Arkay Leathers Pvt Ltd, Chennai V. ACIT, Corporate Range 1, Chennai

ITA 44/CHNY/2018

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5398 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2013-2014
• Appeal Filed On: 03-01-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SRINIVASA RAO VANA
• Assessee Lawyers: R KUMAR
• Keywords: Transfer pricing; International transaction; Earning of tax free income; TDS; Rule 8D
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , , % BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NO. 44/CHNY/2018 / ASSESSMENT YEAR : 2013-14 M/S. ARKAY LEATHERS PVT. LTD., NO. 71, ANNA SALAI, NAGALKENI, CHROMPET, CHENNAI 600 044. [PAN: AAACA 3053E] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE RANGE 1, CHENNAI- 34. ( / APPELLANT) ( &'( /RESPONDENT ) ASSESSEE BY : SHRI. R. KUMAR, ADVOCATE REVENUE BY : SHRI. SRINIVASARAOVANA, JCIT 1 /DATE OF HEARING : 29.10.2018 1 /DATE OF PRONOUNCEMENT : 29.10.2018 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THE ASSESSEE FILED THIS APPEAL AGAINST THE ORDER O F THE COMMISSIONER OF INCOME TAX (APPEALS)-1, CHENNAI IN ITA NO. 280/CIT(A)-1/16-17 DATED 31.10.2017 FOR ASSESSMENT YEAR 2013-14. 2. M/S. ARKAY LEATHERS PVT. LTD., THE ASSESSEE, IS ENGAGED IN THE MANUFACTURE OF FINISHED LEATHER PRODUCTS AND EXPORT S THEM. ITS :-2-: ITA NO. 44/CHNY/2018 ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) AFTER MAKING DISALLOWANCES ON ACCOUNT OF FEES PAID TO THE REGIST RAR OF COMPANIES FOR THE INCREASE IN AUTHORISED SHARE CAPITAL AND EXPEND ITURE INCURRED FOR EARNING EXEMPT INCOME UNDER SECTION 14A. A TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF COMMISSION RECEIVABLE ON EXTENDING OF CORPORATE GUARANTEE WAS ALSO MADE. AGGRIEVED, THE ASSESSEE FILED APPEA L BEFORE THE CIT(A). THE CIT(A) DISMISSED THE APPEAL. AGGRIEVED AGAIN ST THE ORDER OF THE LD CIT(A), THE ASSESSEE FILED THIS APPEAL. THEREFORE , HE SUBMITTED THAT THE IMPUGNED ADDITION IS CORRECTLY MADE. 3. ON THE TP ADDITION MADE ON THE CORPORATE GUARAN TEE, THE LD AR SUBMITTED, INTER ALIA, THAT THOUGH AS A HOLDING CO MPANY THE ASSESSEE HAD EXTENDED CORPORATE GUARANTEE TO ARKAY PACIFIC LTD., HONG KONG (AE) TOWARDS FACILITY ENJOYED BY THE WHOLLY OWNED SUBSID IARY WITH BANK OF INDIA, HONGKONG, IT HAD NOT CHARGED ANY AMOUNT TOW ARDS THE SAME; ON SUCH FACTS THE TRANSFER PRICING ADJUSTMENT CANNOT B E MADE ON HYPOTHETICAL AND NOTIONAL BASIS. WITHOUT PREJUDICE, IN ANY EVENT, THE ALP OF THE CORPORATE GUARANTEE ADOPTED AS 1% OF THE VAL UE OF THE CORPORATE GUARANTEE IS UNREALISTIC AND EXCESSIVE AND LD THE C IT(A) THOUGH HAS RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH C OURT FIXING THE ALP AT 0.5%, HAS IN THE IMPUGNED SITUATION FIXED THE AL P AT 1%. HENCE, EVEN ASSUMING THAT THE SAID ADJUSTMENT IS TO BE MADE, TH E SAME BE LIMITED TO AN ALP 0.5%. PER CONTRA, THE LD DR SUBMITTED THAT T HE APPEAL RELATES TO ASSESSMENT YEAR 2013-14. IN