2022 (10) TMI 251 - AT - Income Tax

Transfer Pricing Adjustment of Interest and Royalty - HELD THAT - The assessee had advanced interest free advertising advances in earlier years to one of its AEs i.e., Titan International Marketing Ltd. (TIML), UK who traded in watches, jewellery clocks. These advances were recovered by the assessee during the year. Following our decision for AY 2007- 08 2022 (10) TMI 182 - ITAT CHENNAI we direct Ld. AO / TPO to apply benchmarking interest at LIBOR 2% on such transactions. The ground stand partly allowed. TPO was on account of Royalty on sales to AE as well as non-AEs - This issue has been restored back by us for AY 2007-08 2022 (10) TMI 182 - ITAT CHENNAI considering the application filed by the assessee under Rule 29 of Income Tax Appellate Tribunal Rules, 1963 for admission of additional evidences. Similar application has been filed for this year also. Since the issue is recurring in nature, the issue of royalty on sales stands restored back to the file of Ld. TPO / AO on similar lines. The corresponding ground stand allowed for statistical purposes. Disallowance u/s 14A - HELD THAT - We find that Rule 8D has been applied by Ld. AO without recording any satisfaction as to why the disallowance computed by the assessee was not acceptable having regards to the accounts of the assessee. In the absence of such a satisfaction, no such disallowance could have been made by Ld. AO as per the ratio laid down by Hon ble Supreme Court in Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT . Therefore, the additional disallowance of Rs.2.63 Lacs as made by Ld. AO is not sustainable. We order so. Ground No.2 stand allowed. Disallowance of Loans Written-off - HELD THAT - The assessee has advanced separate advertising loans to its AEs which are subject matter of determination of ALP by revenue. The loans so granted by the assessee to TIHBV have been stated to have become irrecoverable and accordingly, written-off in the books of accounts. The assessee has accrued interest on these loans in earlier years. Even this interest has not recovered and deduction of the same has been claimed as well as allowed in terms of provisions of Sec.36(1)(vii). In the given factual matrix, we are of the considered opinion that the loans so granted by the assessee are in the capital field only since the same has been further utilized to subscribe to preference share capital which is in the nature of owner s equity. The assessee has granted independent advertising advances to AE which has separately been benchmarked by Ld. TPO and therefore, to say that the loans were for business purpose or in furtherance of business objectives would not be correct. No business expediency of advancement of loan could be demonstrated by the assessee. No further deduction could be allowed to assessee as rightly held by lower authorities. The corresponding grounds stand dismissed. Apportionment of Expenses u/s 80-IC - HELD THAT - Similar petition u/r 29 has been filed by the assessee for this year as well. Facts being pari-materia the same, our adjudication as above shall mutatis-mutandis apply to this year also. The matter, to a limited extent of allocation of depreciation, stands restored back to the file of Ld. AO on similar lines. The grounds relating to allocation of other overhead expenditure stand dismissed. The corresponding grounds stand partly allowed for statistical purposes. Deduction of Software Expenses - AO treated the expenditure as capital expenditure and granted depreciation of 60% - HELD THAT - We direct Ld. AO to allow the expenditure as revenue expenditure and reverse the depreciation granted on the same. The ground stand allowed. TDS credit - HELD THAT - AO is directed to verify the TDS claim and grant TDS credit in accordance with law.

Summary

Issues Involved:
1. Transfer Pricing Adjustment of Interest and Royalty
2. Disallowance under Section 14A
3. Disallowance of Loans Written-off
4. Apportionment of Expenses including Depreciation on Trademark to Compute Deduction under Section 80-IC
5. Nature of Application Software Expenditure
6. TDS Credit
7. Calculation of Interest under Section 234B/234C

Detailed Analysis:

1. Transfer Pricing Adjustment of Interest and Royalty:
The assessee's international transactions with its Associated Enterprises (AEs) were referred to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP). The TPO proposed an adjustment of Rs.552.46 Lacs, which included Rs.137.27 Lacs for interest on advertising advances to Titan International Marketing Ltd. (TIML) and Rs.415.18 Lacs for royalty levied on AEs and deemed AEs. The tribunal directed the AO/TPO to apply a benchmarking interest rate of LIBOR+2% on the advertising advances and restored the issue of royalty on sales to the file of the AO/TPO for re-examination, similar to the previous year's adjudication.

2. Disallowance under Section 14A:
The AO computed a disallowance of Rs.2.69 Lacs under Rule 8D(2), which was confirmed by the Dispute Resolution Panel (DRP). However, the tribunal found that the AO did not record any satisfaction regarding the disallowance computed by the assessee, as required by the Supreme Court's decision in Maxopp Investment Ltd. V/s CIT. Therefore, the additional disallowance of Rs.2.63 Lacs was deemed unsustainable and was ordered to be deleted.

3. Disallowance of Loans Written-off:
The assessee sought deduction for foreign currency loans written-off, amounting to Rs.3815.45 Lacs, advanced to its subsidiary Titan International Holding BV (TIHBV). The AO disallowed the write-off, considering the loans as long-term and in the capital field, not for day-to-day business transactions. The tribunal upheld the AO's decision, noting that the loans were utilized for subscribing to preference share capital, which is in the nature of owner's equity, and not for business purposes.

4. Apportionment of Expenses including Depreciation on Trademark to Compute Deduction under Section 80-IC:
The AO reallocated certain corporate overhead expenditures and depreciation on trademarks for computing deduction under Section 80-IC, reducing the deduction by Rs.18.02 Crores. The tribunal confirmed the AO's method of allocation based on turnover for overhead expenses but directed the AO to re-examine the allocation of depreciation on trademarks, considering additional evidences submitted by the assessee.

5. Nature of Application Software Expenditure:
The AO treated the application software expenses of Rs.430.22 Lacs as capital expenditure and granted depreciation of 60%. The tribunal, following its previous decision for AY 2007-08, directed the AO to allow the expenditure as revenue expenditure and reverse the depreciation granted.

6. TDS Credit:
The assessee claimed a short grant of TDS credit amounting to Rs.11.03 Lacs. The tribunal directed the AO to verify the TDS claim and grant the credit in accordance with the law.

7. Calculation of Interest under Section 234B/234C:
The assessee contested the computation of interest under Sections 234B and 234C. The tribunal noted that the interest computation is consequential in nature and does not require specific adjudication.

Conclusion:
The appeal was partly allowed, with the tribunal providing specific directions on each issue, including re-examination of certain matters by the AO/TPO and allowing certain claims made by the assessee.