2021 (4) TMI 682 - AT - Income Tax

TP Adjustment - Addition considering the interest free loan and advances to its Associated Enterprises - assessee before the AO/TPO contended that there cannot be any adjustment of the notional interest under the provisions of section 92C read with rule 10B of the Income Tax Rules - whether the amount of interest free loans and advances provided to the associated enterprises should be subject to the adjustment on account of notional interest under the transfer pricing provisions as provided under section 92C? - The assessee in the case on hand has provided interest-free advances to its four associated enterprises ? - HELD THAT - We find that the assessee along with its associated enterprises has been carrying out clinical research activities as a whole. On perusal of the activities of the assessee along with its group associated enterprises, it is revealed that there are different activities which are carried out by the different associated enterprises. For example, the preclinical phase activity is carried out in India and Canada. Similarly, the phase-0 activities carried out in India, Canada and Poland so on and so forth - the project of the research activity can be ended upon the completion of process of the different phases. Once the activities of the assessee and its associated enterprises are so interrelated and interconnected then the transactions should be seen in aggregation for working out the ALP. OECD Transfer Pricing Guidelines which reiterates that though ideally the arm's length principles should be applied on a transaction by transaction basis, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. As assessee got such huge business from its associated enterprises based in the USA. In the absence AE in UK the assessee would have taken services from third party which would have led to more cost than the notional interest income. In other words, the transaction for advancing the interest-free loans to the associated enterprises has to be seen in the context of the benefit received by it from such associated enterprises. As such the transaction of interest free loans/ advances viz a viz the benefit received by the assessee are intrinsically linked which has to be evaluated after aggregating both the transactions. The transaction of interest free advances cannot be viewed without considering the benefit derived by the assessee from the associated enterprises. On analyzing the notional interest added by the TPO under the transfer pricing adjustment with the benefit derived by the assessee, the interest cost appears to be negligible. The amount of interest cost stands at ₹ 26,19,740/- whereas the amount of gross receipt generated by the assessee stands at USD 1,556,230 which is far more than the interest expenses after converting in India rupees. Admittedly there was no benefit accrued to the assessee in the year under consideration but considering the interrelated activities carried out by the assessee along with associate enterprises, in our considered view it is not necessary that the benefit will arise in the year in which such loans and advances were provided without interest. A drug normally takes 8 to 10 years time for its development. This associated enterprise was set up for the activities which are directly connected with the assessee as discussed/elaborated in the preceding paragraph. In our view, the generation of the benefit in terms of money in the year under consideration only cannot be a criteria for making any adjustment under the transfer pricing provisions in the given facts and circumstances. Such income may arise in subsequent years. It is also significant to note that the Ld. CIT-A in his order has given a finding that there was no benefit derived by the assessee with respect to the amount of interest free loans and advances given to UK AE. However, on perusal of the details submitted by the assessee, we note that there was the benefit derived by the assessee from such associated enterprises which has been elaborated somewhere in the preceding paragraph. Thus, such finding of the Ld. CIT-A is factually incorrect. At the time of hearing the Ld. DR has also not controverted the fact of benefit derived by the assessee. We hold that no adjustment under the transfer pricing provisions is required to be made with respect to the interest free loans and advances by the assessee to its associated enterprises in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed and the ground of appeal of the revenue is dismissed. Disallowance under section 115JB of the Act on account of exempted income - AO in the year under consideration found that the assessee has made investments in its subsidiary companies - assessee has incurred interest expenses on the borrowed fund thus AO invoked the provisions of section 14A read with rule 8D - HELD THAT - As per explanation (1) to section 115 JB book profit shall increase by the amount of expenditure incurred by the assessee in relation to the income to which the provisions of section 10 applies. Indeed the income by way of dividend is exempt under subsection (34) of section 10 of the Act. Accordingly, subsection (34) of section 10 of the Act applies to the dividend income and consequently the amount of expenses relatable to the exempted income needs to be added while determining the book profit. However, in the case on hand we note that there was no dividend income earned by the assessee in the year under consideration. Accordingly in our considered view the provisions as specified in clause (f) of explanation 1 to section 115JB of the Act cannot be applied in the case on hand.Accordingly the ground of appeal of the assessee is allowed. Addition made on account of deduction u/s.80IB - AO found that the income from the notice pay and miscellaneous income are not arising from the eligible business activities and therefore such income is not subject for deduction under section 80IB (8) - HELD THAT - As income arising to the assessee on account of