GRINDEWELL NORTON LTD, MUMBAI V. ADDL CIT 1(1), MUMBAI

ITA 523/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2838 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 01-09-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 22-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N PADMANABHAM
• Keywords: Depreciation; Transfer pricing; International transaction; Earning of tax free income; Fair market value; Valuation report
• Section: 143(3); 92B; 14A; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K , MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI RAVISH SOOD , JUDICIAL MEMBER ITA NO. 523 /MUM/20 14 : (A.Y : 2009 - 10 ) M/S. GRINDWELL NORTON LTD., KALYANIWALLA & MISTRY ARMY & NAVY BUILDING, 3 RD FLOOR, 148, M.G. ROAD, FORT, MUMBAI 400 001 ( APPELLANT ) PAN : AAACG8752B VS. ADDL. CIT - 1(1), MUMBAI (RESPONDENT) ASSESSEE BY : SHRI M.M. GOLVALA & SHRI AKRAM KHAN REVENUE BY : SHRI N. PADMANABHAM DATE OF HEARING : 23/08 /2016 DATE OF PRONOUNCEMENT : 30 / 09 /2016 O R D E R PER G.S. PANNU , AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF CIT(A) - 15 , MUMBAI DATED 27.11.2013 , PERTAINING TO THE ASSESSMENT YEAR 2009 - 10 , WHICH IN TURN HAS ARISEN FROM THE ORDER DATED 25.02.2013 PASSED BY THE ASSESSING OFFICER, MUMBAI UNDER SECTION 143(3) R.W.S. 144(C)(3)(A) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 2 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 2. IN THIS APPEAL, ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : - 1. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN HOLDING THAT THE SURPLUS OF RS.41,52,959/ - ARISING ON PREPAYMENT OF DEFERRED SALES TAX WAS A REVENUE RECEIPT LIABLE TO TAX U/S.28(IV) OF THE INCOME - TAX ACT. 2. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN HOLDING THAT THE APPELLANT OBTAINED A 'BENEFIT' IN RESPECT OF THE SAID PRE - PAYMENT. 3. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN APPLYING SECTION 28(IV) TO TAX THE SAID AMOUNT. 4 HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPE LLANT SUBMITS THAT THE ADDITION OF RS.41,52,959/ - BE DELETED. 5. BOTH THE LOWER AUTHORITIES ERRED IN HOLDING THAT THE APPELLANT WAS NOT ENTITLED TO DEPRECIATION UNDER SECTION 32 IN RESPECT OF THE FOLLOWING INTANGIBLE ASSETS: ASSETS VALUE (RS.) TRADE MARK 2,00,00,000 TECHNICAL KNOW HOW 3,50,00,000 MARKETINGNETWORK 3,75,00,000 NON - COMPETE FEES 4,02,50,000 TOTAL 13,27,50,000 6. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN GIVING SEVERAL FINDINGS WHICH ARE EITHER IRRELEVANT OR INCORRECT FOR DISALLOWING DEPRECIATION UNDER SECTION 32. 3 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 7. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN HOLDING THAT DEPRECIATION IS ALLOWABLE ONLY ON THOSE INTANGIBLE ASSETS WHICH ARE PROTECTED RIGHTS. 8. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN HOLDING THAT DEPRECIATION IS AVAILABLE UNDER SECTION 32 ONLY IN RESPECT OF A 'REGISTERED TRADE MARK' OR 'PATENTED KNOW HOW'. 9. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT SUBMITS THAT THE ASSESSIN G OFFICER BE DIRECTED TO ALLOW DEPRECIATION UNDER SECTION 32 AMOUNTING TO RS.1,96,32,793/ - ON THE INTANGIBLE ASSETS REFERRED TO ABOVE. 10. THE LEARNED COMMISSIONER OF LNCOME - TAX (APPEALS) ERRED IN CONFIRMING THE ALLOCATION OF INTEREST TO THE EARNING OF DI VIDEND INCOME UNDER SECTION 14A AMOUNTING TO RS.4,55,229/ - . 11. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN CONFIRMING THE ALLOCATION OF EXPENDITURE TO THE TUNE OF RS.16,57,492/ - TO THE EARNING OF DIVIDEND INCOME UNDER SECTION 14A. 12. HAVI NG REGARD TO THE RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE AND THE PAST RECORD OF THE APPELLANT, IT IS SUBMITTED THAT THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IS GROSSLY EXCESSIVE AND REQUIRES TO BE REDUCED SUBSTANTIALLY. 13. THE LEARNED CO MMISSIONER OF INCOME - TAX (APPEALS) ERRED IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT OF RS.2,12,937/ - IN RESPECT OF CORPORATE GUARANTEE GIVEN BY THE APPELLANT ON BEHALF OF ITS ASSOCIATED ENTERPRISE M/S SAINT - GOBAIN CERAMIC MATERIAL BHUTAN PVT. LTD., BHUT AN. 14. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN HOLDING THAT THE TRANSFER PRICING OFFICER HAS ADOPTED THE COMPARABLE UNCONTROLLABLE PRICE METHOD WHILE COMPUTING THE ARM'S LENGTH PRICE OF THE CORPORATE GUARANTEE GIVEN BY THE ASSESSEE ON BEHALF OF ITS ASSOCIATED ENTERPRISE . 4 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 3. THE APPELLANT BEFORE US IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF COMPANIES ACT, 1956 AND IS, INTER - ALIA , ENGAGED IN THE BUSINESS OF MANUFACTURE OF ABRASIVES AND REFRACTORY PRODUCTS AND ALSO DEALS IN CERAMICS AND PLASTICS. FOR ASSESSMENT YEAR 2009 - 10, IT FILED A RETURN OF INCOME DECLARING AN INCOME OF RS.65,78,76,093/ - , WHICH WAS SUBJECT TO SCRUTINY ASSESSMENT WHEREBY THE TOTAL INCOME HAS BEEN DETERMINED AT RS.68,95,40,030/ - AFTER MAKING CERTAIN ADDIT IONS/DISALLOWANCES. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO HAS SINCE ALLOWED PARTIAL RELIEF. NOT BEING SATISFIED WITH THE ORDER OF CIT(A), ASSESSEE IS IN FURTHER APPEAL BEFORE US ON THE AFORESTATED GROUNDS OF APPEAL. 