2022 (7) TMI 888 - AT - Income Tax

TP adjustment - short term advances made by the assessee to its associated enterprises levying notional interest - evidence as to how the loan given in the present case would qualify as quasi capital and or given for commercial expediency of the assessee - HELD THAT - Counsel was unable to convincingly demonstrate the same except for reiterating his contention before the A.O., that the advances were given to its wholly owned subsidiary newly formed for the purpose of procuring work/business of the assessee in the respective countries where they were set up i.e. Mauritius and Nigeria respectively. The main argument of the assessee against the transfer pricing adjustment made on account of the short term advances given to its subsidiaries in Mauritius and Nigeria, fails. The assessee being unable to demonstrate that the advances were not in the nature of loan/advance but were quasi capital in nature and for commercially expedient purposes of the assessee and hence the LIBOR rate could not be applied to them for the purposes of making ALP adjustment on the interest to be charged, the decision of the Ahmedabad Bench in the case of Micro Inks Ltd. 2013 (8) TMI 332 - ITAT AHMEDABAD is not applicable to the assessee. The assessee being unable to establish with evidence the parity of facts as noted by the ITAT in the said case, of the advance being in the nature of quasi capital given to safeguards the business interest of the assessee, the said decision is of no assistance to the assessee. The advances therefore we hold are in the nature of loans and since no interest has been charged by the assessee on the same, the transfer pricing adjustment made by charging interest applying LIBOR is, we hold, justified. No reason to interfere in the order passed of the Ld. CIT(A) upholding the transfer pricing adjustment. - Decided against assessee. Disallowance of expenses made for the purposes of earning exempt income as per the provisions of Section 14A r.w.r.8D - CIT(A) deleted the disallowance of expenses in relation to investments made by the assessee in foreign subsidiary companies, noting that the dividend income earned therefrom were not exempt, while the rest of the disallowance was upheld - HELD THAT - What is relevant is the explanation of the assessee before the A.O. for the disallowances made by it. Any explanation given to the CIT(A) is of no relevance and as noted above since the assessee had given no plausible explanation for making a suo moto disallowance of Rs. 60,000/- and considering the huge investments made by the assessee averaging Rs. 40 crores and huge dividend income earned by the assessee during the year of approximately 8 crores and also noting the substantial activity in the investments made, moving from Rs. 39 crores to Rs. 40 crores from the beginning to the end of the year, the A.O. had rightly recorded his non satisfaction with the reply of the assessee. Therefore even considering the decision of the Hon'ble Apex Court in the case of Godrej Boyce Manufacturing Co. Ltd. 2017 (5) TMI 403 - SUPREME COURT .pointed out by the assessee before us, we hold that there was valid satisfaction of the A.O. for rejecting the explanation of the assessee. The argument of the Ld. Counsel for the assessee therefore that the A.O. had recorded no satisfaction before proceeding to apply Rule 8D for calculating the disallowance to be made u/s. 14A, is therefore dismissed. Investment in SPVs and those investments which did not earn any dividend income during the year should not be considered for the purpose of applying Rule 8D - We find no merit in the contention raised by the Ld. counsel for the assessee for reducing Strategic Investments made while computing disallowance as per Rule 8D of the Rules. As rightly pointed out by the Ld. DR the Hon'ble apex court in the case of Maxopp 2018 (3) TMI 805 - SUPREME COURT has in very clear terms upheld the theory of apportionment of expenses between taxable and exempt income 'categorically rejecting the dominant purpose theory' as per which the dominant purpose of the investment made would determine the applicability of section 14A. Meaning thereby that whether investments have been made for trading purpose or controlling purposes (strategic investment), it would make no difference to the applicability of section 14A as long as such investments earn exempt dividend income. The theory of apportionment would come into play in such cases and expenses incurred in relation to earning exempt income needs to be disallowed. In view of the same the argument of the Ld. counsel for the assessee seeking exclusion of strategic investments while computing disallowance as per Rule 8D of the Rules is dismissed. Upward adjustment made u/s. 92CA - Arm's Length Price adjustment made to the Success fees paid by the assessee to its subsidiary Kalpataru Power Transmission, USA, for its services in identifying projects in the US market - CIT-A deleted the addition - HELD THAT - CIT(A) noted the nature of activities conducted by the AE for the assessee as being identifying projects, collecting project data and technical specification and transmitting the same to India for analysis. He noted that a success fee of 3% was agreed to be paid to the AE for securing orders and during the impugned year had paid the fee for securing order from Isoluv Ingenieria, SA. He noted that the assessee had benchmarked the transaction using US Census Bureau published annual data relating to sales made by agents on behalf of others and commission earned by such agents as part of annual economic census. He noted that as per the data such agents derived 4.1% commission while the AE had charged only 3%. He found the benchmarking done by the assessee to be correct noting that the Census report relied upon by the assessee was relating to electronics market commission agents and contained actual data and not estimates. He further noted that the comparable selected by the TPO was functionally different from the assessee, being a pharmaceutical company while the assessee was in the business of establishing transmission network. That the CUP method did not approve such functionally distinct comparable to be used for bench marking. Accordingly the Ld. CIT(A) has rejected the bench marking of the A.O. and held that of the assessee to be justified. DR was unable to point out any infirmity in the findings of the Ld. CIT(A) nor do we find any. We therefore uphold the order of the Ld. CIT(A) deleting the adjustment made to the liaison fee on account of Arm's Length Price adjustment made u/s. 92CA(3) of the Act. Addition made on profit on sale of carbon credit - taxability of Carbon Credit i.e. CER certificate (Carbon Credits) issued to the assessee for saving emission of carbon - assessee had two biomass based power generation plant using agricultural waste as fuel at Padampur and Tonk in Rajasthan State - CIT(A) deleted the addition agreeing with the assessee's contention that it was a capital receipt - HELD THAT - CIT(A) relied on a plethora of decisions both of the ITAT and the Hon'ble High Courts of Karnataka and Andhra Pradesh holding CER receipts as capital in nature and income earned there from also being capital receipt. The Ld. D.R. unable to distinguish the case laws - we see no reason to interfere in the order passed by the Ld. CIT(A) deleting the addition made on profit of sale of Carbon Credits. Additional depreciation - Claim of additional depreciation @ 50% of the rate applicable which was allowed in the preceding year on account of the fact that the asset so qualifying was purchased and put to use for less than 180 days and the balance was accordingly claimed by the assessee in the impugned year, which was disallowed by the A.O. but allowed by the Ld. CIT(A) - HELD THAT - CIT(A) has correctly appreciated the facts and loan in perspective and has rightfully came to a conclusion that assessee was entitled to remaining part of 50% of the claim of the additional depreciation eligible under s. 32(1)(iia) of the Act in the subsequent assessment year adopting purposive approach to the issue. We thus find no infirmity in the view taken by the CIT(A) and therefore decline to interfere. Ground No. 3 of Revenue's appeal is accordingly dismissed. Disallowance made u/s. 14A rws Rule 8D - CIT(A) deleting the disallowance of expenses pertaining to foreign investment made by the assessee - HELD THAT - We see no reason to interfere in the order passed by the Ld. CIT(A) deleting the disallowance made u/s. 14A read with Rule 8D of the Rules with respect to foreign investment made by the assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Short Term Advances
2. Disallowance of Expenses under Section 14A
3. Arm's Length Price Adjustment on Success Fees
4. Taxability of Carbon Credits
5. Additional Depreciation Claim

