Dy.Commissioner of Income Tax, Circle-1(1)(1), Ahmedabad V. M/s. Adani Port & Special Economic Zone Ltd., Ahmedabad

ITA 3482/AHD/2014

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6407 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 29-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN; SUBHASH BAINS MSA KHAN
• Keywords: Capital asset; Business income; Transfer pricing; International transaction; Earning of tax free income; Source of fund; Wrong claim; TDS; Set aside; Capital Gains
• Section: 43B; 40A(3); 143(3); 92B; 14A; 40(a)(ia); 80IB; 80G; 250; 64; 92

Judgement Text

CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 1 OF 21 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR VP AND MAHAVIR PRASAD JM] ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 DY COMMISSIONER OF INCOME TAX CIRCLE 1, AHMEDABAD ..APPELLANT VS ADANI PORTS AND SPECIAL ECONOMIC ZONE LTD .. ........RESPONDENT ADANI HOUSE, MITHAKALI SIX ROAD, NAVRANGPURA, AHMEDABAD 380 015 [PAN: AAACG7917K] CO NOS. 25 AND 26/AHD/ 2015 IN ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 ADANI PORTS AND SPECIAL ECONOMIC ZONE LTD CROSS OBJECTOR ADANI HOUSE, MITHAKALI SIX ROAD, NAVRANGPURA, AHMEDABAD 380 015 [PAN: AAACG7917K] VS DY COMMISSIONER OF INCOME TAX CIRCLE 1, AHMEDABAD ..........RESPONDENT APPEARANCES BY SUBHASH BAINS, MSA KHAN AND LALIT P JAIN FOR THE APPELLANT ASSESSING OFFICER S N SOPARKAR, BANDISH SOPARKAR AND PARIN SHAH FOR THE ASSESSEE DATE OF CONCLUDING THE HEARING : NOVEMBER 13, 2018 DATE OF PRONOUNCEMENT : FEBRUARY 12, 2019 O R D E R PER PRAMOD KUMAR, VP: 1. THESE TWO APPEALS AND THE RELATED CROSS OBJECTIO NS PERTAIN TO THE SAME ASSESSEE, INVOLVE SOME COMMON ISSUES AND WERE HEARD TOGETHER. AS A MATTER OF CONVENIENCE, THEREFORE, THESE TWO CROSS APPEALS AND THE TWO CROSS OBJECTION S ARE BEING DISPOSED OF BY WAY OF THIS CONSOLIDATED ORDER. 2. WE WILL FIRST TAKE UP THE APPEAL AND THE CROSS O BJECTION FOR THE ASSESSMENT YEAR 2009- 10, WHICH ARE DIRECTED AGAINST THE ORDER DATED 10 TH OCTOBER 2014, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, F OR THE ASSESSMENT YEAR 2009-10. CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 2 OF 21 3. IN THE FIRST GROUND OF APPEAL, THE ASSESSING OF FICER HAS RAISED THE FOLLOWING GRIEVANCE: THE ID. CIT(A) HAS ERRED IN DIRECTING THE AO TO EXC LUDE ONLY THE NET INTEREST INCOME WHILE COMPUTING THE DEDUCTION U/S 80IB DESPI TE THE FACT THAT THE INCOME DERIVED FROM THE INDUSTRIAL UNDERTAKING IS ELIGIBLE FOR DEDUCTION AND INTEREST INCOME CANNOT BE NETTED OFF WITH THE INTEREST EXPEN DITURE WHICH WAS INCURRED FOR BUSINESS. 4. IN A RELATED GRIEVANCE, WHICH IS RAISED IN GROUN D NO. 1 OF THE CROSS OBJECTION BY THE ASSESSEE, THE FOLLOWING ISSUE IS RAISED: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN CONFIRMING THE FINDING OF THE ASSESSING OFFICER THAT THE INTER EST INCOME OF RS.13,86,27,839, BROUGHT TO THE CHARGE OF TAX BY HIM AS BUSINESS INC OME, IS NOT ELIGIBLE FOR DEDUCTION U/S.80-IAB OF THE I.T. ACT, IN SPITE OF T HE FACT THAT THERE IS NET INTEREST PAYOUTS. 5. SO FAR AS THIS GRIEVANCE IS CONCERNED, THE RELEV ANT MATERIAL FACTS ARE LIKE THIS. THE ASSESSEE BEFORE US IS A COMPANY ENGAGED IN THE BUSI NESS OF INTEGRATED PORT AND SEZ DEVELOPMENT. DURING THE COURSE OF SCRUTINY ASSESSME NT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS CLAIMED A DEDUCTION OF RS 401.03 CRORES AS DEDUCTION UNDER SECTION 80IAB. WHEN HE EXAMINED THIS CLAIM FURTHER, HE FOUND THAT WHILE THE ASSESSEE HAS DEBITED INTEREST AND FINANCIAL EXPENSES OF RS 132.9 5 CRORES, THIS DEBIT ONLY REPRESENTS A NET FIGURE AND INCLUDES INTEREST EXPENDITURE OF RS 234. 23 CRORES AND INTEREST EARNED AGGREGATING TO RS 101.28 CRORES. THE ASSESSING OFFICER WAS OF T HE VIEW THAT THE DEDUCTION UNDER SECTION 80IAB WAS PERMISSIBLE ONLY IN RESPECT OF INCOME DE RIVED BY THE UNDERTAKING FROM ANY BUSINESS OF DEVELOPING SPECIAL ECONOMIC ZONES AND, THEREFORE, THE INCOME EARNED AS INTEREST ON DEPOSITS WAS NOT ELIGIBLE FOR THE DEDUCTION UND ER SECTION 80IAB. THE ASSESSING OFFICER DID NOT ACCEPT THE PLEA REGARDING THE NETTING OF IN TEREST AND EXAMINED THE INTEREST EARNINGS ON MERITS OF EACH COMPONENT. WHILE, IN RESPONSE TO TH E SUBMISSIONS MADE BY THE ASSESSEE AND AFTER A DETAILED ANALYSIS OF THE JUDICIAL PRECEDENT S ABOVE, THE ASSESSING OFFICER ACCEPTED THE PLEA WITH RESPECT TO A PART OF INTEREST EARNING BEI NG ELIGIBLE FOR DEDUCTION UNDER SECTION 80IAB, THE ASSESSING OFFICER DECLINED THE DEDUCTION IN RESPECT OF INTEREST ON ICDS AMOUNTING TO RS 12.16 CRORES AND INTEREST ON FDS AM OUNTING TO RS 1.70 CRORES. HE WAS OF THE VIEW THAT THESE AMOUNTS WERE NOT PLACED AS DEPOSITS IN THE NORMAL COURSE OF BUSINESS INCOME AND INTEREST INCOME THEREON COULD NOT BE BROUGHT TO TAX UNDER THE HEAD BUSINESS INCOME. ACCORDINGLY, THE 80IAB DEDUCTION, WHICH WAS CLAIMED AT RS 401.03 CRORES, WAS RESTRICTED TO RS 387.17 CRORES. A DISALLOWANCE OF RS 13,86,27,8 39 WAS THUS MADE. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO, SIMPLY FOLLOWING HIS ORDER DATED 6 TH MAY 2011 IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09 AND WITHOUT ASSIGNING ANY OTHER REASONS, HELD THAT THE ASSESSING OFFICER IS DIRECT ED TO EXCLUDE ONLY THE NET INTEREST INCOME WHILE COMPUTING THE DEDUCTION UNDER SECTION 80IAB. THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL BEFORE US. THE ASSESSEE IS ALSO AG GRIEVED THAT IN ANY CASE ENTIRE INTEREST INCOME WAS ELIGIBLE FOR DEDUCTION UNDER SECTION 80I AB. 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 7. WE FIND THAT THE ORDER DATED 6 TH MAY 2011 PASSED BY THE CIT(A), IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09, HAS, IN THE M EANTIME, BEEN CARRIED IN APPEAL BEFORE A CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 3 OF 21 COORDINATE BENCH OF THIS TRIBUNAL, AND, VIDE ORDER DATED 1 ST SEPTEMBER 2016, HAS CONFIRMED THE STAND OF THE CIT(A). A COPY OF THE SAID ORDER IS PLACED BEFORE US AT PAGES 1 ONWARD OF THE COMPILATION. THE COORDINATE BENCH HAS HELD THAT THE ENTIRE INTEREST INCOME IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IAB, AND, FOR THIS SHORT REASON, THE GRIEVANCE AGAINST NETTING OF INTEREST IS WHOLLY ACADEMIC AND INFRUCTUOUS. THE ST AND OF THE CIT(A) THUS ATTAINED FINALITY. IN ANY CASE, HONBLE JURISDICTIONAL HIGH COURT, IN THE CASE OF CIT VS NIRMA LIMITED (367 ITR 12), HAS HELD THAT NETTING OF INTEREST FOR THE PURPOSE OF THIS DEDUCTION CAN BE ALLOWED. WHICHEVER WAY ONE LOOKS AT IT, THE ISSUE IS COVERED , IN FAVOUR OF THE ASSESSEE, BY THE BINDING JUDICIAL PRECEDENTS. WE, THEREFORE, HAVE NO REASONS TO DISTURB THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A). IN VIEW OF THESE DISCUSSIONS, A S ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE RELIEF GRANTED BY THE CIT(A) AND DECL INE TO INTERFERE IN THE MATTER. 8. GROUND NO. 1 IS THUS DISMISSED, AND GROUND NO. 1 OF THE CROSS OBJECTION IS ALLOWED. 9. IN GROUND NO. 2, THE ASSESSING OFFICER HAS RAISE D THE FOLLOWING GRIEVANCE: THE ID. CIT(A) HAS ERRED IN DELETING THE DISALLOWAN CE MADE BY THE AO FOR THE WRONG CLAIM MADE BY THE ASSESSEE U/S 80G IN ITS RETURN OF INCOME WITHOUT APPRECIATING THE FACT THAT THE AO HAS CORRECTLY ALLOWED THE ELIGIBLE DONATIONS OF RS.2,88,20,302/- IN PROPORTION OF THE TURNOVER AND TO THAT EXTENT THE D EDUCTION U/S 80IB WAS REDUCED BY THE AO. 10. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEE DINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTI ON 80 G IN RESPECT OF ENTIRE DONATIONS OF RS 2,88,20,302 FROM THE PROFITS OF THE BUSINESS WHI CH ARE ELIGIBLE PROFITS. IT WAS NOTED THAT AS THE ASSESSEE COMPANY HAS ONLY ONE UNDERTAKING AND T HERE IS NO OTHER ELIGIBLE BUSINESS, THE ASSESSEE HAS TAKEN THE PROFITS OF BUSINESS AS ELIGI BLE PROFIT. THIS, HOWEVER, DID NOT FIND FAVOUR WITH THE ASSESSING OFFICER. HE WAS OF THE VIEW THAT ELIGIBLE DEDUCTION HAS TO WORKED SEPARATELY AS AN ENCLOSURE TO FORM 10CCB, WHERE COM MON EXPENSES, INCLUDING THE DONATIONS, ARE ALLOCATED TO ELIGIBLE AND NON-ELIGIBLE BUSINESS ES. HE WAS OF THE VIEW THAT BECAUSE OF THE METHOD FOLLOWED BY THE ASSESSEE, OF TAKING THE BUSI NESS INCOME FROM THE COMPUTATION ITSELF, THE DONATIONS TAKEN OUT OF THE WORKING HAVE NOT GOT ALLOTTED, AND, AS A RESULT, ENTIRE DONATION OF RS 2,88,20,302 IS INCORRECTLY CLAIMED AGAINST TH E OTHER INCOME BEING SHORT TERM CAPITAL GAINS AND INTEREST INCOME OF THE ASSESSEE. THE ASS ESSING OFFICER THUS CONCLUDED THAT THE ELIGIBLE DONATION IS TO BE ALLOCATED IN THE PROPORT ION OF TURNOVER AND, TO THIS EXTENT, THE 80IAB DEDUCTION IS TO BE REDUCED. ACCORDINGLY, HE ALLOCAT ED RS 2,82,01,048 TO THE ELIGIBLE UNDERTAKING, AND, TO THAT EXTENT, REDUCED THE DEDUC TION UNDER SECTION 80IAB. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CI T(A) WHO DELETED THE DISALLOWANCE BY OBSERVING THAT DONATION IS NOT AN EXPENSE WHICH CAN BE ALLOCATED IN COMPUTATION OF INCOME UNDER ANY HEAD. THIS IS AN ADJUSTMENT TO BE MADE FR OM ADJUSTED GROSS TOTAL INCOME. HE THUS UPHELD THE CLAIM OF THE ASSESSEE AND REVERSED THE S TAND OF THE ASSESSING OFFICER. THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL BEF ORE US. 11. HAVING HEARD THE RIVAL CONTENTIONS, AND HAVING PERUSED THE MATERIAL ON RECORD, WE SEE NO NEED TO INTERFERE IN THE MATTER. IT IS ONLY IN C OMPUTATION OF TOTAL INCOME THAT THE DEDUCTION UNDER SECTION 80G IS TO BE ALLOWED, AND, AS LEARNED CIT(A) RIGHTLY OBSERVES, IT IS NOT AN EXPENSE WHICH IS TO BE ALLOCATED TO DIFFERENT HEADS OR SOURCES OF INCOME. AS A MATTER OF FACT, A DONATION IS IN THE NATURE OF ALLOCATION OF INCOME AND THE TAX DEDUCTION FOR ELIGIBLE DEDUCTION IS A TAX POLICY DRIVEN DEDUCTION FOR ENCOURAGING SU CH PUBLIC SPIRITED APPLICATION OF INCOME. THE STAND OF THE ASSESSEE WAS INDEED CORRECT AND TH E LEARNED CIT(A) WAS PERFECTLY JUSTIFIED IN CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 4 OF 21 UPHOLDING THE SAME. WE APPROVE THE CONCLUSIONS ARRI VED AT BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 12. GROUND NO. 2 IS THUS DISMISSED. 13. IN GROUND NO. 3, THE ASSESSING OFFICER HAS RAIS ED THE FOLLOWING GRIEVANCE: 3. THE ID. CIT(A) HAS ERRED IN DIRECTING THE AO TO RE-COMPUTE THE DEDUCTION U/S 80IAB AFTER INCREASING THE AMOUNT OF DEDUCTION BY T HE AMOUNT OF DISALLOWANCE U/S 14A. 14. LEARNED REPRESENTATIVES FAIRLY AGREE THAT WHILE THIS RELIEF WAS GRANTED BY THE LEARNED CIT(A) ON THE BASIS OF HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF ITO VS KEVAL CONSTRUCTIONS [2013] 33 TAXMANN.COM 277 (GUJ. ), THE ISSUE IS NOW COVERED, IN FAVOUR OF THE ASSESSEE BY THE CBDT CIRCULAR NO..37/2016 [F .NO.279/MISC./140/2015/ITJ] DATED 2- 11-2016 WHEREIN A POLICY DECISION HAS BEEN TAKEN TO ACCEPT THE SAID DECISION AND LET THE MATTERS REST AT THAT. 15. WE FIND THAT IN PRINCIPLE THUS, WHEN THE PROFIT GOES UP AS A RESULT OF DISALLOWANCES OF EXPENSES, THE ELIGIBILITY FOR DEDUCTION IN RESPECT OF SUCH PROFIT CORRESPONDINGLY INCREASES. THAT IS THE POSITION ACCEPTED BY THE CBDT BY STATIN G AS FOLLOWS: CHAPTER VI-A OF THE INCOME-TAX ACT, 1961 ('THE ACT' ), PROVIDES FOR DEDUCTIONS IN RESPECT OF CERTAIN INCOMES. IN COMPUTING THE PROFIT S AND GAINS OF A BUSINESS ACTIVITY, THE ASSESSING OFFICER MAY MAKE CERTAIN DISALLOWANCE S, SUCH AS DISALLOWANCES PERTAINING TO SECTIONS 32, 40(A)(IA), 40A(3), 43B E TC., OF THE ACT. AT TIMES DISALLOWANCE OUT OF SPECIFIC EXPENDITURE CLAIMED MA Y ALSO BE MADE. THE EFFECT OF SUCH DISALLOWANCES IS AN INCREASE IN THE PROFITS. DOUBTS HAVE BEEN RAISED AS TO WHETHER SUCH HIGHER PROFITS WOULD ALSO RESULT IN CLAIM FOR A HIGHER PROFIT-LINKED DEDUCTION UNDER CHAPTER VI-A. 2. THE ISSUE OF THE CLAIM OF HIGHER DEDUCTION ON TH E ENHANCED PROFITS HAS BEEN A CONTENTIOUS ONE. HOWEVER, THE COURTS HAVE GENERALLY HELD THAT IF THE EXPENDITURE DISALLOWED IS RELATED TO THE BUSINESS ACTIVITY AGAI NST WHICH THE CHAPTER VI-A DEDUCTION HAS BEEN CLAIMED, THE DEDUCTION NEEDS TO BE ALLOWED ON THE ENHANCED PROFITS. SOME ILLUSTRATIVE CASES UPHOLDING THIS VIE W ARE AS FOLLOWS: (I) IF AN EXPENDITURE INCURRED BY ASSESSEE FOR TH E PURPOSE OF DEVELOPING A HOUSING PROJECT WAS NOT ALLOWABLE ON ACCOUNT OF NON -DEDUCTION OF TDS UNDER LAW, SUCH DISALLOWANCE WOULD ULTIMATELY INCREASE ASSESSE E'S PROFITS FROM BUSINESS OF DEVELOPING HOUSING PROJECT. THE ULTIMATE PROFITS OF ASSESSEE AFTER ADJUSTING DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT WOU LD QUALIFY FOR DEDUCTION UNDER SECTION 80-IB OF THE ACT. THIS VIEW WAS TAKEN BY TH E COURTS IN THE FOLLOWING CASES: INCOME-TAX OFFICER -WARD 5(1) V. KEVAL CONSTRUCT ION [2013] 33 TAXMANN.COM 277 (GUJ.) COMMISSIONER OF INCOME-TAX-IV, NAGPUR V. SUNIL V ISHWAMBHARNATH TIWARI [2016] 63 TAXMANN.COM 241 (BOM.) (II) IF DEDUCTION UNDER SECTION 40A(3) OF THE ACT IS NOT ALLOWED, THE SAME WOULD HAVE TO BE ADDED TO THE PROFITS OF THE UNDERT AKING ON WHICH THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION UNDER SECTION 80-IB OF TH E ACT. THIS VIEW WAS TAKEN BY THE COURT IN THE FOLLOWING CASE: CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 5 OF 21 PRINCIPAL CIT, KANPUR V. SURYA MERCHANTS LTD. [2 016] 72 TAXMANN.COM 16 (ALL.). THE ABOVE VIEWS HAVE ATTAINED FINALITY AS THESE JUD GMENTS OF THE HIGH COURTS OF BOMBAY, GUJARAT AND ALLAHABAD HAVE BEEN ACCEPTED BY THE DEPARTMENT. 3. IN VIEW OF THE ABOVE, THE BOARD HAS ACCEPTED THE SETTLED POSITION THAT THE DISALLOWANCES MADE UNDER SECTIONS 32, 40(A)(IA), 40 A(3), 43B, ETC. OF THE ACT AND OTHER SPECIFIC DISALLOWANCES, RELATED TO THE BUSINE SS ACTIVITY AGAINST WHICH THE CHAPTER VI-A DEDUCTION HAS BEEN CLAIMED, RESULT IN ENHANCEMENT OF THE PROFITS OF THE ELIGIBLE BUSINESS, AND THAT DEDUCTION UNDER CHAPTER VI-A IS ADMISSIBLE ON THE PROFITS SO ENHANCED BY THE DISALLOWANCE. 4. ACCORDINGLY, HENCEFORTH, APPEALS MAY NOT BE FILE D ON THIS GROUND BY OFFICERS OF THE DEPARTMENT AND APPEALS ALREADY FILED IN COURTS/TRIB UNALS MAY BE WITHDRAWN/NOT PRESSED UPON. THE ABOVE MAY BE BROUGHT TO THE NOTIC E OF ALL CONCERNED. 16. WHILE THE AFORESAID CIRCULAR DOES NOT SPECIFICA LLY DEAL WITH SECTION 14A DISALLOWANCE, AS THE CIRCULAR ITSELF STATES IN SO MANY WORDS THE CASES CITED ABOVE ARE ONLY ILLUSTRATIVE AND THE PRINCIPLE IS THAT THE COURTS HAVE GENERALLY HELD T HAT IF THE EXPENDITURE DISALLOWED IS RELATED TO THE BUSINESS ACTIVITY AGAINST WHICH THE CHAPTER VI- A DEDUCTION HAS BEEN CLAIMED, THE DEDUCTION NEEDS TO BE ALLOWED ON THE ENHANCED PROFI TS. IN THE LIGHT OF THIS POSITION, WE UPHOLD THE CONCLUSIONS ARRIVED AT BY THE CIT(A) ON THIS POINT AS WELL, AND DECLINE TO INTERFERE IN THE MATTER. 17. GROUND NO. 3 IS THUS DISMISSED. 18. IN GROUND NO. 4, THE ASSESSING OFFICER HAS RAIS ED THE FOLLOWING GRIEVANCE: 4. THE LD. CIT(A) HAS ERRED IN DIRECTING THE AO TO RE-COMPUTE THE ADJUSTMENT BY ADOPTING THE RATE OF GUARANTEE FEE AT 2% AGAINST TH E RATE OF 3% ADOPTED BY THE TPO FOR NON-CHARGING OF GUARANTEE FEES FROM THE AE. 19. IN A RELATED GRIEVANCE I.E. GROUND NO. 4 OF TH E CROSS OBJECTION FILED BY THE ASSESSEE , WHICH WE MUST TAKE UP ALONG WITH THE ABOVE, THE ASS ESSEE IS AGGRIEVED AS FOLLOWS: 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE CIT(A) ERRED IN PARTLY CONFIRMING THE UPWARD ADJUSTMENT OF RS.34,22,250 MA DE BY THE ASSESSING OFFICER ON THE BASIS OF THE ORDER PASSED BY THE TRANSFER PRICI NG OFFICER WITH REGARD TO NON- CHARGING OF GUARANTEE FEES FROM THE ASSOCIATE ENTER PRISE, BY HOLDING THAT THE QUANTUM OF UPWARD ADJUSTMENT MAY BE RECOMPUTED BY ADOPTING THE RATE OF GUARANTEE FEE AT 2%, AS AGAINST THE RATE OF 3% ADOPTED BY THE TRANSFER P RICING OFFICER. 20. SO FAR AS THESE CROSS CLAIMS ARE CONCERNED, THE RELEVANT MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF PROCEEDINGS BEFORE THE TRANSFE R PRICING OFFICER, IT WAS NOTED THAT THE ASSESSEE HAD EXTENDED A CORPORATE GUARANTEE TO THE STATE BANK OF INDIA, HONG KONG BRANCH, FOR ACQUISITION OF AIRCRAFT BY ITS ASSOCIATED ENTER PRISES. IT WAS EXPLAINED BY THE ASSESSEE THAT THE GUARANTEE GIVEN BY THE ASSESSEE IS A GENERIC AN D NON-EXPLICIT GUARANTEE WHICH BINDS THE PRINCIPAL SHAREHOLDERS IN GENERAL ANYWAY, AND THAT IT DID NOT LOWER THE CREDIT RISK TO THE AE SINCE THE AE DERIVES THE SAME BENEFIT BY AFFILIATIO N WITH THE GROUP. IT WAS ALSO SUBMITTED THAT THE SBI HONG KONG HAS GRANTED LOAN TO THE AE AT LIB OR PLUS 145 BPS WHICH IS AS PER THE CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 6 OF 21 MARKET NORMS, AND THAT THE AE WAS REQUIRED TO ENSUR E THAT THE VALUE OF SECURITY DOES NOT FALL BELOW THE 1.33 TIMES OF THE BORROWINGS BY THE AE. A LL THIS, ACCORDING TO THE ASSESSEE, SHOWED THAT THE TRANSACTION BETWEEN THE SBI HONG KONG AND THE AE WAS IN THE LIGHT OF PREVAILING MARKET SITUATION AND THE GUARANTEE BY THE ASSESSEE DID NOT CONFER ANY BENEFITS TO THE AE. THESE ARGUMENTS DID NOT IMPRESS THE TPO. AS THE ASS ESSEE DID NOT CHARGE ANY GUARANTEE COMMISSION, THE TPO COMPUTED GUARANTEE COMMISSION @ 3% OF THE AMOUNT OF GUARANTEE PROVIDED BY THE ASSESSEE TO THE AES BANKER I.E. ST ATE BANK OF INDIA. ACCORDINGLY, AN ADJUSTMENT OF RS 34,22,250 WAS RECOMMENDED. THAT WA S THE ALP ADJUSTMENT MADE BY THE ASSESSING OFFICER IN THE COURSE OF THE SCRUTINY ASS ESSMENT PROCEEDINGS. AGGRIEVED BY THE STAND SO TAKEN BY THE TPO AND THE AO, ASSESSEE CARR IED THE MATTER IN APPEAL BEFORE THE CIT(A). LEARNED CIT(A) UPHELD THE ALP ADJUSTMENT IN PRINCIPLE BUT RESTRICTED THE QUANTIFICATION OF ADJUSTMENT AT 2% OF THE AMOUNT OF GUARANTEE PROVIDED BY THE ASSESSEE. NONE OF THE PARTIES IS SATISFIED. WHILE THE ASSESSE E IS AGGRIEVED OF THE ALP ADJUSTMENT IN RESPECT OF ISSUANCE OF CORPORATE GUARANTEES IN PRIN CIPLE, THE ASSESSING OFFICER IS AGGRIEVED OF THE QUANTUM OF ADJUSTMENT BEING RESTRICTED TO 2% OF THE VALUE OF GUARANTEES AS AGAINST 3% NOTIONAL VALUE ASSIGNED BY THE TPO. BOTH THE PARTIE S ARE IN APPEAL BEFORE US. 21. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 22. WE FIND THAT THIS ISSUE IS NOW COVERED, IN FAVO UR OF THE ASSESSEE, BY A SERIES OF DECISIONS IN VARIOUS CASES, INCLUDING IN THE CASE O F MICRO INK LTD VS ACIT (157 ITD 132), ANALYSED THE ISSUE IN GREAT DETAIL AND TAKEN NOTE O F DECISIONS BY VARIOUS COORDINATE BENCHES, AND THEN COME TO THE CONCLUSION THAT ISSUANCE OF CO RPORATE GUARANTEES DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION WITH THE MEANINGS OF SECT ION 92B. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE ISSUE IS THUS COVERED, IN FAVOUR OF THE ASSESSEE AND IN ASSESSEES OWN CASES, BY COORDINATE BENCHES OF TRIBUNAL. WE MAY ALSO ADD THA T HONBLE JURISDICTIONAL HIGH COURT HAS ADMITTED APPEAL TO DETERMINE THE QUESTION AS TO WHE THER OR NOT ISSUANCE OF CORPORATE GUARANTEES AMOUNTS TO INTERNATIONAL TRANSACTION WIT HIN MEANINGS OF SECTION 92B. IN THE CASE OF MICRO INK (SUPRA), THE COORDINATE BENCH, SPEAKIN G THROUGH ONE OF US (I.E. THE VICE PRESIDENT), HAS HELD, AS SUMMARIZED BY THE HEADNOTE S ON THE TAXMANN.COM, AS FOLLOWS: I. IT IS ONLY ELEMENTARY THAT THE DETERMINATION OF ARM'S LENGTH PRICE, UNDER THE SCHEME OF THE INTERNATIONAL TRANSFER PRICING SET OU T IN THE ACT, CAN ONLY BE DONE IN RESPECT OF AN 'INTERNATIONAL TRANSACTION'. SECTION 92(1) PROVIDES THAT, '(A)NY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE'. IN ORDER TO ATTRACT THE ARM'S LENGTH PRICE ADJUSTMENT, THEREFORE, A TRANSACTION HAS TO BE AN 'INTERNATIONAL TRANSACTION ' FIRST. THE EXPRESSION 'INTERNATIONAL TRANSACTION' IS A DEFINED EXPRESSION. SECTION 92B D EFINES THE EXPRESSION 'INTERNATIONAL TRANSACTION'. [PARA 21] II. THE 'OECD' TRANSFER PRICING GUIDELINES FOR MULT INATIONAL ENTERPRISES AND TAX ADMINISTRATIONS' SPECIFICALLY RECOGNISES THAT ANY A CTIVITY IN THE NATURE OF SHAREHOLDER ACTIVITY, WHICH IS SOLELY BECAUSE OF OWNERSHIP INTE REST IN ONE OR MORE OF THE GROUP MEMBERS, I.E., IN THE CAPACITY AS SHAREHOLDER 'WOUL D NOT JUSTIFY A CHARGE TO THE RECIPIENT COMPANIES'. IT IS THUS CLEAR THAT A SHARE HOLDER ACTIVITY, IN ISSUANCE OF CORPORATE GUARANTEES, IS TAKEN OUT OF AMBIT OF THE GROUP SERVICES. CLEARLY, THEREFORE, AS LONG AS A GUARANTEE IS ON ACCOUNT OF, WHAT CAN BE T ERMED AS 'SHAREHOLDER'S ACTIVITIES', EVEN ON THE FIRST PRINCIPLES, IT IS OUTSIDE THE AMB IT OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF ARM'S LENGTH PRICE. IT IS ESSENTIAL TO A PPRECIATE, AT THIS STAGE, THE DISTINCTION IN A SERVICE AND A BENEFIT. ONE MAY BE BENEFITED EV EN WHEN NO SERVICES ARE RENDERED, CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 7 OF 21 AND, THEREFORE, IN MANY A SITUATION IT'S A 'BENEFIT TEST' WHICH IS CRUCIAL FOR TRANSFER PRICING LEGISLATION. [PARA 36] III. THERE CAN BE ACTIVITIES WHICH BENEFIT THE GROU P ENTITIES BUT THESE ACTIVITIES NEED NOT NECESSARILY BE 'PROVISION FOR SERVICES'. T HE FACT THAT THE OECD CONSIDERS SUCH ACTIVITIES IN THE SERVICES SEGMENT DOES NOT AL TER THE CHARACTER OF THE ACTIVITIES. WHILE THE GROUP ENTITY IS THUS INDEED BENEFITTED BY THE SHAREHOLDER ACTIVITIES, THESE ACTIVITIES DO NOT NECESSARILY CONSTITUTE SERVICES. THERE IS NO SUCH EXPRESS REFERENCE TO THE BENEFIT TEST, OR TO THE CONCEPT OF BENEFIT ATTA CHED TO THE ACTIVITY, IN RELEVANT DEFINITION CLAUSE OF 'INTERNATIONAL TRANSACTION' UN DER THE DOMESTIC TRANSFER PRICING LEGISLATION. IT IS ALSO ESSENTIAL TO TAKE NOTE OF T HE LEGAL POSITION, IN INDIA, IN THIS REGARD. NO MATTER HOW DESIRABLE IS IT TO READ SUCH A TEST I N THE DEFINITION OF THE INTERNATIONAL TRANSACTION' UNDER DOMESTIC TRANSFER PRICING LEGISL ATION, AS IS THE SETTLED LEGAL POSITION, IT IS NOT OPEN TO COURT TO INFER THE SAME. [PARA 37 ] IV. ONE MORE THING WHICH IS CLEARLY DISCERNIBLE FRO M THE ABOVE DISCUSSIONS IS THAT THE TESTS RECOGNIZED BY THESE GUIDELINES ARE INTERW OVEN TWIN TESTS OF BENEFIT AND ARM'S LENGTH. BENEFIT TEST IMPLIES THE RECIPIENT GROUP ME MBER SHOULD GET 'ECONOMIC OR COMMERCIAL VALUE TO ENHANCE ITS COMMERCIAL POSITION '. THE BENEFIT TEST IS INTERLINKED WITH THE ARM'S LENGTH TEST IN THE SENSE THAT IT SEE KS AN ANSWER TO THE QUESTION WHETHER UNDER A SIMILAR SITUATION AN INDEPENDENT ENTERPRISE WOULD HAVE BEEN WILLING TO PAY FOR THE ACTIVITY CONCERNED, OR WOULD HAVE PERFORMED THE ACTIVITY IN-HOUSE FOR ITSELF. SO FAR AS THE BENEFIT TEST IS CONCERNED, IT IS ALIEN TO TH E DEFINITION OF INTERNATIONAL TRANSACTION' UNDER THE INDIAN TRANSFER PRICING LEGISLATION. SO F AR AS ARM'S LENGTH TEST IS CONCERNED, IT PRESUPPOSES THAT SUCH A TRANSACTION IS POSSIBLE IN ARM'S LENGTH SITUATION. HOWEVER, IN A SITUATION IN WHICH THE SUBSIDIARY DOES NOT HAVE ADE QUATE FINANCIAL STANDING OF ITS OWN AND IS INADEQUATELY CAPITALIZED, NONE WILL GUARANTE E FINANCIAL OBLIGATIONS OF SUCH A SUBSIDIARY. [PARA 38] V. THE ISSUANCE OF FINANCIAL GUARANTEE IN FAVOUR OF AN ENTITY, WHICH DOES NOT HAVE ADEQUATE STRENGTH OF ITS OWN TO MEET SUCH OBLIGATIO NS, WILL RARELY BE DONE. THE VERY COMPARISON, BETWEEN THE CONSIDERATION FOR WHICH BAN KS ISSUE FINANCIAL GUARANTEES ON BEHALF OF ITS CLIENTS WITH THE CONSIDERATION FOR WH ICH THE CORPORATES ISSUE GUARANTEES FOR THEIR SUBSIDIARIES, IS ILL CONCEIVED BECAUSE WH ILE BANKS SEEK TO BE COMPENSATED, EVEN FOR THE SECURED GUARANTEES, FOR THE FINANCIAL RISK OF LIQUIDATING THE UNDERLYING SECURITIES AND MEETING THE FINANCIAL COMMITMENTS UN DER THE GUARANTEE, THE GUARANTEES ISSUED BY THE CORPORATE FOR THEIR SUBSIDIARIES ARE RARELY, IF AT ALL, BACKED BY ANY UNDERLYING SECURITY AND THE RISK IS ENTIRELY ENTREP RENEURIAL IN THE SENSE THAT IT SEEKS TO MAXIMISE PROFITABILITY THROUGH AND BY THE SUBSIDIAR IES. VI. IT IS INHERENTLY IMPOSSIBLE TO DECIDE ARM'S LEN GTH PRICE OF A TRANSACTION WHICH CANNOT TAKE PLACE IN ARM'S LENGTH SITUATION. THE MO TIVATION OR TRIGGER FOR ISSUANCE OF SUCH GUARANTEES IS NOT THE KIND FOR CONSIDERATION F OR WHICH A BANKER, FOR EXAMPLE, ISSUE THE GUARANTEES, BUT IT IS MAXIMIZATION OF GAI NS FOR THE RECIPIENT ENTITY AND THUS THE MNE GROUP AS A WHOLE. IN GENERAL, THUS, THE CON SIDERATION FOR ISSUANCE OF CORPORATE GUARANTEES ARE OF A DIFFERENT CHARACTER A LTOGETHER. [PARA 39] VII. AT THIS STAGE, IT WOULD BE APPROPRIATE TO ANAL YZE THE BUSINESS MODEL OF BANK GUARANTEES, WITH WHICH CORPORATE GUARANTEES ARE SOM ETIMES COMPARED, IN THE CONTEXT OF BENCHMARKING THE ARM'S LENGTH PRICE OF CORPORATE GUARANTEES. A BANK GUARANTEE IS A CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 8 OF 21 SURETY THAT THE BANK, OR THE FINANCIAL INSTITUTION ISSUING THE GUARANTEE, WILL PAY OFF THE DEBTS AND LIABILITIES INCURRED BY AN INDIVIDUAL OR A BUSINESS ENTITY IN CASE THEY ARE UNABLE TO DO SO. BY PROVIDING A GUARANTEE, A BANK O FFERS TO HONOUR RELATED PAYMENT TO THE CREDITORS UPON RECEIVING A REQUEST. THIS REQUIR ES THAT BANK HAS TO BE VERY SURE OF THE BUSINESS OR INDIVIDUAL TO WHOM THE BANK GUARANT EE IS BEING ISSUED. SO, BANKS RUN RISK ASSESSMENTS TO ENSURE THAT THE GUARANTEED SUM CAN BE RETRIEVED BACK FROM THE BUSINESS. THIS MAY REQUIRE THE BUSINESS TO FURNISH A SECURITY IN THE SHAPE OF CASH OR CAPITAL ASSETS. ANY ENTITY THAT CAN PASS THE RISK A SSESSMENT AND PROVIDE SECURITY MAY OBTAIN A BANK GUARANTEE. VIII. THE CONSIDERATION FOR THE ISSUANCE OF BANK GU ARANTEE, SO FAR AS A BANKER IS CONCERNED, IS THIS. WHEN THE CLIENT IS NOT ABLE TO HONOUR THE FINANCIAL COMMITMENTS AND WHEN CLIENT IS NOT ABLE TO MEET HIS FINANCIAL C OMMITMENTS AND THE BANK IS CALLED UPON TO MAKE THE PAYMENTS, THE BANK WILL SEEK A COM PENSATION FOR THE ACTION OF ISSUING THE BANK GUARANTEE, AND FOR THE RISK IT RUN S INHERENT IN THE PROCESS OF MAKING THE PAYMENT FIRST AND REALIZING IT FROM THE UNDERLY ING SECURITY AND THE CLIENT. EVEN WHEN SUCH GUARANTEES ARE BACKED BY ONE HUNDRED PERC ENT DEPOSITS, THE BANK CHARGES A GUARANTEE FEES. IN A SITUATION IN WHICH THERE IS NO UNDERLYING ASSETS WHICH CAN BE REALIZED BY THE BANK OR THERE ARE NO DEPOSITS WITH THE BANK WHICH CAN BE APPROPRIATED FOR PAYMENT OF GUARANTEE OBLIGATIONS, THE BANKS WIL L RARELY, IF AT ALL, ISSUE THE GUARANTEES. IX. OF COURSE, WHEN A CLIENT IS SO WELL PLACED IN H IS CREDIT RATING THAT BANKS CAN ISSUE HIM CLEAN AND UNSECURED GUARANTEES, HE