DCIT RG 8(3), MUMBAI V. TECHNOCRAFT INDUSTRIES (I) LTD, MUMBAI

ITA 7990/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75251 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 08-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 28-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 14A; 10B; 10

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI BEFORE SHRI I.P.BANSAL , JM & SHRI N.K.BILLAIYA , AM ITA N O. 7 519 / MUM/20 1 1 ( ASSESSMENT YEAR : 200 7 - 0 8 ) TECHNOCRAFT INDUSTRIES (INDIA) LTD, A - 25, MIDC, MAROL INDUSTRIAL AREA, ROAD NO.3, OPP. ESIS HOSPITAL, ANDHERI (E), MUMBAI - 400 093 VS. A D. CIT - 8(3), MUMBAI PAN/GIR NO. : A AA C T 2724 P ( APPELLANT ) .. ( RESPONDENT ) AND ITA NO. 7990 / MUM/20 11 ( ASSESSMENT YEAR :2007 - 0 8 ) A CIT - 8(3), MUMBAI VS. TECHNOCRAFT INDUSTRIES (INDIA) LTD, A - 25, MIDC, MAROL INDUSTRIAL AREA, ROAD NO .3, OPP. ESIS HOSPITAL, ANDHERI (E), MUMBAI - 400 093 PAN/GIR NO. : A AACT 2724 P ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : MR. PANKAJ R. TOPRANI /REVENUE BY : MS . NEER A JA PRADHAN DATE OF HEARING : 8 TH JANUARY , 201 4 DATE OF PRONOUNCEMENT : 8 TH JANUARY , 201 4 O R D E R PER I.P.BANSAL ( J .M.) : TH ESE ARE CROSS APPEALS DIRECTED AGAINST ORDER DATED 13 - 9 - 2011, PASSED BY LEARNED CIT(A) - 15, MUMBAI FOR ASSESSMENT YEAR 2007 - 08. ITA NO S . 7519 &7990 /20 1 1 2 2 . GROUNDS OF APPEAL BY THE ASSESSEE ARE AS UNDER : - 1. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN UPHOLDING THE DISALLOWANCE OF DEDUCTION UNDER SECTION 10 B IN RESPECT OF INTEREST INCOME OF RS.21,61,170/ - EARNED BY THE APPELLANT IN MAKING EARLY PAYMENT OF ITS DUES OUTSTANDING ON ACCOUNT OF PURCHASE OF RAW MATERIALS WITHOUT APPRECIATING THAT THE SAID INTEREST INCOME IS INEXTRICABLY LINKED WITH THE CORE BUSINESS ACTIVITY OF THE APPE LLANT. 2. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN UPHOLDING AN ADDITION OF RS.52,24,068/ - BEING UPWARD ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER TO THE ARMS - LENGTH PRICE WITHOUT APPRECIATING THAT THERE WAS NO INTERNATIONAL TRANSACTION INA SMUCH AS THE APPELLANT STOOD AS GUARANTOR IN RESPECT OF THE WORKING CAPITAL FACILITIES GRANTED BY THE BANK TO THE APPELLANT'S SUBSIDIARY. 3. THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN DISMISSING THE ADDITIONAL GROUND OF APPEAL RAISED BY THE APPELLANT PRAYING FOR ALLOWANCE OF DEDUCTION OF RS.15,49,880/ - BEING THE AMOUNT PAID BY THE APPELLANT TOWARDS GUARANTEE CHARGES LEVIED BY THE CITIBANK, POLAND IN RESPECT OF WORKING CAPITAL FACILITIES AVAILED BY THE APPELLANTS SUBSIDIARY, AS PER THE DECISION OF THE SUPREME COURT IN THE CASE OF S.A. BUILDERS (288 ITR 1). THE APPELLANT PRAYS THAT THE RELIEFS ON THE AFORESAID GROUNDS OF APPEAL BE ALLOWED AND THE APPELLATE ORDER BE MODIFIED ACCORDINGLY. THE ASSESSEE VIDE LETTER DATED 2 - 12 - 2013, HAS ALSO FILED ADDITIO NAL GROUND, WHICH READS AS UNDER : - WITHOUT PREJUDICE TO GROUND NO.2 RAISED BY THE APPELLANT, THE LEARNED CIT (A) ERRED IN LAW AND ON FACTS IN UPHOLDING AN ADDITION OF RS.52,24,068/ - BEING THE UPWARD ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER TO THE A RMS' LENGTH PRICE WITHOUT APPRECIATING THAT THE UPWARD ADJUSTMENT CANNOT INCREASE THE AMOUNT OF RS.15,49,880/ - BEING THE AMOUNT PAID BY THE APPELLANT TOWARDS GUARANTEE COMMISSION LEVIED BY CITIBANK, POLAND, IN RESPECT OF WORKING CAPITAL FACILITIES AVAI L ED BY THE APPELLANT'S WHOLLY OWNED SUBSIDIARY, TECHNOCRAFT TRADING, SPOLKA. POLAND. THE APPELLANT PRAYS THAT THE ABOVE GROUND OF APPEAL BE ADMITTED AND ADJUDICATED UPON. ITA NO S . 