2022 (4) TMI 1408 - AT - Income Tax

ITAT remands TP and tax issues for re-examination, sets new guidelines on arm's length price and corporate guarantee fees.

M/s. United Spirits Limited Versus The Deputy Commissioner of Income-tax, Circle 7 (1) (1) Bangalore

The ITAT partly allowed the appeal, remanding several Transfer Pricing (TP) adjustments and Corporate Tax issues for re-examination. The ITAT directed the ... TP Adjustment - comparable selection - Interest free advances to its AEs - HELD THAT:- As in the instant case, assessee has not been able to establish that borrower has no discretion of using funds gainfully. In the present case, as mentioned earlier, the co-ordinate bench in assessee’s own case for the earlier assessment year has considered all the facts, arguments, decisions and passed a very elaborate order. It is not in dispute that the facts are same in this year as compared to earlier year. Therefore, we bound to follow the co-ordinate bench decision in assessee’s own case [2020 (6) TMI 135 - ITAT BANGALORE] for the AY 2012-13 and confirm the action of the AO/TPO in making TP adjustment in respect of interest free advances to its AEs. As regards the applicability of LIBOR, the assessee relied on the judgment of the Rajasthan High Court in the case of CIT v Vaibhav Gems Ltd [2017 (12) TMI 583 - RAJASTHAN HIGH COURT]- SLP was dismissed by the Supreme Court [2018 (10) TMI 251 - SC ORDER]. The applicability of LIBOR has also been restored by the Tribunal to the file of the AO for the AY 2012-13. Following the ITAT’s order in assessee’s own case for assessment year 2012-2013, we restore this issue to the file of AO/TPO. The TPO is directed to follow the direction given in assessee’s own case [2020 (6) TMI 135 - ITAT BANGALORE] for the AY 2012-2013. The TPO shall ascertain the applicable LIBOR during the year under consideration and make the adjustment. Fee imputed on corporate guarantee extended to subsidiaries - HELD THAT:- The assessee provided corporate guarantee to USL Holdings Ltd, BVI and USL Holdings UK Ltd without charging any guarantee commission. TPO computed the TP adjustment of Rs. 122,24,28,300 calculated at 3% of corporate guarantee given. DRP confirmed the TP addition made by the TPO. The learned AR argued that corporate guarantee was not an international transactions, it was given out of commercial expediency and as a part of shareholder activity. It was thus argued that TP adjustment should not be made for the corporate guarantee given. It was also argued that without prejudice, the TP adjustment should be restricted to 0.5% of the corporate guarantee given. The assessee also relied on the decision of the Bombay High Court in CIT v Asian Paints India Ltd [2016 (11) TMI 258 - BOMBAY HIGH COURT] and contended that the adjustment if any should be restricted to 0.2% as held in the above decision. The learned DR relied on the TPO, DRP orders and justified the addition. The Bombay High Court in CIT v Everest Kento Cylinders Ltd. [2015 (5) TMI 395 - BOMBAY HIGH COURT] dismissed the revenue’s appeal and upheld the charging of guarantee commission at 0.5% on the corporate guarantee. Thus, the contention of the learned AR that TP adjustment should not be made cannot be accepted. The co-ordinate bench in the case of Manipal Global Education Services Pvt. Ltd [2019 (5) TMI 1942 - ITAT BANGALORE].and recently in Medreich Ltd. [2021 (4) TMI 1321 - ITAT BANGALORE] confirmed the TP addition at 0.5%. Following the above decisions, we direct the AO/TPO to restrict the TP addition on corporate guarantee at 0.5% of the corporate guarantee. Adjustment in respect of purchase of raw material from Shyte & Mackay - HELD THAT:- TPO made an addition of Rs. 68,60,16,563 for the reason that the payments made to W&M for stock purchase has been diverted for onward remittance to Ultra Dynamix and other third parties. The TPO relied on the internal report of the taxpayer submitted to him and held that the international transaction with W&M is same as indicated in the internal report. TPO therefore determined the ALP of this transaction to be NIL by such other method prescribed by the CBDT and the entire amount of Rs. 68,60,16,563 was determined as the adjustment under section 92CA. Before the DRP, assessee assailed the impugned findings of the TPO on various factual reasons as incorporated of the DRP directions. The assessee also argued that proper opportunity of hearing was not provided to the assessee in this regard. The DRP however relied on the TPOs impugned findings and confirmed the above adjustment. On a perusal of the material on record, we find that the assessee was not allowed sufficient opportunity of hearing in connection with the impugned addition. The submissions of the assessee before the DRP has also not been considered and addressed on merits. We thus set aside the impugned TP adjustment and restore the issue to the file of the AO/TPO for proper consideration of facts and to decide as per law after allowing sufficient opportunity of hearing to the assessee. Disallowance under section 14A - HELD THAT:- Disallowance under section 14A of the I.T.Act and restore the issue to the file of the AO. The AO shall follow the above directions of the ITAT and recompute the disallowance u/s 14A of the I.T.Act. It is ordered accordingly. Disallowance of interest u/s 36(1)(iii) - HELD THAT:- We set aside the substantive and the protective addition made under section 36(1)(iii) and restore the issue to the file of the AO to follow similar directions as given above. Disallowance of payments for promotion and advertisement expenses - AO disallowed the sales promotion and advertisement expenses for the reason that these expenses are brand promotion expenditures of USL logo, it promotes the brand the assessee, gives enduring benefit and hence capital in nature - HELD THAT:- Expenditure incurred on sponsoring of sports events are intended to promote business only and hence the same is allowable as expenditure. The allowability of brand promotion expenses was examined by Hon'ble Delhi High Court in the case of Modi Revelon P Ltd [2012 (9) TMI 48 - DELHI HIGH COURT].