2016 (11) TMI 367 - AT - Income Tax

Depreciation on intangible assets - Held that - Assessee is eligible for the claim of depreciation u/s 32(1)(ii) on the amount of intangible assets acquired by it as per Business Transfer Agreement, and thus action of lower authorities was not factually or legally justified while making disallowance of the depreciation on the intangible assets. The AO is directed to grant the benefit of depreciation in terms of section 32(1)(ii) upon the intangible assets acquired by the assessee Disallowance made u/s 14A in respect of interest expenditure - Held that - Factually speaking, the learned representative for the assessee had referred to the Balance-sheet to point out that the Share capital plus Reserves and Surplus amounts to ₹ 318.21 crores as against investment of ₹ 41.65 crores, to point out that sufficient interest-free funds are available to cover the level of investments in question. Under these circumstances, in our view, the disallowance of ₹ 4,55,230/- out of interest expenses by applying the provisions of Rule 8D(2)(ii) of the Rules is unjustified and is hereby set-aside. Thus, on this aspect, order of the CIT(A) is set-aside and Assessing Officer is directed to delete the addition made u/s 14A of the Act. Transfer Pricing adjustment in respect of corporate guarantee given by assessee on behalf of its Associated Enterprise (AE) to the Bank of Bhutan - arm s length rate of 3.35% determined by the income-tax authorities for determining the Transfer Pricing adjustment - Held that - considerations which apply for issuance of Corporate Guarantee were distinct and separate from that of Guarantee provided by the banks and, therefore, the two transactions were incomparable. In our considered opinion, similar parity of reasoning is applicable in the present case too because the considerations which weigh for raising of Bonds, that too in Indian market, are quite distinct and incomparable with the instance of providing of Corporate Guarantee to a bank abroad in connection with raising of loan from such bank by the AE of assessee outside India. Therefore, in our considered opinion, the exercise carried out by the TPO to arrive at the arm s length rate of 3.35% suffers from an inherent misconception as the benchmarking has been done between two incomparable situations. Therefore, we are unable to uphold the said stand of the income-tax authorities. Insofar as the adequacy of 1% rate charged by the assessee is concerned, we find enough reasonableness in the same. It can be safely inferred that providing of Corporate Guarantee was not a critical mass , which enabled the AE to raise term loan from Bank of Bhutan Ltd. Moreover, the savings to the assessee-company in the shape of lower production costs on procurement of material from the AE is also a relevant factor. Thus, considering the entirety of the facts and circumstances of the case, in our view, Corporate Guarantee fee charged by the assessee @ 1% is well-founded and does not require any Transfer Pricing adjustment. Thus, we set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition

Summary

Issues Involved:
1. Taxability of surplus on prepayment of deferred sales tax.
2. Allowance of depreciation on intangible assets.
3. Disallowance under Section 14A of the Income Tax Act.
4. Transfer pricing adjustment for corporate guarantee fee.

Detailed Analysis:

1. Taxability of Surplus on Prepayment of Deferred Sales Tax:
The first issue pertains to the taxability of ?41,52,959/- arising from the prepayment of deferred sales tax. The Assessing Officer treated this amount as a revenue receipt chargeable to tax under Section 41(1) of the Income Tax Act, which was upheld by the CIT(A). However, the Tribunal noted that in previous years, similar issues had been adjudicated in favor of the assessee by both the Tribunal and the Hon'ble Bombay High Court. The High Court held that no benefit accrued to the assessee since the transaction involved paying the present value of a future liability. The Tribunal followed this precedent and allowed the assessee's appeal, deciding that the surplus amount could not be taxed under Section 41(1) or Section 28(iv).

2. Allowance of Depreciation on Intangible Assets:
The second issue involves the allowance of depreciation on intangible assets such as Trademark, Technical Know-how, Marketing Network, and Non-compete fees, totaling ?13,27,50,000/-. The Tribunal observed that the assessee had acquired these intangible assets as part of a business transfer agreement and that their genuineness was not disputed. The Tribunal referred to the Hon'ble Supreme Court's judgment in CIT vs. Smifs Securities Ltd., which allowed depreciation on goodwill. The Tribunal concluded that the assessee was entitled to claim depreciation on the intangible assets and directed the Assessing Officer to allow it as per Section 32(1)(ii) of the Income Tax Act.

3. Disallowance under Section 14A of the Income Tax Act:
The third issue concerns the disallowance of ?4,55,229/- under Section 14A for interest expenditure related to exempt dividend income. The Tribunal noted that the assessee had sufficient interest-free funds to cover the investments yielding exempt income, invoking the presumption established by the Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. The Tribunal found the disallowance of interest expenditure under Rule 8D(2)(ii) unjustified and directed its deletion. However, the disallowance of ?16,57,492/- on account of expenditure under Section 14A was not pressed by the assessee and was dismissed.

4. Transfer Pricing Adjustment for Corporate Guarantee Fee:
The final issue pertains to the transfer pricing adjustment of ?2,12,937/- for the corporate guarantee fee provided by the assessee to its AE in Bhutan. The TPO had determined the arm's length rate of the guarantee fee at 3.35%, based on the credit ratings of the assessee and the AE. The Tribunal found that the TPO's approach of comparing the credit ratings and interest rates in the Indian market was flawed and inconsistent with the Hon'ble Bombay High Court's decision in Everest Kanto Cylinder Ltd. The Tribunal noted that the AE had sufficient debt-equity ratio and that the corporate guarantee was not critical for raising the loan. Considering the entirety of circumstances, the Tribunal held that the 1% fee charged by the assessee was reasonable and directed the deletion of the addition of ?2,12,937/-.

Conclusion:
The Tribunal allowed the assessee's appeal on the issues of taxability of surplus on prepayment of deferred sales tax, allowance of depreciation on intangible assets, and transfer pricing adjustment for corporate guarantee fee. The disallowance under Section 14A for interest expenditure was also deleted, while the disallowance of ?16,57,492/- was dismissed as not pressed. The appeal was partly allowed.