2021 (4) TMI 449 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - HELD THAT - The issue is settled in view of judgment of Apex Court in case of Essar Teleholdings Ltd. 2018 (2) TMI 115 - SUPREME COURT that Rule 8D cannot be enforced prior to AY 2008-09 for making disallowance u/s 14A of the Act. Further, in assessee's own case 2020 (2) TMI 1485 - ITAT DELHI and 2018 (2) TMI 2030 - ITAT DELHI this Tribunal has upheld deletion of disallowance u/s 14A r.w.r. 8D in view of sufficiency of assessee s own surplus funds in form of reserves and surplus over the value of investments. As has been brought to our attention that in the year under consideration, the reserve and surplus are much higher than the investments and further, investment made during the year is only ₹ 399.17 Lakhs (net ₹ 299.00 Lakhs), while there is actual repayment of borrowings during the year to the extent of ₹ 12,020 lakhs. Therefore, assessee s own funds are much more than investment and on the facts of the case it can be reasonably inferred that amount of investment made cannot be said to be made from borrowings but out of assessee s own funds. Thus, the contentions of CIT(A) that assessee has failed to establish the acquisition of shares and sources thereof by producing books of accounts and other documentary evidence by relying on the judgment of Calcutta High Court in case of Dhanuka Sons 2011 (4) TMI 861 - CALCUTTA HIGH COURT is erroneous. It is apparent from the facts submitted by the assessee before assessing officer as well as before CIT (A) from which one may reasonably infer that investments are not out of borrowings but from the assessee s own surplus funds. - we direct the AO to delete the disallowance made u/s 14A - Decided in favour of assessee. Adjustment on account of transfer pricing international transaction under dispute is the Export of Nylon Tyre Yarn' and Export of Chafer' by the assessee to its associated enterprise namely SRF Overseas Ltd, Dubai - assessee benchmarked the aforesaid international transaction by applying CUP as most appropriate method (MAM) to determine ALP - HELD THAT - As carefully examined the working given by the assessee in Annexure-I of the synopsis, according to which the net effect under aggregate approach which we have affirmed before giving effect of debit note is a positive of ₹ 14,58,033/- against the negative of ₹ 44,77,914/- computed by the TPO. While the aforesaid net positive after giving the effect of debit note the same gets enhanced to ₹ 51,53,489/-. Hence there is no scope left for any ALP adjustment in these facts. We therefore, allow the claim of the assessee of benchmarking the entire transaction of export of nylon yarn and chafer using the aggregation approach which has been duly confirmed in various decisions cited supra and accordingly, the assessee s international transactions of export of Nylon Yarn and Chafer are held at arm s length. Thus, transfer pricing adjustment made by the TPO/AO and upheld by CIT (A) is hereby deleted. Transfer of Carbon emission reduction (CER) certificates - assessee has received carbon emission reduction ( CER or carbon credits ) certificates on account of its efforts to reduce the emission of greenhouse gases in terms of Kyoto Protocol - HELD THAT - We have observed that facts of the assessee are similar to the case of Gujarat Flourochemicals Ltd 2018 (8) TMI 857 - ITAT AHMEDABAD . Further, in other cases too, the Hon ble High Courts have held CER as the capital receipts not liable to tax. This tribunal in earlier years also has dealt with this issue in the case of assessee and remitted the matter to the file of AO. 2018 (2) TMI 2030 - ITAT DELHI . Thus following the judgments of coordinate benches in assessee s own case on merits, remit this issue back to the file of AO to decide it in accordance with the law having regard to above observations and the case laws relied upon by the assessee, after granting a reasonable opportunity of hearing to the assessee. Admission of additional grounds - Interest subsidy under TUF scheme and other pertaining to allowance of deduction of education cess u/s 37 - HELD THAT - NATIONAL THERMAL POWER COMPANY LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1996 (12) TMI 7 - SUPREME COURT and M/S. JAI PARABOLIC SPRINGS LTD. 2008 (4) TMI 3 - DELHI HIGH COURT has categorically held that there is no fetters on the powers of the tribunal to entertain an additional ground. Hon ble Court has described that power of tribunal in dealing with appeals have been expressed in widest possible term.We, therefore allow the application of the assessee for admission of additional grounds. Interest Subsidy under Technological upgradation fund (TUF) - It is a settled position that purpose of subsidy or incentive and not the nomenclature of such incentive have to be seen for the purpose of deciding its nature as capital or revenue. Following the order of coordinate bench in assessee s own case for AY 2012-13, we remit the issue to the file of assessing officer to verify the claim of the assessee and allow the relief if the same is in the nature of interest subsidy under TUF scheme after granting a reasonable opportunity of being heard to the assessee. Deduction of education cess u/s 37/40(a)(ii) - HELD THAT - As decided in M/S. SICPA INDIA PRIVATE LTD 2020 (4) TMI 425 - ITAT DELHI education cess is not a disallowable expenditure u/s 40(a)(ii) of the Act having been expressly excluded from section 40(a)(ii) of the Act. Moreover, cess is not in the nature of tax as has been held by Hon ble Supreme Court in case of Smith Kline Amp; French (India) Ltd. and Ors. 1996 (4) TMI 2 - SUPREME COURT - So, we are of the considered view that AO/CIT(A) have erred in disallowing the deduction for education cess on income-tax, dividend distribution tax and fringe benefit tax for AYs 2009-10, 2010-11 2011-12 in computing the total income under normal provisions of the Act, consequently ordered to be deleted. . Accordingly, we remit the issue back to the file of the AO to verify the claim of the assessee and allow the same in accordance with the law after granting a sufficient opportunity to the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D
2. Transfer Pricing Adjustment
3. Treatment of Carbon Emission Reduction (CER) Certificates
4. Additional Grounds: Interest Subsidy under Technology Upgradation Fund (TUF) and Deduction of Education Cess under Section 37

