TaxTMI 
TaxTMI 
2023 (10) TMI 1135
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....of appeal raised by the assessee are as under: "Transfer Pricing Adjustment 1. The learned CIT(A) has erred in confirming addition made by the learned AO and the learned TPO to the value of the International transactions with Associated Enterprises ("AE") and consequently to the total income of the appellant u/s 92C of Rs. 10,99,989. 2. The learned CIT(A) has erred in confirming the order of the learned AO and the learned TPO in making addition of Rs. 10,99,989 by charging notional interest on short term advance made to its overseas subsidiaries being Kalpataru Power Transmission (Mauritius) Ltd and Kalpatary Power Transmission (Nigeria) Ltd. 3. The learned CIT(A), the learned AO and the learned TPO erred in fact and in law in making the addition of Rs. 10,99,989 by rejecting the explanation given by the Appellant for making advances as well as the benefits received by the appellant from the same. 4. Without prejudice to Grounds No. 1 to 3 above, the learned CIT(A) erred in fact and in law in confirming the action of the learned AO and the learned TPO in computing the notional interest chargeable to the tax at Rs. 10,99,989. Disallowance u/s 14A r.w. Rule 8D Invocatio....
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....g the fact that the interest u/s 234C shall not be invoked in the case of the Appellant as the Appellant has already paid necessary amount of advance tax installments within due date to make payment of its tax liability on returned income. Accordingly, such levy of excessive interest prayed to be deleted. Your appellant prays for leave to add, alter and/or to amend any of the grounds before the final hearing of the appeal" 3. Ground No.1:- This ground relates to TP Adjustment on notional interest on advances. 4. The short fact is this that the company had given short term advances of Rs. 3.18 crores to Kalpataru Power Transmission (Mauritius) Ltd. and Rs. 1.68 lakhs to Kalpataru Power Transmission (Nigeria) Ltd. for meeting their requirements. The advances were in nature of quasi equity capital and therefore, no interest was charged by the company. The Transfer Pricing Officer (in short "TPO") followed the decision on the identical issue for A.Y. 2012-13 and made upward adjustment on account of notional interest, which was further confirmed by the Ld. CIT(A) relying on the decision of Soma Textiles Industries (in ITA No. 262/Ahd/2012). Further, in assessee's own case for A.Y. 2....
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....de on the ground that they were not in reality loans but were quasi capital in nature and were given interest free out of commercial expediency since the AEs were subsidiaries of the assessee floated to explore various business opportunities for the assessee only. That notional interest could not be assessed in the context of transfer pricing. The A.O. however rejected all the contentions of the assessee relying on the decision of the ITAT Delhi Bench in the case of Perot Systems TSI vs. DCIT (ITAT Delhi) and bench marked the transmission for interest to be charged thereon @ 4.16% in respect of the Mauritius loan and 4.03% in respect of the Nigeria loan accordingly proposing an adjustment of Rs. 2,52,390/- (Rs. 87,279 + Rs. 1,65,040) respectively for the two loans. The proposed adjustment was made by the A.O. in his order passed u/s. 143(3) of the Act. 7. The matter was carried before the Ld. CIT(A) who upheld the adjustment relying on the decision of the ITAT Ahmedabad Bench in the case of Soma Textile Industries vs. Addl.CIT in ITA No. 262/Ahd/2012 pertaining to A.Y. 2007-08 holding at Para 7.2 of his order as under: 7.2 I have considered the facts of the case, assessment ord....
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....transaction, and that in the subsequent assessment years, the assessee himself has accepted ALP adjustment by adopting the LIBOR + 2% interest rate. In this view of the matter, no interference is warranted on the quantum of the ALP adjustment either. In view of these discussions, we confirm the stand of the authorities below on this issue and decline to interfere in the matter." The facts of the appellant's case being identical, addition of Rs. 2,52,391/- made on short term advance to its overseas subsidiaries is held justified and is hereby confirmed. Relevant ground of appeal is rejected. 8. Before us, the Ld. Counsel for the assessee reiterated the contentions made before the lower authorities that the impugned advances were in the nature of quasi equity capital since they were given to the subsidiaries which were floated to explore business opportunities in their respective regions; the advances had no repayment schedule and was granted without any condition for repayment and further that the loans were given for commercial purposes and was not a simplicitor loan or advance given to the wholly own subsidiary. Heavy reliance was placed on the decision of the ITAT Ahmedab....
