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2023 (2) TMI 1270 - AT - Income TaxTP Adjustment - arm s length adjustment to interest income received on loans advanced to subsidiaries - assessee has charged interest from its subsidiaries using LIBOR/EURIBOR as base rate - contentions of the assessee before AO and the TPO was that banks/financial institutions follow the same practice in line with RBI guidelines - HELD THAT - We find that addition made in respect of interest on loans advanced to be subsidiaries is identical to the one decided by the Tribunal in assessee s own case in the immediate preceding assessment year AY 2008-09 2020 (4) TMI 30 - ITAT MUMBAI wherein AO/TPO is directed to recompute the interest on the basis of rate prevalent in the countries where loan was received. No contrary material has been placed on record by the Revenue. The ground no. 1 of assessee s appeal is allowed and the ground no. 2 raised in appeal by the Revenue is dismissed. Disallowance of weighted deduction u/s 35(2AB) - HELD THAT - A perusal of the order of CIT(A) shows that the facts in assessment year under appeal and in A.Y. 2008-09 are similar. AR of the assessee has prayed for deciding the issue instead of restoring it to AO. After examining the assessment order we find that the AO has rejected the claim of assessee at the outset without verifying the veracity of quantum. In so far as admissibility of assessee s claim we hold that in principle the assessee has merit in the claim. For the purpose of examining the expenditure and quantification the issue has to be restored to AO. Thus following the order of Co-ordinate Bench for A.Y. 2008-09 2020 (4) TMI 30 - ITAT MUMBAI the ground raised in appeal by the assessee is allowed for statistical purpose. Disallowance u/s 14A r.w.r 8D - HELD THAT - It is no more res-integra that disallowance u/s 14A of the Act cannot exceed the exempt income earned during the relevant Financial Year. Hence the AO is directed to restrict the disallowance u/s 14A i.e. the dividend income earned by assessee during the period relevant to assessment year under appeal. Ground no. 3 of appeal is thus allowed protanto. Expenditure incurred on alleged freebies u/s 37(1) - HELD THAT - Assessment year under appeal is 2009-10 relevant FY 2008-09. MCI Regulations were amended w.e.f. 14/12/2009 whereby Regulation 6.8 was inserted prohibiting Medical Practitioners to accept freebies gifts etc. from pharmaceutical companies. The period in the instant appeal is prior to the amendment. Hon ble Supreme Court in the case of Apex Laboratories Ltd 2022 (2) TMI 1114 - SUPREME COURT has held that CBDT Circular 5/2012 being clarificatory would apply retrospectively from the date of amendment to MCI Regulations i.e. w.e.f. 14/12/2009. Thus from the decision rendered in the case of Apex Laboratories (P) ltd 2019 (5) TMI 110 - MADRAS HIGH COURT it is unambiguously clear that the amended MCI Regulations would not apply to the AY 2009-10. Hence for the impugned AY the assessee s claim of deduction of freebies to the Medical Practitioners would be allowable u/s 37(1) of the Act as amendment to MCI Regulations is a subsequent event effective from 14/12/2009. Ergo the assessee succeeds on ground no. 4 of appeal on primary contention. Disallowance u/s 14A r.w.r. 8D made while computing book profit u/s 115 JB - HELD THAT - Special Bench of Tribunal in the case of Vireet Investment Pvt. Ltd 2017 (6) TMI 1124 - ITAT DELHI has held that computation u/s 115JB(2) Explanation I (f) has to be made without resorting to computation of disallowance made