TMI Blog2021 (12) TMI 1167X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. - IT(TP)A No.506/Bang/2016 - - - Dated:- 6-12-2021 - Shri Chandra Poojari, AM And Shri George George K, JM For the Appellant : Sri.T.Suryanarayana, Advocate For the Respondent : Dr.Manjunath Karkihalli.CIT-DR ORDER PER GEORGE GEORGE K, JM This appeal at the instance of the assessee is directed against final assessment order dated 20.01.2016. The relevant assessment year is 2011-2012. 2. The assessee has raised thirteen grounds and several sub-grounds. However, the learned AR during the course of hearing, had argued only on the following issues:- (i) Transfer pricing ( TP ) adjustment of ₹ 18,36,20,541/- made by the Transfer Pricing Officer in respect of the international transaction of payment of royalty by the assessee to its Associated Enterprises ( AEs ) by restricting the same to 1 %; (ii) TP adjustment of ₹ 33,27,95,258/- made by the TPO in respect of the international transaction of payment of interest on C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 28.12.2015 granted partial relief to the assessee. Pursuant to the directions of the DRP, final assessment order was passed on 28.01.2016. 6. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal. We shall adjudicate the above issues argued before us as under: TRANSFER PRICING ADJUSMENT Payment of royalty (Ground 3) 7. The assessee benchmarked the transaction of payment of royalty by aggregating it with certain other transactions. The TPO rejected the method adopted by the assessee. The TPO applied CUP as the most appropriate method and determined the ALP of the transaction at 1% (refer page 18 and 19 of the TPO s order). 7.1 Aggrieved, the assessee filed objections before the DRP. The DRP rejected the objections of the assessee by relying on the directions issued in assessee s own case for assessment year 2010-2011 (refer page 2 of the DRP s directions). 7.2 Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the Tribunal in assessee s own case for assessment years 2009-2010 and 2010-2011 had restored the matter to the TPO to redetermine the ALP of the roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 comparables agreements have unrelated party relationship for which the average royalty rate is computed at 4.10%. Submission of the assessee has been considered. As the average rate of royalty paid by the comparables is more than payment made by the assessee, i.e., at 4%, payment towards royalty is being treated to be at arm s length. 7. Taking all these into consideration, the Royalty payment @ 4% made by the taxpayer to its AE is considered at Arm s Length, hence no adjustment on account of royalty payment is required to be made. 7.6 In view of the above orders of the TPO, 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 3 is allowed. Payment of Interest on Compulsory Convertible Debentures (Ground 4) (Transfer pricing issue) 8. During the financial year 2009-2010, the assessee had entered into a debenture subscription agreement with its AEs, Praxair International Finance. As per the terms of the debenture subscription agreement, the assessee issued unsecured and compulsory convertible debentures beari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term issue price is defined as CCD will be issued at par at ₹ 10 each . Further, the subscription considered shall be converted into INR as per the prescribed exchange rate and the number of CCDs allotted to the holders will be the subscription consideration as converted into INR, divided by face value of the CCD instrument. The debenture certificates issued clearly reflect the face value of debenture at INR at ₹ 10 each. The CCDs are recorded in the financial statements in INR. The CCDs were also subsequently repaid in INR. The true copy of the statement setting out the details of payment and demand deposit transaction clearly demonstrate that the remittance is in INR. 8.6.1 The TPO and DRP erred in treating CCDs as ECBs and benchmarked the interest rate against LIBOR rate. The CCDs is a hybrid instrument and cannot be per se treated as ECB / loan. The Hyderabad Bench of the Tribunal in the case of Adama India (P.) Ltd. v. DCIT (supra) had held that CCDs cannot be categorized as a loan. The relevant finding of the Tribunal reads as follows:- 8. We have considered the issue and examined the rival contentions. There is no dispute with reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- The existing differences in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. 