4. INSOFAR AS THE FIRST ISSUE IS CONCERNED, THE SAME RELATES TO SURPLUS RESULTING TO ASSESSEE AS A CONSEQUENCE OF PRE - PAYING DEFERRED SALES TAX INCENTIVE ON NET PRESENT VALUE (NPV) BASIS IN TERMS OF MAHARASHTRA 1993 PACKAGE SCHEME OF INCENTIVES. SUCH GAIN ON PRE - MAT URE REPAYMENT IN TERMS OF THE SCHEME OF STATE GOVERNMENT OF MAHARASHTRA CAME TO RS.41,52,959/ - WHICH THE ASSESSING OFFICER TREATED AS A REVENUE RECEIPT CHARGEABLE TO TAX U/S 41(1) OF THE ACT. THE SAID ACTION OF ASSESSING OFFICER HAS SINCE BEEN AFFIRMED B Y THE CIT(A) ALSO, AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5. ON THIS ISSUE, IT WAS A COMMON POINT BETWEEN THE PARTIES THAT IN THE PAST YEARS, THE TRIBUNAL HAS ADJUDICATED THE SAID ISSUE IN FAVOUR OF THE ASSESSEE. IT WAS POINTED OUT THAT IN ASSESSMENT YEARS 2005 - 06 AND 2006 - 07, THE ORDERS OF TRIBUNAL HAVE ALSO BEEN AFFIRMED BY THE HON'BLE BOMBAY HIGH COURT. IN THIS CONNECTION, A COPY OF THE ORDER OF TRIBUNAL 5 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 FOR ASSESSMENT YEARS 2007 - 08 AND 2008 - 09 VIDE ITA NOS.528/MUM/2012 AND 5800/MUM/2013 DATED 27.7.2016 HAS BEEN PLACED ON RECORD WHEREIN THE AFORESAID FACT - POSITION HAS BEEN NOTICED. 6. THE AFORESAID FACTUAL MATRIX HAS NOT BEEN CONTROVERTED BY THE LD. DR APPEARING BEFORE US. 7. IN OUR CONSIDERED OPINION, THE CONTROVERSY IN GROUNDS OF APPEAL NO. 1 TO 4 IS LIABLE TO BE DECIDED IN TERMS OF THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF ASSESSEE ITSELF REPORTED IN 369 ITR 717 (BOM) , WHICH HAS BEEN DULY NOTICED BY OUR COORDINATE B ENCH IN ITS ORDER DATED 27.7.2016 (SUPRA) IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEARS 2007 - 08 AND 2008 - 09 IN THE FOLLOWING WORDS : - 4.7 THE PERUSAL OF THE ORDER OF THE HONBLE HIGH COURT REVEALS THAT IN THE EARLIER TWO YEARS I.E. A.YS. 2005 - 06 AND 2 006 - 07, IT HAS BEEN HELD BY THE TRIBUNAL AS AFFIRMED BY THE HONBLE BOMBAY HIGH COURT THAT IMPUGNED AMOUNT WILL NOT BE TAXABLE U/S 41(1). WHILE HOLDING SO, HONBLE BOMBAY HIGH COURT HAS ALSO OBSERVED THAT, IN EFFECT, NO BENEFIT HAD ACCRUED TO THE ASSESSEE, SINCE ULTIMATE EFFECT OF THE TRANSACTION IS THAT THE ASSESSEE PAID PRESENT VALUE OF A FUTURE LIABILITY. IN CASE THE ASSESSEE WOULD NOT HAVE PAID THIS LIABILITY, THE ASSESSEE COULD HAVE UTILIZED THIS AMOUNT DURING THESE YEARS FOR THE PURPOSE OF BUSINESS OR FOR EARNING OF INTEREST INCOME. INSTEAD OF DOING IT LIKE THAT, THE ASSESSEE CHOSE TO PAY IT UPFRONT AT A DISCOUNTED VALUE. UNDER THESE CIRCUMSTANCES, IT WOULD BE VERY DIFFICULT TO SAY IF AT ALL ASSESSEE HAS DERIVED ANY BENEFIT IN FINANCIAL TERMS AND IF YE S, THEN TO WHAT EXTENT. HONBLE HIGH COURT HAS HELD THAT IN FACT NO BENEFIT HAS BEEN DERIVED IN ANY MANNER. IN THE CASE OF SULZER INDIA LTD. V. JCIT (42 SOT 457) (SB), HONBLE SPECIAL BENCH HAD HELD THAT SURPLUS ARISING ON REPAYMENT OF SALES TAX LIABILITY IS ON ACCOUNT OF DIFFERENCE BETWEEN PAYMENT OF NET PRESENT VALUE AGAINST THE FUTURE LIABILITY AND IT CAN 6 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 NEITHER BE TERMED AS REMISSIONS/SESSION OF LIABILITY NOR IT GIVES RISE TO ANY BENEFIT TO THE ASSESSEE. ACCORDING TO HONBLE SPECIAL BENCH, IT IS A SIM PLE CASE OF COLLECTING AMOUNT AT NET PRESENT VALUE OF FUTURE LIABILITY, WHICH CANNOT BE REGARDED AS GIVING RISE TO ANY KIND OF BENEFIT TO THE ASSESSEE. THE HONBLE SPECIAL BENCH HAS DISCUSSED LAW ON THIS ISSUE IN DETAIL AND THIS DECISION WAS SUBSEQUENTLY A FFIRMED BY HONBLE HIGH COURT BY PASSING DETAILED ORDER WHICH HAS BEEN BRIEFLY DISCUSSED IN OUR ORDER ABOVE. IT IS FURTHER NOTED BY US THAT HONBLE HIGH COURT HAS ALSO RELIED UPON AND DISCUSSED ITS EARLIER ORDER IN THE CASE OF MAHINDRA AND MAHINDRA LIMITED 261 ITR 501, WHEREIN IT WAS HELD THAT WAIVER OF THE PRINCIPAL AMOUNT OF LOAN DID NOT GIVE RISE TO BENEFIT AS ENVISAGED U/S 28(IV) AND THEREFORE IT WAS NOT TAXABLE U/S 28(IV). IT IS FURTHER BROUGHT TO OUR NOTICE BY LD. COUNSEL OF THE ASSESSEE THAT THE B ENEFIT AS ENVISAGED U/S 28(IV) IS SOMETHING WHICH ACTUALLY FLOWS TO THE ASSESSEE IN MONETARY TERMS. IN SUPPORT OF HIS VIEW, HE RELIED UPON CIRCULAR OF THE BOARD NO. 20D, DATED 07.07.1964, RELEVANT PART OF THE CIRCULAR IS REPRODUCED HEREUNDER FOR THE SAKE OF READY REFERENCE: ASSESSMENT OF THE VALUE OF ANY BENEFIT OR PERQUISITE ARISING FROM BUSINESS OR EXERCISE OF A PROFESSION, AS INCOME FROM BUSINESS OR PROFESSION. A NEW CLAUSE (IV) HAS BEEN INSERTED IN SECTION 28, WITH EFFECT FROM 1 - 4 - 1964, BY SECTION 7 OF THE FINANCE ACT, 1964, UNDER WHICH THE VALUE OF ANY BENEFIT OR PERQUISITE (WHETHER CONVERTIBLE IN MONEY OR NOT) ARISING FROM BUSINESS OR THE EXERCISE OF A PROFESSION WILL BE CHARGEABLE TO TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION '. A CORRESPONDING AMENDMENT HAS BEEN MADE TO SECTION 2(24), INCLUDING THE VALUE OF SUCH BENEFIT OR PERQUISITE IN THE DEFINITION OF THE TERM 'INCOME' VIDE NEW SUB - CLAUSE (VA) INSERTED IN SECTION 2(24) BY SECTION 4(C)(I) OF THE FINANCE ACT, 1964. THE EFFECT OF THE ABOVE - MENTIONED AMENDMENT IS THAT IN RESPECT OF AN ASSESSMENT FOR THE ASSESSMENT YEAR 1964 - 65 AND SUBSEQUENT YEARS, THE VALUE OF ANY BENEFIT OR AMENITY, IN CASH OR KIND, ARISING TO AN ASSESSEE FROM HIS BUSINESS OR THE EXERCISE OF HIS PROFESSION, E. G., THE VALUE 7 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 OF RENT - FREE RESIDENTIAL ACCOMMODATION SECURED BY AN ASSESSEE FROM A COMPANY IN CONSIDERATION OF THE PROFESSIONAL SERVICES AS A LAWYER RENDERED BY HIM TO THAT COMPANY, WILL BE ASSESSABLE IN THE HANDS OF THE ASSESSEE AS HIS INCOME UNDER THE HE AD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. 