2023 (5) TMI 153 - AT - Income Tax

Short credit of TDS - HELD THAT - We direct the ld AO to grant credit to the assessee of prepaid taxes in accordance with the law. MAT computation u/s 115JB on disallowance u/s 14A - HELD THAT - Increase of book profit by the addition u/s 14 A of the Act is not correct, hence ld AO is directed to delete it. See J.J. GLASTRONICS PVT. LTD., 2022 (4) TMI 1187 - KARNATAKA HIGH COURT TP Adjustment - corporate guarantee given to its associated enterprises - international transaction or not? - whether it does not affect the profit/loss or assets of liabilities of the company? - Claim of the assessee is that provision of corporate guarantee to the associated concerns is not an international transaction and further it is a shareholder activity and therefore, assessee is not required to be remunerated - HELD THAT - We find that the first argument that Corporate Guarantee is not an international Transaction is no more valid in view of the decision of Honourable Madras High court in case of PCIT V Redington 2020 (12) TMI 516 - MADRAS HIGH COURT - Argument of AR that corporate guarantee issued by the assessee to its associated enterprises is not an international transaction is not acceptable. Issuance of the corporate guarantee in favor of subsidiary - To be treated as a shareholders' activity or not - non-charging of corporate guarantee commission - Guarantee was issued for the business of the fellow subsidiary. Further when Guarantee is covered in clause 92B (2)(1)(C) specifically and it is a capital financing transaction specifically included there in, it is unnecessary to stretch it to bring in to clause (d) of ' Provision of services'. Immediate benefit to subsidiary is demonstrated by the assessee as well as ld TPO by showing substantial interest savings due to guarantee which both the parties accrued that to both the contracting parties. AR heavily relied on decision of Coordinate bench 2015 (12) TMI 143 - ITAT AHMEDABAD for AY 2006-07. However, he could not show us a single paragraph on facts to show that what are the compelling factors existing to call it as shareholders' activity. Not every transaction with a subsidiary can be called a shareholder's activity unless reasons are demonstrated with credible facts. Thus, we reject the argument that it is a shareholder's activity. Therefore, this argument is also rejected. Quantum of the guarantee commission - Whether Guarantee commission upheld by the learned Dispute Resolution Panel at the rate of 0.5% is not correct? - We uphold the benchmarking of the assessee of the guarantee commission based on yield approach, which is derived after the proper credit rating of associated enterprises, on Deals Scan database, determining the appropriate interest saving and thereafter attributing it between the two parties. It is also to be noted that the arm's-length price of the guarantee commission by yield method would be the maximum rate. Therefore, we uphold the alternative benchmarking provided by the assessee of the guarantee commission at the rate of 0.35%. Accordingly, ground number 1 of the appeal is partly allowed. Disallowance u/s 14 A - manadation of earning exempt income - HELD THAT - As assessee has not earned any exempt income during the year, the disallowance under section 14 A of the act is not warranted. We find that this issue is squarely covered in favour of the assessee by the decision of the honourable 2022 (7) TMI 1093 - DELHI HIGH COURT wherein it has been held that the explanation inserted in section 14 A of the act by the finance act 2022 with effect from 1/4/2022 is prospective in nature. Accordingly, ground number 2 of the appeal of the assessee is allowed and the learned AO is directed to delete the disallowance under section 14 A the act. Nature of expenses - foreign exchange gain incurred on purchase of material claimed by the assessee - revenue or capital expenditure - HELD THAT - The foreign exchange gain or loss arising on settlement of dues of sundry creditors does not have any correlation with the cost of inventory or putting 88 the present location. Hence, it is not required to be included in the cost of project/cost of inventory. The accounting treatment of the assessee is supported by the authoritative pronouncement of the Institute of chartered accountants of India as well as the Ministry of corporate affairs. No substance in the findings of the lower authority that foreign exchange loss on purchase of material should be included in the cost of project. Accordingly, the foreign exchange loss incurred by the assessee is revenue expenditure and cannot be included in the cost of project. Accordingly, we allow ground of the appeal of the assessee. Addition by invoking the provisions of section 43CA - difference between the sale consideration and stamp duty value is merely 0.43% - HELD THAT - The difference between the stamp duty value of a stock in trade and the transaction value covered by the provisions of section 43CA is less than 10% even prior to 1/4/2021, does not warrant any addition in the hands of the assessee. Accordingly, we direct the learned assessing officer to delete the addition made under section 43CA of the act. Ground number 4 of the appeal of the assessee is allowed. TDS u/s 195 - disallowance u/s 40 (a) (i) - amount paid to non-resident without deduction of the tax - contention of the assessee of applicability of article 12 of the India Singapore double taxation avoidance agreement only if the technical knowledge, experience, skill, know-how or process is made available to the non-resident - HELD THAT - The claim of the revenue is that those services fall under article 12 (4) (b) and it has been made available to the assessee, which is unfounded, we hold that the services do not satisfy the make available condition and therefore are not chargeable to tax as per the double taxation avoidance agreement. Thus, assessee was not obliged to deduct tax at source on such payment. Consequently, no disallowance can be made u/s 40 (a) (i) of the act. In the result we direct the AO to delete the disallowance. Disallowance of loan processing fee - HELD THAT - As respectfully following the decision of CALICO DYEING AND PRINTING WORKS 1958 (3) TMI 59 - BOMBAY HIGH COURT we direct the learned assessing officer to allow the deduction of loan processing fee as expenditure allowable under section 36 (1) (iii) of the act. Addition u/s 43CA - sale consideration declared by the assessee with respect to its stock in trade is less than the amount of stamp duty value of those properties - HELD THAT - For the reasons given by us in ground number 4 of the appeal for assessment year 2017-18, we direct the learned assessing officer to compute the disallowance afresh after granting the benefit of tolerance band of 10% to the assessee for this year. Provisions of section 50C(2)/ (3) Applicability for determination of the value adopted or assessed or assessable u/s. 43CA(1) - We do not find any justification for rejecting the claim of the assessee by holding that the assessee failed to substantiate that valuation of stamp duty authority is not challenged/disputed. It is not the duty of the assessee. The duty of the assessee to make a claim as per 50 C (2) (a) of the act before the AO that stamp duty valuation exceeds the fair market value of the property. For fair market value, assessee has given the reasons, substantiated it with a valuation report and raised a specific claim before the AO to refer the matter to the valuation cell. Accordingly, we do not find any justification in the direction of the learned dispute resolution panel. In fact the learned DRP should have directed the learned AO to refer the matter to the valuation cell in terms of provisions of section 43CA (2) read with section 50 C (2) of the act. Apparently, the learned AO has failed to carry out the mandate of the law of referring valuation of those properties to the valuation cell for valuing those properties. Thus where the law mandates the learned assessing officer to do the things in a particular manner, if he fails to do so as per the provisions of the law, we do not have any other alternative but to delete the addition. Such a view has been taken even in case of violation of procedures; we are dealing with the substantive addition in the hands of the assessee. Grant of minimum alternative tax credit to the assessee of merged entities - Whether there is any provision in the act itself to grant any such credit under section 115JAA? - HELD THAT - When the effective date of merger is 1/4/2017 whereby 11 companies merged with the assessee company by the order of the National company law Tribunal. We direct the learned assessing officer to allow the minimum alternative tax credit available in the hence of those 11 companies to the assessee after proper verification. Accordingly, ground number 7 of the appeal is allowed. Short granting of tax deduction at source credit including the tax credit of merged entities - HELD THAT - We direct the learned assessing officer to grant credit of such sort deduction of tax at source of the assessee as well as of merged entities after proper examination.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance under Section 14A
3. Foreign Exchange Loss
4. Addition under Section 43CA
5. Disallowance under Section 40(a)(i)
6. Initiation of Penalty Proceedings under Section 270A
7. Grant of MAT Credit and Short Grant of TDS Credit

