2022 (12) TMI 1084 - AT - Income Tax

TP adjustment - upward adjustment on notional interest on advance made to wholly subsidiaries/associated enterprises of the assessee - HELD THAT - We noted that this issue is covered in the case of CIT v. Everest Kanto Cylinder Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT wherein, the Libor 200 bps point is accepted at the bench mark and hence, respectfully following the same, we upheld the order of the AO/TPO. This issue of the assessee is dismissed. Disallowance of expenses relatable to exempt income by invoking provisions of Sec.14A r.w.r.8D and making disallowance of interest u/r.8D(2)(ii) and u/r.8D(2)(iii) - HELD THAT - We noted that the AO simpliciter given his findings that the disallowance computed by the assessee is not correct, but he has not examined the accounts of the assessee and disallowance made even though offered by the assessee. We noted that the AO could not find any fault as to how this disallowance is not correct. There is no satisfaction recorded by the AO in regard to this disallowance and hence, there is no satisfaction recorded by the AO in terms of sec.14A of the Act. This issue of the assessee is allowed. Disallowance of claim of deduction u/s.80JJAA - AO required the assessee as to whether any of the regular workmen as mentioned in Column No.7 was employed for a period of less than 300 days during the previous year - HELD THAT - The Hon'ble High Court of Karnataka in the case of Texas Instruments India (P.) Ltd. 2021 (4) TMI 1049 - KARNATAKA HIGH COURT has considered the issue of amendment brought in Sec.80JJAA of the Act, by bringing proviso which has relaxed condition in regard to number of days of employment of new employees. Once, one has interpreted the provision and held the same as retrospective, no contrary decision was pointed out by the Revenue before us. We in principle allow the claim of the assessee, but subject to verification by the AO. The AO will carry out the verification in terms of amendment bringing the provisions of Sec.80JJAA and then will consider the eligibility of claim of deduction. Accordingly, appeal is allowed, but for verification purpose remanded back.

Summary

Issues Involved:
1. Upward adjustment on notional interest on advances to wholly-owned subsidiaries/associated enterprises.
2. Disallowance of expenses related to exempt income under Sec.14A r.w.r.8D.
3. Disallowance of deduction claim under Sec.80JJAA.

Issue-wise Detailed Analysis:

1. Upward Adjustment on Notional Interest:
The first issue pertains to the AO's upward adjustment of Rs.26,64,145/- on notional interest for advances made to the assessee's wholly-owned subsidiaries/associated enterprises. The TPO noted interest-free advances to Craftsman Automation Singapore Pte Ltd. and Craftsman Marine BV, and applied an average Libor + 200 bps to compute the adjustment. The DRP affirmed the TPO/AO's action, stating that independent enterprises would not extend interest-free loans, necessitating an allocation of interest income to reflect an arm's length transaction. The Tribunal upheld the AO/TPO's order, citing the Bombay High Court's decision in CIT v. Everest Kanto Cylinder Ltd., which accepted Libor + 200 bps as a benchmark. Consequently, this issue was dismissed.

2. Disallowance of Expenses Related to Exempt Income:
The second issue involves the AO's disallowance of expenses related to exempt income under Sec.14A r.w.r.8D, amounting to Rs.18,94,425/- under Rule 8D(2)(ii) and Rs.1,74,288/- under Rule 8D(2)(iii). The assessee had computed a disallowance of Rs.4,79,972/-, which the AO found incorrect without examining the accounts or recording satisfaction as required under Sec.14A. The Tribunal noted the lack of satisfaction recorded by the AO and allowed the assessee's appeal on this issue.

3. Disallowance of Deduction Claim under Sec.80JJAA:
The third issue concerns the AO's disallowance of the assessee's deduction claim under Sec.80JJAA amounting to Rs.2,86,13,977/-. The AO noted that 354 newly recruited employees were employed for less than 300 days, contrary to the provisions of Sec.80JJAA, which require new regular workmen to be employed for at least 300 days. The DRP upheld the AO's decision, relying on the Tribunal's decision in the assessee's earlier years. The assessee argued that the amendment by the Finance Act, 2018, which allows for a reduced number of employment days, should be applied retrospectively. The Tribunal, referencing the Karnataka High Court's decision in CIT-LTU v. Texas Instruments India (P.) Ltd., which interpreted the amendment as retrospective, allowed the assessee's claim in principle but remanded the matter to the AO for verification in terms of the amended provisions. The appeal was thus partly allowed, subject to verification.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the AO's order on the notional interest adjustment, allowed the appeal on the disallowance of expenses related to exempt income due to lack of AO's satisfaction, and remanded the issue of deduction under Sec.80JJAA for verification in light of the retrospective application of the amended provisions.