2020 (7) TMI 125 - AT - Income Tax

Appeal outcome: Assessee partially wins, revenue appeal dismissed. Section 14A re-examination ordered. Clarification on disallowance.

The ITAT partially allowed the assessee's appeal and dismissed the revenue's appeal. It directed the AO to re-examine the disallowance under Section 14A, ... Disallowance u/s 14A r.w Rule 8D(2)(iii) - assessee had offered a suo motto disallowance - HELD THAT:- As relying on own case [2019 (10) TMI 995 - ITAT MUMBAI] we restore the matter back to the file of learned AO on similar lines. The learned AO is directed to reappreciate the disallowance made by the assessee and invoke Rule 8D only if not satisfied with assessee’s working of disallowance. It is made clear that if the disallowance is computed in terms of Rule 8D(2)(iii) then apart from the directions of Ld. CIT(A) to exclude certain investments, those investments which have not yielded any exempt income during the year under consideration would also be excluded as per the decision of ACIT Vs. Vireet Investment (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI]. Accordingly, Ground No.1 of assessee’s appeal may be treated as partly allowed for statistical purposes. TP Adjustment - Interest charged on the average share application money advanced by the assessee to the AE Saudi Ensas Company, treated by the TPO as loan - HELD THAT:- transfer pricing adjustment as regards charging of notional interest on the share application money that was given by the assessee to its wholly owned subsidiary company viz. Saudi Ensas Company for Engineering Services WLL, UAE, for which allotment of shares was pending on 31.03.2012, remains the same as was there before the Tribunal in the assessee's own case for A.Y 2009-10 and A.Y 2010-11 [2019 (10) TMI 995 - ITAT MUMBAI] .Finding ourselves to be in agreement with the aforesaid view of the Tribunal, we respectfully follow the same. Accordingly, we uphold the deletion of the addition that was made by the A.O/TPO towards charging of notional interest on share application money pending allotment of shares with its wholly owned subsidiary company - Decided against revenue. Issues Involved:1. Disallowance under Section 14A of the Income-tax Act, 1961.2. Interest on outstanding amount of Associated Enterprise.3. Additional ground regarding Education Cess and Higher Education Cess as disallowable expenditure under Section 40(a)(ii) of the Income-tax Act, 1961.4. Transfer pricing adjustment related to share application money treated as a loan.Detailed Analysis:Issue 1: Disallowance under Section 14AThe assessee company, part of the Tata group, had suo motto disallowed Rs. 17 lakhs under Section 14A of the Income-tax Act, 1961, for administrative expenses related to earning exempt dividend income. The Assessing Officer (AO) disagreed, calculating the disallowance under Rule 8D(2)(iii) at Rs. 2,01,51,905/-. After considering the suo motto disallowance, the AO added Rs. 1,84,51,905/-. The CIT(A) upheld the AO's computation but directed to exclude investments yielding taxable income and strategic investments. The ITAT, following its previous orders for AY 2009-10 and 2010-11, restored the matter to the AO to examine the sufficiency of the suo motto disallowance and exclude non-dividend-yielding investments.Issue 2: Interest on Outstanding Amount of Associated EnterpriseThe CIT(A) and AO/TPO had charged interest on an outstanding amount of Rs. 4,84,879/- from the assessee's wholly owned subsidiary in Saudi Arabia, treating it as a loan. The CIT(A) upheld the charging of interest but directed it to be calculated at LIBOR rate + 3% markup. The ITAT noted that the assessee did not press this ground, and hence it was dismissed as not pressed.Issue 3: Additional Ground Regarding Education Cess and Higher Education CessThe additional ground raised by the assessee was whether Education Cess and Higher Education Cess are disallowable under Section 40(a)(ii). The ITAT admitted this ground, referencing the Bombay High Court's judgment in Sesa Goa Limited vs. Joint Commissioner of Income-tax, which held that 'cess' is not included in 'any rate or tax levied' under Section 40(a)(ii). Therefore, the ITAT concluded that Education Cess and Higher Education Cess are not disallowable under Section 40(a)(ii) and allowed the additional ground.Issue 4: Transfer Pricing Adjustment Related to Share Application MoneyThe AO/TPO had treated share application money advanced to the assessee's wholly owned subsidiary in Saudi Arabia as a loan and charged notional interest of Rs. 1,81,20,323/-. The CIT(A) vacated this adjustment, relying on the Bombay High Court's judgment in Vodafone India Services Pvt. Ltd. The ITAT upheld the CIT(A)'s decision, referencing its own previous orders and other judicial precedents, concluding that the share application money could not be treated as a loan for transfer pricing purposes.Separate Judgments:The ITAT delivered a single judgment covering both the assessee's and the revenue's appeals. The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The ITAT directed the AO to re-examine the disallowance under Section 14A and upheld the CIT(A)'s deletion of the transfer pricing adjustment related to share application money.Conclusion:The ITAT's judgment addressed all the issues comprehensively, providing detailed reasoning for each decision, ensuring consistency with previous orders and judicial precedents. The judgment clarified the treatment of Education Cess and Higher Education Cess, disallowance under Section 14A, and transfer pricing adjustments, providing clear directives for the AO's further actions.