2020 (4) TMI 93 - AT - Income Tax

Revenue recognition - Interest against the advance made to SLCCL - whether compensation received from SICCL was in the nature of Interest against the advance made to SICCL and not in the nature of capital - HELD THAT - Receipt of ₹ 35 crones is nothing but interest on money given to M/S Sahara India Commercial Corporation Ltd. SICCL - The appellant has furnished additional submission vide letter dated 02.01.2016 which is unsigned. Therefore, no cognizance is taken of this letter. Compensation received is of capital nature especially in view of the fact that ₹ 35 crores was received on 09.04.2007 merely five days after such and so called agreement was entered into. It is pertinent to note that principle amount of ₹ 400 crores was received on 25.05.2007. M/s Sahara India Commercial Corporation Ltd. itself had treated ₹ 35 crores as Interest only. The action of AO in taxing ₹ 3,33,00,000/- is confirmed. These grounds of appeal are dismissed. Treatment of interest earned as Income from other sources - During the course of appellate proceedings, the AR of the appellant filed written submission. I have considered the findings given by the AO and written submission filed by the AR of the appellant. The AO has added ₹ 3,33,00,000/- as income from other sources. The appellant has submitted that the learned AO has erred in treating the interest earned including proportionate compensation under the head income from other sources against the business income a claimed by the appellant. The learned AO has failed to appreciate the fact that the Interest of ₹ 1.69 crores was earned from the Inter Corporate Deposits made to Indus City Scapes Construction Pvt. Ltd. The AO observed that the appellant s income consists of rental Income and interest Income only. Therefore, the AO has correctly taxed ₹ 3,33,00,000/- under the head income from Other Sources . Addition u/s 40(a)(ia) - transaction was a colourable device to reduce taxable income - if at all the transaction was in accordance with commercial necessity, the expense was in the nature of interest expense and the assessee was liable to deduct TDS - HELD THAT - As the parties themselves have not acted upon the terms and conditions as laid out in the said agreement, the appellant cannot now pleaded that other terms and conditions contained in this agreement be construed as not ambiguous. The action of Assessing Officer in adding as interest income is confirmed. This ground of appeal is dismissed. There is a difference between discount allowed and interest paid. In the case of the appellant as there was no purchase or delivery of goods or bills raised as held earlier, there cannot be any discount allowed. The amount of ₹ 7,82,68,493/- cannot be termed as discounting charges and is in the nature of interest paid on money borrowed wherein receivable from subsidiary company might have acted as security or a loan of ₹ 100 Cr. As interest is liable for TDS, the action of AO is adding u/s. 40(a)(ia) is confirmed. TP Adjustment - ALP of the service charges / commission on extending corporate guarantee to the AEs - HELD THAT - ALP on corporate guarantee has already been examined by the jurisdictional bench of Chennai ITAT in the case of Redington India Ltd. v. JCIT 2014 (10) TMI 669 - ITAT CHENNAI which was applied by the DRP in the assesses case itself , supra, we do not find any reason to interfere with the order of the DRP and hence the corresponding grounds of the Revenue are dismissed .

Issues Involved:
1. Reopening of assessment.
2. Treatment of compensation as interest income.
3. Treatment of interest earned as income from other sources.
4. Transfer pricing adjustments related to OFCD interest and guarantee commission.
5. Disallowance under section 14A.
6. Addition of factoring charges under section 40(a)(ia).
7. Penalty under section 271(1)(c).
8. MAT credit and TDS credit.

Detailed Analysis:

1. Reopening of Assessment:
The assessee challenged the reopening of assessment under section 147, arguing there was no fresh or tangible material to justify the reopening. The Tribunal upheld the reopening, stating the AO had reason to believe that income had escaped assessment, particularly regarding the compensation received from SICCL treated as interest income.

2. Treatment of Compensation as Interest Income:
The compensation of ?35 crores received from SICCL was treated as interest income by the AO, based on the fact that SICCL deducted TDS under section 194A. The Tribunal upheld this treatment, noting that the agreements and the nature of transactions indicated that the compensation was indeed interest, not a capital receipt.

3. Treatment of Interest Earned as Income from Other Sources:
The AO treated the interest earned, including proportionate compensation, under the head "income from other sources" instead of "business income." The Tribunal upheld this treatment, noting that the appellant's income primarily consisted of rental and interest income, justifying the AO's classification.

4. Transfer Pricing Adjustments:
OFCD Interest:
The TPO made an adjustment to the interest income from OFCDs, treating them as loans and benchmarking the interest rate at LIBOR + 1.9%. The Tribunal upheld this adjustment, rejecting the assessee's claim that OFCDs were quasi-equity investments.

Guarantee Commission:
The TPO added a guarantee commission at 3.5% for guarantees extended to AEs. The DRP reduced this to 1%, based on comparable transactions. The Tribunal upheld the DRP's decision, finding the 1% rate reasonable.

5. Disallowance under Section 14A:
The AO disallowed interest expenses under section 14A, attributing them to investments yielding exempt income. The Tribunal directed the AO to restrict the disallowance to the extent of the dividend income earned by the assessee, following the Delhi High Court's decision in Joint Investments Pvt. Ltd.

6. Addition of Factoring Charges under Section 40(a)(ia):
The AO disallowed factoring charges of ?7,82,68,493, treating them as interest expenses liable for TDS. The Tribunal upheld the AO's decision, noting that the transactions were structured to reduce taxable income and the charges were indeed interest expenses.

7. Penalty under Section 271(1)(c):
The AO levied a penalty for concealment of income or furnishing inaccurate particulars. The Tribunal upheld the penalty on consultancy and escrow fees but directed the AO to cancel the penalty on interest income and disallowance under section 14A, as these were based on subjective interpretation and not on concealment of facts.

8. MAT Credit and TDS Credit:
The Tribunal directed the AO to verify and allow the MAT credit of ?26,35,58,884 and TDS credit of ?1,96,79,460, as claimed by the assessee, if found correct.

Conclusion:
The Tribunal's decisions were a mix of upholding the AO's findings and directing adjustments based on legal precedents and factual verifications. The appeals were partly allowed or dismissed based on the merits of each issue.

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