TVS Logistics Services Ltd., Madurai V. DCIT, Madurai

ITA 458/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9152 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 09-05-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 02-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: M VISWANATHAN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 14A; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.458/MDS/2016 ( )( / ASSESSMENT YEAR : 2011-12 M/S TVS LOGISTICS SERVICES LTD., 7-B, TVS BUILDING, WEST VELI STREET, MADURAI 625 001. PAN : AACCT 1412 E V. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2, MADURAI. (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SHRI M. VISWANATHAN, CA -.+, / 0 / RESPONDENT BY : SMT. VIJAYALAKSHMI , CIT 1 / 2% / DATE OF HEARING : 09.05.2016 3') / 2% / DATE OF PRONOUNCEMENT : 09.06.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER CONSEQUENT TO THE DIRECTION O F THE DISPUTE RESOLUTION PANEL DATED 21.12.2015, AND PERTAINS TO ASSESSMENT YEAR 2011-12. 2 I.T.A. NO.458/MDS/2016 2. THE FIRST ISSUE ARISES FOR CONSIDERATION IS DETE RMINATION OF ARM'S LENGTH PRICE WITH REGARD TO COMMISSION FOR CO RPORATE GUARANTEE GIVEN BY THE ASSESSEE TO ITS ASSOCIATE EN TERPRISES. 3. SHRI M. VISWANATHAN, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE-COMPANY IS A SUBSIDIARY OF T.V. SUNDARAM IYENGAR & SONS LIMITED. ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE-COMPANY ADVANCED A SUM OF ` 44,41,750/- TO ITS ASSOCIATE ENTERPRISE M/S TVS AME RICAS INC. USA WITHOUT CHARGING ANY INTEREST. SIMILARLY, ` 14 CRORES WAS ADVANCED TO M/S TVS LOGISTICS INVESTMENT UK LIMITED WITHOUT CHARGING ANY INTEREST. ANOTHER SUM OF ` 21 CRORES WAS ADVANCED TO M/S TVS LOGISTICS INVESTMENTS USA INC. AND NO FEE/INTEREST WAS CHARGED. ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE-C OMPANY IS THE ULTIMATE AUTHORITY TO DECIDE TO EXPAND ITS BUSINESS IN OTHER COUNTRIES. THEREFORE, THE ASSESSEE-COMPANY IS UNDE R THE OBLIGATION TO ADVANCE MONEY TO ITS ASSOCIATE ENTERPRISES FOR B USINESS EXPANSION. THE LD. REPRESENTATIVE FURTHER CLARIFIE D THAT THE ADVANCES MADE TO ASSOCIATE ENTERPRISES WERE NOT FRO M BORROWING. ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE H AD SURPLUS FUNDS IN THE FORM OF EQUITY CAPITAL RAISED THROUGH ISSUAN CE OF SHARE TO 3 I.T.A. NO.458/MDS/2016 PRIVATE EQUITY INVESTORS. THE LD. REPRESENTATIVE F URTHER SUBMITTED THAT THE ASSESSEE UTILISED THE FUNDS ONLY FOR THE P URPOSE OF EXPANSION OF ITS BUSINESS THROUGH INORGANIC GROWTH IRRESPECTIVE OF THE GEOGRAPHICAL BOUNDARIES. THEREFORE, ADOPTION O F LIBOR RATE OF INTEREST IS NOT WARRANTED. 