Shiv ita1165.13 IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION rt INCOME TAX APPEAL NO.1165 OF 2013 ou Commissioner of Income Tax, Mumbai .. Appellant. Vs. M/s. Everest Kento Cylinders Ltd. .. Respondent. C Mr. A.R. Malhotra for Appellant. Mr. Percy Pardiwalla, Sr. Counsel along with Mr.Atul Jasani for Respondent. h CORAM : S.C. DHARMADHIKARI & ig A.K. MENON , JJ. RESERVED ON : 24TH APRIL, 2015 H PRONOUNCED ON : 8TH MAY, 2015 ORAL JUDGMENT (PER A.K. MENON, J.) y ba 1. revenue has filed present appeal proposing following three questions as substantial questions of law : om (1) Whether on facts and in circumstances of case and in law, order passed bearing ITA B No.542/Mum/2012 dated 23.11.2012 (A.Y. 2007-08) by ignoring Income Tax (fifth amendment) Rules 8D for disallowing of interest u/s 14A of I.T.Act 1961 was perverse ? (2) Whether on facts and circumstance of 1/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 case and in law ITAT Mumbai Bench K Mumbai was justified in restricting disallowance u/s 14A of rt I.T. Act 1961 to Rs.1,00,000/-. When Assessee Company itself had made disallowance of ou Rs.4,47,649/- ? (3) Whether on facts and in circumstances of case and in law Hon'ble ITAT K Bench C Mumbai was right in deleting addition of Rs.28,50,353/- on account of TP adjustment on guarantee commission ? h 2. ig facts in brief are as follows : Assessee was engaged in making High Pressure Gas Cylinder services and H compressed natural gas cylinder. assessee had subsidiary company at Dubai. assessee company filed E-return on y 31.10.2007 declaring total income of Rs.71,90,77,156/- under ba Income Tax Act, 1961 (for short I.T.Act ) and showing book profit of Rs.70,18,79,265/- under section 115JB of I.T.Act. return was om processed under section 143 (1) on 3.12.2008. case of assessee was selected for scrutiny and notice under section 143(2) dated 10.9.2008 was served on assessee along with B questionaire. Subsequently case was transferred to DCIT with effect from 1.9.2010. assessee was heard. After verifying accounts of assessee company draft assessment order was prepared and served on 30.12.2010. assessee was made 2/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 aware that objections to draft assessment order were to be filed within 30 days from date of service, before Dispute rt Resolution Panel (DRP) failing which draft assessment order ou would be finalised. C 3. assessee did not file objections before DRP. Instead it filed letter dated 7.1.2011 stating that they will file appeal before h Commissioner of Income Tax (Appeals). assessee had received dividend of Rs.31,91,330/- and claimed exemption ig under section 10(33) of I.T.Act. assessee was informed that as per H Rule 8D of Income Tax Rule, 2008, total interest under section 14A was disallowable. amount of interest paid on Wealth Tax y amounting to Rs.8,313/- was disallowed. depreciation claim by ba assessee on account of foreign exchange variations loss was Rs.22,71,802/-. assessing officer disallowed this amount of om foreign exchange loss. With specific reference to investments assessee contended it made investments out of surplus funds available during financial year 2005-06 from initial public B offering. As far as transfer pricing adjustment was concerned when Transfer Pricing Officer (TPO) passed order under section 26A dated 28.10.2000 wherein he concluded amount of guarantee commission received by assessee from Associated Enterprise 3/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 was downscaled on Arm's length price by amount of Rs.28,50,353/-. total income was thus assessed at rt Rs.28,50,353/- after adjustments and penalty proceedings under ou section 271(1)(c) were initiated. C 4. TPO in his order dated 28.10.2010 observed that during financial year 2006-07 Associated Enterprise had taken h loan of Rs.86.88 crores that is USD 20,000,000 from ICICI bank and one of clause of term loan was to provide corporate guarantee by ig assessee. In this behalf assessee provided Corporate H Guarantee/guaranteeing repayment of borrowings made by Associated Enterprise at Dubai for purchase of assets and y inventories and for working capital and as term loan. Assesee ba had charged guarantee commission @ 0.5%. TPO found that guarantee fee charged was at lower rate and proceeded to om compare guarantee costs. provision of guarantee was found to be international transaction as defined under section 92B of Act and it was found that transaction would have bearing on B profits, income, losses or assets of assessee. It was observed that overall risk exposure of assessee company becomes higher by virtue of amount of guarantee and company becomes more leveraged including by virtue of its debit equity ratio which would 4/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 ultimately effect cost of borrowing. Dubai subsidiary was newly formed, was unknown had low credit rating and as such rt TPO concluded