TaxTMI 
TaxTMI 
2025 (4) TMI 2223
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.... raised in these appeals, hence, they were heard together and are being disposed off by this consolidated order. By the consent of both the parties, the appeal in IT(TP)A. No. 105/Chny/2024 for assessment year 2011-12 is taken as lead case for adjudication. 3. The first common ground raised in the appeals of the assessee for the assessment years 2011-12, 2012-13 and 2013-14 is with regard to the confirmation of computation of Arm's Length Price at 1.65% on the value of Letter of Comfort (LOC)/Guarantee offered by the assessee on behalf of its associated enterprise. 4. Brief facts of the case are as follows: 5. The assessee filed its return of income for the assessment year 2011-12 on 04.11.2011 admitting a loss of Rs..47,17,77,686/- and the same was processed under section 143(1) of the Act dated 16.08.2012. Subsequently, the case of the assessee was selected for scrutiny under CASS and notice under section 143(2) of the Act dated 02.08.2012 was duly served on the assessee. As per Form 3CEB submitted by the assessee, the assessee company has International Transaction with associated enterprises for Rs..26,26,07,912/-Therefore, the Assessing Officer referred the case to Tra....
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....service tax) as charges to the bank which was not reimbursed by the AE. Hence the character of the LOC is similar to the guarantee. vi) No doubt, provision of Loc/guarantee is one of the financial services rendered by the tax payer for which it has to be remunerated appropriately. Since the concerned parties, are associated enterprises, the said transaction is largely influenced by the related parties. To an independent enterprise the assessee would not have given such a huge Loc/guarantee without any fees or charges. This is one of the important factors in deciding the commission rates. The AE by virtue of the guarantee given, had utilized the funds for their business and is immensely benefitted by it. Any taxable income would accrue to the associate entity and not for the Indian entity. To that extent, shifting of tax base from the country is bound to happen in such transaction. Hence the assessee company should have been remunerated appropriately. For the said reasons the argument of the assessee that the corporate guarantee was extended to preserve the tax base of India cannot be accepted. vii) Moreover, in extending the Loc/guarantee, the risks undertaken by ....
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....ed as single isolated transaction with respect a particular year. It is a continuous process and has a long term effect on the Balance sheet of the company. It is always a contingent liability for the assessee company till the Loc/guarantee is closed. Taking a cue from the assessee's TP study an attempt is made to find out the guarantee commission rates charged by Bank which issued Loc/guarantee. The State Bank of India, Chennai charged 1% along with service tax against the assessee for issue of LOC. The same along with 0.5% of Risk may be considered as ALP and CUP is considered as Most Appropriate Method. 7. Based on the above facts and the rates levied by the bank, the TPO considered the same as ALP which is 1.65% (1%+ 0.15% as service charge + 0.50% as risk) and considering the same as CUP and computed the ALP of the corporate guarantee provided by the assessee to its AE Accordingly, the TPO calculated the ALP on the international transaction and proposed the adjustment amounting to Rs..7,35,900/- vide his order dated 30.12.2014. Since the assessee did not file either acceptance of the variations or objections, if any, with such variations mentioned in the draft assessmen....
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....e comparable uncontrolled price method as the most appropriate method and applied the same along with 0.5% of risk to determine the Arm's Length Price of this transaction, which is 1.65%. As per the above recommendation proposing for an adjustment of Rs..7,35,900/- to be made to the income of the assessee and in conformity with the order passed by the TPO, in the assessment order under section 144C(3) r.w.s. 92CA of the Act dated 29.05.2015, the Assessing Officer disallowed a sum of Rs.. 7,35,900/- as TP adjustment. On appeal, the CIT(A) confirmed the above TP adjustment. The assessee contended that Tribunal is consistently holding that TP adjustment in respect of guarantee given to AE shall be at 0.5% and prayed to restrict the disallowance to 0.5% by relying upon the decision of the Tribunal in the case of M/s. Sundaram Fasteners Ltd. (supra). Upon perusal of the case law, we find that by following the judgement of Hon'ble Jurisdictional High Court in the case of PCIT v. Redington (India) Ltd. reported in [2021] 430 ITR 298 (Mad) and the decision of the Hon'ble High Court of Bombay in the case of Everest Kanto Cylinder Ltd. v. ACIT reported in [2014] 52 taxmann.com 395 (Bom.)....