notice pay represents the income of the earlier cessation of the job of the employees. It is a normal business practice in the industry where the employee wants to leave organization, the employee is required to give the notice in advance and if he doesn t do so the employer recovers certain amount from the employee to compensate the loss which otherwise arises in hiring the new staff in place of previous employee - the assessee would have adjusted the amount of notice pay recovered from the employee against the salary expenses but the assessee has not done so and shown notice pay as a separate item of income. It doesn t mean that the assessee is not entitled for the deduction with respect to the notice pay. In holding so we draw support and guidance from the order of ITAT Delhibench in the case of Birlasoft (India) Ltd. 2011 (12) TMI 385 - ITAT DELHI wherein it was held that notice pay received/receivable from the employee is an income derived from eligible undertaking for the purpose of the section 10A of the Act. Miscellaneous income represents the settlement of the advances given by the assessee to its employees - such income also represents from the day to day activities of the assessee. Accordingly we hold that such income is eligible for deduction under section 80IB. Disallowance of deduction claimed u/s 80 IB (8) - DR contended that the assessee claimed deduction under section 80 IB(8) of the Act first time in the assessment year 2003-04 and its period of 10 years has expired in the assessment year 2012-13. Therefore the assessee is not eligible for deduction under section 80 IB(8) of the Act for the year under consideration - HELD THAT - Admittedly, the assessee has claimed deduction for the assessment year 2003-04 under section 80 IB(8) of the Act which was also allowed by the Revenue. Thus it appears that the assessee has wrongfully claimed the deduction under section 80 IB(8) of the Act for the assessment year 2003-04 under the bona fides believe that it will get the approval in that particular year. But the Revenue failed to take a note of such wrong deduction claimed by the assessee. Thus the question arises, whether the AO can disturb the deduction claimed by the assessee for the year under consideration by holding that it is the 11th year in the given facts and circumstances. In this regard, we are of the view that the inaction on the part of the revenue cannot disentitle the assessee for its rightful claim. Once the Revenue has missed the bus for disallowing the deduction for the assessment year 2003- 04, it cannot challenge the deduction on this reasoning in the year under consideration until and unless there was some violation of the provisions of law under section 80 IB(8) of the Act r.w. relevant rules i.e. rule 18D and 18DA of income tax rule. As we have already held that there was no violation of the provisions of section 80 IB(8) of the Act for the year under consideration, the assessee cannot be denied for its rightful claim. In view of the above and after considering the facts in totality, we do not find any infirmity . Adjustments with respect to corporate guarantee provided by the assessee - International transaction of not? - HELD THAT - As the assessee has extended the guarantee by involving the Axis Bank of India after incurring the cost. Indeed, such cost was reimbursed by the AE of the assessee on actual basis and the same was added by the assessee in the computation of income. Thus, what is inferred is this that the assessee has given corporate guarantee to its AE after availing the services from the bank viz a viz incurring the cost there on which was given in the course of the business. Accordingly, we hold that the corporate guarantee given in the case on hand is the international transaction which requires to be benchmarked at the arm length price. See INFOTECH ENTERPRISES LIMITED, HYDERABAD VERSUS ADDL. CIT, RANGE-2, HYDERABAD 2014 (1) TMI 1363 - ITAT HYDERABAD - thus it cannot, therefore, be said that the issuance of guarantees, on the facts and in the circumstances of this case, did not constitute an 'international transaction'. Determination of the benchmark in order to working out the ALP of the impugned international transaction? - TPO/AO has treated the assessee as if it was engaged in the business of financial services and accordingly the ALP was determined by comparing with the average margin earned by the banks on cost. Admittedly, the assessee is not carrying out any financial activity and therefore we are not convinced with the basis adopted by the authorities below - There is no difference between the banks or a corporate entity as far as corporate guarantee is concerned. Both have to consider the functions performed, assets employed and risks assumed. In case of default by the borrower, the corporate guarantor is exposed to the same risk of a bank.In case of an AE the risk would not be as high as in case of an outsider. Therefore, the rate charged by the bank for providing the corporate guarantee should be a benchmarked for working out the ALP for the corporate guarantee extended by the assessee to its AE. In the case on hand, the bank has charged .79% of the amount of the corporate guarantee as fees from the assessee which has been reimbursed to the assessee by the AE. This fees in absolute amount works out at ₹ 23,52,607/- only. However, the assessee has not added any markup on this international transaction with its AE. In the interest of justice and fair play, we are of the view that a sum of ₹ 1,17,630/- being 5% of the fees paid to the bank for the corporate guarantee of ₹ 23,52,607/- will be sufficient to add as margin of the assessee. We note that the assessee has already made the disallowance in its computation of income and further addition of the same amount to the total income of the assessee will lead to the double addition which is unwanted under the provisions of law. Accordingly, we are of the view that the decision of the learned CIT (A) for deleting the addition does not require any interference. Hence, the ground of appeal of the assessee is partly allowed whereas the ground of appeal of the revenue is dismissed. Addition of advances with respect to the premises taken on rent - assessee has written off the advances given as rent deposits which were not recovered - AO disallowed the same on the reasoning that such rent deposits represents the capital advance and therefore the same cannot be allowed as deduction - CIT (A) deleted the addition HELD THAT - There is no dispute to the fact that the premises were taken by the assessee for its business purposes. It is a prevailing practice that the tenants is to make the rent deposits with the landlord. Generally these rent deposits are returned back to the tenants on the expiry of rent agreement or it is adjusted against the rent due. The assessee against such advance rent deposit has neither generated any capital assets nor getting any benefit of enduring nature. Therefore the same cannot be treated as capital advance as held by the AO. Any expense incurred by the assessee for the purpose of the business is allowable expenses under section 37(1) of the Act, if it is not capital in nature viz a viz personal in nature. In the case on hand, such advance was neither capital in nature nor personal in nature - the premises were taken for the purpose of the business and therefore any rent deposits with respect to such rented premises are allowable as deduction as business loss - Decided against revenue. Addition of amount reflecting in form 26AS which was not shown as income of the assessee - mismatch in the amount of income shown by the assessee in the books of accounts viz a viz the amount recorded in form 26AS - HELD THAT - In the case on hand, there is no dispute to the fact that the AO has selected only those instances where the assessee has shown less income than the amount shown in form 26AS ignoring the cases where the assessee has shown more income in the books of accounts then the amount reflected in the form 26AS. In fact the AO has used the method favouring the revenue which is not correct as a matter of principle. As such the AO, should have taken only in the difference for working out the suppressed income. Even the difference is not to be taken as income for the reason that this has already been offered to tax by the assessee in different years. For this purpose, the reconciliation statement was filed by the assessee before the learned CIT (A). Accordingly the learned CIT (A) allowed the ground of appeal of the assessee subject to verification of reconciliation statement. In fact, there is no ambiguity in the direction of the ld. CIT-A for the reason that, if the difference as highlighted by the AO, has been accounted for as income by the assessee any other year which will prove that the income of the assessee has suffered the tax otherwise the AO will make the addition to the total income of the assessee. The direction of the learned CIT (A) is very clear on the issue and therefore no interference is required. Hence the ground of appeal of the revenue is dismissed. Addition under the provisions of section 14A read with rule 8D of Income Tax Rule - HELD THAT - Undisputedly, there was no income earned by the assessee being exempted from tax and therefore no disallowance under section 14A read with rule 8D is required to be made in terms of the judgment of Hon ble Gujarat High Court in the case of CIT vs. Corrtech Energy Private Ltd 2014 (3) TMI 856 - GUJARAT HIGH COURT TDS u/s 195 - non deduction of TDS under section 40(a)(i) on payment with respect to consultancy expenses in foreign currency to Holter Clinical Outsourcing Corporation (USA) and Grigoria Mavrogeorgis (Canada) - CIT (A) deleted the addition made by the AO by observing that the payment made by the assessee to the non-residents based in USA and Canada are not chargeable to tax in India in terms of the Article 12 of the DTAA with both the countries - HELD THAT - As per the learned CIT (A), the payment made by the assessee was the consultancy charges falls under clause 7 of the DTAA which requires that the payee should have permanent establishment and business connection in India for holding that the income is accruing or arising in India. In other words, if the payee being a non-resident does not have any permanent establishment or business connection in India, then it is construed that income is not arising or accruing in India and therefore the same is not chargeable to tax in India. Thus, once an income is not chargeable to tax in India then the question for deducting the TDS does not arise. DR has not brought any infirmity in the finding of the learned CIT (A). On the contrary, the learned AR before us has contended that the payment made by the assessee to the non-residents as discussed above is not chargeable to tax in India in terms of the provisions of DTAA. In view of the above, we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the Revenue is dismissed. Deemed dividend addition u/s 2(22)(e) - CIT-A delete the addition - whether the assessee company, which is not a registered shareholder obtains any loan from other company in which its shareholder also holding substantial share in such other company may be brought under the scanner of deemed dividend? - HELD THAT - As provision of section 2(22)(e) of the Act can only be invoked in case of shareholder who is holding substantial interest. The provision of section 2(22)(e) of the act nowhere talks about taxing an entity/company who is not a shareholder holder in lender company but shareholder of such company holding substantial share in lender company. See MAHAVIR INDUCTOMELT PVT. LTD. 2017 (1) TMI 1159 - GUJARAT HIGH COURT - Coming to the case on hand admittedly the assessee company in not holding any shares or rights of M/s. Epsillion Marketing and Cons Pvt. Ltd. O was not justified in invoking the provision of section 2(22)(e) of the Act in the present case. The learned CIT(A) rightly deleted the addition made by the AO.

Summary

Issues Involved:
1. Treatment of interest-free loans and advances to associated enterprises (AEs) as international transactions under transfer pricing provisions.
2. Disallowance under Section 14A of the Income Tax Act.
3. Deduction under Section 80IB of the Income Tax Act.
4. Corporate guarantee as an international transaction.
5. Non-deduction of TDS on consultancy fees under Section 195.
6. Deemed dividend under Section 2(22)(e).
7. Miscellaneous income and notice pay treated as business income.

Detailed Analysis:

1. Interest-Free Loans and Advances to AEs:
The primary issue was whether interest-free loans and advances provided to AEs should be subject to adjustment on account of notional interest under transfer pricing provisions. The Tribunal held that the transactions should be evaluated in aggregation with the benefits derived from the AEs. The assessee had provided loans to its AEs as a measure of commercial expediency, and the benefits received from these AEs exceeded the notional cost of interest. Therefore, no adjustment was required under transfer pricing provisions.

2. Disallowance under Section 14A:
The Tribunal noted that the assessee had not earned any exempt income during the year. Following the principles laid down by the Gujarat High Court in the case of Corrtech Energy Pvt. Ltd., it was held that no disallowance under Section 14A read with Rule 8D is warranted in the absence of exempt income.

3. Deduction under Section 80IB:
The Tribunal upheld the CIT(A)’s decision allowing the deduction under Section 80IB. The assessee was engaged in scientific research and development activities approved by DSIR. The AO's contention that the initial assessment year was 2003-04 was rejected, as the approval from DSIR was granted from the assessment year 2004-05. The Tribunal also emphasized that the AO cannot override the approval granted by DSIR.

4. Corporate Guarantee as an International Transaction:
The Tribunal held that corporate guarantees provided to AEs are international transactions that need to be benchmarked. The assessee had incurred costs for providing the guarantee, and the Tribunal directed a 5% markup on the guarantee fee paid to the bank as a reasonable arm’s length price.

5. Non-Deduction of TDS on Consultancy Fees:
The Tribunal upheld the CIT(A)’s decision that the consultancy fees paid to non-residents were not chargeable to tax in India under the respective DTAA. Consequently, no TDS was required to be deducted under Section 195, and the disallowance under Section 40(a)(i) was deleted.

6. Deemed Dividend under Section 2(22)(e):
The Tribunal confirmed that deemed dividend can only be taxed in the hands of the shareholder. Since the assessee was not a shareholder in the lending company, the provisions of Section 2(22)(e) were not applicable. The addition made by the AO was deleted.

7. Miscellaneous Income and Notice Pay:
The Tribunal agreed with the CIT(A) that notice pay and miscellaneous income are related to the business activities of the assessee and are eligible for deduction under Section 80IB. Notice pay reduces salary expenses, and miscellaneous income relates to day-to-day business transactions.

Conclusion:
The Tribunal provided a detailed analysis of each issue, emphasizing the importance of commercial expediency, the principles of natural justice, and adherence to established legal precedents. The appeals of the assessee were partly allowed, and those of the Revenue were dismissed.