RESPECT OF ITEMS SPECIF ICALLY MENTIONED IN :-3-: ITA NO. 44/CHNY/2018 THE EXPLANATION TO SEC 92B, THERE IS A PRESUMPTION UNDER THE STATUTE THAT SUCH TRANSACTIONS HAVE AN IMPACT ON THE PROFITS, IN COME, LOSSES OR ASSETS OF THE ENTERPRISE. FURTHER ON FACTS OF THIS CASE, T HERE IS UNDOUBTEDLY AN IMPACT ON ASSETS OF THE COMPANY IN THE LIGHT OF THE TERMS OF THE GUARANTEE. THEREFORE, THE TRANSACTION OF PROVIDING GUARANTEE BY THE ASSESSEE IN FAVOUR OF ITS AE IS AN INTERNATIONAL TR ANSACTION. WITH REGARDS THE QUANTIFICATION OF THE ALP, THE ASSESSEES ARGUM ENT THAT IT HAS CHARGED NO CONSIDERATION, DOES NOT HOLD GOOD AFTER THE SPEC IAL BENCH DECISION IN THE CASE OF M/S. INSTRURNENTARIUM CORPORATION LTD V ADIT 71 TAXMANN.COM 173 KOLKATTATRIB, WHEREIN IT IS HELD T HAT TP PROVISIONS WOULD BE APPLICABLE IN RESPECT OF EVERY TRANSACTION WHETHER THE ASSESSEE HAS CHARGED OR NOT. WHEN IT IS CHARGED, THE VALUE O F CONSIDERATION WOULD BE SUBSTITUTED BY ALP. WHERE A CONSIDERATION IS NOT CHARGED, BUT THE TRANSACTION IS SUCH THAT IN THE NORMAL CIRCUMSTANCE S WOULD RESULT IN INCOME OF A CERTAIN NATURE, THE TP PROVISIONS WOULD BE APPLICABLE TO QUANTIFY THE INCOME. THEREFORE, HE SUBMITTED THAT T HE IMPUGNED ADDITION IS CORRECTLY MADE. 4. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH RELEVANT MATERIAL. WE HOLD THAT THE TRANSACTION OF PROVIDIN G GUARANTEE IN FAVOUR OF AE IS AN INTERNATIONAL TRANSACTION. SINCE THE LD CIT(A), RESPECTFULLY FOLLOWING THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF M/S. EVEREST KANTO CYLINDERS 75 TAXMANN.COM 288, UPHELD THE ALP FOR :-4-: ITA NO. 44/CHNY/2018 GUARANTEE COMMISSION AT 0.5%, WE CONFIRM THE SAME. THE ASSESSEES CORRESPONDING APPEAL GROUNDS ARE DISMISSED. 5. THE NEXT ISSUE IS RELATED TO THE CLAIM FOR A DE DUCTION AT RS.5,30,968/, BEING THE AMOUNT PAID TO THE REGISTR AR OF COMPANIES FOR THE INCREASE IN THE AUTHORISED SHARE CAPITAL OF THE COMPANY. 6. WE HEARD THE RIVAL SUBMISSIONS. THE ASSESSING OF FICER RELYING ON THE CASE OF M/S. PUNJAB STATE INDUSTRIAL DEVELOPMEN T CORPORATION VS CIT (1997) 93 TAXMAN 5 (SC) DISALLOWED THE CLAIM. BEFOR E THE LD CIT(A) , THE ASSESSEE PLACED PLACE RELIANCE UPON THE DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF M/S. SHASUN CHEMICALS AND DRUG S LTD VS CIT (2016) 73 TAXMAN.COM 93 (SC). THE LD CIT (A) HAS HELD, INT ER ALIA ,THAT DURING THE COURSE OF APPEAL, THE ASSESSEE HAS NOT BROUGHT ANY MATERIAL ON RECORD EITHER TO SHOW THAT THE NEW INDUSTRIAL UNIT HAS BEEN SET UP IN THAT YEAR OR THERE HAS BEEN SUBSTANTIAL EXPANSION OF ITS BUSINESS AND THE CLAIM FALLS WITHIN THE 10 YEAR HOLIDAY PROVIDED UNDER THE SAID SECTION. THUS, THE ASSESSEE HAS NOT BROUGHT ANY MATERIAL ON RECORD TO JUSTIFY ITS CLAIM U/S. 35D. THE ASSESSING OFFICER HAS EVALUATED THE CLAIM U/S. 37(1). IN THE ABSENCE OF ANY FINDING THAT THE ASSESSEE HAS UNDERT AKEN SUBSTANTIAL EXPANSION OF ITS BUSINESS DURING THE RELEVANT PREVI OUS YEAR OR IT HAS SET UP