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TMI Blog2024 (6) TMI 460X X X X Extracts X X X X X X X X Extracts X X X X ..... uo-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational 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. - Mrs. Annapurna Gupta, Accountant Member And Shri T.R. Senthil Kumar, Judicial Member For the Assessee : Shri Tushar Hemani, Sr. Advocate And Shri Parimalsinh B. Parmar, AR For the Revenue : Dr. Darsi Suman Ratnam, CIT-DR ORDER PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER: By way of this appeal, the assessee-appellant has challenged correctness of the order dated 28th July, 2022 passed by the Assessing Officer under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 [hereinafter referred to as the Act for short], for the Assessment Year (AY) 2018-19. 2. Ground No.1 raised by the assessee reads as under:- 1. Disallowance in respect of annual technical fees (Tax effect - Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Bank on this ground from AY 2009-10 to A.Y. 2015-16 and further that the Hon'ble Ahmedabad Bench of Tribunal in Bank's own case has rejected the appeal filed by Revenue from AY 2009-10 to AY 2015-16. 5.3.1 We have considered the facts of the case and submissions of the assessee. We have been informed by the Dy. CIT Ahmedabad, Circle 1(1)(1) that the department has not accepted the decision of the Hon ble ITAT for AY for 2010- 11 to AY 2014-15, and preferred further appeal before the Hon'ble High Court 5.3.2 We may observe here that the process before the DRP is a continuation of assessment proceeding as it is only the draft assessment order which is being challenged before it. The final assessment order is yet to be passed by the assessing officer. Hence, the DRP is not an appellate authority and the proceeding before the DRP is continuation of assessment proceedings. This view is fortified by the decision of the division bench of the Hon'ble High Court of Bombay in the Writ Petition No. 1877 of 2013 in the case of Vodafone India Services Pvt. Ltd. vs. Additional Commissioner of Income Tax Ors. (2014) 264 CTR 0030 (Bom) (2013) 96 DTR 0193 (Bom) (2014) 361 ITR 05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO needs to be sustained. 4. Accordingly, following the directions of the DRP, the impugned disallowance of Annual Technical Service fees amounting to Rs. 48,66,726/- was made by the Assessing Officer in the assessment framed. 5. 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. 6. In view of the same we direct the deletion of the disallowance of Annual Technical Service (ATS) fees to the tune of Rs. 48,66,726/-. Ground of appeal No.1 (1.1 to 1.3) is, therefore, allowed. 7. Ground No. 2 reads as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee, in terms of Section 14A(2) of the Act. That only thereafter the Assessing Officer can apply Rule 8D for computing disallowance u/s 14A of the Act. He referred to the decision of the Hon ble jurisdictional High Court in this regard in the case of PCIT Vs. CIMS Hospital (P.) Ltd., [2021] 125 taxmann.com 227 (Gujarat). The ld. Counsel for the assessee contended that, in the present case, the Assessing Officer had invoked Rule 8D without assigning any reason for rejecting the assessee s working of suo-moto disallowance or without finding any defect in the same. He contended that there was no satisfaction on the part of the Assessing Officer as to why the claim of the assessee was incorrect. 10. In this regard, he pointed out that the assessee has adopted a scientific method of computing the disallowance. He drew our attention to the working of suo-moto disallowance placed at page nos. 327, 456-459 of the paper-book. He pointed out therefrom that the assessee had considered 0.20% of the total operating expenses for the purpose of working disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d raise the issue with appropriate judicial form by questioning the validity or the blanket formula stipulated in the said section. Hence the assessing officer, not being satisfied by this claim of the assessee, the undersigned is bound to revert to Rule 8D of the Rules, for computing this disallowance, the details of which were called for and duly submitted by the assessee. The relevant figures for the current A.Y. for working out the disallowance under Section 14A r.w. Rule 8D as submitted by the assessee are:- (Amount in cr) Working u/s 14A as per amended Rule 8D Month Opening Value of Investment Closing Value of investments Monthly average of tax-free investments April 3,716 3,753 3,740 May 3,763 3,751 3,757 June 3,751 4,069 3,910 July 4,069 4,285 4,177 August 4,285 4,025 4,155 September 4,025 4,500 4,263 October 4,500 5,048 4,774 November 5,048 4,845 4,947 December 4,845 4,682 4,764 January 4,682 4,721 4,702 February 4,721 5,286 5,004 March 5,286 5,421 5,354 Total 53,546 Annual Average of Monthly Average tax free investments (April 17 to March 18 (5,35,45,74,74,780/12) 4,442 Amount as per section 14A r.w.r. 8D (under New Rule 8D) (1 % of Annual Average of Monthly Average inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect having regard to its books of accounts. The ld. Counsel for the assessee has relied on the decision of the Hon ble jurisdictional High Court in the case of CIMS Hospital P. Ltd. (supra) wherein the Hon ble Court has 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. 