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2024 (6) TMI 460 - AT - Income TaxDisallowance of claim of Annual Technical Service (ATS) fees - addition made for the reason that they were found to be prior period expenses - HELD THAT - As is evident from the order of the DRP, identical disallowance was made in the case of the assessee in the preceding years, i.e. from AYs 2009-10 to 2015-16; but was consistently deleted in first appeal by the ld. CIT(A) whose order was confirmed by the ITAT also. Neither has the DRP noted any distinction in facts in the present case from the preceding years nor has the ld. DR being able to point out any distinguishing facts before us. Also, no adverse decision of any higher judicial authority in the case of the assessee has been brought to our notice by the ld. DR. Therefore, there is no case made out by the Revenue before us for not following the decision of the ITAT, deleting identical disallowance, in the preceding years. Disallowance u/s 14A read with Rule 8D - suo-moto disallowance made by the Bank u/s 14A is made on a scientific basis by proportionately allocating all the operating expenses incurred towards earning tax-free income - HELD THAT - As decided in CIMS Hospital P. Ltd. 2020 (3) TMI 1024 - GUJARAT HIGH COURT held in very clear terms that before invoking Rule 8D, the AO is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. The Hon ble Court interpreted the provisions of section 14A(2) of the Act while holding so. Having said so, we find that in the facts of the present case, the AO has failed to fulfil this necessary prerequisite for invoking Rule 8D of the Rules. We have noted from the documents filed before us that the assessee had demonstrated to the AO that the suo moto disallowance made by it had been calculated on a scientific basis. The entire basis of calculating the same had been explained to the AO, pointing out that out of the operating expenses only that portion was considered for the purpose of disallowance which was in proportion to the salary of employee, involved in the investment activity to the salary of the total employees of the assessee being 0.20%; that thereafter, these operating expenses incurred for earning exempt income was determined by bifurcating these expenses in the ratio of tax free income earned from securities and taxable earned income therefrom, which came to 3.72% of the expenses. And accordingly an amount as determined suo moto by the assessee as disallowable under section 14A of the Act, and disallowed while computing its taxable income. Thus, the assessee had demonstrated a reasonable basis for calculating the disallowance of expenses pertaining to earning of exempt income, considering the expenses relatable to the investment activity and allocating that portion of the said expenses to the earning of tax free income therefrom on a scientific basis. AO, we find, has not touched upon and made no adverse comment on the specific explanation offered by the assessee regarding the methodology adopted for allocating the expenses for the purpose of earning exempt income, as pointed out to us above. AO, we find has made only certain general comments for rejecting the assessee s explanation, that too factually incorrect. We have noted, that the AO stated that the assessee has given no basis for holding 3.72% of the expenses attributable to earning of tax free income. This is clearly incorrect, since, as noted above by us, the assessee had given a basis for the same. We are in agreement with the ld. Counsel for the assessee that invocation of Rule 8D by the AO was against the provisions of law, and the disallowance therefore made of expenses by the AO u/s 14A of the Act in accordance with Rule 8D of the Rules is not sustainable in law, and is directed to be deleted. Addition of Bank guarantee commission - HELD THAT - As is evident from the order of the DRP, identical addition of commission income was made in the case of the assessee in the preceding years, i.e. from AYs 2010-11 to 2015-16; but was consistently deleted by the ITAT. Neither has the DRP noted any distinction in facts in the present case from the preceding years nor has the ld. DR being able to point out any distinguishing facts before us. Also, no adverse decision of any higher judicial authority in the case of the assessee has been brought to our notice by the ld. DR. Therefore, there is no case made out by the Revenue before us for not applying the decision of the ITAT in the preceding years in favour of the assessee. Interest on NPA s - addition made to the income of the assessee in respect of interest income on non-performing assets - case of the AO is that as per the Income-tax Rules, interest on NPA should not be recognized when the overdue period of 180 days has been completed - HELD THAT - As is evident from the order of the DRP, identical addition of commission income was made in the case of the assessee in the preceding years, i.e. from AYs 2010-11 to 2015-16; but was consistently deleted by the ITAT. Neither has the DRP noted any distinction in facts in the present case from the preceding years nor has the ld. DR being able to point out any distinguishing facts before us. Also, no adverse decision of any higher judicial authority in the case of the assessee has been brought to our notice by the ld. DR. Therefore there is no case made out by the Revenue before us for not applying the decision of the ITAT in the preceding years in favour of the assessee. Employee Stock Option cost - action of AO in respect of not allowing the ESOP cost claimed as deduction u/s 37(1) - as argued DRP and AO failed to appreciate that the difference between market price as on date of exercise of options and the exercise price is actual discount offered to the employees - HELD THAT - The contention