2017 (11) TMI 376 - AT - Income Tax

Transfer Pricing Adjustment by adding interest in relation to non-interest bearing shareholder s deposits with an associate company - Held that - The statutory permissions required under the foreign exchange laws of India, are equally applicable to controlled and uncontrolled enterprises i.e. they are universally applicable and hence the very restrictions for permissions would be deemed to encompass the principle of neutrality and hence, the standard of arms length is inherent in the provision of law. Hence the company has a contractual and statutory obligation with the PTFSI for not charging any interest on the shareholder deposits and thereby it cannot take any recourse for charging interest till the year 2015 by which PTFSI is required to make payment to the company. There has been no inflow or outflow relating to the above deposit during the Previous Year 2011-12 and hence it is outside the purview of transfer pricing provisions. We are of the view that the assessee cannot be asked to do something which is impermissible in law and expenditure incurred in compliance of law or the direction of the statutory authorities, the same is allowable. This view is supported by the case law relied on by the assessee of Hon ble Bombay High court in the case of CIT vs. Hukumchand Mills Ltd. (1983 (2) TMI 1 - BOMBAY High Court). We are of the considered opinion that no addition on account of transfer pricing adjustment can be made in relation to interest @ 8.39% in relation to non-interest bearing shareholder s deposits with an associate company. We reverse the orders of DRP and AO/TPO on this issue and allow this issue of the appeal of assessee. Transfer Pricing Adjustment towards technical knowhow fees from an associate enterprise P.T. Five Star- Indonesia (PTFSI) - Held that - We are of the view that since there is uncertainty involved in collection of the technical knowhow fees from the PTFSI due to its bad financial condition, the assessee has rightly not recognized the revenue. This view of ours is supported by the decision of Hon ble Supreme Court in the case of Godhra Electricity Co. Ltd. vs. CIT (1997 (4) TMI 4 - SUPREME Court) wherein rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Assessing Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years. Taking the same principle, in the present case before us, we delete the addition made AO / TPO and confirmed by DRP on account of transfer pricing adjustment towards technical knowhow fees from its AE i.e. PTFSI. We direct the AO accordingly. This issue of assessee s appeal is allowed. Addition on account of transfer pricing adjustment towards risk involved in guarantee on loans advanced to the AE-PTFSI - Held that - The decision in the case of ACIT v. Nimbus Communications Ltd. 2011 (1) TMI 68 - ITAT MUMBAI reiterates the proposition of the assessee that when the guarantee has been given by the assessee results in a direct or indirect benefit to the assessee itself, then there arises no need to charge any commission on the same. The above transaction does not fall within the purview of international transaction as defined under section 92B of the Act and hence, the orders of the lower authorities are reversed. This issue of assessee s appeal is allowed. Addition on account of transfer pricing adjustment towards interest on outstanding balances of the AE-PTFSI - Held that - Outstanding debit balances with the associates is not directly covered within the ambit of international transaction . Also, the terms any other transaction having a bearing on the profits, income, losses or assets of such enterprises must be interpreted ejusdem generis with the transactions mentioned in the preceding clause or at least analogous to it and therefore would not include the provision of guarantee for loans taken by associate enterprises. In view of the above, we are of the view that it is the real income and not the hypothetical income which is to be taxed and real income is to be ascertained from the realistic and practical point of view as held by Hon ble Supreme Court in the case of UCO Bank (1999 (5) TMI 3 - SUPREME Court ). Hence, we delete the disallowance and reverse the orders of the lower authorities. Addition on account of subsidy received under package scheme of incentive from Government of Maharashtra by holding the same as revenue receipt - Held that - Central Board of Direct Taxes ( CBDT ) has issued Circular No. 142 dated 01-08-1974 wherein it has clarified that where the subsidy is primarily given for helping the growth of industries and not for supplementing their profits, such subsidy can be regarded as capital receipt in the hands of the recipient. Further, it has been time and again held by various Courts that Circulars issued by CBDT are binding on Revenue and it is not open to the Revenue even to raise a contention contrary to the binding circular. Therefore, it is the purpose under the Scheme which is relevant to decide whether the incentives are capital or revenue receipt and