2022 (3) TMI 1433 - AT - Income Tax

Addition of sales tax incentive/subsidy holding it as capital in nature - HELD THAT - As decided in own case A.Y.2013-14 2020 (12) TMI 165 - ITAT MUMBAI allow the assessee s claim for treatment of Notional Sales tax as Capital receipt not liable to tax. Depreciation claim - Whether the claim of depreciation for the year was optional in nature? - HELD THAT - CIT(A) noted that current year issue is consequential. Accordingly following earlier orders of ITAT in assessee s own case he decided the issue in favour of the assessee. It is not the case that earlier years decision of ITAT has been reversed by Hon ble High Court. Learned Departmental Representative also did not dispute that this issue is covered in favour of the assessee. Hence we uphold the order of learned CIT(A). The Revenue s ground is dismissed. Disallowance u/s 14A r. w. Rule 8D(2)(iii) - AO grievance that CIT(A) has erred in directing the Assessing Officer to take into account only such investments as having yielded dividends during the year under consideration - HELD THAT - We find that this issue is covered in favour of the assessee by several decisions of the coordinate benches in assessee s own case for the assessment years 2010-11 to 2012-13. DR does not dispute this position nor does he point out any specific reasons for our not following these coordinate bench decisions but he relies upon the stand of the Assessing Officer nevertheless. We see no reasons to take any other view of the matter than the view so taken by the coordinate benches in assessee s own cases for the assessment years 2010-11 2011-12 and 2012-13 and respectfully following the same we confirm the conclusions arrived at by the CIT(A) on this point as well and decline to interfere in the matter. MAT computation - disallowance u/s 14A r.w Rule 8D(2)(iii) to the amount calculated by the assessee for the purpose of income u/s. 115JB - HELD THAT - We find that in the immediately preceding assessment year in assessee s own case note that this issue is covered in favour of the assessee by the decision of honourable Bombay High Court in the case of Commissioner of income tax vs Bengal finance and investment private limited 2015 (2) TMI 1263 - BOMBAY HIGH COURT wherein the honourable High Court by the order dated 5/1/18 held that disallowance u/s 14A cannot be added under section 115JB - Decided in favour of assessee. Deduction u/s. 80IB(9) - Disallowance of deduction as assessee shall be eligible to claim deduction u/s. 80IB(9) of the Act in respect of profits not allowed as deduction u/s. 10 AA - HELD THAT - Issue decided in favour of the assessee by a decision of the coordinate bench in the assessee s own cases for the assessment years 2011-12 and 2013-14 2020 (12) TMI 165 - ITAT MUMBAI as held that the assessee shall be eligible to claim deduction u/s. 80IB(9) of the Act in respect of profits not allowed as deduction u/s. 10AA . Accordingly we set aside the vide taken by CIT(A) and A.O. on this issue. Decided in favour of the assessee. Addition of aborted blocks of other contract areas underproduction Sharing contracts other than KGD - HELD THAT - As decided in assessee own case for the assessment year 2013-14 2020 (12) TMI 165 - ITAT MUMBAI the deduction u/s 80IB(9) has to be computed after ascertaining profits and gains of eligible business in terms of sec. 80IA(5). Hence there is no scope to adjust expenses relating to other undertaking while computing deduction u/s 80IB(9) - Hence we are of the view that the decision rendered by CIT(A) does not call for any interference and accordingly we uphold the same . Deduction u/s 80IB(9)(ii) - whether natural gas is mineral oil and is eligible for deduction u/s. 801B(9)? - HELD THAT - As the term mineral oil for the purpose of claiming deduction u/s 80-IB(9) of the Act includes natural gas and condensate and therefore the assessee claim for deduction us 80IB(9) in respect of both natural gas and condensate is accordingly allowed. Accordingly this ground of appeal is accordingly allowed. Exclusion of amount of notional sales tax incentive while computing Book Profit u/s. 115JB - HELD THAT - As where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act 1961. For the aforesaid reason we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act 1961. Weighted deduction at 200% in respect of R D expenditure u/s. 35(2AB) as claimed by the assessee - HELD THAT - We see no reasons to interfere in the findings of the CIT(A)- particularly as there are now a number of decisions of the coordinate benches holding that so far as assessment years prior to 2016-17 are concerned the DSIR s limitingthe quantification of expenditure incurred on research and development expenses on a DSIR approved facility would not come in the way of weighted deduction under section 35AB. We are of the considered view that as long as the expenditure