2019 (9) TMI 1328 - AT - Income Tax

Deduction u/s 80IC - AO excluded the transport subsidiary transport recoveries claims received miscellaneous income and sundry balances written back and net gain on exchange difference forming part of the income of such eligible units and in reducing the income claim - HELD THAT - As relying on assessee s case 2016 (4) TMI 1163 - ITAT MUMBAI Departmental Authorities have not examined the nature of subsidy with reference to the relevant industrial policy resolution and subsidy schemes we are inclined to restore the matter back to the file of the Assessing Officer for deciding afresh. As far as the issue of particular assessment year in which the subsidy deemed to have accrued we may observe the Assessing Officer did not raise this issue in course of assessment proceedings - thus the issue is hereby restored before the AO to decide the matter of controversy on the similar direction Addition of the expenditure incurred for by back shares which is revenue in nature and is allowable u/s 37(1) - HELD THAT - As relying on assessee s case 2016 (4) TMI 1163 - ITAT MUMBAI assessee s claim was not considered only for the reason that it was not made through a revised return of income. However as held by the Hon ble Supreme Court in Goetz India Ltd. 2006 (3) TMI 75 - SUPREME COURT restriction imposed therein for not entertaining a claim otherwise by way of revised return of income is only applicable to the Assessing Officer. That being the case we restore the matter back to the file of the Assessing Officer for considering afresh in the light of the decision relied upon by the assessee. - the issue is hereby restored before the AO to decide the matter of controversy on the similar direction as given by Hon ble ITAT above TP Adjustment - corporate guarantee to its overseas A.E - HELD THAT - As relying on assessee s case 2016 (4) TMI 1163 - ITAT MUMBAI there is no dispute that the internal CUP by way of letter received from HSBC indicates that the commission charged for financial guarantee is 0.5%. Further it is relevant to note that the Department in assessee s own case has accepted the arm s length price of corporate guarantee @ 0.5% in the assessment year 2006 07 and 2007 08. Thus on consideration of overall facts and circumstances in the light of judicial pronouncements referred to above we are of the considered opinion that the arm s length price of the corporate guarantee should be fixed at 0.5%. The Assessing Officer / Transfer Pricing Officer is directed to make adjustment accordingly. Adopting the rate of 11.86% as the arm s length rate based on corporate bond rate - HELD THAT - Rate of interest applicable in the country where the loan has been consumed in the case Aurionpro Solutions Ltd. 2017 (6) TMI 1087 - BOMBAY HIGH COURT ). The Hon ble High Court further affirmed the applicable rate of interest in the case where the assessee company had given the loan to its form AE. - We set aside the finding of the CIT(A) and restore the issue before the AO to apply the rate of interest prevailing in the country where the loan has been given/consumed. Accordingly this issue is decided in favour of the assessee against the revenue.

Issues Involved:

1. Computation of deduction under Section 80IC of the Income Tax Act.
2. Allowability of expenditure incurred on buyback of shares under Section 37(1) of the Income Tax Act.
3. Determination of Arm's Length Price (ALP) for corporate guarantees given on behalf of Associated Enterprises (AEs).
4. Adoption of interest rates for loans advanced to Associated Enterprises.

Issue-wise Detailed Analysis:

Issue No. 1: Computation of Deduction under Section 80IC

The assessee argued that the issue of computing deduction under Section 80IC by excluding transport subsidy, transport recoveries, claims received, miscellaneous income, sundry balances written back, and net gain on exchange difference is covered by the ITAT's decision for A.Y. 2009-10. The ITAT had held that subsidies reducing the cost of manufacture are operational and enhance business profits, thus eligible for deduction under Section 80IC. The AO had not examined the nature of subsidies with reference to the relevant industrial policy. The matter was restored to the AO to decide afresh, considering the relevant judicial pronouncements and the industrial policies. Thus, the issue was decided in favor of the assessee for statistical purposes.

Issue No. 2: Expenditure on Buyback of Shares under Section 37(1)

The assessee contended that the expenditure on buyback of shares is revenue in nature and allowable under Section 37(1). This issue was also covered by the ITAT's decision for A.Y. 2009-10, where the matter was restored to the AO for fresh consideration. The ITAT directed the AO to consider the claim afresh in light of the decisions relied upon by the assessee. Consequently, this issue was restored to the AO for fresh adjudication, favoring the assessee for statistical purposes.

Issue No. 3: ALP for Corporate Guarantees

The assessee provided corporate guarantees to its overseas AEs and benchmarked the commission at 0.25%. The Department determined the ALP at 3%. The ITAT, in the assessee's case for A.Y. 2009-10, held that the ALP for corporate guarantees should be fixed at 0.5%, based on the internal CUP (HSBC letter) and judicial precedents. The ITAT directed the AO/TPO to make adjustments accordingly. Hence, the issue was decided in favor of the revenue, setting the ALP at 0.5%.

Issue Nos. 4 to 7: ALP for Corporate Guarantees (Continued)

These issues were also covered by the ITAT's decision for A.Y. 2009-10, where the ALP for corporate guarantees was fixed at 0.5%. The ITAT followed the same reasoning and judicial precedents, directing the AO/TPO to adjust the ALP to 0.5%. Thus, these issues were decided in favor of the assessee against the revenue.

Issue Nos. 8 to 12: Interest Rates for Loans to Associated Enterprises

The assessee argued that the interest rate should be based on the rate prevailing in the country where the loan was consumed, not in India. The ITAT referred to the Bombay High Court's decision in Aurionpro Solutions Ltd., which held that the ALP for loans to AEs should be determined based on the interest rate in the country of the loan's consumption. The ITAT set aside the CIT(A)'s finding and restored the issue to the AO to apply the appropriate interest rate. Consequently, this issue was decided in favor of the assessee against the revenue.

Conclusion:

The appeal was partly allowed, with several issues restored to the AO for fresh adjudication in light of relevant judicial precedents and factual determinations. The ITAT's directions emphasized the need for a detailed examination of the nature of subsidies and appropriate benchmarking for international transactions.

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