2022 (10) TMI 827 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - suo moto disallowance by assessee - Necessity of recording satisfaction - HELD THAT - We find that this issue has recently been decided by the coordinate bench of the Tribunal in assessee s own case in Reliance Industries Ltd 2022 (3) TMI 1433 - ITAT MUMBAI as specifically observed that since the assessee has not correctly apportioned any expenses as having been incurred for earning this exempt income, we are not satisfied with regard to correctness of the claim of expenditure made by the assessee, and, accordingly, provisions of rule 8D of the Income Tax Rules are being invoked . It cannot, therefore, be said that the Assessing Officer has proceeded to make the disallowance under section 14A r.w.r 8D without recording satisfaction for rejection of the disallowance computed by the assessee - As a result, ground No. 1 raised in assessee s appeal is dismissed. Disallowance u/s 14A being higher of 0.5% of average value of investments which have yielded exempt income during the year or expenses disallowed by the assessee - HELD THAT - As decided in own case 2020 (12) TMI 165 - ITAT MUMBAI findings of the learned CIT(A) are upheld as CIT(A) referred to several judgements relied upon by the assessee and directed that disallowance should be computed @ 0.5% by taking average value of those investments which have yielded dividend during the year under consideration or the expenses disallowed by the assessee whichever is higher, both in normal provisions as well as book profit u/s. 115JB. Computation of book profit under section 115 JB by considering the disallowance under section 14A - HELD THAT -Since, similar issue has already been decided in assessee s own case for preceding assessment years, therefore, we see no reason to deviate from the view so taken by the coordinate bench of the Tribunal, in absence of any allegation of change in facts and law. Thus, respectfully following aforesaid judicial precedent we direct the AO to delete the adjustment of disallowance under section 14A while computing book profit under section 115 JB of the Act. As a result, ground No. 3 raised in assessee s appeal is allowed. Disallowance of depreciation on the opening WDV of capitalised value of goods - HELD THAT - We find that similar issue in respect of depreciation claimed on the opening WDV of capitalised value of goods purchased from P.K. Agarwal group concern has been decided against the assessee by the coordinate bench of the Tribunal in assessee s own case in preceding assessment years. Respectfully following judicial precedents in assessee s own case, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground raised in assessee s appeal is dismissed. Addition on account of interest on income tax refund to the book profit of the assessee u/s 115JB of the Act - Once assessee s accounts have been maintained in accordance with Companies Act and the same have also been scrutinised and audited by the statutory auditor, in absence of any material to negate these facts, the AO has limited power under section 115 JB of the Act to make adjustment to book profit only in respect of the items provided in Explanation 1 to section 115 JB (1). As regards the submission of DR that the information regarding interest on income tax refund being not included in the profit and loss account has not been disclosed by the assessee in its annual accounts and thus could not be said to be approved in the AGM or filed with the ROC and other statutory authorities, we find that no evidence has brought on record to the effect that because of such non-disclosure the accounts of the assessee were not maintained as per the provisions of Companies Act and other relevant rules and regulations. No such objection by the statutory auditor or ROC or other statutory authority has been brought to our notice. In the present case, there is no dispute on the fact that assessee has offered interest on income tax refund to tax while filing its return of income and same has also been assessed under the normal provisions of the Act. Accordingly, we find no merits in addition of interest on income tax refund for computing the book profit under section 115 JB of the Act and the AO is directed to delete the same. As a result, ground No. 5 raised in assessee s appeal is allowed. TP adjustment on account of notional interest charged on share application money returned by the associated enterprise ( AE ) - HELD THAT - From the perusal of aforesaid Master Direction issued by RBI, it is evident that direct investments by residents in joint venture and wholly-owned subsidiary abroad are being allowed in terms of section 6(3)(a) of Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. As per the aforesaid Master Direction, share certificate or any other document as an evidence of investment in foreign entity is to be received by the Indian party within 6 months from the date of effective remittance. In the present case, in respect of last remittance on 21/03/2016, for the year under consideration, shares were allotted on 19/09/2016 and excess share application money amounting to Rs. 45,76,26,069 was refunded to the assessee. It is not the case of the Revenue that even after issuance of shares on 19/09/2016 excess share application money was withheld by the AE and was refunded subsequently. In this case, much before the issuance of shares on 19/09/2016, in respect of remittance made on 21/03/2016, excess share application money was refunded to the assessee in July 2016. These facts are also not disputed by the Revenue. Thus, in view of the above, when the transaction of subscribing to preference shares was itself not found to be bogus or sham, we do not find any merits in findings of learned CIT(A) in upholding levy of interest on excess share application money refunded, by treating the same as loan. Therefore, we direct the AO/TPO to delete the adjustment on account of levy of interest on excess share application money refunded. As a result, grounds raised in assessee s appeal are allowed. Disallowance of expenditure incurred by the assessee on aborted blocks of contract areas other than eligible unit - HELD THAT - As decided in own case 2022 (3) TMI 1433 - ITAT MUMBAI deduction u/s 80IB(9) of the Act has to be computed in terms of sec. 80IB of the Act. Sec. 80IB(13) of the Act provides that the provisions of sec. 80IA(5) shall apply and under the provisions of sec. 80IA(5) of the Act, the profits and gains of eligible business, for the purposes of sec. 80IB, shall be computed as if such eligible business were the only source of income of the assessee. In view of these provisions, the deduction u/s 80IB(9) has to be computed after ascertaining profits and gains of eligible business in