7519 &7990 /20 1 1 3 THE APPELLANT STATES THAT THE OMISSION OF THE ABOVE GROUND OF APPEAL FROM THE MEMORAN DUM OF GROUNDS OF APPEAL WAS NEITHER WILLFUL NOR UNREASONABLE. GROUNDS OF APPEAL BY THE DEPARTMENT ARE AS UNDER : - 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) FAILED TO INTERPRET THE PROVISIONS OF SECTION 14A OF THE INC OME TAX ACT, 1961 AND RULE 8D IN ITS RIGHT PERSPECTIVE AND TRUE MEANING.' ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE INTEREST EXPENDITURE OF RS.21,49,526/- OUT OF RS.32,68,473/ - DISALLOWED BY THE ASS ESSING OFFICER U/S.I4.A OF THE INCOME TAX ACT, 1961 R.W.R.8D BY OBSERVING THAT RULE 8D CANNOT BE APPLIED RETROSPECTIVELY IN THE LIGHT OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S. GODREJ AND BOYCE MANUFACTURING CO.LTD. VS DCIT (328 ITR 81), WITHOUT APPRECIATING THE FACT THAT THEIR LORDSHIPS HAD UPHELD THE CONTENTIONS OF THE UNION OF INDIA THAT RULE 8D IS REASONABLE IN ITS NATURE.' 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN GIVING RELIEF OF RS.21,49,426/ - , IN THE LIGHT OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S. GODREJ AND BOYCE MANUFACTURING CO.LTD. VS .DCIT (328 ITR 81) (SUPRA) WHICH HAS NOT BEEN ACCEPTED BY REVENUE.' THE APPELLANT PRAYS THAT THE ORDER OF THE CI T(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ITO/ACIT/DCIT BE RESTORED. ASSESSEES APPEAL 3 . AT THE OUTSET, IT WAS SUBMITTED BY THE LEARNED AR THAT THE ASSESSEE DOES NOT WANT TO PRESS GROUND NO.3. ACCORDINGLY, GROUND NO. 3 IS DISMISSED BEING NOT P RESSED. 4 . SO FAR AS IT RELATES TO GROUND NO.1 , IT MAY BE MENTIONED THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10B, WHICH IN THE RETURN OF INCOME WAS CLAIMED AT RS. 7,83,31,945/ - . IT WAS NOTICED BY THE AO THAT CERTAIN RECEIPTS SHOWN BY THE AS SESSEE WHICH, INTER ALIA , INCLUDE INTEREST AMOUNTING TO RS. 21,61,170/ - WAS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT AND HE REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THE SAID AMOUNT SHOULD NOT BE EXCLUDED FROM THE ITA NO S . 7519 &7990 /20 1 1 4 ELIGIBILITY OF DEDUCTION U NDER SECTION 10B. IT WAS EXPLAINED THAT THE SAID AMOUNT IS RECEIVED MAINLY FROM PARTIES FOR MAKING LATE PAYMENTS OF SALE INVOICES. SOME COMPONENTS OF THE INTEREST WAS RECEIVED FROM MSEB ON SECURITY DEPOSIT PLACED WITH THEM. THUS, IT WAS SUBMITTED THAT THIS AMOUNT IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10B. THE AO DID NOT ACCEPT SUCH SUBMISSION OF THE ASSESSEE AND EXCLUDED THE AMOUNT OF RS. 21,61,170/ - WHILE COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. 