason that the amount of investment in deleting tax free income during the year is much less than the amount of interest free capital and reserves available with the assessee. Therefore for the similar reasons, we direct the learned assessing officer to recompute the disallowance under section 14 A read with rule 8D for assessment year 2012 – 13 also. To that extent ground number F of the appeal for assessment year 2012 – 13 is allowed. 050. In the result appeal for assessment year 2012 – 13, 2013 – 14 and 2014 – 15 are also partly allowed as indicated above. 051. Accordingly, all the 4 appeal is filed by the assessee for assessment year 2011 – 12 to two Page | 45 ITA Nos. 1745/MUM/2016, 2069 & 7166/MUM/2017, 6560/MUM2018 Graves Cotton Ltd.;A.Y. 2011-12, 2012-13, 2013-14, 2014-15 assessment year 2014 – 15 are disposed of by this common order. Order pronounced in the open court on 25.07. 2023. Sd/- Sd/- (KAVITHA RAJAGOPAL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 25.07. 2023 Sudip Sarkar, Sr.Ps. Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai