2022 (2) TMI 1428 - AT - Income Tax

TP adjustment - Addition of corporate guarantee at the rate of 1% made by TPO as against 0.20% charged by the assessee - HELD THAT - We find that identical issue arose in the case of the assessee for assessment year 2006 07 in 2014 (5) TMI 880 - ITAT MUMBAI deleted the addition of 0.80 percentage made by the learned transfer pricing officer. We also find that the order of the coordinate bench for assessment year 2006-07 has been confirmed by the honourable Bombay High Court 2016 (11) TMI 258 - BOMBAY HIGH COURT . Furthermore identical additions were made in the assessment year 2007-08 2008-09 2009-10 wherein the coordinate benches following the order of the coordinate bench in assessment year 2006-07 deleted those additions. In view of this respectfully following the decision of the coordinate bench in assessee s own case we also hold that there is no infirmity in the order of the learned CIT-A in deleting the addition of 0.80% on account of corporate guarantee commission - Accordingly ground number 1 of the appeal of the learned AO is dismissed. Disallowance on account of non-recovery of service charge for giving letter of comfort to the subsidiary company at the rate of 0.04% as against 0.50% - CIT(A) upheld 20% of the adjustment proposed by the learned transfer-pricing officer i.e. at the rate of 0.20% i.e. 0.04% of the amount of letter of comfort is chargeable - HELD THAT - We find that identical issue arose in case of the assessee for assessment year 2009-10 2016 (11) TMI 1123 - ITAT MUMBAI wherein the coordinate bench on identical facts and circumstances in 2021 (2) TMI 576 - ITAT MUMBAI has hold that there cannot be any addition in the hands of assessee on account of comfort letter issued. Accordingly ground number 2 of the appeal of the learned assessing officer is dismissed. Allowability of expenditure incurred u/s 35 (2AB) with respect to the expenditure disallowed by DSIR for research and development purposes - CIT(A) directed the learned assessing officer to verify the nature of expenditure which has been disallowed by the authority and if on verification the learned assessing officer finds that the such expenditure was incurred for the purpose of research and development - HELD THAT - We find that identical issue arose in the case of the appeal of the assessee for assessment year 2007 08 2014 (1) TMI 16 - ITAT MUMBAI wherein as found on verification of the relevant details that even the expenditure is not included in the said certificate was eligible for deduction u/s 35(2AB) in respect of the said expenditure was allowed by the Tribunal. In our opinion the issue involved in the case of Torrent Pharmaceuticals ltd. thus is similar to the one involved in the present case and this position is not disputed even by the ld. DR at the time of the hearing before us. He however has contended that the claim of the assessee of having incurred the expenditure in question on R D which is eligible u/s 35(2AB) has not been examined either by the AO or by the ld. CIT(A). He has urged that the matter may therefore be restored to the file of AO for giving him an opportunity to verify the same. We find merit in this contention of the ld. DR and since the ld. Counsel for the assessee has also not raised any objection in this regard we restore this issue to the file of the AO with a direction to decide the same afresh after verifying whether the expenditure in question has been incurred by the assessee on research and development which is eligible for deduction u/s 35(2AB). The appeal of the assessee is accordingly treated as allowed for statistical purpose. Nature of expenditure - expenditure incurred on television advertisement in relation to corporate advertisements - HELD THAT - As no difference in facts and circumstances have been pointed out before us respectfully following the decision of the coordinate bench for assessment year 2008 09 2015 (11) TMI 1745 - ITAT MUMBAI we also confirmed the order of the learned CIT A in deleting the television advertisement expenditure with related to brand expenditure holding that the same are revenue expenditure and cannot be held to be capital expenditure as held by the learned assessing officer. Disallowance u/s 14 A - AO invoked the provisions of rule 8D and computed the disallowance - mandation of recording satisfaction recorded by the learned assessing officer - HELD THAT - In view of above facts as no proper satisfaction has been recorded by the learned assessing officer in terms of the provisions of Section 14 A (2) having regard to the accounts of the assessee about the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income Under the act. In view of this ground number 5 of the appeal of the learned assessing officer is dismissed. Additional depreciation at the rate of 10% - Asset put to use it for less than 180 days in a previous year - assessee has already claimed 10% of the additional depreciation in financial year 2008- 2009 (assessment year 2009 10) and therefore it claimed that balance 10% of the depreciation should be allowed to the assessee in financial year 2010 11 - HELD THAT - As respectfully following the decision of the coordinate bench in assessee s own case for assessment year 2009-10 2016 (11) TMI 1123 - ITAT MUMBAI ground number 6 of the appeal is dismissed holding that the learned CIT appeal is correct in allowing additional depreciation at the rate of 10% for asset purchased in the earlier year. TDS u/s 194H - expenditure incurred on trip scheme - non deduction of tds - CIT(A) held that as the payment has been