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2020 (6) TMI 135
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....Resolution Panel (DRP), the assessee has preferred this appeal. 3. The assessee has raised a legal issue in Ground No.1 and the same is addressed first. The ground no.1.1, extracted below, is the legal ground and the ground no.1.2 to 1.5 support the ground number 1.1:-. "1.1 The order passed by the learned Assessing officer ("AO") is bad in law and liable to be quashed for the reason that the same is not in conformity with the directions of the Hon'ble Dispute Resolution Panel ("DRP") and has been passed by the learned AO without application of mind." 4. The facts relating to the above said legal ground are discussed in brief. The return of income filed by the assessee for the year under consideration was taken up for scrutiny. The AO referred the matter relating to determination of Arms Length Price (ALP) of international transactions to the Transfer Pricing Officer (TPO), who passed the order u/s 92CA of the Act on 29-01-2016 proposing Transfer pricing adjustment in respect of interest free loan given to group company. Thereafter, the AO passed a draft assessment order on 30-03-2016 (erroneously mentioned as 30-03-2015 in the draft order) u/s 143(3) r.w.s 144C(....
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.... has been passed only on 6th February, 2017, which was beyond the prescribed time limit for passing the final assessment order. He submitted that the failure of the AO in not complying with the directions issued by Ld DRP cannot be considered to be an irregularity, which could be cured by passing the rectification order. Even otherwise, the rectification order complying with the directions of Ld DRP partially, has been passed beyond the time limit prescribed for passing the final assessment order and hence the same would not cure the illegality committed by the AO in passing the final assessment order. Accordingly he contended that the final assessment order passed by the AO should be quashed. In this regard, the ld A.R placed his reliance on the following case law:- (a) Software Paradigms Infotech P Ltd vs. ACIT (IT(TP)A No.150/Bang.2014) (b) July Systems & Technologies P Ltd vs. DCIT (IT(TP)A No.479/Bang.2016) (c) Addl. CIT vs. Oracle India (P) Ltd (2018)(93 taxmann.com 8)(Delhi - Trib.) 7. The Ld D.R, on the contrary, submitted that the AO has complied with the directions issued by Ld DRP by passing a rectification order u/s 154 of the Act in ord....
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....cle India (P) Ltd (supra). In this case, the AO ordered for a special audit. After conclusion of special audit, the time limit available for completion of assessment was 03-11-2012. The AO passed the final assessment order on 02-11-2012 and also issued notice of demand & penalty notice u/s 274 of the act. On noticing the mistake that he has failed to pass a draft assessment order in terms of sec.144C of the Act, the AO issued a corrigendum stating that the assessment order passed on 02-11-2012 be treated as draft assessment order. The said corrigendum was issued after the time limit prescribed for completion of assessment. Thereafter, the assessee filed objections before Ld DRP and upon receipt of directions, the AO passed the final assessment order on 30th October, 2013, i.e., much beyond the expiry of limitation period of 03-11-2012. Under these set of facts, the Delhi bench of Tribunal held that the procedure prescribed u/s 144C of the Act, having not followed, the assessment order is liable to be quashed. 12. We notice that the facts prevailing in the above said three cases are different from the facts prevailing in the instant case. The assessing officer, in the instant ....
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.... assessment order beyond the limitation period. However, in the instant case, we have noticed that the assessing officer has actually passed the order u/s 143(3) r.w.s 144C(13) of the Act, meaning thereby, he has intended to comply with the directions issued by Ld DRP. However, by inadvertence, he has omitted to incorporate the directions in the final assessment order, which was duly rectified by passing a rectification order u/s 154 of the Act. There should not be any dispute that the Act visualizes committing of mistakes apparent from record either by the assessee or by the assessing officer and hence the provisions of sec. 154 of the Act have been incorporated in the Act. The mistakes apparent from record can be either pointed out by the assessee or it can be noticed by the assessing officer himself. Accordingly he may pass the rectification order suo-motu or on the application filed by the assessee in order to rectify the said mistake apparent from record. The Act also prescribes a time limit of four years for rectifying such mistakes. In the instant case, the assessing officer has passed the rectification order within one week from the date of passing of final assessment....
