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2021 (12) TMI 1167 - AT - Income TaxTP Adjustment - payment of royalty at 4% to be at arm s length - HELD THAT - As relying on assessee's own case accepting the payment of royalty at 4% to be at arm s length, we hold that the payment of royalty at 4% in the year under consideration is to be treated as being at arm s length. Accordingly ground is allowed. Payment of Interest on Compulsory Convertible Debentures - Whether TPO and DRP erred in treating CCDs as ECBs and benchmarked the interest rate against LIBOR rate? - CCDs is a hybrid instrument and cannot be per se treated as ECB / loan - HELD THAT - In the instant case, admittedly, the CCDs are issued in INR, interest is paid in INR and CCD s are repaid also in INR. Therefore, placing reliance on the judgment of the Hon ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd 2015 (3) TMI 1031 - DELHI HIGH COURT we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly. Disallowance u/s 14A computed as per Rules 8D(ii) and (iii) - HELD THAT - It is an undisputed fact that the assessee did not earn any exempt income during the year under consideration. It is a settled position that in the absence of any exempt income, no disallowance can be made u/s 14A of the Act. See Quest Global Engineering Services Pvt. Ltd. 2021 (3) TMI 434 - KARNATAKA HIGH COURT The Hon ble Bombay High Court in the case of India Debt Management (P.) Ltd. 2019 (9) TMI 920 - BOMBAY HIGH COURT has held that when the assessee does not receive any dividend income, no disallowance can be made u/s 14A - thus disallowance made u/s 14A of the Act, ought to be deleted, since the assessee was not in receipt of any exempt income during the relevant assessment year. Disallowance of deduction of expenditure as per first proviso to section 40(a)(ia) - HELD THAT - The assessee is entitled to claim the deduction of expenditure (as per first proviso to section 40(a)(ia) of the Act) in the year the tax on the same has been deducted at source and remitted to the Government account. Therefore, we reiterate the directions to the DRP and remit the matter to the A.O. The A.O. is directed to grant deduction of aforesaid expenditure, if it is found that tax on the same has remitted to the Government account during the relevant assessment year. It is ordered accordingly. Disallowance u/s 40(a)(ia) - DRP rejected the claim of the assessee on the ground that the expenses do not pertain to the year under consideration - HELD THAT - As rightly pointed out by the DRP, the expenditure claimed as deduction does not pertain to the year under consideration. If at all there is an inadvertent offer to tax in the previous year, namely, assessment year 2010-2011, the assessee ought to have taken correctional steps for the assessment concluded for assessment year 2010-2011 and not for the relevant assessment year. There is no statutory provision which provide for claiming amount wrongly shown as income in one year as deduction / expenditure in any subsequent year (unlike first proviso to section 40(a)(ia) whereby the assessee is permitted to claim deduction of the expenditure in the year in which the tax has been deducted on such expenditure and remitted to the Government account). Therefore, we affirm the view taken by the DRP. Disallowance of expenditure u/s 40(a)(ia) - assessee suo moto had disallowed a sum for non-deduction of tax at source - AO recharacterized the same as a disallowance u/s 37 - HELD THAT - AO held the expenditure is not an admissible expenditure u/s 37 - DRP has not adjudicated the issue holding that the objection of the assessee does not arise out of the variation in the returned income. The issue whether the impugned expenditure can be disallowed u/s 37 has not been dealt with either by the AO nor by the DRP. AO has authority to hold that expenditure (though provision expenditure) is not an allowable deduction u/s 37 of the Act. Only those expenditure otherwise allowable u/s 30 to 38 of the Act is deductible as per proviso to section 40(a)(ia) - Therefore, any expenditure not for the purpose of business, the A.O. can certainly re-characterize the same as not allowable expenditure u/s 37 - as mentioned earlier, the A.O. nor DRP has not examined whether the said expenditure is allowable business expenditure u/s 37 - A.O. held that provision disallowed by the assessee u/s 40(a)(ia) of the Act cannot be allowed as deduction in the subsequent assessment year, since, the expenditure does not pertain to the subsequent year. DRP did not adjudicate the issue by observing that there is no variation to the returned income on this count. Therefore, the matter needs to be reconsidered by the AO afresh.
