2024 (1) TMI 151 - AT - Income Tax

TP Adjustment - corporate guarantee fees to its AE and towards royalty income - HELD THAT - This Tribunal in the assessee s own case for AY 2012-13 2018 (5) TMI 1816 - ITAT KOLKATA has restricted the addition of corporate guarantee fee @ 0.25% as against 3% made by the AO/TPO. Under similar set of facts, we find that in the instant year, assessee had already offered income of Corporate guarantee fee @ 0.30% which is higher than 0.25% as held by the Tribunal for Assessment Year 2012-13 and, therefore, taking consistent view, we fail to find any inconsistency in the finding of the ld. CIT(A), who has deleted the impugned addition observing that there being no change in the factual matrix during the year and the guarantee fee have been charged at a rate higher than 0.25% which was held to be ALP of this transaction by this Tribunal in the assessee s own case for AY 2012-13. Thus, no interference is called for in the finding of the CIT(A) and issue is decided against the revenue. Adjustment for royalty income - TPO/AO had adopted an analogy that the brand value is well established from many years and is not a risky intangible and, therefore, WACC cannot be applied - We fail to find any merit in such observation of the ld. TPO/AO because maintaining of a brand is a consistent activity and to maintain a brand value is always a risky task and a small mistake at the end of the assessee or its AE can damage the brand value drastically. Therefore, since it is a risky intangible and there is a cut throat competition in such field, WACC method is a suitable method for the purpose of computing ALP of royalty income under the given facts and circumstances of the case. Since the assessee has offered royalty income higher than the ALP computed by applying WACC of 11.30% of the brand value, no further upward adjustment is called for. It is also noteworthy that assessee has been consistently showing royalty income since Assessment Year 2008-09 to 2013-14 and the same has never been disputed by the revenue authorities and even in the subsequent years also the same has not been disputed. Therefore, no interference is called for in the finding of the ld. CIT(A) and the grounds raised by the revenue is dismissed. Disallowance u/s 14A r.w.r.8D - AO made adjustment @ 0.5% of the average investment after giving benefit of suo moto disallowance by the assessee - HELD THAT - AO in terms of Rule 8D(2)(iii) computed the amount @ 0.5% of the average investment irrespective of any bifurcation whether the investments have given rise to exempt income or not. We further notice that the ld. CIT(A), applying the ratio laid down in the case of M/s. Ashika Global Securities Ltd 2018 (7) TMI 1425 - CALCUTTA HIGH COURT has directed the AO to recomputed the amount by applying the rate of 0.5% on only those average investment which actually yielded dividend income. We fail to find any infirmity in this finding of the ld. CIT(A) directing to recomputed the disallowance. Nature of receipt - VAT subsidy - revenue receipt or capital receipt - HELD THAT - After perusal of the Industrial policies of the Governments of Bihar and Odisha, we find that firstly introduction of amendment in Section 2(24)(xviii) of the Act is prospective in nature and applicable from Assessment Year 2016-17 and onward. Secondly, so far as the nature of the subsidy is concerned, the alleged incentive was assured under the Industrial policy for the purpose of encouraging the assessee to set up new industries in the State. We find that the objective contained in the Industrial policy was not to reduce operation costs of the company or facilitate working of existing undertaking. Therefore, subsidy received in form of VAT reimbursement from the State Governments was towards industrialisation in the State and to generate employment and, therefore, the entrepreneurs with the attraction of such subsidy (VAT Subsidy) plan to establish and commence business operations in such areas and for establishing such business has to make capital expenditure in the form of land, building, plant and machinery and such investments are partly reimbursed by the subsidies granted by the State Governments. Therefore, the alleged subsidy has been rightly held to be capital receipt by the ld. CIT(A) which thus calls for no interference. Ground No. 3 of the revenue is dismissed. Applicability of rate of tax on the assets sold by the assessee during the year on the depreciable assets - whether the depreciable asset used for business and part of block of asset if held for more than three years and sold then whether such gain is liable to be taxed as per the tax rates applicable for long term capital gain from sale of long term capital asset? - HELD THAT - We notice that Section 50 of the Act is a special provision for computation of capital gain in case of sale of depreciable assets and it provides that notwithstanding anything contained in clause 2(24)(xviii) of the Act, where the capital gain is from an asset forming part of the block of asset in respect of which depreciation has been allowed then subject to certain conditions, the capital gain arising from such transfer is deemed to be a short term capital gain. Section 112 of the Act which provides for concessional rate of tax on long term capital gain is only applicable on transfer of long term capital asset. The long term capital asset is defined under Section 2(29A) of the Act as capital asset which is not a short-term capital asset. Since special provision is provided under the Act for computation of capital gain on depreciable assets u/s 50 of the Act and it starts with the line Notwithstanding anything contained in clause (42A) of section 2, we are of the considered view that the depreciable asset which forms part of the block of asset even if held for more than three years cannot be brought under the category of long term capital asset for the purpose of concessional rate of tax. The alleged gain during the year from sale of depreciable fixed asset is a short term capital gain and is liable for levy of tax at normal tax rates and not under special rate provided u/s 112 of the Act. Thus, Ground No. 4 of the revenue is allowed. Taxability of dividend distribution of non-residents as per rate provided in the agreement for avoidance of double taxation between India U.K. - HELD THAT - As relying on Total Oil India Pvt. Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) we are of the view that the dividend distributed by the assessee during the year is liable to be taxed as per the provision of Section 115O of the Act, irrespective of the fact whether such dividend is distributed to resident or non- residents. Thus, Ground No. 2 is dismissed. Deduction for amortization of payment - Both the lower authorities have denied the said claim - HELD THAT - We, however, find that the Hon ble Jurisdictional High Court in the case of Balmer Lawrie Co. Ltd 2019 (8) TMI 569 - CALCUTTA HIGH COURT has held that upfront lease premium on lease-hold land is nothing but advance payment of rent and the same is not a capital expenditure and as such the deduction should be allowed u/s 37(1) of the Act. Considering the said judgment which is squarely applicable on the fact of this case, we are inclined to hold in favour of the assessee and direct the Assessing Officer to allow the claim of deduction for lease premium for Assessment Year 2014-15. Accordingly Ground No. 3 of the cross- objection is allowed.

Summary

Issues Involved:
1. Deletion of adjustment towards corporate guarantee and royalty income.
2. Disallowance under Section 14A.
3. Classification of VAT subsidy as capital receipt.
4. Taxation rate on short-term capital gains from the sale of depreciable assets.
5. Deduction claims in the cross-objection.

Summary:

1. Deletion of Adjustment towards Corporate Guarantee and Royalty Income:
The Tribunal addressed the revenue's appeal against the deletion of adjustments made by the Assessing Officer/TPO regarding corporate guarantee fees and royalty income. The Tribunal upheld the CIT(A)'s decision, noting that the corporate guarantee fee of 0.30% charged by the assessee was consistent with previous years and higher than the 0.25% deemed reasonable by the Tribunal in earlier cases. For royalty income, the Tribunal found that the assessee's use of the Weighted Average Cost of Capital (WACC) method to determine the Arm's Length Price (ALP) was appropriate. The Tribunal dismissed the revenue's argument that the cost of equity should be used instead, affirming that the royalty income declared by the assessee was higher than the ALP computed using WACC.

2. Disallowance under Section 14A:
The Tribunal considered the revenue's challenge to the CIT(A)'s direction to re-compute the disallowance under Section 14A by applying 0.5% only to the average investment that yielded exempt income. The Tribunal upheld the CIT(A)'s decision, which was based on the judgment of the Hon'ble Jurisdictional High Court in the case of M/s. Ashika Global Securities Ltd.

3. Classification of VAT Subsidy as Capital Receipt:
The Tribunal evaluated whether the VAT subsidy received by the assessee should be treated as a capital receipt or revenue receipt. The CIT(A) had classified it as a capital receipt, relying on judicial precedents, including the Supreme Court judgment in CIT v/s. Chaphalkar Brothers Pune. The Tribunal agreed with the CIT(A), noting that the subsidy was intended to encourage industrialization and generate employment, thus qualifying as a capital receipt.

4. Taxation Rate on Short-Term Capital Gains from the Sale of Depreciable Assets:
The Tribunal addressed whether the gains from the sale of depreciable assets held for more than three years should be taxed at concessional rates under Section 112. The Tribunal concluded that, according to Section 50, such gains are deemed short-term capital gains and should be taxed at normal rates, not the concessional rates applicable to long-term capital gains.

5. Deduction Claims in the Cross-Objection:
- Education Cess: The assessee's claim for deduction of education cess was dismissed as not pressed.
- Dividend Distribution Tax (DDT): The Tribunal held that the DDT should be taxed as per Section 115-O, irrespective of the DTAA rates.
- Amortization of Lease Premium: The Tribunal allowed the assessee's claim for deduction of lease premium, following the Hon'ble Jurisdictional High Court's decision in Balmer Lawrie & Co. Ltd Vs CIT.

Conclusion:
The Tribunal partly allowed the revenue's appeal for statistical purposes and partly allowed the assessee's cross-objection. The order was pronounced on 27th October 2023 in Kolkata.