TaxTMI 
TaxTMI 
2022 (2) TMI 1428
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....nd in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance on account non recovery of service charges for giving Letter of Comfort to the subsidiary @0.04% as against 0.50%., without appreciating the facts of the case. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to verify the allowability of expenditure incurred u/s 35(2AB) without appreciating the fact that the expenditure was disallowed by DSIR (as per Certificate in Form No. 3CL) as the same was not incurred for & purpose. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing deduction of Rs. 475.29 lacs (net of depreciation of Rs. 158.43) on account of expenditure incurred on television advertisement in relation to corporate advertisement. 5. On the facts and in the circumstances of the case and in law, the Id. CIT (A) erred in restricting the disallowance u/s 14A r.w. Rule 8D to Rs. 58,23,458/-, without appreciating the facts of the case. 6. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing Rs. 1,51,....
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....those international transactions. The learned transfer pricing officer passed an order u/s 92CA (3) of The Income Tax Act [ The Act] on 30/1/2014, wherein he proposed three adjustments, (1) Rs 1,12,41,357/- in respect of guarantee, (2) Rs. 1,131,136/- in respect of letter of comfort and (3) Rs. 88,523,100/- in respect of buyback of shares. 05. The learned assessing officer incorporated the above adjustment and further held that as assessee has claimed long-term capital loss of Rs. 90,123,700 on account of buyback of shares in its return of income, he reduced the long-term capital loss to Rs. 1,600,600/- to the extent of transfer pricing adjustment. He also disallowed claim u/s 35 (2AB) amounting to Rs. 3,876,000, disallowed advertisement expenditure of Rs 475,29,202/-, gift expenses of Rs. 1,650,000, addition on account of damaged stock of Rs. 6,603,000/-, disallowance u/s 14 A of Rs 1,00, 26,816/-, disallowed the additional depreciation of Rs 1,51,65,251/- and disallowed a trip expenses of Rs. 252,660,686/-. Therefore, total disallowance/addition of Rs. 349,883,448 was made to the returned income of the assessee. Certain deductions/exemptions were granted and the total income o....
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....cial rate as per the applicable double taxation avoidance agreement (DTAA) for dividends paid to non-resident shareholders, should be directed to be refunded to the appellant. Ground number 7 deduction in respect of education cess On the facts and in the circumstances of the case, the education cess on income tax paid by the appellant for the captioned year is an allowable expenditure in the assessing officer be directed to allow the same while computing the income of the appellant 09. For both the above grounds, assessee submitted that these are only legal issues, which can be permitted to be raised at any time during the pendency of the appeal, those grounds do not require any fresh investigation of facts, and therefore it may be admitted. 010. The learned authorised representative reiterated the same argument for admission of the above two additional grounds of appeal. It was also stated that these has arising because of the subsequent judicial precedents after filing of the appeal and therefore could not be raised in the original appeal. 011. The learned departmental representative objected to the admission of additional ground stating that those grou....
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....he assessee has charged / offered 0.20% of the guarantee commission from the A.E. The TPO has held that such guarantee fee / commission is an international transaction, which has to be bench marked with external comparables. He also held that there is a huge risk involved in giving the guarantee on the loan taken by the subsidiary and also it gives huge advantage and benefit to the A.E. in getting the loans, which otherwise would have been difficult on such terms and conditions. While enquiring from HSBC Bank and getting a guarantee from the website of Allahabad Bank, he noted that guarantee commission is being charged in the case of HSBC @ 0.15% to 3% and by Allahabad Bank @ 3% per annum. He also observed that even this rate does not reflect the cost of the risk undertaken, because the banks secure themselves fully, while taking the guarantee. He has also tried to analyze the element of risk by comparing the company fixed deposits and the bank Fixed deposits and worked out the cost of risk embedded in such kind of two deposits at nearly 3 to 4%. Accordingly, he benchmarked the ALP for the guarantee @ 3% p.a. of the amount of the guarantee. 8. First of all, if we analyze t....
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....g to Rs. 140.81 crores. The assessee has charged 0.20% of the guarantee amount as commission to the associated enterprise. The learned transfer-pricing officer noted that the associated enterprise to which corporate guarantee has been issued by the assessee has paid interest to the bank in the range of 1.71% - 2.32%. The appropriate rate to be charged by the assessee to its associated enterprise cannot be more than the rates charged by the banks to the associated enterprise for loans availed by it. The AO further noted that overall risk as exposure of the assessee company is very high by the amount of corporate guarantee and the company becomes more leveraged to that extent thereby increasing the debt equity ratio, which will ultimately affect the cost of borrowing. The assessee in its own case has been charged commission at the rate of 0.25% by the banks, however, in the instant case, the guarantee has been given on behalf of the associated enterprises where the risk element is higher and therefore an addition of 0.75% needs to be made to compensate the assessee for the higher risk assumed. Accordingly the learned assessing officer made an addition at the rate of 1% of the corpora....