terms of sec. 80IA(5) of the Act. Hence there is no scope to adjust expenses relating to other undertaking while computing deduction u/s 80IB(9) of the Act. Ground raised in Revenue s appeal is dismissed. Deduction u/s 80 IB (9)(ii) in respect of natural gas and condensate - HELD THAT - As relying on assessee own case 2022 (3) TMI 1433 - ITAT MUMBAI the term mineral oil , for the purpose of claiming deduction u/s 80-IB(9) of the Act includes natural gas and condensate and therefore the assessee claim for deduction us 80IB(9) of the Act in respect of both natural gas and condensate is accordingly allowed. Accordingly, this ground of appeal is accordingly allowed. Computation of deduction under section 10 AA - HELD THAT - As relying on assessee own case 2022 (3) TMI 1433 - ITAT MUMBAI - Upheld the plea of the assessee in principle and directed the AO to grant the relief accordingly. Since, this is a recurring issue, therefore, we see no reason to deviate from the conclusion so reached by the coordinate bench of the Tribunal in assessee s own case in preceding assessment years, in absence of any allegation of change in facts and law. Thus, with similar directions, the plea of the assessee is accepted in principle. Accordingly grounds No. 4 5 raised in Revenue s appeal are dismissed. Deduction u/s 35(2AB) of the Act in respect of R D expenditure - HELD THAT - It is pertinent to note that prior to the aforesaid amendment, no such authority was granted to DSIR for approving any expenditure for the purpose of claiming deduction under section 35(2AB) of the Act. The pre-amended rules do not prescribe any methodology of approval to be granted by the prescribed authority vis- -vis expenditure from year to year. Since the amendment has come into effect only from 01/07/2016, the same would only apply from assessment year 2017-18. Thus, respectfully following the aforesaid decision of coordinate bench of the Tribunal in M/s. Glenmark Pharmaceuticals Ltd. 2019 (8) TMI 1649 - ITAT MUMBAI . we find no infirmity in the aforesaid findings of learned CIT(A). As a result, ground No. 6 raised in Revenue s appeal is dismissed. Disallowance of long term capital loss and short term capital loss on sale of non-cumulative compulsory convertible preferential shares - HELD THAT - We find that in assessee s own case for preceding assessment years, investment in NCCPs have been held to be investment in the nature of capital asset and its re-characterisation as loan has been quashed. Accordingly, we find no infirmity in the findings of the learned CIT(A) on this issue. As a result, grounds raised in Revenue s appeal are dismissed. Transfer pricing adjustment on account of interest on delayed receipts of sale proceeds - HELD THAT - As relying on own case 2022 (3) TMI 1433 - ITAT MUMBAI no case has been made out that the spread of 200 bps is lower than the arm s length price. As regards the cost-plus method on the cost of funds, we find it is fundamentally flawed inasmuch as it treats all the types of borrowing at par and proceeds on the erroneous assumption that the arm s length price of the debt has, at its basis, cost of funds available to the tested party- particularly when these funds are of significantly different tenures and different currencies. Thus, we find no infirmity in findings of learned CIT(A) on this issue. Accordingly, grounds raised in Revenue s appeal are dismissed. Adjustment on account of preference shares subscribed by assessee of its associated enterprise - HELD THAT - As decided in own case 2022 (3) TMI 1433 - ITAT MUMBAI Many of the issues being raised in the grounds of appeal are neither on the specific findings of fact, nor even specific arguments on facts before us, and have not been raised in the TPO s order. Just because if the assessee was to give loans, rather than make investments in the compulsorily convertible shares, the Indian tax base would not have been eroded cannot be reason enough to disregard the reality of investment having been made in the compulsorily convertible preference shares, and proceed to benchmark the transaction as that of a loan. The BEPS action plan, unless it results in an appropriate amendment in law, and the change in the definition of international transaction, including capital financing in its ambit, has no impact on the stand of the CIT(A) because what has been held is that this transaction cannot be compared with a loan. In the light of these discussions, as also bearing in mind the entirety of the case, we approve the conclusions arrived at by the learned CIT(A) on this point as well, and decline to interfere in the matter. TP adjustment for drilling support services provided by the assessee to its AE pursuant to agreement with Kurdish government - HELD THAT - As in assessee own case 2022 (3) TMI 1433 - ITAT MUMBAI undoubtedly, one of the critical factors in determining the ALP, as recognized by rule 10B(2)(d), is conditions prevailing in the market in which AEs operate, and once it s a legal condition precedent in entering the transaction in the respective PSC market is that the AE s affiliates are not allowed to have any mark up on a supply of services to the AE, the determination of ALP is required to be having regard to this condition. Viewed thus, the cost to cost rendition of services can be indeed be viewed as an arm s length transaction. - Decided against revenue. Determination of arm s length price for corporate guarantee given to its AE - HELD THAT - As decided in own case 2022 (3) TMI 1433 - ITAT MUMBAI 50 50 allocation is reasonable, and there is no change in the material facts, we see no reasons to take any other view of the matter than the view so taken by the coordinate benches in assessee s own cases for the preceding assessment years. We, therefore, approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. Ground of Revenue s appeal are dismissed. Selection of comparables for benchmarking the international transaction pertaining to determination of arm s length price of business support services availed from the AE vis- -vis. - HELD THAT - Companies different with functional profile of assessee is to be rejected as suitable comparable. Determination of arm s length price for inter-unit transfer of power - HELD THAT - We are in considered agreement with the view taken by the coordinate bench in the assessee s own case for the immediately preceding assessment year 2022 (3) TMI 1433 - ITAT MUMBAI and we are unable to see any legally sustainable basis for rejection of internal CUP on the facts of this case. Respectfully following the views so expressed by the coordinate bench, which, in turn, follows the views of other coordinate benches and Hon ble jurisdictional High Court in assessee s own case, we uphold the plea of the assessee.

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act.
2. Disallowance of depreciation.
3. Addition of interest on income tax refund while computing book profits under section 115JB.
4. Reference to the Transfer Pricing Office (TPO) under section 92CA.
5. Interest chargeable on share application money refunded by the Associated Enterprise (AE).
6. Reduction of depreciation by reworking the claim of depreciation on the basis of earlier years.
7. Computation of disallowance under section 14A read with Rule 8D(2)(iii).
8. Deletion of disallowance of expenditure incurred on aborted blocks of contract areas other than eligible unit.
9. Grant of deduction under section 80IB(9)(ii) in respect of 'natural gas' and 'condensate'.
10. Computation of deduction under section 10AA.
11. Deduction under section 35(2AB) in respect of R&D expenditure.
12. Deletion of disallowance of long-term and short-term capital loss on sale of non-cumulative compulsory convertible preference shares.
13. Transfer pricing adjustment on account of interest on delayed receipts of sale proceeds.
14. Transfer pricing adjustment on account of preference shares subscribed by assessee of its associated enterprise.
15. Transfer pricing adjustment for drilling support services provided by the assessee to its AE.
16. Determination of arm's length price for corporate guarantee given to its AE.
17. Selection of comparables for benchmarking the international transaction pertaining to determination of arm's length price of business support services availed from the AE.
18. Determination of arm's length price for inter-unit transfer of power.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Tribunal upheld the disallowance under section 14A read with Rule 8D, following its earlier decision in the assessee's case, confirming that the Assessing Officer (AO) had recorded satisfaction for rejecting the assessee's computation of disallowance. The computation was directed to be at 0.5% of the average value of investments yielding exempt income or the expenses disallowed by the assessee, whichever is higher.

2. Disallowance of Depreciation:
The Tribunal upheld the disallowance of depreciation on the opening WDV of capitalized value of goods purchased from P.K. Agarwal Group concerns. This decision followed the coordinate bench's ruling in the assessee's own case for previous assessment years.

3. Addition of Interest on Income Tax Refund while Computing Book Profits u/s 115JB:
The Tribunal directed the AO to delete the adjustment for interest on income tax refund while computing book profits under section 115JB, following the precedent set in the assessee's own case and the Bombay High Court ruling in the case of Commissioner of Income Tax vs. Bengal Finance and Investment Private Limited.

4. Reference to the Transfer Pricing Office (TPO) under Section 92CA:
The Tribunal dismissed the grounds related to the reference to the TPO without recording satisfaction and without demonstrating the motive to shift profits outside India, as these grounds were not pressed by the learned AR.

5. Interest Chargeable on Share Application Money Refunded by the AE:
The Tribunal directed the AO/TPO to delete the adjustment on account of levy of interest on excess share application money refunded, as the transaction of subscribing to preference shares was not found to be bogus or sham.

6. Reduction of Depreciation by Reworking the Claim of Depreciation on the Basis of Earlier Years:
The Tribunal upheld the CIT(A)'s direction to adopt the WDV of the assets as on 01/04/2015 based on orders giving effect to the orders of CIT(A) of preceding years, following the coordinate bench's decision in the assessee's own case.

7. Computation of Disallowance under Section 14A Read with Rule 8D(2)(iii):
The Tribunal upheld the CIT(A)'s direction to recompute the disallowance at 0.5% by taking the average value of those investments which have yielded exempt income during the year under consideration or the expenses disallowed by the assessee, whichever is higher.

8. Deletion of Disallowance of Expenditure Incurred on Aborted Blocks of Contract Areas Other than Eligible Unit:
The Tribunal upheld the CIT(A)'s direction that the cost in respect of abortive/unsuccessful blocks should not be reduced while computing the profits of the undertaking eligible for deduction under section 80IB(9), following the coordinate bench's decision in the assessee's own case.

9. Grant of Deduction under Section 80IB(9)(ii) in Respect of 'Natural Gas' and 'Condensate':
The Tribunal upheld the CIT(A)'s finding that the term 'mineral oil' for the purpose of claiming deduction under section 80IB(9) includes 'natural gas' and 'condensate', following the coordinate bench's decision in the assessee's own case and the Gujarat High Court ruling in NIKO Resources Limited vs. DCIT.

10. Computation of Deduction under Section 10AA:
The Tribunal upheld the CIT(A)'s direction to grant deduction under section 10AA with respect to profit and gains as determined by the Supreme Court in Vijaya Industries, following the coordinate bench's decision in the assessee's own case.

11. Deduction under Section 35(2AB) in Respect of R&D Expenditure:
The Tribunal upheld the CIT(A)'s direction to allow weighted deduction in respect of R&D expenditure under section 35(2AB) as claimed by the assessee, following the coordinate bench's decision in M/s. Glenmark Pharmaceuticals Ltd. vs. ACIT.

12. Deletion of Disallowance of Long-Term and Short-Term Capital Loss on Sale of Non-Cumulative Compulsory Convertible Preference Shares:
The Tribunal upheld the CIT(A)'s decision to allow the entire capital loss incurred by the assessee, following the coordinate bench's decision in the assessee's own case where the recharacterization of NCCPs as loans was quashed.

13. Transfer Pricing Adjustment on Account of Interest on Delayed Receipts of Sale Proceeds:
The Tribunal upheld the CIT(A)'s acceptance of the benchmarking done by the assessee and deletion of the adjustment made by the TPO, following the coordinate bench's decision in the assessee's own case.

14. Transfer Pricing Adjustment on Account of Preference Shares Subscribed by Assessee of its Associated Enterprise:
The Tribunal upheld the CIT(A)'s decision to delete the adjustment on account of preference shares subscribed by the assessee, following the coordinate bench's decision in the assessee's own case.

15. Transfer Pricing Adjustment for Drilling Support Services Provided by the Assessee to its AE:
The Tribunal upheld the CIT(A)'s decision to delete the adjustment made by the TPO for drilling support services provided by the assessee to its AE, following the coordinate bench's decision in the assessee's own case.

16. Determination of Arm's Length Price for Corporate Guarantee Given to its AE:
The Tribunal upheld the CIT(A)'s acceptance of the benchmarking done by the assessee and deletion of the adjustment made by the TPO, following the coordinate bench's decision in the assessee's own case.

17. Selection of Comparables for Benchmarking the International Transaction Pertaining to Determination of Arm's Length Price of Business Support Services Availed from the AE:
The Tribunal upheld the CIT(A)'s direction to include Empire Industries Ltd, ICRA Management Consulting Services Ltd, and Spectrum Business Solutions Limited as comparables and exclude BVG India Ltd, following the coordinate bench's decision in the assessee's own case.

18. Determination of Arm's Length Price for Inter-Unit Transfer of Power:
The Tribunal upheld the CIT(A)'s decision to allow the appeal filed by the assessee on this issue, following the coordinate bench's decision in the assessee's own case.

Conclusion:
The appeals by the assessee were partly allowed, while the appeals by the Revenue were dismissed. The Tribunal's decisions were primarily based on judicial precedents and coordinate bench decisions in the assessee's own case for previous assessment years.