2017 (10) TMI 588 - AT - Income Tax

Disallowance made under Section 14A - Held that - We find that the Assessing Officer, on being dissatisfied with the assessee s computation of disallowance, embarked on his own computation under rule 8D(2)(iii) at ₹ 5,89,98,005/-. The assessee has not disputed any part of the calculation of such disallowance. This computation of disallowance, having been made in terms of rule 8D(2)(iii), is held to have rightly made. The assessment order making disallowance of ₹ 5.89 crore u/s 14A under the normal provisions of the Act is upheld pro tanto. As regards the adding back of the amount of disallowance under section 14A in the calculation of book profit under section 115JB of the Act, we find that the issue is no more res integra in view of the decision of the Special Bench of the Delhi tribunal in ACIT Vs. Vireet Investments (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income tax Rules 1962. Respectfully following the Special Bench decision, we hold that no separate disallowance should be made under section 14A in the computation of book profits under section 115JB of the Act. Additional depreciation under section 32(1)(iia) - Held that - The word shall is not always conclusive of the mandatory nature and can be read as the word may in certain circumstances. However, when we consider the text and the context of the word shall as employed in clause (iia), there remains no doubt whatsoever that the grant of additional claim at the rate of 20% has necessarily to be allowed as deduction under clause (ii). Once the claim of additional depreciation under clause (iia) is to be allowed as deduction under clause (ii), a fortiori, the command of Explanation 5 which applies to clause (ii) automatically becomes applicable to such a claim of additional depreciation. Once we hold that the claim for additional depreciation is allowable as deduction under Section 32(1)(ii), the writ of Explanation 5 providing for allowing depreciation mandatorily, gets magnetized. Explanation 5, even if placed under clause (ii), applies to sub-section (1) of section 32, which also covers clause (iia). We, therefore, hold that the Assessing Officer was fully justified in granting additional depreciation amounting to ₹ 538.66 crore under clause (iia) read with clause (ii) of section 32(1). Computation under section 115JB whereby the assessee is aggrieved against the disallowance and addition to the book profit - Held that - Assessee determined the amount of net profit as per its Profit and Loss account - both for the purposes of section 115JB and also for placing in the annual general meeting - after claiming Depletion (depreciation) at a higher rate than the one prescribed in Schedule XIV of the Companies Act, which is not forbidden in Parts II and III to Schedule VI of the Companies Act. It is further found that the audit report issued by the auditors of the assessee company is unqualified. The Annual accounts as prepared by the auditors are stated to have been approved by the company in its AGM and then registered by the Registrar of companies without any objection. Such a contention put forth on behalf of the assessee has not been disputed by the Revenue. When position is so, we fail to comprehend as to how the action of the AO in adding the alleged excess depreciation can be sustained. The impugned order is set aside pro tanto and the enhancement to the amount of net profit to the tune made for the purposes of section 115JB of the Act is hereby deleted. Transfer pricing adjustment from the international transaction of payment for intra group services in the nature of business planning and project review board - Held that - The view point of the TPO that such services were duplicate in nature as the assessee was already in similar line of business, is not correct. The assessee undertook exploration work in Rajasthan oil wells in the later part of the preceding year. The assessee also explained to the TPO that it is a highly technical work requiring services of experts for optimising production. Such contentions have not been controverted with any cogent material. Thus, the claim of the Revenue that the assessee was already having personnel for doing similar work and the receipt of services was a case of duplication of services, is belied because of the magnitude and complexity of the work undertaken by the assessee during the year in Rajasthan. This proves that the assessee did receive services from its AE in the exploration, development and production of oil and such services are not duplicate in nature. When the fact of the assessee having received the services, which are not duplicate in nature, is proved, the authorities cannot determine nil ALP of the payment made for such services. Determination of the ALP of the international transaction of Receipt of services - assessee aggregated the international transactions and determined ALP on the basis of TNMM - Held that - By now, it is fairly settled through a catena of decisions that the CUP is the most appropriate method to determine the ALP of an international transaction because it seeks to compare the price charged or paid for property transferred or services rendered, provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. The remaining four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an international transaction on a micro level, thereby lending more credibility to the ALP of a transaction. As such, we hold that the CUP is the most appropriate method for determining the ALP of the international transaction under the present circumstances and the TPO was fully justified in applying the CUP as the most appropriate method. Turning to the methodology adopted, we find that the TPO though applied CUP method but determined Nil ALP without making reference to any comparable uncontrolled transactions. It was on account of his having canvassed a view that either the services were not received by the assessee or were duplicate in nature. Such a view has been overturned by us in earlier paras. We are left with no option but to set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of Receipt of services primarily under the CUP method. In case, the TPO finds that the CUP method cannot be applied either due to non-availability of the relevant data or for some other genuine reasons, he is free to apply any other appropriate methods for a fresh determination of the ALP of the international transaction of Receipt of services . Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. Addition being arm s length interest on redeemable preference shares - Held that - On a specific query, it was stated that the order of the AO making such addition for the preceding assessment year is still pending in appeal before the CIT(A) and there is no finality to the issue. Since the instant transfer pricing addition has its foundation in the immediately preceding assessment year in which re-characterisation of the transaction of investment in Redeemable preference shares was done, we are handicapped to independently decide the issue before us unless the preceding year on the same issue is decided. It is for the reason that if the re-characterization is held to be valid, then the addition will be required to be made in this year as well. If on the other hand, the re-characterization is held to be invalid, this addition will have to be deleted. Under these circumstances, we set aside the impugned order on this issue and remit the matter to the file of AO/TPO for deciding it afresh in conformity with the view of the higher appellate authority for the preceding year, available before them at the time of decision. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. Not allowing credit for tax deducted at source and advance tax as claimed in the return of income - Held that - AO is directed to allow necessary credit for the advance tax paid by the assessee and TDS paid on its behalf, after necessary verification.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act.
2. Forceful allowance of additional depreciation under Section 32(1)(iia).
3. Computation under Section 115JB regarding disallowance and addition to 'book profit'.
4. Transfer pricing adjustment for intra-group services.
5. Arm’s length interest on redeemable preference shares re-characterized as unsecured loans.
6. Credit for tax deducted at source and advance tax.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act:
The assessee challenged the disallowance under Section 14A, arguing that the Assessing Officer (AO) did not record proper satisfaction as required under Section 14A(2). The Tribunal found that the AO had indeed recorded proper satisfaction before making the disallowance under Rule 8D. The AO's disallowance of ?9.63 crore under Rule 8D(2)(ii) was deleted because the assessee’s shareholders' funds were sufficient to cover the investments. However, the disallowance of ?5.89 crore under Rule 8D(2)(iii) was upheld as the assessee's computation was found to be incorrect.

