2023 (11) TMI 196 - AT - Income Tax

TP adjustment on interest on advances given to AEs - assessee had charged interest on the outstanding amount of advances to the AE at the rate of 3.22% - derived on the basis of LIBOR 260 basis points - rejection of internal Comparable of the assessee - HELD THAT - we see no reason given by the authorities below, nor is there any finding by the Revenue Authorities below to the effect that quotation of the Bank of Nova Scotia, Singapore was, in any way, not authentic. There is no investigation or inquiry conducted by the Revenue Authorities with regard to the authenticity of the quotation, and the Bank of Nova Scotia, Singapore is a renowned bank having global operations. Therefore, there is no basis for doubting the authenticity of the quotation. Basis with the ld. CIT(A) for rejecting the internal CUP of the assessee was not correct. Having held so, there is no doubt that the internal CUP is the best comparable which can be taken for comparability analysis as compared to external comparable and no deficiency having been found in the internal CUP, the external CUPs taken by the AO/TPO are rejected as not applicable for comparability analysis in the present case. We hold that the transactions of loans advanced to AEs by the assessee was adequately demonstrated by the assessee to be at Arm s Length Price based on the comparability analysis done with its internal comparable. No transfer pricing adjustment to the same was warranted and the transfer pricing adjustment made by the authorities below is directed to be deleted. TP Adjustment - outstanding receivables of the assessee for the overdue period of outstanding by charging interest thereon treating them as in the nature of loans and advances made to the Associated Enterprises - HELD THAT - As decided in KUSUM HEALTH CARE PVT. LTD. 2017 (4) TMI 1254 - DELHI HIGH COURT where the international transactions of sales has been demonstrated to be at arm s length by adopting the TNMM method and after making working capital adjustment to the Profit Level Indicator (PLI), there remains no scope for making any further adjustment on account of overdue outstanding receivables on account of the very same sales transactions made to AEs. The reasoning being that the working capital adjustment made to the PLI take care of the overdue outstanding receivables. Having said so, we completely agree with the ld. Counsel for the assessee that the said decision squarely applies to the facts of the present case since the assessee in the present case had done the TP analysis of its international transactions using the TNMM method and after making working capital adjustment to its PLI. These facts were sufficiently demonstrated before us through relevant documents of the transfer pricing report as noted above by us and were not controverted by the ld. DR also before us. Thus we hold that no upward adjustment of interest on the outstanding trade receivables of the assessee relating to its AEs was warranted in the present case and the adjustment, therefore, made is directed to be deleted. TP Adjustment made on account of specified domestic transactions undertaken with the AEs - argument of the assessee that the impugned transaction was not covered u/s 92BA - HELD THAT - We find that the assessee had reported this transaction qualifying as specified domestic transaction u/s 92BA(i) of the Act as transactions relating to section 40A(2)(b) - TPO has also accepted this fact which finds mention in his order. The proposition of law canvassed by the assessee has remained uncontroverted before us. Ld.DR was unable to distinguish the decisions relied upon by the assessee before us. Thus following the proposition of law laid down in the case of Texport 2017 (12) TMI 1719 - ITAT BANGALORE followed by various coordinate benches of the Tribunal, we hold that the impugned transaction of purchase by the assessee from its associate enterprise did not qualify as a specified transaction in terms of section 92BA of the Act. The entire exercise of determining its ALP in terms of section 92BA of the Act therefore fails. The adjustment made to the income of the assessee accordingly does not survive and is therefore directed to be deleted. Thus addition on account of specified domestic transaction is deleted. Deduction u/s 35(2AB) - R D expenditure incurred in in-house facility of the assessee - Claim in excess of that allowed by the DSIR in Form 3CL - quantum to which the assessee is eligible? - claim of the department being that the assessee is eligible to claim deduction only on the expenditure approved by the prescribed authority in Form No.3CL and the assessee arguing otherwise - HELD THAT - What is only to be reported by the prescribed authority is the cost of in-house research facility, mentioning specifically the expenditure incurred on land building, since the expenditure on land building is not eligible to weighted deduction as per section 35(2AB) of the Act. Therefore, we are convinced with the contentions made by assessee that the reporting by the prescribed authority in Form No.3CL of the revenue and capital expenditure incurred by the assessee can no way be relied upon and taken as that approved by the prescribed authority, restricting the assessee s claim to weighted deduction to the expenditure allegedly approval by the prescribed authority. As noted above by us from the provisions of section and rules and form prescribed thereto, there is no requirement for the approval of any expenditure by the prescribed authority for the relevant assessment year i.e.Asst.Year 2013-14 and 2014-15. Therefore, we agree with assessee that the AO could not have relied on the Form No.3CL for restricting the claim of the assessee to the extent allegedly approved by the DSIR .Revenue s contention of disallowing the assessee s claim of weighted deduction on clinical trial is dismissed, since solitary contention of the Revenue is that DSIR had not approved this expenditure in Form No.3CL. As for the expenditure incurred on Exhibit Batches and other expenses, the explanation regarding nature of the expenditure being in relation to samples/prototype obtained for pilot studies and in relation to labour cost, staff training etc in the R D units, they are all clearly incurred for the purpose of R D activity only, and therefore are also eligible to claim weighted deduction - We hold that the entire claim of expenses u/s 35(2AB) were in accordance with law and called for no disallowance at all. Deduction of expenditure u/s 35(1)(iv) - claim has been made by appellant company during the course of assessment proceedings and not in the Return of Income. - HELD THAT - Both the authorities below have wrongly denied the assessee s claim of deduction, for the simple reasoning that it does not make any difference that before the AO the assessee had made claim under section 35(1)(i), while before the CIT(A) the assessee claimed u/s 35(1)(iv) - What is pertinent is, whether the assessee is eligible to claim deduction in whichever section it qualifies. As long as the assessee is entitled to deduction, mere wrong quoting of section will not disentitle the claim of deduction. Assessee has claimed the allowability ,as the expenses were incurred for product development and qualified as capital expenditure on research and development, eligible for reduction under section 35(1)(iv) of the Act. Since the facts relating to eligibility of the claim have not been properly verified by the authorities below, we admit the claim of the assessee and restore the issue back to the AO to verify eligibility of the assessee s claim and thereafter allow the same in accordance with law. Disallowance of u/s. 36(1)(iii) - borrowed funds had been used for investing in CWIP and computing the funds so allegedly deployed on CWIP on the average CWIP for the year he worked out the interest attributable to the same on proportionate basis which accordingly was disallowed in terms of section 36(1)(iii) - HELD THAT - DR was unable to controvert the factual finding of the ld.CIT(A) that the assessee s own interest free funds were much more than its investment made in CWIP during the year, as also the fact that even the profits earned during the year sufficed for the purpose of making investment in CWIP during the year. Also judicial proposition in this regard also stands settled by the decision of Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT holding that where mixed funds are available and where sufficient interest free funds are there the presumption is that the same were used for the purpose of making interest free investments, calling for no disallowance under section 36(1)(iii) - DR was unable to point out any subsequent decision of the Hon ble apex court unsettling the said proposition of law. Since the Ld.DR was unable to controvert the findings of the Ld.CIT(A) both on facts as well as law we see no reason to interfere in the order of the CIT(A) deleting the disallowance of interest made u/s 36(1)(iii) of the Act. Disallowance u/s 14A r.w.r. 8D - sufficiency of own funds - HELD THAT - Where sufficient own interest free funds are available no disallowance of interest is called for u/s 14A - See Sintex Industries Ltd 2018 (3) TMI 1448 - SC ORDER . Since the Ld.DR was unable to controvert the findings of the Ld.CIT(A) both on facts and on law, we see no reason to interfere in the order of the ld.CIT(A) deleting the disallowance made by the AO of interest made u/s 14A. CIT(A) deleted disallowance of administrative expenses u/s 14A of the Act noting that the assessee had suo moto disallowed expenses more than what was computed by the AO as disallowable -DR was unable to controvert the factual finding of the Ld.CIT(A) as above. In view of the same the order of the Ld.CIT(A) deleting the disallowance made by the AO of administrative expenses u/s. 14A of the Act calls for no interference. TDS u/s 195 - disallowance u/s. 40(a)(ia) of the IT. Act on export commission payments made to the Non-resident Agents - HELD THAT - No reason to interfere in the order of the ld.CIT(A) deleting the disallowance of commission made under section 40(a)(ia) as AO was incorrect in holding that the commission income accrued in India and hence was liable to tax in India. Revenue appeal dismissed.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Notional Interest on Outstanding Receivables
3. Specified Domestic Transactions
4. Deduction under Section 35(2AB)
5. Deduction under Section 35(1)(iv)
6. Disallowance under Section 36(1)(iii)
7. Disallowance under Section 14A
8. Disallowance under Section 40(a)(ia)

Summary:

1. Transfer Pricing Adjustments:
The Tribunal addressed the addition made by the AO of Rs. 2,59,90,049/- on account of interest on advances given to AEs. The assessee contended that the advances were made for commercial expediency and the interest rate applied was based on a quotation from Bank of Nova Scotia, Singapore. The Tribunal found merit in the assessee's argument, stating that the internal CUP (Comparable Uncontrolled Price) was wrongly rejected by the CIT(A) and that the internal CUP should be preferred over external comparables. Consequently, the Tribunal directed the deletion of the transfer pricing adjustment.

2. Notional Interest on Outstanding Receivables:
The Tribunal examined the upward adjustment of Rs. 3,10,02,967/- towards notional interest on outstanding receivables from AEs. The assessee argued that the TNMM (Transactional Net Margin Method) method was adopted for determining the arm's length price, and working capital adjustments were already made. The Tribunal agreed with the assessee, referring to the decision of the Hon'ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. and directed the deletion of the adjustment.

3. Specified Domestic Transactions:
The Tribunal addressed the transfer pricing adjustment of Rs. 192,84,97,000/- on specified domestic transactions. The assessee argued that the transactions did not qualify as specified domestic transactions as per Section 92BA(i) of the Act, which was omitted by the Finance Act 2017. The Tribunal agreed, following the decision of the Hon'ble Karnataka High Court in Pr. CIT Vs. Texport Overseas (P.) Ltd., and directed the deletion of the adjustment.

4. Deduction under Section 35(2AB):
The Tribunal examined the disallowance of weighted deduction under Section 35(2AB) of the Act. The AO had restricted the claim to the amount approved by DSIR in Form No.3CL. The Tribunal found that the prescribed authority was only required to approve the in-house facility and not the quantum of expenditure. It held that the assessee's claim could not be restricted based on Form No.3CL and allowed the entire claim of expenses under Section 35(2AB).

5. Deduction under Section 35(1)(iv):
The Tribunal addressed the disallowance of Rs. 15,93,96,033/- claimed under Section 35(1)(iv) of the Act. The Tribunal noted that the assessee is entitled to make claims even if not made in the original return of income. It restored the issue to the AO to verify the eligibility of the claim and allow it in accordance with the law.

6. Disallowance under Section 36(1)(iii):
The Tribunal examined the disallowance of interest of Rs. 15,11,66,895/- under Section 36(1)(iii) of the Act. The CIT(A) had noted that the assessee had sufficient interest-free funds to cover the investment in CWIP. The Tribunal upheld the CIT(A)'s decision, noting that the presumption is that interest-free funds are used for making interest-free investments.

7. Disallowance under Section 14A:
The Tribunal addressed the disallowance of Rs. 52,66,664/- under Section 14A of the Act. The CIT(A) had noted that the assessee had sufficient interest-free funds and had not earned any exempt income. The Tribunal upheld the CIT(A)'s decision, noting that no disallowance of interest was called for under Rule 8D(2)(ii) and that the assessee had already made a suo moto disallowance of administrative expenses.

8. Disallowance under Section 40(a)(ia):
The Tribunal examined the disallowance of Rs. 1,51,10,093/- paid to foreign commission agents under Section 40(a)(ia) of the Act. The CIT(A) had noted that the services were rendered by the agents outside India and relied on the decision of the Hon'ble Apex Court in CIT Vs. Toshoku Limited. The Tribunal upheld the CIT(A)'s decision, noting that the commission income did not accrue or arise in India and was not liable to tax in India.

Conclusion:
The appeals of the assessee were allowed, and the appeals of the Revenue were dismissed. The Tribunal directed the deletion of various adjustments and disallowances made by the AO and upheld the decisions of the CIT(A) where applicable.