2019 (11) TMI 1026 - AT - Income Tax

TP Adjustment - provision of corporate guarantee as an international transaction - HELD THAT - After considering the decision of this Tribunal in Glenmark Pharmaceuticals Vs ACIT 2013 (11) TMI 1583 - ITAT MUMBAI the DRP in principle accepted that the adjustment on account of corporate guarantee is to be restricted by applying ALP at 0.53%, however, the DRP has not passed directions in conformity of the decision of this Tribunal in assessee s own case. This is a clear case of judicial indiscipline on the part of the DRP who was performing quasi-judicial functions while passing the directions U/s 144C(5) of the Act. The DRP is supposed to decide the matters independently and as per the law and not supposed to act as a guardian or revenue collecting authority like tax authorities. Thus, we find that this action of the DRP is highly contradiction to the object for which the said panel was constituted under the provisions of the Act. Accordingly, ground No. 1 of the assessee s appeal is dismissed and ground No. 2 of the appeal is allowed. Disallowance of loss on sale of shares of the subsidiary company M/s Jewel Jems USA Inc. - HELD THAT - For the A.Y. 2012-13, the Tribunal in assessee s own case has considered the issue of loss in respect of investment made in the equity shares of the subsidiary and after considering and analyzing the facts as well as the law on the point has held that the USA subsidiaries were set up to expand its business and the expenditure was purely for business expansion of the assessee s product. Thus, the investment made were held to be out of commercial expediency and business interest and consequently the loss of such investment in the 100% subsidiary not recoverable was an allowable business loss. Interest on income tax refund - assessee objected this addition before the DRP on the ground that no such interest was received by the assessee on the refund of income tax - HELD THAT - DRP directed the A.O. to verify this fact of receipt of interest on refund and then compute the income. Since there is a typographical mistake in mentioning the Section which is 234D instead of Section 244A of the Act the A.O. has repeated the addition. It is apparent that the A.O. while passing the final order has not given effect to the directions of the DRP, accordingly, we direct the A.O. to verify the fact whether this interest was actually paid to the assessee or not and then decide this issue after giving an opportunity of hearing to the assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Corporate Guarantee
2. Allowance of Loss on Sale of Shares of Subsidiary
3. Disallowance under Section 14A read with Rule 8D
4. Addition on Account of Interest on Income Tax Refund
5. Restriction on Set-off of Brought Forward Losses

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Corporate Guarantee:
The assessee challenged the adjustment of ?3,84,66,628/- made by the DRP/A.O./TPO for considering the provision of corporate guarantee as an international transaction. The assessee argued that the corporate guarantee provided did not fall within the definition of an international transaction and thus no TP adjustment was necessary. The Tribunal noted that in the assessee's own case for A.Y. 2013-14, the ALP of the guarantee commission was restricted to 0.53%. The Tribunal reiterated that the arm's length price of the guarantee fee should be 0.53%, aligning with the precedent set by the Mumbai Tribunal in the case of Glenmark Pharmaceuticals vs. ACIT, which was upheld by the Hon’ble Bombay High Court and the Supreme Court. The Tribunal criticized the DRP for not adhering to judicial discipline and directed the A.O./TPO to re-compute the adjustment by applying the ALP at 0.53%.

2. Allowance of Loss on Sale of Shares of Subsidiary:
The assessee claimed a business loss of ?50,72,57,000/- on the sale of shares of its wholly-owned subsidiary, M/s Jewel Gems USA Inc. The A.O. disallowed this claim, but the DRP noted that the issue was covered by the Tribunal's decision in the assessee’s favor for A.Y. 2012-13, which was upheld by the Hon’ble High Court. The Tribunal reiterated its previous finding that the investment in the subsidiary was made for business expansion and thus the loss was an admissible business loss. The Tribunal dismissed the SLP filed against the High Court's decision, confirming the allowability of the loss as a business loss. Consequently, the Tribunal allowed the assessee's claim.

3. Disallowance under Section 14A read with Rule 8D:
The assessee did not press this ground due to the smallness of the amount involved (?13,616/-). Consequently, the Tribunal dismissed this ground as not pressed.

4. Addition on Account of Interest on Income Tax Refund:
The assessee contended that no interest on income tax refund was received, despite it being reflected in Form 26AS. The DRP directed the A.O. to verify whether the interest was actually paid to the assessee. The Tribunal noted a typographical error in the DRP's order and directed the A.O. to verify the receipt of interest and decide the issue accordingly after providing an opportunity of hearing to the assessee.

5. Restriction on Set-off of Brought Forward Losses:
The assessee stated that the A.O., while passing the rectification order, allowed the claim for set-off of brought forward losses. Therefore, this ground was not pressed and was dismissed as infructuous.

Conclusion:
The Tribunal allowed the appeal in part, directing the A.O./TPO to re-compute the TP adjustment for the corporate guarantee at 0.53%, allowed the business loss on the sale of shares of the subsidiary, dismissed the ground on disallowance under Section 14A as not pressed, directed verification of the interest on income tax refund, and dismissed the ground on set-off of brought forward losses as infructuous.