2024 (10) TMI 308 - AT - Income Tax

Disallowance of gratuity fund contribution overturned where name change preserved approvals; transfer pricing interest adjustment rejected

GKN Driveline (India) Ltd. Versus ACIT (OSD) New Delhi

ITAT DELHI - AT held that disallowance of contribution to the Employees Group Gratuity Scheme was unsustainable where only the company name had changed ... Disallowance of contribution made by the assessee to Employees Group Gratuity Scheme - only reason for disallowance of premium paid to Employees Group Gratuity Fund was that the same was paid to an unapproved Gratuity Fund - HELD THAT:- It is not in dispute that assessee’s name has been changed from GKN Driveshafts (India) Ltd. to GKN Driveline (India) Ltd. w.e.f 26.06.2003. The Certificate issued for change of name of the company by the Registrar of Companies. The approval granted for the Employees Gratuity Fund Scheme by the CIT - Delhi -4, New Delhi dated 16.12.2003 in the name of GKN Driveshafts India Ltd. Employees Group Gratuity Scheme. Hence, we find that the reason given by the learned AO in the final assessment order has got no basis at all in the eyes of law. We find that just the name of the company is changed and all other activities continue to remain the same. Hence, the statutory approvals granted to the erstwhile assessee stands automatically vested to the assessee before us as only the name of the company being changed. We hold that the assessee would be entitled for deduction of expenditure in respect of contribution made to Employees Gratuity Fund. TP Adjustment - international transaction of interest on outstanding receivables from the Associated Enterprises (AEs) - HELD THAT:- We find that the ratio laid down by the Delhi Tribunal in the aforesaid case squarely applies to the facts of the instant case before us. Tribunal in the case of Bechtel India Pvt. Ltd. [2015 (12) TMI 1560 - ITAT DELHI] it was pleaded that assessee is a debt free company and hence, there is no question of charging interest on outstanding receivables from AEs. But on perusal of the orders of the lower authorities, we find that no such finding is given in the orders to this effect. No submission was even made by the assessee before the lower authorities to this effect. Hence, we refrain to consider this argument in this order. Assessee’s margin is much much higher than the comparables margin, the transfer pricing adjustment on interest on outstanding receivables would have no legs to stand in the peculiar facts and circumstances of the instant case. The other legal arguments advanced by the AR that interest on outstanding receivables cannot be considered as an international transaction per se is dismissed in view of the amendment brought in the statute in Explanation 1(c) of Section 92B of the Act. In view of the aforesaid observations and judicial precedents relied upon hereinabove, the ground no.2 raised by the assessee is allowed. Issues:1. Disallowance of contribution made by the assessee to Employees Group Gratuity Scheme.2. Transfer Pricing Adjustment on account of international transaction of interest on outstanding receivables from Associated Enterprises (AEs).3. Initiation of penalty proceedings under section 270A of the Act.4. Levy of interest under Section 234B and 234C of the Act.Detailed Analysis:Issue 1: Disallowance of contribution to Employees Group Gratuity SchemeThe appeal challenged the disallowance of the contribution made by the assessee to the Employees Group Gratuity Scheme. The company, engaged in manufacturing CVJs for motor vehicles, claimed a deduction for the premium paid to LIC Gratuity Fund for its employees. The AO disallowed the deduction as the fund was not recognized by the Commissioner of Income Tax. The assessee argued that the trust was recognized under its previous name and approval should apply to the new name. The DRP directed the AO to verify the facts. The AO, in the giving effect proceedings, observed ambiguity in the approval letter regarding the applicability of the scheme to the current company name. The ITAT held that the name change did not affect the trust's recognition, allowing the deduction for the contribution to the Gratuity Fund.Issue 2: Transfer Pricing Adjustment on interest on outstanding receivablesThe second ground challenged the Transfer Pricing Adjustment on interest on outstanding receivables from AEs. The TPO imputed interest on outstanding receivables beyond the credit period, leading to a Transfer Pricing Adjustment. The ITAT considered the AR's argument that no interest was charged on delayed payments to AEs and relied on judicial precedents to assert that the adjustment was unjustified due to the high net profit margin of the assessee. The ITAT allowed the appeal, emphasizing the absence of justification for the adjustment based on interest on outstanding receivables.Issue 3: Initiation of penalty proceedings and Issue 4: Levy of interestThe third ground challenged the initiation of penalty proceedings under section 270A, deemed premature for adjudication. The fourth ground challenged the levy of interest under Section 234B and 234C of the Act. The ITAT held that challenging interest under Section 234B was consequential, and interest under Section 234C should be levied only on the returned income, directing accordingly.In conclusion, the ITAT partly allowed the appeal, addressing the disallowance of the contribution to the Gratuity Scheme and the Transfer Pricing Adjustment on interest on outstanding receivables. The premature penalty proceedings and the levy of interest were also considered and clarified by the ITAT.