2020 (4) TMI 30 - AT - Income Tax

Upward adjustment on account of corporate guarantee commission - HELD THAT - As decided in own case 2019 (10) TMI 73 - ITAT MUMBAI arm's length price of guarantee fee can reasonably be fixed @ 0.5%. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals). Arms Length Price adjustment to income from interest loan advances to subsidiaries - HELD THAT - In case of average period of loan is more than five years, the rate is 6 month LIBOR plus 250 basis points may be adopted. The Hon ble jurisdictional High Court in CIT Vs Tata Autocomp 2015 (4) TMI 681 - BOMBAY HIGH COURT held that where the assessee advances loans to its associated enterprises (AE s) situated in Germany, rate of interest was to be determined on the basis of rate prevailing in Germany where loan has been consumed. Considering the decision of jurisdictional High Court the AO/TPO is directed to recompute the interest on the basis of rate prevalent in the countries where loan was received. In the result the ground of appeal raised by the assessee is allowed and resultantly the ground of appeal raised by the revenue has become infructuous. Notional interest income on infusion of additional funds in wholly owned subsidiary - HELD THAT - CIT(A) after considering the submissions of concluded that the delay in receipt of share is short and as per Circular of Reserve Bank of India, the interest would be LIBOR plus 150 and directed the TPO/AO to charge interest for 6 month at LIBOR plus 150 basis point for the period between the date of remittance and by adding 15 days and the date of allotment of shares. The coordinate bench of this Tribunal in ITO Vs Sterling Oil Resources (P) ltd 2016 (4) TMI 163 - ITAT MUMBAI held that adjustment on account of notional interest on share application money, which had been recharacterised as loan, merely because there was delay in allotment of share, was not sustainable in law. Further, this Tribunal in Aditya Birla Minacs Worldwide Ltd 2016 (8) TMI 1417 - ITAT MUMBAI also took the same view that share application money cannot be treated as loan amount; merely there is delay in issuance of shares by subsidiary. Considering the consistent view of the Tribunal, we are of the view that share application money cannot be treated as loan amount only because of delay in issuance of shares by its subsidiary. Allocation of R D expenses to the 80IB and 80IC units - HELD THAT - On show cause notice on the issue, the assessee contended that similar deduction is allowed in the earlier years by Tribunal and furnished the copy of the orders for earlier years. The assessing officer took his view that R D expenditure to the industrial undertaking on which deductions under section 80IB 80IC are claimed, on which the expenditure is not contributed to the earning of the income for which deduction is claimed. The assessing officer allocated interest cost to the units on turnover basis. The ld CIT(A) granted relief to the assessee by following the order of the Tribunal for various earlier years. Considering the consistent view of the Tribunal on identical set of facts and respectfully following the view of the Tribunal in the preceding assessment years in assessee's own case, we uphold the decision of ld. CIT(A). in the result the Ground of appeal is dismissed. Weighted deduction under section 35(2AB) - HELD THAT - As decided in own case 2019 (10) TMI 73 - ITAT MUMBAI restore the issue to the Assessing Officer for adjudication afresh. TDS u/s 195 - Disallowance u/s 40(a)(ia) for want of TDS for payments made to non-residents on account for pilot bio study, clinical research - HELD THAT - AO after issuing show cause notice disallowed the expenditure by taking view that similar expenditure was disallowed in earlier years as the assessee is liable to deduct tax under section 195. The ld CIT(A) deleted the additions by following the order of Tribunal in AY 2007-08, wherein it was payment to non-resident for conducting bio equivalence study are not taxable in India and not subject to withholding tax under section 195 of the Act. We have seen that similar view was taken by Tribunal in AY 2006-07 by following the order of Tribunal in AY 2007-08. Therefore, we affirm the order of ld CIT(A). In the result we do not find any merit in the ground of appeal raised by the revenue and the same is dismissed. Addition of Marked to Market loss for calculation of book profit under section 115JB - HELD THAT - CIT(A) after considering the submissions of the assessee observed that marked to market loss are on account of restatement of trading asset and liability and its ascertainment and computation is not disputed by assessing officer. CIT(A) also held that after the decision in CIT Vs Woodward Governor India (P) ltd. 2009 (4) TMI 4 - SUPREME COURT marked to market loss is allowable deduction. And it cannot be termed as unascertained liability as has been provided in clause (c) of Explanation-1 to section 115JB(2). Accordingly cannot be added back to the book profit. No contrary fact or law is brought to our notice to arrive on other finding. Addition on account of provision of gratuity for calculation of book profit under section 115JB - HELD THAT - CIT(A) after considering the submissions of the assessee observed provisions of gratuity is based on the actuarial valuation and therefore ascertained liability. The assessing officer has not disputed actuarial valuation and cannot be treated unascertained liability as has been provided in clause (c) of Explanation-1 to section 115JB(2). No contrary fact or law is brought to our notice to arrive on other finding. Therefore, we affirm the action of ld CIT(A) and dismiss the ground of appeal raised by the revenue. Disallowance of section 14A for computation u/s 115JB - HELD THAT - CIT(A) after considering the submissions of the assessee observed the provision of section 14A cannot be imported to clause (f) of Explanation 1 to section 115JA. The Special bench of Delhi Tribunal recently in ACIT vs. Vireet Investment (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI held the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with rule 8D. Thus, considering the recent decision of the Special Bench of Tribunal we uphold the order of the ld CIT(A). In the result this ground of appeal is dismissed. Disallowance u/s 14A - HELD THAT - The Hon ble Bombay High Court in Nirved Traders Pvt Ltd 2019 (4) TMI 1738 - BOMBAY HIGH COURT held that the disallowance under section 14A be restrict to the exempt income.