that if guarantee had not been provided, ICICI ou Bank would not have lent and advanced monies to AE. Relying upon principles of computing guarantee fees in case of General C Electronic Capital Canada Inc. Vs. Her Majesty, Queen, difference between bank rate and PLR rate it showed return for h bearing risk followed by other banks during relevant year was 6%, while average PLR rate was 11.35%. This shows that return for ig bearing risk was around 5.35%. It was also found in another case H taken up for comparison that public company with limited liability in which 51% stake was held by Dutch State, FMO (Nederlands y Financierings Maatschappij Voor Ontwikkelingslanden N.V) had ba charged 2.5% for furnishing guarantee in case of RABO India Finance Pvt. Ltd., despite fact that FMO and RABO were not om related entities. TPO came to conclusion that banks and companies are charging atleast 3% for providing guarantees and therefore, bench mark arms length price for guarantee given B by Assessee to ICICI for benefit of AE at 3% of amount of guarantee. In this manner he arrived at amount of Rs.34,99,003/- as guarantee commission and made adjustment of Rs.28,50,353/- since amount of Rs.6,48,650/- (equivalent to 0.5%) 5/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 had already been provided for. rt 5. In appeal before CIT (Appeals) Commissioner ou found that in view of decision of this Court in Godrej and Boyce Manufacturing Co. Ltd. Assessing Officer was duty bound to work C disallowance in terms of section 14A of reasonable basis and found that conclusion of Assessing Officer and making h disallowance of Rs.20,27,896/- was reasonably correct and therefore, this ground of assessee was dismissed and order of Assessing ig Offcer was upheld. On second issue, namely, making of addition H of Rs.28,50,353/- under section 92CA Commissioner (Appeals) after detail consideration of order of TPO came to conclusion y that bank rate and guarantee of relevant period was 6% whereas ba PLR was 10.5% which shows that return for bearing received was 4.5%. He therefore found that return of 3% arrived at by TOP is om justified and challenge on this ground of appellant was also rejected. B 6. Against dismissal of appeal, assessee approached Income Tax Appellate Tribunal questioning rejection of grounds (i) disallowance of Rs.20,27,896/- under section 14A of Act and (ii) order computing arms length price and making 6/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 adjustment of Rs.28,50,353/-. Tribunal after hearing parties partly allowed appeal on ground no.1 and estimated sum of Rs.1 rt lac for purpose of disallowance under section 14A. As far as ou second ground is concerned, adjustment of Rs.28,50,253/- was deleted. Aggrieved by this order revenue is in appeal before us. C 7. Mr.Malhotra, learned counsel for Appellant supported h order of Assessing Officer on both counts. He submitted that referring to paragraph 4 of order that assessee itself had stated ig that disallowance of Rs.4,47,649/- could be made under section 14A. H He further took us through various computations of bank guarantee commission including order of TPO in paragraph 5.2 which set out y manner in which transaction was entered into. According to him ba but for corporate guarantee, Associated Enterprise would not have been granted loan at all. In this view of matter, he further om invited our attention to order of TPO and fact that inquiry had been made by TPO with HSBC Ltd, Mumbai which was charging rate between 0.15% to 3%. Allahabad Bank was charging rate of B 0.75% to per quarter to 3% per annum and foreign companies such as Dutch State, FMO has charged 2.5% in case of Rabo India Finance Pvt. Ltd. Furthermore, he submitted that EXIM Bank of USA has provided guarantee to Boeing Company of USA against Hire 7/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 Purchase Agreement for purchase of aircrafts by Jet Airways India. EXIM bank has charged commission of 3% plus commitment rt charges from Jet Airways as consideration for guarantee. Accordingly, ou he justified bench mark in arm's length price for bank guarantee at 3% of amount of guarantee. In this manner C Mr.Malhotra sought to justify arm's length price of Rs.34,99,003/- and therefore adjustment to extent of Rs.28,50,353/-. As far as h order of Tribunal issuing disallowance under section 14A of Rs.1 lac is concerned, he stated that sum is arbitrary and unsustainable ig specially in view of fact that adjustment to extent of H Rs.4,47,649/- was offered before Assessing Officer by Assessee itself. He therefore submitted that three questions of law y are substantial questions of law and therefore ought to considered and ba appeal be admitted. om 8. Mr.Pardiwalla appearing on behalf of assessee pointed out that first issue of disallowing interest under section 14A of I.T. Act, order of tribunal was prefectly justified and B disallowance of Rs.1 lakh is also justified