Appeal partially allowed: Interest adjustment upheld, expenses dismissed, deduction remanded for verification.

The Tribunal partly allowed the appeal. It upheld the AO's decision on the notional interest adjustment for advances to subsidiaries, dismissed the disallowance of expenses related to exempt income due to lack of AO's satisfaction, and remanded the deduction claim under Sec.80JJAA for verification in line with the retrospective application of amended provisions.

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Issues Involved:
1. Upward adjustment on notional interest on advances to wholly-owned subsidiaries/associated enterprises.
2. Disallowance of expenses related to exempt income under Sec.14A r.w.r.8D.
3. Disallowance of deduction claim under Sec.80JJAA.

Issue-wise Detailed Analysis:

1. Upward Adjustment on Notional Interest:
The first issue pertains to the AO's upward adjustment of Rs.26,64,145/- on notional interest for advances made to the assessee's wholly-owned subsidiaries/associated enterprises. The TPO noted interest-free advances to Craftsman Automation Singapore Pte Ltd. and Craftsman Marine BV, and applied an average Libor + 200 bps to compute the adjustment. The DRP affirmed the TPO/AO's action, stating that independent enterprises would not extend interest-free loans, necessitating an allocation of interest income to reflect an arm's length transaction. The Tribunal upheld the AO/TPO's order, citing the Bombay High Court's decision in CIT v. Everest Kanto Cylinder Ltd., which accepted Libor + 200 bps as a benchmark. Consequently, this issue was dismissed.

2. Disallowance of Expenses Related to Exempt Income:
The second issue involves the AO's disallowance of expenses related to exempt income under Sec.14A r.w.r.8D, amounting to Rs.18,94,425/- under Rule 8D(2)(ii) and Rs.1,74,288/- under Rule 8D(2)(iii). The assessee had computed a disallowance of Rs.4,79,972/-, which the AO found incorrect without examining the accounts or recording satisfaction as required under Sec.14A. The Tribunal noted the lack of satisfaction recorded by the AO and allowed the assessee's appeal on this issue.

3. Disallowance of Deduction Claim under Sec.80JJAA:
The third issue concerns the AO's disallowance of the assessee's deduction claim under Sec.80JJAA amounting to Rs.2,86,13,977/-. The AO noted that 354 newly recruited employees were employed for less than 300 days, contrary to the provisions of Sec.80JJAA, which require new regular workmen to be employed for at least 300 days. The DRP upheld the AO's decision, relying on the Tribunal's decision in the assessee's earlier years. The assessee argued that the amendment by the Finance Act, 2018, which allows for a reduced number of employment days, should be applied retrospectively. The Tribunal, referencing the Karnataka High Court's decision in CIT-LTU v. Texas Instruments India (P.) Ltd., which interpreted the amendment as retrospective, allowed the assessee's claim in principle but remanded the matter to the AO for verification in terms of the amended provisions. The appeal was thus partly allowed, subject to verification.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the AO's order on the notional interest adjustment, allowed the appeal on the disallowance of expenses related to exempt income due to lack of AO's satisfaction, and remanded the issue of deduction under Sec.80JJAA for verification in light of the retrospective application of the amended provisions.

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