2018 (4) TMI 1691 - HC - Income Tax

Transfer pricing adjustment - Interest on loan to Sun Pharma Global Inc (AE) at London Inter Bank Offer Rate (LIBOR) Plus 2% Rate - Interest on short term advances - Corporate Guarantee fees to banks on behalf of AEs at London Inter Bank Offer Rate (LIBOR) - weighted deduction u/s. 35(2AB) - HELD THAT - Appeal admitted on question 1 to 5 relating to TP adjustment for interest, corporate Guarantee fees & weighted deduction u/s. 35(2AB) Disallowance u/s. 14A r.w.r. 8D - disallowance of expenses incurred by the assessee for and on behalf of M/s. Sun Pharmaceutical Industries, partnership firm of which he is a partner, is a subject matter of dispute at the hands of the Revenue - assessee contends that such expenditure is in the nature of his business expenditure and therefore, allowable under section 37 - HELD THAT - Tribunal did not accept the Revenue s contention that section 37 itself was not applicable and the entire expenditure should have been disallowed. This view of the Tribunal, the Revenue has challenged in corresponding appeal 2018 (4) TMI 1686 - GUJARAT HIGH COURT . However, in the present appeal, the question is confined to the disallowance under section 14A of the Act which arises out of the Tribunal s decision in assessee s appeal and which, as noted above, was not allowed by the Tribunal. Therefore, this question is not entertained in the present Tax Appeal making it clear that the corresponding question of applicability or otherwise of section 37 of the Act raised by the Revenue in Tax Appeal would be debated independently. Foreign Exchange Fluctuation Gain - character of income - cancellation/renewal of forward contracts made by the assessee to protect the risk of investments in its subsidiary companies as capital receipts - HELD THAT - In case of Deputy Commissioner of Income Tax (Assessment) vs. Garden Silk Mills Ltd.. 2009 (2) TMI 95 - GUJARAT HIGH COURT the Court was concerned with facts where the assessee had received a gain on cancellation of forward foreign exchange contract and had treated such surplus as not allowable to tax. The Tribunal had added that it was a capital receipt not allowable to capital gains tax as cancellation of such a contract did not involve any transfer or assignment of any asset within the meaning of section 2(47) of the Act. The question of law framed at the instance of the Revenue in appeal before the High Court was Is profit on cancellation of forward exchange contract, a capital receipt or a revenue receipt? . This Court answered the question against the Revenue it cannot be stated that the Assessing Officer and the Tribunal have committed any error in law in holding that the surplus received by the assessee company upon cancellation of forward foreign exchange contract will partake character of a capital receipt.

Summary

Issues:
1. Transfer pricing adjustments on interest rates to related parties.
2. Disallowance of expenses under section 14A of the Income Tax Act.
3. Taxation of foreign exchange fluctuation gain as capital or revenue receipt.

Transfer Pricing Adjustments on Interest Rates:
The High Court considered substantial questions of law related to transfer pricing adjustments on interest rates to related parties. The issues included justifications for directing the deletion or restriction of specific transfer pricing adjustments made by the Income Tax Appellate Tribunal (ITAT). The Court analyzed the rates applied, such as LIBOR plus percentages, in comparison to Prime Lending Rates or American Bank Lending Rates. The ITAT's decisions on various adjustments, including those on loans, short-term advances, and OFCDs, were scrutinized for their legal and factual basis.

Disallowance of Expenses under Section 14A:
Regarding the disallowance of expenses under section 14A of the Income Tax Act, the Court examined a dispute over expenditure incurred by the assessee for a partnership firm. The Assessing Officer initially rejected the applicability of section 37 but later considered disallowance under section 14A. The CIT (Appeals) directed the computation of disallowance under Rule 8D, which was applicable at the time. The Tribunal upheld this decision, leading to a challenge by the Revenue. However, the Court clarified that the question of disallowance under section 14A was not entertained in the present appeal, emphasizing the independent debate in a corresponding appeal.

Taxation of Foreign Exchange Fluctuation Gain:
The issue of taxing foreign exchange fluctuation gain as a capital or revenue receipt was also addressed. The case involved gains from forward contracts to protect investments from currency fluctuations. The assessee treated these gains as capital receipts, while the Assessing Officer argued for their treatment as revenue receipts. The CIT (Appeals) accepted the capital receipt characterization, a decision upheld by the Tribunal based on relevant case law. The Court referenced a similar case to support the treatment of such gains as capital receipts, emphasizing the distinction between capital and revenue transactions in determining tax liability.

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