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Facts
The assessee appealed against assessment orders for AY 2020-21 and 2021-22 concerning issues like depreciation on leasehold property, deduction under section 80G, disallowance under section 14A, and transfer pricing adjustments on loans and corporate guarantees.
Held
The Tribunal decided on several grounds, some were allowed for statistical purposes, some partly allowed, and some were remitted back to the AO for de novo adjudication, considering prior judgments and amendments.
Key Issues
Whether depreciation on leasehold property is allowable, if amounts paid under CSR are deductible under Section 80G, disallowance under Section 14A, and the correctness of transfer pricing adjustments for interest on loans and corporate guarantees.
Sections Cited
143(3), 92CA(4), 144C(13), 144C(5), 92CA(3), 80G, 115BAA, 14A, 8D, 92B
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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM & HON’BLE SHRI MANU KUMAR GIRI, JM
(िनधा)रण वष) / Assessment Year: 2020-21) & 2. आयकरअपील सं./ IT(TP)A No.92/Chny/2024 (िनधा)रण वष) / Assessment Year: 2021-22) M/s Sundram Fasteners Limited ITO बनाम/ 98-A, 7th Floor, Dr. Radhakrishnan Salai Corporate Ward-6(1) Vs. Mylapore, Chennai-600 004. Chennai �थायीलेखासं./जीआइआरसं./PAN/TAN No. AAACS-8779-D (अपीलाथ�/Appellant) : (��थ� / Respondent) Shri Vikram Vijayaraghavan (Advocate) – Ld. AR अपीलाथ�कीओरसे/ Appellant by : ��थ�कीओरसे/Respondent by : Shri A. Sasikumar (CIT) -Ld. DR सुनवाईकीतारीख/Date of Hearing : 08-01-2025 घोषणाकीतारीख /Date of Pronouncement : 15-01-2025 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)
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 Officer, (AO) u/s 143(3) r.w.s. 92CA(4) r.w.s 144C(13) of the Act pursuant to the directions of Ld. Dispute Resolution Panel-2, Bengaluru (DRP) u/s 144C(5) dated 24.06.2024. Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to Ld. Transfer Pricing Officer (TPO) DCIT (TPO)-3(1), Chennai for determination of Arm’s Length Price (ALP). The Ld. TPO passed an order u/s 92CA(3) on 28.09.2022 proposing certain Transfer Pricing (TP) adjustment. Incorporating the same, a draft assessment order was passed on 29.09.2023 which was subjected to assessee’s objections before Ld. DRP. Pursuant to the directions of Ld. DRP, final assessment order was passed against which the assessee is in further appeal before us. The grounds of appeal
read as under: -
1. Depreciation on right to use Leasehold Property: 1.1 The AO/DRP erred in confirming disallowance of depreciation amounting to Rs.43,49,938/- on right to use of Leasehold Property claimed in respect of land taken on long lease by appellant and used in its business. 1.2 The AO/DRP ought to have appreciated that payment by Appellant to owner of land (SIPCOT) gave Appellant permission to construct building and set up manufacturing facility on the land thereby acquiring the right to use leasehold property which is a commercial right obtained by Appellant being in the nature of an intangible asset entitled to depreciation. 1.3 The AO/DRP failed to consider the Karnataka High Court decision in the case of DCIT vs Bangalore International Airport Ltd (IT APPEAL NO. 115 OF 2017) where in it was held that "where assessee incurred cost towards acquiring leasehold right which constituted an intangible right, cost incurred towards acquiring leasehold right would be eligible for depreciation."