4.8 WE HAVE DISCUSSED IN EARLIER PART OF OUR ORDER ALSO THAT BY MAKING PAYMENT OF NET PRESENT VALUE OF A FUTURE LIABILITY IT CANNOT BE SAID IF ANY FINANCIAL BENEFIT, IN REAL TERMS, HAS ACCRUED TO THE ASSE SSEE. IT IS NOTED THAT NONE OF THE AUTHORITIES HAD GONE INTO THIS ASPECT AND DID NOT QUANTIFY, IN FINANCIAL OR MONETARY TERMS, IF ANY AMOUNT COULD BE WORKED OUT WHICH COULD BE SAID TO BE A BENEFIT THAT HAD ACCRUED TO THE ASSESSEE. UNDER THESE CIRCUMSTANC ES, WE ARE OF THIS CONSIDERED OPINION THAT THE IMPUGNED AMOUNT CANNOT BE BROUGHT INTO TAX EITHER U/S 41(1) OR U/S 28(IV). HONBLE HIGH COURT WHILE GIVING ITS DECISION HAD ANALYSED ALL THE ASPECT OF THIS ISSUE AND THEREFORE, THIS ISSUE IS NOT OPEN FOR RECON SIDERATION BEFORE US. THUS, RESPECTFULLY FOLLOWING THE ORDER OF HONBLE HIGH COURT, WE FIND THAT NO DIFFERENT DECISION CAN BE TAKEN; THEREFORE, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. THUS, GROUND NOS. 1 TO 4 ARE ALLOWED. 8. FOLLOWING THE AFORES AID PRECEDENT, WHICH HAS BEEN RENDERED IN ASSESSEES OWN CASE UNDER IDENTICAL CIRCUMSTANCES, WE ALLOW THE PLEA OF ASSESSEE AND ACCORDINGLY, GROUNDS OF APPEAL NO. 1 TO 4 ARE ALLOWED. 9. INSOFAR AS GROUNDS OF APPEAL NO. 5 TO 9 ARE CONCERNED, THEY RELATE TO A SINGULAR ISSUE RELATING TO ALLOWANCE OF DEPRECIATION ON THE INTANGIBLE ASSETS, NAMELY TRADEMARK RS.2,00,00,000/ - , TECHNICAL KNOW - HOW 3,50,00,000/ - , MARKETING NETWORK RS.3,75,00,000/ - AND NON - COMPETE FEES RS.4,02,50,000/ - TOTALLING TO RS.13,27,50, 000/ - . 8 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 10. ON THIS ASPECT, IT WAS A COMMON POINT BETWEEN THE PARTIES THAT THE SAID CONTROVERSY HAS BEEN DEALT WITH BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2007 - 08 AND 2008 - 09 VIDE ORDER DATED 27.7.2016 (SUPRA) . IN THIS CONTEXT, THE RELEVANT DISCUSSION IN THE ORDER OF TRIBUNAL READS AS UNDER : - 5.7. WE HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES AND JUDGMENTS RELIED UPON BEFORE US. THE SOLITARY ISSUE INVOLVED HERE IS ABOUT THE ALLOWABILITY OF THE DEPRECIATION ON THE AMOUNT OF INTANGIBLE ASSETS ACQUIRED BY THE ASSESSEE AS PART OF DEAL OF ACQUISITION OF GRINDING WHEEL BUSINESS OF OAL IN TERMS OF THE BUSINESS TRANSFER AGREEMENT DATED 18.04.2006 ENTERED BY THE ASSESSEE WITH THE SAID COMPANY. IT IS NOTED BY US THAT FROM THE PERU SAL OF THE BUSINESS AGREEMENT ENCLOSED AT PAPER BOOK NO. 27 TO 87 THAT ASSESSEE ACQUIRED GRINDING WHEEL BUSINESS OF OAL ALONG WITH ITS TANGIBLE AND INTANGIBLE ASSETS INCLUDING GOODWILL, INTELLECTUAL PROPERTY RIGHTS E.G. PATENTS, COPYRIGHTS, PAST AND PRESEN T R & D WORKS, BRANDS, TRADEMARK, SERVICE MARKS, REGISTERED DESIGN ETC. AND ALL OTHER RIGHTS AVAILABLE TO PREVENT THE MISUSE OR DISCLOSURE OF TRADE SECRETS. THE ASSESSEE ALSO SUBMITTED VALUATION REPORT FROM M/S. ANMOL SEKHRI AND ASSOCIATES, THE REGISTERED VALUERS (ENCLOSED AT PAGE NO. 10 TO 192 OF THE PAPER BOOK) FOR ASCERTAINING VALUATION OF THE BUSINESS GIVING VALUES OF EACH AND EVERY FIXED ASSETS AND OTHER INTANGIBLE ASSETS ACQUIRED BY THE ASSESSEE UNDER THE AFORESAID DEAL. IT IS NOTED BY US THAT THE LOW ER AUTHORITIES HAVE GRANTED THE BENEFIT OF DEPRECIATION ON THE AMOUNT OF FIXED ASSETS ACQUIRED I.E. PLANT AND MACHINERY ETC. THUS, GENUINENESS OF TRANSACTION HAS NOT BEEN DOUBTED, BUT WHAT HAS BEEN DOUBTED MERELY IS THE VALUATION OF INTANGIBLE ASSETS ACQ UIRED UNDER THE DEAL. IT IS TO BE NOTED HERE THAT FACTUM OF ACQUISITION OF INTANGIBLE ASSETS HAS ALSO NOT BEEN DISPUTED. THUS, UNDER THESE CIRCUMSTANCES, CASE MADE OUT BY THE LOWER AUTHORITIES IS THAT THE AMOUNT PAID BY THE ASSESSEE FOR ITS BUSINESS IS MOR E THAN THE APPROPRIATE VALUE OF ITS INTANGIBLE ASSETS. THE ASSESSEE HAS ALSO ADMITTED THIS POSITION THAT THE ASSESSEE HAS PAID AN AMOUNT WHICH IS MORE THAN THE AMOUNT OF ITS TANGIBLE ASSETS BECAUSE OF NUMEROUS 9 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 INTANGIBLE ASSETS ACQUIRED BY THE ASSESSEE WHI CH WERE QUITE VALUABLE IN THE OPINION OF THE ASSESSEE. UNDER THESE CIRCUMSTANCES, WE CAN SAY THAT SINCE THE ASSESSEE HAD PURCHASED THE GRINDING WHEEL BUSINESS FROM OAL AS A GOING CONCERN, THEREFORE, AMOUNT OF CONSIDERATION PAID IN EXCESS OF VALUE OF TANGIB LE ASSETS WOULD BE ACCOUNTED FOR IN ITS BOOKS OF ACCOUNTS AS GOODWILL. UNDER THESE CIRCUMSTANCES, NO FURTHER EXERCISE WOULD BE REQUIRED TO MAKE PRECISE VALUATION OF THE AMOUNT OF GOODWILL. THERE ARE NO DOUBTS ABOUT THE LEGAL POSITION THAT AS PER LAW, T HE ASSESSEE IS ELIGIBLE TO CLAIM DEPRECIATION ON THE AMOUNT OF GOODWILL. IT IS WORTH NOTING THAT THIS LEGAL POSITION HAS BEEN ACCEPTED BY LD. CIT(A) IN THE SUBSEQUENT YEAR I.E. A.Y. 2008 - 09 WHEREIN CLAIM OF DEPRECIATION ON GOODWILL WAS ACCEPTED AND ORDER O F CIT(A) HAS BEEN ACCEPTED BY THE REVENUE ALSO AS NO APPEAL HAS BEEN FILED AGAINST THE SAID DECISION. OUR VIEW FINDS SUPPORT FROM THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF TRIUNE ENERGY SERVICES PRIVATE LIMITED V. DCIT 65 TAXMANN.COM 288(DELH I) WHEREIN IDENTICAL ISSUE WAS INVOLVED, IN SIMILAR FACTS AND CIRCUMSTANCES. HONBLE DELHI HIGH COURT RELIED UPON THE JUDGMENT OF APEX COURT IN THE CASE OF CIT VS. SMIFS SECURITIES LTD. (348 ITR 302) AND HELD AS UNDER: GOODWILL IS AN INTANGIBLE ASSET PR OVIDING A COMPETITIVE ADVANTAGE TO AN ENTITY. THIS INCLUDES A STRONG BRAND, REPUTATION, A COHESIVE HUMAN RESOURCE, DEALER NETWORK, CUSTOMER BASE, ETC. THE EXPRESSION 'GOODWILL' SUBSUMES WITHIN IT A VARIETY OF INTANGIBLE BENEFITS THAT ARE ACQUIRED WHEN A PE RSON ACQUIRES A BUSINESS OF ANOTHER AS A GOING CONCERN. FROM AN ACCOUNTING PERSPECTIVE, IT IS WELL ESTABLISHED THAT 'GOODWILL' IS AN INTANGIBLE ASSET, WHICH IS REQUIRED TO BE ACCOUNTED FOR WHEN A PURCHASER ACQUIRES A BUSINESS AS A GOING CONCERN BY PAYING M ORE THAN THE FAIR MARKET VALUE OF THE NET TANGIBLE ASSET, THAT IS, ASSETS LESS LIABILITIES. THE DIFFERENCE IN THE PURCHASE CONSIDERATION AND THE NET VALUE OF ASSETS AND LIABILITIES IS ATTRIBUTABLE TO THE COMMERCIAL BENEFIT THAT IS ACQUIRED BY THE PURCHASER . SUCH GOODWILL IS ALSO COMMONLY UNDERSTOOD AS THE VALUE OF THE WHOLE UNDERTAKING LESS THE SUM TOTAL OF ITS PARTS. THE 'FINANCIAL REPORTING STANDARD 10' ISSUED BY ACCOUNTING STANDARD BOARD 10 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 WHICH IS APPLICABLE IN UNITED KINGDOM AND BY THE INSTITUTE OF CHART ERED ACCOUNTANTS OF IRELAND IN RESPECT OF ITS APPLICATION IN THE REPUBLIC OF IRELAND, EXPLAINS THAT THE ACCOUNTING REQUIREMENTS FOR GOODWILL REFLECT THE VIEW THAT GOODWILL ARISING ON AN ACQUISITION IS NEITHER AN ASSET LIKE OTHER ASSETS NOR AN IMMEDIATE LOS S IN VALUE. RATHER, IT FORMS THE BRIDGE BETWEEN THE COST OF AN INVESTMENT SHOWN AS AN ASSET IN THE ACQUIRER'S OWN FINANCIAL STATEMENTS AND THE VALUES ATTRIBUTED TO THE ACQUIRED ASSETS AND LIABILITIES IN THE CONSOLIDATED FINANCIAL STATEMENTS. IN VIEW OF A CCOUNTING STANDARD 10 AS ISSUED BY THE [CAI THE ASSESSEE'S CONTENTION WAS RIGHT THAT THE CONSIDERATION PAID BY THE ASSESSEE IN EXCESS OF VALUE OF TANGIBLE ASSETS WAS RIGHTLY CLASSIFIED AS GOODWILL. IN THE FACTS OF THE PRESENT CASE, THE TRIBUNAL HAS REJEC TED THE VIEW THAT THE SLUMP SALE AGREEMENT WAS A COLOURABLE DEVICE. ONCE HAVING HELD SO, THE AGREEMENT BETWEEN THE PARTIES MUST BE ACCEPTED IN ITS TOTALITY. THE AGREEMENT ITSELF DOES NOT PROVIDE FOR SPLITTING UP OF THE INTANGIBLES INTO SEPARATE COMPONENTS. INDISPUTABLY, THE TRANSACTION IN QUESTION IS A SLUMP SALE WHICH DOES NOT CONTEMPLATE SEPARATE VALUES TO BE ASCRIBED TO VARIOUS ASSETS (TANGIBLE AND INTANGIBLE) THAT CONSTITUTE THE BUSINESS UNDERTAKING, WHICH IS SOLD AND PURCHASED. THE AGREEMENT ITSELF IN DICATES THAT SLUMP SALE INCLUDED SALE OF GOODWILL AND THE BALANCE SHEET SPECIFICALLY RECORDED GOODWILL AT RS. 40.58 CRORE. GOODWILL INCLUDES A HOST OF INTANGIBLE ASSETS, WHICH A PERSON ACQUIRES, ON ACQUIRING A BUSINESS AS A GOING CONCERN AND VALUING THE SA ME AT THE EXCESS CONSIDERATION PAID OVER AND ABOVE THE VALUE OF NET TANGIBLE ASSETS IS AN ACCEPTABLE ACCOUNTINPRACTICE. THUS, A FURTHER EXERCISE TO VALUE THE GOODWILL IS NOT WARRANTED. 5.8. IN THE CASE BEFORE US ALSO THE FACTS ARE IDENTICAL. THE GRINDING WHEEL BUSINESS HAS BEEN ACQUIRED UNDER A SLUMP SALE, UNDER A BUSINESS TRANSFER AGREEMENT WITH OAL. THE SAID AGREEMENT HAS NOT BEEN HELD TO BE BOGUS OR SHAM. IT CAN NEITHER BE REWRITTEN OR NOR HAS BEEN WRITTEN BY THE LOWER AUTHORITIES. THE AO HAD MADE DIRE CT 11 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 INQUIRIES WITH OAL WHEREIN IT WAS CONFIRMED THAT THE ASSESSEE HAD PAID SALES CONSIDERATION AS PER THE TERMS OF THE AGREEMENT AND THE TANGIBLE ASSETS WERE ACQUIRED AS STATED IN THE SAID AGREEMENT AND ACCEPTED BY THE AO AND DEPRECIATION WAS ALLOWED ON THE SAME AS PER FACTS BROUGHT BEFORE US. UNDER THESE CIRCUMSTANCES, ANY AMOUNT OF CONSIDERATION PAID OVER AND ABOVE THE VALUE OF TANGIBLE ASSETS WOULD BE CLASSIFIED AS AMOUNT OF GOODWILL ON WHICH THE ASSESSEE WOULD BE ENTITLED FOR DEPRECIATION IN VIEW OF JUDG MENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS SMIFS SECURITIES LTD,(SUPRA).SIMILAR VIEW HAS BEEN TAKEN BY HONBLE PUNE BENCH IN THE CASE OF COSMOS CO - OP BANK LTD. V. DCIT (64 SOT 90) AND COORDINATE BENCH OF MUMBAI IN THE CASE OF DCIT VS. WORLDWIDE ME DIA PVT LTD 153 ITD 162. IT IS FURTHER NOTED BY US THAT DELHI BENCH OF ITAT IN THE CASE OF THYSSENKRUP ELEVATOR (INDIA) PVT. LTD. V. ACIT 167 TTJ 131 ALSO HELD THAT WHERE THE ASSESSEE HAD ACQUIRED BUSINESS OF ANOTHER COMPANY ON SLUMP SALE BASIS, EXCESS CON SIDERATION PAID BY IT OVER AND ABOVE THE VALUE OF NET ASSET ACQUIRED, WAS TO BE CONSIDERED AS GOODWILL U/S 32(1)(II) WHICH WAS ELIGIBLE FOR DEPRECIATION. 