4. ON THE CONTRARY, SMT. VIJAYALAKSHMI, THE LD. DEP ARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE MADE IN TEREST-FREE ADVANCES TO ITS ASSOCIATE ENTERPRISES AND CLAIMED B EFORE THE AUTHORITIES BELOW THAT IT IS AN ACTIVITY OF SHAREHO LDER TO ADVANCE FUNDS TO ITS SUBSIDIARY COMPANIES. ACCORDING TO TH E LD. D.R., WHEN THE ASSESSEE ADVANCED FUNDS TO ITS ASSOCIATE ENTERP RISES OUTSIDE THE COUNTRY AND ADMITTEDLY PAID `1 0.05 CRORES TOWARDS INTEREST ON THE BORROWED LOAN, NATURALLY, THE PROFIT OF THE ASS ESSEE-COMPANY TO THE EXTENT OF PAYMENT OF INTEREST IS REDUCED AND TH E PROFIT WAS SHIFTED TO OUTSIDE THE JURISDICTION OF THE COUNTRY. THEREFORE, ACCORDING TO THE LD. D.R., THE ASSESSING OFFICER HA S RIGHTLY FOUND THAT THE ADVANCEMENT OF INTEREST-FREE LOAN TO ITS A SSOCIATE ENTERPRISES OUTSIDE THE COUNTRY IS FOR REDUCING/SHI FTING THE TAXABLE PROFIT IN INDIA. ACCORDINGLY, THE TRANSFER PRICING OFFICER COMPUTED THE INTEREST AT LIBOR RATE ON THE ADVANCE MADE TO I TS ASSOCIATE 4 I.T.A. NO.458/MDS/2016 ENTERPRISES. THE DISPUTE RESOLUTION PANEL, AFTER E XAMINING THE FACTS OF THE CASE, INCLUDING THE PAYMENT OF INTERES T TO THE EXTENT OF ` 10.05 CRORES, FOUND THAT THE TPO COMPUTED THE INTER EST BY USING CUP METHOD / YIELD APPROACH METHOD. ACCORDING TO T HE LD. D.R., THE DRP HAS RIGHTLY CONFIRMED THE ORDER OF THE TRAN SFER PRICING OFFICER. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS NOT IN DISPUTE THAT THE ASSESSEE ADVANCED INTEREST-FREE LO AN / ADVANCE TO ITS ASSOCIATE ENTERPRISES OUTSIDE THE COUNTRY. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE HAS NOT CHARGED ANY INTER EST ON THE LOAN GIVEN TO ITS ASSOCIATE ENTERPRISES. THE ASSESSEE C LAIMS BEFORE THIS TRIBUNAL THAT THE BORROWED FUNDS WERE NOT DIVERTED FOR MAKING ADVANCE TO ITS ASSOCIATE ENTERPRISES. THE ASSESSEE CONTENDS THAT IT HAD SURPLUS FUNDS IN THE FORM OF EQUITY CAPITAL RAISED THROUGH ISSUANCE OF SHARE TO PRIVATE EQUITY INVESTORS. AS PER THE SHAREHOLDING ARRANGEMENT, THE ASSESSEE CLAIMED BEFO RE THE LOWER AUTHORITIES THAT THE SURPLUS FUNDS IN THE FORM OF E QUITY CAPITAL RAISED HAS TO BE APPLIED ONLY FOR THE PURPOSE OF EXPANSION OF ITS BUSINESS THROUGH INORGANIC GROWTH IRRESPECTIVE OF GEOGRAPHIC AL BOUNDARIES. 5 I.T.A. NO.458/MDS/2016 SECTION 92 OF THE INCOME-TAX ACT, 1961 (IN SHORT 'T HE ACT') PROVIDES FOR COMPUTATION OF INCOME FROM INTERNATIONAL TRANSA CTION HAVING REGARD TO ARM'S LENGTH PRICE. THE OBJECT OF DETERM INATION OF ARM'S LENGTH PRICE IS TO PREVENT THE ASSESSEE FROM SHIFTI NG THE PROFIT FROM ONE TAXABLE JURISDICTION TO OTHER TAXABLE JURISDICT ION. IN THIS CASE, THE ASSESSEE ADVANCED FUNDS TO ITS ASSOCIATE ENTERPRISE S AND CLAIMING BEFORE THIS TRIBUNAL THAT IT IS MANDATORY FOR THE A SSESSEE TO ADVANCE FOR ITS EXPANSION OF BUSINESS AS PER THE SHAREHOLDI NG ARRANGEMENT IN THE FORM OF EQUITY CAPITAL RAISED. THERE MAY BE AN OBLIGATION, BEING SHAREHOLDER OF THE