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2019 (5) TMI 732 - AT - Income TaxDeduction u/s 80IAB - netting of interest - interest income is eligible for deduction under section 80IAB - HELD THAT - The coordinate bench has held that the entire interest income is eligible for deduction under section 80IAB, and, for this short reason, the grievance against netting of interest is wholly academic and infructuous. The stand of the CIT(A) thus attained finality. In the case of CIT Vs Nirma Limited 2014 (10) TMI 388 - GUJARAT HIGH COURT has held that netting of interest for the purpose of this deduction can be allowed. Whichever way one looks at it, the issue is covered, in favour of the assessee, by the binding judicial precedents. We, therefore, have no reasons to disturb the conclusions arrived at by the learned CIT(A). We uphold the relief granted by the CIT(A) and decline to interfere in the matter. Deduction u/s 80G - eligible donations in proportion of the turnover and to that extent the deduction u/s 80IB - HELD THAT - It is only in computation of total income that the deduction u/s 80G is to be allowed, and, as learned CIT(A) rightly observes, it is not an expense which is to be allocated to different heads or sources of income. A donation is in the nature of allocation of income and the tax deduction for eligible deduction is a tax policy driven deduction for encouraging such public spirited application of income. The stand of the assessee was indeed correct and the CIT(A) was perfectly justified in upholding the same. We approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. Re-compute the deduction u/s 80IAB - increasing the amount of deduction by the amount of disallowance u/s 14A - HELD THAT - When the profit goes up as a result of disallowances of expenses, the eligibility for deduction in respect of such profit correspondingly increases. Circular does not specifically deal with section 14A disallowance, as the circular itself states in so many words the cases cited above are only illustrative and the principle is that the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits . We uphold the conclusions arrived at by the CIT(A) on this point as well, and decline to interfere in the matter. TP adjustment regarding guarantee fees - Re-compute the adjustment by adopting the rate of guarantee fee at 2% against the rate of 3% adopted by the TPO - HELD THAT - In the case of Micro Ink 2015 (12) TMI 143 - ITAT AHMEDABAD we hold that issuance of guarantees, without incurring any specific costs, does not constitute an international transaction, and, accordingly, no arm s length price adjustment can be made in respect of issuance of corporate guarantees. Once we hold so, the ALP adjustment sustained by the CIT(A) must stand deleted. Grievance of the Assessing Officer against the partial relief granted by the CIT(A), in view of the findings above, becomes infructuous and is dismissed as such. Disallowance u/s 14A - HELD THAT - In the light of Hon ble jurisdictional High Court s judgment in the case of CIT Vs Corrtech Energy Pvt Ltd 2014 (3) TMI 856 - GUJARAT HIGH COURT the disallowance u/s 14A cannot exceed the amount of tax exempt income. In the present year, admittedly the dividend income is only ₹ 1,77,47,783. . The disallowance u/s 14A cannot, therefore, exceed the said amount. To this extent, we uphold the grievance of the assessee and restrict the disallowance u/s 14A. TP upward adjustment - non-charging of interest on the loan provided to Associate Enterprise for purchase of Aircraft - ALP adjustment by adopting 7.14% as arm s length interest for borrowings by the AE - HELD THAT - When the AE itself has borrowed the monies from the SBI at LIBOR plus 145 bps the arm s length price of the borrowings cannot indeed be taken as more than LIBOR plus 145 bps. The additional risk adjustment for credit rating of the subsidiary is clearly unwarranted. The correct ALP interest rate, in the present case, thus works out to 2.69% plus 1.45%, i.e. 4.14%. We, accordingly, direct the Assessing Officer to restrict the ALP adjustment to 4.14%.
Issues Involved:
1. Deduction under section 80IAB regarding net interest income. 2. Deduction under section 80G for donations. 3. Adjustment of deduction under section 80IAB due to disallowance under section 14A. 4. Arm’s length price adjustment for non-charging of guarantee fees from Associate Enterprise (AE). 5. Disallowance under section 14A exceeding the amount of tax-exempt income. 6. Upward adjustment for non-charging of interest on loans to AE. Issue-wise Detailed Analysis: 1. Deduction under Section 80IAB Regarding Net Interest Income: The Assessing Officer (AO) contested the CIT(A)’s direction to exclude only the net interest income while computing the deduction under section 80IB, arguing that interest income cannot be netted off with interest expenditure incurred for business. The Tribunal noted that a coordinate bench had previously confirmed that the entire interest income is eligible for deduction under section 80IAB. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court’s ruling in CIT Vs Nirma Limited, which allowed the netting of interest for this deduction. Thus, the AO's appeal was dismissed, and the assessee's cross-objection was allowed. 2. Deduction under Section 80G for Donations: The AO argued that the CIT(A) erred in deleting the disallowance made for the wrong claim under section 80G, asserting that donations should be allocated in proportion to turnover, reducing the deduction under section 80IB. The Tribunal upheld the CIT(A)’s decision, stating that donations are not expenses to be allocated to different heads but adjustments from adjusted gross total income. The Tribunal confirmed that the deduction under section 80G is to be allowed in the computation of total income, not as an expense allocation. Therefore, the AO's appeal on this issue was dismissed. 3. Adjustment of Deduction Under Section 80IAB Due to Disallowance Under Section 14A: The AO contended that the CIT(A) erred in directing the AO to recompute the deduction under section 80IAB after increasing the amount of deduction by the disallowance under section 14A. The Tribunal noted that the issue is covered by the CBDT circular No. 37/2016, which accepts that higher profits resulting from disallowances should lead to higher profit-linked deductions under Chapter VI-A. Consequently, the Tribunal upheld the CIT(A)’s decision and dismissed the AO’s appeal. 4. Arm’s Length Price Adjustment for Non-charging of Guarantee Fees from AE: The AO and the assessee both appealed against the CIT(A)’s decision to partially confirm the upward adjustment for non-charging of guarantee fees from the AE, setting the rate at 2% instead of 3%. The Tribunal referenced several decisions, including Micro Ink Ltd Vs ACIT, concluding that issuance of corporate guarantees does not constitute an international transaction under section 92B. The Tribunal held that no arm’s length price adjustment could be made for such guarantees, thus deleting the ALP adjustment and dismissing the AO’s appeal as infructuous. 5. Disallowance Under Section 14A Exceeding the Amount of Tax-exempt Income: The assessee contested the disallowance under section 14A, which exceeded the amount of tax-exempt income. The Tribunal, referencing the jurisdictional High Court’s judgment in CIT Vs Corrtech Energy Pvt Ltd, held that disallowance under section 14A cannot exceed the tax-exempt income. Therefore, the Tribunal restricted the disallowance under section 14A to the amount of tax-exempt income and partly allowed the assessee’s cross-objection. 6. Upward Adjustment for Non-charging of Interest on Loans to AE: The assessee challenged the ALP adjustment for non-charging of interest on loans to AE. The Tribunal noted that the AE borrowed funds at LIBOR plus 145 bps, and additional risk adjustments were unwarranted. The Tribunal directed the AO to restrict the ALP adjustment to LIBOR plus 145 bps, thereby partly allowing the assessee’s cross-objection. Conclusion: The Tribunal dismissed the AO's appeals for both assessment years and partly allowed the assessee's cross-objections, providing relief on various grounds, including the eligibility of interest income for deduction under section 80IAB, the correct computation of deductions under sections 80G and 14A, and the appropriate arm’s length price adjustments for transactions with AEs.
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