2022 (4) TMI 1582 - AT - Income Tax

ITAT allows interest deduction for subsidiary investment, remits multiple tax issues for re-examination

ITAT Chennai ruled on multiple issues in this tax assessment case. The tribunal admitted additional grounds regarding DDT levy, noting the assessee had ... Levy of DDT - specific ground challenging levy of DDT on the ground that the assessee had already remitted DDT on 06.10.2015 and the payment is reflected in Form No.26AS - HELD THAT:- We find that the assessee has taken a specific ground challenging levy of DDT on the ground that the assessee had already remitted DDT on 06.10.2015 and the payment is reflected in Form No.26AS. Therefore, considering the fact that the issue raised by the assessee is a legal issue and further, the question of computation of DDT is purely depend upon taxes paid by the assessee on distribution of dividend and hence, by following the decision of the Hon’ble Supreme Court in the case of M/s.National Thermal Power Co. Ltd. v [1996 (12) TMI 7 - SUPREME COURT] we admit additional grounds filed by the assessee. TP Adjustment - corporate guarantee fee - HELD THAT:- We direct the AO/TPO to compute corporate guarantee fee @ 0.5% of total corporate guarantee given to their AEs. Disallowance of interest expenditure u/s.36(1)(iii) - assessee has diverted interest bearing funds for the purpose of investments made in subsidiary company M/s.Aban Holdings Pvt. Ltd., Singapore - AO has disregarded the arguments of the assessee that the investment made in share capitals of subsidiary company is for commercial expediency and the assessee derives business advantage in the nature of sharing Revenue from operations along with its subsidiary company. Therefore, when there is a commercial expediency, the question of disallowance of interest expenses does not arise - HELD THAT:- There is no dispute with regard to the fact that M/s.Aban Holdings Pvt. Ltd., Singapore, is a 100% subsidiary of assessee company. It was also not in dispute that the assessee company and subsidiary companies are in the business of rendering services in connection with exploration of oil and gas. The assessee had owned rigs required for carrying out its business activity in the name of subsidiary company in Singapore, for the sole purpose of getting financial advantage by arranging funds required for acquiring rigs. Assessee has filed necessary evidences to prove that the investment made in subsidiary company is facilitated the subsidiary company to rise further capital from the Banks and Financial Institutions, to have a better debt equity ratio. We further noted that the assessee and the subsidiary company are in common business, having some business advantage in growing business in international market. Therefore, we are of the considered view that the assessee, as a businessman, has taken a prudent decision to make investments in subsidiary company to derive commercial advantage and thus, we are of the considered view that the AO as well as the DRP are erred in disallowing interest expenses u/s.36(1)(iii) of the Act, for diversion of interest bearing funds to make investment in subsidiary company. TDS u/s 195 - disallowance of professional and consultancy fee paid to non-residents u/s.40(a)(i) - HELD THAT:- We find that an identical issue had been considered by the Tribunal, in the assessee’s own case for the AY 2015-16, wherein, the Tribunal by following its earlier decision for the AYs 2007-08 & 2012-13 held that the payment made by Branch Office of the assessee at Dubai to non-resident service provider does not come under the definition of fee for technical services and thus, remitted the matter back to the file of the AO to examine the issue afresh in light of the discussions and Article-7 of DTAA between India and UAE. We set aside the issue to the file of the AO and direct the AO to follow the directions of the Tribunal given in the assessee’s own case for the earlier assessment years, to decide the issue for the impugned assessment year in accordance with law. Disallowance of drilling services & management fees paid to non-residents for failure to deduct TDS u/s.195 - An identical issue has been considered by the Tribunal, in the assessee’s own case for the AY 2015-16 [2021 (4) TMI 768 - ITAT CHENNAI wherein, by following its earlier decision for the AY 2012-13, held that twin conditions of rendering services in India and utilization of such services in India are not satisfied to bring the impugned payment within the definition of fee for technical services as per Sec.9(1)(vii) of the Act read with explanation and thus, the question of deduction of TDS on said payments does not arise. Denial of tax credit u/s.90 towards Income Tax paid in Singapore - The issue of disallowance of withholding taxes u/s.90 of the Act, is squarely covered in favour of the assessee by the decision of co-ordinate Bench in the assessee’s own case for the AY 2015-16 [2021 (4) TMI 768 - ITAT CHENNAI in IT (TP) A No.86/Chny/2019, wherein, the Tribunal by following its earlier order for the AY 2012-13, remitted the issue back to the file of the AO and direct the AO to re-examine the issue in light of the directions given by the Tribunal for the earlier years. Disallowance of loss of forward contracts - AO has disallowed Forex loss claimed by the assessee on the ground that the transactions are in the nature of speculative transactions as per the provisions of Sec.43(5) and further, the assessee has failed to file necessary evidences to prove that the import/export obligation is in excess of value of forward contracts entered into by the assessee - HELD THAT:- We find that an identical issue had been considered by the Tribunal in the assessee’s own case for the AY 2015-16 [2021 (4) TMI 768 - ITAT CHENNAI] in IT (TP) A No.86/Chny/2019, wherein, the Tribunal by following its earlier decision for the AY 2012-13, set aside the issue to the file of the and direct the AO to re-consider the issue in light of the decision of the ITAT Bangalore Benches in the case of M/s.Essilor India Pvt. Ltd. v. DCIT [2020 (2) TMI 1487 - ITAT BANGALORE] Disallowance u/s.14A r.w.r.8D - HELD THAT:- We find that there is no merit in the arguments of the assessee that it has sufficient own funds to make investments in shares/mutual funds which yielded exempt income, because, the AO has made disallowance under third limb of Rule 8D @ 0.5% of average value of investment in respect of other expenses, but not towards interest expenses under the second limb of Rule 8D of Income Tax Rules, 1962. Therefore, the arguments of the assessee that it has sufficient own funds devoid of merits. Disallowance computed by the AO @ 0.5% of average value of investment, it is an admitted fact that the assessee has earned exempt income however, not made any suo moto disallowance of expenses in relation to exempt income, even though, the assessee has debited various expenses into the P&L A/c. It is logical to conclude that when the assessee has common expenses for taxable and exempt income, then the possibility of certain expenses attributable towards exempt income, cannot be ruled out. Therefore, we are of the considered view that there is no error in the reasons given by the AO to determine the disallowance u/s.14A r.w.r.8D of Income Tax Rules. AO has considered only those investments, which yielded exempt income for the impugned assessment years. Therefore, we are of the considered view that there is no error in the findings given by the AO to make addition towards disallowance u/s.14A of the Act. Hence, we are inclined to uphold the findings of the lower authorities and reject the ground taken by the assessee. Disallowance u/s.14A r.w.r.8D to book profit computed u/s.115JB - As we find that the ITAT Special Bench in the case of M/s.Vireet Investments Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] held that computation under Clause (f) of Explanation-1 to Sec.115JB(2) of the Act, is to be made without resorting the computation as contemplated u/s.14A r.w.r.8D of Income Tax Rules, 1962, which means, disallowance made u/s.14A r.w.r.8D of Income Tax Rules, 1962, cannot be added to book profit computed u/s.115JB of the Act. Hence, we direct the AO to delete the additions made towards disallowance u/s.14A r.w.r.8D of Income Tax Rules, 1962, to book profit computed u/s.115JB of the Act. Addition towards interest receipts on the basis of Form 26AS - AO has made additions towards interest receipts on the basis of Form 26AS on the ground that the assessee could not file reconciliation explaining the difference between interest received from M/s.Aban Green Power Pvt. Ltd., as per the books of accounts, when compared to Form 26AS - explanation of the assessee before the AO that the assessee has filed reconciliation explaining the difference between interest income accounted for the books of accounts of the assessee and the interest income reported in Form 26AS - HELD THAT:- We find that the AO has made addition towards interest income on the basis of Form 26AS by observing that there is a