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of ?39,55,351/- under Section 14A read with Rule 8D. The Assessing Officer (AO) disallowed expenses related to exempt income, relying on ITAT Mumbai's judgment in ITO v. Daga Capital, applying Rule 8D retrospectively. The CIT (A) upheld the disallowance but reduced it to ?39,55,351/-.

The Tribunal noted that Rule 8D is applicable prospectively from AY 2008-09 as per the Bombay High Court in Godrej and Boyce Manufacturing Co. Ltd. v. DCIT. The Tribunal also observed that the assessee had sufficient own funds, and no borrowed funds were used for investments yielding exempt income. Therefore, the Tribunal directed the AO to delete the disallowance of ?39,55,351/-.

2. Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustment of ?44,77,914/- for export transactions with its AE, SRF Overseas Ltd., Dubai. The AO and CIT (A) rejected the benefit of +5% and made adjustments based on cherry-picked transactions.

The Tribunal held that the TPO cannot cherry-pick transactions and must consider all closely linked transactions in aggregate. The Tribunal found that the aggregate approach showed a positive figure, indicating that the transactions were at arm's length. Consequently, the Tribunal deleted the transfer pricing adjustment of ?44,77,914/-.

3. Treatment of Carbon Emission Reduction (CER) Certificates:
The assessee claimed that the receipt of ?491.53 crores from the transfer of CER certificates should be treated as a capital receipt, not liable to tax. The CIT (A) rejected this claim, citing the need for a revised return as per Goetze India Ltd.

The Tribunal noted that various High Courts, including the Andhra Pradesh High Court in My Home Power Ltd. and the Gujarat High Court in Gujarat Flourochemicals Ltd., have held that CER receipts are capital in nature. Following its own precedents and High Court rulings, the Tribunal remitted the issue back to the AO to decide in accordance with the law, treating CER receipts as capital.

4. Additional Grounds:
Interest Subsidy under Technology Upgradation Fund (TUF):
The assessee claimed that the interest subsidy of ?3,25,00,000/- under the TUF scheme should be treated as a capital receipt. The Tribunal, following its previous decision in the assessee's case for AY 2012-13, remitted the issue back to the AO to verify and allow the claim if the subsidy is indeed for capital purposes.

Deduction of Education Cess under Section 37:
The assessee sought a deduction of ?2,54,68,332/- for education cess under Section 37, relying on judgments from the Rajasthan High Court and the Bombay High Court. The Tribunal remitted the issue back to the AO to verify and allow the deduction in accordance with the law.

Conclusion:
The Tribunal allowed the assessee's appeal partly for statistical purposes, directing the AO to delete the disallowance under Section 14A, delete the transfer pricing adjustment, and reconsider the treatment of CER receipts and additional grounds related to interest subsidy and education cess.