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....er Page 204 to 205 of Paper Book & Page No 701 to 702 of Paper Book * Reliance placed on decision of ITAT Ahmedabad in case of Micro Inks Ltd. v. Asstt. CIT [2013] 144 ITD 610 (Refer Page No 702 to 704 of Paper Book) * Decision of Perot Systems TSI (India) Ltd vs DCIT 37 SOT 358 2010 not applicable (Refer Page No. 702 of Paper Book) * Argument of quasi-equity capital rejected on the basis of facts * Core legal issue i.e. whether ALP adjustments will also be warranted in case of interest free loans given as quasi capital, was left open * There was no material on record to establish that the loans were in reality not loans but were quasi-capital * Without prejudice to above, application of LIBOR + rate for arm's length price determination in case of short-term advance is not permitted. Reliance is placed on decision of ITAT Ahmedabad in case of Micro Inks Ltd. v. Asstt. CIT [2013] 144 ITD 61 * LIBOR is an inter-bank offer rate and is applicable between 2 banks * Such rate charged between banks cannot be made a basis to determine ALP of short-term advance * In any case, if LIBOR is to be applied, appropriate adjustments must be allowed as per Rule 10B(3)(ii) * If....
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....s. 2,52,319/- on account of determination of Arms Length Price (ALP) of interest to be charged on short term advances given to the AE of the assessee. 13. Ground of appeal No. 1 & 1.1 is accordingly dismissed." 6. Keeping in view of the entire aspect of the matter we do not find any reason to deviate from the stand taken by the Coordinate Bench and respectfully relying upon the same in assessee's own case for A.Y. 2012- 13 we reject this ground of appeal preferred by the assessee. 7. In the result, Ground No. 1 of the assessee's appeal is dismissed. 8. Ground No.2:- This ground relates to disallowance under Section 14A r.w.r. 8D of the Act. 9. The brief facts of the case is this that the company has earned exempt income of Rs. 2,37,41,870/- and has disallowed Rs. 70,000/- under Section 14A of the Act. During the course of assessment proceedings the assessee claimed that the investments made by the company were held for business purposes and the same was made out of the own funds which was strategic in nature. The Assessing Officer made disallowance at Rs. 1,80,67,598/- under Section 14A as per Rule 8D of the Act. However, the assessee itself disallowed an amount of Rs. 70,000....
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....ing the substantial activity in the investments made, moving from Rs. 39 crores to Rs. 40 crores from the beginning to the end of the year, the A.O. had rightly recorded his non satisfaction with the reply of the assessee. Therefore even considering the decision of the Hon'ble Apex Court in the case of Godrej & Boyce Manufacturing Co.Ltd. (supra), pointed out by the Ld. Counsel for the assessee before us, we hold that there was valid satisfaction of the A.O. for rejecting the explanation of the assessee . The argument of the Ld. Counsel for the assessee therefore that the A.O. had recorded no satisfaction before proceeding to apply Rule 8D for calculating the disallowance to be made u/s. 14A, is therefore dismissed. 23. The next contention raised by the Ld. Counsel for the assessee before us was that the investment in SPVs and those investments which did not earn any dividend income during the year should not be considered for the purpose of applying Rule 8D. Reliance was placed on the following decisions in this regard: Ground No 2.4 & 2.5 - Disallowance as per Rule 8D should be revised * Investments in SPVs (Jhajjar KT Transco Pvt Ltd) should be excluded while applying Rule....
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....ominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section 14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers....
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....n case for A.Y. 2012- 13 we reject this ground of appeal preferred by the assessee. 14. In the result, Ground No. 2 of the assessee's appeal is dismissed. 15. Ground No. 3:- Since this ground is consequential in nature, hence, no order needs to be passed separately. 16. In the result, the appeal preferred by the assessee in ITA No. 244/Ahd/2020 for A.Y. 2014-15 is dismissed. Now we shall take up Revenue's appeal in ITA No. 270/Ahd/2020 for A.Y. 2014-15 17. The Revenue has taken the following grounds of appeal:- "1. Whether on the facts and circumstances of the case and in law, the ld.CIT(A) is right in deleting he upward adjustment made u/s. 92CA of Rs. 1,02,24,208/-. 2. Whether the ld.CIT(A) has erred in law and on facts in deleting the addition made on profit on sale of carbon credit treating it as Capital Receipt instead of Revenue receipt. 3. Whether the ld.CIT(A) has erred in law and on facts in deleting the disallowance u/s. 14A applying Rule 8D amounting to Rs. 1,79,97,598/-. 4. It is, therefore prayed that the order of the Ld. Commissioner of Income tax(Appeals) may be set aside and that of the Assessing Officer be restored. 5. The appellant prays for leave, ....