difference between interest income reported in Form 26AS and interest income as per the books of accounts. It was the explanation of the assessee that it has filed a reconcile explaining the difference and according to the assessee, the difference amounting to Rs.8,52,000/- represents lease rental received by the assessee from the very same company, which includes service tax portion. Further, the assessee has accounted lease rental and service tax separately which resulted in difference in income as per the books of accounts when compared to Form 26AS. The said difference has been explained to the AO by filing a detailed reconciliation statement. Facts are contradictory. The AO claims that the assessee has not filed reconciliation, whereas, the assessee claims that it has filed reconciliation. Therefore, we are of the considered view that the issue needs to be remitted back to the file of the AO for further verification. Hence, we set aside the issue to the file of the AO and direct the AO to re-examine the claim in light of submissions of the assessee in accordance with law. Disallowance of expenses u/s.37(1) - AO disallowed a sum on the basis of Audit Report issued by the Auditors, as per which, the sum referred to a penalty paid with respect to delayed reversal of service tax credit availed by the assessee - HELD THAT:- As perused the materials available on record and gone through orders of the authorities below. The assessee claims that expenses reported by the Tax Auditor in Clause 21(a) of Form 3CD pertains to interest paid on delayed reversal of service tax credit, whereas, the AO noted that the assessee has paid penalty for delayed reversal of service tax credit. Facts need to be verified by the AO. Hence, we set aside the issue to the file of the AO and direct the AO to re-examine the issue in light of claim of the assessee in accordance with law. Disallowance of MAT credit - AO has denied the MAT credit only on the ground that the tax payable under normal provisions of the Act is higher than the tax payable under book profit for both the assessment years -HEDL THAT:- It was the explanation of the assessee before the AO that if the AO passes order giving effect to the order of the Tribunal, then tax payable under normal provisions of the Act, would be less than the tax payable under the provisions of Sec.115JB of the Act. We find that the assessee is entitled for MAT credit for taxes paid under book profit and such taxes can be carry forward to subsequent years. The AO has not denied the fact that the assessee is not entitled for MAT credit, but denied MAT credit only on the ground that income tax payable under normal provisions is higher than tax payable under book profit. On the other hand, the assessee proved that if relief allowed by ITAT, is considered by the AO, then tax payable under book profit, is higher than tax payable under normal provisions of the Act. Therefore, we are of the considered view that the facts need to be examined by the AO to allow credit for MAT in accordance with the provisions of Sec.115JB of the Act. Hence, we set aside the issue to the file of the AO and direct the AO to re-examine the claim of the assessee in accordance with law. Levy of dividend distribution tax (“DDT') - AO has passed final assessment order u/s.143(3) r.w.s.144C(13) of the Act, without considering the fact that the assessee had paid DDT and such tax was reported in Form 26AS - HELD THAT:- As perused the materials available on record. The AO has levied DDT on the ground that the assessee does not paid tax within specified period. It was the explanation of the assessee that the assessee has paid DDT on 06.10.2015 and the same was reported in Form 26AS. The facts need to be verified. Therefore, we are of the considered view that the issue needs to be set aside to the file of the AO. Hence, we set aside the issue to the file of the AO and direct the AO to reexamine the claim of the assessee in light of evidences filed to prove the facts that the assessee had already paid DDT. If assessee has already paid DDT, then the AO is directed to delete the addition towards DDT. Issues Involved:1. Upward adjustment of ALP for corporate guarantee fee.2. Disallowance of interest expenditure u/s.36(1)(iii).3. Disallowance of professional and consultancy fee paid to non-residents u/s.40(a)(i).4. Disallowance of drilling services & management fees paid to non-residents for failure to deduct TDS u/s.195.5. Denial of tax credit u/s.90 for taxes paid in Singapore.6. Disallowance of loss