5 . THE TREATMENT GIVEN BY THE AO WAS AGITATED IN THE APPEAL FILED BEFORE THE CIT(A). IT WAS SUBMITTED THAT THE AMOUNT OF RS. 21,61,170/ - COMPRISED OF TWO COMPONENTS ONE COMPONENT OF RS. 19,87,300/ - WAS AN INTEREST RECEIVED FROM PARTIES FROM WHOM THE ASSESSEE IS PURCHASING RAW MATERIAL FOR MAKING EARLY PA YMENT OF THEIR DUES. IT WAS SUBMITTED THAT THE SAID AMOUNT HAS INEXTRICABLE LINK WITH THE CORE BUSINESS ACTIVITY OF THE ASSESSEE, THEREFORE, SHOULD BE CONSIDERED TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 10B. ANOTHER AMOUNT OF RS. 1,73,870/ - , WAS RECEIVED FROM MSEB ON SECURITY DEPOSITS AND IT WAS CLAIMED THAT THE SAME IS ALSO ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT. LEARNED CIT(A) HAS REJECTED THE SAID CONTENTION OF THE ASSESSEE O N THE BASIS OF THE ORDER OF ITAT IN RESPECT OF ASSESSMENT YEAR 200 5 - 06, IN WHICH THE ASSESSEE DID NOT PRESS THIS GROUND. LEARNED CIT(A) HAS ALSO MENTIONED THAT THE ASSESSEE HAS CHANGED ITS STAND AS WHAT IS STATED BEFORE HIM IS CONTRADICTING THE SUBMISSIONS ITA NO S . 7519 &7990 /20 1 1 5 MADE BEFORE THE AO. THE ASSESSEE IS AGGRIEVED, HENCE, HAS FILED AFOREMENTIONED GROUNDS OF APPEAL. 6 . AT THE OUTSET, IT WAS SUBMITTED BY THE LEARNED AR THAT THE CLAIM OF THE ASSESSEE IS RESTRICTED ONLY TO A SUM OF RS. 19,87,300/ - AS THE ASSESSEE DOES NOT WANT TO PRESS THE OTHER INTEREST I.E. A SUM OF RS. 1,73,870/ - . IT WAS SUBMITTED THAT ALL THE DETAILS WERE FILED BEFORE THE LEARNED CIT(A) AS WELL AS THE AO. THE INTEREST IS RECEIVED BY THE ASSESSEE FOR MAKING EARLY PAYMENTS OF THE GOODS PURCHASED BY THE ASS ESSEE IN THE COURSE OF ITS BUSINESS. SUCH DETAILS ARE FILED AT PA GES 70 TO 120 OF THE PAPER BOOK. HE SUBMITTED THAT FOR ASSESSMENT YEAR 2005 - 06, THE ASSESSEE DID NOT PRESS THIS GROUND AS THE DISALLOWANCE WAS VERY SMALL. IT WAS ALSO SUBMITTED THAT THERE CANNOT BE ANY ESTOPPEL AGAINST LAW . HE SUBMITTED THAT LEARNED CIT(A) HAS INCORRECTLY REJECTED THE CLAIM OF THE ASSESSEE WITHOUT EXAMINING THE FACT S AND SIMPLY ON THE BASIS THAT THE ASSESSEE HAS TAKEN A DIFFERENT STAND BEFORE HIM. LEARNED AR SUBMITTED THAT ALL THE DOCUMENTS FILED BEFORE HIM WERE CLEARLY SHOWING THAT THE INT EREST RECEIVED BY THE ASSESSEE WAS IN RESPECT OF EARLY PAYMENTS MADE BY THE ASSESSEE WITH REGARD TO PURCHASES MADE DURING THE COURSE OF BUSINESS OF THE ASSESSEE. HE SUBMITTED THAT BY MISTAKE IN THE SUBMISSION MADE BEFORE THE AO , THE SAID AMOUNT WAS RELATED TO SALE INVOICES. LEARNED AR SUBMITTED THAT THIS FACT COULD BE VERIFIED BY THE CIT(A) . ITA NO S . 7519 &7990 /20 1 1 6 6 .1 LEARNED AR FURTHER RELIED UPON THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ADVANCE DETERGENTS LTD., REPORTED IN (2011) 339 ITR 81 (DELHI) , WHEREIN IT HAS BEEN HELD THAT THE INTEREST RECEIVED BY THE ASSESSEE ON OVERDUE PAYMENTS FROM THE CUSTOMERS IS TO BE CONSIDERED AS PROFIT AND GAINS DERIVED FROM INDUSTRIAL UNDERTAKING ELIGIBLE FOR DEDUCTION UNDER SECTION 80 - IA OF THE ACT. IN THIS MANNER, I T WAS PLEADED BY THE LEARNED AR THAT THE CLAIM OF THE ASSESSEE TO THE EXTENT OF RS. 19,87,300/ - SHOULD BE ALLOWED. 7 . ON THE OTHER HAND, LEARNED DR RELYING UPON THE ORDER PASSED BY THE AO AND CIT(A), SUBMITTED THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM IN TEREST AS ELIGIBLE FOR THE DEDUCTION UNDER SECTION 10B. THEREFORE, S HE PLEADED THAT ORDER OF CIT(A) SHOULD BE CONFIRMED. 