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2022 (2) TMI 1402 - AT - Income TaxTP Adjustment - adjustment of notional interest in respect of delayed receivable from its AEs - rate of interest adopted by the TPO - LIBOR 2% - DRP rejected the contention of the assessee that the adjustment is not required in this regard, since it is not an international transaction - HELD THAT - As in case of Swiss Re Global Business Solutions India Pvt. Ltd. 2022 (1) TMI 1275 - ITAT BANGALORE by following the judgment of AMD (India) Pvt.Ltd. 2018 (8) TMI 2094 - KARNATAKA HIGH COURT held that deferred revenue from AE would constitute independent international transaction and the same needs to be benchmarked independently. Further, it was held by the Tribunal that the rate of interest to be adopted is at LIBOR 2%. Thus we direct the A.O. to calculate the interest rate on outstanding receivable from AE by adopting LIBOR 2% TP Adjustment to be confined to International transaction only - AR stated that the revenues from the international transaction constitute only 29.85% of the total revenue, therefore, as submitted that the TP adjustment if at all ought to be restricted to that extent - HELD THAT - The action of the TPO is wholly erroneous and contrary to the provisions of the Act and the Rules made there under. A.O. has to refer the matter to the TPO for computation of ALP only in relation to the international transactions and the TPO is empowered to compute ALP only in respect of the said international transactions. In the case of IKA India (P.) Limited 2018 (10) TMI 49 - ITAT BANGALORE had decided an identical issue and held that the transfer pricing adjustment is to be limited only to the international transactions entered by the assessee with its AEs. In the instant case, the assessee claims that the revenue from the international transactions constitute only 29.84% of the total revenue. TPO is directed to rework the TP adjustment only in respect of the international transaction undertaken by the assessee with its AEs. Disallowance u/s 14A - assessee had made sou moto disallowance for expenditure attributable to earning of exempted income - HELD THAT - AO has not recorded his dissatisfaction as regards the correctness of the claim made by the assessee. The working of suo moto disallowance is on record. AO has not pointed out any specific reasons having regard to the accounts of the assessee for rejecting the suo moto disallowance by the assessee. Assessee has sufficient own funds and borrowed funds were not used for the purpose of making investment. As per the statutory Auditors report (clause No.16 and 17), all the borrowed funds have been utilized for the purpose for which it has been borrowed. Further, on perusal of the financials, it is clear that the assessee has sufficient own funds which exceeds the investments. Therefore as placing reliance on Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT and Microlabs Ltd. 2016 (4) TMI 219 - KARNATAKA HIGH COURT we hold that disallowance u/s 14A r.w.Rule 8D(2)(ii) is not warranted in the facts of the instant given case. Nature of expenditure - Expenditure incurred for treatment of products registration - revenue or capital expenditure - HELD THAT - As decided in own case, 2021 (12) TMI 1467 - ITAT BANGALORE the expenses incurred by assessee in respect of Dolenio during the years under consideration towards Mutual recognition process variation, Patent and Trade mark and other registration expenses, are be considered as revenue expenditure, allowable u/s 37(1). In respect of the Annual fee/license fees paid the ledger account revels that these are recurring in nature, and hence cannot be treated to be one time payment. These are in respect of renewal of licence with the drug authorities in respective countries to continue to hold the licence to export and sell the products developed by assessee. Accordingly no infirmity in the observation of Ld. CIT(A) to treat the payments to be revenue expenditure allowable u/s 37(1) - Decided in favour of assessee. Non grant of entire credit of MAT paid by the assessee u/s 115JAA - HELD THAT - The assessee is entitled to the entire credit available to it as per law. Therefore, the A.O. is directed to grant the appropriate credit available to the assessee.
Issues Involved:
1. Transfer Pricing Adjustment - Interest on Delayed Receivables 2. Transfer Pricing Adjustment - Confinement to International Transactions 3. Disallowance under Section 14A of the Income Tax Act 4. Treatment of Product Registration Expenditure as Capital in Nature 5. Non-Grant of Appropriate Minimum Alternate Tax (MAT) Credit Detailed Analysis: 1. Transfer Pricing Adjustment - Interest on Delayed Receivables (Ground 6(d)): The TPO determined a TP adjustment of Rs.16,99,773 as notional interest for delayed receivables from AEs. The DRP directed the TPO to recompute the interest considering the credit period in the invoices, reducing the interest to Rs.8,91,560, adopting LIBOR + 300/400 basis points. The assessee argued that the rate should be LIBOR + 2%, citing the Bombay High Court judgment in CIT v. Aurionpro Solutions Limited and ITAT Bangalore's decision in Swiss Re Global Business Solutions India Pvt. Ltd. The Tribunal directed the AO to adopt LIBOR + 2% for calculating the interest on outstanding receivables, following the precedent set in Swiss Re Global Business Solutions India Pvt. Ltd. Consequently, Ground 6(d) was allowed. 2. Transfer Pricing Adjustment - Confinement to International Transactions (Ground 7): The assessee contended that TP adjustments should be restricted to international transactions, which constituted 29.85% of total revenue. The Tribunal agreed, referencing CIT v. Phoenix Mecano (India) Pvt. Ltd. and other Tribunal decisions, emphasizing that TP adjustments should only apply to international transactions with AEs. The TPO was directed to rework the TP adjustment accordingly. Thus, Ground 7 was allowed for statistical purposes. 3. Disallowance under Section 14A of the Income Tax Act (Ground 10): The AO made an additional disallowance of Rs.47,69,154 under Section 14A, invoking Rule 8D(2)(ii) and (iii), without recording dissatisfaction with the assessee's suo moto disallowance of Rs.15,48,462. The Tribunal noted that the AO failed to record dissatisfaction with the assessee's claim, citing the Supreme Court's judgment in Maxopp Investments Ltd. v. CIT. Additionally, the assessee had sufficient own funds, and borrowed funds were not used for investments. Thus, the Tribunal deleted the disallowance under Section 14A, allowing Ground 10. 4. Treatment of Product Registration Expenditure as Capital in Nature (Ground 11): The AO treated product registration expenses of Rs.1,03,06,348 as capital in nature. The Tribunal referenced its own decision in the assessee's case for previous years, where similar expenses were allowed as revenue expenditure under Section 37(1). The Tribunal reiterated that these recurring expenses were necessary for business operations and did not result in acquiring new assets. Consequently, the Tribunal allowed the claim, treating the expenses as revenue in nature, thus allowing Ground 11. 5. Non-Grant of Appropriate Minimum Alternate Tax (MAT) Credit (Ground 12): The assessee argued that the AO did not grant the full MAT credit available under Section 115JAA. The Tribunal directed the AO to grant the appropriate MAT credit as per law. Therefore, Ground 12 was allowed for statistical purposes. Conclusion: The appeal was partly allowed, with specific directions issued for each ground raised by the assessee. The Tribunal provided detailed reasoning for each decision, ensuring compliance with relevant legal precedents and statutory provisions.
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