2025 (7) TMI 174 - AT - Income Tax

TP adjustment - Corporate Guarantees provided - HELD THAT - Considering the order for AY 2014-15 we hold that the Corporate Guarantee has to be assessed @ 0.5% and not 1.82%. Consequently the assessee succeeds on this ground of appeal. Downward adjustment of purchase of goods - no deduction u/s 80IE of the Act has been claimed by the assessee - HELD THAT - As seen that prima facie no claim u/s 80IE of the Act has been tendered by the assessee and hence there should be no downward adjustment regarding the same. We find no fault with the directions given by the Ld. DRP. We merely reiterate the same for the AO to follow. Accordingly AO will verify the facts from the record and in case no claim u/s 80IE of the Act has been tendered there will be no downward adjustment. With these directions this ground is allowed for statistical purposes. Disallowance of Employees Contributions u/s 36(1)(va) r.w.s. 2(24)(x) - HELD THAT - We find that this issue has to be decided against the assessee following the judgment in the case of Checkmate Services Pvt. Ltd. 2022 (10) TMI 617 - SUPREME COURT (LB) . Accordingly this ground is dismissed. Disallowance of Club Expense u/s 37 - as argued membership of clubs is beneficial to the business of any person and hence the same deserves to be allowed - HELD THAT - We find no fault in principle with these directions and consequently direct the Ld. AO to verify the expenses and allow all expenses which are billed to the assessee company. The assessee would do well to present the requisite details before the Ld. AO in this regard. Accordingly this ground is allowed for statistical purposes. Disallowance of excess remuneration paid to Managing Director - HELD THAT - We find that the DRP s directions have been mis-construed by the Ld. AO as he was to simply confine himself to the language of the said directions. Thus we direct that the Ld. AO would confine himself to the claim of the assessee with respect to the treatment meted out to the impugned amount in the computation of income and the audited accounts. In case the claim of the assessee is verified from these then there can be no addition on this account. In result this ground of the assessee is allowed for statistical purposes. Double taxation of excess remuneration paid to Managing Director in the AY 2015-16 - HELD THAT - As DRP s order there is a clear direction that the fact of recovery as reflected in Notes 43(e)(i) to the audited accounts should be verified and in case the recovery is reflected in the said audited accounts then there can be no addition. Here also we find that the Ld. AO has travelled beyond the mandate given to him as per para 7.4 at page 13 of the Ld. DRP s order. However to make issues clear we direct that in case the said recovery is reflected in the audited accounts then the assessee would get relief with respect to the impugned amount as per the ground of appeal. The Ld. AO is directed accordingly. In result this ground is allowed for statistical purposes. Disallowance u/s 14A - HELD THAT - Provisions of section 14A read with Rule 8D would apply in principle to the facts in this case. However we are conscious of the fact that the exempt income is only to the tune of Rs. 33, 59, 625/- and in that respect any disallowance u/s 14A of the Act cannot be more than the actual exempt income earned. Thus following the case of TV Today Network Ltd. 2022 (8) TMI 361 - DELHI HIGH COURT hold that the disallowance u/s 14A read with Rule 8D cannot be more than Rs. 33, 59, 625/-. Also this disallowance would take into consideration the amount that has already been disallowed by the assessee amounting to Rs. 20, 28, 109/-. We direct the Ld. AO to compute the disallowance accordingly. In light of this discussion these grounds of the assessee are partly allowed. MAT computation on disallowance u/s 14A - HELD THAT - Considering the finding given in the case of Birla Corporation Ltd 2024 (12) TMI 1591 - ITAT KOLKATA we hold that this issue needs to be decided in favour of the assessee and against the revenue. Disallowance of allowing credit of TDS and TCS - HELD THAT - We allow credit of taxes collected or deducted at source which should be available in Form 26AS etc. Not granting relief u/s 90/90A - HELD THAT - Benefit of relief u/s 90 of the Act is allowable to the assessee and should be granted by the Ld. AO as claimed by the assessee at the time of giving effect to this appellate order. In result this ground of appeal of the assessee is allowed. Computation of proportionate profit/loss on purchase of green leaves - We direct the AO to compute the loss/profit accurately and adopt the figures arising after appeal effect is given to this adjudication order. In result this ground of the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in these appeals for AYs 2017-18 and 2018-19 include:

• Whether the transfer pricing adjustment on Corporate Guarantee Fees at 1.82% is justified or whether the fee should be assessed at 0.5% as per precedent.
• Validity of downward adjustment related to purchase of goods and claim under section 80IE.
• Disallowance of employees' provident fund contributions under section 36(1)(va) read with section 2(24)(x) for delayed payment beyond prescribed due dates but before filing of return.
• Disallowance of club expenses under section 37 of the Act and its business nexus.
• Disallowance of excess remuneration paid to Managing Director and issues of double taxation of such remuneration.
• Disallowance under section 14A read with Rule 8D of expenditures relatable to exempt income, including the quantum of disallowance vis-`a-vis exempt income.
• Whether disallowance under section 14A can be added to book profits for computation under section 115JB.
• Allowability of credit for TDS and TCS claimed by the assessee.
• Computation of book profits under section 115JB, including treatment of deferred tax adjustments.
• Grant of relief under sections 90/90A for foreign tax credits.
• Correctness of computation of proportionate profit/loss on purchase of green leaves and consequential interest charges under sections 234B and 234C.

2. ISSUE-WISE DETAILED ANALYSIS

Corporate Guarantee Fee (AYs 2017-18 & 2018-19)

The Assessing Officer (AO) and Dispute Resolution Panel (DRP) had determined the arm's length price (ALP) of Corporate Guarantee Fees at 1.82%, resulting in upward transfer pricing adjustments of Rs. 2,01,97,394 and Rs. 1,40,38,728 respectively for the two years. The assessee challenged this on the ground that the fee should be assessed at 0.5%, relying on an earlier ITAT Kolkata order for AY 2014-15 which held the ALP at 0.5% based on consistent coordinate bench decisions from Mumbai and Hyderabad ITATs.

The Court accepted the assessee's contention, holding that the issue is covered by the earlier ITAT order for AY 2014-15 and that Corporate Guarantee Fees should be assessed at 0.5%, not 1.82%. The AO and DRP orders were thus set aside on this ground.

Adjustment on Purchase of Goods and Section 80IE Claim (AY 2017-18)

The AO made a downward adjustment of Rs. 2,98,142 on account of purchase of goods linked to a claim under section 80IE. The assessee argued that no claim under section 80IE was made and that the DRP noted the same and directed verification from records.

The Court directed the AO to verify the facts and delete the adjustment if no claim under section 80IE was made. This ground was allowed for statistical purposes.

Disallowance of Employees' Contribution to Provident Fund (AYs 2017-18 & 2018-19)

The AO disallowed employees' provident fund contributions paid beyond the prescribed due date but before filing of the return, invoking section 36(1)(va) read with section 2(24)(x). The assessee challenged this disallowance.

Both parties relied on the Supreme Court decision in Checkmate Services Pvt. Ltd. (448 ITR 518), which held that contributions paid after the due date are to be disallowed even if paid before filing the return. The Court followed this precedent and dismissed the assessee's ground.

Disallowance of Club Expenses (AY 2017-18)

The AO disallowed Rs. 68,81,145 on club expenses under section 37, citing lack of bills/invoices and that only Rs. 15,20,675 was in the assessee's name. The assessee argued that club membership was beneficial to business and should be allowed.

The DRP directed the AO to verify that the club membership was in the company's name and allow the expenses accordingly. The Court upheld this direction and allowed the ground for statistical purposes, emphasizing the need for proper verification and documentation.

Disallowance of Excess Remuneration to Managing Director (AY 2017-18)

The AO disallowed Rs. 2,66,40,000 as excess remuneration paid to the Managing Director, citing lack of evidence for regularization by the Central Government under the Companies Act, and initiated penalty proceedings. The assessee contended that the amount was already offered to tax and that the AO misinterpreted the DRP's direction, which had stated that corporate affairs violations were irrelevant for taxability.

The Court found that the AO had exceeded his mandate by requiring proof of regularization and directed the AO to confine verification to whether the amount was offered to tax and reflected in audited accounts and computation. The ground was allowed for statistical purposes.

Double Taxation of Excess Remuneration (AY 2017-18)

The AO made a suo-moto disallowance of Rs. 3,75,18,000 in AY 2015-16 for excess remuneration, despite the amount being offered to tax in AY 2017-18. The assessee argued this amounted to double taxation.

The DRP directed verification of recovery as reflected in audited accounts. The Court held that if recovery is reflected in audited accounts, no addition should be made. The AO was directed accordingly, and the ground was allowed for statistical purposes.