Issues Involved:
1. Transfer pricing adjustment for payment of royalty. 2. Transfer pricing adjustment for payment of interest on Compulsorily Convertible Debentures (CCDs). 3. Disallowance under Section 14A of the Income Tax Act. 4. Disallowance under Section 40(a) of the Income Tax Act. 5. Recharacterizing the suo moto disallowance under Section 40(a) as a disallowance under Section 37 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment for Payment of Royalty: The assessee benchmarked the payment of royalty by aggregating it with other transactions using the Transactional Net Margin Method (TNMM) and concluded a 4% royalty payment as being at arm’s length. The Transfer Pricing Officer (TPO) rejected this method, applied the Comparable Uncontrolled Price (CUP) method, and determined the Arm's Length Price (ALP) at 1%. The Dispute Resolution Panel (DRP) upheld the TPO’s decision, relying on previous directions for the assessee’s case for the assessment year 2010-2011. The Tribunal, however, noted that in previous assessment years (2009-2010 and 2010-2011), the TPO had accepted a 4% royalty payment as being at arm’s length after remand from the Tribunal. Therefore, the Tribunal held that the 4% royalty payment for the year under consideration should be treated as being at arm’s length, allowing the assessee's ground. 2. Transfer Pricing Adjustment for Payment of Interest on CCDs: The assessee issued CCDs bearing interest at 9% per annum and benchmarked this transaction using the CUP method, concluding it to be at arm’s length. The TPO recharacterized the CCDs as External Commercial Borrowings (ECBs) and benchmarked the interest rate against the LIBOR rate, resulting in a lower acceptable interest rate. The DRP upheld the TPO’s decision. The Tribunal, referencing the Hyderabad Bench’s decision in ADAMA India (P.) Ltd. v. DCIT and the Delhi High Court’s decision in CIT v. Cotton Naturals (I) (P.) Ltd., held that CCDs, being denominated and repaid in INR, cannot be benchmarked against LIBOR. Therefore, the Tribunal accepted the assessee’s benchmarking method and allowed the ground. 3. Disallowance under Section 14A of the Income Tax Act: The Assessing Officer (AO) made a disallowance under Section 14A, computed as per Rules 8D(ii) and (iii) of the Income-tax Rules, 1962, which the DRP affirmed. The assessee contended that no exempt income was earned during the assessment year, thus no disallowance under Section 14A should be made. The Tribunal, relying on the Karnataka High Court’s decision in CIT & Anr. v. Quest Global Engineering Sources Pvt. Ltd. and the Bombay High Court’s decision in India Debt Management (P) Ltd., held that in the absence of exempt income, no disallowance under Section 14A can be made, allowing the assessee's ground. 4. Disallowance under Section 40(a) of the Income Tax Act: The assessee claimed a deduction of ?10,04,41,779 under Section 40(a)(ia) for tax deducted and remitted during the relevant year. The TPO did not allow this deduction. The DRP directed the AO to verify the tax deduction and remittance and allow the deduction if verified. The AO did not implement these directions. The Tribunal reiterated the DRP’s directions and remitted the matter to the AO for verification and allowance of the deduction, allowing the ground for statistical purposes. 5. Recharacterizing the Suo Moto Disallowance under Section 40(a) as a Disallowance under Section 37: The assessee had disallowed ?5,42,35,783 suo moto for non-deduction of tax at source. The AO recharacterized this as a disallowance under Section 37, which the DRP did not adjudicate. The Tribunal noted that the AO and DRP did not examine whether the expenditure was allowable under Section 37. The Tribunal remitted the matter to the AO for fresh consideration, allowing the ground for statistical purposes. Conclusion: The Tribunal partly allowed the appeal, providing relief on the issues of transfer pricing adjustments for royalty and interest on CCDs, disallowance under Section 14A, and directed verification and allowance of deductions under Section 40(a). The Tribunal remitted the matter regarding the recharacterization of the suo moto disallowance for fresh consideration.
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