SUNDARAM FASTENERS LTD.,CHENNAI vs. ITO, CORPORATE WARD-6(1), CHENNAI

ITTPA 92/CHNY/2024Status: DisposedITAT Chennai15 January 2025AY 2021-229 pages
AI SummaryPartly Allowed

What were the facts?

The assessee, M/s Sundram Fasteners Limited, filed appeals for Assessment Years (AY) 2020-21 and 2021-22 against the orders of the Assessing Officer (AO) and Dispute Resolution Panel (DRP). For AY 2020-21, the appeal arises from a final assessment order dated 25.07.2024, passed under sections 143(3), 92CA(4), and 144C(13) of the Income Tax Act, 1961 (the Act), pursuant to DRP directions. The case involved international transactions with Associated Enterprises (AEs), leading to a reference to the Transfer Pricing Officer (TPO). The TPO proposed adjustments, which were incorporated into a draft assessment order, followed by assessee objections to the DRP. For AY 2021-22, the appeal concerns transfer pricing adjustments on loans to AEs, corporate guarantees, and interest on debentures. The revenue is represented by the Income Tax Department.

What did the Tribunal hold?

The Tribunal adjudicated the issues as follows: 1. **Depreciation on leasehold property:** The Tribunal noted that this issue was remitted back to the AO in the assessee's own case for AY 2010-11, directing verification of surplus funds and nexus between borrowed funds and advances. Since the facts are similar, the Tribunal issued similar directions to the AO for de novo adjudication. The grounds were allowed for statistical purposes. 2. **Deduction u/s 80G:** The Tribunal decided to remit this issue back to the AO for de novo adjudication. The AO is directed to consider the nature of donations, subsequent amendments to the law, and various judicial decisions. The fact that only a part of CSR expenditure was claimed under Section 80G is also to be considered. The assessee is directed to substantiate its claim. The grounds were allowed for statistical purposes. 3. **Disallowance u/s 14A:** The Tribunal directed the AO to compute the disallowance under Rule 8D(2)(ii) by considering only those investments that yielded exempt income during the year. The Tribunal held that the amendment to Section 14A, effective from 01.04.2022, does not have retrospective application. The grounds were allowed for statistical purposes. 4. **TP adjustment on interest on loan to AE:** For AY 2020-21, the Tribunal issued directions similar to its order for AY 2010-11, directing the AO to verify surplus funds and the nexus between borrowed funds and advances to the AE. The grounds were allowed for statistical purposes. For AY 2021-22, the facts are the same as AY 2020-21, and the same directions apply, allowing the grounds for statistical purposes. 5. **TP adjustment on Corporate Guarantee:** The Tribunal noted that this matter was remitted back to the AO in the assessee's own case by the Madras High Court. Following the same, similar directions were issued to the AO for AY 2020-21, and the grounds were allowed for statistical purposes. For AY 2021-22, the grounds were partly allowed. 6. **TP adjustment on interest on debentures (AY 2021-22):** The Tribunal directed the TPO to benchmark the interest rate based on comparable international transactions, not domestic ones, considering the AE is a UK-based entity. The assessee is directed to provide the requisite data. The grounds were allowed for statistical purposes. Overall, the appeals were partly allowed.

What were the issues?

The Tribunal had to decide the following issues: 1. **Question of Law:** Whether depreciation on the right to use leasehold property is allowable under Section 32 of the Act, considering the assessee acquired the right to use leasehold property by paying for permission to construct and operate on leased land. * **Assessee's Contention:** The payment for the right to use leasehold property constitutes an intangible asset eligible for depreciation, citing the Karnataka High Court decision in *DCIT vs. Bangalore International Airport Ltd.*. * **Revenue's Contention:** Not recorded. 2. **Question of Law:** Whether a deduction under Section 80G of the Act can be claimed for donations that are part of Corporate Social Responsibility (CSR) expenditure, especially when the assessee opted for Section 115BAA. * **Assessee's Contention:** The disallowance of Rs.3,22,41,778/- was erroneous as it was not part of CSR expenditure. There is no restriction preventing consideration of expenditure for Section 80G if it was disallowed for CSR. The assessee also relied on ITAT decisions, including *Allegis Services (India) Private Limited vs. ACIT*. * **Revenue's Contention:** CSR expenditure cannot be allowed as a deduction under Section 80G, as it would subsidize CSR expenses. 3. **Question of Law:** Whether the disallowance under Section 14A of the Act, read with Rule 8D, was correctly made, particularly concerning the satisfaction of the AO and the scope of investments to be considered. * **Assessee's Contention:** The disallowance should not exceed the dividend income earned. Investments from which no dividend was received should not be considered, as held in the assessee's own case for AY 2012-13 and AY 2013-14. The assessee had already disallowed Rs.12,98,058/-. * **Revenue's Contention:** Not recorded. 4. **Question of Law:** Whether the Transfer Pricing Officer (TPO)/DRP erred in making an upward adjustment on interest receivable on loans given to an AE, considering the nature of funds and the subsidiary's financial position. * **Assessee's Contention:** Loans were not out of borrowed funds and were granted considering the AE's sufficient cash generation. The TPO/AO should have held that no interest would be charged from a third party under similar circumstances. The adopted interest rate of 4.318% is arbitrary. The assessee relied on an ITAT judgment for AY 2010-11. * **Revenue's Contention:** Not recorded. 5. **Question of Law:** Whether the TPO/DRP erred in making an upward adjustment on corporate guarantee by adopting 2.55% as the guarantee commission, and whether corporate guarantee constitutes an international transaction under Section 92B. * **Assessee's Contention:** Corporate guarantee is not an international transaction under Section 92B. The guarantee was provided for commercial expediency or to meet working capital facilities. The assessee relied on its own cases where the ITAT restricted the commission to 0.5% for AYs 2009-10, 2012-13, and 2013-14. * **Revenue's Contention:** Not recorded. 6. **Question of Law (AY 2021-22):** Whether the TPO/DRP erred in making an upward adjustment on interest on debentures issued by an AE, by benchmarking it on domestic rates instead of comparable international rates. * **Assessee's Contention:** The comparable international rates prevailing in the UK should be adopted, as the AE is a UK-based entity. The AE could raise funds at 1.76%, while the assessee received 2.43%. * **Revenue's Contention:** Not recorded.

Which sections of the Income-tax Act were involved?

Section 32,Section 80G,Section 14A,Section 143(3),Section 92CA(4),Section 144C(13),Section 144C(5),Section 92CA(3),Section 115BAA,Section 92B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “D” BENCH, CHENNAI

Before: HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM & HON’BLE SHRI MANU KUMAR GIRI, JM

Manoj Kumar Aggarwal (Accountant Member)

1.

The captioned appeals by assessee for Assessment Years (AY) 2020-21 and 2021-22 have certain common issues. First, we take up appeal for Assessment Year (AY) 2020-21 which arises out of final assessment order dated 25.07.2024 passed by Ld. Assessing Off

The order continues below.

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