2017 (4) TMI 862 - AT - Income Tax

Application of correct rate of surcharge on dividend distribution tax DDT - assessee proposed dividend in the accounts for the year ended 31/03/2011 - Held that - As found that in the grounds of appeal, the assessee has attributed the difference to interest u/s 115P and pleaded for deletion of interest on the premises that DDT has been paid by assessee within time. Further, the issue of additional demand does not form subject matter of final assessment order assailed before us. Rather, the demand has been raised in Notice of Demand u/s 156 and Income Tax Computation Form . Therefore, the proper course of action, in such a case, would be to file rectification application before the AO. Therefore, this ground requires no adjudication / direction at our end and the same is accordingly, dismissed. Disallowance of depreciation on non-compete fees - Held that - During AY 1999-2000, the assessee company purchased Glass division from NIPL as a going concern on slump sale basis for a net consideration of ₹ 186.52 crores. In the absence of specific values being ascribed to the various assets while arriving at the above sale consideration, the net slump purchase consideration of ₹ 186.52 crores was apportioned over various assets and liabilities on fair basis. These values were arrived at on the basis of Technical estimates made by the management in accordance with Accounting Standard-10. The assessee claimed depreciation u/s 32 on values recorded in the books of assessee Company. In the alternative, the assessee claimed depreciation @25% on non-compete fees being intangible assets . But DRP following Tribunal s order in assessee s own case for earlier years, decided both the alternatives against assessee. The Ld. Counsel for Assessee AR has fairly conceded that depreciation on fixed assets have not been allowed in earlier years. Even the claim of 25% depreciation on non-compete fees paid by him was also not allowed by Tribunal in AY 1999- 2000. But thereafter, Tribunal in AY 2001-02, relying upon the judgment of Madras High Court in Pentasoft Technologies Ltd. V DCIT 2013 (11) TMI 1057 - MADRAS HIGH COURT & CIT Vs Ingersoll Rand International Ltd. 2014 (6) TMI 934 - KARNATAKA HIGH COURT and Shreya Life Science 2016 (1) TMI 1094 - ITAT MUMBAI , allowed the claim of 25% depreciation on noncompete fees being intangible assets . Further, the issue was again settled in favor of assessee by Tribunal in AY 2006-2007. The Ld. DR fairly conceded the settled position. Value of assets acquired by assessee in pursuance of Scheme of arrangement - Held that - AO treated the transaction as amalgamation and took WDV of the transferred assets as it stood in the books of the transferor company as actual cost to the assessee. Before, DRP, the assessee contended that slump sale was quite distinct from amalgamation and therefore, various explanations to Section 43(1) and 43(6) were not applicable. Further, for AY 1999-2000 Tribunal vide its order dated 16/12/2008 set aside this issue to the file of Ld. CIT(A) for adjudicating the matter by passing a speaking order which is still pending before Ld. CIT(A). For 2006-07, this issue was decided against assessee by DRP directions and appeal against that issue is pending before Tribunal. In the impugned AY, DRP has followed outcome of AY 2006-07 and disallowed the claim of the assessee which has been assailed before us. The Ld. AR has contended that, following Tribunal s directions in 1999-2000, the issue may be sent back to lower authorities for fresh adjudication. Therefore, in view of the factual situation, the matter is restored back to AO for fresh adjudication with a directions to decide the same on the basis of outcome of Ld. CIT(A) decision in assessee s case for 1999-2000. This ground is allowed for statistical purposes. Interest disallowance u/s 36(1)(iii) - Held that - It is well settled by catena of judgments that in such a scenario, it is to be presumed that the investment made in subsidiary were out of own funds and not out of borrowed funds. Further, the assessee has derived varied incomes by way of dividend, royalty, technical fees, management fees, sale of goods etc. out of these investments. These were primarily old investments which can be gauged from the fact that investment as on 31/03/2010 stood at ₹ 58.95 crores as against ₹ 59.26 crores as on 31/03/2011. We find that on identical set of facts, the issue has been decided by Tribunal in assessee s favor for AY 2006-07. Moreover, Hon ble Bombay High Court in CIT Vs Phil Corp. Ltd. 2011 (6) TMI 912 - BOMBAY HIGH COURT has taken a view that investment in subsidiary company for acquisition of shares form integral part of assessee s business and hence interest thereupon is allowable. Keeping all these factors in mind, we are inclined to delete impugned additions. Additions of proportionate interest on borrowed funds qua receivables from subsidiary companies - Held that - No TP adjustment has been made for the impugned transaction and secondly the outstanding amount represent receivables on account of debtors for sales / technical fees as per the