2018 (5) TMI 797 - AT - Income Tax

TPA - advancing interest free loans - CUP method adoption to make addition - Held that - Advancing interest free loans must not necessarily be deemed to be an interest earning activity and an activity to capitalise the opportunity cost for investing in new territories. Since the funds were raised for the purpose of investment in subsidiaries and on the fact that these funds were interest free and ultimately shares were allotted we are of the opinion that no adjustment need be made on the CUP method adopted by the AO/TPO even if the transaction is considered as one that of international transaction. For all the reasons stated above we are of the opinion that no adjustment is required in the impugned year. The orders of the DRP are accordingly modified and adjustment made by the TPO stands deleted. Disallowance u/s.10B - Assessee filed return on 31-10- 2008 whereas the due date for filing return was 30-09-2008 - return was uploaded belatedly - The reason given is that the computer got infected and it took some time to set it right so that assessee could upload the entire data - Held that - The reasoning for delay given is supported by a certificate from a computer specialist who attended to the problem. Since the audit was completed on 02-09-2008 which was not doubted by the Revenue there is no reason why assessee should postpone the uploading of the return when all the information was ready. Therefore the explanation given that the computers got infected is a reasonable explanation given in the circumstances. We are of the opinion that the delay in filing the return is not an intentional delay but beyond the reasonable control of assessee. Also assessee was also claiming deduction in earlier years and following the principles laid down in the case of Visu International Limited Vs. DCIT 2011 (7) TMI 1161 - ITAT HYDERABAD the deduction u/s. 10B cannot be denied in the subsequent year without a valid reason. - Decided in favour of assessee. Disallowance u/s 36(1)((v)/(va) - contribution to PF - Held that - There is no distinction between employee s and employer s contribution to PF/ESI when the total contribution is deposited on or before the due date of furnishing of return of income u/s 139(1) of the IT Act then no disallowance can be made towards employee s contribution alone. Accordingly we agree with assessee s contentions and therefore set aside the order of AO and DRP on the issue and allow the ground. AO is directed to allow the amounts. Even otherwise if the amount is not allowed as deduction the same will be added to the income of the unit thereby deduction u/s. 10B may get allowed if the disallowed amounts pertain to the unit eligible for deduction. Looking at either way assessee will be entitled for the deduction. Accordingly grounds are allowed. Disallowance of 100% depreciation on Pollution control equipment - Held that - What sort of evidence is required to establish that these are used in controlling the pollution is not specified by the DRP. Assessee categorized certain equipment as pollution control equipment the nature of the equipment is to be examined in the context of the business operations of assessee. Since this aspect has not correctly appreciated by the AO or DRP we are of the opinion that this issue requires re-examination by the AO. In case of any disallowance of depreciation AO is also directed to examine whether such equipment is used and claimed in the unit claiming deduction u/s. 10B and if so any disallowance thereon would increase the profits of the unit so that assessee may be entitled to higher deduction u/s. 10B. Disallowance of excess depreciation on assets purchased - Held that - Even though the DRP has mentioned that assessee-company had shares in the said unit it did not specify whether the shareholding was before the purchase of machinery or after the purchase of machinery which makes a lot of difference. At the time of transaction whether they are sister concerns or not is not established on record. Moreover assessee is objecting to the contention that these are sister concerns. In view of that we are of the opinion that this issue requires re-examination by the AO. In case of any disallowance on this issue AO is also directed to examine whether the machines are utilised for the purpose of business of the unit eligible for deduction u/s. 10B and if so the profits of that unit would increase correspondingly. The deduction u/s. 10B also may have to vary accordingly. With these observations/directions the grounds on this issue are set aside to the file of AO for fresh examination. Disallowance of depreciation on computers - Held that - Since the evidence was not furnished before the AO/DRP to establish that assessee has purchased computes and software it is necessary to examine the transaction of purchase and sale in the hands of those companies stated to be group concerns by the AO and clear finding should be given whether these transactions of sale of computer software are recorded by those companies and if so the nature of purchase of computers and software by that company. Therefore we are of the opinion that this issue also required to be examined by the AO afresh.