2. Claim of deduction U/s. 80G: 2.1 The AO/DRP erred in disallowing Rs.7,95,40,9731- towards claim of deduction U/s 80G. 2.2 The AO/DRP ought to have appreciated that out of Rs. 7,95,40,973/- claimed as deduction U/s. 80G, AO erroneously disallowed Rs.3,22,41,778- which was not part of CSR expenditure at all. 2.3 The AO/DRP ought to have appreciated that there is no restriction in the Act that expenditure, when disallowed for CSR, cannot be considered u/s 80G of the Act. 2.4 The AO/DRP ought to have appreciated that the appellant opted for section 115BAA from AY 2020-21 and there was no restriction to claim deduction U/s. 80G for A Y 2020-21. 2.5 The AO/DRP ought to have appreciated that if your appellant is denied this benefit, merely because it forms part of CSR, it would lead to disallowance on the basis of a contribution required under Companies Act and not under any provisions of Income Tax Act. 2.6 The AO/DRP failed to consider number of ITAT decisions on identical issue including Allegis Services (India) Private Limited. vs. ACIT (ITA No. 1693/Bang/2019).
3. Disallowance u/s 14A:
3.1 The AO/DRP erred in disallowing a sum of Rs.3,22,41,331/- as expenditure incurred in relation to the income which does not form part of the total income under S.14A by applying Rule 8D. 3.2 The AO/DRP erred in making the disallowance without recording the satisfaction as to the correctness of the claim of the appellant as per Section 14A(2). 3.3 Without prejudice, the AO/DRP ought to have appreciated that the disallowance u/s. 14A cannot exceed dividend income earned. 3.4 The AO/DRP failed to appreciate that as per Rule 80(2)(ii), investments from which no dividend income was received should not be considered for the purposes of computing the disallowance, which has been allowed by ITAT in appellant's own case for AY 2012-13 and AY 2013-14. 3.5 The AO/DRP failed to appreciate that the appellant had already disallowed Rs.12,98,058/- in its ROI dated 15.02.2021 (computed based on Rule 8D(2)(ii) on average value of investments) 4. Transfer Pricing upward adjustment on interest receivable on loan given: 4.1 The TPO/DRP erred in making an adjustment of Rs.32,514/- towards Transfer Pricing Adjustment on interest receivable on loan given. 4.2 The TPO/DRP ought to have appreciated that loans granted to subsidiary (Sundram International Inc., (SII)) were not out of borrowed funds and it was granted considering the financial position of SII which had sufficient cash generation of Rs 17,621 Lakhs during the year. 4.4 Without prejudice, considering the financial position of subsidiary, TPO/AO ought to have held that under similar circumstances, Appellant would not have charged interest from 3rd party. 4.5 The TPO/DRP erred in adopting 4.318% (6 Months LIBOR + 200bps) as the interest rate the Appellant should have charged for loans which is highly arbitrary and requires to be deleted. 4.6 The TPO/DRP failed to consider the ITAT judgement granted in favour of the appellant for A Y 2010-11 wherein the AO re-examined the matter in the light of observation made by the ITAT and identified that your appellant had surplus funds available and also there was no nexus between the borrowed funds and the advance made by the appellant to the Associate Enterprise.
5. Transfer Pricing upward adjustment on Corporate Guarantee: 5.1 The TPO/DRP erred in making an adjustment of Rs.4,00,24,000/- towards Transfer Pricing adjustment on Corporate Guarantee by adopting 2.55% as guarantee commission. 5.2 The TPO/DRP ought to have appreciated that Corporate Guarantee is not an international transaction u/s 92B. 5.3 The TPO / DRP ought to have appreciated that Appellant provided CG to landlord of CPFL UK as part of acquisition Obligations i.e. commercial expediency. Further, CG's to SFZL and SIL were to meet the working capital facilities of the respective companies. 5.4 Without prejudice, the TPO/DRP failed to consider the Appellant's own cases in AY 2009-10, 2012-13 and AY 2013-14, ITAT restricted CG commission to 0.5% of the guarantee value.
As is evident the issues that fall for our consideration are – (i) Depreciation on right to use leasehold property for Rs.43.49 Lacs; (ii) Claim of Deduction u/s 80G for Rs.795.40 Lacs; (iii) Disallowance u/s 14A for Rs.322.41 Lacs; (iv) Transfer pricing (TP) adjustment of interest on loan to AE; (v) TP adjustment of corporate guarantee.