GETS N O FURTHER ECONOMIC VALUE BY A CORPORATE GUARANTEE EITHER. ONE CAN NOW COMPARE THI S KIND OF A GUARANTEE WITH A CORPORATE GUARANTEE. THE GUARANTEES ARE ISSUED WITH OUT ANY SECURITY OR UNDERLYING ASSETS. WHEN THESE GUARANTEES ARE INVOKED, THERE IS NO OCCASION FOR THE GUARANTOR TO SEEK RECOURSE TO ANY ASSETS OF THE GUARANTEED ENTIT Y FOR RECOVERING PAYMENT OF DEFAULT GUARANTEES. THE GUARANTEES ARE NOT BASED ON THE CRE DIT ASSESSMENT OF THE ENTITY, IN RESPECT OF WHICH THE GUARANTEES ARE ISSUED, BUT ARE BASED ON THE BUSINESS NEEDS OF THE ENTITY IN QUESTION. EVEN IN A SITUATION IN WHICH TH E GROUP ENTITY IS SURE THAT THE BENEFICIARY OF GUARANTEE HAS NO FINANCIAL MEANS TO REIMBURSE IT FOR THE DEFAULTED GUARANTEE AMOUNTS, WHEN INVOKED, THE GROUP ENTITY W ILL ISSUE THE GUARANTEE NEVERTHELESS BECAUSE THESE ARE COMPULSIONS OF HIS G ROUP SYNERGY RATHER THAN THE ASSURANCE THAT HIS FUTURE OBLIGATIONS WILL BE MET. X. THERE IS NO MEETING GROUND IN THESE TWO TYPES OF GUARANTEES, SO FAR THEIR ECONOMIC TRIGGERS AND BUSINESS CONSIDERATIONS ARE C ONCERNED, AND JUST BECAUSE THESE INSTRUMENTS SHARE A COMMON SURNAME, I.E., 'GUARANTE E', THESE INSTRUMENTS CANNOT BE SAID TO BE BELONG TO THE SAME ECONOMIC GENUS. OF CO URSE, THERE CAN BE SITUATIONS IN WHICH THERE MAY BE ECONOMIC SIMILARITIES, IN THIS R ESPECT, MAY BE PRESENT, BUT THESE ARE MORE OF AN EXCEPTION THAN THE RULE. IN GENERAL, THEREFORE, BANK GUARANTEES ARE NOT COMPARABLE WITH CORPORATE GUARANTEES. [PARA 40] XI. THERE HAS TO BE SOMETHING ON RECORD TO INDICATE OR SUGGEST THAT THE FUNDS RAISED BY THE SUBSIDIARY, WITH THE HELP OF THE GUAR ANTEE GIVEN BY THE ASSESSEE, ARE NOT FOR ITS OWN BUSINESS PURPOSES. AS A PLAIN LOOK AT T HE DETAILS OF CORPORATE GUARANTEES WOULD SHOW, THESE GUARANTEES WERE ISSUED TO VARIOUS BANKS IN RESPECT OF THE CREDIT FACILITIES AVAILED BY THE SUBSIDIARIES FROM THESE B ANKS. THE GUARANTEES WERE PRIMA FACIE IN THE NATURE OF THE SHAREHOLDER ACTIVITY AS IT WAS TO PROVIDE, OR COMPENSATE FOR CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 9 OF 21 LACK OF, CORE STRENGTH FOR RAISING THE FINANCES FRO M BANKS. NO MATERIAL, INDICATING TO THE CONTRARY, IS BROUGHT ON RECORD IN THIS CASE. XII. GOING BY THE OECD GUIDANCE ALSO, IT IS NOT REA LLY POSSIBLE TO HOLD THAT THE CORPORATE GUARANTEES ISSUED BY THE ASSESSEE WERE IN THE NATURE OF 'PROVISION FOR SERVICES' AND NOT A SHAREHOLDER ACTIVITY WHICH ARE MUTUALLY EXCLUSIVE IN NATURE. IN THE LIGHT OF THESE DISCUSSIONS, IT IS OPINED AND SAID V IEW IS FULLY SUPPORTED BY THE OECD GUIDANCE IN THIS, THAT THE ISSUANCE OF CORPORATE GU ARANTEES, IN THE NATURE OF QUASI CAPITAL OR SHAREHOLDER ACTIVITY - AS IS THE UNCONTR OVERTED POSITION ON THE FACTS OF THIS CASE, DOES NOT AMOUNT TO A SERVICE IN WHICH RESPECT OF WHICH ARM'S LENGTH ADJUSTMENT CAN BE DONE. [PARA 41] XIII. IT IS THUS CLEAR THAT EVEN IF ONE ACCEPTS THE CONTENTION OF THE REVENUE THAT ISSUANCE OF A CORPORATE GUARANTEE AMOUNTS TO A 'PRO VISION FOR SERVICE', SUCH A SERVICE NEEDS TO BE RE-CHARACTERIZED TO BRING IT IN TUNE WI TH COMMERCIAL REALITY AS 'ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER'. NO BANK WOULD BE WIL LING TO ISSUE A CLEAN GUARANTEE, I.E., WITHOUT UNDERLYING ASSET, TO ASSESSEE'S SUBSI DIARIES WHEN THE BANKS ARE NOT WILLING TO EXTEND THOSE SUBSIDIARIES LOANS ON THE SAME TERM S AS WITHOUT A GUARANTEE. SUCH A GUARANTEE TRANSACTION CAN ONLY BE, AND IS, MOTIVATE D BY THE SHAREHOLDER, OR OWNERWISE CONSIDERATIONS. XIV. NO DOUBT, UNDER THE OECD GUIDANCE ON THE ISSUE , AN EXPLICIT SUPPORT, SUCH AS CORPORATE GUARANTEE, IS TO BE BENCHMARKED AND, FOR THAT PURPOSE, IT IS IN THE SERVICE CATEGORY BUT THAT OCCASION COMES ONLY WHEN IT IS CO VERED BY THE SCOPE OF 'INTERNATIONAL TRANSACTION' UNDER THE TRANSFER PRIC ING LEGISLATION OF RESPECTIVE JURISDICTION. THE EXPRESSION 'PROVISION FOR SERVICE S' IN ITS NORMAL OR LEGAL CONNOTATIONS, AS SEEN EARLIER, DOES NOT COVER ISSUANCE OF CORPORA TE GUARANTEES, EVEN THOUGH ONCE A CORPORATE GUARANTEE IS COVERED BY THE DEFINITION OF INTERNATIONAL TRANSACTION', IT IS BENCHMARKED IN THE SERVICE SEGMENT. IN VIEW OF THE ABOVE, OECD GUIDELINES, AS A MATTER OF FACT, STRENGTHEN THE CLAIM OF THE ASSESSE E THAT THE CORPORATE GUARANTEES ISSUED BY THE ASSESSEE WERE IN THE NATURE OF QUASI CAPITAL OR SHAREHOLDER ACTIVITY AND, FOR THIS REASON ALONE, THE ISSUANCE OF THESE GUARAN TEES SHOULD BE EXCLUDED FROM THE SCOPE OF SERVICES AND THUS FROM THE SCOPE OF 'INTER NATIONAL TRANSACTIONS' UNDER SECTION 92B. XV. OF COURSE, ONCE A TRANSACTION IS HELD TO BE COV ERED BY THE DEFINITION OF INTERNATIONAL TRANSACTION, WHETHER IN THE NATURE OF THE SHAREHOLDER ACTIVITY OR QUASI CAPITAL OR NOT, ALP DETERMINATION MUST DEPEND ON WH AT AN INDEPENDENT ENTERPRISE WOULD HAVE CHARGED FOR SUCH A TRANSACTION. IN THIS LIGHT OF THESE DISCUSSIONS, IT IS HELD THAT THE ISSUANCE OF CORPORATE GUARANTEES IN QUESTI ON WAS NOT IN THE NATURE OF 'PROVISION FOR SERVICES' AND THESE CORPORATE GUARAN TEES WERE REQUIRED TO BE TREATED AS SHAREHOLDER PARTICIPATION IN THE SUBSIDIARIES. [PAR A 43] XVI. AS FOR THE WORDS 'PROVISION FOR SERVICES' APPE ARING IN SECTION 92B, AND CONNOTATIONS THEREOF, THIS EXPRESSION, IN ITS NATUR AL CONNOTATIONS, IS RESTRICTED TO SERVICES RENDERED AND IT DOES NOT EXTEND TO THE BEN EFITS OF ACTIVITIES PER SE. WHETHER ONE LOOKS AT THE EXAMPLES GIVEN IN THE OECD MATERIA L OR EVEN IN EXPLANATION TO SECTION 92B, THE THRUST IS ON THE SERVICES LIKE MAR KET RESEARCH, MARKET DEVELOPMENT, MARKETING MANAGEMENT, ADMINISTRATION, TECHNICAL SER VICE, REPAIRS, DESIGN, CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 10 OF 21 CONSULTATION, AGENCY, AND SCIENTIFIC RESEARCH, LEGA L OR ACCOUNTING SERVICE OR COORDINATION SERVICES. AS A MATTER OF FACT, EVEN IN THE EXPLANATION TO SECTION 92B GUARANTEES HAVE BEEN GROUPED IN ITEM 'C' DEALING WI TH CAPITAL FINANCING, RATHER THAN IN ITEM 'D' WHICH SPECIFICALLY DEALS WITH 'PROVISION F OR SERVICES'. WHEN THE LEGISLATURE ITSELF DOES NOT GROUP 'GUARANTEES' IN THE 'PROVISIO N FOR SERVICES' AND INCLUDES IT IN THE 'CAPITAL FINANCING', IT IS REASONABLE TO PROCEED ON THE BASIS THAT ISSUANCE OF GUARANTEES IS NOT TO BE TREATED AS WITHIN THE SCOPE OF NORMAL CONNOTATIONS OF EXPRESSION 'PROVISION FOR SERVICES'. XVII. UNDER SECTION 92B, CORPORATE GUARANTEES CAN B E COVERED ONLY UNDER THE RESIDUARY HEAD I.E. 'ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISE'. IT IS FOR THI S REASON THAT SECTION 92B, IN A WAY, EXPANDS THE SCOPE OF INTERNATIONAL TRANSACTION IN T HE SENSE THAT EVEN WHEN GUARANTEES ARE ISSUED AS A SHAREHOLDER ACTIVITY BUT COSTS ARE INCURRED FOR THE SAME OR, AS A MEASURE OF ABUNDANT CAUTION, RECOVERIES ARE MADE FO R THIS NON-CHARGEABLE ACTIVITY, THESE GUARANTEES WILL FALL IN THE RESIDUARY CLAUSE OF DEFINITION OF INTERNATIONAL TRANSACTIONS UNDER SECTION 92B. AS FOR THE REVENUES ARGUMENT THAT 'WHETHER THE SERVICE HAS CAUSED ANY EXTRA COST TO THE ASSESSEE S HOULD NOT BE THE DECIDING FACTOR TO DETERMINE WHETHER IT IS AN INTERNATIONAL AND THEN G IVES AN EXAMPLE OF BRAND ROYALTY TO MAKE HIS POINT. WHAT, IN THE PROCESS, HE OVERLOOKS IS THAT IS THAT SECTION 92B(1) SPECIFICALLY COVERS SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY'. THE EXPRESSION 'BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS O F SUCH ENTERPRISES' IS RELEVANT ONLY FOR RESIDUARY CLAUSE I.E. ANY OTHER SERVICES NOT SP ECIFICALLY COVERED BY SECTION 92B. XVIII. THERE IS NO DISPUTE THAT EXPLANATION TO SECT ION 92B STATES THAT IT IS MERELY CLARIFICATORY IN NATURE INASMUCH AS IT IS 'FOR THE REMOVAL OF DOUBTS', AND, THEREFORE, ONE HAS TO PROCEED ON THE BASIS THAT IT DOES NOT ALTER THE BASIC CHARACTER OF DEFINITION OF 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B. ACCO RDINGLY, THIS EXPLANATION IS TO BE READ IN CONJUNCTION WITH THE MAIN PROVISIONS, AND I N HARMONY WITH THE SCHEME OF THE PROVISIONS, UNDER SECTION 92B. UNDER THIS EXPLANATI ON, FIVE CATEGORIES OF TRANSACTIONS HAVE BEEN CLARIFIED TO HAVE BEEN INCLUDED IN THE DE FINITION OF 'INTERNATIONAL TRANSACTIONS'. THE FIRST TWO CATEGORIES OF TRANSACT IONS, WHICH ARE STATED TO BE INCLUDED IN THE SCOPE OF EXPRESSION 'INTERNATIONAL TRANSACTI ONS' BY THE VIRTUE OF CLAUSE (A) AND (B) OF EXPLANATION TO SECTION 92B, ARE TRANSACTIONS WITH REGARD TO PURCHASE, SALE, TRANSFER, LEASE OR USE OF TANGIBLE AND INTANGIBLE P ROPERTIES. THESE TRANSACTIONS WERE ANYWAY COVERED BY TRANSACTIONS 'IN THE NATURE OF PU RCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY'. XIX. THE ONLY ADDITIONAL EXPRESSION IN THE CLARIFIC ATION IS 'USE' AS ALSO ILLUSTRATIVE AND INCLUSIVE DESCRIPTIONS OF TANGIBLE AND INTANGIB LE