2023 (10) TMI 1514 - AT - Income Tax

TP adjustment - corporate guarantee - appropriate rate for the transfer pricing adjustment - HELD THAT - We noted that this issue is squarely covered by the decision of Everest Kento Cylinder Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT wherein the value of transaction is to be assessed at the rate of 0.5% and not 1% as assessed by the TPO in the present case. Since the issue is covered we direct the AO to adopt the guarantee commission as international transaction and assess the value at 0.5% as against 1%. This issue of Revenue s appeal is partly allowed. Additional depreciation which is reminder of the depreciation from earlier year for which the assessee has claimed balance eligible depreciation - HELD THAT - We noted that the Hon ble High Court of Madras in assessee s own case for assessment year 2004-05 has held that the additional depreciation is allowable for the reminder period i.e. remaining depreciation which is claimed for the asset which has been put to use for less than 180 days in the previous year. We find no infirmity in the order of CIT(A) and hence this issue of Revenue s appeal is dismissed. Therefore the appeal of the Revenue is partly allowed. Disallowing expenses relatable to exempt income by invoking the provisions of section 14A r.w.rule 8D - HELD THAT - As assessee produced before us balance sheets and tried to show us that it has sufficient share capital and reserves and surplus but these are not filed before the lower authorities. Assessee has a case but these facts and figures are to be verified whether assessee has sufficient own funds for making investment and in case there was availability of funds the AO will not make any disallowance in view of the decision of CIT vs. HDFC Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT Hence this issue is remitted back to the file of the AO for verification. Disallowance under Rule 8D(2)(iii) - assessee only made submission that only dividend yielding investments should be considered for disallowance under Rule 8D(2)(iii) in view of the decision of Vireet Investments Pvt. Ltd 2017 (6) TMI 1124 - ITAT DELHI . We direct the AO to verify the above computation and considered only dividend yielding investment alone for the computation of disallowance under Rule 8D(2)(iii) of the Rules.

Summary

ISSUES PRESENTED and CONSIDERED

The judgment addresses the following core legal issues:

• Whether the provision of a corporate guarantee by the assessee to its associated enterprise (AE) constitutes an international transaction under section 92B of the Income Tax Act, 1961, and the appropriate rate for the transfer pricing adjustment.
• Whether the assessee is entitled to claim additional depreciation on plant and machinery installed and used for less than 180 days in the prior assessment year.
• Whether the disallowance of expenses related to exempt income under section 14A read with Rule 8D was justified.

ISSUE-WISE DETAILED ANALYSIS

Corporate Guarantee as an International Transaction

• Relevant legal framework and precedents: The determination of whether a corporate guarantee is an international transaction is guided by section 92B of the Income Tax Act. The Tribunal considered precedents including decisions from the Bombay High Court in Everest Kento Cylinder Ltd. and the Madras High Court in PCIT vs. Redington (India) Ltd.
• Court's interpretation and reasoning: The Tribunal noted that the provision of a corporate guarantee does not involve immediate costs or risks to the assessee, distinguishing it from bank guarantees. However, it recognized the inherent risk involved and the service provided to the AE in enhancing creditworthiness.
• Key evidence and findings: The Tribunal relied on past decisions where corporate guarantees were not considered international transactions, but acknowledged the Bombay High Court's decision to assess the value at 0.5% instead of 1%.
• Application of law to facts: The Tribunal concluded that the corporate guarantee should be treated as an international transaction and directed the Assessing Officer (AO) to adopt a 0.5% rate for the guarantee commission.
• Treatment of competing arguments: The Tribunal balanced the arguments by considering both the assessee's reliance on past favorable decisions and the Revenue's reliance on the Bombay High Court's decision.
• Conclusions: The Tribunal partially allowed the Revenue's appeal, directing a 0.5% rate for the adjustment.

Additional Depreciation Claim

• Relevant legal framework and precedents: Section 32(1)(iib) of the Income Tax Act governs additional depreciation. The Tribunal referenced decisions from the Madras and Karnataka High Courts supporting the carry-forward of unclaimed depreciation.
• Court's interpretation and reasoning: The Tribunal agreed with the CIT(A)'s decision to allow the balance 50% of additional depreciation in the subsequent year when the asset was used for less than 180 days in the initial year.
• Key evidence and findings: The Tribunal noted the judicial precedents and the assessee's practice of claiming the balance depreciation in the subsequent year.
• Application of law to facts: The Tribunal found no infirmity in the CIT(A)'s order allowing the additional depreciation and dismissed the Revenue's appeal on this issue.
• Conclusions: The Tribunal upheld the CIT(A)'s decision, allowing the additional depreciation claim.

Disallowance under Section 14A and Rule 8D

• Relevant legal framework and precedents: Section 14A and Rule 8D address the disallowance of expenses related to exempt income. The Tribunal considered past decisions, including those from the Bombay High Court and the Delhi Special Bench.
• Court's interpretation and reasoning: The Tribunal recognized the need to verify whether the assessee had sufficient own funds to cover investments and directed the AO to consider only dividend-yielding investments for disallowance calculations.
• Key evidence and findings: The Tribunal noted the assessee's submission of balance sheets indicating sufficient own funds and the need for verification by the AO.
• Application of law to facts: The Tribunal remitted the issue back to the AO for verification of the assessee's funds and recalculation of disallowance based on dividend-yielding investments.
• Conclusions: The Tribunal set aside the issue for statistical purposes, directing the AO to verify and adjust the disallowance accordingly.

SIGNIFICANT HOLDINGS

• The Tribunal held that the provision of a corporate guarantee should be treated as an international transaction, with the guarantee commission assessed at 0.5% instead of 1%.
• The Tribunal upheld the CIT(A)'s decision allowing the additional depreciation claim for assets used for less than 180 days in the prior year.
• The Tribunal directed the AO to verify the availability of sufficient own funds for investments and to consider only dividend-yielding investments for disallowance under Rule 8D(2)(iii).
• The appeal by the Revenue was partly allowed, and the assessee's appeal was allowed for statistical purposes.