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.... TPO issued show cause notice to the assessee asking it as to why interest should not be computed on the interest free loan given by the assessee to its AE. The TPO has observed that the assessee did not respond to the show cause notice. However, it is the contention of the Ld A.R that the assessee has furnished a reply on 22.01.2016, which was not considered by the TPO. Accordingly, the TPO proceeded to determine the interest on the "interest free loan" given by the assessee to its AE. The TPO adopted the Comparable Uncontrolled Price (CUP) method for benchmarking the loan transactions. For that purpose, the TPO took guidance from the rating given by CRISIL on corporate bonds, since the yield on the bonds would depend upon rating given by CRISIL. He noticed that the bonds are given ratings from "AAA" to "D". The AAA denotes highest safety and "D" lowest rating, i.e. it denotes "default on scheduled payments". Accordingly the interest yield will be lower for AAA rated companies in view of highest safety and the interest yield shall tend to increase on the basis of down grading of rating. The TPO noticed that the yield on BBB rated corporate bond was 12.06% for 5 years period. Th....
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.... 19. The Ld A.R further submitted that the "Real Income" theory should be applied even to international transactions, because Chapter X of the Act does not impinge on the concept of accrual/receipt of income and the scope of income set forth in section 4 and 5 respectively. It postulates the existence of income that is chargeable to tax and then only the question of determination of the arm's length price thereof in accordance with the provisions of Chapter X would arise. He submitted that Sec.92 provides for determination of arm's length price of the "income" arising from international transactions. He submitted that the assessee has given "interest free" loan to its AE and even if it is considered as an "international transaction", yet "no income" has arisen to the assessee from out of the said loans, since there was no contractual right to receive interest on the said loans. In this regard, he placed his reliance on the decision rendered by Hon'ble Bombay High Court in the case of India Finance & Construction Co. (P) Ltd (1993)(200 ITR 710), wherein it was held that, when no income is received, there is no question of paying any tax on income which the respondents (department)....
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....shall be computed having regard to the arms' length price. Accordingly, he submitted that, in order to attract the provisions of sec.92(1), an income should arise from an international transaction. He submitted that the assessee did not have any contractual right to receive "income" from the interest free advance given to the AE and hence there does not arise any income to the assessee from this transaction. In the absence of any income from the international transaction, the provisions of sec.92(1) shall not apply and hence no T.P adjustment could have been made. He submitted that the provisions of Chapter X have been held to be machinery provisions in the cases of Vodafone India Services (P) Ltd vs. UOI (2014)(368 ITR 1)(50 taxmann.com 300)(Bom) and Maruti Suzuki India Ltd vs. CIT (2015)(64 taxmann.com 150)(Delhi). The Ld A.R invited our attention to the following observations made by Hon'ble Bombay High Court in the case of Vodafone India Services (P) Ltd (supra) at paragraph 45 of its order:- "Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between AEs. The substantive charging provisions are found in Sections 4, 5, 15 (Salaries)....
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....urpose of giving loan is to earn interest income. Hence no TP adjustment could be made in the case of quasi-equity loans comparing the same with simple loans. In support of these contentions, the Ld A.R placed his reliance on the decision rendered by Ahmedabad bench of Tribunal in the case of Cadila Healthcare Ltd vs. ACIT (2017)(80taxmann.com 24)(Ahmd.). He submitted that the substance of transaction should be seen over its legal form. The Ld A.R submitted that the assessee has furnished a detailed submission before TPO on 27th January, 2016, but the same was not considered by him. The assessee also submitted it before ld DRP also, but the same was not considered or dealt with by it also. 24. Without prejudice above said legal contentions, the ld A.R submitted that the TPO was not correct in adopting yield rate of Bonds holding CRISIL rating. He submitted that the Hon'ble Rajasthan High Court has held in the case of CIT vs. Vaibhav Gems Ltd (2017)(88 taxmann.com 12) that "LIBOR" rate should be applied. The SLP filed before the Hon'ble Supreme Court against the decision rendered by Hon'ble Rajasthan High Court in the above said case has been dismissed in SLP (Civil) ....
