2019 (3) TMI 687 - AT - Income Tax

Disallowance u/s 14A under MAT - MAT adjustment u/s 115JB Explanation (f) - HELD THAT - We notice in this backdrop that the instant issue of section 14A r.w.r. 8D disallowance for the purpose of section 115JB MAT computation is no more res integra. Hon ble Bombay high court s judgment in CIT vs. Bengal Finance & Investment P Ltd. 2015 (2) TMI 1263 - BOMBAY HIGH COURT and this Tribunal s Special Bench decision in ACIT vs. Vireet Investments (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI settle this issue in assessee s favour that such a disallowance is not to be subjected to MAT adjustment. Disallowance u/s 14A - AO invoked section 14A r.w.r. 8D(i) on direct expenses disallowance on brokerage, security transaction tax and other similar charges - HELD THAT - Suffice to say, it fails to dispute the crucial fact recorded in the CIT(A) s findings that the assessee had capitalized the above direct expenditure than claiming it as revenue expenditure by debiting the same through Profit & Loss account. We further find that the Revenue s instant argument carries no substances since direct expenses sought to be disallowed have nowhere been claimed at assessee s behest.The Revenue s first argument fails therefore. Revenue seeks to revive section 14A r.w.r. 8D(2)(ii) proportionate interest disallowance - HELD THAT - The assessee s balance sheet reveals that its non-interest bearing funds read figures of ₹ 1,70,302.44 lakhs as against its exempt income investments of ₹ 15,894.02 lakhs and exempt income yielding investment of ₹ 13,650.89 lakhs; respectively. Various judicial precedents, i.e. CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT , CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT and CIT vs. Torrent Power Ltd. 2014 (6) TMI 185 - GUJARAT HIGH COURT hold that impugned proportionate interest expenses disallowance does not apply in the case of non-interest bearing funds turning out to be more than exempt investments. We decline Revenue s instant second argument as well. Whether only exempt income yielding investments have to be taken into consideration whilst computing administrative expenses disallowance u/s 14A r.w.r. 8D(2)(iii)? - HELD THAT - Suffice to say, hon ble jurisdictional high court s decision in REI Agro Ltd. case 2013 (9) TMI 156 - ITAT KOLKATA has already decided the very substantial question of law in assessee s favour. We therefore reject the Revenue s instant third argument as well. Nature of receipt - taxpayers sales tax, subsidy and industrial promotion assistance - revenue or capital receipt - Disallowance of depreciation - HELD THAT - Respectfully following the decision of the Hon ble ITAT, Kolkata in appellant s own case 2017 (2) TMI 685 - ITAT KOLKATA , the Ld. AO s action of adjusting the capital subsidy from the actual cost of assets under Explanation 10 to Section 43(1) is held to be unjustified in law. Accordingly the disallowance of excess claim of depreciation is directed to be deleted. Transfer pricing adjustment - loans given to its overseas Associate Enterprises (AEs) - currency benchmark LIBOR rate - Whether CIT-A not following the method of determining the cost of funds plus credit separately as the most appropriate method determined on the basis of comparables in controlled price (CUP) method - HELD THAT - CIT(A) has precisely followed the tribunal s earlier years order in the assessee s cases 2017 (2) TMI 685 - ITAT KOLKATA itself directing the authorities to benchmark assessee s international transactions in the nature of loans given to its overseas Associate Enterprises (AEs) at the relevancy currency benchmark LIBOR rate prevailing in the relevant previous year(s). Learned coordinate bench s detailed discussion held that the impugned international transactions of loans in the case of AEs have to be benchmarked in the respective foreign currency LIBOR rates than the domestic market credit ratings. We make it clear that the Revenue s pleadings before us in its corresponding grounds have nowhere drawn any distinction on facts in all the assessment years. We accordingly adopt judicial consistency mutatis mutandis in the impugned assessment years to decline instant substantive grounds. TP adjustments - corporate guarantees to its overseas AEs - CIT-A directing the TPO to reduce the impugned corporate guarantee commission @3% to 0.5% - HELD THAT - It is sufficiently clear by now that the assessee s very arguments have been partly accepted through for benchmarking corporate guarantee transaction is issued @ 0.5% commission. We therefore adopt judicial consistency qua the instant issue as well to decline to Revenue s corresponding substantive ground in both of its appeals. TPA on specified domestic transactions with respect to transfer of power from eligible units to manufacturing units - HELD THAT - Following the judgment of the Supreme Court in the case of ThiruArooran Sugars Ltd. Vs. CIT 1997 (7) TMI 12 - SUPREME COURT it is of the considered view that the tariff rates at which the non-eligible units procured power from Electricity Board was the most appropriate and internal comparable rate to benchmark the transfer of power by appellant s CPP to other non-eligible units. The benchmarking exercise conducted by the appellant is found to the appropriate and reasonable and hence no further transfer pricing adjustment is warranted on this count. We adopt learned coordinate bench s discussion mutatis mutandis to uphold the CIT(A) s findings deleting the impugned transfer pricing adjustments pertaining to specified domestic transactions in the absence of any distinction on facts or law pin-pointed at revenue s behest

