2025 (1) TMI 1053 - AT - Income Tax

TP Adjustment of Loans to AE - assessee granted interest free loan to its AE M/s Sundaram International Inc. USA - TPO proposed benchmarking the same on LIBOR 200 bps - HELD THAT - This issue has been adjudicated by Tribunal 2016 (3) TMI 1486 - ITAT CHENNAI Tribunal directed Ld. AO to verify the actual surplus funds available with the assessee. AO was also directed to verify whether there was any nexus between the borrowed loans and advances made to the AE. AO was directed to re-examine the matter in the light of aforesaid observation and re-adjudicate the issue. Since facts are similar in this year we issue similar directions. The corresponding grounds as raised by the assessee stand allowed for statistical purposes. TP adjustment of Corporate Guarantee - assessee provided corporate guarantee for its AE but did not charge any fees - TPO benchmarked the same @2.55% which was nothing but average rate of guarantee fee charged by the bank - HELD THAT - This issue has been adjudicated by Tribunal in 2024 (11) TMI 1419 - ITAT CHENNAI . In para-4.2 of the order the bench directed AO to benchmark the same @0.5%. Facts being pari-materia the same we direct Ld. AO to adopt benchmarking rate of 0.5%. The corresponding grounds stand partly allowed. Depreciation on right to use leasehold property - depreciation was claimed @12.5% i.e. half of 25% depreciation. The same was on the ground that the rights were shown as intangible assets which would be eligible for 25% depreciation - HELD THAT - This issue has been adjudicated by Tribunal in 2024 (11) TMI 1419 - ITAT CHENNAI for AYs 2015-16 and 2016-17 considering the order of Hon ble High Court of Madras in assessee s own case 2021 (3) TMI 1471 - MADRAS HIGH COURT the bench remitted this matter back to the file of Ld. AO. Facts being pari materia the same we issue similar directions to Ld. AO. The corresponding grounds stand allowed for statistical purposes. Claim of Deduction u/s 80G - assessee made CSR expenses - HELD THAT - As we deem it fit to remit this issue back to the file of Ld. AO for de novo adjudication. AO shall consider the nature of donations as well as subsequent amendment to the law. The various judicial decisions as rendered on this issue may also be reconsidered. It appears that only part of CSR expenditure has been claimed u/s 80G which may also be considered on facts. The assessee is directed to substantiate its claim. Consequently the corresponding grounds stand allowed for statistical purposes. Disallowance u/s 14A - HELD THAT - This issue has been adjudicated by Tribunal in 2024 (11) TMI 1419 - ITAT CHENNAI wherein bench directed Ld. AO to compute disallowance u/r 8D(2)(ii) by considering only those investments which have yielded exempt income during this year. Facts being pari-materia the same we issue similar directions. The amendment in our opinion is applicable only w.e.f. 01.04.2022 and the same would not have retrospective application. The corresponding ground stand allowed for statistical purposes. The appeal stand partly allowed in terms of our above order. TP adjustment of interest on debentures - HELD THAT - As the assessee has subscribed to debentures of a UK-based entity and therefore the ALP rate as applicable to that entity would be more suitable benchmarking rate. As per facts the foreign AE was able to raise overdraft facility in independent situation at the rate of 1.76% as against rate of 2.43% as paid to the assessee. In such a situation we direct Ld. TPO to benchmark the same based on comparable international transactions and not on the basis of comparable domestic transaction. The assessee is directed to provide the requisite data. The corresponding grounds stand allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core issues:

• Depreciation on the right to use leasehold property.
• Claim of deduction under Section 80G of the Income Tax Act.
• Disallowance under Section 14A of the Income Tax Act.
• Transfer Pricing (TP) adjustment on interest receivable on loans given to Associated Enterprises (AE).
• TP adjustment on corporate guarantee provided to AE.
• TP adjustment on interest on debentures for Assessment Year 2021-22.

2. ISSUE-WISE DETAILED ANALYSIS

Depreciation on Right to Use Leasehold Property

• Legal Framework and Precedents: The appellant claimed depreciation on leasehold property as an intangible asset eligible for depreciation under the Income Tax Act. The Karnataka High Court decision in DCIT vs. Bangalore International Airport Ltd was referenced.
• Court's Interpretation and Reasoning: The Tribunal referred to its previous orders and the High Court's decision, remitting the matter back to the Assessing Officer (AO) for reconsideration.
• Key Evidence and Findings: The appellant argued that the leasehold right constituted an intangible right eligible for depreciation.
• Application of Law to Facts: The Tribunal directed the AO to re-evaluate the claim based on the factual matrix and judicial precedents.
• Treatment of Competing Arguments: The Tribunal considered both the appellant's reliance on judicial precedents and the AO's disallowance.
• Conclusions: The issue was remitted back to the AO for fresh adjudication.

