2019 (5) TMI 732 - AT - Income Tax

Tribunal decision: AO's appeals dismissed, assessee's cross-objections partly allowed. Key issues: deductions, arm's length pricing.

The Tribunal dismissed the Assessing Officer's appeals and partly allowed the assessee's cross-objections. The decision provided relief on issues such as ... Deduction under Chapter VI-A (section 80IAB) - Netting of interest income against interest expenditure - Deduction for charitable donations under section 80G - Disallowance under section 14A - Profit linked deduction on enhanced profits (recomputation after disallowances) - Transfer pricing - issuance of corporate guarantees and 'international transaction' - Arm's length price for international related party loans - CBDT circular accepting judicial view on Chapter VI A recomputation Deduction under Chapter VI-A (section 80IAB) - Netting of interest income against interest expenditure - Whether interest income (in whole or net) is eligible while computing deduction under section 80IAB - HELD THAT: - The Tribunal followed the coordinate bench and High Court precedents which permit netting of interest and, on facts and binding authorities, upheld the CIT(A)'s direction to exclude only the net interest income while computing deduction under section 80IAB. The coordinate bench decision in the assessee's earlier year, affirmed by a Tribunal order and supported by the jurisdictional High Court authority cited in the order, rendered the grievance of the Assessing Officer academic. For the subsequent assessment year the same position was applied by the Tribunal and the Assessing Officer's contrary contention rejected. [Paras 7, 8, 42, 44] The relief granted by the CIT(A) to allow interest netting for computing section 80IAB was upheld; Assessing Officer's appeals on this point dismissed and assessee's cross objections allowed. Deduction for charitable donations under section 80G - Whether donations are to be allocated between eligible and non eligible businesses for computing deduction under section 80G and its effect on section 80IAB computation - HELD THAT: - The Tribunal agreed with the CIT(A) that deduction under section 80G is a computation adjustment to total income and is not an expense to be allocated among different heads or undertakings in the manner adopted by the Assessing Officer. The Tribunal observed that donation is an allocation of income and the tax concession is policy driven; therefore the Assessing Officer's method of proportionate allocation to reduce 80IAB was incorrect. [Paras 11, 12, 51, 52] The CIT(A)'s deletion of the disallowance was sustained and the Assessing Officer's appeal on this point dismissed. Profit linked deduction on enhanced profits (recomputation after disallowances) - CBDT circular accepting judicial view on Chapter VI A recomputation - Whether disallowances increasing business profits (including specific disallowances) permit a higher Chapter VI A deduction and whether recomputation of 80IAB is required after such disallowances - HELD THAT: - The Tribunal noted the CBDT circular accepting High Court decisions that where a disallowance relates to the business activity against which a Chapter VI A deduction is claimed, the deduction is admissible on profits enhanced by such disallowance. Although the circular cited illustrative cases, its acceptance of the principle was applied; consequently the CIT(A)'s direction to recompute 80IAB after incorporating relevant disallowances was upheld. [Paras 16, 46, 47, 48, 49] CIT(A)'s direction to recompute the deduction under Chapter VI A on enhanced profits was sustained; Assessing Officer's appeal on this point dismissed. Disallowance under section 14A - Extent of disallowance under section 14A and its limitation by the amount of exempt income - HELD THAT: - Relying on the jurisdictional High Court authority cited by the parties, the Tribunal held that the section 14A disallowance cannot exceed the amount of tax exempt income. Applying that principle to the years under appeal, the Tribunal restricted the section 14A disallowance to the amount of dividend income actually received in the relevant year and accordingly partly allowed the assessee's cross objections. [Paras 29, 30, 57, 58] Disallowance under section 14A restricted to the amount of tax exempt income for the relevant year; cross objections partly allowed to that extent. Transfer pricing - issuance of corporate guarantees and 'international transaction' - Whether issuance of corporate guarantees (without specific cost) constitutes an international transaction attracting transfer pricing adjustment - HELD THAT: - Following a coordinate bench analysis, the Tribunal held that issuance of corporate guarantees in the nature of shareholder/quasi capital activity generally does not constitute an 'international transaction' within the meaning of section 92B so as to permit ALP adjustment, particularly where guarantees do not have a demonstrable bearing on profits, income, losses or assets. The Tribunal observed that shareholder activities, absent specific cost or commercial service, fall outside the provision for services and, on the facts, no material showed that the guarantees affected profits or assets so as to bring them within the residuary clause. [Paras 22, 23, 24] The ALP adjustment sustained by the CIT(A) in respect of corporate guarantees was set aside; assessee's cross objection allowed on this point and Assessing Officer's appeal dismissed as infructuous. Arm's length price for international related party loans - Appropriate arm's length interest rate for interest free/low interest loan