8 . WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENTION S HAVE CAREFULLY BEEN CONSIDERED. THOUGH THERE IS CONTRADICTION IN THE STAND T AKEN BY THE ASSESSEE BEFORE THE AO AND CIT(A), HOWEVER, THE DOCUMENTS SUBMITTED BY THE ASSESSEE SUGGEST THAT WHAT WAS SUBMITTED BY THE ASSESSEE BEFORE THE CIT(A), WAS THE CORRECT POSITION. THEREFORE, IF ANY MISTAKE IS COMMITTED BY THE ASSESSEE IN STATING T HE FACTS BEFORE THE AO THAT MISTAKE WAS CORRECTED AT THE STAGE OF APPELLATE PROCEEDINGS BEFORE THE CIT(A) . HOWEVER, THE BENEFIT, IF AVAILABLE TO THE ASSESSEE UNDER THE PROVISIONS OF LAW, CANNOT BE DENIED, SIMPLY ON THE BASIS OF THAT ASSESSEE HAS TAKEN CONT RADICTORY STAND BEFORE THE AO AND CIT(A) . THE FACTS CAN BE VERIFIED FROM THE ITA NO S . 7519 &7990 /20 1 1 7 DOCUMENTS FILED BY THE ASSESSEE. IF THE ASSERTION S OF THE ASSESSEE ARE CORRECT, THEN ACCORDING TO THE AFOREMENTIONED DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF ADVAN CE DETERGENTS LTD (SUPRA) , THE AMOUNT RECEIVED BY THE ASSESSEE ON OVERDUE PAYMENTS FROM CUSTOMERS, IS TO BE CONSIDERED TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE AO TO EXAMINE THE CLAIM O F THE ASSESSEE WITH REGARD TO SUM OF RS. 19,87,300/ - . IF IT IS RELATED TO THE PURCHASES MADE BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS, THE SAME SHOULD BE CONSIDERED TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT. WE DIRECT ACCORDINGLY. THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER AFORESAID. 9 . REGARDING GROUND NO.2 AND ADDITIONAL GROUND , THESE GROUNDS REGULATE THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E HAS PROVIDED STANDBY LETTER OF CREDIT TO CITY BANK POLAND (SBLC) FOR AVAILING WORKING CAPITAL FACILITIES BY M/S TECHNOCRAFT TRADING, SPOLKA, POLAND, THE WHOLLY - OWNED SUBSIDIARY OF THE ASSESSEE . THE SBLC WAS GIVEN FOR THE AMOUNTS OF US$ 15 LAKHS AND EURO 17,50,000/ - FOR AVAILING WORKING CAPITAL TO THE MAXIMUM EXTENT OF THE ABOVE AMOUNT. THE RATE AT WHICH GUARANTEE CHARGES WERE PAID IS 0.90% AND 1.25% RESPECTIVELY . THE ASSESSEE PAID AN AMOUNT OF RS .15,49,880/ - AS GUARANTEE FEE TO THE CITY BANK, WHICH WAS NO T RECOVERED BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISE. SUCH AN AMOUNT WAS CLAIMED BY THE ASSESSEE ITA NO S . 7519 &7990 /20 1 1 8 AS EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT. THE SAID AMOUNT, AS NOT BEING AN EXPENDITURE INCURRED BY THE ASSESSEE FOR ITS BUSINESS, WAS HELD TO BE NOT ALLOWABLE IN THE HANDS OF THE ASSESSEE. IT WAS FURTHER NOTICED THAT THE ASSESSEE DID NOT CHARGE ANY FEE FROM ITS AE FOR RENDERING GUARANTEE TO THE BANK. ACCORDING TO THE TPO FOR THE PURPOSE OF ARMS LENGTH PRICE, SUCH SERVICE COULD NOT BE PROVIDED WITHOUT CONSIDERATION. ACCORDINGLY, SHOW CAUSE NOTICE WAS ISSUE TO THE ASSESSEE TO EVALUATE THE SAID TRANSACTION FOR THE PURPOSE OF TRANSFER PRICING PROVISIONS. IN RESPONSE, THE ASSESSEE PROVIDED FOLLOWING COMPARABLES : - NAME OF BANK NAME OF THE PARTY AVERAGE GUA RANTEE FEE CHARGED FOR GIVING FINANCIAL GUARANTEE SCB INDIA AS PER RATE CARD (COPY ENCLOSED AT ANNEXURE - I) 300 BPPA HSBC INDIA AES AS WELL AS NON - AES 75BPPA# FMO (NEDERLANDSE FINANCIERINGS - MAATSCHAPPIJ VOOR ONTWIKKELINGSLAND