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2018 (7) TMI 1887 - AT - Income TaxDisallowance of deduction claimed u/s 80IC - disallowance of final assessment order without such disallowance having been made in the draft assessment order - whether the AO can make an addition / disallowance in the final assessment order which was not proposed in the draft assessment order? - Held that - The disallowance of deduction under section 80IC made by the AO in the final assessment order, over and above the amount disallowed in the draft assessment order, should be deleted. AO is directed to do so. As regards the amount disallowed in the draft assessment order, we will deal with the issue separately while deciding ground raised by the assessee. This ground is allowed. TDSu/s 195 - Disallowance paid to Piramal Enterprises Ltd. (PEL) - assessee has made payment to PEL towards services claimed to have been rendered in respect of taxation management, fund management, accounts and finance, legal matter, secretarial matter, corporate matters, information technologies, etc - Held that - From the assessment order, prima facie, it appears that the Assessing Officer while concluding that PEL has charged more to the assessee towards reimbursement of expenses than what is contemplated in the agreement is under a misconception of fact. However, in the order giving effect to the direction of the Commissioner (Appeals), the Assessing Officer has allowed the payment made towards expenditure fully and disallowed the amount of ₹ 1.47 crore towards royalty. When the terms of the agreement specifically provide for payment of royalty and royalty was paid in compliance to such term, there is no justification for disallowance of royalty payment. Disallowance made is deleted. Disallowance of deduction claimed u/s 35(2AB) in respect of its research and development facility at Ennore and Goregaon - Held that - As held by the Tribunal, Mumbai Bench, in case of PCP Chemicals Pvt. Ltd. 2017 (10) TMI 1417 - ITAT MUMBAI , approval by the competent authority in Form no.3CM is mandatory for claiming deduction under section 35(2AB) of the Act. However, considering the contention of the learned Sr. Counsel that the assessee has applied for approval in Form no.3CM which is still pending, we are inclined to restore the issue to the AO for providing an opportunity to the assessee to furnish the approval of the competent authority in the prescribed manner for claiming deduction under section 35(2AB). This ground is allowed for statistical purposes. Disallowance of depreciation - Held that - As per the provisions of section 32 of the Act applicable to the relevant assessment year, the assessee was free to either claim or not claim depreciation as per its own option. Only after introduction of Explanation 5 to section 32 of the Act by Finance Act, 2001, w.e.f. 1st April 2002, computation of depreciation became mandatory whether or not the assessee claims it. That being the case, the Assessing Officer, in our considered opinion, was not justified in notionally reducing the depreciation for assessment year 1995 96 and 1996 97 from the WDV for computing depreciation for the impugned assessment year. We allow assessee s claim of depreciation. This ground is allowed. Disallowance of expenditure under section 14A r/w rule 8D - Held that - In Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has observed that only those investment which yielded income during the relevant previous year are to be considered for computing average value of investment for the purpose of rule 8D(2)(iii). In view of the aforesaid, we direct the Assessing Officer to exclude the investments which have not yielded any exempt income during the relevant previous year for computing disallowance under rule 8D(2)(iii) r/w section 14A of the Act. Pertinently, before us, the learned Sr. Counsel has submitted working of disallowance under rule 8D(2)(iii) after excluding investment which did not yield any exempt income during the relevant previous year. As per the said working, the disallowance works out to ₹ 2,18,250. The Assessing Officer is also directed to examine the working of the assessee and decide the issue accordingly after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Disallowance of the deduction claimed under section 80IC - Held that - Assessee s explanation with regard to R&D expenditure has not been verified factually. As it appears, part allocation of the interest and R&D expenditure to Baddi unit have been made on presumptive basis only because of disparity between the profit rate of Baddi unit and other units. However, before disallowing assessee s claim the Department is required to bring on record cogent material to establish that the borrowed funds were utilised in setting up the Baddi unit and further the R&D expenditure incurred was related to manufacturing activity carried out in Baddi unit. There is no clarity on the fact whether the assessee has maintained unit wise accounts and the expenditure claimed is as per the accounts. Therefore, if the expenditure is allocated to each unit as per the account maintained such expenditures are backed by evidence, then, there is no reason why a part of it is to be allocated to Baddi unit. In view of the aforesaid, we restore the issue to the file of the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Addition on account of transfer pricing adjustment on Corporate Guarantee given to the Banks by the assessee for the loans taken by the Associated Enterprises (AEs) - Held that - As regards the claim of the assessee that provision of Corporate Guarantee in respect of loans availed by the AEs do not form part of international transaction as per section 92B of the Act, we are unable to accept it in view of a number of decisions of different Benches of the Tribunal including Mumbai Benches rejecting such claim. However, we find merit in the alternative contention of the learned Sr. Counsel that commission rate of 0.5% should be applied to Corporate Guarantee. We