2021 (2) TMI 666 - AT - Income Tax

Tribunal modifies CIT(A)'s directions on disallowance, transfer pricing, and club expenses

The Tribunal upheld the CIT(A)'s directions with modifications in a case involving disallowance under Section 14A, transfer pricing adjustments, and club ... Disallowance u/s 14A read with Rule 8D(2)(ii) - disallowance of interest - suo motto disallowance offered by the assessee in its return of income - HELD THAT:- Exhaustive contentions that were raised by the assessee to buttress its aforesaid claim for reduction of the disallowance under Sec. 14A were required to be verified and could not have been accepted by the CIT(A) on the very face of it. Accordingly, finding no infirmity in the restoring of the issue pertaining to the assessee‟s claim for reducing the disallowance under Sec. 14A r.w. Rule 8D by the CIT(A), we uphold his order to the said extent. However, before parting, we may herein observe that the claim of the assessee that the disallowance under Sec. 14A is liable to be restricted to the extent of the exempt income received or receivable by the assessee during the year in question, the same, merits acceptance. Our aforesaid view is fortified by the judgement of the Joint Investments Pvt. Ltd. Vs. CIT [2015 (3) TMI 155 - DELHI HIGH COURT] We, thus, in terms of our aforesaid observations uphold the restoration of the aforesaid issue by the CIT(A) to the file of the A.O, with a rider that the disallowance be restricted to the extent of the exempt income received or receivable by the assessee during the year under consideration. Claim of the revenue that the CIT(A) was in error in directing the A.O to consider only those investments made in non-subsidiary company which had yielded dividend income for the purpose of disallowance under Sec. 14A r.w. Rule 8D(2)(iii), as the same was contrary to the CBDT Circular No. 5 of 2014, dated 11.02.2014, we are unable to persuade ourselves to accept the same. Similar reliance placed by the revenue on the aforesaid CBDT Circular No. 5 of 2014, dated 11.02.2014 was rejected by the Hon’ble High Court of Madras in Redington India Ltd. Vs. Addl. CIT [2017 (1) TMI 318 - MADRAS HIGH COURT] and in PCIT Vs. IL & FS Development Company Ltd. [2017 (8) TMI 732 - DELHI HIGH COURT] - At the same time, we in light of the judgment of the Hon’ble Supreme Court in Maxopp Investment Ltd. Vs. CIT [2018 (3) TMI 805 - SUPREME COURT] are unable to subscribe to the observation of the CIT(A), wherein he had inter alia directed the A.O to consider only those investments made in non-subsidiary companies which had yielded dividend income for the purpose of disallowance under Sec. 14A r.w Rule 8D(2)(ii). Accordingly, the aforesaid observation/direction of the CIT(A) is expunged and the latters order is modified to the said extent. TP Adjustment - guarantee/counter guarantee given by the assessee to various banks and other corporate bodies for and on behalf of its AE - HELD THAT:- It is the claim of the ld. A.R that the aforesaid bank guarantee charges that were recovered by the assessee from its AE, viz. Elsamex SA were not considered by the TPO while benchmarking the transaction of providing of guarantee/counter guarantee by the assessee to the various foreign banks and other corporate bodies for and on behalf of its aforesaid AE. It is further stated by the ld. A.R that if over and above the corporate guarantee charges of 1% charged by the assessee to its AE, the aforesaid bank guarantee charges of ₹ 5.67 crores recovered from the AE (which are in the range of 1.25% to 2.6%) are taken into consideration, then, no transfer pricing adjustment would be called for in the hands of the assessee. On being confronted with the aforesaid facts, the ld. D.R fairly submitted that the matter may be restored to the file of the TPO for considering the aforesaid claim of the assessee. In the backdrop of the aforesaid facts, we are of the considered view that as the aforesaid claim was not raised by the assessee before the lower authorities, therefore, in all fairness the matter requires to be restored to the file of the TPO for fresh adjudication after considering the same. Accordingly, we “set aside‟ the issue to the file of the TPO, with a direction to consider the aforesaid claim of the assessee in the course of the “set aside‟ proceedings. Disallowance of club expenses - allowable as a business expenditure or not? - HELD THAT:- The issue pertaining to allowability of club expense as a revenue expenditure is squarely covered