2024 (7) TMI 1587 - AT - Income Tax

TP adjustment towards international transactions - interest rate applied to loans given to associated enterprises (AEs) - assessee company had advanced interest-free loans to its wholly owned two subsidiary companies at Germany and a joint-venture company @ 9% - plea of the assessee is that the assessee had sufficient own money to give interest-free advances to its subsidiaries and due to commercial expediency loan was advanced to them and so it is allowable; and we agree to such a contention in principle - HELD THAT - We find that similar issue had come up in the assessee s own case for earlier assessment years especially for AY 2010-11 2016 (3) TMI 1486 - ITAT CHENNAI wherein 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. Thus matter needs to be reconsidered and orders of the lower authorities are set aside and issue of TP adjustment made in this regard for an amount are remitted back to the file of the AO; and the AO shall re-examine the issue. TP Adjustment on corporate guarantee - 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. Deduction u/s.35(2AB) - non-approval of the expenditure by the DSIR - HELD THAT - Assessee has rightly contended that amendment was not applicable and the prescribed authority was not required to quantify the expenditure and had to only give report in relation to the approval of in-house facility and development facility and therefore in the absence of any requirement of law the AO erred in curtailing the expenditure and consequent weighted deduction claimed by assessee. Therefore the non-approval of the expenditure by the DSIR doesn t disentitle the assessee to make the claim. Thus AO couldn t have disallowed. Disallowance of software Revenue expenditure - HELD THAT - As similar issue had come up before this Tribunal in the assessee s own case for AY 2011-12 2016 (10) TMI 1403 - ITAT CHENNAI Tribunal was pleased to set aside the matter back to the file of the AO thus 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 as observed therefore we set-aside the impugned order on this issue back to the file of the AO to verify the nature of expenditure. Disallowance u/s.43B - HELD THAT - As assessee fairly conceded that this issue has been decided against the assessee by case of Exide Industries 2007 (6) TMI 175 - CALCUTTA HIGH COURT and therefore the same stands dismissed. Amortization of capital expenditure (lease hold land) - HELD THAT -As relying on Madras High Court in the assessee s own case 2021 (3) TMI 1471 - MADRAS HIGH COURT as held held that even though foundational facts appears to have been recorded the issue have not been canvassed by the assessee in the right Forum i.e. before the AO and therefore the issue/claim of depreciation was remitted back to the AO for his adjudication - Thus the impugned order on this 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. Claim of foreign exchange fluctuation loss - HELD THAT - We note that Forex loss which was on actual payment of loan 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 M/s.Wipro Finance Ltd. 2022 (4) TMI 694 - SUPREME COURT we allow the claim of the assessee. Re-statement of foreign currency loan - 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 and therefore such claim made by the assessee is not allowable - HELD THAT - We find force in the submission of Ld AR and note that the assessee s has claimed 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 - The assessee had profit after tax to the tune of Rs.95 Crs. and his net worth was Rs.694 Crs. and the loan given to the sister concern is only to the tune of Rs.9.06 Crs. 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 refer to 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 . Disallowance u/s.14A - assessee had suo moto disallowed - HELD THAT - We find force in the submission of the Ld.AR that since assessee had own funds of more than Rs.673 Crs. and investments as noted by the AO is only to the tune of Rs.132 Crs. It can be safely presumed that its own funds (interest free) were utilized for earning of exempt income. Therefore no disallowance under Rule 8D(2)(ii) is warranted in this case. Assailing the action of the AO in making adjustment u/r.8D(2)(iii) i.e. by applying 0.5% of the total investments made as relying on Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI 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. Appeal filed by the assessee is partly allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core legal questions:

• Whether the Transfer Pricing (TP) adjustment towards international transactions was justified, specifically regarding the interest rate applied to loans given to associated enterprises (AEs).
• The appropriateness of the corporate guarantee adjustment made by the Transfer Pricing Officer (TPO).
• Eligibility for deduction under Section 35(2AB) of the Income Tax Act concerning research and development expenditure.
• Classification and deduction of software expenditure as revenue or capital expenditure.
• Disallowance under Section 43B regarding certain expenditures.
• Amortization of capital expenditure related to leasehold land.
• Claim of foreign exchange fluctuation loss and its treatment in tax calculations.
• Re-statement of foreign currency loan and its tax implications.
• Interest disallowance on funds allegedly diverted to subsidiaries.
• Disallowance under Section 14A concerning expenses for earning exempt income.
• Additional grounds concerning education cess and deduction under Section 10AA.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Adjustment

• Legal Framework: The TP adjustment was based on the interest rates charged on loans to AEs, with the TPO asserting that a uniform rate of 9% should apply.
• Court's Interpretation: The court noted that the loans to wholly-owned subsidiaries were based on commercial expediency and remitted the issue back to the AO for reconsideration, following prior Tribunal directions.
• Evidence and Findings: The assessee argued that loans were given due to financial difficulties of the subsidiaries and were effectively interest-free.
• Application of Law: The court applied existing precedents and remitted the issue for factual verification of surplus funds.
• Conclusions: The matter was remitted to the AO for re-examination in line with prior Tribunal directions.

