2024 (11) TMI 1419 - AT - Income Tax

TP adjustment towards international transactions - interest on the loans given is waived by the assessee though the loans charged with 3M EURIBOR 3.5% p.a (3.66%) interest - HELD THAT - Assessee s plea of the assessee is that the assessee had sufficient own money to give interestfree advances to its subsidiaries and due to commercial expediency loan was advanced to them and so it is allowable is acceptable in principle. We find that similar issue had come up in the assessee s own case for earlier assessment years especially for AY 201011 and the Tribunal had set aside the issue to the file of the AO to verify the actual surplus funds available with the assessee and also to verify whether assessee had borrowed loan and whether there was nexus between the borrowed loan and advance given by the assessee to the AEs at Germany. Since the factual scenario on this issue are similar to that of the AY 2010-11 2011-12 2013-14 matter needs to be reconsidered. Corporate guarantee given to the AE - TPO noted that the assessee company has provided corporate guarantee on behalf of its AE and since no guarantee fee has been collected from its AE he was of the opinion that 1.5% of the value of the corporate guarantee should be adjusted - HELD THAT - We concur with the TPO s order that this is an international transaction but upward adjustment is now covered in favour of the assessee by the decision of Redington (India) Ltd. 2020 (12) TMI 516 - MADRAS HIGH COURT and Everest Kanto Cylinder Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT therefore we direct the AO to restrict adjustment @0.5% of the guarantee value. Nature of expenditure - disallowance of software expenses as revenue expenditure - HELD THAT - In the light of the above orders of the Tribunal in the assessee s own case as well as in AY 2013-14 we note that the assessee s case as far as total software expenditure in this year is concerned is noted to be on account of annual- licence fee which issue was set aside back to the file of the AO to verify the nature of expenditure thus we set-aside the impugned order on this issue back to the file of the AO to verify the nature of expenditure. Amortization of capital expenditure (lease hold land) - HELD THAT - Issue is set aside back to the AO and we direct the AO to consider whether the premium paid for grant of leasehold rights is eligible for depreciation after hearing the assessee. Disallowance of foreign exchange fluctuation loss - HELD THAT -In the present case we note that Forex loss was to the tune of Rs.86.33 lakhs which was on actual payment of loan on the realization date i.e. on date of actual repayment of loan which was taken for purchasing domestic assets. Therefore it needs to be allowed as Revenue expenditure u/s.37 of the Act and is not hit by sec.43A of the Act which is only when assessee has acquired imported assets; and since we have noted that assessee has taken External Commercial Borrowings (ECB) for acquiring indigenous assets and not for acquisition of imported assets disallowance made by the AO u/s.43A of the Act was erroneous and respectfully following the ratio of case of M/s.Wipro Finance Ltd. 2022 (4) TMI 694 - SUPREME COURT we allow the claim of the assessee. Re-statement of foreign currency loan - assessee had claimed deduction towards foreign exchange loss on re-statement of foreign currency loan taken towards acquisition of capital assets which was disallowed by the AO stating that since such expenditure was towards acquisition of capital assets it is in the nature of capital expenditure - HELD THAT - We find force in the submission of Ld AR in the light of Hon ble Supreme Court ratio in Woodward Governor India P Ltd 2009 (4) TMI 4 - SUPREME COURT and note that the assessee has claimed as deduction towards foreign exchange loss on restatement of foreign currency loan (on 31st March) which was undisputedly taken towards acquisition of indigenous assets; and assessee as per AS-11 has rightly shown the same (forex loss) in the P L A/c; and therefore is allowable as revenue deduction and we order accordingly. Interest on diverted funds - HELD THAT - AR brought to our notice that the assessee had profit after tax to the tune of Rs.13, 532.24 Lakhs and its net worth was Rs.85, 896.55 Lakhs and the loan given to the sister concern is only to the tune