2021 (2) TMI 1250 - AT - Income Tax

TP Adjustment - addition on account of corporate guarantee - CIT(A) directed the AO to adopt 0.5% as service fee for corporate guarantee given by the assessee to Dabur Egypt however, held that no service fee towards corporate guarantee can be charged for the corporate guarantee in case of Dabur Nepal - whether a guarantee fee is chargeable by the assessee to its associated enterprises? - HELD THAT - Such guarantee was for a short duration of four months which was thereafter released on 27th July, 2006, a fact not disputed by the Revenue. The submission of assessee that there was no interest savings on account of corporate guarantee issued by the assessee also remains uncontroverted since the letter filed by the assessee dated 31.10.2013 from NABIL Bank, Nepal, copy of which is placed at page 346 of the paper book clearly shows that the corporate guarantee provided by the assessee in no way influenced the interest charged by the bank to Dabur Nepal Pvt. Ltd. - we find no infirmity in the order of the ld.CIT(A) that in absence of any savings/benefit no service fee could be attributed to corporate guarantee issued by the assessee on behalf of Dabur Nepal Pvt. Ltd. Corporate guarantee issued on behalf of Dabur Egypt Ltd. - We find merit in the argument of the ld. Counsel for the assessee that the benefit of an explicit guarantee accrue to both the guarantor and the borrower, therefore, the interest benefit should be split between the parties to the transaction, i.e., the borrower and the guarantor and as per rule of thumb such benefit should be in 50 50 basis. Although the ld.CIT(A) has attributed 50% of such savings as the service fee on account of guarantee, however, he had taken the savings on interest due to such guarantee provided by the assessee at 1%. Under these circumstances, we find merit in the argument of the ld. Counsel that charging of service fee at an ad hoc rate of 0.5% should be reversed and may be restricted to 0.30% in respect of corporate guarantee issued to Dabur Egypt Ltd., as against 0.5% held by the CIT(A). Thus, the ground raised by the Revenue on this issue is dismissed and the ground raised by the assessee is partly allowed. Royalty adjustment - HELD THAT - Since the facts of the present appeal are identical to the facts decided by the Tribunal in assessee s own case in the preceding assessment year, therefore, in absence of any distinguishable features brought before us by either side, we, respectfully following the same, hold that no royalty is receivable by the assessee from Dabur Nepal and, therefore, the order of the CIT(A) sustaining the addition on account of Royalty receivable from Dabur Nepal (P) Ltd., at 2% is directed to be deleted. So far as royalty receivable from Dabur International, UAE is concerned, the same is directed to be restricted to 0.75% as held by the Tribunal. Since the facts of the present appeal are identical to the facts decided by the Tribunal in assessee s own case in the preceding assessment year, therefore, in absence of any distinguishable features brought before us by either side, we, respectfully following the same, hold that no royalty is receivable by the assessee from Dabur Nepal and, therefore, the order of the CIT(A) sustaining the addition on account of Royalty receivable from Dabur Nepal (P) Ltd., at 2% is directed to be deleted. So far as royalty receivable from Dabur International, UAE is concerned, the same is directed to be restricted to 0.75% as held by the Tribunal. Addition on account of interest on loan advanced to Dabur International, UAE, an AE - HELD THAT - Since the assessee in the instant case has charged interest on loan @ 6.75%/7% from Dabur International, UAE, which is higher than the internal CUP wherein interest rate charged by Bank of Baroda for Commercial Papers was 5.675%, therefore, the international transaction of interest received, in our opinion, is considered to be at arm s length applying the CUP method. We find, the coordinate Bench of the Tribunal in the case of Bharti Airtel Limited 2014 (3) TMI 495 - ITAT DELHI too, has held that in a case where loans are advanced in foreign currency, the interest rate on foreign currency loans being qualitatively different, and accordingly, even if one has to see the interest that the assessee would have earned, one has to see the interest that the assessee would have earned on foreign currency loans and not rupee denominated loans. Accordingly, the order of the CIT(A) deleting the addition upheld. Recompute the deduction u/s 80IB and 80IC of the Act without further allocation of the head office and other expenses to various units eligible for such deduction - HELD THAT - We do not find any infirmity in the order of the CIT(A) reversing the action of the AO in allocating the head office expenses and depreciation to various eligible units for the purpose of recomputing the deducting u/s 80IB/80IC. The factual finding of the ld.CIT(A) that the assessee has added back the depreciation as per Companies Act, 1956 and claimed depreciation as per the Income-tax and, therefore, the AO was wrong in allocating the difference of depreciation available under the Companies Act and the Income-tax Act to the eligible units could not be controverted by the ld. DR. Similarly, the ld. DR also could not controvert the factual finding given by the CIT(A) that expenses aggregating to ₹ 1,563.02 lakhs being head office expenses were suo motu disallowed by the assessee and added back in the computation of income and once these expenses were claimed by the assessee, the same cannot be allocated to the eligible units for computation of deduction u/s 80IB/80IC and, therefore, cannot be allocated to the eligible units. As during the financial year under consideration, depreciation was debited to the P L Account. A perusal of the computation of income,shows that the assessee has added back the aforesaid depreciation under Companies Act and claimed depreciation in accordance with the provisions of section 32 of the Act. The depreciation as claimed in the return of income was duly allocated among all the units including the eligible units. We, therefore, find no infirmity in the order of the CIT(A) in reversing the action of the AO in allocating the difference of depreciation available under the Companies Act and Income-tax Act to the eligible units Miscellaneous expenses written off, donation and provision for bad debts were suo motu disallowed by the assessee in its return of income. Therefore, once the aforesaid expenses were not claimed as a deduction by the assessee, the same, in our opinion, cannot be allocated to the eligible units and be considered for computing the deduction u/s 80IB/80IC. Since the scientific research expenses which were included in the head office expenses allocated by the AO are not connected with the units eligible for deduction u/s 80IB/80IC, the same, in our opinion, cannot be allocated to the eligible units. In this view of the matter, the order of the CIT(A) is upheld and the ground raised by the Revenue on this issue is dismissed. Belated payments of employees contribution to ESI which was treated u/s 36(1)(va) of the Act r.w. section 2(24)(10) - HELD THAT - CIT(A) deleted the addition on the ground that although such payments were made /deposited after the due date prescribed in the ESI Act, however, such deposits were made prior to the date of filing of the return u/s 139(1). We find, the Hon ble Delhi High Court in the case of CIT vs. Bharat Hotels Ltd 2018 (9) TMI 798 - DELHI HIGH COURT has held that Employees State Insurance Corporation and Provident Fund dues paid beyond prescribed period is not an allowable deduction. Since the Hon ble Delhi High Court has decided the identical issue against the assessee which is after the date of SLP dismissed by the Hon ble Apex Court in the case of Rajasthan State Beverages Corporation Ltd. 2017 (7) TMI 1087 - SC ORDER and since the decision of the jurisdictional High Court is binding on us, therefore, the various other decisions relied on by the ld. Counsel for the assessee cannot be followed. In this view of the matter, the order of the ld.CIT(A) is reversed and the ground raised by the Revenue is allowed Disallowance u/s 14A r.w. Rule 8D - HELD THAT - Since the assessment year involved in the impugned appeal is 2007-08, therefore, provisions of Rule 8D cannot be applied for the impugned assessment year as held in various decisions. Further, it has been held in various decisions that provisions of section 14A are applicable only if the assessing officer at the first place finds that the assessee has actually incurred expenses which have proximate nexus with earning of dividend income and not otherwise. However, in the instant case, there is no such recording of satisfaction, therefore, we find some force in the argument of the ld. Counsel that in absence of recording of any satisfaction, provisions of section 14A cannot be applied mechanically. Further, the interest expenditure, if any, relatable to dividend yielding investment has to be considered as held in various decisions. It is also held in various decisions that only investments yielding dividend income has to be considered for the purpose of making disallowance u/s 14A. Under these circumstances, we are of the considered opinion that the AO was not justified in applying the provisions of section 14A r.w. Rule 8D and disallow u/s 14A r.w. Rule 8D as against the actual dividend income of ₹ 30,000/-.We accordingly hold that the disallowance u/s 14A has to be restricted to ₹ 30,000/-. The ground raised by the Revenue is accordingly partly allowed. Depreciation @ 25% of the goodwill which were not shown by the assessee as its assets - HELD THAT - We find, the Hon ble Delhi High Court in the case of Areva T D India Ltd. 2012 (4) TMI 79 - DELHI HIGH COURT has held that specified intangible assets, viz, business claims, business information, business records, contracts, employees and know-how acquired by assessee under slump sale agreement are in nature of business or commercial rights of similar nature specified in section 32(1(ii) and are accordingly eligible for depreciation under that section. The various other decisions relied on by the ld. Counsel for the assessee also supports his case that depreciation is allowable on goodwill. AO should not have refused to consider the claim of depreciation despite the fact that the assessee raised such claim vide its letter dated 13.12.2010 addressed to the AO. In this view of the matter and in view of the detailed reasoning given by the CIT(A) on this issue, we find no infirmity in his order allowing claim of depreciation on goodwill. The order of the ld.CIT(A) on this issue is accordingly upheld and the ground raised by the Revenue on this issue is accordingly dismissed. ESOP expenses debited in the Profit Loss Account ought to have been allowed as deduction in computing the income under the head Profit and Gains of Business - HELD THAT - We find, the assessee in the instant case, has raised the additional ground before the Tribunal relating to the ESOP expenses which were debited in the Profit Loss Account, but, added back while computing the income under some misconception of facts and law. However, the issue, in our opinion, is legal in nature. We find, identical issue had come up before the Tribunal in 2017 (4) TMI 1521 - ITAT DELHI has admitted the additional ground and has restored the issue to the file of the AO for deciding the issue in accordance with law, after giving due opportunity of being heard to the assessee. Royalty chargeable from three Associated Enterprises (AEs) as contemplated u/s 92CA - HELD THAT - Revenue s appeal for A.Y. 2007-08 already decided the issue and the grounds raised by the assessee have been partly allowed and the grounds of the Revenue have been dismissed. Following similar reasonings, the grounds raised by the Revenue are dismissed and the grounds raised by the assessee are partly allowed. Addition to the extent of 0.05% as service fee for the corporate guarantee to Dabur Energy and addition to the extent of 0.513% as service fee for the corporate guarantee to Naturelle LLC, UAE - HELD THAT - So far as the guarantee issued on behalf of Dabur Egypt Ltd., Egypt is concerned, we have already dealt with this issue while deciding ground of appeal No. 2and 3 for A.Y. 2007-08 and the same has been determined at 0.30%. Following similar reasonings, we modify the order of the CIT(A) and direct the AO to adopt the service fee on account of corporate guarantee at 0.30% in respect of guarantee issued on behalf of Dabur Egypt Ltd., Egypt. Corporate guarantee issued on behalf of Naturalle LLC, UAE - We have held in the preceding years that interest benefit be split between the guarantor and borrower on 50 50 basis. Therefore, applying the said rule, the benefit can be attributed to the service fee on account of guarantee at 0.30%. We accordingly modify the order of the CIT(A) and direct the AO to restrict the service fee/commission for providing such corporate guarantee at 0.30% on the amount of ₹ 13.06 crores provided to Naturalle LLC, UAE. The grounds of appeal Nos.7 and 8 filed by the assessee are accordingly partly allowed.