Summary

Issues Involved:
1. Addition on account of arm's length adjustment to income from interest on loans advanced to subsidiaries.
2. Treating equity investment in overseas subsidiary as an international transaction.
3. Reclassification of share application money as a loan.
4. Disallowance of weighted deduction under Section 35(2AB) of the Act.
5. Disallowance under Section 14A of the Act.
6. Deletion of addition representing upward adjustments on account of guarantee fee income.
7. Benchmarking of interest rates on foreign currency loans.
8. Imputation of notional interest on infusion of additional funds to the wholly owned subsidiary.
9. Allocation of R&D expenses to units eligible for deduction under Section 80IB & 80IC.
10. Deletion of addition made under Section 40(a)(i) for payments to non-residents.
11. Deletion of addition representing provision for market-to-market (MTM) losses for calculation of book profit under Section 115JB.
12. Deletion of addition representing provision for gratuity for calculation of book profit under Section 115JB.
13. Deletion of addition representing disallowance under Section 14A for calculation of book profit under Section 115JB.

Detailed Analysis:

1. Addition on Account of Arm's Length Adjustment to Income from Interest on Loans Advanced to Subsidiaries:
The Tribunal upheld the decision to recompute interest based on the rate prevalent in the country where the loan was received, following the jurisdictional High Court's ruling in CIT Vs Tata Autocomp System Ltd. The AO/TPO was directed to recompute the interest accordingly.

2. Treating Equity Investment in Overseas Subsidiary as an International Transaction:
The Tribunal found that share application money cannot be treated as a loan amount merely due to a delay in the issuance of shares by its subsidiary. This was based on consistent Tribunal decisions, including ITO Vs Sterling Oil Resources (P) Ltd and Aditya Birla Minacs Worldwide Ltd Vs JCIT.

3. Reclassification of Share Application Money as a Loan:
The Tribunal ruled that the share application money cannot be reclassified as a loan for the period between the date of remittance and the date of allotment of shares. The Tribunal followed its earlier decisions and directed that the notional interest could not exceed LIBOR.

4. Disallowance of Weighted Deduction Under Section 35(2AB) of the Act:
The Tribunal restored the issue to the AO for fresh adjudication, following its decision in the assessee's own case for AY 2006-07. The AO was directed to consider the ratio laid down in relevant judicial precedents, including the Gujarat High Court's decision in Cadila Healthcare Ltd.

5. Disallowance Under Section 14A of the Act:
The Tribunal directed the AO to restrict the disallowance under Section 14A to the extent of the exempt income earned by the assessee, following the Bombay High Court's ruling in Nirved Traders Pvt Ltd.

6. Deletion of Addition Representing Upward Adjustments on Account of Guarantee Fee Income:
The Tribunal upheld the deletion of the upward adjustment on account of corporate guarantee commission, noting that the assessee had benchmarked the transaction at 0.75%, which was consistent with its own case for AY 2006-07 and 2007-08.

7. Benchmarking of Interest Rates on Foreign Currency Loans:
The Tribunal directed the AO/TPO to recompute interest based on the rate prevalent in the country where the loan was received, following the jurisdictional High Court's ruling in CIT Vs Tata Autocomp System Ltd.

8. Imputation of Notional Interest on Infusion of Additional Funds to the Wholly Owned Subsidiary:
The Tribunal ruled that share application money cannot be treated as a loan amount merely due to a delay in the issuance of shares by its subsidiary, consistent with its earlier decisions.

9. Allocation of R&D Expenses to Units Eligible for Deduction Under Section 80IB & 80IC:
The Tribunal upheld the decision of the CIT(A) to grant relief to the assessee, following the consistent view of the Tribunal in the assessee's own case for earlier years.

10. Deletion of Addition Made Under Section 40(a)(i) for Payments to Non-Residents:
The Tribunal affirmed the CIT(A)'s decision to delete the addition, noting that payments to non-residents for conducting bio-equivalence studies are not taxable in India and not subject to withholding tax under Section 195.

11. Deletion of Addition Representing Provision for Market-to-Market (MTM) Losses for Calculation of Book Profit Under Section 115JB:
The Tribunal upheld the CIT(A)'s decision, noting that MTM losses are allowable deductions and cannot be termed as unascertained liabilities under clause (c) of Explanation-1 to Section 115JB(2).

12. Deletion of Addition Representing Provision for Gratuity for Calculation of Book Profit Under Section 115JB:
The Tribunal upheld the CIT(A)'s decision, noting that the provision for gratuity is based on actuarial valuation and is an ascertained liability, not an unascertained liability under clause (c) of Explanation-1 to Section 115JB(2).

13. Deletion of Addition Representing Disallowance Under Section 14A for Calculation of Book Profit Under Section 115JB:
The Tribunal upheld the CIT(A)'s decision, following the Special Bench of Delhi Tribunal's ruling in ACIT Vs Vireet Investment (P) Ltd, which held that the computation under clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to computation as contemplated under Section 14A read with Rule 8D.

Conclusion:
The Tribunal's judgment addressed multiple issues raised by both the assessee and the revenue, providing detailed reasoning and directions based on judicial precedents and consistent Tribunal decisions. The appeals were partly allowed, with specific directions for recomputation and fresh adjudication where necessary.