ASSOCIATE ENTERPRISES, TO ADVANCE MONEY FOR EXPANSION OF ITS BUSINESS. THE QUESTION ARISES FOR CONSIDERATION IS WHEN THE ASSESSEE ADVANCED FUNDS TO ITS ASSOCIAT E ENTERPRISES IN FOREIGN COUNTRY, FROM THE EQUITY CAPITAL RAISED AND BORROWED FUNDS FOR ITS BUSINESS IN INDIA AND PAID INTEREST TO THE EXTENT OF ` 10.05 CRORES, WHETHER THE PROFIT OF THE ASSESSEE-COMPANY WAS SHIFTED OUTSIDE INDIA SO AS TO REDUCE TAX BURDEN IN INDIA? THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE EQUITY SHARES RA ISED BY THE ASSESSEE IS ONLY FOR THE PURPOSE OF EXPANSION OF IT S BUSINESS AND THERE IS NO COMPULSION FOR THE ASSESSEE TO UTILIZE THE FUNDS RAISED IN THE FORM OF EQUITY CAPITAL IN INDIA. IN OTHER WORD S, THE FUNDS RAISED FROM EQUITY CAPITAL CAN ALSO BE UTILIZED OUTSIDE IN DIA SINCE NO COST 6 I.T.A. NO.458/MDS/2016 INVOLVED IN SUCH CAPITAL. THERE IS NO PROHIBITION FOR EXPANDING THE ASSESSEES BUSINESS OUTSIDE INDIA BY INVESTING ITS OWN FUNDS OUTSIDE INDIA AFTER OBSERVING NECESSARY FORMALITIES . HOWEVER, WHEN THE ASSESSEE BORROWED FUNDS IN INDIA AND PAID INTER EST TO THE EXTENT OF ` 10.05 CRORES IN INDIA, INVESTMENT OF FUNDS OUTSIDE INDIA WOULD NATURALLY REDUCE THE TAX LIABILITY IN INDIA. THERE FORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THIS IS A METHOD ADO PTED BY THE ASSESSEE TO REDUCE THE TAX BURDEN IN INDIA BY PAYIN G INTEREST TO THE EXTENT OF ` 10.05 CRORES ON THE BORROWED FUNDS. IF THE EQUITY CAPITAL FUNDS RAISED FROM ITS SHAREHOLDERS ARE NOT DIVERTED TO ITS ASSOCIATE ENTERPRISES OUTSIDE INDIA, THERE MAY NOT BE ANY NEC ESSITY FOR THE ASSESSEE TO BORROW FUNDS AND PAY INTEREST OF ` 10.05 CRORES ON THE BORROWED FUNDS. FROM THE MATERIAL AVAILABLE ON REC ORD, IT IS OBVIOUS THAT JUST TO SHIFT THE PROFIT OUTSIDE INDIA AND RED UCE THE TAX LIABILITY IN INDIA, THE ASSESSEE DIVERTED ITS FUNDS RAISED THROU GH EQUITY CAPITAL OUTSIDE INDIA, AND BORROWED FUNDS IN INDIA. HAD TH E ASSESSEE USED THE EQUITY CAPITAL IN INDIA, THERE IS NO NECESSITY TO BORROW FUNDS IN INDIA AND PAY INTEREST TO THE EXTENT OF ` 10.05 CRORES. IN SUCH A SITUATION, THE PROFIT OF THE ASSESSEE WILL INCREASE TO THE EXTENT OF ` 10.05 CRORES IN INDIA AND THE ASSESSEE IS LIABLE TO PAY TAX ON THAT. 7 I.T.A. NO.458/MDS/2016 6. NOW, BY DIVERTING THE EQUITY CAPITAL RAISED TO I TS ASSOCIATE ENTERPRISES, THE ASSESSEE IS CLAIMING THE PAYMENT O F INTEREST ON THE BORROWED FUNDS TO THE EXTENT OF ` 10.05 CRORES AS EXPENDITURE. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT IT IS AN ATTEMPT ON THE PART OF THE ASSESSEE TO REDUCE THE T AX BURDEN TO THAT EXTENT. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDE RED OPINION THAT INTEREST ON THE FUNDS ADVANCED TO ASSOCIATE ENTERPR ISE OUTSIDE INDIA HAS TO BE COMPUTED ON NOTIONAL BASIS BY APPLYING LI BOR RATE. LIBOR IS ONE OF THE INTERNATIONALLY ACCEPTED RATES FOR THE LOAN ADVANCED IN THE INTERNATIONAL MARKET. THEREFORE, T HE TPO HAS RIGHTLY DETERMINED THE ARM'S LENGTH PRICE FOR THE A DVANCE MADE BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES BY ADOPTI NG LIBOR RATE OF INTEREST. THEREFORE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDING LY THE SAME IS CONFIRMED. 7. THE NEXT ISSUE ARISES FOR CONSIDERATION IS WITH REGARD TO CORPORATE GUARANTEE GIVEN BY THE ASSESSEE TO ITS AS SOCIATE ENTERPRISES. 8. SHRI M. VISWANATHAN, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE HAS PROVIDED A CORPORATE 8 I.T.A. NO.458/MDS/2016 GUARANTEE OF APPROXIMATELY ` 14 CRORES IN FAVOUR OF MULTIPART SOLUTIONS LIMITED, UK, A WHOLLY OWNED SUBSIDIARY CO MPANY OF THE ASSESSEE. ACCORDING TO THE LD. REPRESENTATIVE, THE GUARANTEE WAS FOR A BRIDGE LOAN OBTAINED BY MULTIPART SOLUTIONS L IMITED FROM EXPORT & IMPORT BANK. THE LOAN WAS OBTAINED BY THE MULTIP ART SOLUTIONS LIMITED, UK FOR MEETING ITS WORKING CAPITAL REQUIRE MENTS. FOR PROVIDING THE GUARANTEE, ACCORDING TO THE LD. REPRE SENTATIVE, THE ASSESSEE HAS NOT CHARGED ANY FEE. SINCE THE GUARAN TEE WAS PROVIDED TO ITS ASSOCIATE ENTERPRISE, THE ASSESSEE- COMPANY BELIEVED THAT THE TRANSACTION WAS AT ARM'S LENGTH A S PROVIDED IN SECTION 94C OF THE ACT. THE LD. REPRESENTATIVE FUR THER SUBMITTED THAT PROVIDING GUARANTEE TO ITS ASSOCIATE ENTERPRIS E DOES NOT INVOLVE ANY COST TO THE ASSESSEE, THEREFORE, ACCORDING TO T HE LD. REPRESENTATIVE, IT HAS NO BEARING ON PROFIT, INCOME , LOSS OR ASSET OF THE ASSESSEE. THEREFORE, ACCORDING TO THE LD. REPR ESENTATIVE, SUCH GUARANTEE IS OUTSIDE THE AMBIT OF INTERNATIONAL TRA NSACTION. THE LD. REPRESENTATIVE PLACED HIS RELIANCE ON THE DECISION OF THIS TRIBUNAL IN REDINGTON (INDIA) LIMITED V. ACIT (2015) 42 ITR (TR IB) 408. 9. ON THE CONTRARY, SMT. VIJAYALAKSHMI, THE LD. DEP ARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE TRANSFER PRICING OFFICER FOUND 9 I.T.A. NO.458/MDS/2016 THAT THE ASSESSEE GAVE A CORPORATE GUARANTEE IN FAV OUR OF TVS LOGISTICS INVESTMENTS UK LIMITED. THE SAID GUARANT EE, HOWEVER, WAS NOT OUTSTANDING AT THE END OF THE RELEVANT FINA NCIAL YEAR. ACCORDING TO THE LD. D.R., THE ACCEPTANCE OF THE GU ARANTEE DOES NOT RESULT IN IMPLICIT SUPPORT TO THE RECIPIENT ENTITY. ACCORDING TO THE LD. D.R., THE TRANSFER PRICING OFFICER FURTHER FOUND TH AT INTEREST RECEIVED COULD BE AN APPROPRIATE WAY OF DETERMINING THE APPR OPRIATE FEE FOR GUARANTEE. THE LD. D.R. FURTHER SUBMITTED THAT BY GIVING A BANK GUARANTEE TO ITS ASSOCIATE ENTERPRISE, THE ASSESSEE -COMPANY IS INVITING A RISK BY ITSELF. IF THE ASSOCIATE ENTERP RISE FAILS TO REPAY THE LOAN BORROWED ON THE BASIS OF CORPORATE GUARANTEE G IVEN BY THE ASSESSEE, THEN THE ASSESSEE HAS TO