TaxTMI 
TaxTMI 
2022 (2) TMI 1428
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....T(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. 1,51,65,251/- on account of balance 10% additional depreciation on additions made in A. Y....
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.... 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 of the assessee was as assessed at Rs. 11,197,208,228 by passing an order u/s 143 (3) read with Section 144C (3) of the act on 7 March 201....
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.... 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 grounds were never before the learned assessing officer or never been raised before the lower appellate authorities and therefore they cannot be admitted now. 012. We have careful....
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....ed 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 the external comparable of HSBC Bank, it is noticed that the bank has given the information that it has been charging 0.15% to 3% of the guarantee commission whereas, in case of Allahabad Bank, the TPO h....
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....h 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 corporate guarantee of Rs 140.80 crores amounting to Rs 1,40,51,696/- and reduced the amount already charged by the assessee at the rate of 0.20% amounting to Rs. 2,810,339/- and made a transfer pricing adjustme....
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....he 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 international transactions. 020. On appeal before the learned CIT-A, he followed the decision of his predecessor in assessee's own case for assessment year 2009-10. He was of the opinion that the letter of c....
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....f 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 facility, which was also approved. The assessee has incurred both revenue and capital expenditure on in-house research and development facilities during the year and therefore assessee claimed that he it is entitled to weighted ....
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.... 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 incurred outsider. Relying on the said certificate, the Revenue disallowed the expenditure incurred by the assessee outside its in-house facilities while the Tribunal allowed the same. The Hon'ble Gujarat High Court upheld the decision of the Tr....
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.... 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 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 expend....
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.... 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 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 decid....
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....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 are certain expenditure which have been incurred for creating a brand image of the corporate and these are enduring in nature and falls in the category of capital expenditure. After calling for the detail submissions from the assessee, he held that certain expenditure incurred on TV advertisin....
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....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 by the company which creates the product. Making such kind of a distinction, that part of the advertisement is for the product which is revenue in nature and part of the advertisement for the corporate brand is capital expenditure is not appropriate. Even if there is a promotion of a corporate brand, it directly facilitates the business of the assessee and in the result has affect on the sales and profita....
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....e 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 exempt income under Section 14A of the Act. The Assessing Officer disregarded the same and proceeded to disallow an amount of Rs.1.10 crores under Section 14A of the Act read with Rule 8D of the Rules as expenditure incurred to earn exempt income. Thus, adding Rs.1.10 crores to the income of the respondent. (b) Being aggrieved, the respondent filed an appeal to the CIT(A) but without success. (c) On further appeal, the impugned ....
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.... 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. 036. The learned assessing officer rejected the claim of the assessee holding that there is no such provision to claim balance 10% additional depreciation in subsequent years for addition made in earlier year. In past year learned CIT - A who allowed the claim of the assessee following the decision of coordinate bench in Cosmo films Ltd 24 taxmann 189 and SIL Ltd 26 taxmann 78, The learned assessing officer did not followed order of the learned CIT ....
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....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 revenue has not preferred any appeal before the Tribunal. In view of the above, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground raised is dismissed. 038. Therefore, respectfully following the decision of the coordinate bench in assessee's own case for assessment year 2009-10, ground number 6 of the appeal is dismissed holding that the learned CIT appeal is correct in allowing additional depreciation at the rate of 10% for asset purchased in the earlier year amo....
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....y 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 authority. After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer. 45. Strongly relying upon the observations of the Assessing Officer, the learned Departmental Representative submitted, the expenditure incurred by the assessee for trip scheme is nothing but commission paid to dealers and distributors; hence, subject to deduction of tax under section 194H Act. The assessee having failed....
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....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 that dealers/distributors are agents of the assessee. Further, as we find, the trip scheme has been introduced by the assessee from past 20 years and the deduction claimed by the assessee on account of such trip scheme has never been disallowed by the Assessing Officer except for the impugned assessment year. Therefore, even applying the rule of consistency, the expenditure claimed by the assessee has to be allowed. Accordingly, we do not find any infirmity in the decision of learned Commissioner (Appeals). Ground raised is dismissed. 042. Therefore respectfully following the decision of ....