other factors like the point of time when incentive is received, the form, etc are irrelevant considerations. For the same reasons, nomenclature given to any incentive/component of an incentive will not be decisive for determining the revenue or capital nature of such benefits. Thus, considering that the purpose of PSI is to enable the Company to set up a new unit or to expand an existing unit to encourage industrial development in the State, the subsidy / incentives received is on capital account in the present case of the assessee and hence, not chargeable to tax. Accordingly, this issue of the assessee s appeal is allowed. Disallowance of expenses relatable to exempt by invoking the provision of section 14A r.w.d. 8D - Held that - As during the relevant previous year relevant to this assessment year, the assessee has not earned any dividend on investments, and not claimed it as exempt income u/s. 10(34) of the Act. Therefore, no disallowance u/s. 14A can be called for. We find that this issue is covered in favour of assessee and against Revenue by the decision of the Hon ble Delhi High Court in the case of Cheminvest Limited vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT . AS the assessee itself has made disallowance of ₹ 2,73,960/- and the same is returned by the assessee in its return of income for the relevant assessment year and hence, we restrict the addition to this extend only. The learned counsel for the assessee during the course of hearing also conceded this issue. Accordingly, this issue of assessee s appeal is partly allowed. Addition u/s 115JB of the Act on account of revaluation reserve created for revaluation of land - Held that - this is not a case of revaluation of stocks. The Indian Accounting Standards (AS-2) does not permit upward revaluation of stock-in-trade. This is, a case of transfer of Fixed Asset to Stock-in-trade at a revalued amount. Indeed, in the year of creation of Revaluation Reserve, there is no commercial profit earned by the Assessee Company by virtue of revaluation. The entire purpose of introduction of MAT was that certain companies were declaring significant book profits, paying dividends to its shareholders but not paying any tax because of various tax shields like investment allowance, depreciation etc. Accordingly, we delete the addition made by AO of the entire amount of revaluation reserve created during the year to its audited profit applying the provisions of section clause (b) of explanation (1) to section 115JB (2) of the Act. However, the AO will verify whether the assessee has released a sum of ₹ 165,26,83,871/- from revaluation reserve and credited to the profit and loss account, in that case this is not to be added as income under section 115JB of the Act. This issue of assessee s appeal is partly allowed. Addition towards capital gains on conversion of land into stock-in trade - Held that - We find from records that lower authorities proceeded on total misreading of the relevant provision of the Act and have brought to tax the whole of the capital gain on the conversion of the land (fixed asset) to stock in trade in the year in which only part sale of stock in trade is effected and assessee has offered the proportionate capital gain in the year under consideration. We, in view of the above facts and circumstances, direct the AO to verify the sale of stock in trade effected and offered the proportionate capital gains in the relevant years and the same should be taxed accordingly. This issue of assessee s appeal is set aside for verification purpose only with the above directions. Addition of disallowance under section 14A of the Act r.w.r 8D while computing book profit under section 115JB - Held that - This issue is covered in favour of assessee and against Revenue by the decision of Special Bench of this Tribunal in the case of ACIT vs. Vireet Investments (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein the Tribunal has clearly held that no disallowance under section 14A of the Act r.w.r 8D of the Rules can be made while computing book profit under section 115JB of the Act. The learned CIT Departmental Representative could not controvert the above proposition. Accordingly, we are of the view that this issue is covered by the special bench decision of this Tribunal in the case of Vireet Investments (P.) Ltd. (supra), respectfully following the same, we delete the disallowance and allow this issue of assessee s appeal.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Non-Interest Bearing Shareholder’s Deposit
2. Transfer Pricing Adjustment on Technical Knowhow Fees
3. Transfer Pricing Adjustment on Risk Involved in Guarantee on Loans
4. Transfer Pricing Adjustment on Interest on Outstanding Balances
5. Treatment of Subsidy Received under Package Scheme of Incentives
6. Disallowance under Section 14A read with Rule 8D
7. Addition under Section 115JB on Revaluation Reserve
8. Capital Gains on Conversion of Land into Stock-in-Trade
9. Disallowance under Section 14A for Book Profits under Section 115JB