Claim of Deduction under Section 80G

• Legal Framework and Precedents: The appellant claimed deductions for donations under Section 80G, arguing that part of the CSR expenditure was eligible for such deductions.
• Court's Interpretation and Reasoning: The Tribunal remitted the issue back to the AO for de novo adjudication, considering the nature of donations and subsequent legal amendments.
• Key Evidence and Findings: The appellant differentiated between CSR and non-CSR contributions, claiming only the latter under Section 80G.
• Application of Law to Facts: The Tribunal directed the AO to assess the eligibility of deductions based on the nature of donations and relevant legal provisions.
• Treatment of Competing Arguments: The Tribunal weighed the appellant's claims against the AO's interpretation of legislative intent.
• Conclusions: The matter was remitted for further examination by the AO.

Disallowance under Section 14A

• Legal Framework and Precedents: The AO disallowed expenses related to exempt income under Section 14A, applying Rule 8D.
• Court's Interpretation and Reasoning: The Tribunal directed the AO to consider only investments yielding exempt income for disallowance computation.
• Key Evidence and Findings: The appellant argued that investments were made from self-generated funds, not borrowed funds.
• Application of Law to Facts: The Tribunal emphasized that disallowance should be based on actual income-generating investments.
• Treatment of Competing Arguments: The Tribunal considered the appellant's self-funding argument against the AO's broader disallowance approach.
• Conclusions: Directions were issued to the AO for recalculating disallowance.

TP Adjustment on Interest Receivable on Loans

• Legal Framework and Precedents: The TPO benchmarked interest on loans to AE using LIBOR+200 bps.
• Court's Interpretation and Reasoning: The Tribunal referred to earlier decisions, directing the AO to verify surplus funds and the nexus between borrowed funds and advances.
• Key Evidence and Findings: The appellant contended that loans were granted from surplus funds.
• Application of Law to Facts: The Tribunal instructed the AO to reassess based on actual financial conditions.
• Treatment of Competing Arguments: The Tribunal balanced the TPO's benchmarking against the appellant's financial position argument.
• Conclusions: The issue was remitted for statistical purposes.

TP Adjustment on Corporate Guarantee

• Legal Framework and Precedents: The TPO applied a 2.55% rate for corporate guarantee fees.
• Court's Interpretation and Reasoning: The Tribunal directed the AO to benchmark at 0.5%, aligning with previous decisions.
• Key Evidence and Findings: The appellant argued that corporate guarantees were provided as a commercial necessity.
• Application of Law to Facts: The Tribunal instructed the AO to apply a lower benchmarking rate.
• Treatment of Competing Arguments: The Tribunal considered the appellant's commercial expediency argument against the TPO's rate.
• Conclusions: The AO was directed to adjust the rate to 0.5%.

TP Adjustment on Interest on Debentures (AY 2021-22)

• Legal Framework and Precedents: The TPO benchmarked interest on debentures using domestic rates.
• Court's Interpretation and Reasoning: The Tribunal directed the TPO to use international rates for benchmarking.
• Key Evidence and Findings: The appellant highlighted the lower interest rate applicable to its AE in the UK.
• Application of Law to Facts: The Tribunal instructed the TPO to consider international comparables for ALP determination.
• Treatment of Competing Arguments: The Tribunal weighed the appellant's international rate argument against the TPO's domestic rate application.
• Conclusions: The issue was remitted for further examination using international benchmarks.

3. SIGNIFICANT HOLDINGS

• Depreciation on Leasehold Property: "The corresponding grounds stand allowed for statistical purposes."
• Deduction under Section 80G: "The corresponding grounds stand allowed for statistical purposes."
• Disallowance under Section 14A: "The corresponding ground stand allowed for statistical purposes."
• TP Adjustment on Loans: "The corresponding grounds as raised by the assessee stand allowed for statistical purposes."
• TP Adjustment on Corporate Guarantee: "The corresponding grounds stand partly allowed."
• TP Adjustment on Interest on Debentures: "The corresponding grounds stand allowed for statistical purposes."

The Tribunal's judgment remitted several issues back to the AO for reconsideration, emphasizing the need for detailed examination of facts and application of appropriate legal standards. The judgment reflects adherence to established precedents and careful consideration of both the appellant's and the revenue's arguments.