of the ld. Counsel for the assessee before us was a reiteration of the arguments made to the authorities below, that the issue is now no longer res integra and has been decided in favour of the assessee in series of decisions including that of Hon ble Karnataka High Court in Biocon Ld. 2020 (11) TMI 779 - KARNATAKA HIGH COURT followed by the ITAT in various decisions. Thus the impugned issue is also being restored back to the AO to be decided afresh in accordance with prevailing position of law. TP Adjustment - International Transactions of interest charged on loan provided to Associate Enterprise of the assessee in terms of the provisions of Section 92CA of the Act - contention of assessee before us primarily was against treating LOC as equivalent to bank guarantee for making adjustment to the ALP of the impugned international transaction - whether LOC can be equated to Bank guarantees or for that matter whether LOC s call for any sort of adjustment to be made to interest rates when compared to interest rates charged on non LOC loans? - HELD THAT - There is no scope for equating bank guarantees with letter of comfort. Bank guarantees entail risk, with the provider of guarantee having to pay the amount guaranteed on the default in payment of loan by the person guaranteed. Letters of comfort entail no such financial risk on the provider of the LOC. Therefore we completely agree with assessee that both the TPO and the DRP had erred in equating LOC s to bank guarantees. In the facts of the present case the LOC is asked for by BOI in its quote to Axis Bank, UK but the format in which it is asked is not available. Nothing therefore can be said about the impact of the same on the interest to be charged on the loan transaction. Though the adjustment made to the interest rate by the AO/DRP treating the LOC as bank guarantee cannot be upheld, at the same time, the assessee s alternative argument of treating the interest rates prescribed under the head safe harbour rules i.e. Rule 10TD(2A)(5) of the Income Tax Rules can be accepted, which is six months LIBOR plus 400 bps. The AO is directed to treat the said rate as ALP of the impugned international transaction and make adjustment accordingly. Assessee also contended that the assessee has charged upfront fees also at 1.25% of the loans, and therefore, no adjustment on account of LOC is called. We are unable to agree with the same, since we have noted, even as per the quote of BOI, identical upfront fee of 1.25% of the bank loan was charged. Therefore, the LOC was, over and above, charging of upfront fees, calling for a separate adjustment to the interest on account of the same.
Issues Involved:
1. Disallowance of Annual Technical Service (ATS) fees. 2. Disallowance u/s 14A read with Rule 8D of the Income-tax Act, 1961. 3. Addition of Bank Guarantee commission income. 4. Addition of notional interest income on NPAs. 5. Disallowance of Employee Stock Option Plan (ESOP) cost. 6. Transfer Pricing adjustment related to interest received from AE. Summary: 1. Disallowance of Annual Technical Service (ATS) fees: The issue relates to the disallowance of ATS fees amounting to Rs. 48,66,726/- paid to Infosys Limited, treated as prior period expenses. The DRP upheld the AO's addition despite identical expenses being allowed in preceding years by CIT(A) and ITAT. The Tribunal noted no distinction in facts from previous years and directed the deletion of the disallowance, allowing the assessee's appeal on this ground. 2. Disallowance u/s 14A read with Rule 8D: The assessee contested the disallowance of Rs. 43.59 crores made by the AO under Rule 8D, arguing that the suo-moto disallowance was computed on a scientific basis. The Tribunal found that the AO failed to record dissatisfaction with the assessee's computation as required by Section 14A(2). The Tribunal held that the AO's invocation of Rule 8D was not justified and directed the deletion of the disallowance, allowing the assessee's appeal on this ground. 3. Addition of Bank Guarantee commission income: The AO added Rs. 188.32 crores as commission income, recognizing it upfront instead of on a pro-rata basis. The DRP upheld the addition to keep the issue alive despite ITAT consistently deleting such additions in preceding years. The Tribunal noted no distinguishing facts and directed the deletion of the addition, allowing the assessee's appeal on this ground. 4. Addition of notional interest income on NPAs: The AO added Rs. 237.98 crores as interest income on NPAs, following Rule 6EA instead of RBI guidelines. The DRP upheld the addition to protect Revenue's interest. The Tribunal noted consistent deletion of similar additions by ITAT in preceding years and directed the deletion of the addition, allowing the assessee's appeal on this ground. 5. Disallowance of Employee Stock Option Plan (ESOP) cost: The AO disallowed Rs. 155.60 crores claimed under section 37(1), considering it a notional loss. The DRP upheld the disallowance, noting ongoing appeals. The Tribunal, to maintain consistency with previous years where the matter was restored to the AO, directed the AO to adjudicate afresh in accordance with prevailing law, allowing the appeal for statistical purposes. 6. Transfer Pricing adjustment related to interest received from AE: The AO made an adjustment to the interest rate charged on a loan to AE, equating LOC with a bank guarantee. The Tribunal disagreed with this equivalence but accepted the assessee's alternative argument to apply Safe Harbour Rules, directing the AO to treat six months LIBOR plus 400 bps as ALP and make the adjustment accordingly. The appeal was partly allowed on this ground. Conclusion: The appeal was partly allowed, with specific directions for each issue involved.
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