Detailed Analysis:

1. Transfer Pricing Adjustment on Short Term Advances:
The primary issue was the transfer pricing adjustment of Rs. 2,52,319/- made on account of short-term advances given by the assessee to its associated enterprises (AEs) in Mauritius and Nigeria. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) levied notional interest using LIBOR rates. The assessee argued that these advances were quasi-capital and given out of commercial expediency, hence no interest should be charged. However, the CIT(A) upheld the adjustment, relying on the ITAT Ahmedabad decision in Soma Textile Industries vs. Addl. CIT. The ITAT also upheld the CIT(A)'s decision, noting that the assessee failed to demonstrate that the advances were quasi-capital and for commercial expediency. Therefore, the transfer pricing adjustment was justified.

2. Disallowance of Expenses under Section 14A:
The disallowance pertained to expenses incurred for earning exempt income as per Section 14A of the Income Tax Act. The AO applied Rule 8D and computed a disallowance of Rs. 2,05,15,540/-, while the assessee had made a suo moto disallowance of Rs. 60,000/-. The CIT(A) partly upheld the AO's disallowance but excluded investments in foreign subsidiaries. The ITAT upheld the CIT(A)'s decision, noting that the AO had recorded his dissatisfaction with the assessee's explanation for the suo moto disallowance and rightly applied Rule 8D. The ITAT also rejected the assessee's argument to exclude strategic investments and investments that did not earn dividend income during the year, citing the Supreme Court's decision in Maxopp Investments Ltd. vs. CIT.

3. Arm's Length Price Adjustment on Success Fees:
The issue was the deletion of an upward adjustment of Rs. 1,07,38,080/- made to the success fees paid by the assessee to its subsidiary in the USA for identifying projects. The TPO had benchmarked the transaction using a 2% rate from a pharmaceutical company, Cadila Healthcare Ltd. The CIT(A) rejected this benchmark, noting that the nature of services and industry were different. The CIT(A) found the assessee's benchmarking using US Census Bureau data, which showed a 4.1% commission rate, to be appropriate. The ITAT upheld the CIT(A)'s decision, finding no infirmity in the reasoning.

4. Taxability of Carbon Credits:
The issue was whether the income from the sale of Carbon Credits (CERs) amounting to Rs. 5,25,41,076/- was a capital receipt or taxable business income. The AO treated it as business income, while the CIT(A) held it as a capital receipt, following earlier decisions and the ITAT Ahmedabad's decision in Alembic Ltd. The ITAT upheld the CIT(A)'s decision, noting that various High Courts, including Karnataka and Andhra Pradesh, had held that income from the sale of Carbon Credits is a capital receipt.

5. Additional Depreciation Claim:
The issue was the claim of additional depreciation of Rs. 26,41,911/- for assets put to use for less than 180 days in the preceding year. The AO disallowed the claim, but the CIT(A) allowed it, following the ITAT's decision in the assessee's own case for earlier years. The ITAT upheld the CIT(A)'s decision, noting that the assessee was entitled to the balance of the additional depreciation in the subsequent year.

Conclusion:
All appeals by the assessee and the Revenue were dismissed. The ITAT upheld the CIT(A)'s decisions on all issues, including transfer pricing adjustments, disallowance under Section 14A, arm's length price adjustments, taxability of Carbon Credits, and additional depreciation claims.