2018 (6) TMI 1535 - AT - Income Tax

TPA - benchmarking on sale price - MAM - Held that - Almost all the products which have been noticed in the assessment year 2005-06 have been sold in these years to different AEs in different geographical locations. If on sale of these products CUP method was not upheld in earlier years, then we do not see any reasons to apply that very method in this year as well. Therefore, respectfully following the orders of the ITAT in the assessment year 2003-04 to 2006-07 on this issue, we do not find any error in the finding of the ld.CIT(A). The benchmarking on sale price of various products to AEs is to be tested by following TNM method and if that method is being followed then, it would reveal that the assessee has rightly justified its transactions at arm s length, because the margin shown by it are higher than the average margin shown by the comparable entities, and therefore no adjustment can be made. The ld.CIT(A) has rightly deleted such adjustment in this year, and the order of the ld.CIT(A) is upheld qua first issue. Adjustment recommended in ALP of interest rate required to be charged by the assessee from its AE on the loans given by it - assessee has pointed out that LIBOR is the prevailing rate and it has charged LIBOR plus 1% - Held that - No defect has been pointed out in this rate. Only thing is that one of the AEs has obtained loan from European market, therefore, the ld.TPO has applied that rate. To our mind this action of the ld.TPO could be justified if he has pointed out that a tested party in India has granted loan to its AE in dollar denomination at a higher rate than the LIBOR plus 1%. It is also pertinent to note the cost of the funds to the assessee. The assessee has contended that it has raised funds by issuing of FCCB at nominal cost 0.5% to 1% and it has given these funds to its AE. Thus, the assessee has demonstrated that the rate charged by it was at a market rate and its transactions were at arm s length. No adjustment can be made in the rate of interest charged by the assessee from its AE on providing loans in dollar denomination. We allow the appeal of the assessee on this aspect, and delete adjustment recommended by the ld.TPO. Adjustment recommended by the AO on the guarantee provided - Held that - CIT(A) considered it and held that as per Insurance Act, Indian companies cannot take or make payment to foreign insurers. Since the assessee had made payment to its AE, the same was clearly within the purview of transfer pricing regulations, because it could not explain the business consideration and purpose of making payment on account of insurance, an even it could not take any insurance from foreign insurer. After going through the order of the ld.CIT(A), we do not see any reasons to interference the order of the ld.CIT(A) on this issue. Prior period expenditure crystalised during this year could be set off against the prior period income and only net income or loss is to be given effect in the computation of income - Held that - Considering our finding in the assessment year 2006-07, we partly allow all the grounds and direct the AO to tax only net differential amount. In other words, in any particular year, if there is a negative income, then that amount is to be debited to the profit & loss account. In other words, say, in the assessment year 2007-08, the assessee has income of ₹ 41,11,972/- and expenditure of ₹ 47,34,697/-; there is a negative amount of ₹ 7,22,725/-. This net amount is to be allowed as expenditure to the assessee. On same principle, the income of the assessee be computed in rest of two years. Thus, these grounds of appeal are partly allowed. Disallowance of business expenditure - Held that - This expenditure was incurred by the assessee in order to perform its corporate social responsibility. Expenditure was given to Municipal Corporation, Surat and Ahmedabad and Surat Diamond Association. According to the assessee there were heavy rains and request came from Municipal Corporation. In order to fulfill the social responsibility, it has given the amounts. On due consideration of the facts, we are of the view that there cannot be any doubt about the genuineness of the payment. The payment was made to Municipal Corporation towards corporate social responsibility. This is an essential expenditure for keeping relationship smooth and the society at large. This expenditure deserves to be allowed to the assessee. Therefore, we allow this expenditure and delete disallowance. Disallowance of expenditure - Held that - We