14. 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 em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeded to apply Rule 8D for computing the expenses disallowable under section 14A of the Act without fulfilling the mandatory pre-requisite of first recording dissatisfaction with the assessee s computation of the same, having regard to its books of accounts. 16. Moreover para 21 of the AO s order reveals the AO to be stating that when a clear formula for calculating disallowance of expenses u/s 14A of the Act is provided in the Rules, there is no scope for the assessee to adopt any method of proportional allocation of expenses. That if the assessee has any issues with regard to the formula so prescribed in law he can take up the matter at the appropriate judicial forum. These findings of the AO, no doubt are contrary to the provision of law as interpreted by the jurisdictional High court itself in CIMS(supra) that the formula provided in Rule 8D of the Rules is to be applied only in the circumstance that the assesses calculation of disallowance appears to the AO to be incorrect having regard to its books of accounts. 17. In view of 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 dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rantee issued by the bank during the year, but offered to tax by the assessee in succeeding years over the period of guarantee. 20. Objection to the proposed addition was made to the DRP, who though noted the fact that identical addition of commission income made in preceding years stood deleted by the ITAT, yet directions were given to the AO to make the addition for the reason noted in the order that the DRP had been informed that the decision of the ITAT for A.Y 2010-11 to A.Y 2014-15 had not been accepted by the department and appeal had been preferred to the High Court against the same. To keep the issue alive therefore to protect the interest of the Revenue, the DRP directed the AO to make the addition of commission income to the tune of Rs. 188.32 Crs. Relevant para 7.3.1 of the DRP order. 21. The contention of the learned Counsel for the assessee before us was that identical disallowance made in the case of the assessee in preceding years, right from Assessment Year 2010-11 to Assessment Year 2014-15, had been deleted by the ITAT consistently in its orders passed, as noted by the DRP and that even in AY 2015-16 ITAT had deleted identical addition made in its Order passed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of 180 days has been completed. This is as per Rule 6EA of the Income-tax Rules, 1962. The AO however, noted that the assessee was not recognizing interest income from non-performing assets as per RBI guidelines where the overdue period was only three months/90 days. The AO held that the overdue interest needed to be recognized as per the Income-tax Rules and therefore the difference period, as per the RBI guidelines and the Income-tax Rules relating to which interest on NPAs was not recognized by the assessee, was subjected to tax which amounted in all to Rs. 237.98 crores. 26. Objection to the proposed addition was made to the DRP, who though noted the fact that identical addition of commission income made in preceding years stood deleted by the ITAT, yet directions were given to the AO to make the addition for the reason noted in the order that the DRP had been informed that the decision of the ITAT for A.Y 2010-11 to A.Y 2014-15 had not been accepted by the department and appeal had been preferred to the High Court against the same. To keep the issue alive therefore to protect the interest of the Revenue, the DRP directed the AO to make the addition of commission income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual discount offered to the employees. 5.3 The learned DRP and AO also failed in correctly applying the observations of the decision of Bangalore special bench of Hon'ble ITAT in case of Biocon Limited (supra) which states that ESOP cost in hands of the company has to be equivalent to amount taxable as perquisite in the hands of employees. Relying on the decision of Hon'ble Special Bench. the difference between market price as on the date of exercise of options and exercise price (i.e., market price on grant date) is an allowable deduction for computing income under the head 'profit and gains from business and profession' in the year of allotment of options to the employee (such amount being equal to the amount taxable as perquisite in hands of employee). 5.4 The learned DRP and AO have erred in law by emphasizing on the fact that the ESOP cost claimed by the Assessee is not an expenditure per se being a notional loss. As reading down the word expenditure as being confined to situation involving outlay of cash, would result in a very narrow inference of the expression, Further, the fact mentioned in the assessment order that Department is in appeal against the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. (supra) followed by the ITAT in various decisions. 