Corporate Guarantee Adjustment

• Legal Framework: The TPO made an adjustment for a corporate guarantee without a fee, applying a 1% adjustment rate.
• Court's Interpretation: The court directed the AO to restrict the adjustment to 0.5% based on precedents from higher courts.
• Conclusions: The adjustment was reduced following established legal precedents.

Deduction under Section 35(2AB)

• Legal Framework: The deduction pertains to research and development expenses, with the AO disputing the claimed amount based on DSIR approval.
• Court's Interpretation: The court noted that prior to 2016, DSIR was not required to quantify expenditure, thus allowing the full claim.
• Conclusions: The court allowed the full deduction as claimed by the assessee.

Software Expenditure

• Legal Framework: The issue was whether software expenses should be capitalized or treated as revenue expenditure.
• Court's Interpretation: The court remitted the issue back to the AO to verify the nature of the software expenditure.
• Conclusions: The matter was remitted for factual verification.

Disallowance under Section 43B

• Legal Framework: Section 43B disallows certain deductions unless actually paid.
• Court's Interpretation: The court upheld the disallowance based on a Supreme Court precedent.
• Conclusions: The disallowance was confirmed.

Amortization of Capital Expenditure

• Legal Framework: The issue was whether depreciation could be claimed on leasehold land.
• Court's Interpretation: The court remitted the issue back to the AO following a High Court decision.
• Conclusions: The issue was remitted for further consideration.

Foreign Exchange Fluctuation Loss

• Legal Framework: The treatment of forex loss on loans for domestic asset acquisition.
• Court's Interpretation: The court allowed the loss as a revenue deduction, distinguishing it from Section 43A, which applies only to imported assets.
• Conclusions: The court allowed the deduction as claimed by the assessee.

Re-statement of Foreign Currency Loan

• Legal Framework: The issue was the treatment of forex loss on re-statement of foreign currency loans.
• Court's Interpretation: The court allowed the deduction based on AS-11 and Supreme Court precedent.
• Conclusions: The deduction was allowed as a revenue expense.

Interest on Diverted Funds

• Legal Framework: The issue was whether interest should be disallowed on funds allegedly diverted to subsidiaries.
• Court's Interpretation: The court noted sufficient own funds and applied the principle of commercial expediency.
• Conclusions: The disallowance was deleted.

Disallowance under Section 14A

• Legal Framework: Section 14A deals with expenses related to earning exempt income.
• Court's Interpretation: The court found no disallowance warranted under Rule 8D(ii) due to sufficient own funds and directed recalculation under Rule 8D(iii).
• Conclusions: The disallowance was partially deleted.

Additional Grounds

• Education Cess: The court dismissed the claim as it was covered against the assessee by Supreme Court precedent.
• Deduction under Section 10AA: The court remitted the issue to the AO for de novo adjudication based on recent legal developments.

3. SIGNIFICANT HOLDINGS

• "The matter needs to be reconsidered in the light of the observations made by this Tribunal for AY 2010-11." - On TP adjustment.
• "We direct the AO to restrict adjustment @0.5% of the guarantee value." - On corporate guarantee adjustment.
• "The AO erred in curtailing the expenditure and consequent weighted deduction claimed by assessee." - On Section 35(2AB) deduction.
• "The issue was remitted back to the AO to verify the nature of expenditure." - On software expenditure.
• "The disallowance stands confirmed." - On Section 43B disallowance.
• "The matter stands remanded to the Assessing Officer for a decision to be taken on merits." - On amortization of capital expenditure.
• "We allow the claim of the assessee." - On foreign exchange fluctuation loss.
• "The deduction is allowable as revenue deduction." - On re-statement of foreign currency loan.
• "We direct deletion of Rs.30,80,119/-." - On interest on diverted funds.
• "No disallowance under Rule 8D(2)(ii) is warranted in this case." - On Section 14A disallowance.
• "The additional ground stands dismissed." - On education cess.
• "The matter is remitted back to the file of the AO for de novo adjudication." - On Section 10AA deduction.

The judgment provides a comprehensive analysis of each issue, applying relevant legal principles and precedents, and remitting issues for further factual verification where necessary.