made to various travel agencies the same cannot be said to be a gift or a commission payment to the dealers from the appellant. hence ld AO misconceived the provisions of Section 194H by making the disallowance - HELD THAT - As respectfully following the decision of the coordinate bench in assessee s own case for assessment year 2009-10 2016 (11) TMI 1123 - ITAT MUMBAI scheme is closely linked to assessee s business activity. It is also a fact that the assessee has not paid any amount to the dealers and distributors but amount spent has been paid to SOTC for organizing the trip. It is also a fact on record that the amounts paid to SOTC has been subjected to TDS as per the relevant provision. Therefore the allegation of the Assessing Officer that the amount has not been subjected to deduction of tax is without any basis. As regards the applicability of section 194H of the Act by no means the AO has established on record that dealers/distributors are agents of the assessee. Further as we find the trip scheme has been introduced by the assessee from past 20 years and the deduction claimed by the assessee on account of such trip scheme has never been disallowed by the Assessing Officer except for the impugned assessment year. Therefore even applying the rule of consistency the expenditure claimed by the assessee has to be allowed. TP adjustment - long-term capital loss arising on account of buyback of shares - International transaction or not?- HELD THAT - In case of buy back of shares shares are tendered to the issuer company; therefore it fits into the criteria of purchase or sale of marketable securities . Buy back also results in income or loss in the hands of the assessee. Assessee has claimed such losses in its computation of total income. Further form no 3CEB in clause no 16 speaks about buyback of shares being an international Transaction. In the present case the transaction is chargeable to tax in the hands of Indian assessee company who has already included the same in its computation therefore it has an impact on Income of the assessee. Therefore it is clear and unambiguous that after the amendment by the Finance Act 2012 Buy back of security is an international transaction. How this international transaction is required to be benchmarked ? - In the present case the buyback of the shares by the overseas associated enterprises from the assessee is at par value i.e. one US dollar per share which is also the face value of that share. As per explanation assessee applied less weightage to discounted cash flow method and more weightage to NAV method. There is no justification coming from the assessee for giving weightage to NAV method and to DCF method. Therefore it is apparent that the assessee does not have any benchmarking the buyback of the shares to determine its arm s-length price. TPO proceeded to value/compute the valuation on his own. He adopted the discounted cash flow method of valuation and thereafter made the addition of the net current assets to arrive at the final equity value. Accordingly he valued the share at US 1.45 per share. In the present case before us the assessee has also adopted changing stands and no justification was given for 30 % discount on cash flow claimed TPO also did not allow any discount in the valuation of subsidiaries. There are no details available of the financials of the subsidiary companies and what are the natures of activities carried out by those subsidiaries companies. It is also not clear whether the subsidiary companies have further subsidiaries and how their valuation has been made to arrive at the value of shares of those companies. The annual accounts of all of the subsidiary companies were placed on record. Assessee has justified the valuation made by chartered accountant by merely providing numbers. No assumptions basis for impairment basis for discount and weightage is provided. Therefore this matter needs to set-aside to the file of the learned assessing officer/transfer pricing officer for determination of the arm s-length price of the buyback of 41 lakh shares of a foreign subsidiary. Thus we set-aside this issue back to the file of the learned transfer pricing officer with a direction to the assessee to 1st show the fair market value of the shares bought back by supporting the valuation report along with the assumptions for such valuations. Assessee is also directed to show the nature of activities of the various subsidiaries their risk factor geographical discounts and complete cash flow with revenue and projected expenditure etc. Dividend distribution tax - applicability of beneficial rate as per the applicable DTAA to the dividend distribution tax (DDT) paid under section 115-O of the Act and has claimed refund of the excess amount - HELD THAT - No information about the country of residence of those shareholders whether those shareholders have Tax Residency certificate of that country there is no submission whether the dividend income is income of shareholders and about how the assessee will claim refund of the taxes if same is income of the shareholders. Further the host of issues with respect to applicable of DTAA as stated in grounds of appeal by assessee are required to be addressed. Therefore respectfully following the decision of the coordinate bench in case of assessee itself for assessment year 2009 10 we also set-aside this issue back to the file of the learned assessing officer with direction to the assessee to submit its claim with all necessary supporting evidences and certificates and then ld AO to decide in accordance with the law.