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....% in the case of Cadila Health care Ltd. approved by the ITAT Ahmedabad Bench. Accordingly the difference amounting to Rs. 1,04,85,761/- was proposed to be adjusted by way of reduction in the liaison fees so paid by the assessee. The same was accordingly adjusted by the A.O. in his order passed u/s. 143(3). 33. Ld. CIT(A) however, it was pointed out, deleted the same noting that the liaison fees paid to Pharmaceutical Company i.e. Cadila could not be said to be comparable for the assessee which was engaged in the business of designing High end transmission lines towers and providing turnkey solutions. The relevant findings of the CIT(A) at para 6.2 of his order is as under: 6.2 I have considered the facts of the case, assessment order and submission filed by the appellant. The Appellant Company has set up an AE in USA for identifying projects in. America, to collect project data and technical specifications and transmitting the same to India for further, analysis. In respect of these services the AE charges a monthly sum of USD 15000 plus 3% success fee on the net invoice. During the year under consideration the AE was successful in generating business for the Appellant and a s....
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....re-G of the Paper-book. The data collection methodology has been elaborately described and jt is seen that it is not merely an estimate but it is actual collection of data from various organizations in different fields of activities. At this juncture, it is relevant to refer to Rule 10D(3) which gives a statutory support to use a Government publication in/the benchmarking process. Clause (a) of Rule 10D(3) categorically specifies that the assessee can use official publications, reports, studies, database from the Government of the country of residence of the AE. The TPO has simply rejected the CUP method and has compared the Appellant Company engaged in the business of designing high-end transmission lines, towers and providing turnkey solutions with a pharmaceutical company which does not seem to be appropriate at all. Accordingly, the addition made by the TPO simply relying on the decision: of Cadila Healthcare is held not justified and is hereby directed to be deleted. .Relevant grounds of appeal are therefore, allowed. 34. Ld. D.R. relied on the order of the A.O. while the Ld. Counsel for the CIT(A). 35. We have gone through the order of the Ld. CIT(A). We find that the Ld.....
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....edits which was not offered to tax by treating it as capital receipt. 26. During the course of assessment proceedings it is found that the assessee has earned income from sale of carbon credits (in short "CERs"). The assessee has credited to its profit and loss account an amount of Rs. 1,13,58,727/- on account of CERs. During the course of assessment proceedings the assessee submitted the details with regard to the sale of CERs which is similar to earlier year and there is no change in facts of CER receipts. Thus, during the course of assessment proceedings the assessee explained the income of Rs. 1,36,04,211/- derived from sale of CERs and the income was added to the total income of the assessee. 27. In the appellate proceedings, Ld. CIT(A) relied on the decision of ITAT Ahmedabad in assessee's own case for A.Y. 2010-11 and 2011-12 and relying on the judgment of Jurisdictional High Court in the case of CIT vs. Alembic Ltd. where it was specifically held that income from sale of CERs is capital receipt and not chargeable to tax and deleted the addition. 28. At the time of hearing the Counsel submitted before us that the issue is decided in favour of the assessee in A.Y. 2012-13 ....
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....ved that CERs received by Appellant including sale proceeds are capital receipt. The jurisdictional Hon'ble AHMEDABAD ITAT in the case of ALEMBIC LIMITED in TTA No. 1912/Ahd/2012, relied by Appellant, dealt with the issue in the factual matrix of the case where the appellant itself had treated the income from sale of CERs as the revenue income in profit & loss account but the judicial authorities held it to be in the nature of the capital income. The relevant extracts of the judgment are as follows: "19, Adverting to the additional ground No.l in respect of income from realization-of carbon credits, which is taxed as Revenue receipt. The ld. Counsel for the appellant, at the outset, contends that the Hon'ble Karnataka High Court in the case of CIT vs. SubhashKabini Power Corporation Ltd, [2016] 69 taxmann.com 394 (Karnataka).dealt with the issue at length and relied on various judicial pronouncements, holding income received from realization of carbon credits as capital in nature. The Hon'ble Karnataka High Court in paragraph 6 of its order (supra) has dealt with the issue at length and square held that the carbon credits are generated out of environmental concerns wh....
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....in Tax Appeal No. 553 of 2017 dated 28/08/2017 wherein it was held as under: "6. The last surviving question pertains to the treatment that the appellant's income from trading of carbon credits should be given. The Tribunal held that receipts should be in the nature of capital receipts and therefore, would not invite tax. This issue has been examined by two High Courts. The Karnataka High Court in case of CIT v. SubhashKabini Power Corporation Ltd. reported in (2016) 385 ITR 592 (Karn) and Andhra Pradesh High Court in case of Commissioner of Income tax v. My Home Power Limited reported in (2014) 365 ITR 82 (AP) have held that receipts of carbon credit are in 'nature of revenue receipts. Following the decision of said two High Courts, this question is also not considered." It is observed that entire legal issue involved.in present case has been decided in favour of Assessee by Hon'ble Ahmedabad ITAT and Gujarat High Court. '8.3.5 It is further observed that while passing Assessment Order for A.Y. 2009- 10 in case of Appellant, AO has taxed CERs on accrual basis even though there was no sale of such CERs. The said addition was deleted by CIT (Appeals) and Hon....