33. At this juncture, the ld. Counsel for the assessee was asked about the status of these expenses disallowed in the case of the assessee in the preceding years, as noted by the AO i.e. Asst. Year 2013-14 to 2015-16. To this, the ld. Counsel pointed out that the matter had been restored back to the AO for adjudication afresh by the ITAT. 34. In view of the above admission of the ld. Counsel for the assessee, and to bring consistency on the issue, the impugned issue is also being restored back to the AO to be decided afresh in accordance with prevailing position of law. 35. Ground No.5 is allowed for statistical purpose. 36. Ground No. 6 raised by the assessee reads as under:- 6. TP adjustment (Tax effect - Rs. 25,59,032) 6.1 The learned DRP has erred in partially agreeing with TPO in making transfer pricing adjustment of Rs. 73,94,337 by rejecting the benchmark conducted by the Bank using Other Method as the most appropriate method with respect to internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a suitable spread of 200 bps to be charged. Accordingly, the TPO held Arms Length Price (ALP) of interest to be charged on the Tier-II loan given to AE of the assessee to be 6 months USD LIBOR plus 425 bps plus 200 bps, i.e. the quote of BOI suitably adjusted for the Letter of Comfort given by the assessee to the BOI for providing the quote to the extent of 200 bps. The same resulted in the ALP of interest to be charged determined at 7.76% resulting in quantum of interest determined to be at ALP amount to Rs. 11,52,16,600/-. Thus, in nutshell, the assessee had charged the interest at 3 months USD LIBOR plus 425 bps, resulting the interest rate of 6.09% and the quantum of interest earned accordingly being Rs. 9,04,50,688/-, while The TPO held the ALP of interest to be 6 months USD LIBOR plus 625 bps resulting in rate of interest of 7.76% and quantum of interest at ALP being Rs. 11,52,16,600/-. 39. Accordingly, the difference of interest so determined, of Rs. 2,47,65,912/-, was adjusted upward to the interest charged by the assessee resulting in an addition to the said extent to the income of the assessee. The DRP confirmed the order of the TPO and directed the AO to make the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Development Corporation (supra) held that Letter of Comfort merely indicates the appellant's assurance that respondent would comply the term of financial transaction without guaranteeing performance in the event of default. The co-ordinate bench of Tribunal in India Hotels Co. Ltd. (supra) on similar ground of appeal by following the decision of Hon'ble Karnataka High Court held that Letter of Comfort does not constitute international transaction. So far as contention of ld. DR for the revenue that after amendment in Explanation to section 92B is concerned, we have noted that co-ordinate bench in SIRO Clinpharm P. Ltd. (supra) held that amendment in Explanation to section 92B by Finance Act, effective from 01.04.2002 is to be treated as effective at the best from A.Y. 2013-14. Thus, in view of the aforesaid discussion, we do not find any illegality or infirmity in the order passed by ld. CIT(A). In the result, Ground No. 6 to 9 (additional ground) of assessee's appeal are allowed and consequently the grounds of appeal raised by revenue are dismissed. Indian Hotels Company Ltd. Vs. DCIT [2019] 112 taxmann.com 340 (Mumbai - Trib.) TRANSFER PRICING: CUP method is most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of both the parties. The issue before us relates to the determination of ALP of the international transaction of interest charged on loan given to the associate entity of the assessee. Tier-II Loan having been provided by the assessee to Axis Bank, UK- amounting to 25 Million USD i.e. 148.47 crores. The facts relating to the interest charged by the assessee and that determined by the TPO to be ALP of the interest charged is as under: interest charged by the assessee --- 3 months USD LIBOR plus 425 bps along with upfront fee charged @ 2.5% of the loan amount ALP of the interest determined by TPO -- interest charged by BOI as per its quotation given to AXIS Bank , UK for the same Tier II Loan of 25 million USD -6 months USD LIBOR plus 425bps + 200bps added by the TPO on account of adjustment made for the letter of comfort (LOC) required by BOI from the assessee before us ,as per its terms and conditions for granting the loan as per the quotation. In effect ALP determined by TPO 6 months USD LIBOR plus 625 bps (425bps + 200bps). The DRP in turn restricted the adjustment made on account of LOC to 0.5% 45. The assessee, before us, has contested this adjustment made to the ALP of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. In effect it establishes a parent company s commitment to providing its subsidiary with the resources it needs to meet its financial obligations or get credit. Ultimately all boils down to how the letter of comfort is worded to understand the underlying import of the LOC vis-a-vis the liability shouldered by the provider of LOC. 51. 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. 52. In view of the same, 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. 53. The ld. Counsel for the assessee also contended that the assessee has charged upfront fees also at 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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