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....rprise. Therefore, according to him it would have accrued to the taxpayer, if the said amount were given for a loan to unrelated parties in the similar circumstances as that of the associated enterprises. The assessee objected to the same stating that giving a comfort letter is not an international transaction as well as it is not a guarantee given by the assessee and therefore nothing would have been receivable by the assessee on account of letter of comfort issued in favour of the bankers. The learned transfer pricing officer held that the letter of comfort is to be regarded as an international transaction and that an intragroup services has been rendered by the assessee to its associated enterprise and therefore issuing guarantee is an International Transactions, determination of its arm's-length price of letter of comfort provided by the assessee on behalf of the assessee is required to be done. He therefore determined that the assessee should have received 0.50% being 50% of the 1% of fees for guarantee fee. Accordingly, he computed 0.50% on the comfort letter issued of Rs. 22.62 crores amounting to Rs. 3,131,136 and made an adjustment of the arm's-length price of the about in....
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....r the assessee. Accordingly, we delete the addition of Rs. 3,28,280/-. This ground is allowed." 022. We do not find any difference in the facts and circumstances of the case except to the extent of amount of letter of comfort issued by the assessee. The learned CIT-A has also followed the decision rendered by the learned CIT - A for assessment year 2009-10 which has been confirmed by the coordinate bench per its order dated 3 February 2021. Therefore, respectfully following the decision of the coordinate bench, we also hold that there cannot be any addition in the hands of assessee on account of comfort letter issued. Accordingly, ground number 2 of the appeal of the learned assessing officer is dismissed. 023. Ground number 3 is with respect to the direction of the learned CIT - A to the assessing officer to verify the allowability of expenditure incurred u/s 35 (2AB) with respect to the expenditure disallowed by DSIR for research and development purposes. The fact shows that the assessee has Department of scientific and industrial research recognized research and development unit situated at Bhandup in Mumbai. Assessee also built its own new research and development facilit....
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....he approval of Department of Industrial and Scientific Research and Development (DSIR) was received by the assessee for its R & D activity, expenditure claimed to be incurred at Rs.13,56,47,149/- on R & D was reduced to Rs.13,02,11,457/- by the said authority in the certificate issued. Relying on the said certificate, claim of the assessee for the deduction u/s 35(2AB) was reduced by the AO by Rs.27,18,846/-being 50% of the R & D expenditure treated to be not eligible by DSIR in its certificate. On appeal, the ld. CIT (A) confirmed the disallowance made by the AO on this issue relying again on the certificate issued by DSIR. 13. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. In support of the assessee's case, the ld. Counsel for the assessee has relied on the decision of the Hon'ble Gujarat High Court in the case of CIT vs Cadila Health Care ltd. 87 DTR 56. A perusal of the judgment passed by the Hon'ble Gujarat High Court in this case, however, shows that the expenditure on R & D was bifurcated by the prescribed authority as per it's certificate in two parts, one incurred in-house and the other....
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....e expenditure in question on R & D which is eligible u/s 35(2AB) has not been examined either by the AO or by the ld. CIT(A). He has urged that the matter may therefore be restored to the file of AO for giving him an opportunity to verify the same. We find merit in this contention of the ld. DR and since the ld. Counsel for the assessee has also not raised any objection in this regard we restore this issue to the file of the AO with a direction to decide the same afresh after verifying whether the expenditure in question has been incurred by the assessee on research and development which is eligible for deduction u/s 35(2AB). The appeal of the assessee is accordingly treated as allowed for statistical purpose. 12. In its return of income for year under consideration, the assessee company had claimed weighted deduction u/s 35(2AB) of the Act on account of expenditure incurred by it on scientific research and development during the course assessment proceedings it was noticed by the AO that although the approval of Department of Industrial and Scientific Research and Development (DSIR) was received by the assessee for its R & D activity, expenditure claimed to be incurred at....
