2023 (10) TMI 1313 - AT - Income Tax

Deduction of Scientific Research Expenses claimed u/s 35(2AB) - Claim disallowed as DSIR has not approved the above said expenditure in Form No.3CL - approval of expenses by DSIR has been made compulsory after the amendment carried out in Rule 6(7A) of Income tax Rules w.e.f. 01.07.2016 - HELD THAT - As provisions of sec.35(3) provides for making a representation to the prescribed authority. In the instant case, the question is about quantifying the expenditure, i.e., whether the expenses incurred in the in-house scientific research facility is would fall under the category of scientific research expenses or not as specified in sec.35(2AB) of the Act. Since the DSIR has not certified part of the expenses incurred by the assessee and since it did not furnish any reason for doing so, we are of the view that there is violation of principle of natural justice. Unless the prescribed authority furnishes the reason for not certifying the reasons, it will not be possible for us to adjudicate this issue. Accordingly, we restore this issue to the file of the AO to take appropriate action to ascertain the reasons for non-certification. Depreciation made in respect of capital asset purchased from certain entities - HELD THAT - The facts are that the assessee had capitalized steel purchased by it from P K Agarwal in the year relevant to AY 2003-04. The AO had held that those purchases are not genuine in nature and accordingly disallowed the depreciation claimed thereon. Consequent thereto, the AO has been disallowing the proportionate amount of depreciation relatable to the above said purchases in all the subsequent years. We notice that the said disallowance has since been confirmed by the co-ordinate benches of Tribunal in the earlier years. Accordingly, we do not find any infirmity in the decision of Ld CIT(A) in confirming the proportionate amount of depreciation relatable to the steel purchases claimed by the assessee in both the years under consideration - Decided against assessee. Disallowance u/s 14A r.w. Rule 8D - mandation of recording dissatisfaction by AO - assessee had computed disallowance u/s 14A by allocating specific expenses to the exempt income - AO held that he was not satisfied with the workings given by the assessee, thus computed disallowance as per Rule 8D(2) - HELD THAT - We notice that the AO did not examine the workings furnished by the assessee before him. For arriving at the dissatisfaction over the correctness of the expenditure claimed by the assessee, it is required for the AO to examine the workings furnished by the assessee vis- -vis the accounts, find fault therein, i.e., identify the deficiencies in the workings furnished by the assessee. There should not any dispute that the dissatisfaction contemplated in sec. 14A of the Act is objective dissatisfaction . Since these observations have been made by the AO without examining the workings furnished by the assessee, we are of the view that the AO has not arrived at the objective satisfaction as contemplated in sec. 14A of the Act. AO could not have resorted to the provisions of rule 8D for computing disallowance u/s 14A of the Act in both the years. Decided in favour of assessee. Addition u/s 115JB in respect of expenses relating to exempt income - HELD THAT - As decided in the case of Vireet Investments P Ltd. 2017 (6) TMI 1124 - ITAT DELHI that the disallowance computed u/s 14A of the Act cannot be adopted for the purpose of making addition under clause (f) of Explanation 1 to sec.115JB of the Act, meaning thereby, the disallowance to be made for computing book profit u/s 115JB, the expenses relatable to the exempt income has to be computed on the basis of expenses claimed in the relevant Profit and Loss account. Hence the Ld CIT(A) was justified in holding that the disallowance computed u/s 14A of the Act cannot be adopted verbatim for the purpose of clause (f) of Explanation 1 to sec. 115JB Also CIT(A) was not right in law in directing the AO to restrict the addition to be made under clause (f) of Explanation 1 to sec.115JB of the Act to the amount of disallowance computed by the assessee for the purposes of sec.14A of the Act, since the disallowance made by the assessee also u/s 14A could not have been imported in sec.115JB of the Act. MAT computation - addition of interest on income tax refund to the Net Profit while computing book profit of the assessee u/s 115JB - HELD THAT - We notice that this issue has been decided in favour of the assessee by the Co-ordinate bench in AY 2016-17,.. 2022 (10) TMI 827 - ITAT MUMBAI as held 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) of the Act. As 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 - Decided in favour of assessee. LTCG arising on compulsory acquisition of land - new claim made - Land acquired as per section 96 of the Right to Fair compensation and Transparency in land Acquisition, Rehabilitation and Resettlement Act, 2013 - HELD THAT - Since the above said claim of the assessee has been raised for the first time before the Tribunal and since the AO did not have occasion to examine the above said claim, we are of the view that it requires verification at the end of AO in both the years. Accordingly, we restore this issue in both the years to the file of AO for examining the same in the light of contentions raised by the assessee and also accordance with law. Short grant of foreign tax credit - CIT(A) confirmed the action of AO in both the years, but accepted the alternative plea of the assessee that the above said amounts are allowable as deduction u/s 37(1) - AO has not given any reasons for giving short credit - HELD THAT - As the decision rendered in the case of Wipro Ltd 2015 (10) TMI 826 - KARNATAKA HIGH COURT is applicable to the facts of the present case. Accordingly, we set aside the order passed by Ld CIT(A) on the main claim of the assessee and restore the same to the file of AO for examining the above said main claim of the assessee afresh. ALP adjustment - share application money returned back, by re-charcterising the same as loan - assessee had made investment in preference shares issued by its subsidiary company - HELD THAT - As it is held that there is no merit in imputing interest thereon by way of transfer pricing adjustment. Since the transfer pricing adjustment made in this year is a continuation of earlier year s action of TPO and since the earlier year s T P adjustment has been deleted by the Tribunal, following the said decision, we direct the AO to delete the Transfer pricing adjustment that was confirmed by Ld CIT(A). Disallowance of part of depreciation claim, on account of reduction of WDV by thrusting depreciation upon the assessee in the earlier years, when the claim of depreciation in those years was optional in nature - HELD THAT - CIT(A) has granted relief to the assessee on this issue following earlier orders of ITAT, wherein it was held that the depreciation, which was not claimed by the assessee in the earlier years when the claim was optional in nature, cannot be thrust upon the assessee so as to reduce the WDV of assets. We notice that the disallowance of depreciation made by the AO in both the years under consideration are consequential to the stand taken by him in the earlier years, which has since been rejected by the ITAT in those years - we uphold the order of learned CIT(A) passed on this issue. Deduction claimed u/s 10AA by computing profits and gains of Refinery SEZ unit and PP SEZ unit as per Chapter VI-D, instead of adopting gross profit of the said units - assessee had claimed deduction u/s 10AA of the Act on the gross profit reasoning that the Profits and Gains of undertaking for the purpose of sec. 10AA of the Act should be taken as the gross profits as commercially understood and hence the AO should not resort to the provisions of Chapter IV of the Act for computing profits of undertaking - HELD THAT - Deduction to be allowed u/s 10AA of the Act shall be allowed from the total income and further the said deduction shall not exceed such total income. Hence there is merit in the contentions of the assessee that the above said Explanation specifies the stage at which the deduction u/s 10AA of the Act should be allowed (i.e. from the total income) and also states that quantum of deduction should be restricted to the amount of Total income - we agree with the contentions of the assessee that sec.80AB and Explanation inserted in sec. 10AA operate in different fields. Decision rendered by Ld CIT(A) on this issue does not require any interference. Deduction claimed u/s 80G - donations given under Corporate Social Responsibility - HELD THAT - In the case of Naik Sea foods P Ltd 2021 (11) TMI 1168 - ITAT MUMBAI as followed the decision rendered of M/s FNF India P Ltd ( 2021 (1) TMI 205 - ITAT BANGALORE which in turn followed the decision rendered in the case of Allegis Services (India) Pvt. Ltd 2020 (5) TMI 378 - ITAT BANGALORE and held that the assessee is eligible for deduction u/s 80G of the Act in respect of certain payments included in CSR Expenses. Disallowance u/s 42(1)(b) in respect of KG-DWN- 98/3 (KGD6 bloc) and Coal Bed Methane Sohagpur (CBM) - reasoning given by the AO is that, as per PSC), the assessee has an option to exercise either Article 17.2.3 or Article 17.2.4 of PSC to compute correct profits of KGD6 and CBM units - AO allowed 10% of expenses claimed by the assessee and accordingly disallowed 90% of expenses in both the blocks - HELD THAT - Option to claim expenses incurred prior to the date of commercial production in ten instalments is available only in KGD-6 Block, vide clause 17.2.4 and not in CBM Block, i.e., as per PSC in CBM block, expenditure incurred prior to the commercial production shall be aggregated and the loss so assessed as well as loss, if any, incurred in the assessment year relevant to the year in which Commercial production commences or in any subsequent assessment year shall be carried forward to succeeding assessment years for being set off as provided in the Income tax Act. Accordingly, in the absence of any clause for allowing expenses in installments in CBM block, the AO was not justified in restricting the deduction to 10% of expenses claimed by the assessee. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO to allow entire expenses claimed in CBM block. KGD-6 block, we notice that the Ld CIT(A) has given a categorical finding that all the expenses claimed by the assessee have been incurred post Commercial production. As per clause 17.2.4 of PSC of KGD-6 block, the option to claim expenses in installments is available to the expenses incurred prior to the date of Commercial Production. Since the impugned expenses are Post Commercial production expenses, the clause 17.2.4 of PSC will not apply. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO to allow entire expenses claimed in KGD-6 block. TP Adjustment - addition by imputing Interest on delayed receipts - assessee had benchmarked interest income on delayed receipts of sale proceeds at LIBOR plus 200 basis points - TPO, however, adopted weighted average borrowing cost of the assessee (including long term and short term domestic and foreign borrowings) plus mark up based on Bloomberg date - HELD THAT - We notice that the ALP adopted by the assessee at LIBOR plus 200 basis points has been accepted by the Tribunal in the earlier years. No distinguishing feature was pointed out by the revenue in these two years, which may compel us to take a different view. Accordingly, we uphold the view taken by Ld CIT(A) on this issue in both the years. Disallowance of long term and short term capital loss on sale of Non-cumulative compulsorily convertible preference shares (NCCPS) - AO noticed that the TPO had characterized the above said investment as loan in the earlier years and hence held that the loss is not allowable as deduction - HELD THAT - Since an identical issue has been decided in favour of the assessee by the Tribunal in AY 2016-17 2022 (10) TMI 827 - ITAT MUMBAI and since the decision rendered by Ld CIT(A) on this issue is identical with the view taken by the Tribunal, we uphold the view taken by Ld CIT(A) on this issue in AY 2017-18 also. Addition u/s 50C - addition on the basis of information not shared with the appellant - CIT(A) deleted the addition on the reasoning that the said addition was made on presumptions, since no information was provided by the AO to the assessee - HELD THAT - It is settled principle of law that the AO is required to confront the material relied upon by him with the assessee before using the same against the assessee. In the instant case, it is the contention of the assessee that it was not aware that the stamp duty valuation was more than the sale consideration and further the AO did not confront the material with the assessee. Accordingly, we are of the view that this issue may be restored to the file of AO with the direction to confront the material that was relied upon by him. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO. After examining the reply given by the assessee, the AO may take appropriate decision in accordance with the law. TP adjustment in respect of Management consultancy services (MCS), technical services and business support services (BSS) rendered to AE - Comparable selection - HELD THAT - ANJ POWER TECHNOLOGIES P LTD - TPO has considered only turnover of this company, but did not examine as to whether it is functionally comparable. We notice that the ld CIT(A) has given categorical finding that it is not functionally comparable. No material was placed before us to contradict above said finding of Ld CIT(A). Accordingly, we are of the view that the Ld CIT(A) was justified in rejecting this company. 1 to 1 Help P Ltd - TPO has simply mentioned that the business of this company is comparable with that of assessee. On the contrary, the ld CIT(A) has noticed that the functions of this company is not comparable at all with the assessee. No material was placed before us to contradict the findings given by Ld CIT(A). In view of the above said discussions, we are of the view that this company s functions are not comparable with that of the assessee. Accordingly, we are of the view that the Ld CIT(A) was justified in excluding this company. Inmacs Management Services P Ltd - We notice that the TPO has considered the description of services provided by this company, but ignored the fact of development of specialized software. No segmental result is given. Further, the turnover of this company is Rs.1.34 crores only, where as the assessee s turnover is Rs.13.99 crores. Hence, it fails in turnover filter of 10% also. Accordingly, we are of the view that the Ld CIT(A) was justified in excluding this company. Spectrum Business Solutions Ltd - As description of nature of services provided by this company would show that it is functionally comparable. Further, the turnover of this company is Rs.5.53 crores, while the transaction value of the assessee company is 13.99 crores. Hence it would not fail in turnover filter of ( )/(-) 10%. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO/TPO to include this company. Allsec Technologies Ltd - As this company has been accepted as comparable in the years relevant to AY 2012-13 to 2015-16 by the Tribunal. In AY 2016-17, the TPO has accepted this company as good comparable. It was submitted that there is no change in facts in this year also. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in directing the AO/TPO to include this company. Since we have rejected the claim of the revenue in respect of above said five companies, the assessee does not have objection in inclusion/exclusion of remaining three companies, i.e., the assessee does not object to the exclusion of two other companies (MCI Management India P Ltd and ICRA Management Consulting Services Ltd) and inclusion of M/s JPS Associates P Ltd. Accordingly, we restore this issue to the file of AO/TPO for redetermining the ALP of this international transaction in the light of discussions made supra. TP adjustment in respect of Guarantee commission given to the Associated Enterprise (AE) - assessee followed Yield spread approach method for calculating the Guarantee commission to be charged on the above said Corporate guarantee given by the assessee - HELD THAT - We noticed that the decision rendered by the learned CIT(A) on this issue is in line with the decision rendered by the Tribunal in A.Y. 2011-12 to 2016-17. We noticed earlier that the Tribunal has been consistently upholding the yield spread approach and also splitting of differential interest in the ratio 50 50 between the assessee and its AE. Hence, we do not find any reason to interfere with the decision rendered by the learned CIT(A) on this issue. TP adjustment in respect of the business support services availed from its AE - adjustment relates to Specified domestic transactions (SDT) - Comparable selection - HELD THAT - BVG India Ltd. company is engaged in diversified business activity, thus we uphold exclusion of this company by the learned CIT(A). Empire Industries Ltd. assessee has considered relevant business segment for the purpose of benchmarking analysis. However, the TPO has missed this vitas aspect. Further this company has been accepted as comparable company by the ITAT in A.Y. 2013-14 to 2016-17. Accordingly, we do not find any infirmity with the decision of the learned CIT(A) in including this company as comparable one. ICRA Management Consultancy Services justification in including this company as comparable one as functionally similar. Spectrum Business Solutions Ltd. -. Since we have applied turnover filter in respect of other comparable companies, we are of the view that the learned CIT(A) was not justified in directing for inclusion of this company. Accordingly, we set aside the order passed by the learned CIT(A) and direct for inclusion of this company. Arms Length price adjustment made in respect of money realized on transfer of electricity generated by one undertaking to other undertakings - assessee is running a captive power plant which is eligible unit for deduction u/s 80IA - CIT(A) noticed that the Tribunal has accepted the internal CUP in A.Y. 2013-14 to 2015-16. Accordingly, he reversed the order of AO and deleted the addition - HELD THAT - Since the Tribunal is consistently upholding the practice of adopting internal CUP in respect of transaction of sale of power to non-eligible undertaking and since the learned CIT(A) has followed the order so passed by the ITAT in earlier years, which has been upheld by Hon ble Bombay High Court in one of the years, we uphold the order passed by the learned CIT(A) on this issue. TP adjustment in respect of Management Consultancy Services (MCS), technical services and Business support services (BSS) rendered to AE - Comparable selection - HELD THAT - Spectrum Business Solutions Ltd -description of nature of services provided by this company would show that it is functionally comparable. Further, the turnover of this company is Rs.6.75 crores, while the transaction value of the assessee company is 10.33 crores. Hence it would not fail in turnover filter of ( )/(-) 10%. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO/TPO to include this company. Allsec Technologies Ltd - CIT(A) was justified in directing the AO/TPO to include this company as services provided by this company is akin to the services provided by assessee. Also this company has been accepted as comparable in the years relevant to AY 2012-13 to 2015-16 by the Tribunal. In AY 2016-17, the TPO has accepted this company. ANJ Power Technologies P Ltd., 1 to 1 Help P Ltd. - CIT(A) was justified in rejecting this company as it is not functionally comparable. Inmacs Management Services P Ltd - TPO has considered the description of services provided by this company, but ignored the fact of development of specialized software. This company also holds inventories of Rs.1.12 crores, meaning thereby, it is also a product company. No segmental results is provided. Accordingly, we are of the view that the Ld CIT(A) was justified in excluding this company.

Summary

Issues Involved:
1. Disallowance of weighted deduction u/s 35(2AB) on the basis of Form 3CL.
2. Disallowance of Depreciation on goods (steel) purchased.
3. Disallowance u/s 14A read with Rule 8D of the Income-tax Rules 1962.
4. Addition of interest on Income Tax Refund while computing Book Profits u/s 115JB.
5. Long term capital gain on Sale/Compulsory acquisition of land.
6. Short grant of foreign tax credit.
7. Reference to the Transfer Pricing Officer (TPO) under section 92C of the Act.
8. Interest chargeable on share application money refunded by the Associated Enterprise (AE) Reliance Industries Middle-East DMCC.
9. Transfer Pricing Adjustment on Share Application Money.
10. Reduction of claim of depreciation by thrusting depreciation in earlier assessment years.
11. Disallowance of deduction u/s 10AA by adopting Gross Profit in respect of Refinery SEZ and PP SEZ.
12. Disallowance of deduction claimed u/s 80G of the Act in respect of donations given under Corporate Social Responsibility.
13. Disallowance under section 42(1)(b) in respect of KG-DWN-98/3 (KGD6 bloc) and Coal Bed Methane Sohagpur (CBM).
14. Disallowance of foreign tax credit u/s 90(1)(a)(ii) relating to income eligible for deduction u/s 10AA of the Act.
15. Transfer pricing adjustment by imputing Interest on delayed receipts.
16. Transfer pricing adjustment by recharacterising the preference shares as loan.
17. Disallowance of long term and short term capital loss on sale of Noncumulative compulsorily convertible preference shares (NCCPS) of M/s. RGBV by recharacterising the same as loan.
18. Deletion of addition under section 50C of the Act on the basis of information not shared with the appellant.
19. Transfer pricing adjustment in respect of Management consultancy services (MCS), technical services and business support services (BSS) rendered to AEs.
20. Transfer pricing adjustment in respect of Guarantee commission given to the Associated Enterprise (AE).
21. Transfer pricing adjustment in respect of Business support services availed from AE - RCITPL (Specified Domestic Transaction).
22. Transfer Pricing adjustment for Inter-unit of transfer of power (Excess income shown by the eligible units).

Summary:

1. Disallowance of weighted deduction u/s 35(2AB) on the basis of Form 3CL:
The Tribunal restored the issue to the AO to ascertain reasons for non-certification by DSIR and directed the AO to examine the issue afresh.

2. Disallowance of Depreciation on goods (steel) purchased:
The Tribunal upheld the disallowance of depreciation on goods purchased from certain entities as the issue was covered against the assessee by earlier orders.

3. Disallowance u/s 14A read with Rule 8D of the Income-tax Rules 1962:
The Tribunal found that the AO had not recorded dissatisfaction over the workings furnished by the assessee and directed the AO to accept the disallowance made by the assessee.

4. Addition of interest on Income Tax Refund while computing Book Profits u/s 115JB:
The Tribunal directed the AO to delete the addition of interest on income tax refund to the book profit as the interest was not credited to the profit and loss account.

5. Long term capital gain on Sale/Compulsory acquisition of land:
The Tribunal admitted the additional ground regarding exemption of long-term capital gains on compulsory acquisition of land and restored the issue to the AO for verification.

6. Short grant of foreign tax credit:
The Tribunal restored the issue of short grant of foreign tax credit to the AO for fresh examination in accordance with the decision of the Karnataka High Court in Wipro Ltd.

7. Reference to the Transfer Pricing Officer (TPO) under section 92C of the Act:
The Tribunal dismissed the grounds related to the validity of reference made to the TPO as not pressed by the assessee.

8. Interest chargeable on share application money refunded by the Associated Enterprise (AE) Reliance Industries Middle-East DMCC:
The Tribunal deleted the transfer pricing adjustment made by imputing interest on share application money refunded by the AE.

9. Transfer Pricing Adjustment on Share Application Money:
The Tribunal deleted the transfer pricing adjustment on share application money as the transaction of subscription of preference shares was not found to be bogus or sham.

10. Reduction of claim of depreciation by thrusting depreciation in earlier assessment years:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of depreciation as the issue was covered by earlier orders of the Tribunal.

11. Disallowance of deduction u/s 10AA by adopting Gross Profit in respect of Refinery SEZ and PP SEZ:
The Tribunal upheld the CIT(A)'s decision to compute profit and gains of the undertaking as interpreted by the Supreme Court in Vijay Industries.

12. Disallowance of deduction claimed u/s 80G of the Act in respect of donations given under Corporate Social Responsibility:
The Tribunal upheld the CIT(A)'s decision to allow the deduction u/s 80G for CSR donations, following the decision of the ITAT in Naik Seafoods P Ltd.

13. Disallowance under section 42(1)(b) in respect of KG-DWN-98/3 (KGD6 bloc) and Coal Bed Methane Sohagpur (CBM):
The Tribunal upheld the CIT(A)'s decision to allow the entire expenses claimed in respect of KGD-6 and CBM blocks.

14. Disallowance of foreign tax credit u/s 90(1)(a)(ii) relating to income eligible for deduction u/s 10AA of the Act:
The Tribunal restored the issue to the AO for fresh examination.

15. Transfer pricing adjustment by imputing Interest on delayed receipts:
The Tribunal upheld the CIT(A)'s decision to delete the transfer pricing adjustment by imputing interest on delayed receipts, following earlier years' orders.

16. Transfer pricing adjustment by recharacterising the preference shares as loan:
The Tribunal upheld the CIT(A)'s decision to delete the transfer pricing adjustment by recharacterising the preference shares as loan, following earlier years' orders.

17. Disallowance of long term and short term capital loss on sale of Noncumulative compulsorily convertible preference shares (NCCPS) of M/s. RGBV by recharacterising the same as loan:
The Tribunal upheld the CIT(A)'s decision to allow the capital loss, following earlier years' orders.

18. Deletion of addition under section 50C of the Act on the basis of information not shared with the appellant:
The Tribunal restored the issue to the AO to confront the material relied upon for the addition.

19. Transfer pricing adjustment in respect of Management consultancy services (MCS), technical services and business support services (BSS) rendered to AEs:
The Tribunal restored the issue to the AO/TPO for redetermining the ALP of the transaction, considering the comparable companies discussed.

20. Transfer pricing adjustment in respect of Guarantee commission given to the Associated Enterprise (AE):
The Tribunal upheld the CIT(A)'s decision to delete the transfer pricing adjustment, following earlier years' orders.

21. Transfer pricing adjustment in respect of Business support services availed from AE - RCITPL (Specified Domestic Transaction):
The Tribunal restored the issue to the AO/TPO for redetermining the ALP of the transaction, considering the comparable companies discussed.

22. Transfer Pricing adjustment for Inter-unit of transfer of power (Excess income shown by the eligible units):
The Tribunal upheld the CIT(A)'s decision to delete the adjustment, following earlier years' orders.

Conclusion:
Both the appeals of the assessee and the revenue were partly allowed, and the cross-objection filed by the assessee was dismissed as infructuous.