2018 (12) TMI 1725 - AT - Income Tax

ALP adjustment - international transactions of sale of polyester film products by the appellant to its associated enterprises ( AEs ) applying Transactional Net Margin Method ( TNMM ) - HELD THAT - As carefully gone through the orders of the Tribunal for the A.Y 2006-07 and 2007-08 in Assessee s own case and found that exactly similar additions so made by the TPO has been deleted by the Tribunal. The facts and circumstances during both the assessment yeaRs. 2010-11 and 2011-12 under consideration are same we therefore respectfully follow the same and do not find any reason to interfere with the order of the CIT(A) for deleting the addition made on account of transfer pricing adjustment. Disallowance made u/s 43B in respect of payment of interest by issue of equity shares - HELD THAT - Respectfully following the order of the Tribunal in the case of sister concern as well as RATHI GRAPHICS TECHNOLOGIES LTD. 2015 (8) TMI 376 - DELHI HIGH COURT we do not find merit for the disallowance of interest u/s 43B which was paid by issue of equity shares. As per our considered view the conversion of interest liability into share capital would lead to extinguishment of the liability whereas its conversion into borrowings or loans would simply lead to change in the nature of the liability. Thus Courts have conceded with the appellant s view that conversion of interest liability into share capital would indeed be treated as actual payment of interest for the purposes of Sec. 43B. Disallowance made u/s 14A while computing book profit u/s 115JB - HELD THAT - The issue is covered in favour of the assessee by the order of Special Bench ITAT Delhi in the case of Vireet Investment 2017 (6) TMI 1124 - ITAT DELHI . Respectfully following the proposition laid down in the case of above said case we do not find any merit for the addition of disallowance made u/s 14A of the Act while computing book profit u/s 115JB of the Act. Disallowance u/s 14A r.w.r. 8D - assessee has argued for exclusion the investments made in the group concerns while computing the disallowance u/s 14A - HELD THAT - We do not find any merit in this contention of the Ld. AR in so far as Hon ble Supreme Court recent decision in the case of Maxoup Investment 2018 (3) TMI 805 - SUPREME COURT have held that even investments made in group concern as strategical investment is also liable for disallowance u/s 14A of the Act. We confirmed the action of the A.O with regard to inclusion of strategical investment / investment made in group concerns while working out average investment on which disallowance u/s 14A r.w.r. 8D of the IT Rules is warranted. We direct the A.O to restrict the disallowance u/s 14A in all the years to the amount of exempt income earned by the appellant during the year under consideration. We also find support for this contention in case of Daga Global Chemicals Vs. ACIT 2015 (1) TMI 1204 - ITAT MUMBAI wherein he assessee had appealed against the excessive disallowance made u/s 14A - ITAT subsequently held that even if disallowance u/s 14A of the Act is made the same shall not exceed the amount of exempt income earned. Depreciation on revalued assets in computing the book profit u/s 115JB - HELD THAT - This plea was taken by the assessee first time before the A.O during the course of assessment without filing revised return accordingly A.O declined same by following the decision of Hon ble Supreme Court in the case of Goetz (India) Pvt Ltd. 2006 (3) TMI 75 - SUPREME COURT . Following the reasons given herein above with respect to disallowance on depreciation on revalued assets while computing book profit u/s 115JB of the Act which was also filed before the A.O during the course of assessment proceedings. We restore the matter back to the file of the A.O for deciding as per law we direct accordingly.

Summary

Issues Involved:
1. Deletion of ALP adjustment.
2. Disallowance under section 14A.
3. Set-off of unabsorbed depreciation.
4. Disallowance under section 43B.
5. Computation of book profit under section 115JB.
6. Deduction of gain on exchange rate fluctuations.

Detailed Analysis:

1. Deletion of ALP Adjustment:
The Revenue challenged the deletion of the ALP adjustment made by the TPO, which was based on the internal TNMM method adopted by the assessee. The CIT(A) deleted the adjustment, following the Tribunal's order for AYs 2006-07 and 2007-08, concluding that the margin earned on sales to AEs and non-AEs fell within the safe harbor limit of (+)(-) 5%. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere.

2. Disallowance under Section 14A:
The Revenue contested the CIT(A)’s deletion of disallowance under section 14A while computing book profit under section 115JB. The Tribunal followed the Special Bench decision in Vireet Investment and ruled in favor of the assessee, stating that disallowance under section 14A should not exceed the dividend income earned. Furthermore, it was held that no interest disallowance can be made if the assessee's own funds are sufficient to cover the investments.

3. Set-off of Unabsorbed Depreciation:
The CIT(A) allowed the set-off of unabsorbed depreciation from AYs 1999-2000 and 2000-01 against the current year’s business income. The Tribunal upheld this decision, citing the Bombay High Court's ruling in CIT vs. Associated Cables Pvt Ltd and the Gujarat High Court’s decision in General Motors India Pvt Ltd vs. DCIT, which supported the assessee's claim.

4. Disallowance under Section 43B:
The assessee contested the disallowance of interest converted into equity shares under section 43B. The Tribunal referred to its earlier decision in the case of the assessee’s group company, Garware Chemicals Ltd., and the Delhi High Court's ruling in CIT vs. Rathi Graphics Technologies Ltd., which held that conversion of interest into shares extinguishes the liability and qualifies as actual payment under section 43B. The Tribunal ruled in favor of the assessee, allowing the deduction.

5. Computation of Book Profit under Section 115JB:
The assessee was aggrieved by the disallowance of depreciation on revalued assets and the deduction of gain on exchange rate fluctuations while computing book profit under section 115JB. The Tribunal restored these matters back to the AO for reconsideration, following the Bombay High Court’s decision in Pruthvi Brokers and Share Holders Pvt Ltd., allowing fresh claims made during assessment proceedings without revised returns.

6. Deduction of Gain on Exchange Rate Fluctuations:
The assessee's claim for deduction of gain on exchange rate fluctuations was initially declined by the AO for not being filed through a revised return. The Tribunal, referencing its earlier directions on similar issues, restored the matter back to the AO for a decision as per law.

Conclusion:
The Tribunal's judgment addressed multiple issues concerning ALP adjustments, disallowances under sections 14A and 43B, set-off of unabsorbed depreciation, and computation of book profits under section 115JB. The Tribunal upheld the CIT(A)'s decisions favoring the assessee on most counts, except where it restored matters back to the AO for reconsideration based on legal precedents. The judgment emphasizes adherence to established legal principles and precedents in resolving tax disputes.