contention of the assessee. Therefore, on the facts and circumstances of the case, we deem it fit to restore this issue back to the file of AO for fresh adjudication in proper perspective including benefits derived by AE on account of receivables vis- -vis normal debtors of the business. The assessee is directed to cooperate with the lower authorities forthwith to substantiate its claim forthwith falling which the AO shall be at liberty to adjudicate the same on the basis of material available on record. TP adjustments against loan transaction and corporate guarantee - Interest Free Loan to Subsidiaries - Held that - In principal it is agreed that LIBOR rate plus some mark-up shall apply to the transaction. To calculate the appropriate mark-up on the same, as per contentions of Ld. DR, we deem it fit to restore the matter back to the file of AO for limited purposes of calculation of appropriate mark up with the help of the said data base. The ground is allowed for statistical purposes. Corporate Guarantee - Held that - Hon ble Bombay High Court in CIT Vs. Everest Kento Cylinders Ltd. (2015 (5) TMI 395 - BOMBAY HIGH COURT ) has observed that issuance of a corporate guarantee are distinct and separate from that of bank guarantee and therefore, no TP adjustment can be made in respect of guarantee commission by making comparison between guarantees issued by commercial banks as against a corporate guarantee issued by holding company for benefits of its AE, a subsidiary company. Further, in the said case, the Hon ble court has affirmed guarantee adjustment of 0.50% upheld by the Tribunal. Therefore, respectfully following the same, we restrict TP adjustment against bank guarantee to 0.50%. This ground is partly allowed. Addition on account of certain interest income - Held that - Adequate efforts have been made by assessee and the assessee cannot be asked to prove the negative. We agree with AR s stand that additions cannot be made solely on the basis of Form 26AS entries only which is well settled by various judicial pronouncements. The revenue has not brought anything on record to substantiate its stand and relied merely upon entries in Form 26AS. It appears that the same is erroneous and has crept in due to quoting of wrong PAN by the Bank in their TDS returns and therefore, at least addition, in such a scenario, in the hands of assessee could not be in made. Thus, we are inclined to delete the impugned addition. The bench was informed that similar entries are appearing in Form 26AS of the assessee for other assessment years also. Therefore, the assessee is directed to pursue the correction thereof forthwith with due diligence. The revenue is also directed to scrutinize the TDS return of Bank of America and enable to Bank to take steps in rectifying the impugned errors. Foreign exchange gains arising out of loans given to subsidiaries - Held that - We fail to understand when the item has not been credited to the Profit & Loss Account, how the deduction thereof could be claimed in the computation of income treating it as capital in nature. Therefore, on the facts and circumstances of the case, we are inclined to dismiss this ground of assessee s appeal. Adjustment of provision for bad and doubtful debts from book profits u/s 115JB - Held that - The said amount represented reversal of provision for bad and doubtful debts made by debiting profit & loss account in earlier years but added back to compute book profits for those years. Although, AO accepted the factual matrix, yet relying upon apex court decision in Goetz India Ltd. Vs CIT 2006 (3) TMI 75 - SUPREME Court did not entertain the claim of the assessee on the premises that the same could be admissible only by way of filing the revised return of income. The assessee took support of CBDT circular No. 14 (XL-35) dated 11/04/1955 to assert that it was the duty of AO to grant the admissible reliefs, although not claimed by the assessee due to oversight / inadvertent mistake. AO was duty bound to assess the correct income of the assessee. But DRP and AO rejected the same relying upon Apex Court decision in Goetz India Ltd. Vs CIT(Supra). Before us, the Ld. AR has raised similar contentions. As the factual matrix is not in dispute and the lower authorities, in principal, agreed with the claim of the assessee, the issue is decided in favor of the assessee and hence the AO is directed the give the benefit of impugned amounts in computation of Book Profit u/s 115JB. Non allowing set off of brought forward of business losses and unabsorbed depreciation - Held that - The assessee recomputed brought forward business losses and unabsorbed depreciation on the basis of outcome of appeals of earlier years at ₹ 104.23 crores, the set off of which was not allowed to assessee. DRP concluded that since the issue was consequential, AO was directed to consider the said claim. However, in the final computation of income, we find that credit thereof was not granted to the assessee. Therefore, reiterating the stand of DRP, AO is directed to verify the claim of assessee in this respect and allow the same as per statutory provisions.