is actually incurred in the DSIR approved facility which is not even in dispute in the present case the entire expenses will have to be allowed as a deduction. TP adjustment in respect of interest on delayed realization of receivables - whether the assessee s benchmarking of the interest on the delayed realization of debts at 200 bps above the LIBOR is correct or not? - HELD THAT - We find that in the immediately preceding assessment years consistently this approach of the assessee at the even lower spread of 150 bps has been all along accepted by the coordinate benches. In any case no case has been made out that the spread of 200 bps is lower than the arm s length price. As regards the cost-plus method on the cost of funds we find it is fundamentally flawed inasmuch as it treats all the types of borrowing at par and proceeds on the erroneous assumption that the arm s length price of the debt has at its basis cost of funds available to the tested party- particularly when these funds are of significantly different tenures and different currencies. In view of these discussions as also bearing in mind the entirety of the case we approve the conclusions arrived at by the learned CIT(A)- which is in any event in harmony with the decisions of the coordinate benches in assessee s own and decline to interfere in the matter. Transfer pricing adjustment on Provision of support services for drilling operations to AE - HELD THAT - One of the critical factors in determining the ALP as recognized by rule 10B(2)(d) is conditions prevailing in the market in which AEs operate and once it s a legal condition precedent in entering the transaction in the respective PSC market is that the AE s affiliates are not allowed to have any mark up on a supply of services to the AE the determination of ALP is required to be having regard to this condition. Viewed thus the cost to cost rendition of services can be indeed be viewed as an arm s length transaction. In view of these discussions and being consistent with the co-ordinate bench decisions we uphold the action of the CIT(A) and decline to interfere in the matter. TP adjustment of corporate guarantee fee which is split into 50 50 as against the split of 60 40 charged by the TPO - HELD THAT - We find that this is a purely factual matter which permeates from year to year and once the coordinate benches have consistently held right from 2011-12 onwards that 50 50 allocation is reasonable and there is no change in the material facts we see no reasons to take any other view of the matter than the view so taken by the coordinate benches in assessee s own cases for the preceding assessment years. We therefore approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. Nature of expenses - expenses incurred on corporate social responsibility (CSR) - HELD THAT - As in assessee s own case for the immediately preceding assessment year deleted the similar disallowance. We see no reasons to take any other view of the matter than the view so taken by the coordinate benches and in any case no specific reasons for doing so have been pointed out to us. We have also noted that there is not even doubt on the bonafides and reasonableness of the expenses and that the dispute before us as elaborated earlier is confined to the nature of the amendment being clarificatory. That issue for the detailed reasons set out above- with which we are in considered agreement must be held to only prospective in effect. In this view of the matter and respectfully following the esteemed views of the coordinate benches we delete the impugned disallowance. Disallowance of investment allowance under section 32AC deleted. Deduction in respect of export profits of SEZ unit u/s 10AA with reference to the income computed under the head profits and gains of business or profession of the SEZ unit instead of gross profits and gains of SEZ unit as interpreted by Supreme Court in the recent judgement in the case of Vijay Industries 2019 (3) TMI 171 - SUPREME COURT - Thus we direct the assessing officer to grant the deduction under section 10 AA with reference to the profit and gains as determined by the honourable Supreme Court in the case of Vijay Industries (supra). Reference to the Transfer Pricing Officer ( TPO ) under section 92CA - CIT(A) erred in confirming the action of the learned AO in not demonstrating that the course of business between the Appellant and the closely connected person was so arranged that it produces to the Appellant more than ordinary profits which might be expected to arise in its eligible business. Inter-unit transfer of Power - As definition of the market value shall change for the purpose of domestic transfer pricing regimen is not at all sustainable. Accordingly in the background of the aforesaid discussion and precedent we set aside the orders of the authorities below and decide issue in favour of the assessee.

