2023 (11) TMI 1145 - AT - Income Tax

TP Adjustment - corporate guarantee to AE constitutes an international transaction u/s 92B - CIT(A) reducing the arm s length guarantee fee rate of 2.5% determined by the Assessing Officer/TPO to 0.5% - HELD THAT - For the Assessment Year 2008-09 and 2009-10 the Tribunal had, following the decision of the Tribunal in the case of the Assessee for the Assessment Year 2007-08 2015 (5) TMI 639 - ITAT MUMBAI agreed with the CIT(A) that providing corporate guarantee to an AE constitutes an international transaction and had accepted the guarantee fee rate of 0.5% determined by the CIT(A) as the arm s length rate while rejecting the rate proposed by the Assessee. There is no change in the facts and circumstances of the case. Nothing has been placed before us to persuade us to depart from the view taken by the Tribunal in the case of the Assessee for the preceding assessment years on this issue.Thus we do not find any infirmity in the order passed by the CIT(A).Ground No. I II raised by the Assessee are dismissed. TP Adjustment - interest on loan to Associated Enterprises - Assessee voluntary made an adjustment in the computation of total income by computing interest at the rate of 1.53% (i.e. Average US LIBOR 1%) in case of interest free USD loan to Aditya Birla Minacs Philippines and at the rate of 5.50% in case of interest free CAD loan to AVTL, Canada - HELD THAT - As decided in assessee own case has accepted LIBOR plus 1% as arm s length rate of interest. Thus keeping in view the above decisions of the Tribunal in the case of the Assessee, which continue to hold the field, we do not find any merit in the contention advanced by the Assessee that no transfer pricing adjustment was warranted. The decision of CIT(A) to hold LIBOR 1% as arm s length rate of interest in respect of loan for AEs is in line with the above decisions of the Tribunal in the case of the Assessee. Disallowance of claim of proportionate premium paid arising on account of repayment of optionally convertible debentures - CCDs were initially issued the Assessee had no obligation to pay premium, interest, or charges in relation to the CCDs as the same were convertible into equity on expiry of 60 months as per the conversion formula which was to be mutually agreed by the Assessee and the subscriber/holder of CCDs - HELD THAT - It is admitted position that the CCDs were transferred from subscriber to holders and from holder to subsequent holders over a period of time. At the time of conversion the CCDs were held by ABNL, however, during the relevant previous year the CCDs were not held by ABNL. Therefore, the modification of terms as agreed upon between the ABNL and the Assessee, cannot change the terms and conditions which were binding upon the Assessee and the holders of CCDs at the relevant time according to which the debentures were to be compulsorily convertible into equity. Given the facts and circumstances of the present case, we are of the view that the commercial arrangement entered into by the Assessee subsequent to the filing of return of income for the relevant previous year, cannot be applied retroactively to make additional claim leading to reduction of the income returned by the Assessee. Having perused the judicial precedents cited on behalf of the Assessee, we conclude that, in view of the above, none of the judicial precedents cited apply to the factual matrix before us and therefore, the same do not advance the case of the Assessee. We confirm the order passed by the CIT(A) rejecting the claim for deduction in respect of proportionate premium on redemption of OCDs made by the Assessee during the assessment proceedings. Decided against assessee. Addition u/s 36(1)(iii) in respect of the interest and other expenses incurred for acquisition of shares of a subsidiary company - CIT(A) deleted disallowance - HELD THAT - Tribunal 2016 (8) TMI 1417 - ITAT MUMBAI , has allowed deduction for interest and other expenses incurred by the Assessee under Section 36(1)(iii)/37 of the Act on the ground of commercial expediency/exigency as such interest other expenses were incurred in connection with the loans taken by the Assessee for DBS Bank which has been utilized for making investment in AVTL, Canada which had acquired Minacs Worldwide Inc, Canada, leading to significant rise in the business of the Assessee. We note that the appeal preferred by the Assessee against the above order of the Tribunal on the issue of deletion of disallowance under Section 36(1)(iii) of the Act has been dismissed by the Hon ble Bombay High Court 2019 (10) TMI 760 - BOMBAY HIGH COURT . Further, the Special Leave Petition 2020 (10) TMI 1213 - SC ORDER preferred by the Revenue against the aforesaid order of the Hon ble Bombay High Court has also been dismissed on the ground of delay. Thus no infirmity in the order passed by the CIT(A) in allowing the claim for deduction. Disallowance of Employee Stock Option Scheme (ESOP) expenses - Allowable revenue expenses u/s 37(1) or not? - HELD THAT - In view of the Special Bench of the Tribunal in Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE allowed deduction of ESOP expenses under Section 37(1) of the Act stands confirmed by the Hon ble High Court 2020 (11) TMI 779 - KARNATAKA HIGH COURT we do not find any infirmity in the order passed by the CIT(A) allowing the claim for deduction of ESOP Expenses under Section 37(1). Mark to Market loss - loss pertaining to forward contracts treated as notional loss - Assessee had claimed deduction for foreign exchange loss booked by the Assessee as Mark to Market loss pertaining to forward contracts entered into by the Assessee for hedging the foreign exchange of risk in the course of export business - AO disallowed the same holding the same to be notional loss by placing reliance upon the Instruction No. 3 of 2010 dated 23/03/2010 issued by Central Board of Direct Taxes (CBDT) - HELD THAT - while Instruction No. 3 of 2010, dated 23/03/2010, was binding upon the Assessing Officer, the same was not binding on the courts or this Tribunal. In this regard, it could be pertinent to the refer to the judgment of M/s Suven Life Sciences Ltd 2017 (9) TMI 1598 - ITAT HYDERABAD wherein the Tribunal had rejected the identical reasoning given by the Assessing Officer and allowed the claim of the Assessee for deduction of Mark to Market losses as held that the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet is an item of expenditure u/s 37(1) - Decided against revenue. Delayed payments of employees contribution to ESIC - Payment made after the expiry of the time specified in the applicable statute but before the filing of tax return under Section 139(1) - HELD THAT - This issue is no longer res integra and stands decided against the Assessee and in favour of the Revenue by the judgment of the Hon ble Supreme Court in the case Checkmate Services Private Ltd 2022 (10) TMI 617 - SUPREME COURT wherein the Hon ble Supreme Court has held that where an assessee failed to deposit Employees' Contribution towards Provident Fund and Employees State Insurance within due date prescribed in respective statutes, deduction under Section 36(1)(va) of the Act was not allowable. The non-obstante clause contained in Section 43B of the Act would not apply in the case of employees contribution held in trust by assessee-employer. Therefore, such assessee-employer would not be absolved from the liability to deposit employees contribution on or before the due date specified in the respective statutes as a pre-condition for claiming deduction under Section 36(1)(va) of the Act. - Decided against assessee. CIT(A) admitted the additional claim of the Assessee - HELD THAT - As relying upon the judgment of Pruthvi Brokers Shareholders Pvt. Ltd. 2012 (7) TMI 158 - BOMBAY HIGH COURT wherein after considering the judgment of Goetze India Ltd. Vs. CIT 2006 (3) TMI 75 - SUPREME COURT it was, inter alia, held that the first appellate authorities was entitled to entertain and adjudicate even a new claim raised by the Assessee for the first time before the first appellate authority. Accordingly, we do not find any infirmity in the order passed by the CIT(A).

Summary

Issues Involved:
1. Corporate Guarantee as an International Transaction
2. Notional Interest on Loans to AEs
3. Disallowance under Section 35D
4. Disallowance of Premium on Repayment of Optionally Convertible Debentures
5. Disallowance of ESOP Expenses
6. Mark to Market Losses
7. Delayed Payments of Employees' Contribution to ESIC

Summary:

Corporate Guarantee as an International Transaction:
The Tribunal upheld the CIT(A)'s decision that providing a corporate guarantee to an AE constitutes an international transaction under Section 92B of the Act. The Tribunal followed its earlier decisions for Assessment Years 2007-08, 2008-09, and 2009-10, confirming the arm's length rate of guarantee fee at 0.5% despite the assessee's contention for a lower rate. The Revenue's appeal to adopt a 2.5% rate was dismissed based on the Tribunal's consistent stance and the Hon'ble Bombay High Court's affirmation.

Notional Interest on Loans to AEs:
The Tribunal upheld the CIT(A)'s decision to determine the arm's length rate of interest at LIBOR + 1% for loans given to AEs. The Tribunal followed its earlier decisions for Assessment Years 2007-08, 2008-09, and 2009-10, rejecting the assessee's contention that no transfer pricing adjustment was warranted.

Disallowance under Section 35D:
The Tribunal dismissed the assessee's ground regarding the disallowance of INR 4,65,200/- under Section 35D for stamping charges paid on further issue of shares, as the assessee did not wish to pursue this ground.

Disallowance of Premium on Repayment of Optionally Convertible Debentures:
The Tribunal upheld the CIT(A)'s decision to disallow the deduction for the proportionate premium paid on the redemption of optionally convertible debentures. The Tribunal found that the assessee had no obligation to pay premium during the relevant previous year, and the liability arose only upon conversion to OCDs and subsequent redemption.

Disallowance of ESOP Expenses:
The Tribunal upheld the CIT(A)'s decision to allow the deduction of ESOP expenses under Section 37 of the Act, following the Special Bench's decision in Biocon Ltd. and the Hon'ble Karnataka High Court's affirmation of the same. The Tribunal dismissed the Revenue's appeal against this allowance.

Mark to Market Losses:
The Tribunal upheld the CIT(A)'s decision to allow the deduction for Mark to Market losses, rejecting the Assessing Officer's reliance on CBDT Instruction No. 3 of 2010. The Tribunal followed precedents, including the Hon'ble Supreme Court's decision in Woodward Governor India Pvt. Ltd., and other Tribunal decisions affirming that such losses are not notional but accrued liabilities.

Delayed Payments of Employees' Contribution to ESIC:
The Tribunal overturned the CIT(A)'s decision to allow the deduction for delayed payments of employees' contribution to ESIC, following the Hon'ble Supreme Court's decision in Checkmate Services Private Ltd., which held that such deductions are not allowable if payments are made after the due date specified in the respective statutes.

Conclusion:
- Assessment Year 2011-12: Assessee's appeal dismissed; Revenue's cross-appeal dismissed.
- Assessment Year 2012-13: Assessee's appeal partly allowed; Revenue's cross-appeal partly allowed.
- Assessment Year 2013-14: Revenue's appeal partly allowed.