Summary

Issues Involved:
1. Application of correct rate of surcharge on Dividend Distribution Tax (DDT).
2. Disallowance of depreciation on non-compete fees.
3. Valuation of assets acquired under a scheme of arrangement.
4. Interest disallowance under Section 36(1)(iii).
5. Proportionate interest on borrowed funds for receivables from subsidiary companies.
6. Transfer Pricing (TP) adjustments on loan transactions and corporate guarantees.
7. Addition of certain interest income.
8. Foreign exchange gains on loans given to subsidiaries.
9. Adjustment of provision for bad and doubtful debts from book profits under Section 115JB.
10. Set-off of brought forward business losses and unabsorbed depreciation.

Detailed Analysis:

Application of Correct Rate of Surcharge on DDT:
The assessee contested the application of the correct rate of surcharge on DDT, arguing that the dividend liability crystallized on the date of approval by the AGM, and the rate applicable on that date should apply. The Tribunal found that the issue of additional demand did not form the subject matter of the final assessment order and suggested that the proper course of action would be to file a rectification application before the AO. This ground was dismissed.

Disallowance of Depreciation on Non-Compete Fees:
The assessee claimed depreciation on non-compete fees capitalized over various assets, which was disallowed by the AO and DRP. The Tribunal noted that in previous years, the claim for depreciation on non-compete fees was allowed by relying on various High Court judgments. Following the settled position, the Tribunal allowed the claim for depreciation at 25% on the WDV of non-compete fees, thus dismissing Ground No. 6 and 8 but allowing Ground No. 7.

Valuation of Assets Acquired Under a Scheme of Arrangement:
The AO treated the transaction as an amalgamation and took the WDV of transferred assets as the actual cost to the assessee. The Tribunal noted that similar issues were pending before the CIT(A) for earlier years and restored the matter back to the AO for fresh adjudication based on the outcome of the CIT(A)'s decision for AY 1999-2000. This ground was allowed for statistical purposes.

Interest Disallowance Under Section 36(1)(iii):
The AO disallowed interest expenditure on the ground that the investments in subsidiaries were not used for business purposes. The Tribunal found that the assessee had sufficient owned funds to cover the investments and derived various incomes from these investments, which were offered to tax. Following judicial precedents, the Tribunal allowed the interest expenditure under Section 36(1)(iii) and dismissed the alternative ground.

Proportionate Interest on Borrowed Funds for Receivables from Subsidiary Companies:
The AO disallowed proportionate interest on borrowed funds for receivables from subsidiary companies. The Tribunal observed that the receivables represented outstanding for more than one year and restored the issue back to the AO for fresh adjudication, directing the assessee to substantiate its claim.

TP Adjustments on Loan Transactions and Corporate Guarantees:
The Tribunal addressed two TP adjustments:
- Interest-Free Loan to Subsidiaries: The Tribunal agreed that LIBOR plus some mark-up should apply and restored the matter back to the AO for calculating the appropriate mark-up.
- Corporate Guarantee: The Tribunal restricted the TP adjustment to 0.50%, following the Bombay High Court judgment in CIT Vs. Everest Kento Cylinders Ltd.

Addition of Certain Interest Income:
The AO added interest income based on entries in Form 26AS. The Tribunal agreed with the assessee that additions could not be made solely based on Form 26AS entries and deleted the impugned addition. The Tribunal directed the assessee to pursue correction with due diligence and the revenue to scrutinize the TDS return of the Bank of America.

Foreign Exchange Gains on Loans Given to Subsidiaries:
The AO and DRP treated foreign exchange gains as revenue in nature. The Tribunal noted the inconsistency in the assessee's treatment of transactions and dismissed the ground, finding the gains to be revenue in nature.

Adjustment of Provision for Bad and Doubtful Debts from Book Profits Under Section 115JB:
The Tribunal agreed with the assessee that the AO should have granted the admissible reliefs due to oversight and directed the AO to give the benefit of the impugned amounts in the computation of Book Profit under Section 115JB.

Set-off of Brought Forward Business Losses and Unabsorbed Depreciation:
The Tribunal directed the AO to verify the assessee's claim for set-off of brought forward business losses and unabsorbed depreciation and allow the same as per statutory provisions.

Conclusion:
The appeal was partly allowed with various grounds being addressed as per the detailed analysis provided. The Tribunal provided directions for fresh adjudication and verification of claims where necessary.