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....e purpose of attributing the indirect interest burden on the investments made on proportionate basis. The Assessing Officer further noted that substantial personnel, administrative and other expenses are debited to the profit & loss account, it cannot be denied that a portion of expenses such as consultation charges, bank charges, printing and stationery, legal and professional charges, electricity, etc. would be relatable to the earning of income from investment and thereby not satisfied with the correctness of the assessee's claim of expenses at Rs..16,16,641/- towards earning of exempted dividend income. Accordingly, the Assessing Officer invoked the provisions of Rule 8D and determined the expenditure component in relation to the exempted dividend income and made disallowance of Rs..13,87,85,866/- under section 14A of the Act r.w. Rule 8D after allowing voluntary disallowance under 14A of the Act made by the assessee. 14. The assessee carried the matter in appeal before the CIT(A) and contended that the assessee had its own surplus funds for making investments in shares, etc. and pleaded that the disallowance under section 14A of the Act r.w Rule 8D(2)(ii) of interest expend....
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....med the disallowance made under Rule 8D(2)(iii) of Rs..2,78,87,000/- being 0.5% of the average of investments as appearing in the balance sheet of the assessee, the income from which does not form part of total income as the Assessing Officer recorded satisfaction as provided under section 14A(2) of the Act. We find force in the arguments of the ld. Counsel for the assessee that the disallowance under Rule 8D(2)(iii) has to be restricted at 0.5% of investments, which has actually yielded exempt income during the year after reducing suo motu disallowance made by the assessee and not the average of investments as appearing in the balance sheet of the assessee by relying upon the decision of the Delhi Special Bench of the Tribunal in the case ACIT v. Vireet Investments Pvt. Ltd. (supra). We have perused the case law, wherein, the Delhi Special Bench of the Tribunal has held that the disallowance has to be worked out on the basis of investment which yielded dividend income during the year and not by factoring in the total amount of investment. 19. Respectfully following the order of the Delhi Special Bench of the Tribunal in the case of ACIT v. Vireet Investments Pvt. Ltd. (supra), ....
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....eed to be inflated by 17.24 crores. Out of the inflated amount, Rs..15 crores were to be returned to EID Parry India Ltd. after retaining conversion charges of Rs..2.24 crores. It was also stated that till the date of search, PIL has paid Rs..7.86 crores to the assessee in cash. Accordingly, during the course of scrutiny proceedings, the assessee was directed to submit the details of projects under taken with PIL in respect of Sivagangai & Pudukottai projects. After analysing the details furnished by the assessee as well as from the details received the DDIT, Pune, the Assessing Officer noted that the claim made by the assessee as retention money payable of Rs..7.84 crores matches with the amount said to have been inflated and repaid in cash by PIL to the assessee, which was further confirmed by the statement recorded under section 131 of the Act from Shri Anirudha Phadke, AVP on 20.02.2015. Accordingly, the Assessing Officer show-caused the assessee vide his letter dated 19.03.2015 as to why the claim of depreciation on the distillation plant installed by PIL at Shivagangai should not be disallowed. Moreover, the assessee was show-caused as to why the amount of Rs..55,00,000/- sho....
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....has further submitted that the assessee filed appeals before the CIT(A) against the adjustment for the assessment years 2008-09 to 2010-11 in 2015, which are still pending for adjudication. 27. Per contra, the ld. DR strongly supported the orders of authorities below. The ld. DR submitted that the retention money payable of Rs..7.84 crores matches approximately with the amount said to have been inflated and repaid in cash by PIL to the assessee and in fact, the PIL admitted to providing accommodation entries in its application before the Income Tax Settlement Commission [ITSC]. In response to the settlement application of PIL pertaining to the AY 2007-08 to 2012-13, the Hon'ble ITSC vide order dated 20.03.2013 observed that against the cheque payments made to the parties for supplying bills for the bogus purchases, equivalent amount of cash after deduction of VAT and commission was received back in cash by the applicant and the amount so received was Rs..97,90,93,750/- and utilized for making payments to various management of personnel, executive and staff of customers for procurement of the business, approval for installation, supplies, etc. Therefore, the Assessing Officer has....