NATURALLY REPAY THE LOAN. IN THAT CASE, THE PROFIT OF THE ASSESSEE AND TAX THERETO WI LL BE SHIFTED TO OUTSIDE THE JURISDICTION OF THE COUNTRY. THE LD. D .R. FURTHER SUBMITTED THAT GUARANTEE TO THE BANKER IN MOST CASE S RESULT IN A LOAN WITH LOWER RATE OF INTEREST. THEREFORE, ACCOR DING TO THE LD. D.R., THERE IS A COST SAVING TO THE GROUP CONCERN W HICH WOULD REFLECT IN THE BOOKS OF ACCOUNT AS WELL. THE LD. D.R. FURT HER SUBMITTED THAT THE DECISION OF THIS TRIBUNAL IN REDINGTON (INDIA) LIMITED (SUPRA) HAS NOT REACHED FINALITY AND THE MATTER IS PENDING BEFO RE THE HIGH COURT. MOREOVER, THE OPINION OF THIS TRIBUNAL AND VARIOUS BENCHES OF THE 10 I.T.A. NO.458/MDS/2016 TRIBUNAL ARE EQUALLY DIVIDED. THEREFORE, THE DRP F OUND THAT THE BENEFIT ACCRUED TO THE ASSOCIATE ENTERPRISES BECAUS E OF THE GUARANTEE GIVEN BY THE ASSESSEE HAS TO BE ESTIMATED BY APPLYING LIBOR RATE OF INTEREST. ACCORDINGLY, THE DRP HAS R IGHTLY CONFIRMED THE DECISION OF THE TRANSFER PRICING OFFICER. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS OFFERED CORPORATE GUA RANTEE TO ITS ASSOCIATE ENTERPRISES AT UK. AN IDENTICAL FACT WAS CONSIDERED BY THIS TRIBUNAL IN REDINGTON (INDIA) LIMITED (SUPRA). THIS TRIBUNAL, AFTER CONSIDERING THE DECISION OF DELHI BENCH OF TH IS TRIBUNAL IN BHARATI AIRTEL LTD. V. ADDL. CIT (2004) 43 TAXMANN .COM 150 FOUND THAT THE CORPORATE GUARANTEE GIVEN BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE DOES NOT INVOLVE ANY COST TO T HE ASSESSEE, THEREFORE, IT WAS OUTSIDE THE AMBIT OF INTERNATIONA L TRANSACTION. IN VIEW OF THIS DECISION CO-ORDINATE BENCH OF THIS TRI BUNAL ON IDENTICAL SET OF FACTS IN RESPECT OF SIMILAR CORPORATE GUARAN TEE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT DETERMINATION OF ARM'S LENGTH PRICE MAY NOT BE NECESSARY. MERE PENDENCY OF APPEAL AGAI NST THE DECISION OF THIS TRIBUNAL IN REDINGTON (INDIA) LIMI TED (SUPRA) CANNOT 11 I.T.A. NO.458/MDS/2016 BE A REASON TO TAKE A DIFFERENT VIEW. UNLESS AND U NTIL ORDER OF THIS TRIBUNAL IS REVERSED BY THE MADRAS HIGH COURT IN RE DINGTON (INDIA) LTD., THE AUTHORITIES BELOW CANNOT TAKE A DIFFERENT VIEW ON THE SUBJECT. THEREFORE, BY FOLLOWING THE DECISION OF C O-ORDINATE BENCH OF THIS TRIBUNAL IN REDINGTON (INDIA) LTD. (SUPRA), THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE. THE ADJUSTMENT MA DE BY THE TRANSFER PRICING OFFICER AS CONFIRMED BY THE DISPUT E RESOLUTION PANEL IS NOT JUSTIFIED. ACCORDINGLY, THE ADDITION MADE BY THE TRANSFER PRICING OFFICER IS DELETED. 