have observed that the assessee failed to give any evidence demonstrating nature of expenditure etc. However, considering volume of expenditure and part details submitted by the assessee i.e. incurred towards library books, R&D, deferred revenue expenses etc. we have confirmed the expenditure on adhoc basis at ₹ 10 lakhs. The ld.AO shall give necessary effect in these years also. This will meet ends of justice. Provision of bad and doubtful debts - Held that - The assessee has not actually written off debts, and therefore, its claim cannot be allowed. The ld.CIT(A) has rightly upheld the disallowance. We do not find any error in this ground of appeal, hence it is rejected. Loans/investments in foreign subsidiaries - Whether on capital account and loss on account of capital assets ought not to be allowed under section 37? - Held that - If the ld.Revenue authorities are accepting the gains on account of foreign exchange fluctuations as taxable then how and why the loss could be denied to the assessee? No specific finding has been recorded about the nature of loans and how such losses on account of fluctuations loss could be disallowed. Therefore, taking into consideration all the facts that ld.Revenue authorities have failed to examine the issue by keeping in mind taxation of gains in earlier and subsequent years on the same loans, and failed to record any specific finding as to how in such circumstances the loss could be denied, we deem it appropriate to set aside this issue to the file of the AO for re-adjudication. Disallowance of section 14A r.w.s Rule 8D - Held that - No doubt the assessee is having sufficient interest free funds and according to the proposition in the decisions referred above, if an assessee has interest free funds more than the investment then no disallowance for interest expenditure in making investment, which would result in exempt income be made. However, in the assessment year 2006-07, we have confirmed the disallowance on account of administrative expenditure and other issues at ₹ 3.00 lakhs. Considering of our finding in the assessment year 2006-07 and overall facts and circumstances of the case, we confirm the adhoc disallowance of ₹ 3 lakhs in the assessment year 2007-08 and equivalent to the amount confirmed by the ld.CIT(A) in the assessment years 2008-09 and 2009-10. Deemed dividend addition u/s 2(22)(e) - Held that - As find that in the asstt.year 2006-07, we have considered similar transactions between the assessee and the SDBPL. When the issue travelled to the Hon ble High Court in earlier year, then it was pointed out that these were not simplicitor loan transactions, rather these are the business transactions whereby the current amount is being maintained. Both parties have given amounts to each other and these are adjustment entries. Considering the current account and number of transactions, and since the Hon ble High Court has upheld the finding of the Tribunal in earlier years that these are not loans, which could be brought in the ambit of section 2(22)(e) of the Act for the purpose of treating it as deemed dividend, we respectfully following the order of the ITAT in the assessment year 2006-07 as well as judgment of the Hon ble High Court in earlier years, are of the view that advance given to M/s.Bhadra Raj Holdings P.Ltd. cannot be treated as deemed dividend. We allow this ground of appeal. Determination of correct amount for grant of deduction under section 10B - Held that - We direct the AO to allow the claim of the assessee under section 10B in accordance with our directions contained in order for the assessment year 2006-07. Accordingly, we allow the grounds of appeals of the assessee and reject that of the Revenue. Addition under section 14A while computing book profit - calculation of profits both under MAT and normal provisions - Held that - As in the case of ACIT Vs. Vireet Investment P. Ltd. 2017 (6) TMI 1124 - ITAT DELHI Special Bench after discussing the issue in detail and considering various authoritative pronouncements answered in favour of the assessee by holding that scope of section 14A could not be extended to the provisions of section 115JB, and computation of book profits under section 115JB is to be made without resorting to disallowance under section 14A read with rule 8D of the Act. Therefore, following the judgment of the Special Bench in the case of Vireet Investment P. Ltd. (supra) we direct the AO to recompute the book profit by excluding disallowance under section 14A and we allow this ground of appeal of the assessee.