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....ome" is sine qua non for invoking the provisions of sec.92(1) of the Act. It was contended that the assessee does not have any contractual right to receive any income from the interest free loan given by the assessee to its AE. Hence, no "income" arises to the assessee from the interest free loan given by it to its AE and hence provisions of sec.92(1)/Chapter X should not be applied. It was also contended, by placing reliance on certain case laws, that the Courts cannot be invited to supply the omission made by the Legislature. 28. There is no doubt that real income principle should be followed under the Income tax Act. However, under the Income tax Act, the tax is levied on "total income". The expression "total income" is defined u/s 2(45) of the Act as under:- "total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act." Though section 5 defines "Scope of total income", yet the total income has to be computed in the manner laid down in the Act. The term "income" is defined in sec. 2(24) in an inclusive manner. The said income, when computed in the manner laid down in the Act becomes "total income". Hence....
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....tional transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. The judicial precedents relied by the assessee, such as in the case of SA Builders Ltd. (supra), in support of the proposition that interest free advance to the subsidiary, in which assessee has deep interest, are justified on the grounds of commercial expediency are in the context of the question whether such a use of borrowed funds can be said to be for the purposes of business, and, accordingly, whether interest on borrowings for funds so used can be allowed as a deduction in computation of business income of the assessee. That is not the issue here, and these judicial precedents on the commercial expediency, therefore, have no relevance in computation of arm's length price of loan given to an associated enterprise. Similarly, learned counsel's contention that a notional income cannot be taxed, and reliance on Shoorji Vallabhdas & Co.'s case (supra) in this regard, is wholly misplaced because that proposition is in the context of tax laws in general, whereas, transfer pricing provisions,....
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....tion and inasmuch as the substitution of zero interest by arm's length interest does not alter the basic character of transaction. The question of re characterization arises only when the very nature of transaction is altered, such as capital subscription being treated as loan or such a trade advance received being treated as a borrowing. There is no change in the character of transaction in this case. Learned counsel's reliance on EKL Appliances Ltd.'s case (supra) and Cotton Naturals India (P.) Ltd. case (supra) is thus irrelevant. In the case of Abhishek Auto Industries Ltd. (supra), what was done was that of the joint venture agreement, which was duly approved by the Reserve Bank of India and other regulatory bodies, was disregarded by questioning its need, and it was in this context that the Tribunal observed that legally binding joint venture arrangements cannot be disregarded by the revenue authorities. This observations, taken out of the context, cannot be interpreted to mean that an arm's length price of an interest free loan cannot be adopted for ascertaining income from loan transaction. 39. In our considered view, the assessee is not re....
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....nature of income, such as interest, but the substitution of transaction price by arm's length price results in an income, it can very well be brought to tax under Section 92. This plea of the assessee is also, therefore, unsustainable in law." 30. The contention of the assessee that there should arise some "income" from the international transaction in order to invoke the provisions of sec. 92 has been duly addressed by the Special bench in Paragraph 39 of the order. The loan transactions have been included in the definition of the term "International transactions". If the loan is given at free of interest, the same should be construed as having been given at "Zero interest". Hence the income relating to loan transactions with the AE is required to be tested under Arms length principles u/s 92(1) of the Act, even if no interest income is contemplated between the parties. It can be noticed that the Special bench has specifically addressed the case of charging of Zero interest or no interest and held that so long as the transactions fall under the category of "international transactions", the arms length principle has to be applied. We may look at another instance also. The ne....
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....computing total income, the AO shall adopt Rs. 125/- only as income arising from the said international transaction. The real income principle fails here, since Chapter X brings in a legal fiction/deeming provision and the same is required to be complied with in order to arrive at the total income. As explained by Hon'ble Supreme Court in the case of DIT vs. Morgan Stanely & Co. (292 ITR 416), the object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Hence, the interest free loan should be taken as a case of Zero interest and accordingly the impugned loan transactions should also be examined under arms' length principles. 31. We notice that the decisions rendered by the Mumbai bench of Tribunal in the case of Shilpa Shetty (supra) and M Suresh Company P Ltd (supra) did not consider binding decision rendered by the Special bench of ITAT, Kolkatta and hence the above said decisions so rendered by the Mumbai bench are per-incurium and cannot be followed. Various other decisions relied upon by Ld A.R are related to the computation of income under general provisions of the Act, whereas Chapter X is Special provision relating to Av....