Issues Involved:

1. Section 14A disallowance for MAT computation.
2. Disallowance of direct expenses related to exempt income.
3. Proportionate interest disallowance under Section 14A.
4. Administrative expenses disallowance under Section 14A.
5. Sales tax subsidy and industrial promotion assistance as capital receipts.
6. Transfer pricing adjustment for arm's length interest rate.
7. Transfer pricing adjustment for corporate guarantees.
8. Transfer pricing adjustment for specified domestic transactions.

Issue-wise Analysis:

1. Section 14A Disallowance for MAT Computation:
The assessee contended that the CIT(A) erred in directing the AO to compute Section 115JB Explanation (f) MAT adjustment for Section 14A r.w.r. 8D disallowance. The Tribunal referred to the Bombay High Court's judgment in CIT vs. Bengal Finance & Investment P Ltd. and the Special Bench decision in ACIT vs. Vireet Investments (P) Ltd., which settled that such disallowance is not subjected to MAT adjustment. Consequently, the Tribunal accepted the assessee's arguments and rejected the Revenue's contentions, allowing the assessee's appeals.

2. Disallowance of Direct Expenses Related to Exempt Income:
The Revenue argued that the AO rightly invoked Section 14A r.w.r. 8D(i) for direct expenses disallowance on brokerage, STT, and other charges. However, the Tribunal noted that the assessee had capitalized these expenses rather than claiming them as revenue expenditure through the Profit & Loss account. Since the direct expenses were not claimed by the assessee, the Tribunal rejected the Revenue's argument.

3. Proportionate Interest Disallowance Under Section 14A:
The Revenue sought to revive the proportionate interest disallowance of ?2,00,34,065/-. The Tribunal observed that the assessee's non-interest-bearing funds exceeded its exempt income investments. Citing judicial precedents like CIT vs. Reliance Utilities and Power Ltd., the Tribunal held that the proportionate interest expenses disallowance does not apply when non-interest-bearing funds are more than exempt investments. The Revenue's argument was thus declined.

4. Administrative Expenses Disallowance Under Section 14A:
The Revenue argued that the CIT(A) erred in holding that only exempt income-yielding investments should be considered for administrative expenses disallowance under Section 14A r.w.r. 8D(2)(iii). The Tribunal referred to the jurisdictional high court's decision in REI Agro Ltd., which favored the assessee's stance. Consequently, the Tribunal rejected the Revenue's argument.

5. Sales Tax Subsidy and Industrial Promotion Assistance as Capital Receipts:
The Revenue contended that the CIT(A) erred in holding that the assessee's sales tax subsidy and industrial promotion assistance were capital receipts, not chargeable to tax. The CIT(A) followed the Tribunal's earlier decision in the assessee's case, which held that such subsidies are not directly related to the acquisition of assets and should not be reduced from the actual cost of assets under Section 43(1) Explanation 10. The Tribunal upheld the CIT(A)'s decision, confirming the deletion of excess depreciation disallowance.

6. Transfer Pricing Adjustment for Arm's Length Interest Rate:
The Revenue sought to revive the transfer pricing adjustment based on an arm's length interest rate of 14.11%. The CIT(A) followed the Tribunal's earlier decision in the assessee's case, which held that loans to AEs should be benchmarked at the relevant currency-denominated LIBOR rate rather than domestic interest rates. The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's argument.

7. Transfer Pricing Adjustment for Corporate Guarantees:
The Revenue sought to revive the transfer pricing adjustment for corporate guarantees, computed at a 3% commission rate. The CIT(A) followed the Tribunal's earlier decision, which benchmarked corporate guarantee transactions at a 0.5% commission rate. The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's argument.

8. Transfer Pricing Adjustment for Specified Domestic Transactions:
The Revenue sought to revive the transfer pricing adjustment for specified domestic transactions related to the transfer of power from eligible units to manufacturing units. The CIT(A) followed the Tribunal's earlier decision, which held that the tariff rates at which non-eligible units procured power from the Electricity Board were the most appropriate and internal comparable rates. The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's argument.

Conclusion:
The assessee's appeals were allowed, and the Revenue's cross-appeals were dismissed. The Tribunal upheld the CIT(A)'s decisions on all issues, following judicial precedents and earlier decisions in the assessee's case.

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