Summary

Issues Involved:
1. Determination of arm's length price (ALP) for international transactions.
2. Interest on loans to associated enterprises (AEs).
3. Corporate guarantee fees.
4. Insurance payments to AEs.
5. Prior period income and expenditure.
6. Disallowance of business expenditure.
7. Disallowance of depreciation.
8. Foreign exchange loss on loans/investments.
9. Disallowance under section 14A.
10. Disallowance under section 40(a)(i).
11. Deemed dividend under section 2(22)(e).
12. Deduction under section 10B.
13. Addition under section 14A while computing book profit.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:
The primary issue involves the determination of ALP for international transactions between the assessee and its AEs for the assessment years 2007-08 to 2009-10. The TPO recommended upward adjustments using the CUP method instead of the TNMM method adopted by the assessee. The CIT(A) upheld the TNMM method, referring to previous years' decisions and ITAT orders, which found TNMM appropriate for the assessee's transactions. The ITAT upheld the CIT(A)'s decision, confirming that the TNMM method was suitable and no adjustments were necessary.

2. Interest on Loans to Associated Enterprises (AEs):
The TPO recommended adjustments based on higher interest rates observed in European markets. The CIT(A) allowed credit for interest already charged by the assessee. The ITAT found that the assessee's rate of LIBOR plus 1% was appropriate, considering the cost of funds and market conditions, and deleted the adjustments recommended by the TPO.

3. Corporate Guarantee Fees:
The TPO recommended adjustments for corporate guarantees provided by the assessee to its AEs. The CIT(A) deleted these adjustments, citing ITAT Hyderabad's decision that corporate guarantees do not fall within the definition of international transactions under transfer pricing regulations. The ITAT upheld the CIT(A)'s decision, following consistent ITAT orders across the country.

4. Insurance Payments to AEs:
The TPO made adjustments for insurance payments made to AEs, which were upheld by the CIT(A) on the grounds that such payments were not justified and were not allowable under the Insurance Act. The ITAT upheld the CIT(A)'s decision, rejecting the assessee's appeal on this issue.

5. Prior Period Income and Expenditure:
The CIT(A) disallowed set-off of prior period expenditure against prior period income. The ITAT, following its decision in the assessment year 2006-07, directed the AO to tax only the net differential amount, allowing the set-off of prior period expenditure against prior period income.

6. Disallowance of Business Expenditure:
The CIT(A) confirmed the disallowance of business expenditure claimed under section 37(1). The ITAT allowed the expenditure, recognizing it as genuine and incurred for corporate social responsibility.

7. Disallowance of Depreciation:
The assessee did not press these grounds, and the ITAT rejected them.

8. Foreign Exchange Loss on Loans/Investments:
The CIT(A) disallowed the foreign exchange loss on loans/investments, treating them as capital in nature. The ITAT set aside this issue to the AO for re-adjudication, considering the taxation of gains in earlier and subsequent years and the Supreme Court's judgment in Woodward Governor India Pvt. Limited.

9. Disallowance under Section 14A:
The CIT(A) made an adhoc disallowance under section 14A. The ITAT confirmed the disallowance for administrative expenditure but reduced the amount, following its decision in the assessment year 2006-07.

10. Disallowance under Section 40(a)(i):
The AO disallowed expenses under section 40(a)(i) for non-deduction of TDS on payments to non-residents. The ITAT, following its decision in the assessment year 2006-07, deleted the disallowance, recognizing the payments as reimbursements without an income element.

11. Deemed Dividend under Section 2(22)(e):
The AO treated loans from B.R. Laboratories and Bhadra Raj Holdings as deemed dividends. The CIT(A) deleted the addition for B.R. Laboratories but upheld it for Bhadra Raj Holdings. The ITAT, following earlier decisions, held that these were not loans but current account transactions and deleted the additions.

12. Deduction under Section 10B:
The AO made adjustments in the deduction under section 10B. The CIT(A) and ITAT allowed the assessee's claim, following the ITAT's decision in the assessment year 2006-07 and relevant High Court judgments.

13. Addition under Section 14A While Computing Book Profit:
The AO added disallowance under section 14A to the book profit under section 115JB. The ITAT, following the Special Bench decision in Vireet Investment P. Ltd., directed the AO to recompute the book profit without including the disallowance under section 14A.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on most issues, allowing the assessee's appeals on several grounds and rejecting the Revenue's appeals. The ITAT's decisions were consistent with previous years' rulings and relevant judicial precedents.