by the Judgment of the Hon’ble High Court of Bombay in the case of Otis Elevator Company India Ltd. Vs. CIT [1991 (4) TMI 53 - BOMBAY HIGH COURT] wherein as approved the view taken by the Tribunal that the payment of club membership is allowable as a revenue expenditure - also see M/S GROZ BECKERT ASIA LIMITED [2013 (2) TMI 375 - PUNJAB & HARYANA HIGH COURT] - thus we are of the considered view that the CIT(A) had rightly allowed the assessee‟s claim for deduction of the club membership fees of ₹ 4,79,225/- as a revenue expenditure. Also, we concur with the observation of the CIT(A) that the rejection of the assessee‟s claim for deduction of club membership expenses by the A.O, de hors any verification on his part that as to whether or not the said expenditure was incurred by the assessee wholly and exclusively in the course of its business, also, cannot be sustained. Whether CIT(A) had exceeded his powers under Sec.251(1)(a) by “setting aside‟ the matter to the file of the A.O/TPO for carrying out a fresh benchmarking and determining the arm‟s length price of the guarantee fees ? - We are unable to concur with the same. On a perusal of the order of the CIT(A), we find that as observed by him, instead of quashing the addition on a mere technical ground i.e a wrong basis of comparison adopted by the TPO, the CIT(A) had in all fairness restored the issue to the file of the A.P/TPO, with a limited direction and a defined line of action for carrying out a fresh benchmarking and determining the arm‟s length price of the aforesaid international transaction. In light of the aforesaid limited purpose for which the matter had been restored with specific directions to the file of the AO/TPO, we are unable to persuade ourselves to agree with the department that the CIT(A) by so doing had exceeded the jurisdiction vested with him under Sec. 251(1)(a) of the Act. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Transfer Pricing Adjustment for Corporate Guarantee/Counter Guarantee.3. Disallowance of Club Expenses.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The assessee contested the disallowance of interest and administrative expenses under Section 14A r.w. Rule 8D. The CIT(A) had restored the matter to the AO with specific directions, including following decisions in HDFC Bank Ltd. vs. DCIT and considering only investments yielding dividend income for disallowance under Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s restoration but added that the disallowance should be restricted to the exempt income received or receivable during the year, aligning with the Delhi High Court judgment in Joint Investments Pvt. Ltd. vs. CIT. The Tribunal partly allowed the revenue's appeal by expunging the CIT(A)'s direction to consider only investments yielding dividend income, following the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT.2. Transfer Pricing Adjustment for Corporate Guarantee/Counter Guarantee:The assessee argued that the transfer pricing adjustment for the guarantee/counter guarantee provided to its AE was incorrect. The CIT(A) upheld the TPO's adjustment, but the Tribunal found that the TPO/CIT(A) had not considered the bank guarantee charges recovered by the assessee from its AE. The Tribunal restored the matter to the TPO for fresh adjudication, directing the TPO to consider the bank guarantee charges recovered by the assessee. For A.Y. 2011-12, the CIT(A) had directed the AO/TPO to conduct fresh benchmarking excluding rates applied by commercial banks, in line with Bombay High Court decisions. The Tribunal upheld this direction, dismissing the revenue's claim that the CIT(A) exceeded his powers under Section 251(1)(a).3. Disallowance of Club Expenses:The AO disallowed club expenses, treating them as personal and capital in nature. The CIT(A) allowed the expenses, finding the AO had not verified if the expenses were incurred wholly and exclusively for business purposes. The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's judgment in Otis Elevator Company India Ltd. vs. CIT, which allows club membership fees as a revenue expenditure.Conclusion:The Tribunal's decision involved a detailed examination of disallowance under Section 14A, transfer pricing adjustments, and club expenses. The Tribunal upheld the CIT(A)'s directions with modifications, ensuring compliance with judicial precedents and principles of fairness in reassessment. The appeals were partly allowed for statistical purposes, providing a balanced resolution to the contested issues.