40. The aforesaid methodology recommended by Klaus Vogal appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also tobe repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency and different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as the instant case pertains to Assessment Year 2009-10. The aforesaid Circular has no retrospective operation. It is noteworthy that aforesaid Circular was not even relied by the parties. This court in COMMISSIONER OF INCOME TAX VS. KINGFISHER INVESTMENT INDIA LTD. vide judgment dated 29.09.2020 inter alia held that disallowance under Section 14A read with Rule 8D has to be made even when taxpayer in a particular year has not earned any exempt income. This court relied on the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra which was reproduced in Paragraph 5 of the decision and reliance was also placed on Circular dated 11.02.2014 issued by Central Board of Direct Taxes (CBDT). However, the aforesaid decision was subsequently considered by this court in judgment dated 16.01.2021 passed in I.T.A.No.271/2017 (PRINCIPAL COMMISSIONER OF INCOME TAX VS. NOVEL SOFTWARE DEVELOPMENT) in which it was held that decision of this court in KINGFISHER FIN VEST LTD. was distinguishable as the basis of the aforesaid decision of this court was the decision of the Supreme Court in MAXOPP INVESTMENTS LTD. supra and it was held that the aforesaid decision does not deal with applicabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 14A in MIS NOVEL SOFTWARE INDIA (P) LTD. are factually incorrect and we hasten to clarify the same. However, from relevant extract of Paragraph 40, it is evident that only expenses proportionate to earning of exempt income could be disallowed under Section 14A of the Act and the decision of MAXOPP INVESTMENT LTD is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of Section 14A is to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The High Court of Madras has relied on the decision of the Supreme Court in COMMISSIONER OF INCOME TAX VS. WALFORT SHARE AND STOCK BROKERS (2010) 326 ITR 1 wherein it has been held that Section 14A is relatable to income of actual income or not notional or anticipated income. Therefore, the conclusion arrived at by us in MIS NOVEL SOFTWARE INDIA (P) LTD. is affirmed but for different reasons. It is also clarified by us that while recording the conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 10,04,41,779. 10.2 Aggrieved, the assessee filed objections before the DRP. The DRP allowed the claim of the assessee. The DRP directed the AO to verify whether the assessee had deducted tax and remitted the same during the relevant assessment year. In the event, the assessee has remitted the TDS during the relevant assessment year, the expenditure claimed (for which TDS was submitted) was directed to be allowed as a deduction. However, the directions of the DRP was not given effect by the A.O. in the final assessment order. 10.3 Aggrieved by the final assessment order, the assessee has raised this issue before the ITAT. The learned AR submitted that the A.O. has grossly erred in not giving effect to the DRP s directions. Therefore, it was submitted that the disallowance made are liable to be set aside on implementation of the DRP s directions. 10.4 The learned Departmental Representative was duly heard. 10.5 We have heard rival submissions and perused the material on record. The DRP s directions with reference to the disallowance of expenditure of ₹ 10,04,41,779 reads as follow:- 4.4 As regards amounts of ₹ 5,23,71,553/- as in (a) abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of ₹ 4,28,08,922 (ground 6.3) 11. During the year the assessee had claimed deduction of a sum of ₹ 4,28,08,922 u/s 40(a)(ia) of the Act. Admittedly, the expenditure pertains to assessment year 2010-2011. 11.1 The DRP rejected the claim of the assessee on the ground that the expenses do not pertain to the year under consideration. The relevant finding of the DRP reads as follows:- 4.3 As far as amount of ₹ 4,28,08,922/- in part (c) as above is concerned, the same can certainly be not claimed as an expenditure or deduction in AY 2011-12 as the same does not pertain to the year under consideration. The Act does not provide for claiming the amount wrongly shown as income in one year as deduction or expenditure in any subsequent year. So the objection of assessee in relation to this amount cannot be accepted. 11.2 Aggrieved, the assessee has raised this issue before the Tribunal. It was submitted that the amount was offered to tax u/s 40(a)(ia) of the Act inadvertently in the assessment year 2010-2011, when no corresponding expenses was claimed as deduction. It was stated that the amounts so inadvertently offered to tax in the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Departmental Representative strongly supported the orders of the Income Tax Authorities. 12.3 We have heard rival submissions and perused the material on record. The assessee had created a provision for the expenditure incurred for the current assessment year and suo moto disallowed the same as taxes were not deducted. The Assessing Officer held the expenditure is not an admissible expenditure u/s 37 of the Act. The 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 of the Act has not been dealt with either by the AO nor by the DRP. The A.O. 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) of the Act. 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 of the Act. However, as mentioned earlier, the A.O. nor DRP has not examined whether the said ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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