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....d to be unsustainable by the Tribunal holding that There was no justification in harping upon the figure contained in the certificate issued by DSIR as was done by the Assessing Officer. It was held by the Tribunal that the relevant provisions of the Act did not contain any specific condition that the deduction u/s 35(2AB) and accordingly the claim of the assessee for deduction u/s 35(2AB) will be restricted to the amount of R & D expenditure as contained in the certificate. The Tribunal found on verification of the relevant details that even the expenditure is not included in the said certificate was eligible for deduction u/s 35(2AB) in respect of the said expenditure was allowed by the Tribunal. In our opinion, the issue involved in the case of Torrent Pharmaceuticals ltd. thus is similar to the one involved in the present case and this position is not disputed even by the ld. DR at the time of the hearing before us. He, however, has contended that the claim of the assessee of having incurred the expenditure in question on R & D which is eligible u/s 35(2AB) has not been examined either by the AO or by the ld. CIT(A). He has urged that the matter may therefore be restored to the....
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....ate bench has decided this issue in favour of the assessee and the same decision has been confirmed by the honourable Bombay High Court in ITA number 1564/2016. However we find that such issue arose in the case of the assessee for assessment year 2006 - 07 in ITA number 7801/M/2010 first and subsequently all the orders in the case of the assessee by the coordinate benches followed this decision. For that year the coordinate bench decided as Under:- 24. In ground no.4, the assessee has challenged the disallowance of Rs.5,47,00,000 paid towards corporate advertisement expenditure as capital expenditure. 25. The assessee has incurred expenditure of Rs.29,99,30,000, on account of advertisement on TV, the captionwise details of such advertisement expenditure was given before the Assessing Officer, which has been incorporated at Page-15 of the assessment order. The Assessing Officer, from the said summary of expenditure, observed that the assessee has incurred expenditure on advertisement of product brand like, exterior paint brand, royal brand and tractor brands, which fall in the category of product advertisement and hence they are revenue in nature. However, there ar....
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.... 7,01,20,716 Exteriors Ottam Thullal 38,09,870 Time Proof 3,52,07,073 10,91,37,659 Cutting Shutting 4,42,00,096 APSS 11,05,000 Corporate Cheetah 93,52,638 Colour Week 1,23,250 5 46,57,734 Vignette Birthday 2,38,05,182 Royale Precious 3,74,12,626 612,17,808 Courier 56,92,688 Courier New 2,32,17,927 Tractors Kids 21,01,688 Saheb 40,47,520 Saheb New 1,34,57,873 4,85,17,696 From the aforesaid details, he held that the advertisement expenditure incurred under the head "Corporate Brand" is to be disallowed as it relates to enduring benefit. Such a distinction made by the Assessing Officer, in our opinion is wholly misplaced, because the expenditure on account of advertisement even for the product brands does highlight the name of the company. The brand name of the company is embedded in the product and the brand value of the product is also the brand value of the company, who owns the product. If any advertisement does not give the details of the product this does not ipso-facto means that it is not for the promotion of product. The product in the market is known by its brand which is owned....
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....rest amount computed on interest incurred for normal running of the business and restricted the disallowance only to Rs. 5,823,458/-. The revenue is in appeal with respect to restrict of the above disallowance. 032. The learned authorised representative submitted that in the case of the assessee for assessment year 2008-09, 2009-10 the identical issue arose and same has been decided by the coordinate bench. He further stated that for assessment year 2008-09 the honourable High Court has confirmed the order of the coordinate bench. In that case, in absence of any satisfaction recorded by ld AO, disallowance was deleted. 033. We find that honourable High Court in INCOME TAX APPEAL NO. 1564 OF 2016 in case of assessee has considered this issue and has upheld the order of the coordinate bench for the reason that there is no satisfaction recorded by the learned assessing officer before applying provisions of rule 8D for making disallowance u/s 14 A of the act. The honourable High Court held as Under:- "4. Regarding question no.(c) :- (a) In its return of income, the respondent made a suo-moto disallowance of Rs.15.21 lakhs being the expenditure incurred to earn e....
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....ve facts, as no proper satisfaction has been recorded by the learned assessing officer in terms of the provisions of Section 14 A (2) having regard to the accounts of the assessee about the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income Under the act. In view of this ground number 5 of the appeal of the learned assessing officer is dismissed. 035. Ground number 6 is in relation to allowing the additional depreciation at the rate of 10% amounting to Rs 1,51,65,251/-. The claim of the assessee is that according to the provisions of Section 32 (1) (iiia) the assessee is eligible to claim 20% additional depreciation on any Machinery or plant , acquired after 31st of March 2005. As per the proviso to Section, if the assessee has put to use it for less than 1 80 days in a previous year, the deduction in respect of depreciation shall be restricted to 50%. The assessee has already claimed 10% of the additional depreciation in financial year 2008- 2009 (assessment year 2009 - 10) and therefore it claimed that balance 10% of the depreciation should be allowed to the assessee in financial year 2010 - 11.....