of Rs.11, 90, 30, 000/-. Therefore applying the ratio in the case of CIT (LTU) v. Reliance Industries 2019 (1) TMI 757 - SUPREME COURT it can be safely presumed that assessee had sufficient own funds and that advances/loans were given to M/s.SFIL from the interest free funds (own funds) available with the assessee and not from the interest bearing funds (mixed fund of both) and rely on the decision of Hotel Savera 1997 (11) TMI 37 - MADRAS HIGH COURT and also Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT Thus we direct deletion of addition. Mistake in recording Dividend Distribution Tax (DDT) paid - HELD THAT - AO has erred in giving credit fir DDT only for Rs.3, 46, 58, 640/- as against actual DDT remittance of Rs.5, 73, 96, 200/- which according to assessee was available in on-line tax credit statement i.e. Form 26AS. Thus we set aside this issue back to the file of AO for verification and if the assessee s contention is found to be correct to grant credit accordingly. Mistake in computing interest u/s.234A - HELD THAT - Since we find that this issue was not raised by the assessee before the AO hence there was no occasion for him to look into the merits of such claim. Therefore we admit this ground and remit it back to the file of the AO for de novo adjudication. Deduction u/s.35(2AB) - non-approval of expenditure by the DSIR - HELD THAT - For the relevant year under consideration i.e. AY 2016-17 i.e. F.Y 2015-16 the prescribed authority (DSIR) was not required to quantify the expenditure for events taking place before 30.06.2016 and it was only w.e.f 01.07.2016 (AY 2017-18) it is mandated to do so. Therefore the assessee s contention that non-approval of expenditure to the tune of balance amount of Rs.7, 33, 404/- claimed by the DSIR could not have entitled the assessee to make the claim and the AO ought to have disallowe and therefore we are unable to accept action of the AO/DRP and direct the AO to allow deduction on the same ratio held for AY 2013-14. Disallowance u/s.43B - HELD THAT - This issue has been decided against the assessee by the Hon ble Supreme Court in the case of Union of India Ors Vs. Exide Industries 2020 (4) TMI 792 - SUPREME COURT wherein it was held that leave salary is to be claimed based on date of actual payment as per section 43B. Hence this issue is found to be covered against assessee and therefore we dismiss this ground of appeal of the assessee. Disallowance u/s.14A - Assessee suo-motu disallowed amount on exempt income earned - HELD THAT - We direct the AO to compute disallowance under Rule 8D(2)(iii) by only considering the investment which yielded exempt income (dividend) and not other investments. Levying interest u/s.234D - As argued interest u/s.234D is leviable on the whole or excess amount so refunded i.e. refund of tax excluding interest if any granted. This may be verified by the AO and pass orders accordingly.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the Transfer Pricing (TP) adjustments towards international transactions, particularly regarding the waiver of interest on loans given to Associated Enterprises (AEs), were justified.
• Whether the adjustment made for the corporate guarantee provided to the AE without charging a fee was appropriate.
• Whether the disallowance of software expenses as revenue expenditure was correct.
• Whether the amortization of capital expenditure on leasehold land should be allowed.
• Whether the foreign exchange fluctuation loss on loans taken for acquiring domestic assets should be treated as revenue expenditure.
• Whether the re-statement of foreign currency loans should be allowed as a revenue deduction.
• Whether the interest on diverted funds to subsidiaries should be disallowed.
• Whether the education cess should be treated as a business expenditure.
• Whether there was a mistake in recording Dividend Distribution Tax (DDT) paid.
• Whether there was a mistake in computing interest under Section 234A.
• Whether the claim for deduction under Section 10AA was correctly quantified.
• Whether the disallowance under Section 43B was justified.
• Whether the disallowance under Section 14A was appropriately calculated.
• Whether the interest under Section 234D was correctly computed.
• Whether there was an incorrect credit of TDS.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Adjustment on Loan Interest Waiver

