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2021 (12) TMI 1167 - AT - Income TaxTP Adjustment - payment of royalty at 4% to be at arm’s length - HELD THAT:- As relying on assessee's own case accepting the payment of royalty at 4% to be at arm’s length, we hold that the payment of royalty at 4% in the year under consideration is to be treated as being at arm’s length. Accordingly ground is allowed. Payment of Interest on Compulsory Convertible Debentures - Whether TPO and DRP erred in treating CCDs as ECBs and benchmarked the interest rate against LIBOR rate? - CCDs is a hybrid instrument and cannot be per se treated as ECB / loan - HELD THAT:- In the instant case, admittedly, the CCDs are issued in INR, interest is paid in INR and CCD’s are repaid also in INR. Therefore, placing reliance on the judgment of the Hon’ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd [2015 (3) TMI 1031 - DELHI HIGH COURT] we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly. Disallowance u/s 14A computed as per Rules 8D(ii) and (iii) - HELD THAT:- It is an undisputed fact that the assessee did not earn any exempt income during the year under consideration. It is a settled position that in the absence of any exempt income, no disallowance can be made u/s 14A of the Act. See Quest Global Engineering Services Pvt. Ltd. [2021 (3) TMI 434 - KARNATAKA HIGH COURT] The Hon’ble Bombay High Court in the case of India Debt Management (P.) Ltd. [2019 (9) TMI 920 - BOMBAY HIGH COURT] has held that when the assessee does not receive any dividend income, no disallowance can be made u/s 14A - thus disallowance made u/s 14A of the Act, ought to be deleted, since the assessee was not in receipt of any exempt income during the relevant assessment year. Disallowance of deduction of expenditure as per first proviso to section 40(a)(ia) - HELD THAT:- The assessee is entitled to claim the deduction of expenditure (as per first proviso to section 40(a)(ia) of the Act) in the year the tax on the same has been deducted at source and remitted to the Government account. Therefore, we reiterate the directions to the DRP and remit the matter to the A.O. The A.O. is directed to grant deduction of aforesaid expenditure, if it is found that tax on the same has remitted to the Government account during the relevant assessment year. It is ordered accordingly. Disallowance u/s 40(a)(ia) - DRP rejected the claim of the assessee on the ground that the expenses do not pertain to the year under consideration - HELD THAT:- As rightly pointed out by the DRP, the expenditure claimed as deduction does not pertain to the year under consideration. If at all there is an inadvertent offer to tax in the previous year, namely, assessment year 2010-2011, the assessee ought to have taken correctional steps for the assessment concluded for assessment year 2010-2011 and not for the relevant assessment year. There is no statutory provision which provide for claiming amount wrongly shown as income in one year as deduction / expenditure in any subsequent year (unlike first proviso to section 40(a)(ia) whereby the assessee is permitted to claim deduction of the expenditure in the year in which the tax has been deducted on such expenditure and remitted to the Government account). Therefore, we affirm the view taken by the DRP. Disallowance of expenditure u/s 40(a)(ia) - assessee suo moto had disallowed a sum for non-deduction of tax at source - AO recharacterized the same as a disallowance u/s 37 - HELD THAT:- AO held the expenditure is not an admissible expenditure u/s 37 - DRP has not adjudicated the issue holding that the objection of the assessee does not arise out of the variation in the returned income. The issue whether the impugned expenditure can be disallowed u/s 37 has not been dealt with either by the AO nor by the DRP. AO has authority to hold that expenditure (though provision expenditure) is not an allowable deduction u/s 37 of the Act. Only those expenditure otherwise allowable u/s 30 to 38 of the Act is deductible as per proviso to section 40(a)(ia) - Therefore, any expenditure not for the purpose of business, the A.O. can certainly re-characterize the same as not allowable expenditure u/s 37 - as mentioned earlier, the A.O. nor DRP has not examined whether the said expenditure is allowable business expenditure u/s 37 - A.O. held that provision disallowed by the assessee u/s 40(a)(ia) of the Act cannot be allowed as deduction in the subsequent assessment year, since, the expenditure does not pertain to the subsequent year. DRP did not adjudicate the issue by observing that there is no variation to the returned income on this count. Therefore, the matter needs to be reconsidered by the AO afresh.
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