11. THE NEXT GROUND OF APPEAL IS WITH REGARD TO DIS ALLOWANCE MADE UNDER SECTION 14A OF THE ACT. 12. SHRI M. VISWANATHAN, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT SECTION 14A OF THE ACT WOU LD COME INTO OPERATION IN CASE THERE IS NO INCOME EXEMPTED FROM TAXATION WAS EARNED. IN THE CASE ON HAND, ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE HAS NOT RECEIVED ANY DIVIDEND FOR THE YEAR UNDER CONSIDERATION, THEREFORE, NO INCOME WAS EARNED BY T HE ASSESSEE WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THER EFORE, THE PROVISIONS OF SECTION 14A OF THE ACT ARE NOT APPLIC ABLE AT ALL. THE LD. REPRESENTATIVE FURTHER SUBMITTED THAT THE INVES TMENT WAS MADE 12 I.T.A. NO.458/MDS/2016 BY THE ASSESSEE IN THE ASSOCIATE ENTERPRISE, THEREF ORE, THE DIVIDEND INCOME EARNED FROM THE ASSOCIATE ENTERPRISE ARE TAX ABLE IN INDIA. HENCE, THE DRP IS NOT JUSTIFIED IN CONFIRMING THE O RDER OF THE TRANSFER PRICING OFFICER. 13. ON THE CONTRARY, SMT. VIJAYALAKSHMI, THE LD. DE PARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE HAS NOT MAINTAINED ANY SEPARATE BOOKS OF ACCOUNT WITH REGARD TO INVEST MENT FROM WHICH THE INCOME WAS EARNED. THE CLAIM OF THE ASSESSEE B EFORE THE LOWER AUTHORITIES APPEARS TO BE THAT NO EXPENDITURE WAS INCURRED FOR THE INVESTMENT MADE FOR EARNING THE TAX-FREE DIVIDE ND INCOME. THE ASSESSEE HAS ALSO CLAIMED THAT NO INCOME EXEMPTED F ROM TAXATION WAS EARNED BY THE ASSESSEE. THE LD. D.R. FURTHER S UBMITTED THAT IT IS AN ADMITTED FACT THAT THE ASSESSEE BORROWED LOAN FOR THE BUSINESS AND PAID INTEREST TO THE EXTENT OF ` 10.05 CRORES DURING THE YEAR UNDER CONSIDERATION. THE INVESTMENT DECISION WAS T AKEN BY THE TOP MOST EXECUTIVES OF THE COMPANY AND THE INVESTMENT W AS MANAGED BY ITS KEY MANAGEMENT PERSONNEL AND EXECUTIVES. TH E CORPORATE STRUCTURE ITSELF REQUIRES AN ADMINISTRATIVE ESTABLI SHMENT, WHICH REQUIRES INCURRING OF MULTIFARIOUS EXPENSES INCLUDI NG ESTABLISHMENT, GENERAL AND ADMINISTRATIVE EXPENSES. THE DECISION ON INVESTMENT 13 I.T.A. NO.458/MDS/2016 AND HOW AND WHERE TO BE INVESTED NEED CONSIDERABLE TIME AND EXPERTISE. THEREFORE, THE DECISION TAKEN AT THE HI GH LEVEL OF THE CORPORATE ENTITY INVOLVES TIME AND COST. HENCE, IT IS NOT CORRECT TO SAY THAT NO EXPENDITURE WAS INCURRED. 14. REFERRING TO SECTION 14A OF THE ACT, THE LD. DE PARTMENTAL REPRESENTATIVE POINTED OUT THAT THE ASSESSEE WAS EX PECTED TO MAINTAIN BOOKS OF ACCOUNT WITH REGARD TO INVESTMENT MADE. SINCE THE ASSESSEE HAS NOT MAINTAINED ANY BOOKS, THE ASSE SSEE CANNOT SAY THAT NO EXPENDITURE WAS INCURRED. THE ADMINIST RATIVE AND ESTABLISHMENT EXPENSES CANNOT BE RULED OUT FOR TAKI NG DECISION ON INVESTMENT AND MAINTAINING THE INVESTMENT PORTFOLIO . THEREFORE, ACCORDING TO THE LD. D.R., THE TRANSFER PRICING OFF ICER HAS RIGHTLY DISALLOWED THE EXPENDITURE FOR EARNING THE EXEMPTED INCOME. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE CLAIMS THAT MAJOR PORTION OF INVESTMENT WAS MADE IN THE ASSOCIATE ENTERPRISE OUTSIDE THE COUNTRY. THE ASSESSEE ALSO CLAIMS THAT NO EXPENDITURE WAS INCURRED FOR MAKING THE INVESTMENT. THE ASSESSEE HAS ALSO CLAIMED THAT IF AT ALL ANY INCOME WAS GENE RATED ON THE INVESTMENT MADE OUTSIDE THE COUNTRY IN ASSOCIATE EN TERPRISE THAT 14 I.T.A. NO.458/MDS/2016 WOULD BE TAXABLE IN THE HANDS OF THE ASSESSEE. THE REFORE, THERE IS NO QUESTION OF APPLYING PROVISIONS OF SECTION 14A O F THE ACT. THE FACT REMAINS THAT THE ASSESSEE HAS NOT MAINTAINED A NY SEPARATE BOOKS OF ACCOUNT FOR THE INVESTMENT MADE BY THE ASS ESSEE. EVEN THOUGH THE ASSESSEE CLAIMS THAT MAJOR INVESTMENT WA S MADE IN ASSOCIATE ENTERPRISE, NO DETAILS OF SUCH INVESTMENT ARE AVAILABLE ON RECORD. THEREFORE, THE CLAIM OF THE ASSESSEE THAT MAJOR INVESTMENT WAS MADE IN ASSOCIATE ENTERPRISE IS NOT SUBSTANTIAT ED. THE FACT REMAINS THAT THE ASSESSEE HAS MADE INVESTMENT IN TH E ASSOCIATE ENTERPRISE AND IT IS ALSO AN ADMITTED FACT THAT THE ASSESSEE HAS PAID INTEREST TO THE EXTENT OF ` 10.05 CRORES ON THE LOAN BORROWED FOR THE BUSINESS. IN THE ABSENCE OF ANY DIRECT LINK BETWEE N THE PAYMENT OF INTEREST AND THE INCOME EARNED BY THE ASSESSEE, THI S TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE PROVISIONS OF SECON D AND THIRD LIMB OF RULE 8D(2) OF THE INCOME-TAX RULES, 1962 HAVE TO BE APPLIED. IN OTHER WORDS, THE AVERAGE OF THE AMOUNT AS COMPUTED UNDER SECOND AND THIRD LIMBS OF RULE 8D(2) HAS TO BE NOTIONALLY TAKEN FOR THE PURPOSE OF DISALLOWING THE EXPENDITURE. IN THE ABS ENCE OF ANY OTHER DETAILS, THE DRP HAS RIGHTLY FOUND THAT DISALLOWANC E HAS TO BE MADE BY APPLYING RULE 8(2) OF INCOME-TAX RULES, 1962. T HEREFORE, WE 15 I.T.A. NO.458/MDS/2016 FIND NO INFIRMITY IN THE ORDER OF THE LOWER AUTHORI TY AND ACCORDINGLY THE SAME IS CONFIRMED. 16. THE LAST ISSUE ARISES FOR CONSIDERATION IS WITH REGARD TO LETTER OF COMFORT ISSUED BY THE ASSESSEE-COMPANY TO ITS AS SOCIATE ENTERPRISE. 17. SHRI M. VISWANATHAN, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT A LETTER OF COMFORT WAS IS SUED BY THE ASSESSEE-COMPANY AS A PROCEDURAL FORMALITY TO BE CO MPLIED WITH BY WHOLLY OWNING SHAREHOLDER TO ENABLE THE SUBSIDIARY COMPANY TO BORROW FUNDS FROM BANKS. ACCORDING TO THE LD. REPR ESENTATIVE, THE ASSESSEE HAS NOT DERIVED ANY BENEFIT OUT OF THIS LE TTER OF COMFORT. IN THE ABSENCE OF ANY BENEFIT DERIVED FROM LETTER O F COMFORT, THERE IS NO JUSTIFICATION FOR IMPUTING THE RECOVERY CHARG ES OF 1% ON THE AMOUNT GENERATED ALONG WITH INCIDENTAL CHARGES INCU RRED BY THE ASSESSEE FOR ISSUING THE LETTER OF COMFORT AS PART OF PROCEDURAL COMPLIANCE. ACCORDING TO THE LD. REPRESENTATIVE, I T IS OBLIGATION ON THE PART OF THE ASSESSEE TO GIVE THE LETTER OF COMF ORT TO ITS ASSOCIATE ENTERPRISE SO THAT THE ASSOCIATE ENTERPRI SE WAS ABLE TO BORROW FUNDS COMFORTABLY FROM FINANCIAL INSTITUTION S. THE LD. REPRESENTATIVE SUBMITTED THAT THERE IS NO ELEMENT O F PROFIT INVOLVED 16 I.T.A. NO.458/MDS/2016 IN GIVING THE LETTER OF COMFORT, THEREFORE, IT CANN OT BE A SUBJECT MATTER OF INTERNATIONAL TRANSACTION. 