2025 (8) TMI 291 - AT - Income Tax

ITAT directs SBI-PLR for CCD interest, disallows goodwill depreciation, adjusts deductions under sections 14A, 10AA, 80G, and 234B/D

ITAT Hyderabad set aside the AO's and DRP's additions regarding interest on CCDs, directing use of SBI-PLR instead of LIBOR plus 200 bps for benchmarking ... TP Adjustment - interest paid on Compulsory Convertible Debentures (CCD) by the Appellant - HELD THAT:- In the present case, there is no dispute with regard to the fact that, CCDs issued by the assessee are denominated in Indian currency and, therefore, in our considered view, while benchmarking interest payable on such CCDs, it is SBI-PLR is appropriate rate of interest, but, not LIBOR plus 200 basis points as considered by the TPO. TPO without appreciating the relevant facts benchmarked interest by LIBOR plus 200 basis points. DRP simply sustained the addition made by the AO Therefore, we set-aside the Final Assessment Order passed by the Assessing Officer on this issue and direct the Assessing Officer/TPO to delete the addition made towards interest paid on CCDs. Addition towards notional interest on overdue trade receivables from AE - TPO has imputed interest on overdue receivable from AE after allowing 30 days credit period by applying SBI short term deposit rate for the relevant financial year - HELD THAT:- AO and TPO has erred in benchmarking the interest receivable on trade receivables from AE by applying SBI short term deposit rate. The DRP without appreciating the relevant facts, simply sustained the addition made by the AO - Thus, we set aside the order of the Assessing Officer and direct the Assessing Officer/TPO to compute interest receivable on outstanding receivables from AE by applying LIBOR plus 200 basis points after allowing credit period of 30 days. Argument of Assessee on the issue of weighted average credit period - When the TPO is able to compute the exact number of days credit period, then, aggregating the invoices for the purpose of computing credit period is contrary to the procedure provided u/sec. 92CA of the Income Tax Act, 1961. Thus, we reject the arguments of Counsel for the Assessee on the issue of computing the weighted average credit period. Disallowance of depreciation on goodwill arising on amalgamation - HELD THAT:- Since in the present case, we held that, ‘goodwill’ created by the assessee, is not a real one or genuine one, the question of considering the ratio laid down by the Hon’ble Supreme Court and various Benches of the Tribunal for the purpose of allowing depreciation does not arise and thus, we reject the various case laws relied upon by Assessee - we are of the considered view that, the assessee is not entitled for depreciation on ‘goodwill’ accounted on account of amalgamation. AO and DRP rightly rejected the claim of the assessee. Disallowance of expenditure relatable to exemption income u/s14A read with Rule 8D of I.T. Rules, 1962 - legality of ‘method’ followed by the AO - HELD THAT:- Making addition towards suo motu disallowance made by the assessee is incorrect. Since the total disallowance computed by the Assessing Officer was at Rs. 42,97,430/-, in our considered view, out of said disallowance, the expenditure already disallowed by the assessee was at Rs. 11,59,197/- should be deducted. Therefore, we direct the Assessing Officer to allow deduction of suo motu disallowance of expenditure of Rs. 11,59,197/- made by the assessee out of total disallowance computed in terms of Rule 8D of I.T. Rules, 1962 and make balance addition of Rs. 31,38,233/- u/sec. 14A read with Rule 8D of I.T. Rules, 1962. Accordingly, ground no.4 of assessee’s appeal is partly allowed. Deduction u/sec. 10AA - HELD THAT:- In our considered view, the alternate claim made by the assessee is consequential in nature on the total income computed by the assessee after giving effect to the order passed by the Tribunal on the issue of depreciation on goodwill, which we have rejected. Once, depreciation on ‘goodwill’ is disallowed, it increases the profit of the assessee. Since the assessee is eligible for deduction u/sec. 10AA, in our considered view, enhanced profit is eligible for deduction. Therefore, we direct the AO to consider the enhanced profit for the purpose of allowing deduction u/sec. 10AA of the Act, if conditions for claiming such deduction are satisfied. Deduction u/sec. 80G - DRP rejected the claim of the assessee on the ground that, donation paid by the assessee is out of CSR expenditure - HELD THAT:- If the assessee claimed deduction u/sec. 80G of the Act towards donations paid out of CSR fund, then, the assessee is not entitled. Further, the claim of the assessee is that, donation paid is out of normal fund and not, out of CSR fund. The facts are not clear either in the assessment order or DRP Directions. Further, the assessee has not furnished relevant evidences. Therefore, matter needs to re-examine by the Assessing Officer to re- consider the issue. Denial of credit for Foreign Tax Credit - We find that, assessee claims FTC by filing relevant evidences including relevant Form-67. Therefore, the Assessing Officer is directed to verify the claim of assessee and allow credit for FTC in accordance with law. Charging of interest u/sec. 234B and 234D of the Act are consequential in nature and depends upon the total income computed by the AO. Therefore, we direct the Assessing Officer to re-compute the interest u/sec. 234B and 234D of the Act on the total income computed in accordance with law. ISSUES: Whether the transfer pricing adjustment towards interest paid on Compulsory Convertible Debentures (CCDs) denominated in Indian Rupees is justified by benchmarking interest at LIBOR plus 200 basis points instead of SBI PLR rate'Whether imputation of interest on overdue