Summary:

Transfer Pricing Adjustment:
The primary issue was whether the provision of a corporate guarantee by the assessee to its Associated Enterprise (AE) constitutes an 'international transaction' under Section 92B of the Income-tax Act. The Tribunal held that the corporate guarantee is indeed an international transaction, rejecting the assessee's argument that it is a shareholder activity. The Tribunal also determined the Arm's Length Price (ALP) for the guarantee commission at 0.35%, based on a scientific approach involving interest saving and credit rating analysis, rather than the 0.5% upheld by the Dispute Resolution Panel (DRP).

Disallowance under Section 14A:
The Tribunal addressed the disallowance under Section 14A for earning exempt income. It was found that the assessee did not earn any exempt income during the year, and therefore, no disallowance under Section 14A is warranted. This decision was supported by the Delhi High Court's ruling in Principal Commissioner of Income-tax vs. Era Infrastructure (India) Ltd.

Foreign Exchange Loss:
The Tribunal ruled that foreign exchange loss incurred on material purchases should not be included in the cost of inventory but should be allowed as revenue expenditure. This decision aligns with the accounting standards and previous judicial precedents.

Addition under Section 43CA:
The Tribunal held that the tolerance band of 10% for the difference between the sale consideration and the stamp duty value, as amended by the Finance Act 2021, should apply retrospectively. Therefore, the addition made by the Assessing Officer (AO) under Section 43CA was deleted. Additionally, the Tribunal emphasized that the AO should have referred the matter to the valuation officer when the assessee contested the stamp duty valuation.

Disallowance under Section 40(a)(i):
The Tribunal found that the payments made to Singapore-based entities for consultancy services did not satisfy the 'make available' condition under Article 12 of the India-Singapore DTAA. Consequently, the assessee was not required to deduct tax at source under Section 195, and the disallowance under Section 40(a)(i) was deleted.

Initiation of Penalty Proceedings under Section 270A:
The Tribunal deemed the initiation of penalty proceedings under Section 270A as premature and dismissed this ground of appeal.

Grant of MAT Credit and Short Grant of TDS Credit:
The Tribunal directed the AO to grant MAT credit and TDS credit, including those of merged entities, after proper verification. This decision was based on the principle that all assets and liabilities, including MAT credit, of amalgamating companies become those of the amalgamated company.

Conclusion:
The appeals were partly allowed, with significant relief granted to the assessee on various grounds, including transfer pricing adjustments, disallowance under Section 14A, foreign exchange loss treatment, addition under Section 43CA, and disallowance under Section 40(a)(i). The Tribunal also directed the AO to grant MAT and TDS credits appropriately.