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.... the decision of the first appellate authority submitted, the issue is now squarely covered by a number of judicial precedents including the decision of the Tribunal in assessee's own case. 42. We have considered rival submissions and perused materials on record. The facts on record clearly reveal that assessee had purchased and installed new plant and machinery in the preceding assessment year, which is eligible for additional depreciation @20%. However, since the new assets were put to use for less than 180 days in the preceding assessment year, the claim of additional depreciation allowable at 20% was restricted to half of it, i.e. 50%. Thus, in effect, the assessee was allowed additional depreciation of 10%. Now, it is well settled by a number of judicial precedents that if for use of new plant and machinery for a period of less than 180 days the entire amount of additional depreciation cannot be claimed in the subject assessment year, the balance unclaimed amount can be claimed in the subsequent assessment year. It is also a fact on record, against similar claim allowed by learned Commissioner (Appeals) in assessee's own case in Assessment Year 2008-09, the re....
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....A number 2754/M/2014 and ITA number 4203/M/2014 wherein the coordinate bench held as Under:- "43. In ground 6, the revenue has challenged deletion of disallowance of Rs. 1,610.45 lakhs on account of expenditure incurred on trip scheme. 44. Briefly the facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee had debited an amount of Rs. 16,10,45,094/- towards expenditure incurred on account of trip scheme. Noticing this, he called upon the assessee to justify the claim. After verifying the details furnished by the assessee, the Assessing Officer observed that the amount was paid to SOTC for foreign trip of its dealers. Being of the view that the expenditure incurred was not for the purpose of assessee's business, he held the same as not allowable. Further, he held that since the assessee has not deducted tax at source on the expenditure incurred, which is nothing but in the nature of commission paid to dealers and distributors, the same has to be disallowed under section 40(a)(ia) of the Act. Accordingly, he disallowed the deduction claimed by the assessee. Assessee contested the disallowance before the first appellate autho....
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.... materials on record. As could be seen from the facts on record, to expand its business the assessee has devised a trip scheme wherein it organized foreign trips to its dealers and distributors based on achieving a specific target assigned by the assessee. On achieving such target, the dealer/distributor is entitled to undertake the trip organized by the assessee through SOTC. Thus, from the aforesaid facts it is very much clear that the entire trip scheme is for the purpose of expanding assessee's business by encouraging the dealers and distributors to achieve a specific target of purchase. Thus, the scheme is closely linked to assessee's business activity. It is also a fact that the assessee has not paid any amount to the dealers and distributors, but amount spent has been paid to SOTC for organizing the trip. It is also a fact on record that the amounts paid to SOTC has been subjected to TDS as per the relevant provision. Therefore, the allegation of the Assessing Officer that the amount has not been subjected to deduction of tax is without any basis. As regards the applicability of section 194H of the Act, by no means, the Assessing Officer has established on record tha....
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....following the order of the honourable High Court upholding the order of the coordinate bench in assessee's own case for earlier years i.e. assessment year 2008 - 09. For the same reasons the ground number 3 of the appeal of the assessee is allowed. 048. Ground number 5 is with respect to the rejection of additional ground raised by the assessee with respect to the claim for non-taxability of royalty income received from SCIB chemicals SAE, Egypt. The learned CIT-A did not admit the same, as according to him it did not arise from the order of d AO. 049. The fact shows that the assessee has credited royalty income in the books of accounts amounting to Rs. 7.90 crores from the above subsidiary company. The same was offered for taxation in the return of income. However, later on, assessee contended that as per article 13 of The Double Taxation Avoidance Agreement [DTAA] royalty income is not liable to tax in India and therefore the same needs to be reduced from the total taxable income. 050. We have carefully perused the order of the learned CIT - A wherein paragraph number 14 the issue is dealt with and the learned CIT has held that on consideration of the order of the learne....
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....d for the impugned assessment year the assessee had offered the royalty income received from its subsidiary in Egypt. For the first time through an additional ground raised before us, the assessee has claimed that the royalty income is not taxable in India in view of Article 13 of India-Egypt tax treaty. No doubt, this is a purely legal issue. Further, we find that identical issue raised by the assessee through additional ground in Assessment Years 2008-09 and 2006-07 has been restored back to the Assessing Officer for fresh adjudication, keeping in view the provisions of the tax treaty between India and Egypt. We have also noted that while completing the assessment for Assessment Year 2012-13, the Assessing Officer has accepted assessee's claim that royalty income is not taxable in view of Article 13 of India-Egypt tax treaty. In view of the above, we are inclined to restore this issue to the Assessing Officer for fresh adjudication keeping in view Article 13 of the India Egypt tax treaty as well as the decisions of the Tribunal Needless to mention, the Assessing Officer shall afford reasonable opportunity of hearing to the assessee before finalizing the issue. This ground may....