5.9. IN ADDITION TO THE ABOVE, ON FACTS ALSO, IT IS NOTED BY US THAT THE ASSESSEE BROUGHT ON RECORD AMPLE EVIDENCES IN SUPPORT OF ITS CLAIM TO JUSTIFY THE ACQUISITION OF VARIOUS OTHER INTANGIBLE ASSETS AND THE JUSTIFICATION OF THEIR VALUATION AS WELL AS ADMISSIBILITY OF DEPRECIATION ON THESE ASSETS. IT IS NOTED THAT THE BUSINESS TRANSFER AGREEMENT WAS QU ITE EXHAUSTIVE HAVING ELABORATE SCHEDULES AND ANNEXURES CONTAINING ITEM WISE DESCRIPTION OF EACH AND EVERY TANGIBLE AND INTANGIBLE ASSETS ACQUIRED BY THE ASSESSEE. THE ASSESSEE ACQUIRED ENTIRE PLANT AND MACHINERY, VARIOUS TRADEMARKS, COMMERCIAL LIST OF CUS TOMERS AND DEALERS, ENTIRE DATA AND INFORMATION IN RELATION TO SALES AND DISTRIBUTION NETWORK, OF TECHNICAL KNOW - HOW, GOODWILL OF GRINDING WHEEL BUSINESS, RIGHTS OF NON - COMPETITION ETC WERE DESCRIBED IN THE SAID AGREEMENT. IT IS FURTHER NOTED THAT PROPER B REAK - UP AND JUSTIFICATION FOR THE CONSIDERATION HAS BEEN NARRATED IN THE SAID AGREEMENT. THE SAID AGREEMENT ALSO CONTAINS LISTS OF EMPLOYEES OF OAL TO BE TAKEN - OVER BY THE ASSESSEE COMPANY. IT ALSO CONTAINING THE LIST OF TRADEMARKS, PARTICULARS OF GOODWILL OF BUSINESS OF THE OAL IN THE FORM OF BUSINESS DATA, CUSTOMER DETAILS, SPECIFICATIONS AND 12 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 QUALITY REQUIREMENT FOR THE PRODUCTS, TRADE SECRETS AND OTHER CONFIDENTIAL INFORMATION, SOFTWARE PROCESS AND SIMILAR OTHER INTANGIBLE ASSETS. THERE WAS A PROPER VALU ATION REPORT SPECIFYING SEPARATE VALUE OF EACH AND EVERY ASSET OF TANGIBLE OR INTANGIBLE NATURE. IT IS ALSO NOTED THAT THE AO MADE DIRECT INQUIRIES WITH OAL IN RESPONSE TO WHICH PROPER REPLY WAS GIVEN BY THE OAL CONFIRMING THE TRANSACTIONS. THE OAL SUBMITT ED LETTER DATED 21.02.2009 TO THE AO WHEREIN IT WAS INTER ALIA CONFIRMED THAT THE SAID COMPANY TRANSFERRED ITS ABRASIVE DIVISION SITUATED AT BHIWADI (RAJASTHAN) TO THE ASSESSEE COMPANY FOR A TOTAL CONSIDERATION OF RS.26.17 CRORES. IT IS ALSO BROUGHT TO OUR NOTICE THAT SUBSEQUENT TO THE TAKE - OVER, THE ASSESSEE COMPANY FILED PETITIONS WITH THE CONCERNED DEPARTMENTS FOR REGISTRATION OF TRADEMARKS IN THE NAME OF ASSESSEE COMPANY. IT IS FURTHER NOTED BY US FROM THE PERUSAL OF THE ORDER OF LD. CIT(A) WHEREIN IT H AS BEEN ACCEPTED THAT THE ASSESSEE HAD PRODUCED BEFORE HIM (I.E. CIT(A)) MORE THAN 26 FILES CONTAINING EVIDENCES WITH REGARD TO ACQUISITION OF TECHNICAL KNOW - HOW. UNDER THESE CIRCUMSTANCES, WE FIND THAT THERE WAS NO BASIS WITH THE LOWER AUTHORITIES TO HOLD THAT NO INTANGIBLE ASSETS WERE ACQUIRED BY THE ASSESSEE. THUS, VIEWED FROM ANY ANGLE, THE ASSESSEE IS ELIGIBLE FOR THE CLAIM OF DEPRECIATION U/S 32(1)(II) ON THE AMOUNT OF INTANGIBLE ASSETS ACQUIRED BY IT AS PER BUSINESS TRANSFER AGREEMENT, AND THUS ACTIO N OF LOWER AUTHORITIES WAS NOT FACTUALLY OR LEGALLY JUSTIFIED WHILE MAKING DISALLOWANCE OF THE DEPRECIATION ON THE INTANGIBLE ASSETS. THE AO IS DIRECTED TO GRANT THE BENEFIT OF DEPRECIATION IN TERMS OF SECTION 32(1)(II) UPON THE INTANGIBLE ASSETS ACQUIRED BY THE ASSESSEE. THUS, THESE GROUNDS ARE ALL OWED IN FAVOUR OF THE ASSESSEE. 11. FOLLOWING THE AFORESAID PRECEDENT, WHICH HAS BEEN RENDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE ON A SIMILAR ISSUE, WE ALLOW THE PLEA OF ASSESSEE AND DIRECT THE ASSESSING O FFICER TO ALLOW DEPRECIATION ON THE AFORESTATED INTANGIBLE ASSETS, AS PER LAW. THUS, ON THIS ASPECT ALSO, ASSESSEE SUCCEEDS. 13 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 12. BY WAY OF GROUND OF APPEAL NO. 10 ASSESSEE IS CHALLENGING DISALLOWANCE MADE U/S 14A OF THE ACT IN RESPECT OF INTEREST EXPENDI TURE OF RS.4,55,229/ - . 13. IN THIS CONTEXT, THE RELEVANT FACTS ARE THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE EARNED DIVIDEND INCOME OF RS.2,30,40,005/ - , WHICH WAS CLAIMED AS EXEMPT. IN THE RETURN OF INCOME ASSESSEE MADE A SUO MOTU DISALLOWANCE OF RS.16,57,492/ - U/S 14A OF THE ACT. THE ASSESSING OFFICER, HOWEVER, COMPUTED THE TOTAL DISALLOWANCE AT RS. 21,12,722/ - AND ACCORDINGLY MADE AN ADDITIONAL DISALLOWANCE OF RS.4,55,230/ - , WHICH IS THE SUBJECT MATTER OF APPEAL BEFORE US. IT HAS BEEN EXPLAINED THAT THE DISALLOWANCE OF RS.4,55,230/ - IN APPEAL IS OUT OF INTEREST EXPENDITURE AND HAS BEEN COMPUTED BY APPLYING RULE 8D(2)(II) OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES) . IN THIS CONTEXT, THE LIMITED PL EA OF THE ASSESSEE IS THAT THE S HARE CAP ITAL PLUS R ESERVES & S URPLUS AVAILABLE WITH THE ASSESSEE IS MORE THAN ENOUGH TO COVER THE INVESTMENTS WHICH HAVE YIELDED EXEMPT INCOME AND, THEREFORE, IN TERMS OF THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIE S AND POWER LTD. , 313 ITR 340 (BOM) A PRESUMPTION ARISES THAT THE INVESTMENTS HAVE BEEN MADE OUT OF SUCH INTEREST - FREE FUNDS. IT IS POINTED OUT THAT THE PROPOSITION LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITY (SUPRA) HAS BEE N ALSO APPLIED IN THE CONTEXT OF SEC. 14A OF THE ACT BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LIMITED V. DCIT , 383 ITR 529 (BOM). ON THIS BASIS, IT IS CONTENDED THAT THE DISALLOWANCE OF INTEREST FOR THE PURPOSE OF SEC. 14A OF THE ACT IS NOT JUSTIFIED IN THE INSTANT CASE . 14 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 14. ON THE OTHER HAND, THE LD. DR REITERATED THE STAND OF REVENUE THAT THE APPLICABILITY OF RULE 8D OF THE RULE S IN ORDER TO COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT IS MANDATORY. 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. SEC. 14A OF THE ACT PRESCRIBES THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF AN EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE INSTANT CASE, THE ASSESSEE HAS EARNED AN EXEMPT DIVIDEND INCOME OF RS. 2,30,40,005/ - AND THE ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF SEC. 14A OF THE ACT TO DISALLOW THE EXPENDITURE RELATABLE TO SUCH EXEMPT INCOME , COMPUTED BY APPLYING R ULE 8D OF THE RULES . SUB - SECTION (2) TO SEC. 14A OF THE ACT DOES PRESCRIBE A METHOD TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME , WHICH IMPLIES A REFERENCE TO R ULE 8D OF THE RULES. SO HOWEVER, SUB - SECTION (2) TO SEC. 14A OF THE ACT ITSELF PROVIDES A CAVEAT THAT RECOURSE TO R ULE 8D OF THE RULES IS NOT AUTOMATIC, BUT IT IS BASED ON THE SATISFACTION OF ASSESSING OFFICER REGARDING THE CORRECTNESS OF THE CLAIM MADE BY ASSESSEE , HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE DISPU TE BEFORE US PERTAINS TO THE ACTION OF ASSESSING OFFICER IN RESORTING TO SUB - CLAUSE (II) OF CLAUSE (2) OF R ULE 8D OF THE RULES TO DISALLOW A PART OF INTEREST EXPENDITURE. NOTABLY, THE DISALLOWANCE COMPUTED OUT OF EXPENSES BASED ON R ULE 8D(2)(III) OF THE R ULES IS NOT IN DISPUTE. REGARDING THE INTEREST EXPENDITURE, THE CLAIM MADE BY ASSESSEE WA S THAT NO EXPENDITURE CAN BE SAID TO HAVE BEEN INCURRED IN RELATION TO THE EXEMPT INCOME BECAUSE IT HAS SUFFICIENT OWN NON - INTEREST BEARING FUNDS FOR THE PURPOSE OF 15 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 I NVESTMENTS WHICH HAVE YIELDED SUCH EXEMPT INCOME. THE SAID CLAIM OF ASSESSEE IS BASED ON THE PROPOSITION LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA). AS PER THE HON'BLE BOMBAY HIGH COURT, IN A CASE WHERE ASSESSEE HAS BOTH INTEREST - FREE AND INTEREST BEARING FUNDS, AND IF THE S HARE CAPITAL PLUS R ESERVES & S URPLUS (WHICH ARE NON - INTEREST BEARING FUNDS) ARE SUFFICIENT TO COVER THE INVESTMENTS, THEN A PRESUMPTION WOULD ARISE THAT SUCH INVESTMENTS HAVE BEE N MADE OUT OF NON - INTEREST BEARING FUNDS. OF COURSE, THE DECISION OF THE HON'BLE HIGH COURT HAS BEEN RENDERED IN THE CONTEXT OF SEC. 36(1)( III ) OF THE ACT, AS CONTENDED BY THE REVENUE BEFORE US. SO HOWEVER, THAT IS NOT A GROUND TO DEFEAT ITS APPLICABILIT Y IN THE CONTEXT OF DISALLOWANCE U/S 14A OF THE ACT BECAUSE THE PROPOSITION APPROVED IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) HAS BEEN APPLIED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LIMITED (SUPRA) WHILE DEALING WITH THE PROVISIONS OF SEC. 14A OF THE ACT. THEREFORE, IN OUR VIEW, THE PLEA OF REVENUE THAT THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA) CANNOT BE APPLIED IN THE CONTEXT OF SEC. 14A OF THE AC T IS NOT MERITED. FACTUALLY SPEAKING, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE HAD REFERRED TO THE BALANCE - SHEET TO POINT OUT THAT THE S HARE CAPITAL PLUS R ESERVES AND S URPLUS AMOUNTS TO RS. 318.21 CRORES AS AGAINST INVESTMENT OF RS.41.65 CRORES, TO POI NT OUT THAT SUFFICIENT INTEREST - FREE FUNDS ARE AVAILABLE TO COVER THE LEVEL OF INVESTMENTS IN QUESTION. UNDER THESE CIRCUMSTANCES, IN OUR VIEW, THE DISALLOWANCE OF RS. 4,55,230/ - OUT OF INTEREST EXPENSES BY APPLYING THE PROVISIONS OF RULE 8D(2)(II) OF THE RULES IS UNJUSTIFIED AND IS HEREBY SET - ASIDE. THUS, ON THIS ASPECT, ORDER OF THE CIT(A) IS SET - ASIDE AND ASSESSING OFFICER IS 16 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 DIRECTED TO DELETE THE ADDITION OF RS. 4,55,230/ - MADE U/S 14A OF THE ACT. ACCORDINGLY, ASSESSEE SUCCEEDS IN GROUND OF APPEAL NO . 10. 16. GROUNDS OF APPEAL NO. 11 & 12 RELATING TO DISALLOWANCE OF RS.16,57,492/ - ON ACCOUNT OF EXPENDITURE U/S 14A OF THE ACT IS NOT PRESSED AND IS ACCORDINGLY DISMISSED. 17. THE REMAINING GROUNDS OF APPEAL NO. 13 & 14 RELATE TO A SINGULAR ISSUE OF RS. 2,12,937/ - REPRESENTING ADDITION MADE BY ASSESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF CORPORATE GUARANTEE GIVEN BY ASSESSEE ON BEHALF OF ITS ASSOCIATED ENTERPRISE (AE) TO THE BANK OF BHUTAN. 18. IN THIS REGARD, THE BRIEF FACTS ARE THAT ASSESSEE HAD DECLARED INCOME BY WAY OF CORPORATE GUARANTEE FEE OF RS.1,57,331/ - RECEIVED FROM ITS AE, M/S. SAINT - GOBAIN CERAMIC MATERIALS BHUTAN PVT. LTD. THE SAID AE HAD AVAILED OF A LOAN FACILITY FROM BANK OF BHUTAN LTD. AND ASSESSEE HAD PROVI DED THE BANK A CORPORATE GUARANTEE ON BEHALF OF ITS AE. THE ASSESSEE - COMPANY HAD CHARGED CORPORATE GUARANTEE COMMISSION @ 1% FOR THE PERIOD OF THREE MONTHS FROM JANUARY, 2009 TO MARCH, 2009 SINCE THE AE HAD RAISED THE LOAN OF RS.6,29,32,450/ - FROM THE BAN K IN THE MONTH OF JANUARY, 2009. THE TRANSFER PRICING OFFICER (TPO) IN THE ORDER PASSED U/S 92CA(3) OF THE ACT DID NOT CONSIDER THE GUARANTEE FEE CHARGED @ 1% TO BE AT AN ARMS LENGTH RATE. INSTEAD, THE TPO HELD THAT THE ARMS LENGTH RATE ON GUARANTEE COMMISSION WAS TO BE TAKEN AT 3.35% AND ACCORDINGLY THE DIFFERENTIAL @ 2.35%, I.E., A SUM OF RS.1,57,331/ - WAS DETERMINED AS AN ADJUSTMENT REQUIRED TO BE MADE 17 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 IN ORDER TO BRI NG THE GUARANTEE COMMISSION INCOME AT ITS ARMS LENGTH RATE. THE TPO DETERMINED THE ARMS LENGTH RATE OF 3.35% ON THE BASIS OF CREDIT RATING OF THE ASSESSEE AS WELL AS THE AE. THE ASSESSING OFFICER NOTED THAT CREDIT RATING OF THE ASSESSEE WAS AAA WHEREAS THE CREDIT RATING OF AE WAS BBB, WHICH WAS CALCULATED ON THE BASIS OF THE DEBT - EQUITY RATIOS. THE TPO NOTED THAT THE DIFFERENCE IN THE CREDIT RATING LED TO VARYING COST OF INTEREST RATES AT WHICH THE TWO ENTITIES COULD RAISE B ONDS IN THE INDIAN MARKET. IN OTHER WORDS, THE TPO NOTED THE DIFFERENCE BETWEEN THE CREDIT RATING OF ASSESSEE (AND THE CORRESPONDING INTEREST RATE PAYABLE TO RAISE B ONDS IN INDIAN MARKET) AND THE CREDIT RATING OF THE AE (AND THE CORRESPONDING INTEREST RATE PAYABLE FOR RAISING B ONDS IN INDIAN MARKET) AND SUCH DIFFERENCE, ACCORDING TO HIM, REFLECTED THE BENEFIT IN THE FORM OF CORPORATE GUARANTEE GIVEN BY THE ASSESSEE. THE ASSESSING OFFICER ACCORDINGLY ADDED A SUM OF RS.2,12,397/ - TO THE RETURNED INCOME FOR THE PURPOSE OF DETERMINING T HE ARMS LENGTH RATE OF THE INCOME BY WAY OF GUARANTEE COMMISSION. SUCH AN ACTION OF THE ASSESSING OFFICER HAS SINCE BEEN AFFIRMED BY THE CIT(A) ALSO. 19. BEFORE US, THE ONLY POINT OF DISPUTE RELATES TO THE ARMS LENGTH RATE OF 3.35% DETERMINED BY THE INCOME - TAX AUTHORITIES FOR DETERMINING THE TRANSFER PRICING ADJUSTMENT. THE LEARNED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TPO HAS NOT ADOPTED ANY OF THE RECOGNIZED METHODS FOR DETERMINING THE ARMS LENGTH RATE OF THE GUARANTEE COMMISSION AN D THAT EVEN THE DETERMINATION OF THE CREDIT RATING OF THE ASSESSEE - COMPANY AND THAT OF THE AE IS BASED ON CONJECTURES. IT IS ALSO POINTED OUT THAT THE TPO HAS MADE A 18 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 FUNDAMENTAL MISTAKE BY ADOPTING THE BORROWING RATE OF INTEREST IN THE INDIAN/DOMESTIC B ON D S MARKET BECAUSE THE TRANSACTION IN QUESTION RELATED TO CORPORATE GUARANTEE ADVANCED FOR A LOAN RAISED IN A FOREIGN COUNTRY, I.E., BHUTAN. IT WAS ALSO POINTED OUT THAT THE AE HAD ADEQUATE ASSET RATIO TO RAISE THE LOAN FROM THE BANK OF BHUTAN LTD. IN THI S CONNECTION, REFERENCE HAS BEEN MADE TO PAGE 26 OF THE PAPER BOOK WHEREIN IS PLACED COPY OF BALANCE - SHEET OF THE AE. FURTHERMORE, IT IS POINTED OUT THAT IN BHUTAN THE BANK CHARGES UNIFORM RATE OF INTEREST ON THE TERM LOANS ADVANCED AND, THEREFORE, THE RA TE OF INTEREST CHARGED BY THE BANK OF BHUTAN LTD. FROM THE AE AT 12% WAS NOT DEPENDENT ON THE CORPORATE GUARANTEE ADVANCED BY THE ASSESSEE; AND, THAT SUCH PROVISION OF CORPORATE GUARANTEE WAS ONLY A COMFORT PROVIDED TO THE BANK FOR AVAILING OF LOAN FACILIT Y BY THE AE. 20. APART THEREFROM, THE LEARNED REPRESENTATIVE POINTED OUT THAT THE AE WAS ENGAGED IN THE MANUFACTURE OF SILICON CARBIDE CRUDE AND ITS ENTIRE PRODUCTION WAS BEING CONSUMED BY THE ASSESSEE IN INDIA TO MANUFACTURE SILICON CARBIDE GRAINS. IT W AS POINTED OUT THAT SINCE THE COST OF ELECTRICITY IN BHUTAN IS LOW, THERE WAS A BUSINESS RATIONALE IN PROCURING THE RAW MATERIAL MANUFACTURED IN BHUTAN WITH THE OBJECTIVE OF LOWERING THE PRODUCTION COST. CONSIDERING THE ENTIRETY OF CIRCUMSTANCES, 1% CORPO RATE GUARANTEE FEE CHARGED BY THE ASSESSEE WAS QUITE JUSTIFIED. IN THE COURSE OF HEARING, THE LEARNED REPRESENTATIVE HAS RELIED UPON VARIOUS DECISIONS, WHICH ARE AS UNDER : - I) EVEREST KANTO CYLINDER LTD. V ACIT (34 TAXMANN.COM 19) (MUM TRIB) 19 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 II) CIT V E VEREST KANTO CYLINDER LTD. (378 ITR 57) (BOMBAY HC) III) HINDALCO INDUSTRIES LTD. V ACIT (62 TAXMANN.COM 181) (MUM TRIB) IV) THOMAS COOK (INDIA) LTD. V ACIT (69 TAXMANN.COM 443) (MUM TRIB) V) GODREJ CONSUMER PRODUCTS LTD. V ACIT (69 TAXMANN.COM 436) (MU M TRIB) 21. ON THE OTHER HAND, THE LD. DR APPEARING FOR THE REVENUE DEFENDED THAT THE ARMS LENGTH RATE DETERMINED BY THE ASSESSING OFFICER AT 3.35% , AND SUBMITTED THAT IT WAS REASONABLE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. THE LD. DR POINTED OUT THAT PROVISION OF CORPORATE GUARANTEE CONSTITUTED A BUSINESS FACILITY ON THE BASIS OF WHICH THE AE RAISED LOAN FROM THE BANK IN BHUTAN AND, THEREFORE, ASSESSEE - COMPANY W AS TO BE COMPENSATED ADEQUATELY . THE LD. DR ARGUED THAT TPO HAD POINTED OUT THAT THE CREDIT RATING OF AE WAS LOWER THAN THAT OF THE ASSESSEE AND, THEREFORE, THE AE COULD RAISE FUNDS FROM THE MARKET AT HIGHER INTEREST RATES. THE LD. DR DEFENDED THE SELECT ION OF INTEREST RATES PREVAILING IN THE DOMESTIC BOND MARKET BY POINTING OUT THAT SUCH DATA WAS MORE RELIABLE, THOUGH IT RELATED TO THE INDIAN CONTEXT. 22. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN THE PRESENT CASE, AE OF THE ASSESSEE, M/S. SAINT - GOBAIN CERAMIC MATERIALS BHUTAN PVT. LTD., WHICH IS BASED IN BHUTAN , RAISED A TERM LOAN FROM BANK OF BHUTAN LTD., BHUTAN IN THE MONTH OF JANUARY, 2009 AND THE AMOUNT 20 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 OUTSTANDING AS ON 31 ST MARCH WAS RS. 6,29,32,450/ - . THE ASSESSEE - COMPANY PROVIDED C ORPORATE GUARANTEE TO THE BANK OF BHUTAN IN CONNECTION WITH THE SAID BORROWING ON BEHALF OF ITS AE. THE PROVISION OF SUCH CORPORATE GUARANTEE IS QUITE WELL UNDERSTOOD AND IT MEANS THAT IF THE AE WAS TO DEFAULT IN THE REPAYMENT OF LOAN AVAILED FROM THE BAN K, ASSESSEE WOULD STEP IN AND MAKE GOOD THE DUES OWNED TO THE BANK. THE ASSESSEE - COMPANY HAS CHARGED CORPORATE GUARANTEE FEE @ 1% FROM ITS AE AND SUCH TRANSACTION HAS BEEN CONSIDERED AS AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC. 92B OF THE ACT. ACCORDINGLY, THE ARMS LENGTH PRICE OF SUCH TRANSACTION HAS BEEN DETERMINED BY THE TPO AT 3.35%, WHICH HAS RESULTED IN ENHANCEMENT OF ASSESSEES INCOME BY A SUM OF RS. 2,12,937/ - . THE ISSUE BEFORE US IS RESTRICTED TO WHETHER THE ARMS LENGTH RATE OF THE CORPORATE GUARANTEE IS TO BE TAKEN AT 1%, WHICH HAS BEEN CHARGED BY THE ASSESSEE, OR THE RATE OF 3.35% DETERMINED BY THE INCOME - TAX AUTHORITIES. 