- We allow deduction of sales promotion and advertisement expenses - As the entire expenses are allowed as revenue expenditure, the question of depreciation does not arise. Issues Involved:1. Notional interest on interest-free advances to Associated Enterprises (AE) (TP Adjustment)2. Fee on corporate guarantee extended to subsidiaries (TP Adjustment)3. Adjustment in respect of purchase of raw material from Whyte & Mackay (TP Adjustment)4. Disallowance under section 14A of the Income-tax Act (Corporate Tax Issue)5. Disallowance of interest under section 36(1)(iii) of the Income-tax Act (Corporate Tax Issue)6. Disallowance of payments for promotion and advertisement expenses (Corporate Tax Issue)7. Disallowance of payments based on Project Spirit Report (Corporate Tax Issue)8. Levy of interest under section 234B of the Income-tax Act9. Excess levy of interest under section 234C of the Income-tax Act10. Short credit of TDS/TCS11. Allowability of education cess paid as a tax-deductible expenditureDetailed Analysis:1. Notional Interest on Interest-Free Advances to AE (TP Adjustment):The assessee provided interest-free loans to its AE for acquiring businesses of global liquor suppliers. The TPO imputed interest at 14.18% (SBI PLR), resulting in a TP adjustment of Rs. 548,04,95,014. The DRP upheld this adjustment. The ITAT, referencing its decision in the assessee's case for AY 2012-2013, directed the TPO to re-examine the computation of arm's length price considering the LIBOR rate.2. Fee on Corporate Guarantee Extended to Subsidiaries (TP Adjustment):The assessee extended corporate guarantees to its subsidiaries without charging a fee. The TPO imputed a guarantee fee at 3%, resulting in a TP adjustment of Rs. 122,24,28,300. The DRP upheld this adjustment. The ITAT, following the Bombay High Court decision in CIT v Everest Kento Cylinders Ltd, directed the AO/TPO to restrict the TP addition to 0.5% of the corporate guarantee.3. Adjustment in Respect of Purchase of Raw Material from Whyte & Mackay (TP Adjustment):The TPO, relying on an internal report on fund diversion, disallowed the purchase of raw materials from Whyte & Mackay, determining the ALP as NIL. The DRP confirmed this adjustment. The ITAT found that the assessee was not given sufficient opportunity to present its case and set aside the TP adjustment, directing the AO/TPO to re-examine the issue.4. Disallowance under Section 14A of the Income-tax Act (Corporate Tax Issue):The AO disallowed Rs. 48,04,00,000 under section 14A read with Rule 8D. The DRP upheld this disallowance. The ITAT, referencing its decision in the assessee's case for AY 2012-2013, remanded the issue to the AO with directions to re-examine the disallowance considering the assessee's own funds and the exempt income earned.5. Disallowance of Interest under Section 36(1)(iii) of the Income-tax Act (Corporate Tax Issue):The AO disallowed Rs. 140,46,63,276 under section 36(1)(iii), applying SBI’s Prime Lending Rate on outstanding loans. The DRP upheld this disallowance. The ITAT, referencing its decision in the assessee's case for AY 2012-2013, remanded the issue to the AO to re-examine the disallowance considering the assessee's own funds.6. Disallowance of Payments for Promotion and Advertisement Expenses (Corporate Tax Issue):The AO treated Rs. 44,33,55,403 spent on brand promotion as capital expenditure. The DRP upheld this view. The ITAT, referencing its decision in the assessee's case for AY 2012-2013, allowed the deduction of these expenses as revenue expenditure.7. Disallowance of Payments Based on Project Spirit Report (Corporate Tax Issue):The AO disallowed Rs. 48,14,00,000 based on the Project Spirit Report and imputed interest of Rs. 6,35,10,000 on alleged interest-free loans. The DRP upheld this disallowance. The ITAT found that the AO did not properly examine the claims and set aside the addition, directing the AO to re-examine the issue.8. Levy of Interest under Section 234B of the Income-tax Act:The ITAT noted that this ground is consequential and dismissed it.9. Excess Levy of Interest under Section 234C of the Income-tax Act:The ITAT directed the AO to calculate interest under section 234C based on the returned income, following the Bangalore Bench order in SAP India Private Limited.10. Short Credit of TDS/TCS:The ITAT directed the AO to verify and grant the TDS credit as per law.11. Allowability of Education Cess Paid as a Tax-Deductible Expenditure:The ITAT, following the Kolkata Bench decision in Kanoria Chemicals & Industries Ltd, held that education cess is not allowable as a deduction.Conclusion:The ITAT partly allowed the appeal, remanding several issues for re-examination and providing specific directions for others.