on forward contracts.7. Disallowance u/s.14A r.w.r.8D.8. Addition towards interest receipts on the basis of Form 26AS.9. Disallowance of expenses u/s.37(1).10. Disallowance of MAT credit.11. Levy of Dividend Distribution Tax (DDT).Issue-wise Detailed Analysis:1. Upward Adjustment of ALP for Corporate Guarantee Fee:The AO made a TP adjustment of Rs.64,26,250/- towards corporate guarantee fee at 1% on the total corporate guarantee outstanding. The assessee argued that the corporate guarantee does not result in any quantifiable benefit to the AEs and should not be considered an international transaction. The Tribunal, following the decision in the assessee's own case for AY 2015-16, directed the AO to compute the corporate guarantee fee at 0.5% of the total corporate guarantee given to their AEs.2. Disallowance of Interest Expenditure u/s.36(1)(iii):The AO disallowed Rs.82,40,26,367/- on the ground that the assessee diverted interest-bearing funds to invest in its subsidiary, M/s.Aban Holdings Pvt. Ltd., Singapore. The assessee contended that the investment was for commercial expediency. The Tribunal, referencing its earlier decisions, remitted the issue back to the AO to verify if the investment was made for maintaining controlling interest and to decide accordingly.3. Disallowance of Professional and Consultancy Fee Paid to Non-residents u/s.40(a)(i):The AO disallowed payments to non-residents for professional and consultancy services due to non-deduction of TDS, considering them as fees for technical services. The Tribunal, following its decision in the assessee's case for AY 2015-16, remitted the issue back to the AO to examine the payments in light of the DTAA between India and UAE and decide afresh.4. Disallowance of Drilling Services & Management Fees Paid to Non-residents for Failure to Deduct TDS u/s.195:The AO disallowed Rs.10,87,63,665/- paid to M/s.Haledon International Corporation, Dubai, treating it as fees for technical services. The Tribunal, consistent with its earlier decisions, remitted the issue back to the AO to reconsider the matter in light of the DTAA and decide accordingly.5. Denial of Tax Credit u/s.90 for Taxes Paid in Singapore:The AO denied tax credit of Rs.5,97,27,171/- for taxes paid in Singapore due to lack of evidence that the interest income was received in excess of the interest expenditure. The Tribunal, following its earlier decisions, remitted the issue back to the AO to re-examine the claim in light of the Tribunal's directions for earlier years.6. Disallowance of Loss on Forward Contracts:The AO disallowed the loss on forward contracts, treating them as speculative transactions. The Tribunal, following its earlier decisions, remitted the issue back to the AO to reconsider the matter in light of the decision in M/s.Essilor India Pvt. Ltd. v. DCIT.7. Disallowance u/s.14A r.w.r.8D:The AO disallowed Rs.6,11,500/- under Rule 8D(2)(iii) for expenses related to exempt income. The Tribunal upheld the disallowance under normal provisions but directed the AO to delete the addition to book profit computed u/s.115JB, following the ITAT Special Bench decision in M/s.Vireet Investments Pvt. Ltd. v. JCIT.8. Addition Towards Interest Receipts on the Basis of Form 26AS:The AO made additions based on Form 26AS due to differences in reported interest income. The Tribunal remitted the issue back to the AO to verify the reconciliation provided by the assessee and decide accordingly.9. Disallowance of Expenses u/s.37(1):The AO disallowed Rs.43,755/- based on the Audit Report, treating it as a penalty. The assessee claimed it was interest on delayed reversal of service tax credit. The Tribunal remitted the issue back to the AO to verify the nature of the expenses and decide accordingly.10. Disallowance of MAT Credit:The AO denied MAT credit for AYs 2014-15 & 2015-16, stating that tax payable under normal provisions was higher. The Tribunal remitted the issue back to the AO to re-examine the claim considering the relief allowed by the ITAT.11. Levy of Dividend Distribution Tax (DDT):The AO levied DDT, claiming the tax was not paid within the specified period. The assessee contended that DDT was paid and reflected in Form 26AS. The Tribunal remitted the issue back to the AO to verify the payment and delete the addition if the tax was already paid.Conclusion:The appeal was partly allowed for statistical purposes, with multiple issues remitted back to the AO for further verification and reconsideration in light of the Tribunal's directions and earlier decisions.