23. NOTABLY, THE TPO HAS BENCHMARKED THE INSTANT TRANSACTION OF PROVISION OF CORPORATE GUARANTEE ON THE BASIS OF RESPECTIVE ABILIT IES OF THE ASSESSEE AND AE TO RAISE B ONDS IN THE INDIAN DOMESTIC MARKET. THE TPO ASSERTED THAT BASED ON THE DEBT - EQUITY RATIO THE CREDIT RATING O F THE ASSESSEE - COMPANY WAS HIGHER IN COMPARISON TO THAT OF THE AE AND, THEREFORE, THE RATE OF INTEREST PAYABLE BY THE AE TO RAISE B ONDS IN THE INDIAN MARKET WOULD BE HIGHER THAN THE RATE PAYABLE BY THE ASSESSEE - COMPANY . SUCH DIFFERENTIAL HAS BEEN USED TO DETERMINE THE CORPORATE GUARANTEE FEE THAT SHOULD HAVE BEEN CHARGE D BY THE ASSESSEE - COMPANY FROM ITS AE SO AS TO DETERMINE THE ARMS LENGTH PRICE OF THE INSTANT TRANSACTION. IN OUR CONSIDERED OPINION, THE AFORESAID APPROACH OF THE 21 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 TPO IS CLEARLY INCONSIST ENT WITH THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF EVEREST KANTO CYLINDER LTD. (SUPRA). NOTABLY, IN THE CASE OF EVEREST KANTO CYLINDER LTD. (SUPRA), THE DISPUTE WAS RELATING TO THE ADJUSTMENT MADE BY THE TPO IN THE MATTER OF GUAR ANTEE COMMISSION EARNED FOR PROVIDING A CORPORATE GUARANTEE TO THE BANK IN CONNECTION WITH THE BORROWINGS MADE BY THE AE OF THE ASSESSEE THEREIN. THE TPO DETERMINED THE ARMS LENGTH PRICE OF SUCH TRANSACTION BASED ON THE INSTANCE S OF COMMERCIAL BANKS PROV IDING GUARANTEE ON BEHALF OF THEIR CLIENTS. THE HON'BLE HIGH COURT HELD THAT THE CONSIDERATIONS WHICH APPLY FOR ISSUANCE OF CORPORATE GUARANTEE WERE DISTINCT AND SEPARATE FROM THAT OF GUARANTEE PROVIDED BY THE BANKS AND, THEREFORE, THE TWO TRANSACTIONS WE RE INCOMPARABLE. IN OUR CONSIDERED OPINION, SIMILAR PARITY OF REASONING IS APPLICABLE IN THE PRESENT CASE TOO BECAUSE THE CONSIDERATIONS WHICH WEIGH FOR RAISING OF B ONDS, THAT TOO IN INDIAN MARKET, ARE QUITE DISTINCT AND INCOMPARABLE WITH THE INSTANCE OF PROVIDING OF CORPORATE GUARANTEE TO A BANK ABROAD IN CONNECTION WITH RAISING OF LOAN FROM SUCH BANK BY THE AE OF ASSESSEE OUTSIDE INDIA . THEREFORE, IN OUR CONSIDERED OPINION, THE EXERCISE CARRIED OUT BY THE TPO TO ARRIVE AT THE ARMS LENGTH RATE OF 3.35% SUFFERS FROM AN INHERENT MISCONCEPTION AS THE BENCHMARKING HAS BEEN DONE BETWEEN TWO INCOMPARABLE SITUATIONS. THEREFORE, WE ARE UNABLE TO UPHOLD THE SAID STAND OF THE INCOME - TAX AUTHORITIES. 24. INSOFAR AS THE ADEQUACY OF 1% RATE CHARGED BY THE ASSESSEE IS CONCERNED, WE FIND ENOUGH REASONABLENESS IN THE SAME. IN THIS CONTEXT, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO VARIOUS DECISIONS OF THE TRIBUNAL, VIZ., HINDALCO INDUSTRIES LTD. V. ACIT (62 22 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 TAXMANN.COM 181) (MUM TRIB.), THOMAS COOK (INDI A) LTD. V. ACIT (69 TAXMANN.COM 443) (MUM TRIB.) AND GODREJ CONSUMER PRODUCTS LTD. V ACIT (69 TAXMANN.COM 436) (MUM TRIB.) , WHEREIN THE ARMS LENGTH RATE OF 0.5% HAS BEEN APPROVED IN THE MATTER OF BENCHMARKING GUARANTEE COMMISSION FEE CHARGEABLE FROM A SSOC IATED E NTERPRISES . ON THIS ASPECT, WE MAY OBSERVE THAT EACH CASE WOULD HAVE TO BE DECIDED IN THE LIGHT OF THE PREVAILING FACTS AND CIRCUMSTANCES. IN THE PRESENT CASE, A POINT WHICH HAS BEEN CONSISTENTLY MADE BY ASSESSEE IS TO THE EFFECT THAT THERE IS NO CONCEPT OF CREDIT RATING IN BHUTAN AND THAT THE BANKS CHARGE A UNIFORM RATE OF INTEREST ON THE TERM LOANS, WHICH IS 12%. SECONDLY, IT IS POINTED OUT WITH REFERENCE TO THE BALANCE - SHEET OF AE THAT IT HAS ADEQUATE DEBT - EQUITY RATIO TO RAISE SUCH LOAN FROM T HE BANK OF BHUTAN. IN FACT, IT HAS ALSO BEEN POINTED OUT , AND WHICH IS REFLECTED FROM THE N OTES IN THE BALANCE - SHEET OF AE , THAT THE CORPORATE GUARANTEE HAS BEEN ADVANCED BY THE ASSESSEE - COMPANY ONLY FOR 35% OF THE SANCTIONED LOAN. UNDER THESE CIRCUMSTAN CES, IT CAN BE SAFELY INFERRED THAT PROVIDING OF CORPORATE GUARANTEE WA S NOT A CRITICAL MASS , WHICH ENABLED THE AE TO RAISE TERM LOAN FROM BANK OF BHUTAN LTD. MOREOVER, THE SAVINGS TO THE ASSESSEE - COMPANY IN THE SHAPE OF LOWER PRODUCTION COSTS ON PROCUR EMENT OF MATERIAL FROM THE AE IS ALSO A RELEVANT FACTOR. THUS, CONSIDERING THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, IN OUR VIEW, CORPORATE GUARANTEE FEE CHARGED BY THE ASSESSEE @ 1% IS WELL - FOUNDED AND DOES NOT REQUIRE ANY TRANSFER PRICING ADJUSTMENT. THUS, WE SET - ASIDE THE ORDER OF CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.2,12,937/ - . THUS, GROUNDS OF APPEAL NO. 13 & 14 ARE ALLOWED. 23 M/S. GRINDWELL NORTON LTD. ITA NO. 523/MUM/2014 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 0 T H SEPTEMBER, 2016. SD/ - SD/ - ( RAVISH SOOD ) JUDICIAL MEMBER ( G.S. PANNU ) ACCOUNTANT MEMBER MUMBAI, DATE : 3 0 T H SEPTEMBER , 2016 * SSL * COPY TO : 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT(A) CONCERNED 4) THE CIT CONCERNED 5) THE D.R, K BENCH, MUMBAI 6) GUARD FILE BY ORDER DY./ASSTT. REGISTRAR I.T.A.T, MUMBAI