Detailed Analysis:

1. Transfer Pricing Adjustment on Non-Interest Bearing Shareholder’s Deposit:
The assessee contested the addition of ?1,27,66,301/- made by the AO/TPO as a transfer pricing adjustment for non-interest bearing shareholder’s deposit. The assessee argued that the deposit was converted into a non-interest bearing shareholder’s deposit due to financial restructuring approved by the RBI and the Government of Indonesia, which should not be considered an international transaction. The Tribunal agreed with the assessee, noting that the transaction occurred before transfer pricing regulations were introduced and that no income was earned or expense claimed. The Tribunal reversed the orders of the DRP and AO/TPO, deleting the addition.

2. Transfer Pricing Adjustment on Technical Knowhow Fees:
The assessee challenged the addition of ?1,05,35,800/- towards technical knowhow fees from an associate enterprise, PTFSI, citing the bad financial condition of the AE and uncertainty in collection. The Tribunal upheld the assessee’s argument, referencing Accounting Standards AS-9 and AS-1, and the principle of real income. The Tribunal deleted the addition, agreeing that no income had accrued due to the AE’s financial difficulties.

3. Transfer Pricing Adjustment on Risk Involved in Guarantee on Loans:
The assessee disputed the addition of ?1,30,86,649/- for providing a counter guarantee on loans to its AE, arguing it was not an international transaction under Section 92B of the Act. The Tribunal agreed, referencing previous Tribunal decisions and noting that the guarantee did not have a bearing on the profits, income, losses, or assets of the enterprise. The Tribunal deleted the addition.

4. Transfer Pricing Adjustment on Interest on Outstanding Balances:
The assessee contested the addition of ?1,40,04,120/- for interest on outstanding debit balances with its AE, arguing that it was not an international transaction and that the AE’s financial condition made recovery uncertain. The Tribunal agreed, citing the principle of real income and deleting the addition.

5. Treatment of Subsidy Received under Package Scheme of Incentives:
The assessee argued that the subsidy of ?30,60,02,721/- received under the Package Scheme of Incentives from the Government of Maharashtra should be treated as a capital receipt, not chargeable to tax. The Tribunal agreed, noting that the subsidy was for industrial development and expansion, applying the purpose test from Supreme Court decisions in Ponni Sugars and Chemicals Ltd. and Sahney Steel & Press Works Ltd. The Tribunal directed that the subsidy be treated as a capital receipt.

6. Disallowance under Section 14A read with Rule 8D:
The assessee contested the disallowance of ?2,73,960/- under Section 14A read with Rule 8D, arguing no exempt income was earned during the year. The Tribunal agreed, referencing the Delhi High Court decision in Cheminvest Limited, which stated that Section 14A does not apply if no exempt income is received or receivable during the relevant previous year. The Tribunal deleted the disallowance but upheld the disallowance of ?2,73,960/- as returned by the assessee.

7. Addition under Section 115JB on Revaluation Reserve:
The assessee challenged the addition of ?768,18,00,000/- on account of revaluation reserve created for revaluation of land while calculating book profits under Section 115JB. The Tribunal found that the revaluation reserve was not created by debiting the P&L account and that the addition was based on a misreading of the law. The Tribunal deleted the addition but directed the AO to verify the release of ?165,26,83,871/- from the revaluation reserve and credited to the P&L account.

8. Capital Gains on Conversion of Land into Stock-in-Trade:
The assessee disputed the recomputation of long-term capital gains on the conversion of land into stock-in-trade at ?259,44,03,914/- instead of ?116,29,63,578/- as offered by the assessee. The Tribunal directed the AO to verify the sale of stock-in-trade and compute the capital gains proportionately, aligning with the percentage completion method followed by the assessee.

9. Disallowance under Section 14A for Book Profits under Section 115JB:
The assessee contested the addition of ?2,73,960/- being the amount disallowed under Section 14A while computing book profits under Section 115JB. The Tribunal, referencing the Special Bench decision in ACIT vs. Vireet Investments (P.) Ltd., held that no disallowance under Section 14A can be made while computing book profit under Section 115JB and deleted the addition.

Conclusion:
The Tribunal provided relief to the assessee on multiple grounds, including transfer pricing adjustments, treatment of subsidies, and disallowances under Sections 14A and 115JB, emphasizing the principles of real income, purpose test, and correct application of legal provisions.