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....ions made by the learned Tribunal with respect to the income from sale of CERs, made in the Impugned judgment and order, however keeping the said question open to be considered in accordance with law and in the year in which the income from sale of CERs is accrued / received. Thus, Hon'ble Gujarat High Court has held that the taxability of CERs is a question open to be considered in accordance with the law in the year in which the income from sale of CERs is received. It is observed that Hon'ble Ahmedabad ITAT in the case of Alembic Limited referred supra, has on identical facts has held that income from sale of CERs is capital receipt and said decision is upheld by Hon'ble Gujarat High Court referred supra, which has settled entire controversy as discussed herein above. 8.3.6 During the course of Appellate proceedings Appellant has also relied upon following decisions which are also in favour of Assessee: (i) Decision of Hon'ble Andhra Pradesh High court in the case of CIT v. My Home Power Ltd 1720141 365 ITR 82]: Section 28(1) of the Income-tax Act, 1961 - Business income -Chargeable as (Carbon credits) - Assessment year 2007-08 - Appellant-company was ....
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....t in the case of CIT vs SubhashKabini Power Corporation Ltd [69 taxmann. com 394]: Section 28(1), read with section 263, of the Income-tax Act 1961 - Business income - Chargeable as (Carbon credit) - Assessment year 2009-10-Whether since carbon credit was generated out of environmental concerns and it was not having character of trading activity, receipt from sale of carbon credit was capital receipt and not business income - Held, yes [Para 12] [In favour of appellant]. Considering the facts discussed Herein above it is held that income from sale of CERs is capital receipt and AO is not justified in treating such income as revenue receipt. It is also held that AO is not justified in reducing deduction under Section 80-IA claimed by Appellant by reducing expenditure incurred for sale of CERs from profit derived from industrial undertaking. Thus, both the grounds of appeal are allowed. 43. We have gone through the order of the ld. CIT(A) and we have noted that the Ld. CIT(A) relied on a plethora of decisions both of the ITAT and the Hon'ble High Courts of Karnataka and Andhra Pradesh holding CER receipts as capital in nature and income earned there from also being capital receip....
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....llowance of expenses pertaining to exempt income earned as per the provisions of Section 14 A of the Act and the revenue is aggrieved by the order of the Ld. CIT(A) deleting the disallowance of expenses pertaining to foreign investment made by the assessee . The ld. CIT(A) had directed exclusion of foreign investment made for the purpose of computation of disallowance u/s. 14A as per Rule 8D of the Income Tax Rules 1962 holding that the dividend earned from the said foreign investment was not exempt from tax. 52. The ld. D.R. was unable to controvert the above findings of the ld. CIT(A). 53. In view of the above, we see no reason to interfere in the order passed by the Ld. CIT(A) deleting the disallowance made u/s. 14A read with Rule 8D of the Rules with respect to foreign investment made by the assessee." 35. Keeping in view of the entire aspect of the matter we do not find any reason to deviate from the stand taken by the Coordinate Bench and respectfully relying upon the same for A.Y. 2012-13 we reject this ground of appeal preferred by the Revenue. 36. In the result, this ground of appeal preferred by the Revenue is dismissed. ITA No. 245/Ahd/2020 (A.Y. 2015-16)(Assessee....
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....rred in facts and in law by upholding levy of interest of Rs. 18,19,145 as against of Rs. 3,94,615 as computed by the Appellate u/s 234C made by learned AO by holding that the same is mandatory and consequential in nature which is without appreciating the fact that the interest u/s 234C as computed by the learned AO is not in accordance with provision of section 234C of the Act. Accordingly, such levy of excessive interest prayed to be deleted. Your appellant prays for leave to add, alter and/or to amend any of the grounds before the final hearing of the appeal." 38. Ground No.1:- Disallowance under Section 14A r.w.r. 8D of the Act. 39. This ground has already been dealt with by us in ITA No. 244/Ahd/2020 for A.Y. 2014-15 and in the absence of any changed circumstances the same shall apply mutatis mutandis. Hence, this ground preferred by the assessee is dismissed. 40. In the result, this ground of appeal preferred by the assessee in ITA No. 245/Ahd/2020 for A.Y. 2015-16 is dismissed. 41. Ground No. 2:- Since this ground is consequential in nature hence, no order needs to be passed separately. ITA No. 279/Ahd/2020 (A.Y. 2015-16)(Revenue's Appeal):- 42. The Revenue has taken....