Disallowance under Section 14A read with Rule 8D (AYs 2017-18 & 2018-19)

The AO disallowed Rs. 44,07,000 (AY 2017-18) and Rs. 5,17,964 (AY 2018-19) under section 14A read with Rule 8D for expenditure relatable to exempt income. The assessee challenged the disallowance as mechanical and without nexus, and contended that the disallowance cannot exceed exempt income.

The DRP upheld the disallowance, relying on CBDT Circular No. 5/2014 and case law. The Court held that while section 14A and Rule 8D apply, the disallowance cannot exceed the exempt income earned. The Court directed the AO to restrict disallowance to the exempt income amount (Rs. 33,59,625 for AY 2017-18 and Rs. 16,96,336 for AY 2018-19) and to consider amounts already disallowed by the assessee. These grounds were partly allowed.

Addition of Section 14A Disallowance to Book Profit under Section 115JB (AYs 2017-18 & 2018-19)

The AO added the disallowance under section 14A to book profits for MAT computation under section 115JB. The assessee relied on judicial precedents including decisions of the Karnataka and Delhi High Courts and the ITAT Special Bench, which held that disallowance under section 14A cannot be added to book profits under section 115JB.

The Court, after reviewing these authorities and a recent ITAT Kolkata decision, held that disallowance under section 14A read with Rule 8D should not be added to book profits under section 115JB. The AO was directed to exclude such disallowance from book profit computation. The assessee's ground was allowed.

Allowability of Credit for TDS and TCS (AY 2017-18)

The assessee claimed credit for TDS of Rs. 10,20,11,960 and TCS of Rs. 43,630, which was not allowed by the AO. The DRP and AO did not dispute the claim.

The Court directed the AO to allow credit of taxes deducted or collected at source as reflected in Form 26AS or other documentary evidence. The ground was allowed for statistical purposes.

Computation of Book Profit and Deferred Tax Adjustment (AY 2018-19)

The assessee challenged the AO's computation of book profit at Rs. 135.57 crores instead of Rs. 107.63 crores after adjustment for deferred tax of Rs. 27.94 crores certified by the auditor.

The Court directed the AO to recompute book profits correctly considering deferred tax adjustment and other directions in the order. The ground was allowed for statistical purposes.

Grant of Relief under Sections 90/90A (AY 2018-19)

The assessee claimed relief under sections 90/90A for foreign tax credit of Rs. 83,59,942, which was denied by the AO and DRP on procedural grounds.

The Court accepted the assessee's submission that relief under sections 90/90A is allowable and directed the AO to grant the relief at the time of giving effect to the appellate order. The ground was allowed.

Computation of Proportionate Profit/Loss on Purchase of Green Leaves and Interest Charges (AY 2018-19)

The assessee challenged incorrect computation of business loss and proportionate profit/loss on purchase of green leaves, as well as interest charges under sections 234B and 234C.

The Court directed the AO to compute profit/loss correctly and adopt the figures after giving effect to the appellate order. Regarding interest charges, the Court held that they are consequential and did not give specific directions but partly allowed the ground.

3. SIGNIFICANT HOLDINGS

"The Corporate Guarantee has to be assessed @ 0.5% and not 1.82%. Consequently, the assessee succeeds on this ground of appeal."

"Following the case of TV Today Network Ltd. and other decisions, we hold that the disallowance u/s 14A, read with Rule 8D, cannot be more than the exempt income earned by the assessee."

"Disallowance made under Section 14A of the Act could not be considered while computing book profit under Section 115JB of the Act."

"The AO is directed to verify the claim of the assessee with respect to excess remuneration and if found offered to tax and reflected in accounts, no addition shall be made to avoid double taxation."

"The benefit of relief u/s 90 of the Act is allowable and should be granted by the AO as claimed by the assessee."

"Employees' contribution to provident fund paid beyond due date but before filing return is to be disallowed as per Supreme Court precedent."

"The AO shall allow credit of TDS/TCS as per Form 26AS and other documentary evidence."

"The AO shall recompute book profits correctly, taking into account deferred tax adjustments and other directions."

These holdings establish that transfer pricing adjustments must align with coordinate bench precedents; disallowances under section 14A must be proportionate to exempt income and excluded from MAT book profits; procedural irregularities or double taxation must be avoided; and statutory reliefs including foreign tax credits and TDS/TCS credits must be allowed when substantiated.