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....red above and also that may be relied upon by the assessee in the set aside proceedings. 35. Ground No.3 urged by the assessee relates to the disallowance made u/s 14A of the Act. During the year under consideration, the assessee earned dividend income, which included dividend received from Overseas subsidiary of Rs. 3.38 crores, which was taxable. The remaining dividend income was received from domestic companies and mutual funds. The assessee claimed the same as exempt. As per the assessment order, aggregate amount of dividend received during the year was Rs. 8.98 crores. However, in the written submissions, the assessee has stated that it has received dividend income of Rs. 4.46 crores only. This difference requires to be examined. Be that as it may, the fact remains that the assessee did not disallow any expenditure u/s 14A of the Act, even though it claimed exemption of dividend income received from domestic companies and mutual fund. The AO, hence, computed disallowance by applying provisions of Rule 8D of I.T Rules at Rs. 94.97 crores. The Ld DRP directed the AO to exclude the dividend received from foreign subsidiaries, as they are taxable. Otherwise, in principle, it....
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....ncur, we do not find any substantial question of law would arise for consideration as canvassed." Accordingly, we direct the AO to examine the claim of the assessee and if it is found that the own funds available with the assessee is in excess of the value of investments, then no disallowance u/r 8D(2)(ii) out of interest expenditure is called for. (b) In the alternative, the assessee has also submitted that the loan funds were taken for specific purposes and utilised the same for those purposes. Accordingly, it was contended that, when the assessee would be able to show the nexus between the interest expenditure and its utilisation for specific purposes, no interest disallowance is called for. In this regard, it is stated that it has paid interest on security deposits, cash credits/overdrafts, working capital demand loan, bill discounting facilities. When the disallowance is worked out under rule 8D(2)(ii), this contention of the assessee would loose its significance. (c) The Ld A.R submitted that, for the purpose of computing average value of investments, the AO should consider only those investments which have actually yielded exempt dividend income. W....
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....L Holdings Ltd. The AO has already made Transfer pricing adjustment in respect of interest free advance given to its AE and the said advance has again been included while computing the present interest disallowance. Accordingly, the Ld DRP observed that the disallowance on the loan given to AE is not warranted. Accordingly the Ld DRP held that the disallowance of interest expenditure to the extent of transfer pricing adjustment should only be made on protective basis and confirmed the disallowance of remaining interest expenditure on substantive basis. 38. The Ld A.R submitted that the decision rendered by Hon'ble Punjab & Haryana High Court in the case of Auluck and Sons P Ltd (supra) was rendered by following its earlier decision in the case of Abhishek Industries Ltd (supra). However, the decision rendered by Hon'ble Punjab and Haryana High Court in the case of Abhishek Industries Ltd (supra) has since been revered by the Hon'ble Supreme Court in the case of Munjal Sales Corporation (2008)(168 Taxman 43)(SC). 39. The ld A.R submitted that the assessee had advanced interest free funds to USL Holdings Ltd located in British Virgin Island, an associated enterprise....
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....ly to the facts of the present case, in which event, no interest disallowance is called for. We notice that this contention of the assessee has not been examined by the AO in the light of decision of Hon'ble Supreme Court referred above. Accordingly, we restore this issue to the file of the AO to examine the factual aspects and for deciding this issue following the decision rendered by Hon'ble Supreme Court, referred above. If the disallowance gets deleted on this ground, then other contentions of the assessee would be rendered academic in nature. However, if any part of disallowance is liable to be made, then the AO should consider other arguments of the assessee also in the set aside proceedings. 43. The next issue relates to the disallowance of promotion and advertisement expenses. The assessee had claimed following payments as Advertisement and sales promotion expenses:- a. Royal Challengers Sports P Ltd - 9.00 crores b. United Racing & Bloodstock breeders - 7.72 crores c. United Mohun Bagan Football Team - 8.55 crores 25.27 crores d. Force India F1 Team Ltd. - 7.39 crores 32.66 crores The AO took the view that the....