The Ld. AR referred to the earlier orders of Tribunal in assessee’s own case whereas Ld. CIT-DR referred to the findings of lower authorities. Having heard rival submissions upon perusal of case records, the issues are adjudicated as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing of high-tensile fasteners, power metal components etc. It is part of TVS group which is engaged in automotive component manufacturing.
TP Adjustment of Loans to AE 3.1 The assessee granted interest free loan to its AE M/s Sundaram International Inc., USA. The Ld. TPO proposed benchmarking the same on LIBOR+200 bps. Though the assessee opposed the same, Ld. TPO benchmarked the same and proposed TP adjustment of Rs.0.32 Lacs. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 3.2 This issue has been adjudicated by Tribunal in dated 04.03.2016 for AY 2010-11. In para-5 of the order, Tribunal directed Ld. AO to verify the actual surplus funds available with the assessee. The Ld. AO was also directed to verify whether there was any nexus between the borrowed loans and advances made to the AE. The Ld. AO was directed to re-examine the matter in the light of aforesaid observation and re-adjudicate the issue. Since facts are similar in this year, we issue similar directions. The corresponding grounds as raised by the assessee stand allowed for statistical purposes.
TP adjustment of Corporate Guarantee 4.1 The assessee provided corporate guarantee for its AE but did not charge any fees. The Ld. TPO benchmarked the same @2.55% which was nothing but average rate of guarantee fee charged by the bank. Accordingly, Ld. TPO proposed adjustment of Rs.6.06 Crores. The same was confirmed by Ld. DRP against which the assessee is in further appeal before us. 4.2 This issue has been adjudicated by Tribunal in & 33/Chny/2021 dated 08.11.2024 for AYs 2015-16 and 2016-17. In para- 4.2 of the order, the bench directed Ld. AO to benchmark the same @0.5%. Facts being pari-materia the same, we direct Ld. AO to adopt benchmarking rate of 0.5%. The corresponding grounds stand partly allowed.
Depreciation on right to use leasehold property for Rs.43.49 Lacs 5.1 The assessee claimed depreciation on a leasehold property. The depreciation was claimed @12.5% i.e., half of 25% depreciation. The same was on the ground that the rights were shown as intangible assets which would be eligible for 25% depreciation. The Ld. AO rejected the same and disallowed depreciation of Rs.43.49 Lacs as claimed by the assessee. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 5.2 This issue has been adjudicated by Tribunal in & 33/Chny/2021 dated 08.11.2024 for AYs 2015-16 and 2016-17. In para- 6.3 of the order, considering the order of Hon’ble High Court of Madras in assessee’s own case (TCA No.498 of 2018 dated 15.03.2021), the bench remitted this matter back to the file of Ld. AO. Facts being pari- materia the same, we issue similar directions to Ld. AO. The corresponding grounds stand allowed for statistical purposes.
Claim of Deduction u/s 80G for Rs.795.40 Lacs 6.1 The assessee made CSR expenses of Rs.1087.89 Lacs out of which an amount of Rs.795.40 Lacs was claimed as deduction u/s 80G. The assessee relied on various decisions of the Tribunal in support of the same. The assessee claimed that out of Rs.795.40 Lacs claimed as deduction u/s 80G, only Rs.472.99 Lacs pertain to CSR expenditure whereas the balance Rs.322.41 Lacs represents contributions to donee which are not part of CSR expenditure. However, Ld. AO held that the intention of the legislature was not to allow deduction of CSR expenditure otherwise it would result into subsidizing the CSR expenditure. Accordingly, the deduction was denied which was confirmed by Ld. DRP. Aggrieved, the assessee is in further appeal before us. The Ld. AR has referred to the decision of this Tribunal in M/s Source HOV India Private Ltd. (ITA No.2454/Chny/2024 dated 10.12.2014) which has taken a view favoring the assessee. The Ld. CIT- DR opposed such deduction and referred to decisions favoring revenue. The Ld. CIT-DR submitted that CSR expenditure could not be allowed as deduction u/s 80G. 6.2 Having considered factual background and rival arguments, we deem it fit to remit this issue back to the file of Ld. AO for de novo adjudication. The Ld. AO shall consider the nature of donations as well as subsequent amendment to the law. The various judicial decisions as rendered on this issue may also be reconsidered. It appears that only part of CSR expenditure has been claimed u/s 80G which may also be considered on facts. The assessee is directed to substantiate its claim.