A NEW INDUSTRIAL UNIT, DEDUCTION UNDER THE PROVI SIONS OF SECTION 35D IS NOT ADMISSIBLE. NO MATERIAL IN THIS REGARD WAS PLAC ED ON RECORD IN THE COURSE OF APPEAL PROCEEDINGS EITHER. HENCE, THE LD CIT(A) DISMISSED THIS GROUND OF APPEAL FOR WANT OF MATERIAL TO SHOW THA T THE ASSESSEE HAS :-5-: ITA NO. 44/CHNY/2018 COMPLIED WITH THE CONDITIONS STIPULATED IN SECTION 35D. BEFORE US ALSO, THE ASSESSEE HAS NOT LAID ANY MATERIAL IN SUPPORT OF IT S CONTENTIONS AND HENCE WE CONFIRM THE ORDER OF THE LD CIT(A). THE ASSESSE ES CORRESPONDING APPEAL GROUNDS ARE DISMISSED. 7. THE NEXT ISSUE RELATES TO THE DISALLOWANCE MADE U/S. 14A READ WITH RULE 8D. THE ASSESSING OFFICER HAS OBSERVED THAT DU RING THE YEAR, THE ASSESSEE HAD EARNED DIVIDEND INCOME TO THE EXTENT O F RS.8,800/. THE ASSESSEE HAD MADE CERTAIN INVESTMENTS IN SHARES WHI CH RESULTED IN THIS EXEMPT INCOME. THE ASSESSEE HAD NOT MADE ANY DISALL OWANCE ON ACCOUNT OF EXPENDITURE INCURRED FOR THE EXEMPT INCOME. HOWE VER, BEFORE THE ASSESSING OFFICER THE ASSESSEE SUBMITTED THAT A DIS ALLOWANCE AT THE RATE OF 2% MAY BE CONSIDERED. THE ASSESSING OFFICER OBSE RVED THAT THE ESTIMATION AT THE RATE OF 2% OF THE DIVIDEND INCOME WAS NOT IN ACCORDANCE WITH LAW, AS ONCE THE PROVISIONS OF SECT ION 14A BECAME APPLICABLE, DEDUCTION OR THE DISALLOWANCE HAS TO BE QUANTIFIED IN ACCORDANCE WITH THE SECTION READ WITH RULE 8D. ACC ORDINGLY, THE ASSESSING OFFICER COMPUTED THE DISALLOWANCE OF RS.2 ,13,560/-. BEFORE THE LD CIT(A) , THE ASSESSEE RELIED ON THE ORDER OF THE HONBLE TRIBUNAL IN DCIT VS AMALGAMATIONS LTD., REPORTED IN (2015) 43 I TR (TRIB) 540 (CHENNAI) HOLDING THAT FOR PURPOSES OF COMPUTING DI SALLOWANCE U/S 14A R.W RULE 8D OF THE IT RULES 1962, INVESTMENTS MADE IN SUBSIDIARY COMPANIES HAVE TO BE REDUCED FOLLOWING ITS OWN OR DER IN EIH ASSOCIATED HOTELS LTD., VS DCIT (ITA NO.S.1503 & 16 24/MAD/2012 DATED :-6-: ITA NO. 44/CHNY/2018 17-7-2013. HOWEVER, THE LD CIT(A) DISMISSED THE APP EAL. THE LD. AR PLEADED THAT THE RATIO OF THE DELHI HIGH COURT DECI SION IN THE CASE OF JOINT INVESTMENT PVT. LTD., VS CIT, REPORTED IN 372 ITR 694 (DELHI), MAY BE APPLIED. THE LD. DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 8. WE HEARD THE RIVAL SUBMISSIONS. FOLLOWING THE R ATIO OF THE DELHI HIGH COURT, SUPRA, WE DIRECT THAT THE DISALLOWANCE BE RESTRICTED TO THE EXEMPT INCOME. THUS, THE ASSESSEES APPEAL IS PART LY ALLOWED. 9. THOUGH THE ASSESSEE CHALLENGED THE ORDER OF THE CIT(A) CONFIRMING THE DISALLOWANCE MADE AT RS. 1,12,408/- TOWARDS INT EREST PAID ON TDS IN THE GROUNDS, SINCE THE LD AR DID NOT PRESS THIS GR OUND, IT IS DISMISSED. 10. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH OCTOBER, 2018 AT CHENNAI. SD/- ( ) (GEORGE MATHAN) ! /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ! /ACCOUNTANT MEMBER /CHENNAI, 6 /DATED: 29 TH NOVEMBER, 2018 JPV 1&89:9 /COPY TO: 1. ( / APPELLANT 2. &'( /RESPONDENT 3. < ) ( /CIT(A) 4. < /CIT 5. 9& /DR 6. /GF