2020 (8) TMI 173 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - HELD THAT - As the investments from which the tax-free income is earned were made from the appellant s own surplus funds/accumulated profits, following the decision RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT AND HDFC BANK LTD. 2016 (3) TMI 755 - BOMBAY HIGH COURT we delete the disallowance made under Rule 8D(2)(ii). Disallowance under Rule 8D(2)(iii) - In the instant case, the appellant has not maintained separate books of accounts in respect of exempt income. It is relevant to mention here that Rule 8D was notified by Central Board of Direct Taxes (CBDT) by the IT (5th Amdt) Rules, 2008 w.e.f. 24.03.2008.Thus it is applicable for the impugned assessment year. The reliance placed by the Ld. counsel for AY 2007-08 stands on a different pedestal from AY 2008- 09. Considerig the case of GODREJ AND BOYCE MFG. CO. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT addition confirmed - Decided partly in favour of assessee. Nature of expenditure - reduction of share capital of the company - revenue or capital expenditure - HELD THAT - In the instant case, as recorded by the AO, the assessee incurred mainly of professional charges, legal charges, postage, printing etc. Herein there is a reduction of share capital which has resulted in decrease in fund. The appellant has neither acquired any benefit of enduring nature nor has such expenditure resulted into any asset. We are of the considered view that the ratio laid down in Selan Exploration Technology Ltd. 2009 (9) TMI 989 - DELHI HIGH COURT after considering the decision in Brooke Bond India Ltd. 1997 (2) TMI 11 - SUPREME COURT squarely applies to the present case. Following the same, we delete the disallowance. TP Adjustment - upward adjustment in respect of advertisement, marketing and sales promotion ('AMP') expenses - HELD THAT - In the absence of agreement between the assessee and its AE obliging the assessee to incur AMP expenditure on behalf of its AE, no international transaction can be presumed. Even if some indirect benefit has accrued to the AE by aforesaid expenditure, it could not be held that the same was incurred to promote the brand of foreign AE. - As relying on own case we delete the upward adjustment TP Adjustment - comparability - HELD THAT - Under Rule 10C(2)(b) in selecting the most appropriate method, among other factors, the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises, shall be taken into account. And under Rule 10B(2)(b), the comparability of an international transaction with an uncontrolled transaction shall be judged, among other factors, with reference to the functions performed, taking into account assets employed or to be employed and risks assumed by the respective parties to the transactions. Comparability of Dolphin Medical Services Ltd. and Medinova Diagnostic Services Ltd. need to be re-examined by the AO/TPO.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of expenditure related to the reduction of share capital.
3. Upward adjustment related to Advertisement, Marketing, and Sales Promotion (AMP) expenses.
4. Upward adjustment related to provision of research and development/testing services.

Issue-wise Analysis:

1. Disallowance under Section 14A:
The appellant contested the disallowance of ?66,18,230/- under Section 14A, arguing that no expenses were directly incurred for earning tax-free income. The AO computed the disallowance under Rule 8D, attributing ?37,03,813/- to interest expenses and ?29,14,417/- to administrative expenses. The Tribunal noted that the appellant's investments were made from its own surplus funds, referencing the Bombay High Court's decision in HDFC Bank Ltd., and deleted the disallowance of ?37,03,813/-. However, the disallowance of ?29,14,417/- for administrative expenses was upheld, as the appellant did not maintain separate books of accounts for exempt income.

2. Disallowance of Expenditure Related to Reduction of Share Capital:
The appellant incurred ?1,86,38,936/- for reducing the face value of its shares and claimed it as revenue expenditure. The AO treated it as capital expenditure. The Tribunal referenced the Gujarat High Court's decision in M/s Bayer Vapi Pvt. Ltd. and the Delhi High Court's decision in Selan Exploration Technology Ltd., distinguishing the case from Brooke Bond India Ltd., and concluded that the expenditure did not result in any enduring benefit or asset creation. Thus, the disallowance was deleted, allowing the expenditure as revenue in nature.

3. Upward Adjustment Related to AMP Expenses:
The AO made an upward adjustment of ?572,554,441/- for AMP expenses, alleging an arrangement between the appellant and its AE, CP USA. The Tribunal referenced its own decisions in the appellant's previous assessment years and the Bombay High Court's decision in Johnson & Johnson Ltd., which held that in the absence of an agreement obliging the appellant to incur AMP expenses on behalf of its AE, no international transaction could be presumed. Consequently, the upward adjustment was deleted.

4. Upward Adjustment Related to Provision of R&D/Testing Services:
The appellant contested the upward adjustment of ?86,59,200/- made by the TPO, who used single-year data and excluded certain comparables. The Tribunal directed the AO/TPO to re-examine the comparability of Dolphin Medical Services Ltd. and Medinova Diagnostic Services Ltd., and to exclude Alphageo (India) Ltd. from the set of comparables. The AO/TPO was also instructed to consider the appellant's contentions regarding risk and working capital adjustments. The matter was restored to the AO/TPO for fresh adjudication.

Additional Ground:
The appellant's additional ground regarding the revision of profit from the Baddi unit eligible for deduction under Section 80IC, consequent to the AMP expenditure adjustment, was deemed infructuous as the AMP adjustment was deleted.

Procedural Note:
The order was pronounced beyond the 90-day period due to the COVID-19 pandemic and subsequent lockdowns, invoking exceptions under Rule 34(5)(c) of the Income Tax Appellate Tribunal Rules, 1963.

Conclusion:
The appeal was partly allowed, with specific disallowances and adjustments being deleted or remanded for fresh consideration.