2021 (10) TMI 927 - AT - Income Tax

TP adjustment - ALP adjustment on corporate guarantee adjustment involving its overseas Associated Enterprises - international transaction or not? - HELD THAT - As relying on assessee's own case 2021 (8) TMI 1238 - ITAT HYDERABAD we hold that the learned lower authorities have rightly treated the assessee s corporate guarantee(s) in all the three impugned assessment years as an international transaction falling u/s.92B - Decided against assessee. Delayed employees contribution - assessee had very much deposited the said employees contribution before the due date of filing return u/s.139(1) - As per revenue employees contribution is covered u/s.36(1)(va) of the Act rather than Section 43B applicable in case of employer s contribution - HELD THAT - We notice in this factual backdrop that the legislature has not only incorporated necessary amendment in Sections 36(1)(va) as well as u/s. 43B vide Finance Act, 2021 to this effect but also the CBDT has issued Memorandum of Explanation that the same applies w.e.f. 01-04-2021 only. It is further not an issue that the foregoing legislative amendments have proposed employers contribution/disallowance u/s.43B as against employee s contribution u/s.36(va) of the Act; respectively. However, keeping in mind the fact that the same has been clarified to be applicable only with prospective effect from 01-04-2021 only, we hold that the impugned disallowance is not sustainable in view of all these latest developments. The impugned ESI/PF disallowance is deleted therefore. - Decided in favour of assessee. Disallowance of sponsorship fees under section 37(1) - HELD THAT - We find no merit in the assessee s instant last substantive grievance. This is for the reason that it has failed to pin point even a distinct direct nexus between its day to day business activity viz-a-viz the impugned alleged sponsorship fee paid to the eligible women for their life time achievements. This tribunal s Third Member s decision in M/s. Hyundai Motors India Ltd. Vs. DCIT, 2015 (9) TMI 962 - ITAT CHENNAI after considering the hon'ble apex court s landmark decision Sassoon J. David and Company (P) Ltd 1979 (5) TMI 3 - Supreme Court holds that any expenditure claim raised u/s.37 of the Act ought to be wholly and exclusively incurred for the purpose of the concerned business only. We therefore find no reason to interfere with the impugned disallowance made in both the lower proceedings - Decided against assessee.

Summary

Issues Involved:
1. Arm's Length Price (ALP) adjustment for corporate guarantee.
2. Disallowance under Section 36(1)(va) read with Section 43B for ESI/PF contributions.
3. Disallowance of sponsorship fees under Section 37(1).

Issue-Wise Detailed Analysis:

1. Arm's Length Price (ALP) Adjustment for Corporate Guarantee:
The primary issue in the assessment year 2016-17's appeal (ITA No.595/Hyd/2020) was the correctness of the lower authorities' action in making an ALP adjustment of ?29,68,60,000/- concerning corporate guarantee involving its overseas Associated Enterprises (AEs). The tribunal referred to its earlier decisions in similar cases (ITA Nos.1719/Hyd/2016, 435/Hyd/2018 & 2154/Hyd/2018) for preceding assessment years (AYs 2012-13, 2013-14 & 2014-15), where it upheld an identical adjustment. The tribunal cited the Madras High Court's decision in PCIT Vs. M/s. Redington (India) Limited, which clarified that corporate guarantees are considered international transactions under Section 92B of the Act with retrospective effect. The tribunal concluded that the lower authorities correctly treated the assessee's corporate guarantees as international transactions and upheld the adjustment. The assessee's arguments were declined as no legal or factual distinction was pointed out.

2. Disallowance under Section 36(1)(va) read with Section 43B for ESI/PF Contributions:
The assessee's second substantive grievance in AY 2016-17 and the former substantive ground in AY 2017-18 challenged the correctness of the lower authorities' action in invoking Section 36(1)(va) read with Section 43B for disallowance of ?14,14,41,324/- and ?3,42,98,657/- respectively. The tribunal noted that the assessee had deposited the employees' contributions before the due date of filing the return under Section 139(1). The lower authorities' case was based on the premise that the employees' contribution is covered under Section 36(1)(va) rather than Section 43B. However, the tribunal observed that the legislature had amended Sections 36(1)(va) and 43B via the Finance Act, 2021, with the CBDT clarifying that these amendments apply prospectively from 01-04-2021. Therefore, the tribunal held that the impugned disallowance was not sustainable and deleted the ESI/PF disallowance in view of the latest legislative developments. The assessee succeeded on this issue in both appeals.

3. Disallowance of Sponsorship Fees under Section 37(1):
The third issue involved the disallowance of sponsorship fees of ?17,30,400/- each in both assessment years. The CIT(A) upheld the disallowance, stating that the expenditure incurred towards sponsorship fees was in the nature of charity and not a business expenditure incurred wholly and exclusively for the purpose of business. The assessee argued that the sponsorship was linked to its business activities in Uttar Pradesh, where it operated multiple projects and employed women. However, the tribunal found no merit in the assessee's grievance, as it failed to establish a direct nexus between the expenditure and its business activities. Citing the Third Member's decision in ITA No.2157/MAS/2011, M/s. Hyundai Motors India Ltd. Vs. DCIT, and the Supreme Court's decision in Sassoon J. David and Company (P) Ltd [118 ITR 26] (SC), the tribunal held that the expenditure claim under Section 37 must be wholly and exclusively for business purposes. Consequently, the tribunal upheld the disallowance made by the lower authorities.

Conclusion:
The assessee's appeals (ITA Nos.595/Hyd/2020 and 596/Hyd/2020) were partly allowed. The tribunal confirmed the ALP adjustment for corporate guarantees and the disallowance of sponsorship fees, while it deleted the disallowance under Section 36(1)(va) read with Section 43B for ESI/PF contributions. The order was pronounced in the open court on 27th September 2021.