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....d 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 learned assessing officer he finds that the issue raised in this ground of appeal by the assessee does not emanate from the order of the learned assessing officer and therefore same was dismissed. 051. The learned authorised representative submitted that identical issue arose in case of the assessee company for assessment year 2006 - 07, 2008 - 09 and 2009 - 10 wherein the claim of the assessee was allowed. It was further stated that the learned assessing officer himself allowed the above claim for assessment year 2012 - 13 while passing an order u/s 143 (3) of the act. 052. The coordinate bench for assessme....
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....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 be treated as allowed for statistical purposes." 053. Therefore respectfully following the decision of the coordinate bench in earlier year in assessee's own case we also set-aside this issue back to the file of the learned assessing officer to decide it in accordance with the law. Thus, ground number 5 of the appeal of the assessee is allowed for statistical purposes. 054. Now we come to ground number 2, where the assessee challenges the order of the learned CIT-A in disallowing the claim for long-term capital loss arising on account of buyback of shares amounting to Rs. 885.23 lakhs on transfer pricing adjustment. 055. The fa....
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....ected 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 addition/ adjustment on account of Arms Length Price on account of buyback of shares of Rs. 88,523,100/- was made. 056. When the matter reached before the learned CIT-A, he held that the learned transfer pricing officer has adopted very justified method for valuation of the shares while determining the value of the shares at US$ 1.45 instead of $ 1 , as adopted by the appellant. He also upheld the methodology adopted by the learned transfer-pricing officer and held that he is in complete agreement for determining the arm's-length price on buyback of shares by the learned transfer-pricing officer. Accordingly, he confirmed the addition. 057. T....
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....pe 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 also considered as the deemed 'international transactions'. Buyback is a share repurchases transaction when a company buys its own outstanding shares to reduce the number of shares available in the open market. There may be several reasons for the buy back. It is an investment made by the company in itself by reducing the number of shares, which increases the proportion of shares owned by investors. Thus, it is a transaction of purchases of shares by subsidiary from its holding company through buyback route. There is also no doubt that shares held by holding company in subsidiary company are a 'security'. As it is transaction and a value is put to it by Holding company [assessee] an....
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....low 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 financial years of all the subsidiaries of the target company and after considering the risk premium the value of investment in the hands of the target company was worked out at US$ 49.95 million. Thereafter both these valuations were given appropriate weights in the final value of the investment in the hands of the target company were determined at US$ 27.45 million. Thus in than it was stated that as per the valuation report the weighted average valuation of the shares of the associated enterprises company is arrived at one US dollar per share. 066. On 6 January 2014, once again as per the net asset value method the valuation of the shares was made. On the basis of the net asset value, total....
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....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 number 272- 275 of paper book is also incomplete for the reason that it does not have the content mentioned in paragraph number 4 to 4.1.3, and further 7 onwards. In fact, the methodology of the valuation of the subsidiary companies stated to be the net asset value is devoid of any merit unless the true nature of such subsidiaries and their functioning is evaluated. Further, at page number 273, which is part of the valuation report as on 1/9/2009, says that one of the subsidiaries of the target company had disposed of its investment of its own subsidiaries during the financial year 2009 the effect of the same on valuation has already been considered and it does not require any further adjustment. Befo....
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....ies 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 discount and weightage is provided. Therefore, this matter needs to set-aside to the file of the learned assessing officer/transfer pricing officer for determination of the arm's-length price of the buyback of 41 lakh shares of a foreign subsidiary. In view of this we set-aside this issue back to the file of the learned transfer pricing officer with a direction to the assessee to 1st show the fair market value of the shares bought back by supporting the valuation report along with the assumptions for such valuations. Assessee is also directed to show the nature of activities of the various subsidiaries, their risk factor, geographical discounts, and complete cash flow with revenue and projected expenditure etc.....