2024 (2) TMI 392 - AT - Income Tax

TP adjustment - specified domestic transactions (SDT) for advisory services charge paid to its related parties and on account of payment of commission expenses to non-executive Directors - Effect of clause 92BA(i) as been omitted from the statute by the Finance Act, 2017 w.e.f. 01/04/2017 - assessee s contention before us is that, once the provision itself has been omitted from the statute, the entire reference in transfer pricing adjustment itself is invalid - HELD THAT - We hold that once SDT provisions has been omitted from the statute, then even for A.Y.2016-17, no TP adjustment can be made under SDT. Accordingly, ground Nos.2-15 is treated as allowed. Disallowance u/s. 14A - assessee is a core investment company for non-banking financial services and its main business is lending and investing in good companies - assessee had shown exempt income - assessee had suo-moto disallowed u/s. 14A - assessee had worked out the disallowance by taking investment which has yielded dividend income and has moved those investments which have not yielded any exempt income - HELD THAT - After relying upon CBDT Circular 5/2014 dated 11/02/2014. Before us ld. Counsel submitted that in so far as assessee suomoto disallowance under Rule 8D(2)(i), there is no dispute. However, with regard to disallowance of interest under Rule 8D(2)(ii), he submitted that assessee had huge surplus funds and therefore, in view of the decision of CIT vs. South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT no disallowance of interest can be made. However, in so far as disallowance under Rule 8D(2)(iii) is concerned, the only condition of the assessee is that no disallowance should be made with respect to investment which had not yielded any exempt income. Thus, it has been submitted that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee s own case right from A.Y.2008-09 to 2012-13. Accordingly, the contention of the assessee is upheld that only exempt yielding investment should be worked out for the purpose of disallowance which has been done by the assessee. Accordingly, the disallowance made by the ld. AO over and above suomoto disallowance offered by the assessee is deleted. Disallowance u/s. 14A in book profit u/s. 115JB - HELD THAT - This issue now stands covered by the series of judgments in the case of Vireet Investments Pvt. Ltd 2017 (6) TMI 1124 - ITAT DELHI and judgment of Bhushan Steel Ltd 2015 (9) TMI 1424 - DELHI HIGH COURT - Accordingly, disallowance u/s. 14A in the book profit is deleted. Depreciation on printers, routers, scanners and computer software @ 60% upheld.

Summary

Issues Involved:
1. Transfer Pricing (TP) adjustment in respect of specified domestic transaction (SDT).
2. TP adjustment for advisory service charges paid to related party.
3. Addition on account of payment of commission expenses to non-executive directors.
4. Disallowance under Section 14A of the Act.
5. Disallowance under Section 14A to the book profits under Section 115JB of the Act.
6. Addition of income on toll roads.
7. Disallowance of depreciation on printers, routers, scanners, and computer software.
8. Disallowance of brought forward losses and unabsorbed depreciation.
9. Disallowance of MAT credit under Section 115JAA.
10. Disallowance of deduction of education cess and secondary and higher education cess.

Summary:

1. Transfer Pricing (TP) Adjustment in Respect of Specified Domestic Transaction (SDT):
The Tribunal held that once the provision under clause (i) of Section 92BA has been omitted from the statute by the Finance Act, 2017, no TP adjustment can be made for SDT for A.Y. 2016-17. The Tribunal relied on the judgment of the Hon'ble Karnataka High Court in PCIT vs. Texport Overseas (P) Ltd. and other relevant case laws to conclude that the omission of the provision means it never existed, making any reference to the TPO for SDT invalid.

2. TP Adjustment for Advisory Service Charges Paid to Related Party:
The Tribunal noted that the assessee paid advisory service charges to IL&FS Infrastructure Development Corporation Limited (IIDC) for the CII smart city initiative. The AO/TPO rejected the assessee's justification for the payment, stating no business benefit was derived, and adjusted the payment to 'Nil'. The Tribunal, however, held that the omission of clause (i) of Section 92BA invalidates such TP adjustments.

3. Addition on Account of Payment of Commission Expenses to Non-Executive Directors:
The Tribunal observed that the AO/TPO disallowed commission expenses paid to non-executive directors, arguing no additional benefit was derived by the assessee. The Tribunal, following the same reasoning as in the SDT issue, invalidated the TP adjustments.

4. Disallowance under Section 14A of the Act:
The Tribunal upheld the assessee's method of disallowance under Rule 8D(2)(i) and deleted additional disallowance made by the AO. The Tribunal emphasized that only investments yielding exempt income should be considered for disallowance, aligning with the assessee's past cases and the decision in CIT vs. South Indian Bank Ltd.

5. Disallowance under Section 14A to the Book Profits under Section 115JB of the Act:
The Tribunal followed the Special Bench decision in Vireet Investments Pvt. Ltd. and the Hon'ble Delhi High Court's judgment in PCIT vs. Bhushan Steel Ltd., deleting the disallowance under Section 14A in the book profits.

6. Addition of Income on Toll Roads:
The issue regarding the addition of income on toll roads was not pressed by the assessee and hence dismissed as not pressed.

7. Disallowance of Depreciation on Printers, Routers, Scanners, and Computer Software:
The Tribunal deleted the disallowance made by the AO and upheld the claim of 60% depreciation on these items, following the directions of the DRP.

8 & 9. Disallowance of Brought Forward Losses and Unabsorbed Depreciation & Disallowance of MAT Credit under Section 115JAA:
These issues were considered academic and consequential, requiring no adjudication. The AO was directed to examine and allow the MAT credit claim in accordance with the law.

10. Disallowance of Deduction of Education Cess and Secondary and Higher Education Cess:
The issue was not pressed by the assessee.

Conclusion:
The appeal of the assessee was partly allowed, with significant relief granted on the major issues contested. The order was pronounced on 31st Jan, 2024.