2023 (9) TMI 1427 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - interest expenditure debited against the non-tonnage income - assessee has suo-moto made disallowance - when the income of assessee is taxed under the Tonnage tax Scheme whether there can be any disallowance u/s 14A of the Act despite assessee earning exempt income such as Dividend? - HELD THAT - We find that identical issue arose in case of varun Shipping Limited 2011 (11) TMI 370 - ITAT MUMBAI to hold that where the income of the assessee is assessed under Tonnage tax Scheme , no disallowance u/s 14A can be made. Therefore, AO and DRP are incorrect in apportioning interest expenditure and other expenditure, which are part of computation of tonnage tax computation of Total income. AO and the learned DRP have considered the total interest expenditure of the Appellant Company aggregating Rs.153.64 crores, which includes the interest expenditure of the tonnage tax business of the Appellant of Rs.145.88 crores for computing the disallowance under Rule 8D(2)(ii), same is not correct. Grounds of appeal concerning disallowance u/s 14 A rwr 8 D while computing normal computation of income to the file of the ld AO, assessee is directed to submit revised computation before ld Ao, The ld AO may examine the same and following our above directions and finding recompute the disallowance by - i. No disallowance of expense or interest should be made out of tonnage tax income computation ii. As there is no interest expenditure liable for a disallowance as the own funds consisting of the share capital and reserves, are far more than the aggregate value of investments held by the company. No Interest disallowance should be made. iii. The administrative expenses cannot exceed the actual expenditure incurred. iv. Those investments on which no exempt dividend income was received by the Appellant during the year are to be excluded while computing the disallowance under Rule 8D(2)(iii). Disallowance u/s. 14A while computing the book profit u/s. 115JB - This issue now stands covered in the favour of the assessee by the decision of the Tribunal in assessee s own case in the earlier years whereas the Tribunal has followed the decision of the Special Bench in the case of Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that the computation under clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to the computation as contemplated under Section 14A read with Rule 8D of the Income-tax Rules, 1962. Also in JSW ENERGY LTD. 2015 (5) TMI 823 - BOMBAY HIGH COURT has also held that such adjustment is not permitted. Therefore adjustment to the book profit as computed u/s 115 JB of the act and further increasing it by disallowance computed u/s 14A rwr 8D is not warranted. Taxation of the long-term capital gain at the rate of 20% as against the current rate of 10% while passing the assessment order u/s 143 (3) read with section 144C (13) - On hearing the parties, we find that the learned assessing officer should have charged the correct rate of tax on the long-term capital gain. The learned assessing officer is directed to do so. Ground of the appeal of the assessee is allowed. Non granting tax credit while framing the assessment order - On hearing the parties, we direct the learned assessing officer to grant tax credit to the assessee of the above amount after proper verification. If the learned assessing officer finds that assessee is not entitled to any tax credit, he must give an opportunity to the assessee to explain the same and thereafter decide the issue. TP Adjustment - arm s-length price computation of the financial guarantee issued by the assessee - HELD THAT - It is necessary to benchmark the international transaction by adopting the most appropriate method and also by showing comparable/comparability analysis. For this assessment year, we find that the learned TPO and the learned DRP has repeated their own orders of earlier years i.e. assessment year 2008 09. Therefore, both these orders/directions are not in accordance with the transfer pricing provisions as they do not determine the arm s-length price of the international transaction in accordance with the provisions of section 92C (3) of the act. Therefore, we disapprove both the above orders and directions. Coming to the benchmarking analysis adopted by the assessee, we noted that assessee has made a suo moto adjustment considering 0.55% as arm s-length price of the international transaction, despite the fact that, assessee has not charged any guarantee fees from its associated enterprises. For the purpose of benchmarking, the assessee adopted the comparable uncontrolled price method and considered the average corporate guarantee charges charged by the bankers to the assessee which is 0.56%. On that basis, the assessee has benchmarked these corporate guarantees at the rate of 0.55%. Therefore, there was no dispute with the method i.e. CUP method as well as the comparables selected as average corporate guarantee charges charged by the bankers. As average corporate guarantee charged by the bankers on the assessee is 0 .56%, is compared with the corporate guarantee issued by the assessee to the bankers on behalf of its associated enterprises, in any way cannot exceed 0.56%. Therefore, the adjustment made by the assessee is at maximum. Therefore, even otherwise, when the assessee has offered the income being adjustment of ALP of international transaction more than what it could have been in a worst-case scenario, no further adjustment can be made. Therefore, for this solitary reason we do not find that the method adopted by the assessee is improper and further for comparison, the assessee has selected maximum what could have been charged as corporate guarantee fees. ALP determination of performance guarantee issued by the assessee - HELD THAT - As the international transaction is required to be benchmarked for each financial/assessment year, we are of the view that the issue of performance guarantee which is a financial guarantee with risk mitigation, should also be benchmarked as it involves financial risk on the assessee. However, we are also conscious of the fact that assessee has made us you a Moto adjustment with respect to the financial guarantee of 0.55% of the outstanding guarantees. These performance guarantees in the nature of financial guarantees needs to be benchmarked, which can be remunerated at less than that rate. As in the case of financial guarantees without any security, the assessee has offered SUO Moto disallowance of 0.55% as guarantee. In addition, here the assessee has adequate security and therefore the benchmarking of this performance guarantee needs to be substantially lower than pure financial guarantees. Thus the rates adopted by the learned TPO and the learned dispute resolution panel are not at all relevant and are exorbitant high without any basis. Therefore, those rates are already rejected by us. Non-taxability of bad debts written back and an insurance claim received during the year but pertaining to the years prior to the tonnage tax scheme applicability to the assessee directed by the learned dispute resolution panel to be not taxable - HELD THAT - We find that the logic and reason given by the learned assessing officer for separately taxing the above income is unjustified in view of the fact that had there been a bad debt arising out of the sale made by the assessee prior to the tonnage tax regime would have been allowed to the assessee as a deduction separately or not. Clear-cut answer is no. Therefore similarly, the bad debts of earlier if written back during the year cannot also be taxed when the income of the assessee is required to be computed under the tonnage tax scheme. As claimed by assessee, issue is covered in favour of assessee by earlier decision; however, we decide this issue based on clear provision of law itself. Accordingly we do not find any infirmity in the direction of the learned dispute resolution panel directing the AO to not to include the bad debts written back and insurance claim received separately as income of the assessee. Accordingly, ground number 1 and 2 of the appeal of the AO are dismissed. Direction of DRP of not taxing the forfeiture of the warrants u/s 41 (1) - HELD THAT - The fact shows that assessee Company had on August 09, 2007, allotted 50,05,000 convertible warrants to certain Promoters and Non Executive Directors, pursuant to the resolution passed by the shareholders at their meeting held on July 26, 2007, at a price of Rs. 312.75 per share. Each warrant was convertible into one Equity Share of the face value of Rs. 10/-, at the option of the warrant holders, at any time prior to expiry of 18 months from the date of allotment of the warrants. Out of the 50,05,000 warrants, 10,000 warrants were converted into Equity Shares. Due to the unfavorable market conditions, which did not justify conversion of warrants, the balance 49,95,000 warrants were not converted. Accordingly the said warrants stood cancelled and the amount being the amount received upfront from the warrant holders @ Rs. 32/- has been forfeited and credited to capital reserve. The issue is squarely covered in favour of the assessee by the decision of the honourable Supreme Court in case of CIT versus Mahindra and Mahindra Ltd 2018 (5) TMI 358 - SUPREME COURT .Thus, we do not find any infirmity in the direction of the learned dispute resolution panel. Accordingly, ground number 3 of the appeal of the learned AO is dismissed.

