2023 (12) TMI 1299 - AT - Income Tax

TP Adjustment - Corporate guarantee fee - HELD THAT - Corporate guarantee given by the assessee on behalf of its AE for availing loan facility is for the purpose of reducing the interest rate charged by the banks and while determining the ALP of the said transaction the same has to be considered on the perspective of the benefit received by the AE as per the interest saving approach by reason of the corporate guarantee given by the assessee and to compare the same as to what would be the interest rate charged by the bank for the loan availed by the AEs if the corporate guarantee is not given by the assessee for availing the said loan Reliance placed on the decision of Everest Kento Cylinders 2015 (5) TMI 395 - BOMBAY HIGH COURT cannot be the basis for holding the corporate guarantee commission to be 0.5% which was held to be an appropriate rate by the Hon ble High Court in case of that assessee and for that particular year under consideration. It is evident that 0.5% cannot be a standard rate for charging corporate guarantee commission and the same has to be determined in each case and for each year based on the credit rating of AE comparable loan transactions where guarantees are issued and non guaranteed loans by working out interest saving and then sharing it between transacting parties. We therefore direct the ld. A.O./TPO to determine the ALP on corporate guarantee commission on the basis of the interest saving approach of the said transaction. The assessee is also directed to bench mark the said transaction where it has already been held to be an international transaction and on the basis of which the ld. A.O./TPO has to determine the ALP of the corporate guarantee commission as per the provisions of section 92CA of the Act which makes it compulsory to benchmark the international transactions every year - We therefore remand this issue back to the ld. A.O. Assesee ground allowed for statistical purpose. Disallowance u/s. 14A r.w.r. 8D - assessee contended that the investments made in the subsidiary companies are strategic investments which should not be considered for computing the disallowance under Rule 8D(2)(iii) - HELD THAT - We deem it fit to direct the ld. A.O. to restrict the disallowance to the extent of investment which has yielded in earning of the exempt income and not those investments where the assessee has not earned any exempt income for the purpose of computing the disallowance u/s. 14A read with Rule 8D. See Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI - We therefore remand this issue back to the file of the ld. A.O. for recomputing the disallowance u/s. 14A read with Rule 8D to the extent of the investments made by the assessee which has resulted in earning of the exempt income. Nature of income - Interest income on temporary deposits - A.O. observed that the assessee has availed external commercial borrowings (ECB) and temporary surplus of such borrowings were deposited in bank fixed deposit out of which the assessee has earned an interest was netted of against the interest expenses which was capitalized - AO taxing the said interest income as income from other source u/s. 56 - HELD THAT - We do not find any observation by the lower authorities as to how the borrowed fund and the surplus amount parked in the fixed deposits are not inextricably linked to the setting up of the new unit by the assessee. In the absence of such observation and by placing reliance on the decision cited by the assessee we hold that the interest income out of the fixed deposits which is made from the ECB has to be capitalized as capital receipt and not revenue receipt. As decided in Indian Oil Panipat Power Consortium 2009 (2) TMI 32 - DELHI HIGH COURT funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant the interest earned by the assessee could not be treated as income from other sources. In the result we answer the question as framed in favour of the assessee. Additional depreciation u/s. 32(1)(ii) - additional depreciation for plant and machinery which was purchased and put to use for less than 180 days during the financial year - AO held additional depreciation is to be restricted as per the second proviso to section 32(1)(ii) which restricts the claim of additional depreciation to the amount otherwise allowable and in the absence of the explicit provision the balance 50% of the additional deprecation would lapse - explicit provision applies 50% of the said claim was introduced by Finance Act 2015 which is w.e.f. 01.01.2016 vide third proviso to sub section (1) of section 32 and since the said provision is applicable prospectively the assessee s claim of additional deprecation was disallowed by the ld. A.O - HELD THAT - As this issue has been squarely covered by the decision of the Hon ble Jurisdictional High Court in the case of CIT vs. Rashtriya Chemicals and Fertilizers Ltd. ( 2021 (10) TMI 1269 - BOMBAY HIGH COURT wherein it was held that the 3rd proviso to clause (ii) of sub section (1) of section 32 of the Act being clarificatory in nature would apply to previous years also. As seen that the Karnataka High Court in Rittal India Pvt. Ltd., ( 2015 (1) TMI 1248 - KARNATAKA HIGH COURT even without the aid of the statutory amendment held that remaining 50% unclaimed depreciation would be available to the Assessee in the succeeding Assessment Year. Now the legislation has amended the provision by adding a proviso which specifically recognizes the said right. The Madras High Court in Shri T. P. Textiles Pvt. Ltd. ( 2017 (3) TMI 739 - MADRAS HIGH COURT ruled that such proviso being clarificatory in nature would apply to pending cases covering past period also. Thus we hold that the assessee is entitled to the additional depreciation claimed u/s. 32(1)(ii) of the Act and therefore find no infirmity in the order of the ld. CIT(A). Ground no. 1 raised by the Revenue is dismissed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Corporate Guarantee
2. Disallowance under Section 14A
3. Additional Depreciation
4. Interest Income on Temporary Deposits
5. Disallowance on Expenditure for Foreign Travel of Director's Relative

Summary:

1. Transfer Pricing Adjustment on Corporate Guarantee
The assessee challenged the transfer pricing adjustment on corporate guarantee given to its associated enterprises (AEs). The Assessing Officer (A.O.) and Transfer Pricing Officer (TPO) considered it an international transaction and applied a 1.75% rate for the guarantee commission. The CIT(A) reduced this rate to 0.70%, based on a comparable rate from Standard Chartered Bank. The Tribunal observed that the corporate guarantee given by the assessee should be benchmarked based on the interest-saving approach and remanded the issue back to the A.O./TPO for re-evaluation.

2. Disallowance under Section 14A
The assessee contested the disallowance under Section 14A read with Rule 8D, arguing that investments in subsidiary companies should not be considered for disallowance. The A.O. computed the disallowance at Rs. 66,83,290/-, while the CIT(A) upheld this. The Tribunal directed the A.O. to recompute the disallowance, limiting it to investments that yielded exempt income, following the decision in ACIT vs. Vireet Investments Pvt. Ltd.

3. Additional Depreciation
The Revenue challenged the CIT(A)'s decision to allow additional depreciation for the assessee. The Tribunal upheld the CIT(A)'s decision, referencing the Karnataka High Court's ruling in M/s. Rittal India Pvt. Ltd. vs. ACIT and the Bombay High Court's decision in CIT vs. Rashtriya Chemicals and Fertilizers Ltd., which allowed the carry-forward of unclaimed additional depreciation to subsequent years.

4. Interest Income on Temporary Deposits
The assessee argued that interest earned from temporary deposits of external commercial borrowings (ECB) should be capitalized as it was inextricably linked to the setting up of a new plant. The A.O. treated this interest as income from other sources. The Tribunal, relying on the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd. vs. ITO, held that such interest should be capitalized and not taxed as revenue receipt, remanding the issue back to the A.O. for proper evaluation.

5. Disallowance on Expenditure for Foreign Travel of Director's Relative
The assessee did not press this ground, and thus, the Tribunal dismissed it.

Conclusion:
The appeals were partly allowed for statistical purposes, with specific issues remanded back to the A.O./TPO for re-evaluation based on the Tribunal's observations and legal precedents. The Tribunal upheld the CIT(A)'s decision on additional depreciation and directed the re-computation of disallowance under Section 14A.