2015 (6) TMI 673 - AT - Income Tax

Disallowance u/s 14A - disallowance in respect of the investment in the wholly owned Indian subsidiaries - Held that - The fund flow statement filed by the assessee is only regarding the fresh investment made by the assessee during the year which is otherwise excluded for the purpose of disallowance u/s 14A being the investment in foreign companies. It is not clear from the record whether any disallowance was made on account of interest expenditure in the earlier assessment years. Since the investment was made in the earlier assessment years, therefore, the disallowance on account of interest expenditure has to be as per the funds available with the assessee and the finding on the issue of disallowance u/s 14A for the earlier years is relevant for the purpose of deciding this issue for the year under consideration. Similarly, the issue of disallowance on account of administrative expenses has to be decided keeping in view the finding of the earlier assessment years on this account. Accordingly, in the facts and circumstances of the case, we set aside this issue to the record of Assessing Officer to decide this issue afresh by considering the finding of the earlier A.Ys on this issue and further in view of the decisions in case of JM Financial Ltd. Vs. Addl. CIT (2014 (4) TMI 752 - ITAT MUMBAI) as well as Garware Wall Ropes Ltd. Vs. Addl. CIT (2015 (2) TMI 628 - ITAT MUMBAI ). - Decided in favour of assessee for statistical purposes. Disallowance u/s 80IB/80IC - allocation of expenses made by the assessee between eligible business and non-eligible business - Held that - Keeping in view the decision of Hon ble Supreme Court in the case of Consolidated Coffee Ltd. v. State of Karnataka (2000 (11) TMI 136 - SUPREME Court) and having regard to the facts of the case, we are of the view that the allocation of expenses made by the assessee between eligible business and non-eligible business for the purpose of computing deduction u/s 80IB/80IC of the Act was reasonable and there was no justifiable reason for the A.O. to disturb the same and make reallocation on adhoc basis. We, therefore, delete the addition made by the A.O. by restricting the claim of the assessee for deduction u/s 80IB/80IC of the Act by reallocating the common indirect expenses - Decided in favour of assessee. Depreciation on UPS - at the rate of 15% OR 60% - Held that - We are in agreement with the view that computer accessories and peripherals such as, printers, scanners and server, etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent. See CIT v. BSES Rajdhani Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT - Decided in favour of assessee. Transfer Pricing adjustment in respect of sale of insecticide products to various AEs - Held that - The concept of clubbing and aggregating the transaction is based on the premise that such transactions influenced by each other and particularly in determining the price and profit involved in the transactions then such transactions can safely be regarded as closely linked transactions. The OECD guidelines has referred a portfolio approach as business strategy consisting of tax payers bundling certain transaction for the purpose of earning an appropriate return across portfolio rather than single product. The assessee is selling various insecticide products used in the household at various strata of the society and, therefore, the products of the assessee are clearly falling under the one portfolio of same category of product and, therefore, the assessee can have a portfolio approach as a business strategy. A similar view has been taken by the Coordinate bench of this Tribunal in the case of Taj Sats Air Catering Ltd. Vs. Additional CIT (2013 (12) TMI 1007 - ITAT MUMBAI ). Thus we are of the view considered opinion that all the insecticide products sold by the assessee to its AE in each country shall be clubbed together for the purpose of determining the arm s length price. Consequently, the addition made by the Assessing Officer is deleted. - Decided in favour of assessee.

Issues Involved:
1. Applicability of Section 14A of the Income Tax Act.
2. Disallowance of interest expenditure under Section 36(1)(iii).
3. Excessiveness of disallowance under Rule 8D.
4. Disallowance of administrative and other expenditures.
5. Computation of book profits under Section 115JB.
6. Allocation of overheads under Sections 80IB/80IC.
7. Re-computation of profits for deduction under Section 80IC.
8. Depreciation rate on UPS and printers.
9. Transfer Pricing adjustments for sales to Associated Enterprises (AEs).

Detailed Analysis:

1. Applicability of Section 14A of the Income Tax Act:
The assessee contested the disallowance of Rs. 22,73,821 under Section 14A, arguing that investments were made in foreign subsidiaries whose dividend income is taxable. The DRP directed the Assessing Officer to exclude investments in foreign companies but upheld disallowance for investments in Indian subsidiaries. The Tribunal noted that the fund flow statement indicated investments were made from the assessee's own funds, and strategic investments in subsidiaries should not attract Section 14A. The Tribunal set aside this issue to the Assessing Officer for fresh consideration, referencing past decisions in similar cases.

2. Disallowance of Interest Expenditure under Section 36(1)(iii):
The Tribunal observed that the assessee's investments were funded from its own cash flow, sufficient to cover the investments. It was noted that the authorities did not dispute the cash flow statement. The Tribunal directed the Assessing Officer to reconsider the disallowance of interest expenditure, taking into account findings from earlier assessment years.

3. Excessiveness of Disallowance under Rule 8D:
The assessee argued that the disallowance of Rs. 2,48,648 was arbitrary and excessive. The Tribunal directed the Assessing Officer to reassess the disallowance, considering the assessee's cash flow and strategic investment nature.

4. Disallowance of Administrative and Other Expenditures:
The Tribunal noted that the DRP confirmed the disallowance of Rs. 8,28,725 for administrative expenses. The Tribunal directed the Assessing Officer to reassess this disallowance in light of earlier findings and relevant case law.

5. Computation of Book Profits under Section 115JB:
The Tribunal found that the disallowance of Rs. 10,77,373 towards earning exempt dividend income was consequential to the issues raised in grounds 1 to 5. Hence, this issue was also set aside to the Assessing Officer for fresh consideration.

6. Allocation of Overheads under Sections 80IB/80IC:
The Tribunal noted that the assessee had consistently allocated overheads in the ratio of sales, which was accepted by the Department until A.Y. 2004-05. For subsequent years, the Assessing Officer reallocated 50% of overheads, reducing the deduction under Sections 80IB/80IC. The Tribunal referenced its earlier decisions in the assessee's favor for A.Y. 2005-06 and 2006-07, maintaining consistency and deleting the addition made by the Assessing Officer.

7. Re-computation of Profits for Deduction under Section 80IC:
The assessee did not press this ground, and it was dismissed as not pressed.

8. Depreciation Rate on UPS and Printers:
The Tribunal referenced the Delhi High Court judgment in CIT Vs. BSES Yamuna Powers Ltd., which held that computer accessories and peripherals are entitled to a 60% depreciation rate. The Tribunal allowed the assessee's claim for a higher depreciation rate.

9. Transfer Pricing Adjustments for Sales to AEs:
The Tribunal considered whether the assessee's sales of insecticide products to AEs should be benchmarked individually or aggregated. The assessee argued for aggregation based on marketing strategies and portfolio approach, supported by OECD guidelines and past Tribunal decisions. The Tribunal accepted the aggregation approach, concluding that all insecticide products sold to AEs in each country should be clubbed for determining the arm's length price, and deleted the addition made by the Assessing Officer.

Conclusion:
The appeal was partly allowed, with several issues remanded to the Assessing Officer for fresh consideration in light of past findings and relevant case law. The Tribunal emphasized consistency and adherence to established legal principles in its directives.

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