ACIT Vs Tata Sons Ltd. (ITAT Mumbai)
Conclusion: Payment of Rs.89 lakhs on account of pension to wholetime Directors on the basis of Board resolution of the assessee company was incurred wholly and exclusively for the purpose of business of the assessee and was allowable as deduction.
Held: Assessee had debited Rs.5.77 Crores as provision for pension payable to former Directors out of which a sum of Rs.89 lakhs was actually paid. The remaining sum of Rs.4.88 Crores was payable which was the subject matter in the aforesaid ground 6(i) which was not pressed by assessee. Assessee contended that the remaining sum of Rs.89 lakhs was paid to whole time Directors in recognition of their services to the company during their period as whole time Directors, which was also supported by a board resolution passed in this regard. This sum was duly allowed as deduction by AO in the assessment. However, CIT(A) observed that this pension had not been paid out of any approved pension fund and hence, the same was not an allowable expenditure for the company. It was held that there was absolutely no dispute that the wholetime Directors to whom pension of Rs.89 lakhs was paid by assessee company had rendered tremendous services to assessee company which was duly recognised by assessee company by way of Board resolution appreciating their services and sanction for payment of pension was accorded thereon. Hence, the business expediency of the subject mentioned transaction had been duly approved by assessee and it could not be said that it was not incurred for the purpose of the business of the assessee. Therefore, the case of assessee squarely fall within the ambit of the decision of the Hon’ble Supreme Court in the case of Sassoon J. David & Co. Pvt. Ltd., vs. CIT reported in 118 ITR 261. Hence, the payment of Rs.89 lakhs on account of pension to wholetime Directors on the basis of Board resolution of the assessee company was incurred wholly and exclusively for the purpose of business of the assessee and was allowable as deduction.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These cross appeals in ITA Nos.4630/Mum/2016 & 4637/Mum/2017 for A.Y.2009-10 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-58 in appeal No.CIT(A)-58/Arr-74/2013-14 dated 28/03/2016 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 09/05/2013 by the ld. Asst. Commissioner of Income Tax 2(3), Mumbai (hereinafter referred to as ld. AO).
2. The first issue raised by the assessee to be decided in this regard is with regard to transfer pricing adjustment made in respect of Corporate guarantee fee.
2.1. We have heard rival submissions and perused the materials available on record. We find that the functional profile of the assessee is as under:-
Tata Sons Ltd(“TSL”) established as a trading firm by Jamshetji Tata in 1868 is the promoter of all the key/major Tata Companies and holds the majority promoter holding in the Tata Companies. It is the owner of the ‘Tata’ name and the ‘Tata’ trademark, which are registered in India and several other countries. These are used by various Tata companies in relation to their products and services. The terms of use of the TATA Trademark by Tata companies are governed by the Brand Equity and Business Promotion Agreement, which is by TSL and individual Tata companies.
Apart from this, the company’s activities are:
To maintain shareholding in main operating companies;
To invest in operating companies to facilitate growth; and
To promote the group’s entry into new businesses.
Tata Sons has two divisions:
Tata Quality Management Services: Helps Tata companies achieve business excellence through the TBEM. There are various programmes like Business Excellence Leaders’ Programme, Practising Business Excellence and Management of Business Ethics. The basic contents of these programmes include detailed TBEM criteria understanding, assessment concepts, feedback comment writing, scoring, soft skills in assessment, team consensus, site visit planning, feedback presentation skills.
Tata Financial Services: In-house financial consultancy, which carries out long- and short-term financial planning for Tata companies.
TSL continues to acquire shares and securities of its existing industrial enterprises. The dividend income supplemented by the profit made on sale of investments is utilised to augment the resources of the Company for increasing the long term investments in promoted companies.
TSL also subscribes to the Rights Issues made during the year by the other Tata companies and increases its holdings in several promoted companies.
The Company has two Liaison Offices located at:
a) Washington DC USA
b) Beijing, China
The role of the Liaison Offices is to interact with the Government and the business community to promote the Tata Name and Brand and to oversee Tata business interest in these countries.
As per the Tata group organizational structure, about 66 percent of the equity capital of TSL is held by public charitable trusts endowed by members of the Tata family. The biggest of these trusts are the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust, which were created by the families of the sons of Jamshetji Tata.
2.2. Tata Limited UK is one of the associated enterprises (AEs) of the assessee company. AE acts as purchasing agent, representative, traders in commodities and industrial raw materials and trade financing. The assessee provided a corporate guarantee in October 2008 to its AE on term loan facility of USD 100 million issued by Standard Chartered Bank. The said AE is wholly owned subsidiary of the assessee company. The assessee charged 0.25% guarantee commission from its subsidiary. The assessee submitted that it had neither provided guarantee nor received guarantee from any unrelated party. Further, the AE has not obtained or provided any other guarantee loan to any unrelated party. Thus Internal Comparable Uncontrolled Price (CUP) method could not be applied to benchmark the tested guarantee transaction. In order to determine an indicative range of arm’s length guarantee fee for the tested transaction, i.e. guarantee payment made by the AE to assessee, the assessee has utilised the Interest Saving (IS) approach based on External CUP method. The ld. TPO disregarded the approach of the assessee and adopted yield approach to benchmark the guarantee transaction of the assessee with its AE based on the credit rating of the assessee and yield on interest rate for one year unsecured bond period as the guarantee given by the assessee was for a period of 364 days. Accordingly, the ld. TPO applying CUP method adopted the yield on interest rate for one year unsecured bond of 6.878% per annum and compared the same with credit rating of the AE which was at BB rating and for which the yield on interest rate for one year unsecured bond for 3.121% per annum. Accordingly, the ld. TPO arrived at the benefit accrued to the AE on account of guarantee given by the assessee at 3.757% (6.878-3.121). From that the ld. TPO also gave benefit of better bargaining power of the assessee and reduced 0.751% and finally arrived at the ALP of guarantee fee at 3.006% per annum (3.757-0.751) and made an adjustment of Rs.6,84,44,433/- after reducing the guarantee fee received by the assessee in the sum of Rs.58,03,767/-.
2.3. We find that the ld. CIT(A) observed that the credit rating of the assessee would enable the assessee to get yield of one year USD bond rate at 1.356% as against the credit rating of the AE for the same period at 2.5688% which leads to a difference of 1.32%. We find that the ld. CIT(A) had split this rate in the ratio of 60:40 based on the risks undertaken by both the assessee (being the guarantee) and the AE (being the borrower). Accordingly, he arrived the arm’s length guarantee fee to be at 0.792% being 60% of 1.32%. Since the assessee has charged fee of 0.25% from its AE, he directed the ld. TPO to make adjustment only to the extent of the 0.542% ( 0.792-0.25).
2.4. Aggrieved, the assessee is in appeal before us.
2.5. At the time of hearing, the ld. AR fairly submitted that the grounds raised by the assessee with regard to the fact that the issue of corporate guarantee would not fall within the ambit of international transaction is not pressed by her. The same is reckoned as the statement made from the Bar and accordingly, the grounds raised by the assessee that the corporate guarantee issue is not an international transaction are hereby dismissed as not pressed. We find that the Hon’ble Jurisdictional High Court in number of occasions had restricted the Arm’s Length Price (ALP) from the guarantee fee to be at 0.5%. We find that these decisions were subsequently followed by the Co-ordinate benches of this Tribunal and one such decision which was quoted by the ld. AR at the time of hearing in the case of Virgo Engineers Ltd. vs. DCIT in IT(TP)A No.3718/Mum/2017 for A.Y.2011-12 dated 08/01/2019 wherein by placing reliance on the decision of Hon’ble Jurisdictional High court in the case of Everest Kanto Cylinder Ltd., vs. DCIT reported in 34 Taxmann.com 19, the ALP of corporate guarantee fee was restricted to 0.5%. Respectfully following the same, we direct the ld. TPO to consider the ALP of corporate guarantee fee at 0.5% and further reduce 0.25% already charged by the assessee and make adjustment accordingly. Accordingly, the ground No.1 raised by the assessee is partly allowed.
3. The ground No.2 raised by the assessee is with regard to expenses incurred towards providing additional services in respect of which service charges were collected by the assessee and separately offered to tax in addition to rent.
3.1. We have heard rival submissions and perused the materials available on record. We find that the assessee while computing income from house property, the assessee had reduced Rs.30,55,040/- from the annual value in addition to the other statutory deduction including 30% deduction allowed towards repairs u/s. 24. The assessee had submitted that these expenditures represent maintenance facilities like salaries, security charges and electricity of house property. The ld. AO observed that assessee is entitled only for deduction for municipal tax paid and flat deduction @30% for repairs under head ‘income from house property’ and no other deduction shall be permissible under the Act. The assessee had received Rs.1,73,90,000/- towards amenities and service charges which were duly offered to tax as rent under the head ‘income from house property’ against which, this expenditure of Rs.30,55,040/- was deducted by the assessee under the head ‘income from house property’. It is not in dispute that assessee had duly offered rental income as well as amounts received towards amenities and service charges under the head ‘income from house property’. We find that the ld. AR referred to the decision rendered in group companies case of the assessee by this Tribunal in the case of Ewart Investments Ltd., vs. DCIT in ITA No.3623/Mum/2017 dated 28/02/2019 for A.Y.2012-13 wherein this issue was restored to the file of the ld. AO. The ld. AR fairly prayed for similar direction to be given in the impugned case. We have gone through the said decision and respectfully following the said decision, we deem it fit and appropriate to restore this issue to the file of the ld. AO and decide the issue before us on the same lines as directed by this Tribunal in ITA No.3623/Mum/2017 dated 28/02/2019 from para 5 & 6 thereon. Accordingly, the ground No.2 raised by the assessee is allowed for statistical purposes.