EN N.V.) RABO INDIA (FINANC E) LTD. 250BPPA AVERAGE 208.33 BPPA #SINCE HSBC INDIA HAS QUOTED THE RATE OF 75 BPPA AS EXPLAINED BY THE ASSESSEE, THE SAME RATE IS TAKEN. HOWEVER, IT WAS CLAIMED BY THE ASSESSEE THAT SINCE GUARANTEE CHARGES ARE PAID IN RESPECT OF WHOLLY - OWNED SUBSID IARY OF THE ASSESSEE AND NO OTHER EXPENSES WERE INCURRED FOR GIVING THE GUARANTEE, THEREFORE, THE TRANSACTION SHOULD NOT BE EVALUATED FOR THE PURPOSE OF TP PROVISIONS. BUT, THE TPO DID NOT ACCEPT SUCH SUBMISSIONS AND BEFORE ADDING THE ITA NO S . 7519 &7990 /20 1 1 9 AFOREMENTIONED AMOUNT OF RS. 15,49,880/ - , WHICH WAS PAID AS GUARANTEE FEE TO THE BANK, HE ADDED FOLLOWING TWO AMOUNTS TO ARRIVE AT ARMS LENGTH PRICE OF THE TRANSACTIONS : - (I) A SUM OF RS. 75,944/ - AS INTEREST ON THE PAYMENT MADE BY THE ASSESSEE AS GUARANTEE FEE . ACCORDING TO THE L EARNED TPO , THE ASSESSEE WAS REQUIRED TO RECOVER THE SAID AMOUNT FROM ITS AE AND IT DID NOT RECOVER, THEREFORE, INTEREST WAS CHARGEABLE ON THE SAID AMOUNT. HE FOUND THAT THE AFORESAID INTEREST CHARGED BY EUROPEAN CENTRAL BANK WAS AT THE RATE OF 3.40% . ADDI NG 150 BASIS POINTS, THE INTEREST RATE WAS WORKED OUT TO 4.90% PER ANNUM AND ACCORDINGLY, THE INTEREST OF RS. 75,944/ - WAS COMPUTED. (II) RS.35,98,244/ - FOR EVALUATING THE SERVICE OF THE ASSESSEE FOR PROVIDING GUARANTEE ON THE BASIS OF AFOREMENTIONED COMPARABLE S . THE AMOUNT OF RS. 35,98,244/ - HAS BEEN WORKED OUT AS FOLLOWS : - I. SBLC GIVEN FOR US$ 15,00,000 CURRENCY RATE RS. 46.46 TOTAL AMOUNT IN RS. 6,96,90,000 (15,00,000X46.46) 2.08% RS. 14,49,552 (A) II SBLC GIVEN FOR EURO 17,50,000 CURRENC Y RATE RS. 59.03 TOTAL AMOUNT IN RS. 10,33,02,500 (17,50,000X59.03) 2.08% RS. 14,49,552 (B) TOTAL 35,98,244 (A+B) ITA NO S . 7519 &7990 /20 1 1 10 1 0 . AGGREGATE OF THE AFOREMENTIONED THREE AMOUNTS , BEING A SUM OF RS. 52,24,068/ - , WAS ADDED TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF TP ADJUSTMENT. 1 1 . BEFORE THE CIT(A) , IT WAS THE MAIN CONTENTION OF THE ASSESSEE THAT THE AFOREMENTIONED TRANSACTION DOES NOT FALL WITHIN THE DEFINITION OF INTERNATIONAL TRANSACTION AS DEFINED UNDER THE PROVISIONS OF INCOME TAX ACT AND, THER EFORE, THE ARMS LENGTH PRICE SHOULD NOT BE DETERMINED. SUCH CONTENTION OF THE ASSESSEE HAS BEEN REJECTED BY THE LEARNED CIT(A) AND THE TP ADJUSTMENT HAS BEEN UPHELD. 1 2 . LEARNED AR NARRATED THE FACTS BEFORE US AND HE SUBMITTED THAT AS THERE IS NO COST T O THE ASSESSEE OVER AND ABOVE THE AMOUNT PAID BY THE ASSESSEE TO BANK WHICH IS A SUM OF RS. 15,49,880/ - , THEREFORE, THE TP ADJUSTMENT, IF ANY, SHOULD NOT EXCEED THE AMOUNT PAID BY THE ASSESSEE TO THE BANK. HE FURTHER SUBMITTED THAT THE ASSESSEE IS MAINLY AG ITATING THE ADDITION OF RS. 35,98,244/ - , WHICH HAS BEEN EVALUATED FOR PROVIDING SERVICE OF GUARANTEE BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE. HE FURTHER SUBMITTED THAT IN ANY CASE, THE RATE OF 2.08% APPLIED BY THE TPO SHOULD NOT BE UPHELD AS HSBC INDIA S BPPA IS ONLY 75. THUS, IT WAS PLEADED BY THE LEARNED AR THAT APPROPRIATE RELIEF SHOULD BE GIVEN TO THE ASSESSEE. 1 3 . ON THE OTHER HAND, IT WAS SUBMITTED BY LEARNED DR THAT COMPARABLES HAVE BEEN PROVIDED BY THE ASSESSEE ITSELF TO THE TPO. T HEREFORE, SHE SUBMITTED THAT THE ASSESSEE CANNOT DISPUTE THE ITA NO S . 