2021 (2) TMI 576 - AT - Income Tax

TP Adjustment - International transaction - transaction relating to provision of letter of comfort/support with AEs, is not at arm's length - Commissioner (Appeals) held that provision of letter of comfort to the AE is an international transaction - Equating the letter of comfort/support to corporate guarantee, learned Commissioner (Appeals) determined the arm's length price of provision of letter of comfort/support at 20% of 0.20% which is the arm's length price determined for provision of corporate guarantee - HELD THAT - After going through sample copy of letter of comfort/support given to the bank towards loan availed by the AE, we have noticed that there is no liability or responsibility fastened with the assessee for making good the liability of the AE in case of any default. There is nothing on record to suggest that in case of any default by the AE, the outstanding loan will be recovered from the assessee. Pertinently, while sustaining a part of the adjustment made by the TPO, learned Commissioner (Appeals) has equated the letter of comfort/support to corporate guarantee - on perusal of the letter of comfort/support, it cannot be construed to be in the nature of any sort of guarantee in respect of the loan liability of the AE. The only promise made by the assessee is, it will not make any divestment of the shares during the currency of the loan. In our view, in no way it makes the letter of comfort/support a guarantee of any kind as there is no financial implication on the assessee - Reading of section 92B Explanation 1(c), we are of the considered opinion that provision of letter of comfort/support cannot be termed as an international transaction within the meaning of the aforesaid provision. Our aforesaid view is well supported by the decisions cited by the learned Counsel for the assessee. Accordingly, we delete the addition. Disallowance u/s. 14A of the Act r.w.r. 8D - Mandation of recording proper satisfaction by AO before making addition - HELD THAT - Without recording a proper satisfaction to the effect that the computation made by the assessee is incorrect having regard to the books of account maintained, has proceeded to compute the disallowance simply on the reasoning that disallowance under section 14A of the Act has to be made by applying the methodology of Rule 8D. In our view, the aforesaid reasoning of the Assessing Officer is contrary to the mandate of section 14A(2) - no reason to uphold the disallowance made. Hence, we delete the same. This ground is allowed. Taxability of royalty income received from a subsidiary in Egypt - assessee has claimed that the royalty income is not taxable in India in view of Article 13 of India-Egypt tax treaty - HELD THAT - No doubt, this is a purely legal issue. Further, we find that identical issue raised by the assessee through additional ground in Assessment Years 2008-09 and 2006-07 has been restored back to the Assessing Officer for fresh adjudication, keeping in view the provisions of the tax treaty between India and Egypt. We have also noted that while completing the assessment for Assessment Year 2012-13, the Assessing Officer has accepted assessee's claim that royalty income is not taxable in view of Article 13 of India-Egypt tax treaty. In view of the above, we are inclined to restore this issue to the Assessing Officer for fresh adjudication keeping in view Article 13 of the India Egypt tax . Deduction of education cess paid on income-tax as allowable expenditure - HELD THAT - We find that the issue is squarely covered by the decision of the Hon'ble jurisdictional High Court in case of Sesa Goa Ltd. vs. JCIT 2020 (3) TMI 347 - BOMBAY HIGH COURT wherein, it is held that education cess not being in the nature of rate or tax will not be covered u/s. 40(a)(ii). Even, different benches of the Tribunal have expressed identical view. In view of the above, we are unable to accept the submissions of learned Departmental Representative. Respectfully following the decision of the Hon'ble jurisdictional High Court (supra) and other decisions cited before us by the learned Counsel for the assessee, we hold that the assessee is eligible to claim deduction of education cess. This ground is allowed Applicability of beneficial rate as per the applicable DTAA to the dividend distribution tax (DDT) paid under section 115-O of the Act and has claimed refund of the excess amount - HELD THAT - We restore the issue to the Assessing Officer for examining assessee's claim of applicability of beneficial rate of tax as per the applicable DTAA to the DDT paid under section 115-O. Adjustment of corporate guarantee to 0.2% p.a - HELD THAT - In assessee's own case Tribunal in separate orders has accepted commission on corporate guarantee provided to AEs charged at 0.20% to be at arm's length. The aforesaid decisions of the Tribunal have been upheld by the jurisdictional High Court while dismissing the appeals of the revenue. The latest order passed by the Hon'ble High Court in this regard is for the assessment year 2008-09 2019 (2) TMI 819 - BOMBAY HIGH COURT , in Income Tax Appeal No. 1564 of 2016 order dated 06-02-2019. Therefore, following the consistent view of the co-ordinate benches and the Hon'ble jurisdictional High Court, we uphold the decision of learned Commissioner (Appeals) on this issue. Ground of the revenue is dismissed. Deduction under section 35(2AB) - HELD THAT - As decided in own case 2014 (1) TMI 16 - ITAT MUMBAI as directed the Assessing Officer to allow assessee's claim of deduction, if, on verification it is found that the expenditure claimed was actually incurred on research and development activity irrespective of the fact whether the entire amount was approved by DSIR or not. Since, learned Commissioner (Appeals) has decided the issue keeping in view the aforesaid direction of the Tribunal, in our view, there is no infirmity in such decision. Accordingly, ground raised is dismissed. Disallowance made on account of expenditure incurred on television advertisement in relation to corporate advertisement - HELD THAT As could be seen, this is a recurring dispute between the parties since assessment year 2006-07 onwards. While deciding the issue in assessment years 2006-07 and 2007-08, the Tribunal has deleted similar disallowance made by the Assessing Officer. The aforesaid decision of the Tribunal has also been upheld by the Hon'ble jurisdictional High Court. In the latest order passed by the Tribunal for the assessment year 2008-09 2015 (11) TMI 1745 - ITAT MUMBAI , the Tribunal has reiterated its earlier view. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground is dismissed. Additional depreciation - use of asset less than 180 days - HELD THAT - As assessee had purchased and installed new plant and machinery in the preceding assessment year which is eligible for additional depreciation @20%. However, since the new assets were put to use for less than 180 days in the preceding assessment year, the claim of additional depreciation allowable at 20% was restricted to half of it, i.e. 50%. Thus, in effect, the assessee was allowed additional depreciation of 10%. Now, it is well settled by a number of judicial precedents that if for use of new plant and machinery for a period of less than 180 days the entire amount of additional depreciation cannot be claimed in the subject assessment year, the balance unclaimed amount can be claimed in the subsequent assessment year. It is also a fact on record, against similar claim allowed by learned Commissioner (Appeals) in assessee's own case in Assessment Year 2008-09, the revenue has not preferred any appeal before the Tribunal. In view of the above, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground raised is dismissed. TDS u/s 194H - Disallowance of expenditure incurred on trip scheme - expenditure incurred by the assessee for trip scheme is - Whether in the nature of commission paid to dealers and distributors; hence, subject to deduction of tax - HELD THAT - As the entire trip scheme is for the purpose of expanding assessee's business by encouraging the dealers and distributors to achieve a specific target of purchase. Thus, the scheme is closely linked to assessee's business activity. It is also a fact that the assessee has not paid any amount to the dealers and distributors, but amount spent has been paid to SOTC for organizing the trip. It is also a fact on record that the amounts paid to SOTC has been subjected to TDS as per the relevant provision. Therefore, the allegation of the Assessing Officer that the amount has not been subjected to deduction of tax is without any basis. As regards the applicability of section 194H of the Act, by no means, the Assessing Officer has established on record that dealers/distributors are agents of the assessee. Further, as we find, the trip scheme has been introduced by the assessee from past 20 years and the deduction claimed by the assessee on account of such trip scheme has never been disallowed by the Assessing Officer except for the impugned assessment year. Therefore, even applying the rule of consistency, the expenditure claimed by the assessee has to be allowed.