18. ON THE CONTRARY, SMT. VIJAYALAKSHMI, THE LD. DE PARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE TRANSFER PRICING OFFICER MADE ADJUSTMENT IN RESPECT OF THE PAYMENT ACTUALLY MADE BY THE ASSESSEE. THE NOTIONAL ADJUSTMENT WAS MADE TO THE EXTENT OF ` 21 LAKHS WHICH IS FOR THE RISK TAKEN BY THE ASSESSEE I N RESPECT OF THE LOAN AVAILED BY THE ASSOCIATE ENTERPRISE. ACCORDIN G TO THE LD. D.R., BY GIVING LETTER OF COMFORT, THE ASSESSEE EXPOSED T O THE RISK OF THE ASSOCIATE ENTERPRISE AND THE ASSESSEE ITSELF IS TAK ING OVER THE RISK OF ASSOCIATE ENTERPRISE. FOR TAKING RISK, THE ASSE SSEE HAS PROVIDED LETTER OF COMFORT TO ITS ASSOCIATE ENTERPRISE SO TH AT THE ASSOCIATE ENTERPRISE MAY GET MONETARY BENEFIT BY WAY OF LOAN FROM FINANCIAL INSTITUTIONS. THEREFORE, THE TRANSFER PRICING OFFI CER HAS RIGHTLY COMPUTED THE ARM'S LENGTH PRICE BY TAKING INTO CONS IDERATION THE ACTUAL PAYMENT MADE BY THE ASSESSEE CLOSE TO 1% OF THE GUARANTEE. THE DRP HAS RIGHTLY FOUND THAT THE METH OD ADOPTED BY THE TPO IS MORE APPROPRIATE. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. LETTER OF COMFORT 17 I.T.A. NO.458/MDS/2016 IS NOTHING BUT A GUARANTEE GIVEN BY THE ASSESSEE-CO MPANY TO ITS ASSOCIATE ENTERPRISE TO AVAIL LOAN FROM FINANCIAL I NSTITUTIONS SO AS TO ENABLE THE ASSOCIATE ENTERPRISE TO AVAIL LOAN FACIL ITY. AS RIGHTLY SUBMITTED BY THE LD. D.R., BY GIVING SUCH LOAN, THE ASSESSEE EXPOSED ITSELF TO THE RISK OF REPAYING THE LOAN AVA ILED BY THE ASSOCIATE ENTERPRISE. THIS SAID LETTER OF COMFORT IS ALMOST A GUARANTEE GIVEN BY THE ASSESSEE TO ITS ASSOCIATE EN TERPRISE. AS FOUND BY THIS TRIBUNAL IN REDINGTON (INDIA) LIMITED (SUPRA), BY GIVING SUCH A GUARANTEE OR LETTER OF COMFORT BY THE ASSESS EE-COMPANY, IT DOES NOT INVOLVE ANY COST TO THE ASSESSEE, THEREFOR E, IT IS OUTSIDE THE AMBIT OF INTERNATIONAL TRANSACTION. BY FOLLOWI NG THE ORDER OF THIS TRIBUNAL IN REDINGTON (INDIA) LIMITED (SUPRA) AND F OR THE REASON STATED THEREIN, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE MAY NOT BE ANY NEED TO MAKE ANY ADJUSTMENT IN RESPE CT OF LETTER OF COMFORT. ACCORDINGLY, THE ORDERS OF THE LOWER AUTH ORITIES ARE SET ASIDE THE AND ASSESSING OFFICER IS DIRECTED TO DELE TE THE ADDITION MADE WITH REGARD TO LETTER OF COMFORT ON NOTIONAL B ASIS. 20. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 18 I.T.A. NO.458/MDS/2016 ORDER PRONOUNCED ON 9 TH JUNE, 2016 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 9 TH JUNE, 2016. KRI. / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. THE SECRETARY, DRP-2, BENGALURU 4. TRANSFER PRICING OFFICER 3, CHENNAI 5. 79 -2 /DR 6. ( : /GF.