2021 (2) TMI 1397 - AT - Income Tax

Assessee wins on Section 14A disallowance and transfer pricing but loses on PF ESI contributions timing

DCIT Circle-4 (1) (1), Ahmedabad Versus Suzlon Energy Ltd. And (Vice-Versa)

ITAT Ahmedabad ruled in favor of the assessee on multiple grounds. The tribunal deleted the addition under Section 14A as no exempt income was earned, ... Addition u/s 14A r.w.s. 8D - no exempt income was earned by the assessee - HELD THAT:- We have heard the respective parties, and we have further considered the judgment passed in the case of CIT vs. Corrtech Energy Pvt. Ltd. [2014 (3) TMI 856 - GUJARAT HIGH COURT] and in view of the ratio laid down we find no ambiguity in deleting the addition made by the CIT(A) u/s 14A in the absence of any admitted claim for exemption by the appellant so as to warrant interference. Hence, the order is passed in the affirmative i.e. in favour of the assessee. Addition made to the book profit u/s. 115JB in respect of the provision of 14A -It is a settled principle of law that amount of disallowance u/s 14A cannot be added to the book profit u/s 115JB. Thus, no ambiguity in making such decision by the Ld. CIT(A) in deleting the addition made by the A.O. Upward TP adjustment - determining Arms Length Price on the ‘Corporate Guarantee’ on the average value of loans provided by the assessee to its assessee enterprises - Case of the assessee is this that issuance of “Corporate Guarantee” by the assessee on behalf of its subsidiary company is in the nature of quasi-capital or shareholder activity and not in the nature of provision of service and, therefore, the said transaction is to be excluded from this scope of “international transaction” u/s 92B - HELD THAT:- Applying the rule of consistency the Ld. CIT(A) has allowed the issue in favour of the assessee by deleting the said adjustment. No reason to deviate from such stand taken by the ITAT in deciding the matter in favour of the assessee for A.Y. 2011-12 and respectfully relying upon the same we find no merit in this ground preferred by Revenue and, therefore, we dismiss the same. Disallowance of Employees’ Contribution to PF and ESI - assessee failed to deposit such sum within the prescribed due date in terms of the concerned rule - HELD THAT:- The issue has been decided against the assessee in view of the judgment passed in the case CIT vs. Gujarat State Road Transport Corporation [2014 (1) TMI 502 - GUJARAT HIGH COURT] We, therefore, find no reason to entertain this particular ground. ISSUES: Whether disallowance under Section 14A of the Income Tax Act is warranted in the absence of exempt income during the relevant assessment year. Whether the amount of disallowance under Section 14A can be added to the book profit for the purpose of computation under Section 115JB of the Income Tax Act. Whether issuance of corporate guarantees by an assessee on behalf of its subsidiary company constitutes an international transaction subject to Transfer Pricing adjustments under Section 92B and Section 92CA of the Income Tax Act. Whether disallowance of Employees' Contribution to Provident Fund (PF) and Employees' State Insurance (ESI) for non-deposit within prescribed due dates under the relevant statutory provisions is justified. RULINGS / HOLDINGS: Disallowance under Section 14A is unwarranted where no exempt income is earned during the year; the addition made under Section 14A was rightly deleted as there was 'no admitted claim for exemption' by the assessee. The amount of disallowance under Section 14A cannot be added to the book profit under Section 115JB; the deletion of such addition to book profit was confirmed following binding precedents and coordinate bench decisions. Issuance of corporate guarantees by the assessee on behalf of its subsidiary constitutes a 'quasi-capital or shareholder activity' and does not amount to 'provision of service' or an 'international transaction' under Section 92B; therefore, no Arms Length Price (ALP) adjustment under Transfer Pricing provisions is permissible, and the deletion of such adjustment was upheld. Disallowance of Employees' Contribution to PF and ESI for failure to deposit within the prescribed due date is justified and consistent with the judgment of the jurisdictional High Court; hence, the disallowance was upheld and the cross-objection dismissed. RATIONALE: The Court applied the statutory provisions of the Income Tax Act, 1961, specifically Sections 14A, 115JB, 92B, 92CA, and relevant rules, alongside authoritative judicial precedents including the jurisdictional High Court's decision in CIT vs. Corrtech Energy Pvt. Ltd. and coordinate bench rulings. For Section 14A disallowance, the Court emphasized the principle that disallowance is contingent upon the existence of exempt income, referencing the absence of 'any admitted claim for exemption' as determinative. Regarding book profit under Section 115JB, the Court followed settled law and coordinate bench decisions that disallowance under Section 14A does not constitute a positive enhancement to book profit and thus cannot be added thereto. In Transfer Pricing matters, the Court recognized the nature of corporate guarantees as shareholder activities rather than international transactions, relying on coordinate bench precedents and acknowledging pending High Court adjudication without disturbing binding tribunal decisions. The disallowance of Employees' Contributions was supported by binding jurisdictional High Court authority, reinforcing the statutory requirement of timely deposit and the consequences of non-compliance. No dissenting or concurring opinions were recorded; the Court respected the principle of judicial consistency and precedent adherence throughout its reasoning.