ASSETS. SIMILARLY, CLAUSE (D) DEALS WITH THE ' PROVISION OF SERVICES, INCLUDING PROVISI ON OF MARKET RESEARCH, MARKET DEVELOPMENT, MARKETING MANAGEMENT, ADMINISTRATION, TECHNICAL SERVICE, REPAIRS, DESIGN, CONSULTATION, AGENCY, SCIENTIFIC RESEARCH, LEGAL OR ACCOUNTING SERVICE' WHICH ARE ANYWAY COVERED IN 'PROVISION FOR SERVICES' AND 'MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES '. XX. THAT LEAVES THE TRIBUNAL WITH TWO CLAUSES IN TH E EXPLANATION TO SECTION 92B WHICH ARE NOT COVERED BY ANY OF THE THREE CATEGORIE S DISCUSSED ABOVE OR BY OTHER CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 11 OF 21 SPECIFIC SEGMENTS COVERED BY SECTION 92B, NAMELY BO RROWING OR LENDING MONEY. THE REMAINING TWO ITEMS IN THE EXPLANATION TO SECTION 9 2B ARE SET OUT IN CLAUSE (C) AND (E) THERETO, DEALING WITH (A) CAPITAL FINANCING AND (B) BUSINESS RESTRUCTURING OR REORGANIZATION. THESE ITEMS CAN ONLY BE COVERED IN THE RESIDUAL CLAUSE OF DEFINITION IN INTERNATIONAL TRANSACTIONS, AS IN SECTION 92B(1), W HICH COVERS 'ANY OTHER TRANSACTION HAVING A BEARING ON PROFITS, INCOMES, LOSSES, OR AS SETS OF SUCH ENTERPRISES'. IT IS, THEREFORE, ESSENTIAL THAT IN ORDER TO BE COVERED BY CLAUSE (C) AND (E) OF EXPLANATION TO SECTION 92B, THE TRANSACTIONS SHOULD BE SUCH AS TO HAVE BEATING ON PROFITS, INCOMES, LOSSES OR ASSETS OF SUCH ENTERPRISE. XXI. IN OTHER WORDS, IN A SITUATION IN WHICH A TRAN SACTION HAS NO BEARING ON PROFITS, INCOMES, LOSSES OR ASSETS OF SUCH ENTERPRISE, THE T RANSACTION WILL BE OUTSIDE THE AMBIT OF EXPRESSION 'INTERNATIONAL TRANSACTION'. THIS ASP ECT OF THE MATTER IS FURTHER HIGHLIGHTED IN CLAUSE (E) OF THE EXPLANATION DEALIN G WITH RESTRUCTURING AND REORGANIZATION, WHEREIN IT IS ACKNOWLEDGED THAT SUC H AN IMPACT COULD BE IMMEDIATE OR IN FUTURE AS EVIDENT FROM THE WORDS 'IRRESPECTIVE O F THE FACT THAT IT (I.E. RESTRUCTURING OR REORGANIZATION) HAS BEARING ON THE PROFIT, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISE AT THE TIME OF TRANSACTION OR ON A FUTURE DATE'. WHAT IS IMPLICIT IN THIS STATUTORY PROVISION IS THAT WHILE IMPACT ON ' PROFIT, INCOME, LOSSES OR ASSETS' IS SINE QUA NON, THE MERE FACT THAT IMPACT IS NOT IMMEDIATE, BUT ON A FUTURE DATE, WOULD NOT TAKE THE TRANSACTION OUTSIDE THE AMBIT OF 'INTERNATIONAL TRANSACTION'. I T IS ALSO IMPORTANT TO BEAR IN MIND THAT, AS IT APPEARS ON A PLAIN READING OF THE PROVI SION, THIS EXCLUSION CLAUSE IS NOT FOR 'CONTINGENT' IMPACT ON PROFIT, INCOME, LOSSES OR AS SETS BUT ON 'FUTURE' IMPACT ON PROFIT, INCOME, LOSSES OR ASSETS OF THE ENTERPRISE. XXII. THE IMPORTANT DISTINCTION BETWEEN THESE TWO C ATEGORIES IS THAT WHILE LATTER IS A CERTAINTY, AND ONLY ITS CRYSTALLIZATION MAY TAKE PL ACE ON A FUTURE DATE, THERE IS NO SUCH CERTAINTY IN THE FORMER CASE. IN THE INSTANT CASE I T IS AN UNDISPUTED POSITION THAT CORPORATE GUARANTEES ISSUED BY THE ASSESSEE TO THE VARIOUS BANKS AND CRYSTALLIZATION OF LIABILITY UNDER THESE GUARANTEES, THOUGH A POSSIBIL ITY, IS NOT A CERTAINTY. IN VIEW OF THE DISCUSSIONS ABOVE, THE SCOPE OF THE CAPITAL FINANCI NG TRANSACTIONS, AS COULD BE COVERED UNDER EXPLANATION TO SECTION 92B READ WITH SECTION 92B(1), IS RESTRICTED TO SUCH CAPITAL FINANCING TRANSACTIONS, INCLUDING INTER ALI A ANY GUARANTEE, DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT DURING THE COURSE OF B USINESS, AS WILL HAVE 'A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OR SUCH ENTER PRISE'. XXIII. THIS PRE-CONDITION ABOUT IMPACT ON PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES IS A PRE-CONDITION EMBEDDED IN SECTION 92B(1) AND THE ONLY RELAXATION FROM THIS CONDITION PRECEDENT IS SET OUT IN CLAUSE (E) OF THE EXPLANATION WHICH PROVIDES THAT THE BEARING ON PROFITS, INCOME, LOSSE S OR ASSETS COULD BE IMMEDIATE OR ON A FUTURE DATE. THESE GUARANTEES DO NOT HAVE ANY IMP ACT ON INCOME, PROFITS, LOSSES OR ASSETS OF THE ASSESSEE. THERE CAN BE A HYPOTHETICAL SITUATION IN WHICH A GUARANTEE DEFAULT TAKES PLACE AND, THEREFORE, THE ENTERPRISE MAY HAVE TO PAY THE GUARANTEE AMOUNTS BUT SUCH A SITUATION, EVEN IF THAT BE SO, I S ONLY A HYPOTHETICAL SITUATION, WHICH ARE, AS DISCUSSED ABOVE, EXCLUDED. WHEN AN ASSESSEE EXTENDS AN ASSISTANCE TO THE ASSOCIATED ENTERPRISE, WHICH DOES NOT COST ANYTHING TO THE ASSESSEE AND PARTICULARLY FOR WHICH THE ASSESSEE COULD NOT HAVE REALIZED MONEY BY GIVING IT TO SOMEONE ELSE DURING THE COURSE OF ITS NORMAL BUSINESS, SUCH AN ASSISTAN CE OR ACCOMMODATION DOES NOT HAVE ANY BEARING ON ITS PROFITS, INCOME, LOSSES OR ASSET S, AND, THEREFORE, IT IS OUTSIDE THE AMBIT OF INTERNATIONAL TRANSACTION UNDER SECTION 92 B(1). [PARA 44] CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 12 OF 21 XXIV. IN THE PRESENT CASE, AS ALREADY HELD THAT THE ISSUANCE OF CORPORATE GUARANTEES WERE IN THE NATURE OF SHAREHOLDER ACTIVITIES- AS WA S THE UNCONTROVERTED CLAIM OF THE ASSESSEE, AND, AS SUCH, COULD NOT BE INCLUDED IN TH E 'PROVISION FOR SERVICES' UNDER THE DEFINITION OF 'INTERNATIONAL TRANSACTION' UNDER SEC TION 92B. TAKING NOTE OF THE INSERTION OF EXPLANATION TO SECTION 92B, THAT THE ISSUANCE OF CORPORATE GUARANTEES IS COVERED BY THE RESIDUARY CLAUSE OF THE DEFINITION UNDER SECTIO N 92B OF THE ACT BUT SINCE SUCH ISSUANCE OF CORPORATE GUARANTEES, ON THE FACTS OF T HE PRESENT CASE, DID NOT HAVE 'BEARING ON PROFITS, INCOME, LOSSES OR ASSETS', IT DID NOT CONSTITUTE AN INTERNATIONAL TRANSACTION, UNDER SECTION 92B, IN RESPECT OF WHICH AN ARM'S LENGTH PRICE ADJUSTMENT COULD BE MADE. IN THIS VIEW OF THE MATTER, AND FOR BOTH THESE INDEPENDENT REASONS, THE IMPUGNED ALP ADJUSTMENT IS SET ASIDE. [PARA 48] 23. WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS S O EXPRESSED BY THE COORDINATE BENCH. IN THE CIRCUMSTANCES, WE SEE NO REASONS TO TAKE ANY REVIEW OF THE MATTER THEN THE VIEW SO TAKEN BY THE COORDINATE BENCHES. IT CANNOT BE OPEN TO US TO REVISIT THE CONCLUSIONS ARRIVED AT BY THE COORDINATE BENCHES, BUT THEN THIS ISSUE IS A N OPEN ISSUE BEFORE THE HONBLE JURISDICTIONAL HIGH COURT AND OF COURSE, WHATEVER W E SAY IS AND SHALL ALWAYS REMAIN SUBJECT TO WHAT HONBLE COURTS ABOVE DECIDE ON THE ISSUE. RESPECTFULLY FOLLOWING THE VIEWS OF THE COORDINATE BENCHES ON THE ISSUE, IN THE CASE OF MIC RO INK (SUPRA), WE HOLD THAT ISSUANCE OF GUARANTEES, WITHOUT INCURRING ANY SPECIFIC COSTS, D OES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION, AND, ACCORDINGLY, NO ARMS LENGTH PRIC E ADJUSTMENT CAN BE MADE IN RESPECT OF ISSUANCE OF CORPORATE GUARANTEES. ONCE WE HOLD SO, THE ALP ADJUSTMENT SUSTAINED BY THE CIT(A) MUST STAND DELETED. GRIEVANCE OF THE ASSESSI NG OFFICER AGAINST THE PARTIAL RELIEF GRANTED BY THE CIT(A), IN VIEW OF THE FINDINGS ABOV E, BECOMES INFRUCTUOUS AND IS DISMISSED AS SUCH. 24. GROUND NO. 4 OF THE ASSESSEE, TAKEN IN HIS CROS S OBJECTION, IS THUS ALLOWED AND GROUND NO. 4 OF THE ASSESSING OFFICERS APPEAL IS DISMISSE D AS INFRUCTUOUS. 25. IN THE RESULT, THE APPEAL OF THE ASSESSING OFFI CER FOR THE ASSESSMENT YEAR 2009-10 IS THUS DISMISSED. 26. WE NOW TAKE UP THE CROSS OBJECTIONS FILED BY TH E ASSESSEE FOR THE ASSESSMENT YEAR 2009-10. 27. GROUND NO. 1 IN THE CROSS OBJECTION HAS ALREADY BEEN DEALT WITH WHILE DEALING WITH GROUND NO. 1 OF THE ASSESSING OFFICERS APPEAL. FOR THE DETAILED REASONS SET OUT THEREIN, THIS GROUND OF CROSS OBJECTION IS ALLOWED. 28. IN GROUND NO. 2, THE ASSESSEE HAS RAISE THE FOL LOWING CROSS OBJECTION: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.20,27,93,648 MADE BY THE ASS ESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 14A OF THE I.T. ACT. 29. LEARNED REPRESENTATIVES FAIRLY SUBMIT THAT, IN THE LIGHT OF HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF CIT VS CORRTECH ENE RGY PVT LTD (372 ITR 97), THE DISALLOWANCE UNDER SECTION 14A CANNOT EXCEED THE AM OUNT OF TAX EXEMPT INCOME. IN THE PRESENT YEAR, ADMITTEDLY THE DIVIDEND INCOME IS ONL Y RS 1,77,47,783. THE DISALLOWANCE UNDER SECTION 14A CANNOT, THEREFORE, EXCEED THE SAID AMOU NT. TO THIS EXTENT, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND RESTRICT THE DISALLOW ANCE UNDER SECTION 14A. CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 13 OF 21 30. GROUND NO. 2 IS THUS PARTLY ALLOWED IN THE TERM S INDICATED ABOVE. 31. IN GROUND NO. 3, THE ASSESSEE HAS RAISED THE FO LLOWING GRIEVANCE IN THE CROSS OBJECTION: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE CIT (A) ERRED IN CONFIRMING THE UPWARD ADJUSTMENT OF RS.27,64,950 MADE BY THE A SSESSING OFFICER ON THE BASIS OF THE ORDER OF THE TRANSFER PRICING OFFICER, WITH REG ARD TO NON-CHARGING OF INTEREST ON THE LOAN PROVIDED TO ASSOCIATE ENTERPRISE FOR PURCH ASE OF AIRCRAFT. 32. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CON CERNED, THE RELEVANT MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF THE PROCEEDINGS, IT WAS NOTICED THAT THE ASSESSEE HAD ADVANCED A LOAN OF US $ 345,04,000 TO ITS AE, VIDE AGREEMENT DATED 25 TH MAY 2007, FOR PURCHASE OF AN AIRCRAFT. IT WAS EXPLAINED BY THE ASSESSEE THAT THE LOAN WAS IN THE NATURE OF QUASI EQUITY AND THAT IT WAS THE FIRST YEAR OF OPERATIONS OF THE AE WHICH MADE THE TRANSACTION MORE IN THE NATURE OF THE SHAREHOLDER ACTIVITY RATHER THAN A CO MMERCIAL TRANSACTION. WHILE, BY WAY OF THIS INTEREST FREE LOAN, THE ASSESSEE HAD GIVEN 25% OF T HE COST OF THE AIRCRAFT, THE BALANCE 75% WAS MET OUT OF THE SBI LOAN. IT WAS ALSO EXPLAINED THA T THIS INTEREST FREE LOAN RESULTED IN LOWER AIRCRAFT LEASE RENTAL AND THUS BENEFIT TO THE ASSES SEE. NONE OF THESE SUBMISSIONS, HOWEVER, IMPRESSED THE TPO. HE PROCEEDED TO ADOPT LIBOR PLUS 445 BPS AS THE ARMS LENGTH PRICE OF THE INTEREST, AND, AS HE DID SO, HE REJECTED THE PL EA OF THE ASSESSEE THAT AS AE WAS ABLE TO RAISE LOANS AT LIBOR PLUS 1.45% FROM THE STATE BANK OF IN DIA, HONG KONG BRANCH, THE SAME SHOULD BE TAKEN AS ARMS LENGTH PRICE OF THE INTERE ST FREE LOAN TAKEN BY THE AE FROM THE ASSESSEE. THE TPO OBSERVED THAT THIS IS SO IN VIEW OF THE DIFFERENCE IN CREDIT RISK ON ACCOUNT OF COLLATERAL AND THE GUARANTEE. CONSEQUENTLY, TH E ALP OF INTEREST FREE LOAN WAS TAKEN AT 7.14% AND AN ALP ADJUSTMENT OF RS 27,64,950 WAS MAD E. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 33. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 34. WE FIND THAT A COORDINATE BENCH OF THIS TRIBUNA L, IN THE CASE OF UFO MOVIES INDIA LTD VS ACIT [(2016) 175 TTJ 633 (DEL)] AND SPEAKING TH ROUGH ONE OF US I.E. THE VICE PRESIDENT, HAD OBSERVED AS FOLLOWS: 5. WE HAVE NOTED THAT THERE IS NO DISPUTE THAT THE LIBOR RATE, SO FAR AS THE RELEVANT PREVIOUS YEAR WAS CONCERNED, IS TO BE TAKEN AT 4.53 %, AS THE TPO HIMSELF HAS, PURSUANT TO THE DIRECTIONS OF THE DRP TO ADOPT ALP AT LIBOR+4%, TAKEN THE ALP AT 8.53%. THE ORDER DATED 19TH MARCH 2013, A COPY OF W HICH WAS PLACED BEFORE US AT PAGES 426 AND 427 OF THE PAPER-BOOK, CLEARLY EVIDEN CES THIS FACTUAL POSITION. THERE IS ALSO NO DISPUTE THAT THE ASSESSEE HAS ADVANCED THE LOAN TO THE SUBSIDIARY AT 7% PER ANNUM. CLEARLY, THEREFORE, AS LONG AS THE COMPARABL E UNCONTROLLED PRICE OF THE US $ DENOMINATED LENDING IS LESS THAN 247 POINTS (I.E.70 0-453) ABOVE THE LIBOR RATE, THE TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS S UBSIDIARY CANNOT BE SAID TO BE AT LESS THAN ARMS LENGTH PRICE. THE TRANSFER PRICING STUDY FILED BY THE ASSESSEE, HOWEVER, DOES NOT THROW MUCH LIGHT ON THIS ASPECT OF THE MAT TER BEYOND STATING, IN RATHER VAGUE TERMS, THAT 'A STUDY REVEALED THAT AROUND 100 BASIS POINTS INCREASE IN THE LIBOR RATE IS CONSIDERED APPROPRIATE FOR LENDING TO CORPORATES ', AND THAT 'THEREFORE, THE ADJUSTED INTEREST PERCENTAGE IS TO BE TAKEN THE ARM'S LENGTH INTEREST RATE I.E. 5.53%'. SUCH SWEEPING GENERALIZATIONS AND VAGUE JUSTIFICATIONS A S INHERENT IN THE ABOVE COMMENT CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 14 OF 21 IN THE TP STUDY, IN SUPPORT OF LIBOR+100 BASIS POIN TS AS ALP, CANNOT MEET ANY JUDICIAL APPROVAL. 6. WHAT IS IMPORTANT, HOWEVER, IS THAT EVEN AFTER T HIS STATED ALP OF LIBOR + 100 BASIS POINTS, THERE IS STILL A CUSHION OF FURTHER 1 47 BASIS POINTS BEFORE THE INTEREST CHARGED CAN BE SAID TO MORE THAN THE ARM'S LENGTH P RICE, AND IT IS AN OLD MATTER. IT IS, THEREFORE, WORTH EXPLORING WHETHER, EVEN WITHIN THE LIMITATIONS OF SOMEWHAT SKETCHY INFORMATION AVAILABLE ON THE FACTS OF THIS CASE, TH E MATTER CAN BE DECIDED ONE WAY OR THE OTHER RATHER THAN SENDING IT BACK TO THE TPO FO R FRESH ADJUDICATION. 7. WHILE EXPLORING SUCH POSSIBILITIES, IT WILL BE U SEFUL TO TAKE NOTE OF THE FACT THAT IN THE CASE OF BHARTI AIRTEL LTD. V. ADDL. CIT [2014] 64 SOT 50 (URO)/43 TAXMANN.COM 50 (DELHI), AND A COORDINATE BENCH HAD DELETED A SI MILAR ALP ADJUSTMENT ON ACCOUNT OF INTEREST AMOUNTING TO RS. 10,11,786 WHEREIN THE SAME APPROACH OF ADOPTING 400 BASIS POINTS ABOVE THE LIBOR AS ALP WAS ADOPTED. WH ILE DELETING THIS ALP ADJUSTMENT, SPEAKING THROUGH ONE OF US, THE TRIBUNA L HAD, INTER ALIA, OBSERVED AS FOLLOWS: '62. AS FAR AS THE FIRST ADJUSTMENT IS CONCERNED, W HILE THE TPO HAS ADOPTED THE RATE AS 4% OVER LIBOR RATE, HE HAS NOT SET OUT THE SPECIFIC BASIS OF THIS RATE. HE HAS MENTIONED ABOUT SOME INFORMATION GATHERED FROM WEBS ITES OF FINANCIAL INSTITUTIONS WHICH, ACCORDING TO HIM, STATES THAT, 'FOR THE FORE IGN CURRENCY DENOMINATED TERM LOANS, THE MAXIMUM RATE OF INTEREST IS 4% OVER 6 MO NTHS LIBOR', AND THEN PROCEEDED TO ADOPT THIS MAXIMUM INTEREST RATE AS A FAIR BASIS FOR HIS COMPUTING THE ARM'S LENGTH PRICE. ON THE OTHER HAND, THE ASSESSEE HAS TAKEN TW O SPECIFIC COMPARABLES OF USD BORROWINGS, I.E. L&T AND SERI INFRASTRUCTURE, ON TH E INTEREST RATE OF LIBOR + 150 BPS AND 1.4% TO 1.7% BAND OVER LIBOR RESPECTIVELY. THER E IS NO MATERIAL WHATSOEVER, SAVE AND EXCEPT FOR VAGUE OBSERVATIONS ABOUT WEAK F INANCIALS OF THE SUBSIDIARIES - WHICH ARE NOT SUPPORTED BY ANY SPECIFIC FACTS AND P ROCEED ON SWEEPING GENERALIZATIONS AND ASSUMPTIONS, TO REJECT THE COMP ARABLES TAKEN BY THE ASSESSEE. WHEN A TRANSFER PRICING OFFICER REJECTS COMPARABLES TAKEN BY THE ASSESSEE, HE HAS TO SET OUT SPECIFIC, COGENT AND LEGALLY SUSTAINABLE RE ASONS FOR DOING SO. ON THIS POINT, THEREFORE, THE STAND OF THE ASSESSING OFFICER CANNO T BE ACCEPTED. . . . . . . . . . . . . . . . . . . . . . . 65. THAT LEAVES US WITH THIRD POINT OF DIFFERENCE B ETWEEN THE ASSESSEE AND THE TPO AND THAT IS WITH REGARD TO ADJUSTMENT OF 177.60 POI NTS, AS BALANCING FIGURE, TOWARDS LACK OF SECURITY AND LENDER NOT BEING IN THE BUSINE SS OF BORROWING AND LENDING MONEY. THIS ADJUSTMENT IS JUSTIFIED BY THE TPO ON THE FOLL OWING GROUND: 7.10 ADJUSTMENT BETWEEN A BANKER AND NON-BANKER AS THE TAXPAYER IS NOT IN THE BUSINESS OF LENDING A ND BORROWING MONEY, HIS RISK IS HIGHER IN ADVANCING LOAN TO A SINGLE CUSTOMER THAN A BANK, WHICH SPREADS ITS RISK AMONG ITS VARIOUS CUSTOMERS. THUS, THE DIFFERENCE B ETWEEN BANKER AND NON-BANKER IS TO BE KEPT IN MIND WHILE ARRIVING AT THE ARM'S LENG TH CUP RATE BASED ON BANK RATES. 7.11 ADJUSTMENT FOR SECURITY CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 15 OF 21 USUALLY, BANKERS EXTENDING LOANS IN FOREIGN CURRENC Y ALSO INSIST ON SUFFICIENT SECURITY. IN THIS CASE, NO SECURITY IS OFFERED BY THE AE. KEE PING IN VIEW THE FINANCIAL HEALTH OF THE SUBSIDIARY, IT MAY NOT BE IN A POSITION TO OFFE R SECURITY. THUS AN ADJUSTMENT IS REQUIRED TO BE MADE FOR NOT OFFERING A SECURITY. TH IS MAY BE COMPUTED AS THE DIFFERENCE BETWEEN THE INTEREST RATES PREVAILING FO R THE BONDS OF EQUIVALENT CREDIT RATING OF THE AE AND SOVEREIGN GOVERNMENT BONDS IN THE COUNTRY IN WHICH THE AE IS LOCATED. THIS CAN ALSO BE CONSIDERED AS THE GUARANT EE COST PAYABLE TO THE TAXPAYER FOR GIVING GUARANTEE FOR EQUIVALENT AMOUNT OF LOAN GIVE N TO THE AE I.E. THE RATE DIFFERENTIAL FOR THE DIFFERENCE IN INTEREST SPREAD BETWEEN THE CREDIT RATING OF THE TAXPAYER AND THE AE. THUS AFTER THE ABOVE ANALYSIS, THE EQUIVALENT INTEREST RATE IS THE INTEREST RATE INCLUDING THE TRANSACTION COST FOR A FOREIGN CURRENCY LOAN, IF GIVEN TO THE AE FOR ITS CREDIT STANDING/RATING. 66. WE SEE NO SUBSTANCE IN THIS ADJUSTMENT EITHER. THE TPO HAS TAKEN THE LENDER AS THE TESTED PARTY, AND YET MADE ADJUSTMENTS FOR HIGH ER RISKS ON ACCOUNT OF ASSUMED LACK OF SECURITY AND INCREASED RISK OF SINGLE PARTY DEALING. THIS APPROACH OVERLOOKS THE FACT THAT THE ASSESSEE HAS ADVANCED MONIES TO I TS SUBSIDIARIES WHICH ARE UNDER ITS MANAGEMENT AND CONTROL- A FACTOR WHICH SUBSTANTIALL Y REDUCES THE RISK RATHER THAN INCREASING IT. ON THESE FACTS, IT IS DIFFICULT TO U NDERSTAND, MUCH LESS APPROVE, ANY RATIONALE FOR ADJUSTMENT ON ACCOUNT OF HIGHER RISKS . ON THIS POINT ALSO, WE SEE NO MERITS IN THE STAND OF THE TPO. (EMPHASIS, BY UNDER LINING, SUPPLIED BY US NOW)' 8. WHEN THE MATTER WAS CARRIED IN FURTHER APPEAL, T HIS TIME BY THE COMMISSIONER, BEFORE HON'BLE DELHI HIGH COURT, THEIR LORDSHIPS WE RE, VIDE JUDGMENT, DATED 25TH FEBRUARY 2015- A COPY OF WHICH WAS PLACED BEFORE US BY THE LEARNED COUNSEL, PLEASED TO APPROVE THE REASONING ADOPTED BY THE TRIBUNAL. I N DOING SO, THEIR LORDSHIP OBSERVED AS FOLLOWS: '8. THE ITAT HAS ALSO TAKEN NOTE OF THE FACT THAT T WO SPECIFIC COMPARABLES OF USD BORROWINGS I.E. L&T AND SERI INFRASTRUCTURE, ON THE INTEREST RATE OF LIBOR HAD BEEN TAKEN INTO CONSIDERATION. THERE IS NO MATERIAL WHAT SOEVER, SAVE AND EXCEPT FOR VAGUE OBSERVATIONS ABOUT WEAK FINANCIALS OF THE SUBSIDIAR IES - WHICH ARE NOT SUPPORTED BY ANY SPECIFIC FACTS AND PROCEED ON SWEEPING GENERALI ZATIONS AND ASSUMPTIONS, TO REJECT THE COMPARABLES TAKEN BY THE ASSESSEE. WHEN A TRANS FER PRICING OFFICER REJECTS COMPARABLES TAKEN BY THE ASSESSEE, HE HAS TO SET OU T SPECIFIC, COGENT AND LEGALLY SUSTAINABLE REASONS FOR DOING SO. ON THIS POINT, TH EREFORE, THE STAND OF THE ASSESSING OFFICER CANNOT BE ACCEPTED. 