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.... purposes. 29. The next common ground raised in the appeals of the assessee for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15 is with regard to the confirmation of disallowance made under section 40(a)(i) of the Act. 30. During the course of scrutiny proceedings, the assessee was directed to submit the details of expenditures incurred in foreign currency and TDS deducted thereon. Accordingly, the assessee furnished the details of expenditure incurred towards professional charges - legal & consultancy of Rs.. 5,90,886/-, sales promotion at Rs..13,11,110/-; US patent Mc Tavish - Rs..89,648/-, Valensa International - Rs..6,77,475, Market research - Rs..25,97,654/- & sales commission paid to Valensa International at Rs. 35,10,594/- and conclusively submitted that in order to procure orders and customers base at abroad, market services rendered outside India, the assessee incurred these expenses for professional and managerial services rendered by the non-resident agents against which TDS was not deducted. After considering the submissions by reproducing the same at pages 14 & 15 in the assessment order, the Assessing Officer disallowed the expenses of Rs..87,77,367/-....
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....,500/-. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). The CIT(A), by following various decisions, dismissed the ground raised by the assessee by observing as under: The appellant raised an additional ground that the amount of Rs. 79,81,500/- disallowed on the basis of DSIR letter dated 10.07.2012 for non-eligibility u/s 35(2AB) has to be allowed u/s 37(1). The AO had restricted the eligible amount u/s 35(2AB) on the basis of DSIR letter which certified only the capital expenditure of Rs. 17,84,000/- and revenue expenditure of Rs. 3,67,27,000/- as eligible for the said deduction. The alternate plea of the appellant to allow the balance amount u/s 37(1) is rejected in view of the Hon'ble Supreme Court decision in the case of Drilcos India Co Ltd. [2012] taxmann.com 228 (SC) which held that once section 35AB comes into play, then section 37(1) has no application. The Supreme Court affirmed the decision of the High Court of Madras in [2004] 138 Taxman 177 (Madras) wherein the court observed that the assessee was clearly not entitled to have the amount paid by it to its collaborator for acquiring know-how as an ite....
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....rried out does not result in enhancement of research facilities. He further submits that the case law relied on by the ld. Counsel for the assessee cannot be applied for the reason that the Tribunal, while passing order, has not discussed section 35(3) of the Act and prayed that the amount of disallowance made by the Assessing Officer based on the DSIR valuation should be upheld and dismiss the ground raised by the assessee. 36. We have heard the rival submissions and perused the material on record. Admittedly, the assessee has in-house Research and Development facilities which is approved by the Department of Scientific and Industrial Research (DSIR) and was entitled to deduction under section 35(2AB) of the I.T. Act. The Assessing Officer disallowed the deduction to the extent of Rs..79,81,500/- on the ground that DSIR has not approved the expenditure in Form 3CL. The CIT(A) confirmed the above disallowance. 37. As per section 35(2AB) of the Act, the DSIR is empowered to approve only R&D facility and not the expenditure. In other words, once the R & D facility is approved by the prescribed authority, i.e., DSIR by issuing Form No.3CM, the expenses incurred by the assessee h....
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....e Mumbai Benches of the Tribunal has observed and held as under: 12. It would also be apt to reproduce here-under the provisions substituted in clause (b) of sub rule (7A) of Rule 6, as brought in by the amendment effective from 01.07.2016 as above: "The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of the in-house research and development facility in Part A of Room No. 3CL; (ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Income Tax Act, 1961 in Part B of Form No. 3CL." 13. Hitherto, the provision was as follows: "The prescribed authority shall submit its report in relation to the approval of in-house facility and development facility in Form No. 3CL to the Director General (Income-tax Exemptions) within sixty days of its granting approval." The above also makes it amply clear that prior to the amendment, i.e., upto 30.06.2016, it was not required to quantify the expenditure and it was only w.e.f. 01.07.2016 that ....
