2020 (6) TMI 135 - AT - Income Tax

Rectification u/s 154 - draft assessment order, i.e., without complying with the directions issued by Ld DRP - AO has passed a rectification order suo-motu complying with the directions issued by the Ld DRP in respect of transfer pricing adjustment and also complying with the directions in respect of other matters except the matter of addition relating to belated payment of PF/ESI - HELD THAT - Action of the AO would show that he has consciously omitted to comply with or completely disregarded the provisions of sec.144C of the Act by either ignoring the directions issued by Ld DRP or they have passed the final assessment order beyond the limitation period. In the instant case, we have noticed that the AO has actually passed the order u/s 143(3) r.w.s 144C(13) of the Act, meaning thereby, he has intended to comply with the directions issued by Ld DRP. By inadvertence, he has omitted to incorporate the directions in the final assessment order, which was duly rectified by passing a rectification order u/s 154 of the Act. There should not be any dispute that the Act visualizes committing of mistakes apparent from record either by the assessee or by the assessing officer and hence the provisions of sec. 154 have been incorporated in the Act. The mistakes apparent from record can be either pointed out by the assessee or it can be noticed by the assessing officer himself. Accordingly he may pass the rectification order suo-motu or on the application filed by the assessee in order to rectify the said mistake apparent from record. The Act also prescribes a time limit of four years for rectifying such mistakes. In the instant case, the assessing officer has passed the rectification order within one week from the date of passing of final assessment order. Accordingly, we are of the view that there was inadvertent omission on the part of the AO in not complying with the directions issued by Ld DRP, which has been duly rectified by him by passing the rectification order u/s 154 - A.R submitted that the AO has only partially complied with the directions, i.e., he has not followed the direction in respect of addition relating to belated payment of PF/ESI. In our view, this omission should also be treated as mistake apparent from record, which could have been brought to the notice of the AO by the assessee himself. Hence the said omission, in our view, would not be fatal to the final assessment order. Transfer Pricing adjustment made in respect of interest free advances given to M/s USL Holdings Limited - HELD THAT - The fact remains that, during the year under consideration, the impugned transactions remained as loan transactions only. The loan has been given to a holding company and the proposed acquisition of a foreign company was proposed to be executed through Special Purpose Vehicles. Thus we notice that there appears to be multiple layers in the proposed scheme. There was no contractual obligation or option for converting the loan into equity as existed in the case of Cadila healthcare Ltd 2017 (4) TMI 462 - ITAT AHMEDABAD . It is a fact that the TPO/DRP did not deal with the contentions of the assessee regarding quasi-equity. However, it is stated that the assessee has intended to convert the loan into equity. When the loan transactions remained as loan transactions in the books, in our view, the contention of any such intention cannot be recognized. Under these set of facts, we are unable to appreciate this alternative contention of the assessee. Disallowance made u/s 14A - HELD THAT - We direct the AO to exclude investments, which did not yield exempt income, while computing average value of investments. Disallowance of interest expenditure relatable to the interest free advances given by the assessee to the related parties - own funds available with the assessee is in excess of the aggregate amount of interest free advances and hence the decision rendered by Hon'ble Supreme Court in the case of Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT shall apply to the facts of the present case, in which event, no interest disallowance is called for. We notice that this contention of the assessee has not been examined by the AO in the light of decision of Hon'ble Supreme Court referred above. Accordingly, we restore this issue to the file of the AO to examine the factual aspects and for deciding this issue following the decision rendered by Hon'ble Supreme Court, referred above. If the disallowance gets deleted on this ground, then other contentions of the assessee would be rendered academic in nature. However, if any part of disallowance is liable to be made, then the AO should consider other arguments of the assessee also in the set aside proceedings. Disallowance of promotion and advertisement expenses - HELD THAT - We notice the issue relating to allowability of expenditure incurred on sponsorship of sports event was considered by the Mumbai bench of ITAT in the case of Samudra Developers Pvt Ltd 2017 (4) TMI 1188 - ITAT MUMBAI and it was held that the same is allowable as revenue expenditure. Expenditure incurred on sponsoring of sports events are intended to promote business only and hence the same is allowable as expenditure. The allowability of brand promotion expenses was examined by Hon'ble Delhi High Court in the case of Modi Revelon P Ltd 2012 (9) TMI 48 - DELHI HIGH COURT consists merely in facilitating the assessee's business operations, enabling the management to conduct their Hotel business more efficiently and profitably. We are, therefore, satisfied that the view taken by the Tribunal in answering this question in favour of Assessee. Disallowance of PF/ESI payments for belated remittance - DRP directed the AO to delete the disallowance by following the decision rendered by jurisdictional Karnataka High Court in the case of Sabari Enterprises 2007 (7) TMI 169 - KARNATAKA HIGH COURT - It is the say of the assessee that the AO did not follow the direction given by Ld DRP on this issue in the final assessment order as well as in the rectification order passed by the AO thereafter - HELD THAT - Since it is a matter of rectification, we direct the AO to rectify the mistake pointed out by the assessee on this issue by deleting the disallowance as per the direction issued by Ld DRP. We heard the parties on this issue. Since it is a matter of rectification, we direct the AO to rectify the mistake pointed out by the assessee on this issue by deleting the disallowance as per the direction issued by Ld DRP.

Summary

Issues Involved:
1. Legality of the assessment order.
2. Transfer Pricing adjustment for interest-free loans to AE.
3. Disallowance under Section 14A of the Act.
4. Disallowance of interest expenditure on interest-free advances to related parties.
5. Disallowance of promotion and advertisement expenses.
6. Disallowance of PF/ESI payments for belated remittance.
7. Excess levy of interest under Sections 234A and 234B.
8. Short credit of TDS/TCS.

Issue-wise Detailed Analysis:

1. Legality of the Assessment Order:
Relevant Keywords and Sentences:
- "The order passed by the learned Assessing officer (AO) is bad in law and liable to be quashed for the reason that the same is not in conformity with the directions of the Hon'ble Dispute Resolution Panel (DRP) and has been passed by the learned AO without application of mind."
- "The assessing officer has passed the final assessment order by replicating the draft assessment order, i.e., without complying with the directions issued by Ld DRP."
- "The AO has passed a rectification order on 6th February, 2017 suo-motu complying with the directions issued by the Ld DRP in respect of transfer pricing adjustment and also complying with the directions in respect of other matters except the matter of addition relating to belated payment of PF/ESI."

Analysis:
The assessee contended that the final assessment order was not in conformity with the DRP's directions, making it illegal. The AO had initially failed to incorporate the DRP's directions in the final assessment order but later passed a rectification order under Section 154 to correct this. The Tribunal held that the omission was inadvertent and not a conscious disregard of the DRP's directions. Therefore, the rectification order was deemed sufficient to cure the defect, and the final assessment order was upheld.

2. Transfer Pricing Adjustment for Interest-Free Loans to AE:
Relevant Keywords and Sentences:
- "The TPO took the view that the interest-free advance given by the assessee to its subsidiary, being an international transaction, is required to be examined in terms of sec. 92 of the Act."
- "The TPO adopted the Comparable Uncontrolled Price (CUP) method for benchmarking the loan transactions."
- "The Ld DRP, following the decision rendered by Special bench of ITAT Kolkatta in the case of Instrumentarium Corporation Ltd Vs. ADIT, confirmed the Transfer pricing adjustment in principle."

Analysis:
The assessee had advanced interest-free loans to its AE, which the TPO deemed an international transaction requiring arm's length pricing. The TPO used the CUP method, resulting in a transfer pricing adjustment. The Tribunal upheld the adjustment, rejecting the assessee's arguments that no income arose from the transaction and that the loans were quasi-equity. The Tribunal directed the AO to apply the LIBOR rate for interest computation, following judicial precedents.

3. Disallowance under Section 14A of the Act:
Relevant Keywords and Sentences:
- "The AO, hence, computed disallowance by applying provisions of Rule 8D of I.T Rules at ? 94.97 crores."
- "The Ld A.R contended that the own funds available with it is in excess of the investments."
- "The jurisdictional Hon'ble Karnataka High Court in the case of CIT vs. Microlabs Limited has dealt with an identical issue."

Analysis:
The AO disallowed expenses under Section 14A, applying Rule 8D, as the assessee had claimed exempt dividend income without disallowing any expenditure. The Tribunal directed the AO to re-examine the issue, considering the assessee's contention that its own funds exceeded investments and that only investments yielding exempt income should be considered. The Tribunal also directed that the disallowance should not exceed the exempt income, following judicial precedents.

4. Disallowance of Interest Expenditure on Interest-Free Advances to Related Parties:
Relevant Keywords and Sentences:
- "The AO proposed to disallow interest relatable to the advances so given."
- "The Ld A.R submitted that the own funds available with the assessee is more than the aggregate amount of interest-free loans given by the assessee."
- "The decision rendered by Hon'ble Supreme Court in the case of Reliance Industries Ltd shall apply to the facts of the present case."

Analysis:
The AO disallowed interest expenditure, arguing that the assessee had given interest-free loans to related parties while incurring interest on its borrowings. The Tribunal directed the AO to examine if the assessee's own funds exceeded the interest-free advances, following the Supreme Court's decision in Reliance Industries Ltd. If the own funds were sufficient, no disallowance would be warranted.

5. Disallowance of Promotion and Advertisement Expenses:
Relevant Keywords and Sentences:
- "The AO took the view that these expenses have been incurred for promotion of USL brand and hence they give enduring benefit to the assessee."
- "The assessee, being manufacturer of alcoholic beverages, is allowed to advertise only its brand name as per Rule 7 of Cable Television Rules, 1994."
- "We notice the issue relating to allowability of expenditure incurred on sponsorship of sports event was considered by the Mumbai bench of ITAT in the case of Samudra Developers Pvt Ltd."

Analysis:
The AO disallowed the expenses, treating them as capital expenditure for brand promotion. The Tribunal, following judicial precedents, held that sponsorship expenses for sports events are revenue in nature, intended to promote business. The Tribunal directed the AO to allow these expenses as revenue expenditure.

6. Disallowance of PF/ESI Payments for Belated Remittance:
Relevant Keywords and Sentences:
- "The AO disallowed a sum of ? 1,51,904/- relating to employees contribution of PF/ESI relating to USL, Hospet."
- "The Ld DRP directed the AO to delete the disallowance by following the decision rendered by jurisdictional Karnataka High Court in the case of Sabari Enterprises and Essea Teraoka Company Ltd."

Analysis:
The AO disallowed PF/ESI payments for belated remittance. The DRP directed the AO to delete the disallowance, following the Karnataka High Court's decisions. The Tribunal directed the AO to rectify the mistake and delete the disallowance.

7. Excess Levy of Interest under Sections 234A and 234B:
Relevant Keywords and Sentences:
- "The remaining grounds relate to excess levy of interest u/s 234A and 234B and also Short credit of TDS/TCS."
- "These issues also are matters of rectification at the end of AO and charging of interest is also consequential."

Analysis:
The assessee raised issues regarding excess levy of interest under Sections 234A and 234B and short credit of TDS/TCS. The Tribunal directed the AO to rectify these issues as they are consequential and matters of rectification.

Conclusion:
The appeal of the assessee was partly allowed, with directions for the AO to re-examine and rectify certain issues based on judicial precedents and detailed examination of facts.