trade receivables from Associated Enterprises (AEs) using SBI short term deposit rate is appropriate, or should LIBOR plus basis points be applied'Whether depreciation claimed on goodwill arising on amalgamation is allowable under section 32(1)(ii) of the Income Tax Act, 1961, considering the valuation methods and intra-group transactions'Whether disallowance of expenditure relatable to exempt income under section 14A read with Rule 8D of the Income Tax Rules, 1962, computed by the Assessing Officer, is justified'Whether consequential deduction under section 10AA of the Act is allowable based on enhanced profits after disallowance of depreciation on goodwill'Whether deduction under section 80G of the Act for donations is allowable when donations are claimed to be out of normal funds and not Corporate Social Responsibility (CSR) expenditure'Whether foreign tax credit (FTC) under section 90 of the Act should be granted in accordance with the Dispute Resolution Panel's directions'Whether Minimum Alternate Tax (MAT) credit and TDS/advance tax credit of the amalgamating entity should be granted to the amalgamated company'Whether levy of interest under sections 234B and 234D of the Act is justified? RULINGS / HOLDINGS: The transfer pricing adjustment on interest paid on CCDs denominated in INR benchmarked at LIBOR plus 200 basis points is erroneous; the appropriate arm's length interest rate is SBI PLR rate as per the Special Bench ITAT Hyderabad decision. The addition made by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP) is set aside.Interest imputed on overdue trade receivables from AEs using SBI short term deposit rate is incorrect; internationally recognized rates such as LIBOR plus 200 basis points should be applied after allowing a 30-day credit period. The TPO/DRP order is set aside and remanded for recomputation accordingly.Depreciation claimed on goodwill arising on amalgamation is disallowed as the goodwill created is found to be artificial and not genuine, resulting from intra-group transactions with differing enterprise valuations on the same date. The Assessing Officer and DRP's disallowance is upheld.The Assessing Officer's disallowance of expenditure relatable to exempt income under section 14A read with Rule 8D is partly upheld; the suo motu disallowance made by the assessee is to be allowed and the balance disallowance is to be made by the Assessing Officer after deducting the amount already disallowed by the assessee.The enhanced profits resulting from disallowance of depreciation on goodwill are eligible for deduction under section 10AA, subject to fulfillment of conditions. The Assessing Officer is directed to consider this consequential claim.Deduction under section 80G is not allowable if donations are out of CSR expenditure as mandated by section 135 of the Companies Act, 2013, since such donations are not voluntary. The matter is remitted to the Assessing Officer to verify the nature of donations and decide accordingly.Foreign tax credit under section 90 is to be granted by the Assessing Officer in accordance with law and upon satisfaction of conditions, as per DRP's directions.Grounds relating to MAT credit and TDS/advance tax credit of the amalgamating entity are dismissed as not pressed.Interest levied under sections 234B and 234D is consequential and to be recomputed based on the income determined after giving effect to the Tribunal's directions. RATIONALE: The Court applied the transfer pricing provisions under sections 92CA and related rules of the Income Tax Act, 1961, relying on precedent decisions by the Special Bench ITAT Hyderabad which held that CCDs denominated in Indian currency should be benchmarked using domestic lending rates (SBI PLR) rather than international rates such as LIBOR.For interest on overdue receivables, the Court referenced judicial precedents including the Bombay High Court and ITAT Chennai Bench decisions, which support applying international interest rates (LIBOR plus basis points) for foreign currency receivables, rejecting the application of domestic deposit rates.Regarding depreciation on goodwill arising from amalgamation, the Court examined the statutory provisions under sections 32(1)(ii), 43(1), and 43(6)(c) of the Act, and the proviso to section 32(1), alongside accounting standards and Supreme Court precedents (CIT vs. Smifs Securities Ltd., Zydus Wellness Ltd.). However, it distinguished the present case on facts, holding the goodwill as artificial due to intra-group transactions with inconsistent valuations, thus not genuine for tax depreciation purposes.The disallowance under section 14A read with Rule 8D was upheld based on the Assessing Officer's satisfaction under section 14A(2) and the statutory formula prescribed in amended Rule 8D effective from 01.04.2016, rejecting the assessee's method due to lack of supporting details.The consequential relief under section 10AA was recognized as dependent on the final taxable income after adjustments, consistent with the statutory framework for deductions related to Special Economic Zones.On deduction under section 80G, the Court recognized the statutory requirement that donations must be voluntary and not mandated CSR expenditure under Companies Act, 2013. The lack of clarity and evidence on the nature of donations warranted remand for factual verification.Foreign tax credit entitlement under section 90 was acknowledged subject to statutory conditions and evidence, with directions to the Assessing Officer to grant credit accordingly.The Court accepted the parties' concession to dismiss grounds on MAT credit and TDS/advance tax credit.Interest under sections 234B and 234D was held to be consequential and dependent on the final tax computation, requiring recomputation consistent with the Tribunal's directions.