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.... the judicial precedents on the issue, we are of the view that the deduction u/s.35(2AB) of the Act ought to have been allowed as weighted deduction at 200% of the expenditure as claimed by the Assessee and ought not to have been restricted to 100% of the expenditure incurred on scientific research. We hold and direct accordingly and allow the appeal of the Assessee." 41. The Ahmedabad Bench of the Tribunal in the case of M/s. Sun Pharmaceutical Industries Ltd. v. PCIT (supra) had held that FormNo.3CL is merely a report in the form of an intimation regarding approval of inhouse R & D facility to be sent from prescribed authority to the Department and once the facility is approved in Form No.3CL, the expenses incurred within the notified period have to be allowed under section 35(2AB) of the Act. The said order of the Tribunal was affirmed by the Hon'ble High Court of Gujarat in the case of CIT v. Sun Pharmaceutical Industries Ltd. reported in 250 Taxman 270 (Guj.). 42. The Pune Benches of the Tribunal in the case of Cummins India Limited v. DCIT in ITA No.309/Pun/2014 vide order dated 15.05.2018 had held that the action of the Assessing Officer curtailing the expenditure and ....
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.... scientific research. The contention of the DR that the amendment to Rule 6(7A) is procedural cannot be accepted, since the amended rule stipulates a condition that apart from approval of in-house R & D facility of assessee, the expenditure also has to be quantified by the prescribed authority for weighted deduction under section 35(2AB) of the Act. Since, the amended Rule 6(7A) affects the substantive right of the assessee; it cannot be termed merely as procedural. Moreover, the coordinate Benches of Bangalore Tribunal in case of M/s. Mahindra Electric Mobility Ltd. v. ACIT (supra) have clearly held that prior to 01.07.2016 Form 3CL has no legal sanctity and it is only w.e.f. 01.07.2016 with the amendment to Rule 6(7A) of the I.T. Rules, the quantification of weighted deduction under section 35(2AB) of the Act has significance. Therefore, we are of the considered opinion that if the power of quantification of weighted deduction already exists with DSIR prior to 01.07.2016, then, there was no necessity to make amendment to Rule 6(7A) of the IT Rules. Thus, in view of the above facts and circumstances, we hold that the deduction as claimed by the assessee under section 35(2AB) of th....
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.... the assessee against the show-cause notice, the Assessing Officer has observed that entering into forward contracts/hedging contracts are not a regular business transaction. These contracts are primarily to protect the assessee from the unforeseen exchange fluctuations. They are not on account of foreign exchange fluctuation on receivable or payable which can be a regular business transaction. These liabilities are on account of hedging/forward contract which are totally independent from the assessee's regular business. The Assessing Officer has further observed that in order to reduce the risk of exposing to the fluctuations in the foreign currency exchange rates, the assessee company entered into hedging contracts. These contacts are entered into keeping in mind the possible future fluctuations in view. Therefore, the hedging/forwarding contracts though for the purpose of protecting the assessee from exchange fluctuation risk, are essentially speculative in nature. Accordingly, the Assessing Officer disallowed the expenditure of loss on account of forward contracts entered into by the assessee to protect the forex fluctuation claimed under section 37 of the Act. 47. On appeal....
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....lant is entitled to claim loss on forward contracts taken for the purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuations. However, it needs to be examined whether the foreign currency loans against which the forward contracts were entered into, were for regular business activities or for the purpose of acquisition of fixed assets. If for the purpose of acquisition of fixed assets, the same is not allowable. The AO is directed to verify the purpose for which borrowings were made in foreign currency against which the appellant has claimed provision on forward contract losses of Rs. 2.28.19.794 If on the basis of verification, it is established that the borrowings were on revenue account, the losses are to be allowed. Accordingly ground no 8 is allowed for statistical purposes. 48. Before us, the ld. Counsel for the assessee has submitted that the forward contact losses represent the losses arising to the assessee in respect of restatement of contracts as on 31st March, 2011. He further submitted that these forward contracts were entered into to hedge in the course of normal bu....