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....versus Hindustan Lever Ltd dated 24 October 1994. The learned transfer-pricing officer asked the assessee to determine the value of the shares, using only Discounted Cash Flow Method of valuation and provide a revised working of the same. The assessee also contested that the cash flow of the subsidiary would have to be adjusted on account of long gestation and on account of tax cost. Therefore, the revised cash flow was required to be adjusted by 25% on account of the above reasons and dividend receipt. Accordingly, the assessee valued the shares at $ 1.45 per share considering five years projections. The learned transfer-pricing officer rejected the adjustment to the extent of 25%, computed the discounted cash flow method of valuation at $ 39,013,471, and determined the net current assets value of the same at US$ 1,576,811. Accordingly, the value of equity shares was considered being total of both at US$ 40,590,282 and the number of equity shares were US$ 28,055,444 and therefore the value per share was US$ 1.45. Accordingly he determined fair market value of 41 lakhs equity shares at Rs. 285,241,100/-.However the assessee has received only Rs. 19,67,18,000 towards buyback, an add....
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....that as on 1 April 2009 Assessee was holding 2,80,45,444 shares in its wholly owned subsidiary company namely Asian paints International Ltd Mauritius. During the year under consideration the AE bought back 41 lakh shares at the rate of 1 US$ per share and thereby received Rs. 19.36 crores. Assessee did not report the above transaction in form number 3CEB as the above form was filed before retrospective amendment in Finance act 2012, as on that date buyback of shares were not covered in the definition of ‗international transactions. 061. By the finance act 2012, explanation was added, wherein clause (c) provides as under :- (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other 99 debt arising during the course of business; 062. Thus Capital financing including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments of deferred payments or receivable or any other debt arising during the course of business is ....
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.... learned transfer-pricing officer, assessee submitted as per letter dated 27 December 2013 that for arm's-length price the associated enterprise has obtained a valuation report from an independent chartered accountant. Assessee submitted valuation report dated 14 September 2009 from Shah & co based on (i) audited financial statement of Asian paints (International) Ltd and all of its subsidiaries as on 31st of December 2008, (ii) audited financial statement of subsidiary as on 31st of July 2009 and (iii) projected cash flow of that company along with its subsidiary for financial year 2009-2011. The valuer valued the investment held by the subsidiary on net asset value and discounted cash flow basis, each of the method was given an appropriate weightage, and final value of the target company comes determined at $ 1 per share. The valuation Under NAV method was made with reference to historical cost of the assets owned by the company on the valuation date and in case of the subsidiaries, there are certain adjustments were carried out by the assessee. Accordingly, the valuation was arrived at US$ 19.96 million. Valuer also used the cash flow method using cash flow for next three financ....
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....sessee submitted another letter dated 22nd of January 2014 where the discounted cash flow method was adopted which was suggested by the learned transfer-pricing officer for the purpose of the valuation and accordingly assessee submitted that the value per share is $ 1.45 per share. For working out discounted cash flow the five calendar years were considered however, 25% reduction on account of delay in receiving cash flow and taxes has been considered. 069. We note that as per the schedule given to us at page number 275 which is annexure 2 of valuation report shows that the subsidiary company has a further 10 subsidiary companies. There is no indication that whether these subsidiary companies are ‗investment companies' and how their values are derived at. Naturally if these are Investment Company the investment of the step down subsidiaries are also required to be valued for determination of fair market value of those shares. There is no explanation coming from the assessee that if those companies are manufacturing companies how their valuations are derived at. Further the valuation report dated 14 September 2009, by Shah and Co which is submitted before us from page numbe....
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....its arm's-length price. The learned transfer-pricing officer proceeded to value/compute the valuation on his own. He adopted the discounted cash flow method of valuation and thereafter made the addition of the net current assets to arrive at the final equity value. Accordingly, he valued the share at US$ 1.45 per share. In addition, thereby made the addition of Rs. 8,85,23,100/- . 074. In the present case before us, the assessee has also adopted changing stands and no justification was given for 30 % discount on cash flow claimed The learned transfer-pricing officer also did not allow any discount in the valuation of subsidiaries. There are no details available of the financials of the subsidiary companies and what are the natures of activities carried out by those subsidiaries companies. It is also not clear whether the subsidiary companies have further subsidiaries and how their valuation has been made to arrive at the value of shares of those companies. The annual accounts of all of the subsidiary companies were placed on record. Assessee has justified the valuation made by chartered accountant by merely providing numbers. No assumptions, basis for impairment, basis for disco....