direct the Assessing Officer to charge commission on Corporate Guarantee @ 0.5%. This ground is partly allowed. Disallowance made under section 14A r/w rule 8D while computing book profit under section 115JB - Held that - While computing book profit under section 115JB AO cannot invoke the provisions of section 14A r/w rule 8D, as held by the Tribunal, Special Bench, Delhi, in Vireet Investments Ltd. (supra). Thus, to that extent, the disallowance made under section 14A r/w rule 8D while computing the book profit will not survive. However, the Assessing Officer is directed to compute the book profit in consonance with the provisions of section 115JB of the Act r/w Explanation 1(f) to the said provision. This ground is allowed for statistical purposes. Disallowance of expenditure claimed u/s 35A - Held that - Revenue being conscious of the fact that if assessee s claim is allowed under section 37 of the Act then the entire amount of ₹ 34 crore has to be allowed in one go, therefore, the Revenue would be in a disadvantageous position, did not press its appeal on the issue of allowability of claim under section 35A of the Act. Therefore, considering the fact that in the preceding assessment years assessee s claim of deduction under section 35A of the Act has been allowed, applying the rule of consistency also assessee s claim of deduction in the impugned assessment year cannot be disallowed. Therefore, we uphold the decision of the learned Commissioner (Appeals) on this issue by dismissing the ground raised by the Revenue. Adjustment to the arm s length price of interest on loans given to AE - Held that - In case of Tata Autocomp Systems Ltd. 2015 (4) TMI 681 - BOMBAY HIGH COURT the Hon ble Jurisdictional High Court held that when the AE is situated in Germany, rate of interest on the loan advanced to the AE has to be determined on the basis of rate of interest prevailing in Germany where the loan has been consumed. The Hon ble Delhi High Court in Cotton Naturals (I) Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT has also expressed similar view. The other decisions relied upon by the learned Sr. Counsel are also in the same line. Keeping in view the ratio laid down in the aforesaid decisions, we do not find any infirmity in the order of the learned Commissioner (Appeals). Accordingly, we uphold the same by dismissing the ground raised by the Revenue. Determining the rate of commission on Corporate Guarantee @ 1% - Held that - As directed the Assessing Officer to determine the arm s length price of the Corporate Guarantee by applying the commission rate of 0.5%. In view of the aforesaid, the ground raised by the Revenue has become redundant, hence, dismissed.
Issues Involved:
1. Disallowance of deduction under section 80IC of the Income Tax Act, 1961. 2. Disallowance of payment to Piramal Enterprises Ltd. (PEL). 3. Disallowance of deduction under section 35(2AB) of the Act. 4. Disallowance of depreciation. 5. Disallowance of expenditure under section 14A r/w rule 8D. 6. Transfer pricing adjustment on Corporate Guarantee. 7. Disallowance under section 14A while computing book profit under section 115JB. 8. Disallowance of expenditure under section 35A. 9. Transfer pricing adjustment on interest on loans given to AE. Detailed Analysis: 1. Disallowance of Deduction under Section 80IC: - The assessee challenged the disallowance of deduction under section 80IC, arguing that the final assessment order deviated from the draft assessment order. - The Tribunal held that the Assessing Officer cannot deviate from the draft assessment order unless directed by the DRP. The disallowance made in the final assessment order over the draft assessment order was deleted. 2. Disallowance of Payment to PEL: - The Assessing Officer disallowed part of the payment to PEL, questioning the allocation basis. - The Tribunal found that the payment included both reimbursement of expenses and royalty. The disallowance was deleted as the payment was in line with the agreement terms. 3. Disallowance of Deduction under Section 35(2AB): - The disallowance was due to the absence of approval in Form no.3CM. - The Tribunal restored the issue to the Assessing Officer to allow the assessee an opportunity to furnish the required approval. 4. Disallowance of Depreciation: - The Assessing Officer adjusted depreciation for previous years not claimed by BMIL. - The Tribunal held that as per the provisions applicable at the time, depreciation was optional. The disallowance was deleted. 5. Disallowance of Expenditure under Section 14A r/w Rule 8D: - The Tribunal directed the Assessing Officer to verify the availability of interest-free funds and exclude non-income-yielding investments while computing administrative expenses disallowance. 6. Transfer Pricing Adjustment on Corporate Guarantee: - The Tribunal upheld the inclusion of Corporate Guarantee as an international transaction but reduced the commission rate to 0.5%. 7. Disallowance under Section 14A while Computing Book Profit under Section 115JB: - The Tribunal held that disallowance under section 14A r/w rule 8D cannot be made while computing book profit under section 115JB, following the decision in Vireet Investments Ltd. 8. Disallowance of Expenditure under Section 35A: - The Tribunal upheld the deduction under section 35A for trade mark expenditure, following the consistent allowance in previous years and the decision of the Hon'ble Jurisdictional High Court. 9. Transfer Pricing Adjustment on Interest on Loans Given to AE: - The Tribunal held that the arm's length price for interest on loans given in foreign currency should be benchmarked using LIBOR or EUROBOR, not Indian PLR. Conclusion: The Tribunal allowed the assessee's appeal partly, deleting several disallowances and directing fresh adjudication on some issues. The Revenue's appeal was dismissed. The order emphasizes adherence to statutory provisions and principles of natural justice in assessment proceedings.
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