2018 (1) TMI 1372 - AT - Income Tax

Disallowance u/s 14A - disallowance of interest under Rule 8D(2)(ii) - Held that - There cannot be any disallowance of interest under Rule 8D(2)(ii) of the Rules by applying the ratio laid down in the decision in the case of CIT vs Reliance Utilities & Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein it was held that the presumption would go in favour of the assessee if the interest free funds are more than the loans taken by the assessee, then it would be presumed that the investments were made out of own funds of the assessee. The said ratio would squarely apply to the facts of the instant case. Hence we hold that the disallowance made under the second limb of Rule 8D(2)(ii) of the Rules is hereby directed to be deleted. With regard to the third limb of Rule 8D(2)(iii) we hold that the assessee has got investments in foreign companies, the dividend earned from which would be taxable income and hence should be outside the ambit of disallowance u/s 14A read with Rule 8D of the Rules. Investments made in subsidiary companies would have to be reckoned as strategic investments and hence the same should be excluded while working out the disallowance under Rule 8D(2)(iii). The investments which had yielded dividend income alone, are to be considered while working out the disallowance under Rule 8D(2)(iii) of the Rules as has been held by the decision of this tribunal in the case of REI Agro Ltd. But we find that if the disallowance made under second limb of Rule 8D(2) of the Rules is deleted, then the disallowance made by the ld AO would remain at ₹ 23,77,882/- and whereas the assessee itself had voluntarily disallowed ₹ 42,48,850/-. Hence we direct the ld AO to adopt the disallowance figure of ₹ 42,48,850/- which had already been disallowed by the assessee and hence no further disallowance in that regard is to be made. Disallowance u/s 14A while computing the book profits u/s 115JB - Held that - In the case of ACIT vs Vireet Investment (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI had held that no disallowance u/s 14A of the Act could be made by resorting to computation mechanism provided in Rule 8D of the Rules. However, the ld AO would have to disallow u/s 14A of the Act having regard to the books of accounts on some rational basis as expenditure incurred for earning exempt income, in terms of clause (f) of section 115JB(2) of the Act. Hence the disallowance already made by the assessee having regard to the books of accounts of the assessee in the sum of ₹ 42,49,346/- does not require to be disturbed. Hence the addition made by the ld AO u/s 115JB of the Act had been rightly deleted by the ld CITA. Accordingly, the Ground raised by the revenue is dismissed. Addition towards running, repairs & maintenance of aircrafts including depreciation thereon - Held that - No addition need to be made on an estimated basis towards running and maintenance of aircrafts including depreciation thereon. Set off of Long Term Capital Loss arising on sale of land, against the deemed short term capital gain arising out of sale of residential property (being a long term capital asset as the holding period of them exceeded 36 months) - Held that - As reliance placed by the ld AR on the decision of Hon ble Bombay High Court in the case of CIT vs Manali Investment reported in (2013) 219 Taxman 113 (Bom) wherein it was held that short term capital gain computed u/s 50 of the Act on long term depreciable assets can be set off against long term capital loss u/s 74 - Thus we hold that the assessee is indeed entitled to set off the brought forward long term capital loss of ₹ 9,77,54,843/- against the deemed short term capital gain of ₹ 7,18,74,000/- in the facts of the case. The ld AO is accordingly directed to give benefit of the same to the assessee based on the correctness of the claim of brought forward loss figure made by the assessee. Ground raised by the assessee are allowed for statistical purposes as directed above. TDS u/s 195 - payments under various heads in foreign currency on which due deduction of tax at source was not made - Held that - CIT-A had granted relief to the assessee by placing reliance on make available clause prevailing in various tax treaties , but the same is not done by the ld AO and ld DRP in the instant case. We find that the assessee had filed various documents with detailed factual and legal submissions with supporting evidences before the ld AO , which had not been appreciated by the ld AO and ld DRP in the proper perspective. Hence we deem it fit and appropriate, to remand this entire issue to the file of the ld AO , for denovo adjudication of this issue afresh in accordance with law. The assessee is also directed to co-operate with the ld AO by producing the necessary evidences in support of its contentions. Validity of levy of interest u/ 115P - delayed payment of dividend distribution tax - Held that - The assessee stated that the dividend distribution tax had been duly paid within the time prescribed. However , he fairly agreed for this matter to be verified by the ld AO. The Ld DR also agreed for the same. Accordingly, we deem it fit and appropriate to remand this issue to the file of the ld AO with a direction to verify the date of remittance of dividend distribution tax with supporting evidence and then decide whether to levy interest u/s 115P of the Act in accordance with law. Accordingly, the Ground No. 8 raised by the assessee is allowed for statistical purposes. TDS u/s 194J OR 194H - Held that - The assessee company paid this commission to the directors as per their terms of employment for the work done in their capacity as whole time directors, this commission should have been treated as an incentive in addition to salary, bonus and other perquisities. Therefore, in our considered opinion, CIT-A is justified in recording the same as not coming within the purview of commission or brokerage as defined in s.194H nor a fee for professional or technical services as defined in s.194J. Therefore, we find no infirmity in the orders of the learned CIT(A) on this issue. Therefore, this ground of the Revenue is dismissed. Addition regarding Principal Repayment of Finance Fee - Held that - AO proposed to disallow the same on the contention that under finance lease, the lessee is the owner of the leased assets and principal repayment component of lease rental represents payment for purchase of leased assets and thus should be treated as capital expenditure. The ld DRP after considering the facts in detail and applying the ratio laid down by the Hon ble Supreme Court in the case of ICDS Ltd vs CIT 2013 (1) TMI 344 - SUPREME COURT allowed the issue in favour of the assessee. TPA - addition of corporate guarantee - Held that - Provision of corporate guarantee is in the nature of shareholder activity and hence, no TP adjustment on account of corporate guarantee is required. In the said case, this tribunal had held that the assessee s expectation from provision of guarantee was not that of a guarantor i.e. to earn a guarantee fee, rather, the expectation was of a shareholder to protect its investment interest, to help it achieve the assessee s business objective . Thus, we agree with the contention of the assessee that the objective of the assessee for providing guarantee was not to earn guarantee fee but to earn returns in the form of appreciation in investment value and receive dividends and, therefore, no TP adjustment ought to have been made in the facts and circumstances of the case. The price for corporate guarantee should be that which would have been paid and accepted by independent enterprises in comparable circumstances. In that case transfer pricing adjustments are required. In that case, it has to be determined what will be the ALP of corporate guarantee commission paid by associate enterprise to the parent company providing corporate guarantee. Non charging of interest on loan to its AE - addition as international transaction - Held that - LIBOR and basis points should be the criteria for meeting the cost of interest on the international transaction in respect of interest to be charged on the loan advanced to AE. For this purpose the credit rating of the assessee as well as the credit rating of the AE should be taken into account. Accordingly we deem it fit to remand the issue to the TPO to determine the basis points on the basis of the aforesaid parameters and such other relevant parameter in accordance to law. Therefore, we remand this issue for this limited purpose back to the TPO / AO and to determine the issue as directed by us.