2. Forceful allowance of additional depreciation under Section 32(1)(iia):
The assessee had withdrawn its claim for additional depreciation, but the AO allowed it mandatorily under Explanation 5 to Section 32(1)(ii). The Tribunal upheld the AO's decision, stating that additional depreciation under Section 32(1)(iia) is part of the depreciation under Section 32(1)(ii) and thus falls under the mandatory allowance as per Explanation 5.

3. Computation under Section 115JB regarding disallowance and addition to 'book profit':
The AO added back the disallowance under Section 14A to the book profit under Section 115JB, which the Tribunal disallowed, following the Special Bench decision in ACIT Vs. Vireet Investments (P) Ltd. The AO also recomputed the book profit by disallowing excess depreciation claimed under the Unit of Production (UOP) method. The Tribunal held that the UOP method was appropriate and recommended by the Institute of Chartered Accountants of India, and the AO's adjustment was not justified.

4. Transfer pricing adjustment for intra-group services:
The AO made an adjustment for intra-group services, determining the arm's length price (ALP) at nil. The Tribunal found that the assessee did receive services and that these were not duplicate. The Tribunal remitted the matter back to the AO/TPO for fresh determination of the ALP using the Comparable Uncontrolled Price (CUP) method or any other appropriate method.

5. Arm’s length interest on redeemable preference shares re-characterized as unsecured loans:
The AO re-characterized the investment in redeemable preference shares as loans and charged interest, resulting in a transfer pricing adjustment. The Tribunal remitted the matter back to the AO/TPO to decide afresh based on the outcome of the preceding year's appeal, which was still pending.

6. Credit for tax deducted at source and advance tax:
The Tribunal directed the AO to allow necessary credit for the advance tax paid and TDS after verification.

Conclusion:
The Tribunal provided a detailed analysis and directions on each issue, ensuring proper application of legal principles and adherence to precedents. The appeal was partly allowed, with specific instructions for remand on certain issues.