Summary

Issues Involved:
1. Adjustment on corporate guarantee charges.
2. Non-recovery of service charges for providing Letter of Comfort.
3. Allowability of expenditure under Section 35(2AB).
4. Deduction of expenditure on television advertisement.
5. Disallowance under Section 14A read with Rule 8D.
6. Additional depreciation on additions made in the previous year.
7. Deduction of expenditure incurred on Trip Scheme.
8. Transfer Pricing adjustments for non-recovery of charges for providing letter of support/comfort.
9. Claim for Long-term capital loss on buyback of shares.
10. Non-taxability of royalty income received from a foreign entity.
11. Refund for excess Dividend Distribution Tax (DDT) paid.
12. Deduction in respect of education cess.

Issue-wise Detailed Analysis:

1. Adjustment on Corporate Guarantee Charges:
The Appellate Tribunal upheld the CIT(A)'s deletion of the adjustment made by the TPO for corporate guarantee charges. The Tribunal referenced earlier decisions in the assessee’s own case for previous assessment years, where it was held that no upward adjustment in the ALP for guarantee commission over 0.20% could be made. The Tribunal confirmed that the CIT(A)'s decision to delete the addition of 0.80% on account of corporate guarantee commission amounting to Rs. 112.41 lakhs was correct.

2. Non-Recovery of Service Charges for Providing Letter of Comfort:
The Tribunal found that the issuance of a letter of comfort does not constitute an international transaction. This was based on the Tribunal's earlier decision for the assessment year 2009-10, where it was held that letters of comfort/support do not have financial implications on the assessee and cannot be equated to guarantees. Therefore, the Tribunal upheld the CIT(A)'s decision to restrict the adjustment to 0.04% instead of 0.50%.

3. Allowability of Expenditure under Section 35(2AB):
The Tribunal upheld the CIT(A)'s direction to the AO to verify the nature of the expenditure disallowed by DSIR. The Tribunal referenced its earlier decision in the assessee’s case for the assessment year 2007-08, where it was held that the AO should verify whether the expenditure was incurred for research and development purposes and allow the claim if it was found to be eligible.

4. Deduction of Expenditure on Television Advertisement:
The Tribunal upheld the CIT(A)'s decision to allow the deduction of Rs. 475.29 lakhs incurred on television advertisement, considering it as revenue expenditure. The Tribunal referenced its earlier decision for the assessment year 2006-07, where it was held that advertisement expenditure, whether for product or corporate brand, facilitates the business and is revenue in nature.

5. Disallowance under Section 14A read with Rule 8D:
The Tribunal upheld the CIT(A)'s decision to restrict the disallowance under Section 14A to Rs. 58,23,458/-. The Tribunal noted that the AO had not recorded any satisfaction regarding the correctness of the assessee’s claim, as required under Section 14A(2). This was consistent with the Tribunal’s decision in the assessee’s case for the assessment year 2008-09, which was upheld by the High Court.

6. Additional Depreciation on Additions Made in the Previous Year:
The Tribunal upheld the CIT(A)'s decision to allow additional depreciation of Rs. 1,51,65,251/- for assets purchased in the previous year. The Tribunal referenced its earlier decision in the assessee’s case for the assessment year 2009-10, where it was held that the balance additional depreciation could be claimed in the subsequent year if the assets were put to use for less than 180 days in the previous year.

7. Deduction of Expenditure Incurred on Trip Scheme:
The Tribunal upheld the CIT(A)'s decision to allow the deduction of Rs. 25,26,60,686/- incurred on the trip scheme. The Tribunal referenced its earlier decision for the assessment year 2009-10, where it was held that the expenditure was for business promotion and not in the nature of commission, thus not liable for TDS under Section 194H.

8. Transfer Pricing Adjustments for Non-Recovery of Charges for Providing Letter of Support/Comfort:
The Tribunal reiterated its decision that the issuance of a letter of comfort does not constitute an international transaction and upheld the CIT(A)'s decision to restrict the adjustment to 0.04%.

9. Claim for Long-Term Capital Loss on Buyback of Shares:
The Tribunal set aside the issue of the long-term capital loss on buyback of shares amounting to Rs. 885.23 lakhs to the TPO for fresh adjudication. The Tribunal noted that the valuation methodologies and assumptions used by the assessee and the TPO needed further examination and directed the TPO to determine the arm's-length price based on a detailed valuation report.

10. Non-Taxability of Royalty Income Received from a Foreign Entity:
The Tribunal set aside the issue of non-taxability of royalty income received from SCIB Chemicals SAE, Egypt, to the AO for fresh adjudication. The Tribunal referenced its earlier decisions in the assessee’s case for the assessment years 2006-07, 2008-09, and 2009-10, where the issue was restored to the AO to consider the provisions of the India-Egypt DTAA.

11. Refund for Excess Dividend Distribution Tax (DDT) Paid:
The Tribunal set aside the issue of refund for excess DDT paid to the AO for fresh examination. The Tribunal referenced its earlier decision in the assessee’s case for the assessment year 2009-10, where the issue was restored to the AO to examine the applicability of the beneficial rate under the DTAA.

12. Deduction in Respect of Education Cess:
The Tribunal set aside the issue of deduction of education cess to the AO for fresh adjudication, referencing its earlier decisions in the assessee’s own case.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, setting aside certain issues for fresh adjudication by the AO/TPO. The decisions were largely based on precedents in the assessee’s own case for earlier assessment years.