7519 &7990 /20 1 1 11 COMPARABILITY OF THE COMPARABLES WITH THE ASSESSEES CASE. SHE ALSO SUBMITTED THAT BEFORE THE CIT(A) , THE CASE OF THE ASSESSEE WAS ONLY THAT THE IMPUGNED TRANSACTION IS NOT AN INTERNATIONAL TRANSACTION. SHE AL SO SUBMITTED THAT THE ASSESSEE HAS NEVER CONTENDED THAT ON MERITS, THE SAID ADDITION WAS NOT SUSTAINABLE. SHE FURTHER SUBMITTED THAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008 - 09, BANK GUARANTEE FEES COMMISSION AT THE RATE OF 3% HAS BEEN UPHELD. REFE RENCE IN THIS REGARD WAS MADE TO THE ORDER OF THE TRIBUNAL DATED 28 TH AUGUST, 2013, PASSED IN ITA NO. 6394/M/2012 . COPY OF THIS ORDER WAS PLACED ON RECORD AND WAS ALSO GIVEN TO THE LEARNED AR. IN THE SAID ORDER, THE ISSUE RELATING TO GUARANTEE COMMISSION HA S BEEN DISCUSSED AS UNDER : - 10. APROPOS GROUND NO.8; DURING THE COURSE OF PROCEEDINGS BEFORE LD. TPO IT CAME TO THE NOTICE THAT ASSESSEE HAD ISSUED COUNTER GUARANTEE AMOUNTING TO RS.2,92,53,940/ - WITH REGARD TO ITS AE AND HAD RECEIVED GUARANTEE COMMISSIO N @ 1.2% PER ANNUM AMOUNTING TO RS.3,49,711/ - AND SUCH TRANSACTION WAS NOT REPORTED IN TP STUDY. THE TPO REQUIRED THE ASSESSEE TO EXPLAIN THE SAME AND VIDE LETTER DATED 24/08/2011 IT WAS SUBMITTED AS UNDER: THE ASSESSEE SUBMITS THAT FOR ALL ITS BORROWIN GS GUARANTEE IS PROVIDED BY TECHNIMONT SPA, ITALY AND THE ASSESSEE HAS NOT PAID ANY CONSIDERATION FOR THIS GUARANTEE. FURTHER, THE ASSESSEE SUBMITTED THAT STATE BANK OF INDIA IS A LEAD BANKER IN ITS MULTIPLE BANKING CONSORTIUM AND THEY HAVE ISSUED SANCTION LETTER TO TICB WHICH DETAILS THE RATE OF 1.2% AS BG COMMISSION. BASED ON THE SAME RATE, TICB HAS ALSO RECOVERED GUARANTEE COMMISSION FROM ITS AE AT THE RATE OF 1.2% PER ANNUM. IN LIGHT OF THE ABOVE TICB HUMBLY SUBMITTED THAT CONSIDERING THE FACTS OF THE C ASE THE RATE OF 1.2% PA CHARGED BY TICB ON THE COUNTER GUARANTEE SEEMS APPROPRIATE AND MIRRORS THE ARMS LENGTH RATE. 10.1 LD. TPO DID NOT ACCEPT SUCH SUBMISSION OF THE ASSESSEE AND GATHERED INFORMATION FROM STATE BANK OF INDIA, WHEREIN BANK STATED THA T THE RATE CHARGED IS 2.75% PER ANNUM FOR AMOUNT OF GUARANTEE BETWEEN RS.1.00 CRORE AND RS.5.00 CRORE. RELYING UPON THAT AND ADDING A MARK UP 0.25% ON THE GROUND THAT ASSESSEE DID NOT TAKE ANY SECURITY FROM ITS AE AND COMMISSION MUST ALSO TAKE INTO ACCOUN T THE EXCHANGE RATE RISK, THE COUNTRY SPECIFIC RISK AND THE AE RISK, THE LD. TPO APPLIED 3% GUARANTEE COMMISSION WHICH WAS WORKED OUT AT RS.8,77,618/ - . AFTER REDUCING THE COMMISSION SHOWN BY THE ASSESSEE AN ADDITION OF RS.5,27,907/ - WAS MADE. ITA NO S . 7519 &7990 /20 1 1 12 THE ADDITION HAS BEEN UPHELD BY LD. DRP. THE ASSESSEE IS AGGRIEVED, HENCE, HAS FILED AFOREMENTIONED GROUND. 11. DURING THE COURSE OF HEARING LD. AR PLACED HEAVY RELIANCE UPON THE BANK GUARANTEE GIVEN BY STATE BANK OF INDIA IN WHICH ON A BANK GUARANTEE OF RS. 75.00 L ACS COMMISSION WAS CHARGED @1.2%. COPY OF SUCH BANK GUARANTEE IS FILED AT PAGES 402 TO 403 OF THE PAPER BOOK. IT WAS SUBMITTED THAT ON THE BASIS OF ABOVE GUARANTEE THE RATE WAS CHARGED BY THE ASSESSEE AND SAME SHOULD BE TAKEN AS COMPARABLE IN PLACE OF INFO RMATION GATHERED BY LD. TPO FROM THE BANK. IT MAY BE MENTIONED THAT GROUND NO.9 WAS NOT PRESSED BY LD. AR. 12. ON THE OTHER HAND, LD. DR SUBMITTED THAT LD. TPO HAS COLLECTED THE INFORMATION FROM SBI IN WHICH IT WAS CLEARLY STATED THAT THEY ARE CHARGING 2. 