9. . . . . . . . . . . . . . . . . . . . . . 10. THE TRIBUNAL FURTHER NOTICED THAT THE ASSESSEE ADVANCED MONIES TO THE SUBSIDIARIES WHICH WERE UNDER ITS MANAGEMENT AND CO NTROL, WHICH IN FACT SUBSTANTIALLY REDUCED THE RISK AND IN THESE CIRCUMS TANCES THERE WAS NO RATIONALE OF ADJUSTING ANY AMOUNT OF HIGHER BASIS. 11. THIS COURT IS OF THE OPINION THAT THE REASONING OF THE ITAT ON EACH OF THE HEADS WHICH WENT INTO THE ADJUSTMENT OF RS. 10,11,786/- I S REASONABLE AND JUSTIFIED AND DOES NOT CALL FOR ANY INTERFERENCE. (EMPHASIS, BY UNDERL INING, SUPPLIED BY US)' 9. THAT WAS ALSO A CASE IN WHICH THE LENDER PARENT COMPANY WAS TAKEN AS THE TESTED PARTY, THE LOAN WAS ADVANCED TO A SUBSIDIARY COMPAN Y WITHOUT MUCH TO THE CREDIT OF CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 16 OF 21 ITS FINANCIAL CREDENTIALS AND THE LOAN WAS TREATED AS A HIGH RISK LOAN RESULTING IN ADOPTING THE MAXIMUM LIBOR RATE ON WHICH DOLLAR LOA NS WERE ADVANCED. YET, HON'BLE HIGH COURT SPECIFICALLY APPROVED THE TRIBUN ALS REASONING THAT THE 'ASSESSEE ADVANCED MONIES TO THE SUBSIDIARIES WHICH WERE UNDE R ITS MANAGEMENT AND CONTROL, WHICH IN FACT SUBSTANTIALLY REDUCED THE RISK AND IN THESE CIRCUMSTANCES THERE WAS NO RATIONALE OF ADJUSTING ANY AMOUNT OF HIGHER BASIS'. WHEN SUCH ARE THE VIEWS OF THEIR LORDSHIPS, IT IS FUTILE TO SUGGEST THAT THE LOANS A DVANCED BY THE PARENTS TO SUBSIDIARY CAN INDEED BE TAKEN AS BB TO D GRADE INVESTMENTS WH ICH REFERS TO, AS NOTED BY THE TPO HIMSELF AT PAGE 28 OF THE ORDER, INVESTMENTS WI TH SERIOUS RISKS OF INADEQUATE SAFETY, INVESTMENTS OF HIGH RISK, INVESTMENTS OF SU BSTANTIAL RISK AND INVESTMENTS OF DEFAULT. THE APPROACH ADOPTED BY THE DRP CANNOT, TH EREFORE, MEET OUR APPROVAL. 10. SIMILARLY, THE DRPS OBSERVATION TO THE EFFECT T HAT 'GENERALLY, INDIAN BANKS ARE CHARGING INTEREST RATE OF 2.5% TO 5% ABOVE THE LIBO R/EURIBOR FOR FOREIGN CURRENCY LOANS' IS NOT ONLY DEVOID OF ANY BASIS BUT , AS OUR DAY TO DAY EXPERIENCE ON THE BENCH SHOWS, EX FACIE INCORRECT. 11. THERE ARE ANY NUMBER OF DECISIONS BY THE COORDI NATE BENCHES WHICH SHOW THAT THE INTEREST RATES CHARGED ON FOREIGN CURRENCY, SAY US DOLLARS, LOANS ARE MUCH LOWER THAN THE 250 TO 500 BASIS POINTS ABOVE THE LIBOR HAVING BEEN TO BE GENERALLY APPLICABLE RATES. FOR INSTANCE, IN THE CASES OF BHARTI AIRTEL LTD. (SUPRA), WHICH PERTAINS TO THE ASSESSMENT YEARS 2007-08 AND 2008-09, THE COMPARABL E CASES WERE TAKEN AS 150 BASIS POINTS ABOVE LIBOR AND IN THE RANGE OF 140-17 0 BASIS POINTS ABOVE LIBOR. IN CONTRAST TO THIS COMPARABLE CASE, THE INTEREST CHAR GED IN THE PRESENT CASE IS 247 POINTS ABOVE THE LIBOR RATE. IN THE CASE OF SIVA IN DUSTRIES & HOLDINGS LTD. V. ASSTT. CIT [2012] 26 TAXMANN.COM 96/54 SOT 49 (CHENNAI), D EALING WITH THE ASSESSMENT YEAR 2006-07 AND WHILE REFERRING TO LIBOR AT 4.42, INTEREST RATE ON ADVANCES TO SUBSIDIARY AT 6%, WHICH WAS THUS 158 POINTS ABOVE T HE LIBOR RATE, WAS HELD TO BE AN ARMS LENGTH PRICE. IN VIEW OF THESE DISCUSSIONS, IT CANNOT BE SAID THAT THE ADVANCE TO SUBSIDIARY, AT 247 BASIS POINTS ABOVE THE LIBOR, IS NOT AT AN ARMS LENGTH PRICE. IN ANY EVENT, ONCE DRP ITSELF STATES THAT THE INDIAN B ANKS ARE CHARGING 250 BASIS ABOVE LIBOR ON SIMILAR LOANS, EVEN THOUGH THIS INTEREST R ATE COULD REACH UPTO 400 BASIS POINTS IN SOME CASES, THERE CANNOT BE ANY GOOD REAS ON FOR HOLDING THAT LOAN ADVANCED TO A SUBSIDIARY AT 247 BASIS POINTS ABOVE THE LIBOR RATE IS NOT AT AN ARMS LENGTH PRICE. THAT APART, AS NOTED EARLIER IN THIS ORDER, ONCE HON'BLE DELHI HIGH COURT, OBSERVES THAT THE 'ASSESSEE ADVANCED MONIES TO THE SUBSIDIARIES WHICH WERE UNDER ITS MANAGEMENT AND CONTROL, WHICH IN FACT SUBSTANTIALLY REDUCED THE RISK AND IN THESE CIRCUMSTANCES THERE WAS NO RATIONALE OF ADJUSTING A NY AMOUNT OF HIGHER BASIS', IT CANNOT BE OPEN TO THE TRANSFER PRICING AUTHORITIES TO CONTEND THAT THIS LOAN SHOULD BE TREATED AS A HIGH RISK LOAN ON WHICH HIGH INTEREST RATE SHOULD BE CHARGED EVEN WITHIN THE RANGE OF INTEREST RATES CHARGED BY THE INDIAN B ANKS GENERALLY. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF TH E CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DE LETE THIS ARMS LENGTH PRICE ADJUSTMENT OF RS. 74,20,785 IN RESPECT OF INTEREST CHARGED ON ADVANCES TO THE SUBSIDIARIES. 35. THE AUTHORITIES BELOW WERE THUS CLEARLY IN ERRO R IN UPHOLDING THE ALP ADJUSTMENT BY ADOPTING 7.14% AS ARMS LENGTH INTEREST FOR BORROWI NGS BY THE AE. WHEN THE AE ITSELF HAS BORROWED THE MONIES FROM THE SBI AT LIBOR PLUS 145 BPS AND WHEN, AS NOTED BY HONBLE DELHI HIGH COURT ABOVE, THE TRIBUNAL FURTHER NOTIC ED THAT THE ASSESSEE ADVANCED MONIES TO THE SUBSIDIARIES WHICH WERE UNDER ITS MANAGEMENT AN D CONTROL, WHICH IN FACT SUBSTANTIALLY CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 17 OF 21 REDUCED THE RISK AND IN THESE CIRCUMSTANCES THERE W AS NO RATIONALE OF ADJUSTING ANY AMOUNT OF HIGHER BASIS AND THAT THIS COURT IS OF THE OPINIO N THAT THE REASONING OF THE ITAT ON EACH OF THE HEADS WHICH WENT INTO THE ADJUSTMENT ..IS RE ASONABLE AND JUSTIFIED AND DOES NOT CALL FOR ANY INTERFERENCE THE ARMS LENGTH PRICE O F THE BORROWINGS CANNOT INDEED BE TAKEN AS MORE THAN LIBOR PLUS 145 BPS. THE ADDITIONAL RISK A DJUSTMENT FOR CREDIT RATING OF THE SUBSIDIARY IS CLEARLY UNWARRANTED. THE CORRECT ALP INTEREST RATE, IN THE PRESENT CASE, THUS WORKS OUT TO 2.69% PLUS 1.45%, I.E. 4.14%. WE, ACCO RDINGLY, DIRECT THE ASSESSING OFFICER TO RESTRICT THE ALP ADJUSTMENT TO 4.14%. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 36. GROUND NO. 3 OF THE CROSS OBJECTION IS THUS PAR TLY ALLOWED IN THE TERMS INDICATED ABOVE. 37. GROUND NO. 4 OF THE CROSS OBJECTION, WHILE DEAL ING WITH THE APPEAL OF THE ASSESSEE, IS ALREADY ALLOWED. 38. THE CROSS OBJECTION FILED BY THE ASSESSEE FOR T HE ASSESSMENT YEAR 2009-10 IS THUS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. 39. WE NOW TAKE UP THE APPEAL AND THE CROSS OBJECTI ON FOR THE ASSESSMENT YEAR 2010-11 WHICH ARE DIRECTED AGAINST THE ORDER DATED 17 TH OCTOBER 2014, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, F OR THE ASSESSMENT YEAR 2010-11. 40. IN THE FIRST GROUND OF APPEAL FILED BY THE ASSE SSING OFFICER, THE ASSESSING OFFICER HAS RAISED THE FOLLOWING GRIEVANCE: 1. THE ID. CIT(A) HAS ERRED IN DIRECTING THE AO TO EXCLUDE ONLY THE NET INTEREST INCOME WHILE COMPUTING THE DEDUCTION U/S 80IB DESPI TE THE FACT THAT THE INCOME DERIVED FROM THE INDUSTRIAL UNDERTAKING IS ELIGIBLE FOR DEDUCTION AND INTEREST INCOME CANNOT BE NETTED OFF WITH THE INTEREST EXPENDITURE WHICH WAS INCURRED FOR BUSINESS. 41. IN THE CONNECTED GRIEVANCES RAISED BY THE ASSES SEE, BY WAY OF FIRST AND SECOND GROUND OF CROSS OBJECTION, THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCES: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF RS.19,79,54,135/- MADE B Y THE ASSESSING OFFICER WHILE COMPUTING PROFITS AND GAINS ELIGIBLE FOR DEDUCTION U/S.80-IAB OF THE I.T. ACT, THEREBY HOLDING THAT INTEREST INCOME DERIVED BY THE APPELLA NT FROM BUSINESS ADVANCES CANNOT BE CONSIDERED TO BE INEXTRICABLY LINKED TO THE CARR YING ON OF THE BUSINESS ELIGIBLE U/S.80-IAB OF THE I.T. ACT. THIS RESULTED INTO CONF IRMATION OF EXCLUSION OF TOTAL INTEREST OF RS.19,79,54,135/- WHILE COMPUTING DEDUC TION U/S.80-IAB OF THE I.T. ACT IN SPITE OF THE FACT THAT THERE IS A NET PAY OUT OF IN TEREST EXPENSE. 2. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN NO T APPRECIATING THAT THE PHRASEOLOGY OF 'BUSINESS OF DEVELOPMENT OF SEZ' IS MUCH WIDER THAN THE PHRASEOLOGY OF 'PROFITS AND GAINS DERIVED FROM THE UNDERTAKING'. CONSEQUENTLY I NTEREST INCOME OF RS.19,79,54,135/- ON BUSINESS ADVANCES NEEDS TO BE ALLOWED AS DEDUCTION U/S.80-IAB OF THE ACT. ON THIS GROUND AS WELL THE CLAIM OF THE APPELLANT MAY BE ALLOWED. 