4. The ground No.3 raised by the assessee is with regard to the set off of interest charged and paid to the Income Tax department against interest granted by the Income Tax department on refunds in the same year.
4.1. We have heard rival submissions and perused the materials available on record. This issue is already covered positively in favour the assessee by the order of this tribunal in assessee’s own case for A.Y.2008-09 in ITA No.3192/Mum/2013 dated 06/11/2019 wherein it was held as under:-
“2. Set off of Interest on Income Tax Refund with Interest charged on income tax demands
Ground No.1 of Assessee Appeal
The brief facts of this issue is that the assessee received interest from income tax department to the tune of Rs 43.81 crores and also paid interest to income tax department on its tax demands to the tune of Rs 6.57 crores. The assessee sought to set off the interest paid on income tax demands with the interest received from income tax department in the return of income. The ld AO disallowed the interest paid on income tax demands to the tune of Rs 6.57 crores as the same is not allowable in terms of section 40(a)(ii) of the Act and accordingly taxed the gross interest received from income tax department of Rs 43.81 crores under the head income from other sources. The ld CITA by placing reliance on the order passed by his predecessor for the Asst Years 2007-08 and 2005-06 in assessee’s own case upheld the action of the ld AO. The ld CITA further directed the ld AO to verify the assessment records of Asst Year 1990-91, 2003-04 and 2005-06 in order to ensure that there is no double addition. Aggrieved, the assessee is in appeal before us.
2.1. We have heard the rival submissions and perused the materials available on record including the judicial pronouncements relied upon by both the sides at the time of hearing. We find that the ld AR placed reliance on the decision of Hon’ble Jurisdictional High Court in the case of DIT (International Taxation) vs Bank of America NT and SA in Income Tax Appeal No. 177 of 2012 dated 3.7.2014 wherein the Hon’ble High Court approved the action of this tribunal had held as under:-
“3 Even with regard to the question No.2 we do not find that it is a substantial question of law. The Tribunal found that the Assessee Bank received interest on refund of taxes paid. It also paid interest on the taxes which were payable. The Assessee sought to set off the interest paid against the interest received and offered the net interest received to tax. We do not see that such findings of the Tribunal are vitiated in law. All that the Tribunal has done earlier and now is that in the case of this Assessee simply because the exercise carried out by it does not result in loss of revenue and there could not be any prohibition for the same, allowed it. That is how the Assessing Officer’s order is set aside. We do not see how any larger controversy or question arises for our consideration.
Mr.Pinto would refer to Section 57 of the Income Tax Act, 1961 in that regard and submit that this course would be adopted by other Assessees as well and in that event the order passed by this Court would come in the way of the Revenue in investigating and probing such exercise by other Assessees.
4 We do not see how this order can be cited _as .precedent inasmuch as the Assessee before the Tribunal and before us paid interest to the Income Tax Department amounting to Rs.10,26,906/-. The Assessee claimed that this was business expenditure and this should have been allowed. The Assessee has received the interest of Rs.1,07,57,930/-. It was submitted that the amount of interest paid by the Assessee should have been allowed to be set off against the interest deposited with the Department and taxed in the hands of the Assessee. The argument was that the interest paid to and received from is the same party i.e. Government of India and therefore, both transactions should be taken together.
5. We do not find that the Tribunal has, in permitting this exercise, in any way violated any of the provisions of the Income Tax Act, 1961. It was a peculiar situation between the Assessee and the Department. The Tribunal has followed the similar exercise in the case of very Assessee on the prior occasion as well. In such circumstances we are of the opinion that the second question also does not raise any substantial question of law.”
2.2. Respectfully following the said decision, the ground no. 1 raised by the assessee is allowed.”
4.2. Respectfully following the said decision, the ground No.3 raised by the assessee is allowed.
5. The ground No.4 raised by the assessee is with regard to disallowance made u/s.14A of the Act.
5.1. We have heard rival submissions and perused the materials available on record. We find that assessee had claimed an exempt income of Rs.1755.84 Crores as against the investment of Rs.28007.67 Crores in tax free investments. We find that the assessee had disallowed Rs.474.19
Crores voluntarily u/s.14A of the Act as expenditure related to exempt income. The ld. AO applied the computation mechanism provided in Rule 8D(2) of the Rules and made the disallowance as under:-