Summary

Issues Involved:
1. Corporate Guarantee
2. Royalty Adjustment
3. Interest on Loan to Associated Enterprises
4. Deduction under Section 80IB and 80IC
5. Disallowance under Section 14A
6. Depreciation on Goodwill
7. ESOP Expenses
8. Exempted Excise Duty

Issue-Wise Detailed Analysis:

1. Corporate Guarantee:
The assessee issued corporate guarantees on behalf of its associated enterprises, which the TPO considered an international transaction requiring benchmarking. The TPO applied a rate of 4.68% for the corporate guarantee fee. The CIT(A) reduced this to 0.50% for Dabur Egypt and 0.513% for Naturalle LLC, UAE. The Tribunal further reduced the fee to 0.30% for both entities, noting that the benefit of the guarantee should be split between the guarantor and the borrower.

2. Royalty Adjustment:
The TPO made adjustments for royalty not charged by the assessee to its AEs. The CIT(A) reduced the royalty rate from 7.5% to 2% for Dabur Nepal and from 3% to 2% for Dabur International, UAE. The Tribunal upheld the CIT(A)'s decision but further reduced the rate to 0.75% for Dabur International, UAE, and applied the same rate to Asian Consumer Care Pvt. Ltd., Bangladesh, following its decision for the previous assessment year.

3. Interest on Loan to Associated Enterprises:
The TPO applied a 14% interest rate on loans given to Dabur International, UAE. The CIT(A) reduced this to the LIBOR rate plus a margin, finding the rates of 6.75% and 7% charged by the assessee to be at arm's length. The Tribunal upheld the CIT(A)'s decision, noting that the interest rate should be market-determined and comparable to the currency in which the loan was denominated.

4. Deduction under Section 80IB and 80IC:
The AO allocated head office expenses and depreciation to various units, reducing the deduction claimed under Sections 80IB and 80IC. The CIT(A) reversed this, noting that the assessee had already disallowed these expenses in its computation of income. The Tribunal upheld the CIT(A)'s decision, finding no nexus between the head office expenses and the eligible units.

5. Disallowance under Section 14A:
The AO made a disallowance under Section 14A r.w. Rule 8D. The CIT(A) deleted the disallowance, noting that the AO had not recorded any satisfaction regarding the incorrectness of the assessee's claim. The Tribunal upheld the CIT(A)'s decision, noting that the disallowance cannot exceed the exempt income, which was only ?30,000.

6. Depreciation on Goodwill:
The AO disallowed depreciation on goodwill, arguing that it was not shown as an intangible asset and was adjusted against reserves. The CIT(A) allowed the depreciation, noting that the excess payment over net assets was in the nature of goodwill. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in CIT vs. Smifs Securities Ltd., which held that goodwill is an asset eligible for depreciation under Section 32.

7. ESOP Expenses:
The assessee raised an additional ground for the deduction of ESOP expenses. The Tribunal admitted the additional ground and restored the issue to the AO for adjudication in accordance with the law, following its decision in the assessee's own case for the previous assessment year.

8. Exempted Excise Duty:
The assessee raised an additional ground arguing that the exempted excise duty should be treated as a capital receipt and not liable to tax. The Tribunal admitted the additional ground and remanded the issue to the AO for adjudication, noting that the issue was legal in nature and should be considered to correctly assess the tax liability.

Conclusion:
The Tribunal provided partial relief to the assessee on several issues, including corporate guarantee fees, royalty adjustments, and interest on loans to associated enterprises. It upheld the CIT(A)'s decisions on the allocation of head office expenses and depreciation on goodwill. The Tribunal also admitted additional grounds related to ESOP expenses and exempted excise duty, remanding these issues to the AO for further consideration.