u/s 14A r.w.r. 8D. The view taken by Special Bench has been approved by the Hon ble Karnataka High Court in the case of PCIT Vs. Atria Power Corporation ltd 2022 (8) TMI 1322 - SC ORDER In the result ground of the appeal is allowed. Corporate guarantee fee - assessee has charged guarantee commission from its overseas AE at the rate of 0.75% based on a letter obtained from HSBC Bank Mumbai - CIT(A) deleted the adjustment made by the TPO and restricted the guarantee commission to 0.75%. - HELD THAT - As in the case of Everest Kanto Cylinders ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT has approved 0.5% guarantee commission at arm s length. In the instant case the assessee has charged guarantee commission from its AEs at 0.75%. We find no infirmity in the findings of CIT(A) on this issue. Hence the findings of CIT(A) on this issue are upheld ground no.1 of appeal by the Revenue is dismissed. Notional interest on infusion of additional funds - CIT(a) deleted addition - HELD THAT - CIT(A) has only allowed consequential relief in the impugned assessment year. Revenue has not disputed the fact that the relief is already granted to the assessee in earlier assessment year i.e. AY 2008-09 and it is only the consequent relief that has been allowed to the assesssee in the assessment year under appeal. Thus in facts of the case the ground no. 3 raised in appeal by Revenue is dismissed. Allocation of R D expenses for the purpose of section 80IB and 80IC to the qualifying units - HELD THAT - We find that similar issue had come up before the Tribunal in assessee s own case in AY 2008-09 2020 (4) TMI 30 - ITAT MUMBAI wherein CIT(A) granted relief to the assessee by following the order of the Tribunal for various earlier years. TDS u/s 195 - Addition made u/s 40 (a)(i) - payments made to non-residents on account of pilot bio-study clinical research - HELD THAT - In AY 2008-09 2020 (4) TMI 30 - ITAT MUMBAI the Tribunal following the decisions rendered in AY 2006-07 2019 (10) TMI 73 - ITAT MUMBAI held that it was payment to non-resident for conducting bio equivalence study are not taxable in India and not subject to withholding tax u/s 195 of the Act. MAT - addition with respect to provision for marked to market for calculation of book profits u/s 115JB - HELD THAT - We find that the Coordinate bench has decided identical issue in AY 2008-09 2020 (4) TMI 30 - ITAT MUMBAI dismissing the ground raised in appeal by the Revenue as observed that marked to market loss are on account of restatement of trading asset and liability and its ascertainment and computation is not disputed by assessing officer. CIT(A) also held that after the decision in CIT Vs Woodward Governor India (P) Ltd 2009 (4) TMI 4 - SUPREME COURT marked to market loss is allowable deduction. And it cannot be termed as unascertained liability as has been provided in clause (c) of Explanation-1 to section 115JB(2). Accordingly cannot be added back to the book profit. Decided against revenue. Addition in respect of provision for gratuity for the purpose of calculating book profit u/s 115JB - HELD THAT - We find that the Tribunal has decided the issue in AY 2008-09 2020 (4) TMI 30 - ITAT MUMBAI wherein as observed that provisions of gratuity is based on the actuarial valuation and therefore ascertained liability. The assessing officer has not disputed actuarial valuation and cannot be treated unascertained liability as has been provided in clause (c) of Explanation-1 to section 115JB(2) No contrary fact or law is brought to our notice to arrive on other finding. Decided against revenue.