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of aircraft maintenance expenses including depreciation.
3. Non-granting of set-off of long-term capital loss against deemed short-term capital gain.
4. Disallowance of foreign currency payments under Section 40(a)(i).
5. Short grant of credit for TDS and TCS.
6. Levy of interest under Section 115P.
7. Disallowance of commission and sitting fees paid to directors without deduction of tax at source.
8. Disallowance of principal repayment of finance lease.
9. Determination of arm's length price for corporate guarantee fees.
10. Determination of arm's length price towards interest rate for loan provided to AE.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The assessee contested the disallowance made by the AO under Section 14A read with Rule 8D. The Tribunal found that the assessee had sufficient own funds for making investments, thus no disallowance of interest under Rule 8D(2)(ii) was warranted. For Rule 8D(2)(iii), investments in foreign companies and strategic investments in subsidiaries were excluded. The Tribunal directed the AO to adopt the voluntary disallowance figure of ?42,48,850 made by the assessee.

2. Disallowance of aircraft maintenance expenses including depreciation:

The assessee claimed that the aircraft was used exclusively for business purposes. The AO disallowed 10% of the expenses, assuming personal use. The Tribunal held that the aircraft was used for business purposes, and any personal use should be taxed as perquisites in the hands of directors or employees. The Tribunal deleted the disallowance.

3. Non-granting of set-off of long-term capital loss against deemed short-term capital gain:

The assessee claimed set-off of long-term capital loss against deemed short-term capital gain under Section 50. The Tribunal held that the asset's character as a long-term capital asset does not change despite being taxed as short-term capital gain under Section 50. The Tribunal allowed the set-off based on the Supreme Court's decision in CIT vs V.S. Dempo Company Ltd.

4. Disallowance of foreign currency payments under Section 40(a)(i):

The AO disallowed payments made in foreign currency for various services without TDS. The Tribunal found that the payments were not taxable in India under the respective DTAAs and remanded the issue to the AO for fresh adjudication, directing the assessee to provide necessary evidence.

5. Short grant of credit for TDS and TCS:

The Tribunal directed the AO to verify whether the related income was offered by the assessee in the relevant year and to allow due credit for TDS and TCS accordingly.

6. Levy of interest under Section 115P:

The Tribunal remanded the issue to the AO to verify the date of remittance of dividend distribution tax and decide on the levy of interest under Section 115P based on supporting evidence.

7. Disallowance of commission and sitting fees paid to directors without deduction of tax at source:

The AO disallowed payments to directors under Section 194J. The Tribunal, following the decision in Jahangir Biri Factory (P) Ltd vs DCIT, held that the payments were not covered under Section 194J and upheld the DRP's decision to delete the disallowance.

8. Disallowance of principal repayment of finance lease:

The AO disallowed the principal repayment of lease rental, treating it as capital expenditure. The Tribunal, following the Supreme Court's decision in ICDS Ltd vs CIT, held that the lease rentals were deductible as revenue expenditure and upheld the DRP's decision.

9. Determination of arm's length price for corporate guarantee fees:

The AO treated the corporate guarantee as an international transaction and made an adjustment. The Tribunal, following the decision in Tega Industries Ltd vs DCIT, held that the provision of corporate guarantee is a shareholder activity and not an international transaction. The Tribunal allowed the assessee's appeal.

10. Determination of arm's length price towards interest rate for loan provided to AE:

The AO computed notional interest using Indian Prime Lending Rate. The DRP directed to use LIBOR. The Tribunal remanded the issue to the AO to determine the basis points considering the credit rating of the assessee and AE and to compute the interest accordingly.

Conclusion:

The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the revenue's appeal. The issues were remanded for fresh adjudication where necessary, with directions to the AO to consider the evidence and legal precedents provided.