Consequently, the corresponding grounds stand allowed for statistical purposes.
Disallowance u/s 14A 7.1 It transpired that the assessee earned exempt income of Rs.321.52 Lacs and it had made investments in equity share capital. The assessee made disallowance of Rs.12.98 Lacs. It was stated that the investments were made out of self generated funds only. The Ld. AO did not make any interest disallowance but worked out indirect expenses disallowance u/r 8D(2)(ii). The same was computed at 1% of annual average of monthly average of the opening and closing balances of the value of investment, income from which do not form part of total income. The same came to be Rs.335.39 Lacs and accordingly, the differential of Rs.322.41 Lacs was proposed to be disallowed u/s 14A. The Ld. DRP confirmed the same, inter-alia, by relying upon amendment made to Sec.14A w.e.f. 01.04.2022 which provided that such disallowance was to be computed regardless of the fact whether the investments have yielded any exempt income or not. Aggrieved, the assessee is in further appeal before us. 7.2 This issue has been adjudicated by Tribunal in & 33/Chny/2021 dated 08.11.2024 for AYs 2015-16 and 2016-17. In para- 18.3 of the order, the bench directed Ld. AO to compute disallowance u/r 8D(2)(ii) by considering only those investments which have yielded exempt income during this year. Facts being pari-materia the same, we issue similar directions. The amendment, in our opinion is applicable only w.e.f. 01.04.2022 and the same would not have retrospective application. The corresponding ground stand allowed for statistical purposes. The appeal stand partly allowed in terms of our above order.
Assessment Year 2021-22 8. In this year, the grievance of the assessee is three-fold i.e., (i) TP adjustment of interest on loan to AE; (ii) TP adjustment of Corporate Guarantee; (iii) TP adjustment of interest on debentures.
The facts relating to first two grounds are the same as in AY 2020- 21. Therefore, our adjudication therein, on these two issues, shall mutatis-mutandis apply in this year also. The grounds of first issue stand allowed for statistical purposes. The grounds of second issue stand partly allowed.
The TP adjustment of interest on debentures has been proposed by Ld. TPO in its order dated 06.10.2023. The assessee subscribed to the debentures of its AE M/s Sundaram International Ltd. UK. The assessee received interest of Rs.15.51 Lacs which was at the rate of 2.43%. The said rate was stated to be based on overdraft facility as availed by its AE from M/s HSBC Bank PLC which prescribe interest rate of 1.76%. The assessee stated that comparable interest rates prevailing in UK should be adopted for ALP interest rate. However, Ld. TPO benchmarked the same on the basis of domestic rates applicable for NCCD and arrived at benchmarking rate of 11.8%. The same resulted into an adjustment of Rs.59.81 Lacs. The Ld. DRP confirmed the same against which the assessee is in further appeal before us.
We are of the opinion that the assessee has subscribed to debentures of a UK-based entity and therefore, the ALP rate as applicable to that entity, would be more suitable benchmarking rate. As per facts, the foreign AE was able to raise overdraft facility in independent situation at the rate of 1.76% as against rate of 2.43% as paid to the assessee. In such a situation, we direct Ld. TPO to benchmark the same based on comparable international transactions and not on the basis of comparable domestic transaction. The assessee is directed to provide the requisite data. The corresponding grounds stand allowed for statistical purposes. The appeal stand partly allowed.
Both the appeals stand partly allowed. Order pronounced on 15th January, 2025.