75% AS GUARANTEE FEE IN RESPECT OF BANK GUARANTEE OF RS.1.00 CRORE TO RS.5.00 CRORES. HE SUBMITTED THAT THE EVIDENCES SUBMITTED BY THE ASSESSEE RELATES TO A SUM OF RS.75.00 LACS WHICH IS LESS THAN RS.1.00 CRORE, THEREFORE, THE SAID EVIDENCE CANNOT BE ACCEP TED. HE SUBMITTED THAT ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO SUGGEST THAT THE RATE CHARGED BY IT WAS AT ARMS LENGTH. THEREFORE, HE SUBMITTED THAT DELETION AS SOUGHT BY THE ASSESSEE SHOULD NOT BE APPROVED. 13. WE HAVE HEARD BOTH THE PARTIES ON THIS IS SUE. THE ASSESSEE HAS NOT SUBMITTED ANY CONTRADICTORY EVIDENCE TO SUGGEST THAT THE RATE APPLIED BY LD. TPO AT 3% WAS NOT APPROPRIATE. THE EVIDENCE SUBMITTED BY THE ASSESSEE RELATES TO BANK GUARANTEE WHICH IS LESS THAN RS.1.00 CRORE. THEREFORE, THE SAID EVI DENCE CANNOT BE TAKEN AS COMPARABLE INSTANCE. IN THIS VIEW OF THE SITUATION AS NO EVIDENCE HAS BEEN SUBMITTED BY THE ASSESSEE TO JUSTIFY THE RATE CHARGED BY IT FROM ITS AE, WE DECLINE TO INTERFERE IN THE ADDITION UPHELD BY LD.DRP. THIS GROUND OF THE ASSESS EE IS DISMISSED. THUS, IT WAS SUBMITTED BY THE LEARNED DR THAT THE ADDITION IN THIS REGARD DESERVES TO BE SUSTAINED. 1 4 . WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENTIONS HAVE ALSO BEEN CONSIDERED. DURING THE COURSE OF HEARING, IT WAS NOT DISPUTED B Y THE LEARNED AR THAT IMPUGNED TRANSACTIONS FALL WITHIN THE DEFINITION OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WITH ITS AE, WHICH REQUIRED EVALUATION OF ARMS LENGTH PRICE UNDER THE PROVISIONS OF INCOME TAX ACT. IT WAS ALSO NOT DENIED BY THE LEAR NED AR THAT NO AMOUNT HAS ITA NO S . 7519 &7990 /20 1 1 13 BEEN CHANGED BY THE ASSESSEE FROM ITS SUBSIDIARY ON ACCOUNT OF BANK GUARANTEE . THE INCLUSION OF INTEREST TO THE COMMISSION AMOUNT PAID BY THE ASSESSEE WAS ALSO NOT DISPUTED. THE DISPUTE, IF ANY , RAISED BY THE LEARNED AR WAS WITH R EGARD TO EVALUATION OF SERVICE RENDERED BY THE ASSESSEE IN THE SHAPE OF BANK GUARANTEE TO ITS AE WHICH WAS DETERMINED ON THE BASIS OF COMPARABLES GIVEN BY THE ASSESSEE DURING THE COURSE OF HEARING BEFORE THE TPO AND THE SAID CALCULATION HAS ALSO BEEN REPRO DUCED IN THE ABOVE PART OF THIS ORDER. ON THE BASIS OF FIGURES GIVEN BY THE ASSESSEE, THE AVERAGE RATE OF 2.08% WAS TAKEN . IN THIS REGARD ALSO ASSESSEE COULD NOT POINT OUT ANY DEFECT. THEREFORE, WE ARE OF THE OPINION THAT ADDITION HAS RIGHTLY BEEN MADE AN D SUSTAINED. HENCE, WE DECLINE TO INTERFERE AND DISMISS THE GROUND NO. 2 AS WELL AS ADDITIONAL GROUND RAISED BY THE ASSESSEE. DEPARTMENTS APEAL 1 5 . DURING THE COURSE OF HEARING, IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS EARNED EXEMPTED DIVIDEND O F INCOME OF RS. 99,81,647/ - . THE ASSESSEE DID NOT ATTRIBUTE ANY EXPENDITURE TO EARN THAT EXEMPTED INCOME. DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE ASSESSEE PLACED A CALCULATION ON RECORD, ACCORDING TO WHICH A SUM OF RS. 4,75,362/ - WAS CALCULATED AS D ISALLOWABLE UNDER SECTION 14A. THE AO DID NOT ACCEPT SUCH CALCULATION AND ON THE BASIS OF RULE 8D, HE CALCULATED A DISALLOWANCE OF RS. 32,68,473/ - . ITA NO S . 