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II. Direct Taxes Case Laws:
1. CIT Vs. Amar Ujala Publication Ltd., I.T.A. No. 546/2013, Date of Judgment: 11.05.2016, High Court of Delhi
Issue:
Whether discount and interest on borrowing through commercial
papers and Non-Convertible Debentures (NCDs) is a business expenditure
and allowable?
Held_Yes
Brief Facts:
The AO in his assessment order disallowed certain expenditure
declaring it to be not for business purposes. The expenditure comprised
of Discount on commercial paper and Interest on non-convertible
debentures. The Commercial Paper was issued by the assessee and A&M
Publications Limited to give effect to the Company Law Board’s order for
making payment to Ajay Aggarwal & others to buy the shareholding of
Shri Ajay Aggarwal in the Assessee Company and A&M Publications
Limited. Due to shortage of funds, the Non-convertible debentures were
also issued. The AO contended that the acquisition of shares is not in
ordinary course of business and the said expenditure on Commercial Paper
and Debentures were disallowed u/s 36(1)(iii), 37(1), 57(iii) of the
Income Tax Act. The CIT (A) and ITAT disagreeing with the findings of
the AO allowed such expenditure. Aggrieved by which, the revenue
appealed before the High Court.
Held:
After the acquisition of these shares, A & M Publications Limited
merged with and into the respondent/assessee resulting in the
cancellation of the shareholding held by each of the companies. It was
observed that as on 01.04.2007 post-merger, the entire funds owned by
the respondent/assessee were deployed in its business. The entire
borrowed funds on which the interest had been paid had been utilized for
the purpose of business. It was noted that the re-structuring of the
respondent/ assessee was affected in the preceding year and that during
the year under consideration there was no implication of such
re-structuring so far as the allowability of interest on borrowed funds
was concerned. Consequently, the addition of ₹ 10,79,75,982/- could not
be sustained on facts and in law.
(Please click here for judgment)
2. Thomas Cook (India) Limited Vs. Add. CIT, I.T.A. No. 859/Mum/2014, Date of Judgment: 29.04.2016, ITAT - Mumbai
Issue:
Whether Corporate Guarantees are comparable to Bank Guarantees
& accordingly the commission charged by Banks becomes a benchmark to
evaluate the ALP of a corporate guarantee?
Held_No
Brief Facts:
The assessee company engaged in the business of tour operator, travel
agent, authorized dealer in foreign exchange, global service card and
call centre was found to have entered into certain international
transactions with its associated enterprise and consequential reference
u/s 92CA(1) was made by the AO to the TPO for determination of ALP of
such transactions. The TPO found that assessee had not charged any fee
for providing corporate guarantee on behalf of its associated
enterprise. During the year under consideration, the assessee had
provided a corporate guarantee on behalf of its associated enterprise
M/s. Thomas Cook Mauritius Operations Co. Ltd. for banking facilities
availed by it from HSBC bank. The TPO contented that in the absence of
any guarantee fee commission earned by the assessee from such
transaction, the same could not be said to have been recorded at an ALP
and determined guarantee commission fee at a rate of 3%, that was liable
to be charged as an arm’s length rate as guarantee commission fee.
Before
the Hon’ble ITAT, the assessee contended that the rate of 3% adopted by
the income-tax authorities in order to determine the arm's length rate
of the impugned international transaction was untenable and instead
pointed out that in certain decisions of the Tribunal, rate of 0.50% has
been considered to be arm's length rate on account of fee for providing
corporate guarantee.
Held:
Hon’ble ITAT held that assessee company issued corporate guarantee on
behalf of the it’s associated enterprise which enabled it’s associated
enterprise to avail banking facilities from HSBC Bank in Mauritius. When
commercial banks issue bank guarantees, the same is quite distinct in
character, than the situation where a corporate issues guarantee to the
effect that, if a subsidiary associated enterprise does not repay a
loan, the same would be made good by such corporate. Thus, the manner in
which the TPO has proceeded to determine the arm's length rate is not
justified and 3% rate of guarantee commission fee determined as arm's
length rate by the income-tax authorities is not approved whereas 0.50%
rate is upheld for the purpose of determining the arm's length rate of
the guarantee commission fee.
Hence, the appeal of assessee partly succeeded.
(Please click here for judgment)
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