42. WHILE DEALING WITH THE APPEAL AND THE CROSS OBJ ECTION, ON THE SAME POINT AND FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, WE HAVE, INT ER ALIA, OBSERVED AS FOLLOWS: CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 18 OF 21 7. WE FIND THAT THE ORDER DATED 6TH MAY 2011 PASSED BY THE CIT(A), IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09, HAS, IN T HE MEANTIME, BEEN CARRIED IN APPEAL BEFORE A COORDINATE BENCH OF THIS TRIBUNAL, AND, VIDE ORDER DATED 1ST SEPTEMBER 2016, HAS CONFIRMED THE STAND OF THE CIT( A). A COPY OF THE SAID ORDER IS PLACED BEFORE US AT PAGES 1 ONWARD OF THE COMPILATI ON. THE COORDINATE BENCH HAS HELD THAT THE ENTIRE INTEREST INCOME IS ELIGIBLE FO R DEDUCTION UNDER SECTION 80IAB, AND, FOR THIS SHORT REASON, THE GRIEVANCE AGAINST NETTIN G OF INTEREST IS WHOLLY ACADEMIC AND INFRUCTUOUS. THE STAND OF THE CIT(A) THUS ATTAINED FINALITY. IN ANY CASE, HONBLE JURISDICTIONAL HIGH COURT, IN THE CASE OF CIT VS NI RMA LIMITED (367 ITR 12), HAS HELD THAT NETTING OF INTEREST FOR THE PURPOSE OF TH IS DEDUCTION CAN BE ALLOWED. WHICHEVER WAY ONE LOOKS AT IT, THE ISSUE IS COVERED , IN FAVOUR OF THE ASSESSEE, BY THE BINDING JUDICIAL PRECEDENTS. WE, THEREFORE, HAVE NO REASONS TO DISTURB THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A). IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE RELIEF GRANTED BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 8. GROUND NO. 1 IS THUS DISMISSED, AND GROUND NO. 1 OF THE CROSS OBJECTION IS ALLOWED. 43. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY US FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. RESP ECTFULLY FOLLOWING THE SAME, WE MUST UPHOLD THE PLEA OF THE ASSESSEE AND REJECT THE GRIE VANCE OF THE ASSESSING OFFICER. 44. GROUND NO. 1 OF THE APPEAL IS THUS DISMISSED AN D GROUND NO. 1 AND 2 OF THE CROSS OBJECTIONS ARE THUS ALLOWED. 45. IN GROUND NO. 2, THE ASSESSING OFFICER HAS RAIS ED THE FOLLOWING GRIEVANCE: 2. THE ID. CIT(A) HAS ERRED IN DIRECTING THE AO TO RECOMPUTED THE DEDUCTION U/S 80IAB AFTER INCREASING THE AMOUNT OF DEDUCTION BY T HE AMOUNT OF DISALLOWANCE U/S 14A. 46. LEARNED REPRESENTATIVES FAIRLY AGREE THAT WHILE THIS RELIEF WAS GRANTED BY THE LEARNED CIT(A) ON THE BASIS OF HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF ITO VS KEVAL CONSTRUCTIONS [2013] 33 TAXMANN.COM 277 (GUJ. ), THE ISSUE IS NOW COVERED, IN FAVOUR OF THE ASSESSEE BY THE CBDT CIRCULAR NO..37/2016 [F .NO.279/MISC./140/2015/ITJ] DATED 2- 11-2016 WHEREIN A POLICY DECISION HAS BEEN TAKEN TO ACCEPT THE SAID DECISION AND LET THE MATTERS REST AT THAT. 47. WE FIND THAT IN PRINCIPLE THUS, WHEN THE PROFIT GOES UP AS A RESULT OF DISALLOWANCES OF EXPENSES, THE ELIGIBILITY FOR DEDUCTION IN RESPECT OF SUCH PROFIT CORRESPONDINGLY INCREASES. THAT IS THE POSITION ACCEPTED BY THE CBDT BY STATIN G AS FOLLOWS: CHAPTER VI-A OF THE INCOME-TAX ACT, 1961 ('THE ACT' ), PROVIDES FOR DEDUCTIONS IN RESPECT OF CERTAIN INCOMES. IN COMPUTING THE PROFIT S AND GAINS OF A BUSINESS ACTIVITY, THE ASSESSING OFFICER MAY MAKE CERTAIN DISALLOWANCE S, SUCH AS DISALLOWANCES PERTAINING TO SECTIONS 32, 40(A)(IA), 40A(3), 43B E TC., OF THE ACT. AT TIMES DISALLOWANCE OUT OF SPECIFIC EXPENDITURE CLAIMED MA Y ALSO BE MADE. THE EFFECT OF SUCH DISALLOWANCES IS AN INCREASE IN THE PROFITS. DOUBTS HAVE BEEN RAISED AS TO WHETHER CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 19 OF 21 SUCH HIGHER PROFITS WOULD ALSO RESULT IN CLAIM FOR A HIGHER PROFIT-LINKED DEDUCTION UNDER CHAPTER VI-A. 2. THE ISSUE OF THE CLAIM OF HIGHER DEDUCTION ON TH E ENHANCED PROFITS HAS BEEN A CONTENTIOUS ONE. HOWEVER, THE COURTS HAVE GENERALLY HELD THAT IF THE EXPENDITURE DISALLOWED IS RELATED TO THE BUSINESS ACTIVITY AGAI NST WHICH THE CHAPTER VI-A DEDUCTION HAS BEEN CLAIMED, THE DEDUCTION NEEDS TO BE ALLOWED ON THE ENHANCED PROFITS. SOME ILLUSTRATIVE CASES UPHOLDING THIS VIE W ARE AS FOLLOWS: (I) IF AN EXPENDITURE INCURRED BY ASSESSEE FOR TH E PURPOSE OF DEVELOPING A HOUSING PROJECT WAS NOT ALLOWABLE ON ACCOUNT OF NON -DEDUCTION OF TDS UNDER LAW, SUCH DISALLOWANCE WOULD ULTIMATELY INCREASE ASSESSE E'S PROFITS FROM BUSINESS OF DEVELOPING HOUSING PROJECT. THE ULTIMATE PROFITS OF ASSESSEE AFTER ADJUSTING DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT WOU LD QUALIFY FOR DEDUCTION UNDER SECTION 80-IB OF THE ACT. THIS VIEW WAS TAKEN BY TH E COURTS IN THE FOLLOWING CASES: INCOME-TAX OFFICER -WARD 5(1) V. KEVAL CONSTRUCT ION [2013] 33 TAXMANN.COM 277 (GUJ.) COMMISSIONER OF INCOME-TAX-IV, NAGPUR V. SUNIL V ISHWAMBHARNATH TIWARI [2016] 63 TAXMANN.COM 241 (BOM.) (II) IF DEDUCTION UNDER SECTION 40A(3) OF THE ACT IS NOT ALLOWED, THE SAME WOULD HAVE TO BE ADDED TO THE PROFITS OF THE UNDERT AKING ON WHICH THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION UNDER SECTION 80-IB OF TH E ACT. THIS VIEW WAS TAKEN BY THE COURT IN THE FOLLOWING CASE: PRINCIPAL CIT, KANPUR V. SURYA MERCHANTS LTD. [2 016] 72 TAXMANN.COM 16 (ALL.). THE ABOVE VIEWS HAVE ATTAINED FINALITY AS THESE JUD GMENTS OF THE HIGH COURTS OF BOMBAY, GUJARAT AND ALLAHABAD HAVE BEEN ACCEPTED BY THE DEPARTMENT. 3. IN VIEW OF THE ABOVE, THE BOARD HAS ACCEPTED THE SETTLED POSITION THAT THE DISALLOWANCES MADE UNDER SECTIONS 32, 40(A)(IA), 40 A(3), 43B, ETC. OF THE ACT AND OTHER SPECIFIC DISALLOWANCES, RELATED TO THE BUSINE SS ACTIVITY AGAINST WHICH THE CHAPTER VI-A DEDUCTION HAS BEEN CLAIMED, RESULT IN ENHANCEMENT OF THE PROFITS OF THE ELIGIBLE BUSINESS, AND THAT DEDUCTION UNDER CHAPTER VI-A IS ADMISSIBLE ON THE PROFITS SO ENHANCED BY THE DISALLOWANCE. 4. ACCORDINGLY, HENCEFORTH, APPEALS MAY NOT BE FILE D ON THIS GROUND BY OFFICERS OF THE DEPARTMENT AND APPEALS ALREADY FILED IN COURTS/TRIB UNALS MAY BE WITHDRAWN/NOT PRESSED UPON. THE ABOVE MAY BE BROUGHT TO THE NOTIC E OF ALL CONCERNED. 48. WHILE THE AFORESAID CIRCULAR DOES NOT SPECIFICA LLY DEAL WITH SECTION 14A DISALLOWANCE, AS THE CIRCULAR ITSELF STATES IN SO MANY WORDS THE CASES CITED ABOVE ARE ONLY ILLUSTRATIVE AND THE PRINCIPLE IS THAT THE COURTS HAVE GENERALLY HELD T HAT IF THE EXPENDITURE DISALLOWED IS RELATED TO THE BUSINESS ACTIVITY AGAINST WHICH THE CHAPTER VI- A DEDUCTION HAS BEEN CLAIMED, THE DEDUCTION NEEDS TO BE ALLOWED ON THE ENHANCED PROFI TS. IN THE LIGHT OF THIS POSITION, WE UPHOLD THE CONCLUSIONS ARRIVED AT BY THE CIT(A) ON THIS POINT AS WELL, AND DECLINE TO INTERFERE IN THE MATTER. 49. GROUND NO.2 IS THUS DISMISSED. 50. IN GROUND NO. 3, THE ASSESSING OFFICER HAS RAIS ED THE FOLLOWING GRIEVANCE: CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 20 OF 21 3. THE ID. CIT(A) HAS ERRED IN DELETING THE DISALLO WANCE WITH REGARD TO THE CLAIM OF DEDUCTION IN RESPECT OF DONATIONS U/S 80G OF RS.6,7 0,525/-. THE ID. CIT(A) HAS FAILED TO APPRECIATE THAT THE ASSESSEE HAS TAKEN THE INCOM E FROM BUSINESS AS THE INCOME OF THE UNDERTAKING AND CLAIMED DEDUCTION U/S 80IAB. 51. LEARNED REPRESENTATIVES FAIRLY AGREE THAT WHATE VER WE DECIDE FOR THE ASSESSMENT YEAR 2009-10 ON THIS ISSUE WILL APPLY MUTATIS MUTANDIS ON THIS ASSESSMENT YEAR AS WELL. VIDE OUR ORDER ABOVE, WE HAVE REJECTED THE GRIEVANCE OF THE ASSESSING OFFICER ON THIS ISSUE AND WE HAVE UPHELD THE STAND OF THE CIT(A). WE SEE NO REAS ONS TO TAKE ANY OTHER VIEW OF THE MATTER FOR THE PRESENT ASSESSMENT YEAR. WE, ACCORDINGLY, U PHOLD THE CONCLUSIONS ARRIVED AT BY THE CIT(A) ON THIS POINT AS WELL AND DECLINE TO INTERFE RE IN THE MATTER. 52. GROUND NO. 3 IS THUS DISMISSED. 53. IN THE RESULT, THE APPEAL OF THE ASSESSING OFFI CER FOR THE ASSESSMENT YEAR 2010-11 IS DISMISSED. 54. WE NOW TAKE UP THE CROSS OBJECTIONS FILED BY TH E ASSESSEE FOR THE ASSESSMENT YEAR 2010-11. 55. WHILE DEALING WITH THE APPEAL OF THE ASSESSING OFFICER EARLIER IN THIS ORDER, WE HAVE ALREADY ALLOWED GROUND NOS. 1 AND 2 OF THE CROSS OB JECTION. 56. IN GROUND NO. 3, THE ASSESSEE HAS RAISED THE FO LLOWING CROSS OBJECTION: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT[A] ERRED IN CONFIRMING DISALLOWANCE OF RS.6,11,72,420/- MADE BY THE ASSESSING OFFICER U/S.14A OF THE I.T. ACT. 57. LEARNED REPRESENTATIVES FAIRLY SUBMIT THAT, IN THE LIGHT OF HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF CIT VS CORRTECH ENE RGY PVT LTD (372 ITR 97), THE DISALLOWANCE UNDER SECTION 14A CANNOT EXCEED THE AM OUNT OF TAX EXEMPT INCOME. IN THE PRESENT YEAR, ADMITTEDLY THE DIVIDEND INCOME IS ONL Y RS1,33,91,149. THE DISALLOWANCE UNDER SECTION 14A CANNOT, THEREFORE, EXCEED THE SAID AMOU NT. TO THIS EXTENT, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND RESTRICT THE DISALLOW ANCE UNDER SECTION 14A. 58. GROUND NO. 3 IS THUS PARTLY ALLOWED IN THE TERM S INDICATED ABOVE. 59. IN THE RESULT, CROSS OBJECTION OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2010-11 IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THE 12 TH DAY OF FEBRUARY, 2019. SD/- SD/- MAHAVIR PRASAD PRAMOD KUMAR (JUDICIAL MEMBER) (VICE P RESIDENT) AHMEDABAD, DATED THE 12 TH DAY OF FEBRUARY, 2019 CO NOS. 25 AND 26/AHD/ 2015 ITA NO.: 3481 AND 3482/AHD/14 ASSESSMENT YEAR: 2009-10 AND 2010-11 PAGE 21 OF 21 COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD