2024 (2) TMI 921 - AT - Income Tax

Expenditure by way of payments made to clubs - HELD THAT - As decided in assessee's own case for AY 2005-06 2020 (3) TMI 799 - ITAT MUMBAI as noted that in assessee s own case for Assessment Year 1996-97, 1997-98 1998-99, the co-ordinate bench of Tribunal in allowed similar claim in favour of assessee as held that the payment made to clubs are revenue in nature and are allowable as such. Decided in favour of assessee. Addition u/s 14A - expenditure incurred on earning exempt income - HELD THAT - As relying on the decision of Hon ble jurisdictional High Court in the case of Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC Bank Ltd 2016 (3) TMI 755 - BOMBAY HIGH COURT wherein it has been held that where the Appellant's own funds are in excess of investments then it should be presumed that the investments are made from the Own Funds and not from Borrowings, consequently disallowance u/s. 14A of the Act cannot be made - there is no need to discuss alternative arguments raised by the assessee. As far as disallowance of 0.5% on average investment is concerned, it is found there is no specific finding or working has been done by the AO and Ld. DRP, hence same need not be sustained here also. In view of the above, ground no. 2 raised by the assessee is allowed and AO is directed to delete the same. TP Adjustment - transaction of providing Letter of Comfort would fall within the ambit of the term 'international transaction' u/s. 92B or not? - HELD THAT - As decided in assessee own case 2020 (3) TMI 799 - ITAT MUMBAI held that Letter of Comfort merely indicates the appellant's assurance that respondent would comply with the term of financial transaction without guaranteeing performance in the event of default. The co- ordinate bench of Tribunal in India Hotels Co. Ltd. ( 2019 (9) TMI 1340 - ITAT MUMBAI on similar ground of appeal held that Letter of Comfort does not constitute international transaction. So far as contention of Id. DR for the revenue that after amendment in Explanation to section 92B is concerned, we have noted that co- ordinate bench in SIRO Clinpharm P. Ltd. ( 2016 (5) TMI 633 - ITAT MUMBAI ) held that amendment in Explanation to section 92B by Finance Act, effective from 01.04.2012 is to be treated as effective at the best from A.Y. 2013-14. TP adjustments - interest on delayed realisation of sales proceeds from its AEs - applicability of interest rate on amounts due from AEs is to be calculated based on PLR rate declared by RBI (being Central Bank of India where assessee is based) or LIBOR rate (as AE is based outside India) - HELD THAT - It s a legal issue and precisely the same issue has been dealt in by the Hon ble Delhi High Court in the case of CIT-I vs. Cotton Naturals (I) (P) Ltd 2015 (3) TMI 1031 - DELHI HIGH COURT as held Chapter 10 of UN Transfer Pricing rightly stipulates that inter-company loans would require examination of the loan agreement, comparison of the terms and conditions of loan agreements, the determination of credit rating of the lender and the borrower, identification of comparable third party loan agreements and suitable adjustments should be made. In addition to the aforesaid factors, the comparability analysis should also take into account the business relationship and the functions performed by the subsidiary AE for the parent company. Normally there would be a difference between the lending rate and borrowing rate in each country. Some authors and writers suggest that the average or mid-point between the two should be taken. However, others like Klaus Vogel have suggested that economic purpose and substance of the debt-claim or debt for which granting of credit calls for the lending rate would be determinative. Thus, in case of a capital investment, the borrowing rate will apply, whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply. We do not deem it necessary to enter into this controversy and express our view as regards the same. Decided in favour of assesee. Disallowing expenditure by way of Additional Sales Tax paid - HELD THAT - As gone through the application for admission of additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. Assessee submitted appeal orders and challan in relation to additional sales tax liability (not submitted earlier before the authorities below). We find the same is in order and complying with Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. In view of above, this matter is restored to the file of the jurisdictional AO for verification and to examine the nature of payment made i.e. payment is not in the nature of penalty and the same is allowable as per law. In the result, this ground of assessee is allowed for statistical purposes. Disallowing expenditure by way of professional charges paid - HELD THAT - It is found that assessee is substantially failed to adduce any evidence of services rendered in the category of professional fee. We have gone through the contents of agreement reproduced nowhere it looks like an agreement for rendering professional services. Assessee s argument that for earlier 2 years, the same expense was allowed and they are relying on the decision of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT is not applicable here based on the facts of the case. Principle of consistency should have been followed as far as possible and permitted by the facts of the case, but as the concept of res-judicata is also there, to be considered before any adjudication. Hence, in the present situation we also asked the AR of the assessee to substantiate the claim by placing on record any cogent evidence which confirms delivery of service by M/s. VCCPL. But at this stage also, assessee is substantially failed to substantiate its claim. MAT addition on disallowance u/s 14A - held that - As no addition under clause (f) of Explanation 1 to section 115JB (2) of the Act is warranted and as hold that the appellant has not incurred any expenditure towards earning exempt income addition otherwise also cannot be made. In view of this AO is directed to delete the addition made u/s. 115JB of the Act. Charging an amount as Amount already refunded - HELD THAT - As in the computation sheet attached to the Assessment Order, the AO has mentioned that amount has been refunded to the appellant. The appellant has not received any refund for the Assessment Year under reference. A copy of Indemnity Bond filed with the Ld. AO is enclosed herewith. In view of the above, the appellant requests to give necessary direction to grant relief after verification. Additional Income Tax and Interest Payable on Distributed Profits - HELD THAT - The appellant during the year under reference distributed dividend of Rs. 4,00,00,000/- and has paid dividend distribution tax of Rs. 67,98,000/- on the same on 19th September 2007. The said details are duly reflected in the Income Tax Return filed by the appellant and Tax Audit Report for the year under reference. Relevant extract of Income Tax Return and Tax Audit Report are enclosed herewith, the appellant requests to give necessary direction to grant relief after verification. Recovering interest u/s. 244A though the same was not received by the appellant - HELD THAT - As mentioned above in Ground No 9, the appellant has not received any refund for the year under reference and accordingly have not received interest u/s. 244A of the Act. In view of the same the appellant requests to give necessary direction to grant relief after verification.

Summary

Issues Involved:
1. Disallowance of expenditure on club payments.
2. Disallowance of interest expenditure under Section 36(1)(iii) and Section 14-A.
3. Transfer Pricing Adjustment for non-recovery of fees/commission for Letters of Comfort.
4. Transfer Pricing Adjustment for interest on delayed realization of sales proceeds.
5. Disallowance of expenditure paid to Tata Public School.
6. Disallowance of expenditure on Additional Sales Tax.
7. Disallowance of professional charges paid.
8. Enhancement of "book profit" under Section 115-JB.
9. Charging of an amount as "Amount already refunded."
10. Charging of "Additional Income Tax and Interest Payable on Distributed Profits."
11. Charging of "Interest u/s 244A."

Summary:

1. Disallowance of Expenditure on Club Payments:
The learned AO-DRP erred in disallowing expenditure aggregating Rs. 3,74,855 by way of payments made to clubs. This issue was covered by the decision of the Coordinate Bench of ITAT Mumbai in the assessee's own case for AY 2005-06. The Hon'ble Bombay High Court in Otis Elevator held that payments made to clubs are revenue in nature and allowable. Therefore, this ground was allowed in favor of the assessee.

2. Disallowance of Interest Expenditure:
The learned AO-DRP erred in disallowing Rs. 1,65,35,000 out of the aggregate interest paid by the appellant. The appellant argued that their own funds were far in excess of the investments made, and therefore, the interest should be allowable under Section 36(1)(iii). The appellant also cited judicial precedents supporting the claim that where own funds exceed investments, it should be presumed that investments are made from own funds. The AO was directed to delete the disallowance.

3. Transfer Pricing Adjustment for Letters of Comfort:
The learned AO-DRP made an addition of Rs. 9,29,30,250 as a Transfer Pricing Adjustment for non-recovery of fees/commission from AEs for Letters of Comfort. The issue was covered in favor of the appellant by the decision of the Hon'ble ITAT in the appellant's own case for AY 2005-06 and AY 2007-08, where it was held that issuing Letters of Comfort does not constitute an international transaction under section 92B of the Act. The AO was directed to delete the addition.

4. Transfer Pricing Adjustment for Interest on Delayed Realization:
The learned AO-DRP made an addition of Rs. 20,79,633 for interest on delayed realization of sales proceeds from AEs, applying the Indian PLR. The appellant contended that the interest rate should be based on the currency in which the loan was to be repaid, citing the Delhi High Court decision in Cotton Naturals India Pvt. Ltd. The AO was directed to delete the addition, following the principle that interest rates should be market-determined for the currency concerned.

5. Disallowance of Expenditure Paid to Tata Public School:
This ground of appeal was not pressed by the AR of the assessee and was therefore dismissed.

6. Disallowance of Additional Sales Tax:
The learned AO-DRP disallowed Rs. 17,76,270 by way of Additional Sales Tax paid. The appellant submitted additional evidence to support the payment of demands raised. The matter was restored to the AO for verification and to ensure the payments were not in the nature of penalties.

7. Disallowance of Professional Charges Paid:
The learned AO-DRP disallowed Rs. 36,32,040 paid to M/s. Vaishnavi Corporate Communications Pvt. Ltd. for lack of evidence of services rendered. The appellant provided an agreement and invoices but failed to substantiate the claim. The ground was dismissed due to insufficient evidence.

8. Enhancement of "Book Profit" under Section 115-JB:
The learned AO-DRP enhanced "book profit" by Rs. 1,65,35,000, representing disallowance under Section 14-A read with Rule 8-D. This was contrary to the decision of the Special Bench in ACIT vs. Vireet Investment Pvt. Ltd., which held that computation under clause (f) of Explanation 1 to section 115JB (2) should be made without resorting to Section 14-A. The AO was directed to delete the addition.

9. Charging of "Amount Already Refunded":
The AO mentioned an amount of Rs. 2,77,01,822 as already refunded, which the appellant had not received. The matter was restored to the AO for verification and resolution.

10. Charging of "Additional Income Tax and Interest Payable on Distributed Profits":
The AO charged Rs. 67,32,000 as additional tax on distributed profits, which the appellant had already paid. The matter was restored to the AO for verification and resolution.

11. Charging of "Interest u/s 244A":
The AO charged Rs. 29,08,689 as interest under Section 244A, which the appellant claimed was not received. The matter was restored to the AO for verification and resolution.

The appeal of the assessee was partly allowed for statistical purposes, with specific directions for verification and resolution by the AO.