Summary

Issues Involved:

1. Nature of Sales Tax Incentive/Subsidy
2. Depreciation Claims
3. Disallowance under Section 14A
4. Deduction under Section 80IB(9)
5. Investment Allowance under Section 32AC
6. Transfer Pricing Adjustments
7. Corporate Social Responsibility (CSR) Expenditure
8. Computation of Book Profits under Section 115JB
9. Interest on Delayed Realization of Receivables
10. Interest on Investment in Preference Shares
11. Inter-Unit Transfer of Power
12. Reference to Transfer Pricing Officer (TPO)
13. Exclusion and Inclusion of Comparables in Transfer Pricing Analysis
14. Interest Subsidy under Technology Upgradation Fund (TUF) Scheme

Detailed Analysis:

1. Nature of Sales Tax Incentive/Subsidy:
The primary issue was whether the sales tax incentive/subsidy received by the assessee should be considered as capital or revenue in nature. The Tribunal upheld the CIT(A)'s decision that the sales tax subsidy was a capital receipt not liable to tax, following earlier decisions in the assessee's own cases for previous years. The Tribunal emphasized that the incentive was aimed at encouraging the setting up of industries in backward areas, thus having a direct nexus with fixed capital investment.

2. Depreciation Claims:
The Tribunal addressed the issue of depreciation claims where the assessee had not claimed depreciation on certain assets before April 1, 2002. The Tribunal upheld the CIT(A)'s decision that the claim of depreciation cannot be thrust upon the assessee, following earlier orders which stated that the claim for depreciation is optional.

3. Disallowance under Section 14A:
The Tribunal dealt with the disallowance under Section 14A concerning the computation of book profits under Section 115JB. It was held that only those investments that yielded dividends during the year should be considered for disallowance. The Tribunal upheld the CIT(A)'s decision and dismissed the additional ground raised by the assessee, agreeing with the CIT(A)'s approach.

4. Deduction under Section 80IB(9):
The Tribunal examined the eligibility of the assessee for deduction under Section 80IB(9) for profits derived from refining mineral oil. The Tribunal upheld the CIT(A)'s decision to allow the deduction, following earlier decisions that included natural gas and condensate within the term 'mineral oil.'

5. Investment Allowance under Section 32AC:
The Tribunal addressed the issue of investment allowance under Section 32AC, particularly whether it applied to assets acquired before April 1, 2013, but installed in FY 2013-14. The Tribunal upheld the CIT(A)'s decision to allow the deduction, emphasizing that the installation of assets is crucial for claiming the allowance, even if acquired in an earlier year.

6. Transfer Pricing Adjustments:
Several transfer pricing issues were discussed, including the benchmarking of interest on delayed realization of receivables and investments in preference shares. The Tribunal upheld the CIT(A)'s decisions, emphasizing the need for consistency and rejecting the TPO's recharacterization of transactions.

7. Corporate Social Responsibility (CSR) Expenditure:
The Tribunal examined the disallowance of CSR expenditure under Section 37(1). It was held that the amendment to Section 37(1), which disallows CSR expenses, is not retrospective and applies only from April 1, 2015. The Tribunal allowed the assessee's claim for CSR expenses incurred before this date.

8. Computation of Book Profits under Section 115JB:
The Tribunal addressed the inclusion of notional sales tax incentives in the computation of book profits under Section 115JB. It was held that such incentives, being capital receipts, should not be included in book profits, following earlier decisions and the principle that capital receipts are outside the ambit of book profits.

9. Interest on Delayed Realization of Receivables:
The Tribunal upheld the CIT(A)'s decision to benchmark interest on delayed realization of receivables at LIBOR plus 200 bps, rejecting the TPO's approach of using the assessee's cost of funds.

10. Interest on Investment in Preference Shares:
The Tribunal addressed the issue of treating investments in preference shares as loans and charging interest. It upheld the CIT(A)'s decision that such investments should not be recharacterized as loans, following earlier decisions and emphasizing the nature of quasi-equity.

11. Inter-Unit Transfer of Power:
The Tribunal examined the ALP adjustment for inter-unit transfer of power from captive power plants. It upheld the assessee's benchmarking using the internal CUP method based on the rate charged by an external supplier, rejecting the TPO's adjustments.

12. Reference to Transfer Pricing Officer (TPO):
The Tribunal dismissed the assessee's ground challenging the validity of the reference to the TPO, as the issue was not pressed by the assessee.

13. Exclusion and Inclusion of Comparables in Transfer Pricing Analysis:
The Tribunal addressed the inclusion and exclusion of certain comparables in the transfer pricing analysis. It upheld the CIT(A)'s decisions, following earlier rulings and emphasizing functional similarity.

14. Interest Subsidy under Technology Upgradation Fund (TUF) Scheme:
The Tribunal remitted the issue of excluding interest subsidy under the TUF scheme from taxable income and book profits to the Assessing Officer for fresh adjudication, as the related facts were not examined by the lower authorities.