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....n nature of advertisement providing visibility to the assessee group and hence it is revenue expenditure. Similarly, it has been held in the case of Pepsico India Holdings P Ltd (ITA No.4517/Del/2016 & others) that sponsorship payments made by Pepsi to ICC for the World Cup event was to be allowed as deduction u/s 37(1) of the Act, as those expenses are for promotion of business and sporting events are generally used by companies as a platform to advertise. 45. We have heard Ld D.R on this issue and perused the record. We notice the issue relating to allowability of expenditure incurred on sponsorship of sports event was considered by the Mumbai bench of ITAT in the case of Samudra Developers Pvt Ltd (ITA 5974/Mum/2013 dated 26-04- 2017) and it was held that the same is allowable as revenue expenditure. For the sake of convenience, we extract below the operative portion of the order passed by Mumbai bench of Tribunal on an identical issue:- "3.Second ground of appeal pertains to deleting the disallowance on account of sponsorship fees and management fees.In the earlier part of our order,we have mentioned the facts about the various disallowances made by the AO including....
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.... total expenditure the assessee had claimed a very small proportion under the head sponsorship expenses. Such an expenditure is for advertising the brand name of the Group. Being a recurring expenditure, it had to be allowed as revenue expenditure. We find that in the case of Delhi Cloth and General Mills Co.Ltd.(supra)the Hon'ble Court had held that expenditure incurred for organizing sports events are allowable items of revenue expenditure as such events publicise the names of the sponsor. The AO was not justified in capitalising the expenses. The entire expenditure was rightly allowed by the FAA as revenue expenditure. After going through the details of expenditure incurred by assessee under the head managerial expenses, we are of the opinion that it had not got any enduring benefit from the expenditure incurred nor did the expenditure create any capital asset.Therefore, we do not want to interfere with the order of the FAA.Considering the above,we decide second ground of appeal against the AO." 46. The Delhi bench of Tribunal has also examined an identical claim in the case of M/s Pepsico India Holdings Pvt Ltd (supra) and the same was allowed as revenue expendi....
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.... and Sports for sponsoring the events covered under the agreement. Copy of the order under section 195 of the Act and the approval received from the Ministry of Youth Affairs and Sports has been enclosed at pages 247 to 249 and 224 of the paper-book respectively. He further submitted that the expenditure was wholly and exclusively for the business of the assessee company and had not been disputed by the revenue. Any incidental benefit that may arise to any other person or entity cannot be a bar for allowance of expenditure under section 37 of the Act, as per the settled position of law. Reference in this regard was made to the decisions of the Hon'ble Supreme Court of India in CIT vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC), Sasson J. David and Co. P. Ltd vs. CIT 118 ITR 261(SC) and SA Builders Ltd. vs. CIT 288 ITR 1(SC. He further submitted that the Revenue cannot step into the shoes of an assessee to determine the commercial expediency of an expenditure incurred by it. 90. On the other hand, the learned DR relied upon the order of the AO and the DRP in support of his contentions. 91. After considering the rival submissions and on perusal of the impu....
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.... sports events are intended to promote business only and hence the same is allowable as expenditure. The allowability of brand promotion expenses was examined by Hon'ble Delhi High Court in the case of Modi Revelon P Ltd (supra) and the relevant discussions made by the High Court are extracted below:- "22. As far as the second aspect, i.e. expenditure for promotion of the brand is concerned, there is no doubt that the dealer's functions extend to advertising the products of the assessee, manufactured by the sister concern. On this aspect, Section 37 of the Income-tax Act would be relevant. The said provision reads as follows: "SECTION 37 GENERAL: (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any pu....
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.... he allowed about 50 per cent of those expenses. However, the reasoning for disallowance of the rest, i.e. that the assessee could claim only a proportion of such expenses, since advertising expenses were to be borne by the sister concern dealer, and that the proportion was in respect of its territory, was not upheld. This Court does not see any fallacy in the Tribunal's approach or reasoning, on this aspect. One is not unmindful of the concerns of a business which engages in sale of consumer items, and faces continuous competition. Brand promotion enhances the visibility of given products or services, and are often perceived as conferring a competitive advantage on those who adopt those strategies or schemes. Expenditure towards that end is based on pure commercial expediency, which the revenue in this case, ought to have recognised, and allowed. The revenue's arguments on this point too are insubstantial." 48. The observations made by the Hon'ble jurisdictional Karnataka High Court in the case of CIT vs. ITC Hotels (2014)(47 taxmann.com 215) on the concept of "enduring benefit" is relevant here and the same is extracted below:- "6. The first substantial questi....
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....ing in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the Courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton Vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), where the learned Law Lord stated : "...when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite condition) for treating such an expenditure as properly attributable not to revenue but to capital". This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC) : TC16R.991, it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expend....