Summary

Issues Involved:
1. Addition on account of transfer pricing adjustment.
2. Disallowance under section 14A of the Income Tax Act.
3. Taxability of royalty income received from a subsidiary in Egypt.
4. Deduction of education cess paid on income-tax.
5. Applicability of beneficial rate as per DTAA to the dividend distribution tax (DDT).
6. Adjustment of corporate guarantee commission.
7. Disallowance on account of letter of comfort.
8. Claim of deduction under section 35(2AB) of the Act.
9. Disallowance of expenditure incurred on television advertisement.
10. Claim of additional depreciation.
11. Disallowance of expenditure incurred on trip scheme.

Detailed Analysis:

1. Addition on account of transfer pricing adjustment:
The assessee challenged an addition of ?3,28,00,000/- related to transfer pricing adjustment for providing non-contractual letters of comfort/support to banks on behalf of its subsidiaries without charging any fee. The TPO determined an arm's length fee of 1.41% of the loan availed by the AEs, proposing an adjustment of ?1,51,71,220. The Commissioner (Appeals) equated the letter of comfort to a corporate guarantee and determined the arm's length price at 20% of 0.20%. The Tribunal found no financial implication on the assessee from the letter of comfort/support and concluded that it does not constitute an international transaction under section 92B of the Income Tax Act. Hence, the addition was deleted.

2. Disallowance under section 14A of the Income Tax Act:
The assessee contested the disallowance of ?102.26 lakhs under section 14A r.w.r. 8D. The Tribunal noted that the Assessing Officer did not record proper satisfaction before rejecting the assessee's computation of disallowance. The Tribunal referred to its earlier decision and the jurisdictional High Court's judgment, which upheld the deletion of similar disallowance. Consequently, the disallowance was deleted.

3. Taxability of royalty income received from a subsidiary in Egypt:
The assessee claimed that royalty income of ?5.46 crores received from its Egyptian subsidiary is not taxable in India under Article 13 of the India-Egypt DTAA. The Tribunal restored the issue to the Assessing Officer for fresh adjudication, considering the provisions of the DTAA and the Tribunal's decisions in earlier years.

4. Deduction of education cess paid on income-tax:
The assessee claimed deduction of education cess as an allowable expenditure. The Tribunal relied on the jurisdictional High Court's decision in Sesa Goa Ltd. and other similar rulings, which held that education cess is not in the nature of a rate or tax under section 40(a)(ii). Hence, the deduction was allowed.

5. Applicability of beneficial rate as per DTAA to the dividend distribution tax (DDT):
The Tribunal restored the issue to the Assessing Officer to examine the applicability of the beneficial rate under the applicable DTAA to the DDT paid under section 115-O of the Act.

6. Adjustment of corporate guarantee commission:
The revenue challenged the decision to restrict the adjustment of corporate guarantee commission to 0.2% p.a. The Tribunal upheld the Commissioner (Appeals)'s decision, noting that in earlier years, the Tribunal and the jurisdictional High Court had accepted the commission at 0.20% as arm's length.

7. Disallowance on account of letter of comfort:
The Tribunal, in line with its decision on the assessee's appeal, held that the provision of letter of comfort does not constitute an international transaction under section 92B. Hence, the adjustment was deleted.

8. Claim of deduction under section 35(2AB) of the Act:
The revenue contested the deduction under section 35(2AB) based on the DSIR certificate. The Tribunal upheld the Commissioner (Appeals)'s direction to verify the nature of the expenditure and allow the deduction if it was for R&D purposes, irrespective of DSIR approval.

9. Disallowance of expenditure incurred on television advertisement:
The Tribunal upheld the Commissioner (Appeals)'s decision to delete the disallowance of expenditure on TV advertisement, noting that similar disallowances in earlier years were deleted by the Tribunal and upheld by the jurisdictional High Court.

10. Claim of additional depreciation:
The Tribunal upheld the Commissioner (Appeals)'s decision to allow the carried-over additional depreciation from the preceding year, following judicial precedents and noting that the revenue did not appeal against a similar decision in the earlier year.

11. Disallowance of expenditure incurred on trip scheme:
The Tribunal upheld the Commissioner (Appeals)'s decision to delete the disallowance of expenditure on the trip scheme, noting that the scheme was for business purposes, the amount was paid to SOTC and subjected to TDS, and there was no principal-agent relationship requiring TDS under section 194H.

Conclusion:
The assessee's appeal was partly allowed, and the revenue's appeal was dismissed.