• Legal Framework and Precedents: The issue revolves around whether the waiver of interest on loans to AEs aligns with the arm's length principle under transfer pricing regulations.
• Court's Interpretation and Reasoning: The Tribunal remitted the issue back to the Assessing Officer (AO) to verify the surplus funds available with the assessee and whether there was a nexus between borrowed funds and loans given to AEs.
• Key Evidence and Findings: The assessee argued that the loans were given due to commercial expediency and sufficient own funds were available.
• Application of Law to Facts: The Tribunal referenced its earlier decisions in similar cases and directed the AO to re-examine the issue.
• Competing Arguments: The Department argued for a 9% interest rate based on internal CUP, while the assessee contended for a waiver due to financial health and commercial reasons.
• Conclusion: The issue was remitted back for reconsideration.

Corporate Guarantee Adjustment

• Legal Framework and Precedents: The adjustment was based on the lack of a guarantee fee.
• Court's Interpretation and Reasoning: The Tribunal directed the AO to restrict the disallowance to 0.5% of the guarantee value, aligning with precedents.
• Conclusion: The Tribunal's direction was to follow the jurisdictional High Court's precedent.

Disallowance of Software Expenses

• Legal Framework and Precedents: The issue was whether software expenses were capital or revenue in nature.
• Court's Interpretation and Reasoning: The Tribunal remitted the issue back to the AO to verify the nature of the expenditure.
• Conclusion: The AO was directed to verify and decide the issue based on the nature of the software licenses.

Amortization of Capital Expenditure on Leasehold Land

• Legal Framework and Precedents: The issue was whether depreciation should be allowed on leasehold land.
• Court's Interpretation and Reasoning: The Tribunal set aside the issue back to the AO in light of the High Court's decision.
• Conclusion: The AO was directed to reconsider the issue of depreciation eligibility.

Foreign Exchange Fluctuation Loss

• Legal Framework and Precedents: The applicability of Section 43A for foreign exchange losses on domestic assets.
• Court's Interpretation and Reasoning: The Tribunal allowed the loss as a revenue expenditure, citing Supreme Court precedents.
• Conclusion: The loss was allowed as revenue expenditure.

Re-statement of Foreign Currency Loans

• Legal Framework and Precedents: The issue was whether the restatement loss was capital or revenue in nature.
• Court's Interpretation and Reasoning: The Tribunal allowed the claim, referencing the Supreme Court's decision in Woodward Governor.
• Conclusion: The restatement loss was allowed as a revenue deduction.

Interest on Diverted Funds

• Legal Framework and Precedents: The issue was whether interest should be disallowed for advances to subsidiaries.
• Court's Interpretation and Reasoning: The Tribunal found that sufficient own funds were available, and the advances were for business purposes.
• Conclusion: The disallowance was deleted.

Education Cess as Business Expenditure

• Conclusion: The issue was not pressed as it was covered against the assessee by a Supreme Court decision.

Dividend Distribution Tax (DDT) Credit

• Conclusion: The issue was remitted back to the AO for verification and correction.

Interest under Section 234A

• Conclusion: The AO was directed to verify the facts and pass orders accordingly.

Deduction under Section 10AA

• Court's Interpretation and Reasoning: The Tribunal remitted the issue back to the AO for de novo adjudication.
• Conclusion: The AO was directed to reconsider the claim based on the Supreme Court's decision.

Disallowance under Section 43B

• Conclusion: The issue was covered against the assessee by a Supreme Court decision.

Disallowance under Section 14A

• Court's Interpretation and Reasoning: The Tribunal directed the AO to compute disallowance under Rule 8D(2)(iii) only for investments yielding exempt income.
• Conclusion: The disallowance was to be recalculated.

Interest under Section 234D

• Conclusion: The AO was directed to verify the computation and pass orders accordingly.

Incorrect Credit of TDS

• Conclusion: The AO was directed to verify the TDS credit and rectify any errors.

3. SIGNIFICANT HOLDINGS

• Transfer Pricing Adjustments: The Tribunal emphasized the need for verification of surplus funds and the nexus between borrowed funds and loans to AEs.
• Corporate Guarantee Fee: The adjustment should be restricted to 0.5% of the guarantee value.
• Software Expenses: The nature of software licenses should determine the treatment as capital or revenue expenditure.
• Foreign Exchange Losses: Losses on loans for domestic assets are revenue in nature, not capital.
• Interest on Diverted Funds: Advances to subsidiaries can be justified by commercial expediency and sufficient own funds.
• Section 10AA Deduction: The deduction should be reconsidered based on the Supreme Court's decision.
• Section 14A Disallowance: Only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii).