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2019 (8) TMI 557 - AT - Income TaxDisallowance made u/s 14A r/w rule 8D - HELD THAT - As decided in own case 2019 (2) TMI 1067 - ITAT MUMBAI disallowance under section 14A of the Act has to be restricted to the exempt income earned during the year. In view of the aforesaid, we direct the Assessing Officer to restrict the disallowance under section 14A r/w rule 8D to ₹ 3,267, i.e., the exempt income by the assessee during the year Adjustment to the book profit computed u/s 115JB on account of expenditure incurred for earning exempt income - Though, we agree with the AR that while making such adjustment the AO cannot invoke the provisions of section 14A r/w rule 8D, however, it is equally true that the AO can make adjustment to the book profit towards expenditure incurred for earning exempt income as per Explanation 1(f) of section 115JB. Therefore, in the facts of the present case, we direct the AO to restrict the adjustment under Explanation 1(f) to section 115JB to the amount of exempt income earned by the assessee during the year. Addition u/s 41(1) - sundry creditors pending for more than three years - HELD THAT - AO neither made any enquiry or brought any material on record to demonstrate that the liability relating to the concerned creditors have ceased to exist in terms with the conditions prescribed under section 41(1). It is further relevant to observe, while deciding identical issue in assessee s own case for the assessment year 2010 11, the Tribunal 2019 (2) TMI 1067 - ITAT MUMBAI has upheld the decision of learned CIT(A) deleting similar disallowance made by the AO on identical reasoning.That being the case, we do not find any reason to interfere with the decision of the learned CIT(A) on this issue. This ground is dismissed. Deduction u/s 80IC - Addition on account of R D expenses allocated to Baddi and Solan Units of the assessee - HELD THAT - As relying on 2019 (2) TMI 1067 - ITAT MUMBAI we restore the issue to the Assessing Officer for deciding afresh in terms with the directions of the Tribunal in the preceding assessment year and only after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Addition on account of interest expenditure allocated by the AO to Baddi and Solan Units while computing deduction u/s 80IC - HELD THAT - The assessee has allocated interest expenditure on the basis of utilization of borrowed funds in different Units. Since no borrowed funds were utilized at Baddi Unit, which is in existence since the year 2006 07, the assessee had not allocated any interest expenditure to the Baddi Unit, while allocating interest expenditure to other two Units. It is apparent, before the Departmental Authorities the assessee has demonstrate that no borrowed funds were utilized at Baddi Unit. Whereas, without factually examining assessee s claim the AO has arbitrary allocated a part of interest expenditure to the Baddi Unit on the basis of sales turnover. It is relevant to observe, while deciding identical issue in assessee s own case for the assessment year 2010 11 2019 (2) TMI 1067 - ITAT MUMBAI as held that when no loan is there for baddi unit and the unit is generating huge profits, the case law relied by the assessee duly support the proposition that only the interest expenses which have direct nexus in earning the income of the tax exempt unit should be considered. Since the documentary evidence duly support the plea that there is no direct nexus between the expenses allocated by the A.O. to the unit, we do not find any infirmity in the order of the ld. CIT(A). Expenditure incurred on gifts, freebies given to doctors and medical professionals - disallowance made by the AO on the reasoning that the expenditure is prohibited by law as per Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002 - HELD THAT - though, under the Medical Council of India guidelines and regulations, doctors and medical professionals are prohibited from accepting gifts, such restriction does not apply to the pharmaceutical companies. Of course, CBDT Circular no.5/2012, dated. 1st August 2012, speaks of disallowance of expenditure incurred by pharmaceutical companies towards gifts given to doctors and medical professionals. However, the said circular would apply prospectively from the assessment year 2013 14 and not to the impugned assessment year. In fact, considering the aforesaid factual legal position, the Tribunal, while deciding identical issue in assessee s own case for the assessment year 2010 11, 2017 (8) TMI 1255 - ITAT MUMBAI has upheld the decision of the learned CIT(A) in allowing the expenditure incurred by the assessee towards gifts to doctors and medical professionals. Arm s length price of the corporate guarantee fee - CIT(A) in accepting it as @ 0.53% as against 2.25% determined by the TPO - HELD THAT - Undisputedly, this is a recurring dispute between the parties from the past assessment years. In fact, in assessment year 2008 09 and 2009 10, the matter went up to the Hon'ble Supreme Court and ultimately, the Hon'ble Supreme Court upheld the arm s length price of guarantee commission @ 0.5%. Undisputedly, in the impugned assessment year, the assessee has shown the arm s length price of guarantee commission by applying the rate of 0.53% which has been accepted by learned CIT(A). Pertinently, while deciding assessee s appeal in assessment year 2010 11, the Tribunal in 2019 (2) TMI 1067 - ITAT MUMBAI has held that arm s length price of guarantee commission for all types of guarantee should be determined @ 0.53%. Facts being identical, respectfully following the aforesaid decision of the Co ordinate Bench, we uphold the order of learned CIT(A) on the issue. Grounds are dismissed. Arm s length price of comfort guarantee provided to the AE - HELD THAT - While deciding identical issue in assessee s own case in assessment year 2010 11 cited supra, the Tribunal has held that guarantee commission of all types of guarantee should be fixed @ 0.53%. In fact, as could be seen from the facts on record, the assessee has not charged any guarantee commission for providing comfort guarantee. In view of the aforesaid, since the TPO has charged guarantee commission @ 0.5% on comfort guarantee, the decision of the TPO on the issue deserves to be upheld. Disallowance under section 14A r/w rule 8D - HELD THAT - we uphold the decision of learned CIT(A) in deleting the disallowance of interest expenditure under rule 8D(2)(ii), since, the assessee was having sufficient interest free fund. However, we are unable to approve the direction of learned CIT(A) to exclude investment made in subsidiaries for computing disallowance under rule 8D(2)(iii), in view of the decision of Maxopp Investment Ltd. v/s CIT, 2018 (3) TMI 805 - SUPREME COURT . We direct the Assessing Officer to compute disallowance under rule 8D(2)(iii) by considering only those investments which have yielded exempt income during the year under consideration. Further, we make it clear, the disallowance u/s 14A should not exceed the exempt income earned by the assessee during the year under consideration. In so far disallowance of expenditure for earning exempt income while computing book profit u/s 115JB, we direct the AO to restrict such disallowance to the exempt income earned during the year
Issues Involved:
1. Disallowance under section 14A r/w rule 8D. 2. Addition under section 41(1) of the Act. 3. Allocation of R&D expenses to Baddi and Solan Units. 4. Allocation of interest expenditure to Baddi and Solan Units. 5. Expenditure on gifts and freebies to doctors. 6. Arm's length price of corporate guarantee fee. 7. Arm's length price of comfort guarantee. Issue-wise Detailed Analysis: 1. Disallowance under section 14A r/w rule 8D: The assessee's appeal for AY 2011-12 included a challenge to the disallowance made under section 14A r/w rule 8D. The Tribunal noted that the disallowance should not exceed the exempt income earned by the assessee during the year, which was ?3,267. The Tribunal directed the Assessing Officer to restrict the disallowance to this amount. Similarly, the adjustment to the book profit under section 115JB should also be restricted to the exempt income earned. The Tribunal upheld the decision of the Commissioner (Appeals) to exclude expenditure related to investments in subsidiary companies for business purposes. For AY 2012-13, similar directions were given, with the Tribunal emphasizing that disallowance should not exceed the exempt income and should be computed by considering only those investments that yielded exempt income during the year. 2. Addition under section 41(1) of the Act: The Revenue challenged the deletion of an addition of ?3,58,478 made under section 41(1) for AY 2011-12. The Tribunal observed that the Assessing Officer had not provided evidence that the liability ceased to exist and upheld the Commissioner (Appeals)' decision to delete the addition. For AY 2012-13, the Tribunal followed the same reasoning and dismissed the Revenue's ground. 3. Allocation of R&D expenses to Baddi and Solan Units: For AY 2011-12, the Revenue challenged the deletion of an addition of ?5,44,38,514 related to R&D expenses allocated to Baddi and Solan Units. The Tribunal restored the issue to the Assessing Officer to decide afresh, following directions given in the earlier assessment year. For AY 2012-13, the Tribunal dismissed the Revenue's ground, following its decision in the earlier year. 4. Allocation of interest expenditure to Baddi and Solan Units: The Revenue's appeal for AY 2011-12 included a challenge to the deletion of an addition of ?8,54,86,997 related to interest expenditure allocated to Baddi and Solan Units. The Tribunal upheld the Commissioner (Appeals)' decision, noting that the assessee had demonstrated that no borrowed funds were utilized at Baddi Unit. For AY 2012-13, the Tribunal followed the same reasoning and dismissed the Revenue's ground. 5. Expenditure on gifts and freebies to doctors: The Revenue challenged the deletion of a disallowance of ?15,30,84,266 made by the Assessing Officer on the grounds that the expenditure was prohibited by the Indian Medical Council regulations. The Tribunal upheld the Commissioner (Appeals)' decision, noting that the regulations applied to doctors and medical professionals, not pharmaceutical companies, and that the CBDT Circular was applicable prospectively from AY 2013-14. 6. Arm's length price of corporate guarantee fee: The Revenue challenged the acceptance of the arm's length price of the corporate guarantee fee at 0.53% for AY 2011-12. The Tribunal upheld the Commissioner (Appeals)' decision, noting that the rate had been accepted by the Tribunal, the High Court, and the Supreme Court in earlier years. For AY 2012-13, the Tribunal upheld the Commissioner (Appeals)' decision as the assessee had charged a guarantee commission at 1%. 7. Arm's length price of comfort guarantee: For AY 2011-12, the Tribunal reversed the Commissioner (Appeals)' decision and upheld the Transfer Pricing Officer's decision to charge a guarantee commission at 0.5% on comfort guarantee. For AY 2012-13, the Tribunal directed the Assessing Officer to compute the arm's length price of the comfort guarantee fee at 0.53%. Conclusion: The Tribunal partly allowed the appeals of both the assessee and the Revenue for AY 2011-12 and AY 2012-13, providing detailed directions on each issue based on the facts and legal precedents.
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