7519 &7990 /20 1 1 14 1 6 . THE DISALLOWANCE WAS CHALLENGED IN AN APPEAL BEFORE THE CIT(A). LEARNED CIT(A) ON THE BASIS OF DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF M/S. GODREJ AND BOYCE MANUFACTURING CO.LTD. VS DCIT , REPORTED IN 328 ITR 81 , HAS HELD THAT THE SAID RULE WAS NOT APPLICABLE IN RESPECT OF ASSESSMENT YEAR 2007 - 08. HOWEVER, LEARNED CIT(A) HAS EVOLVED FOLLOWI NG FORMULA TO CALCULATE THE REASONABLE DISALLOWANCE : - EXPENDITURE INCURRED BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT OTHER THAN 1 ABOVE - A THE WEIGHTED MONTHLY AVERAGE VALUE OF INV ESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE - B THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE APPELLANT AS ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR C AN AMOUNT EQUAL TO ONE - HALF PER CENT OF THE MONTHLY WEIGHTED AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME - D THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME - E ACCORDINGLY, DISALLOWANCE WAS COMPUTED AT RS. 11,18,947/ - AND BALANCE ADDITION OF A SUM OF RS. 21,49,426/ - WAS DELETED. TH US PART RELIEF WAS GIVEN TO THE ASSESSEE. THE ASSESSEE HAS NOT PREFERRED ANY APPEAL AGA INST THE SUSTAINED DISALLOWANCE. H OWEVER, THE REVENUE HAS FILED THE AFOREMENTIONED GROUNDS TO ASSAIL THE DELETION OF A SUM OF RS. 21,49,426/ - . 1 7 . LEARNED DR RELYING UPON THE ORDER PASSED BY THE AO SUBMITTED THAT THE DISALLOWANCE WAS RIGHTLY CALCULATED BY THE AO. SHE SUBMIT TED THAT LEARNED CIT(A) HAS NOT CALCULATED THE DISALLOWANCE PROPERLY. ITA NO S . 7519 &7990 /20 1 1 15 THEREFORE, SHE PLEADED THAT DISALLOWANCE AS MADE BY THE AO SHOULD BE UPHELD. 18 . ON THE OTHER HAND, IT WAS CONTENDED BY THE LEARNED AR THAT THE ASSESSEE HAS ACCEPTED THE CALCULATION DO NE BY THE CIT(A) , BEING REASONABLE ONE. RULE 8D IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. THEREFORE, HE SUBMITTED THAT THE DISALLOWANCE UPHELD BY THE LEARNED CIT(A) BEING REASONABLE, DESERVES TO BE UPHELD. 19 . WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENTIONS HAVE ALSO BEEN CONSIDERED. ON REASONABLE BASIS, LEARNED CIT(A) HAS CALCULATED THE DISALLOWANCE. LEARNED DR COULD NOT POINT OUT ANY DEFECT IN THE CALCULATION OF LEARNED CIT(A) . THEREFORE, WE DECLINE TO INTERFERE IN THE PART DELETION MADE BY THE LEARNED CIT(A) AND DISMISS THE GROUNDS OF APPEAL FILED BY THE DEPARTMENT. 2 0 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE (ITA NO.7519/M/2011) IS CONSIDERED TO BE PARTLY ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER AFORESAID AND THE APPEAL FILED BY THE DEPARTMENT (ITA NO. 7990/M/2011) IS DISMISSED. (ITA NO.7519/M/2011) (ITA NO.7990/M/2011) ITA NO S . 7519 &7990 /20 1 1 16 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 8 TH JANUARY . 201 4 . 8 TH JAN,2014 SD/ - SD/ - ( ) ( N.K.BILLAIYA ) ( ) (I.P.BANSAL) / ACCOUNTANT MEMBER / JUDICIALMEMBER MUMBAI ; DATED 0 8 / 01/2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) - X, MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//