Issues involved:
1. Addition on account of arm's length adjustment to income from interest on loans advanced to subsidiaries. 2. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act, 1961. 3. Disallowance under section 14A of the Act. 4. Disallowance of freebies under section 37(1). 5. Disallowance under section 14A under computation of book profits under section 115JB. 6. Validity of assessment order under section 143(3) r.w.s. 144C due to limitation. 7. Deletion of addition representing upward adjustments on account of Guarantee Fee income. 8. Benchmarking of interest rates on foreign currency loans. 9. Deletion of imputation of notional interest on infusion of additional funds. 10. Allocation of R&D expenses for deductions under sections 80IB and 80IC. 11. Deletion of addition made under section 40(a)(i) for payments to non-residents. 12. Deletion of addition representing provision for marked to market (MTM) unrealized losses for calculation of book profit under section 115JB. 13. Deletion of addition representing provision for gratuity for calculation of book profit under section 115JB. Detailed Analysis: 1. Addition on account of arm's length adjustment to income from interest on loans advanced to subsidiaries: The assessee charged interest from subsidiaries using LIBOR/EURIBOR as the base rate. The TPO applied an interest rate of 12.5% on unsecured loans advanced by the assessee to its AEs, making an upward adjustment of Rs. 498,99,490/-. The CIT(A) followed the decisions of its predecessor and held that if the average maturity period of loans advanced to AEs is 3 to 5 years, the rate of interest should be 6 months LIBOR + 150 BP, and if more than 5 years, 6 months LIBOR + 250 BP. The Tribunal upheld this decision, following its earlier order in the assessee's own case. 2. Disallowance of weighted deduction under section 35(2AB): The assessee claimed a deduction at the rate of 150% on capital and revenue expenditure of the in-house R&D unit. The AO disallowed the claim for payments made to third parties for clinical trials and bio-studies. The CIT(A) dismissed this ground, but the Tribunal restored the issue to the AO for verification of expenditure and quantification, following its decision in the assessee's case for AY 2008-09. 3. Disallowance under section 14A: The AO computed disallowance under section 14A at Rs. 74,75,317/-. The Tribunal directed the AO to restrict the disallowance to the extent of dividend income earned by the assessee, i.e., Rs. 18,450/-. 4. Disallowance of freebies under section 37(1): The assessee incurred expenses on sales promotion, gifts, and giveaways amounting to Rs. 70,89,734/-. The AO disallowed these expenses, relying on CBDT Circular No. 5/2012 and MCI Regulations. The Tribunal held that the amendment to MCI Regulations was effective from 14/12/2009 and was not applicable to AY 2009-10. Therefore, the assessee's claim was allowed. 5. Disallowance under section 14A under computation of book profits under section 115JB: The Tribunal held that computation under section 115JB(2), Explanation 1(f) should be made without resorting to the computation of disallowance made under section 14A r.w.r. 8D, following the Special Bench decision in Vireet Investment Pvt. Ltd. and the Karnataka High Court in PCIT Vs. Atria Power Corporation Ltd. 6. Validity of assessment order under section 143(3) r.w.s. 144C due to limitation: The Tribunal dismissed the additional ground challenging the validity of the assessment order on grounds of limitation, following its earlier decision in the assessee's case for the same assessment year. 7. Deletion of addition representing upward adjustments on account of Guarantee Fee income: The assessee charged guarantee commission at 0.75% based on a letter from HSBC Bank, Mumbai. The TPO determined the arm's length rate at 2.847%. The CIT(A) deleted the adjustment, and the Tribunal upheld this decision, following the jurisdictional High Court's decision in Everest Kanto Cylinders Ltd. 8. Benchmarking of interest rates on foreign currency loans: The CIT(A) held that benchmarking should be based on LIBOR for foreign currency loans, not on rupee loans. The Tribunal upheld this decision, following its earlier order in the assessee's case. 9. Deletion of imputation of notional interest on infusion of additional funds: The Tribunal upheld the CIT(A)'s decision to grant consequential relief for notional interest on additional funds, as the relief was already granted in the preceding assessment year. 10. Allocation of R&D expenses for deductions under sections 80IB and 80IC: The Tribunal upheld the CIT(A)'s decision to allocate R&D expenses for deductions under sections 80IB and 80IC, following its earlier order in the assessee's case for AY 2008-09. 11. Deletion of addition made under section 40(a)(i) for payments to non-residents: The Tribunal upheld the CIT(A)'s decision to delete the addition for payments to non-residents for pilot bio-study and clinical research, following its earlier orders in the assessee's case for AY 2005-06, 2006-07, and 2008-09. 12. Deletion of addition representing provision for marked to market (MTM) unrealized losses for calculation of book profit under section 115JB: The Tribunal upheld the CIT(A)'s decision to delete the addition for MTM losses, following its earlier order in the assessee's case for AY 2008-09. 13. Deletion of addition representing provision for gratuity for calculation of book profit under section 115JB: The Tribunal upheld the CIT(A)'s decision to delete the addition for provision for gratuity, following its earlier order in the assessee's case for AY 2008-09. Conclusion: The appeal by the assessee was partly allowed, and the appeal by the Revenue was dismissed.
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