2019 (12) TMI 1418 - AT - Income Tax

Transfer Pricing (TP) adjustment - corporate guarantee extended by the assessee company to its Associate Enterprise (AE) - Whether it is not an international transaction prior to the amendment to Section 92B of the Act by the ld. CIT(A)? - HELD THAT - As relying on M/S. TEGA INDUSTRIES LTD. 2019 (8) TMI 1450 - ITAT KOLKATA assessee s corporate guarantee (s) in issue do not amount to international transactions u/s. 92B - corresponding transfer pricing adjustment in question stand deleted. Decided in assessee s favour. Disallowance u/s 14A - Sufficiency of own funds - HELD THAT - As the assessee has own surplus funds which are not interest bearing and which were sufficient to meet the cost of investments no disallowance can be made under Rule 8D(2)(ii) of the Rules r.w.s. 14A of the Act. The ld. D/R could not controvert this factual findings. Hence we uphold the same and dismiss Ground of the revenue. Computation of deduction u/s 80IC - HELD THAT - CIT(A) has followed the judgment of the Hon ble Supreme Court in the case of CIT vs. Meghalaya Steels Ltd. 2016 (3) TMI 375 - SUPREME COURT and directed the Assessing Officer to include the subsidiary received on sales tax as profits for the purpose of computation of deduction u/s 80IC of the Act. Though the ld. CIT D/R controverted the findings of the ld. CIT(A) we are of the considered opinion that the judgment of the Hon ble Supreme Court referred above applies on all fours to the facts of the case and hence we uphold the findings of the ld. CIT() on this issue. Write back of expenses we agree with the finding of the ld. CIT(A) that the expenses in question were allowed as a deduction from profit in earlier years and when the same are written back they should be included in the profits eligible for deduction u/s 80IC of the Act. Thus this ground of the revenue is dismissed.

Summary

Issues Involved:
1. Deletion of Transfer Pricing (TP) adjustment regarding corporate guarantee extended by the assessee company to its Associate Enterprise (AE).
2. Disallowance under Section 14A of the Income Tax Act.
3. Computation of deduction under Section 80IC of the Income Tax Act concerning sales tax subsidy and write-back of expenses.

Detailed Analysis:

1. Transfer Pricing (TP) Adjustment:
The primary issue revolves around whether the corporate guarantee extended by the assessee company to its AE qualifies as an international transaction under Section 92B of the Income Tax Act for the Assessment Year 2012-13. The Tribunal referenced the case of M/s. Tega Industries Ltd. vs. ACIT, where it was held that the Explanation to Section 92B introduced by the Finance Act, 2012, is clarificatory in nature and does not alter the fundamental definition of an international transaction. It was concluded that corporate guarantees provided by a parent company to its subsidiary, which do not involve any cost or bearing on the profits, incomes, losses, or assets of the parent company, fall outside the ambit of international transactions under Section 92B(1). The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground and confirming that the corporate guarantee in question does not amount to an international transaction.

2. Disallowance under Section 14A:
The second issue pertains to the disallowance under Section 14A of the Act. The CIT(A) ruled that investments made in foreign subsidiaries, which are capable of yielding taxable income, should not be considered for Section 14A disallowance. Furthermore, investments made for strategic business purposes in subsidiaries and group companies were also excluded from disallowance. However, this decision was found to be contrary to the Supreme Court's ruling in Maxopp Investment Ltd. v. CIT. Despite this, the Tribunal upheld the CIT(A)'s alternative argument that no disallowance under Rule 8D(2)(ii) of the Income Tax Rules can be made when the assessee's own surplus funds, which are not interest-bearing, are sufficient to cover the investments. This is in line with the legal precedents set by HDFC Bank Ltd. v. Deputy Commissioner of Income-tax and CIT vs. Rasoi Ltd. Consequently, the Tribunal dismissed the revenue's ground on this issue.

3. Computation of Deduction under Section 80IC:
The third issue concerns the computation of deduction under Section 80IC of the Act. The CIT(A) followed the Supreme Court's judgment in CIT vs. Meghalaya Steels Ltd., which mandates that sales tax subsidies should be included in the profits for the purpose of computing deductions under Section 80IC. The Tribunal upheld the CIT(A)'s decision, affirming that the judgment applies to the case at hand.

Write-back of Expenses:
Additionally, the Tribunal agreed with the CIT(A) that expenses previously allowed as deductions from profit, when written back, should be included in the profits eligible for deduction under Section 80IC. This ground of the revenue was also dismissed.

Conclusion:
The Tribunal dismissed the appeal of the revenue on all grounds, upholding the CIT(A)'s decisions on the deletion of the TP adjustment, disallowance under Section 14A, and computation of deduction under Section 80IC. The judgment emphasized adherence to legal precedents and the clarificatory nature of amendments to the Income Tax Act.