Summary

Issues Involved:
1. Non-Transfer Pricing Issues
2. Transfer Pricing Issues
3. Taxation of Forfeiture of Share Application Money
4. Bad Debts Written Back and Insurance Claims

Summary:

Non-Transfer Pricing Issues:
1. Section 14A Applicability: The DRP erred in holding that the provisions of Section 14A of the Act were applicable since the dividend from shares/units of mutual funds is subjected to tax in the hands of the payer.
2. Interest Expenditure Disallowance: The DRP erred in holding that the aggregate interest expenditure incurred by the Appellant pertaining to tonnage and non-tonnage activities was to be considered for computing the disallowance under Rule 8D.
3. Administrative Expenditure Disallowance: The DRP confirmed the disallowance of administrative and other expenditure aggregating to Rs.5,56,16,741/- computed in accordance with Rule 8D.
4. Long Term Capital Gains Tax Rate: The AO erred in computing the tax on Long Term Capital Gains at 20% instead of 10%.
5. Tax Credit: The AO erred in not granting credit for tax deducted at source aggregating to Rs 12,62,041/-.

Transfer Pricing Issues:
1. Financial Guarantees: The AO/TPO erred in rejecting the arithmetic mean of internal comparable rates of guarantee commission of 0.60% per annum adopted by the Appellant for benchmarking the financial guarantees given by it on behalf of its Associated Enterprise.
2. Performance Guarantees: The AO/TPO erred in holding that the performance guarantees given by the Appellant on behalf of its Associated Enterprises constitute "international transaction" under Section 92B of the Act and in holding the arm's length price of the performance guarantees at 1% per annum.

Taxation of Forfeiture of Share Application Money:
1. Forfeiture of Warrants: The AO treated the forfeiture of warrants as income invoking the provisions of section 41 (1) and section 28 (iv) of the act. The learned dispute resolution panel directed the learned AO to not to tax the above amount.

Bad Debts Written Back and Insurance Claims:
1. Bad Debts and Insurance Claims: The AO's appeal to tax bad debts written back and insurance claims received during the year but pertaining to the years prior to the tonnage tax scheme applicability to the assessee was dismissed. The DRP directed that these should not be taxed separately as they are part of the tonnage tax income.

Conclusion:
The appeals were disposed of with directions to the AO to recompute disallowances and adjustments as per the Tribunal's findings, particularly focusing on the correct application of Section 14A, proper benchmarking of transfer pricing adjustments, and adherence to the tonnage tax scheme's provisions. The Tribunal upheld the DRP's directions on non-taxability of forfeited warrants and bad debts written back under the tonnage tax scheme.