in view of fact that adjustment to extent of Rs.4,47,649/- that was offered before Assessing Officer was not based on original return at all. He pointed out that original return did not contain any such concession 8/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 and adhoc figure was something that assessee submitted during course of assessment. admission was thus not part of rt return filed and which was before Assessing Officer and ou Assessee could not be bound by it. He therefore submitted that qualification made by Tribunal was appropriate considering C facts of case. He further submitted that sum of Rs.11.09 crores which was invested was sourced from funds raised by way of Initial h public offering (IPO) to extent of Rs.90 crores. It was found to have been made out of funds raised by IPO and order of Commissioner ig of Income Tax (Appeal) has been confirmed by tribunal. He H submitted that investment was made from surplus funds and nothing was brought on record to show otherwise. tribunal y observed that after having considered fund flow statement there was ba no scope of supporting views of Commissioner of Income Tax and Assessing Officer that assesee has made investment out of om interest bearing funds. Therefore, considering fact that interest bearing funds were not used and providing for some administrative costs, fair assessment of Rs.1 lac is arrived at for B purpose of disallowance under section 14. 9. Mr.Pardiwalla then assailed TPO findings by making reference to order of Tribunal. He pointed out in paragraph 9/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 14(b) that Associated Enterpise could have borrowed money as per prevailing rate in AE countries which were around 5.5 % per rt annum and during said period AE had borrowed at rate LIBOR ou + 0.83% for term loan for working capital purpose. Thus, if it could have borrowed at said rate, prevailing LIBOR rates were C ranging from 5.3% and effective rate of borrowing was @ 6.13% for term loan and 5.8% for working capital loan, which was in line with h normal rates prevailing in AE country. Mr.Pardiwalla further submitted that AE had obtained loan from its bankers on first charge towards ig fixed asset and further hypothecation of inventory and book debts. H AE has gross fixed asset base valued at about USD 13 million and had inventory valued at USD 7.6 million, book debts of USD 5.4 million y and cash and bank balance of USD 1.8 million. He pointed out that ba against loan outstanding of USD 10 million as of 31.3.2007, assets available were to tune of USD 27.4 million. Accordingly there was om no question Associated Enterprise not being able to obtain loan without this corporate guarantee issued by Assessee. B 10. Having considered submissions of Mr.Malhotra for revenue and Mr.Pardiwalla for assessee, we are of view that order of Tribunal as regards disallowance under section 14A and restricting same to Rs.1 lac was justified in view of material 10/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 before Tribunal. Furthermore, having considered fact that sum of Rs.4,47,649/- was not conceded in return but was adhoc rt acceptance during course of assessment, assessee could not ou be bound by it. Tribunal as second fact finding authority had gone into factual aspects in great detail and therefore having C interpreted law as it stood on relevant date order passed cannot be faulted. In matter of guarantee commission, h adjustment made by TPO were based on instances restricted to commercial banks providing guarantees and did not contemplate ig issue of Corporate Guarantee. No doubt these are contracts of H guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as blood of commerce being easily y encashable in event of default, and if bank guarantee had to ba be obtained from Commercial Banks, higher commission could have been justified. In present case, it is assessee company that om is issuing Corporate Guarantee to effect that if subsidiary AE does not repay loan availed of it from ICICI, then in such event, assessee would make good amount and repay loan. B considerations which applied for issuance of Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of view that commission charged cannot be called in question, in manner TPO has done. In our view comparison is not as 11/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: ita1165.13 between like transactions but comparisons are between guarantees issued by commercial banks as against Corporate rt Guarantee issued by holding company for benefit of its AE, ou subsidiary company. In view of above discussion we are of view that appeal does not raise any substantial question of law and C it is dismissed. There will be no order as to costs. h (A.K. MENON,J.) (S.C. DHARMADHIKARI,J.) ig H y ba om B 12/12 ::: Uploaded on - 11/05/2015 ::: Downloaded on - 25/11/2015 10:50:55 ::: Commissioner of Income Tax, Mumbai v. M/s. Everest Kento Cylinders Ltd