Summary

Issues Involved:
1. Transfer Pricing Issue
2. Disallowance u/s. 10B of the Act
3. Disallowance u/s 36(1)(v)/(va)
4. Disallowance of 100% depreciation on Pollution control equipment
5. Disallowance of excess depreciation on assets purchased from M/s. IRIS Smart Card Limited
6. Disallowance of Excess Depreciation on Computers

Detailed Analysis:

I. Transfer Pricing Issue:
The primary issue under the Transfer Pricing (TP) provisions was the advances to subsidiaries amounting to Rs. 280.81 Crores. The assessee advanced funds to its subsidiaries in Singapore and the USA without charging interest. The TPO determined an interest rate of 17.26% based on BB rated bonds and proposed an adjustment of Rs. 11,68,36,167/-. The DRP directed the TPO to adopt a rate of LIBOR + 2%. The assessee contended that the advances were meant for equity investments and expansion, not loans, and hence, no interest should be charged. The Tribunal noted that the funds were raised through zero-coupon bonds and were interest-free. The Tribunal held that the advances were intended for investment and expansion, and no interest adjustment was required. The Tribunal also noted that the transactions did not violate FEMA regulations, and the advances were ultimately converted into equity shares.

II. Disallowance u/s. 10B of the Act:
The assessee claimed a deduction u/s. 10B for Rs. 16,72,92,241, which was denied due to a delay in filing the return. The assessee explained that the delay was caused by a virus attack on their systems, which was beyond their control. The Tribunal accepted the explanation, noting that the audit was completed on time and the delay was not intentional. The Tribunal held that the delay in filing the return was due to reasonable cause and directed the AO to allow the deduction u/s. 10B.

III. Disallowance u/s 36(1)(v)/(va):
The AO disallowed Rs. 10,11,278/- for delayed remittance of PF/ESI contributions. The Tribunal noted that the contributions were remitted before the due date for filing the return and relied on various judicial precedents to hold that no disallowance was warranted. The Tribunal directed the AO to allow the deduction, noting that any disallowance would increase the profits of the unit eligible for deduction u/s. 10B.

IV. Disallowance of 100% depreciation on Pollution control equipment:
The AO allowed 15% depreciation on pollution control equipment instead of 100%, doubting the necessity and use of the equipment for business. The Tribunal set aside the issue for re-examination by the AO, directing to verify the nature and use of the equipment. If the equipment is used in the unit eligible for deduction u/s. 10B, any disallowance would increase the profits of that unit.

V. Disallowance of excess depreciation on assets purchased from M/s. IRIS Smart Card Limited:
The AO restricted depreciation on machinery purchased from IRIS Smart Cards Ltd., treating it as a related party transaction under Section 43(1) Explanation-3. The Tribunal set aside the issue for re-examination to determine if IRIS Smart Card Ltd. was a related party at the time of the transaction. If disallowed, the AO should verify if the machinery is used in the unit eligible for deduction u/s. 10B, and adjust the profits accordingly.

VI. Disallowance of Excess Depreciation on Computers:
The AO disallowed depreciation on computers and software purchased from Asia Trading Pte Ltd. and Godavari Exports & Imports Ltd., doubting the genuineness of the transactions. The Tribunal directed the AO to re-examine the transactions, verify the genuineness and arm’s length nature of the purchases, and determine if the assets were used in the unit eligible for deduction u/s. 10B. Any disallowance should adjust the profits of the eligible unit.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, setting aside several issues for re-examination by the AO with specific directions. The Tribunal emphasized the need to verify the genuineness of transactions, the nature of assets, and compliance with relevant regulations while ensuring that any disallowances are appropriately adjusted for units eligible for deductions u/s. 10B.