advanced to an associate enterprise - HELD THAT: - The Tribunal, applying earlier coordinate bench and High Court reasoning, rejected the higher notional rate adopted by the TPO and held that where the AE had itself borrowed at LIBOR+145 bps and the parent advanced funds to a subsidiary under group control (reducing risk), the ALP should not exceed the AE's borrowing cost. The additional credit risk adjustment adopted by the TPO was held unwarranted; the correct ALP interest rate was computed and the ALP adjustment restricted accordingly. [Paras 34, 35, 36] ALP adjustment in respect of interest on intercompany loan restricted to LIBOR+145 bps (i.e. 4.14% as computed); assessee granted relief by reduction of the adjustment. Final Conclusion: Appeals of the revenue were dismissed and several of the assessee's cross objections were allowed or partly allowed: the tribunal upheld netting/eligibility principles for section 80IAB, sustained the CIT(A)'s allowance of section 80G deductions, applied the CBDT policy on recomputation of Chapter VI A deductions after disallowances, restricted section 14A disallowances to the amount of exempt income, deleted transfer pricing adjustments in respect of corporate guarantees, and limited ALP adjustment on intercompany loan interest to the rate supported by the record. Issues Involved:1. Deduction under section 80IAB regarding net interest income.2. Deduction under section 80G for donations.3. Adjustment of deduction under section 80IAB due to disallowance under section 14A.4. Arm’s length price adjustment for non-charging of guarantee fees from Associate Enterprise (AE).5. Disallowance under section 14A exceeding the amount of tax-exempt income.6. Upward adjustment for non-charging of interest on loans to AE.Issue-wise Detailed Analysis:1. Deduction under Section 80IAB Regarding Net Interest Income:The Assessing Officer (AO) contested the CIT(A)’s direction to exclude only the net interest income while computing the deduction under section 80IB, arguing that interest income cannot be netted off with interest expenditure incurred for business. The Tribunal noted that a coordinate bench had previously confirmed that the entire interest income is eligible for deduction under section 80IAB. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court’s ruling in CIT Vs Nirma Limited, which allowed the netting of interest for this deduction. Thus, the AO's appeal was dismissed, and the assessee's cross-objection was allowed.2. Deduction under Section 80G for Donations:The AO argued that the CIT(A) erred in deleting the disallowance made for the wrong claim under section 80G, asserting that donations should be allocated in proportion to turnover, reducing the deduction under section 80IB. The Tribunal upheld the CIT(A)’s decision, stating that donations are not expenses to be allocated to different heads but adjustments from adjusted gross total income. The Tribunal confirmed that the deduction under section 80G is to be allowed in the computation of total income, not as an expense allocation. Therefore, the AO's appeal on this issue was dismissed.3. Adjustment of Deduction Under Section 80IAB Due to Disallowance Under Section 14A:The AO contended that the CIT(A) erred in directing the AO to recompute the deduction under section 80IAB after increasing the amount of deduction by the disallowance under section 14A. The Tribunal noted that the issue is covered by the CBDT circular No. 37/2016, which accepts that higher profits resulting from disallowances should lead to higher profit-linked deductions under Chapter VI-A. Consequently, the Tribunal upheld the CIT(A)’s decision and dismissed the AO’s appeal.4. Arm’s Length Price Adjustment for Non-charging of Guarantee Fees from AE:The AO and the assessee both appealed against the CIT(A)’s decision to partially confirm the upward adjustment for non-charging of guarantee fees from the AE, setting the rate at 2% instead of 3%. The Tribunal referenced several decisions, including Micro Ink Ltd Vs ACIT, concluding that issuance of corporate guarantees does not constitute an international transaction under section 92B. The Tribunal held that no arm’s length price adjustment could be made for such guarantees, thus deleting the ALP adjustment and dismissing the AO’s appeal as infructuous.5. Disallowance Under Section 14A Exceeding the Amount of Tax-exempt Income:The assessee contested the disallowance under section 14A, which exceeded the amount of tax-exempt income. The Tribunal, referencing the jurisdictional High Court’s judgment in CIT Vs Corrtech Energy Pvt Ltd, held that disallowance under section 14A cannot exceed the tax-exempt income. Therefore, the Tribunal restricted the disallowance under section 14A to the amount of tax-exempt income and partly allowed the assessee’s cross-objection.6. Upward Adjustment for Non-charging of Interest on Loans to AE:The assessee challenged the ALP adjustment for non-charging of interest on loans to AE. The Tribunal noted that the AE borrowed funds at LIBOR plus 145 bps, and additional risk adjustments were unwarranted. The Tribunal directed the AO to restrict the ALP adjustment to LIBOR plus 145 bps, thereby partly allowing the assessee’s cross-objection.Conclusion:The Tribunal dismissed the AO's appeals for both assessment years and partly allowed the assessee's cross-objections, providing relief on various grounds, including the eligibility of interest income for deduction under section 80IAB, the correct computation of deductions under sections 80G and 14A, and the appropriate arm’s length price adjustments for transactions with AEs.