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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Assessing Officer, consequent to the directions of Dispute Resolution Panel dated 21.12.2015 and pertains to assessment year 2011-12.
The first ground of appeal is with regard to adjustment of interest free loan and guarantee commission.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee advanced interest free loan to subsidiary company. According to the Ld. counsel, the loan was given to wholly owned subsidiary company of the assessee since the subsidiary company was in a very bad financial position. The subsidiary company also suffered loss. Therefore, according to the Ld. counsel, if the interest was charged on the wholly owned subsidiary company in such a situation, ultimately it has to be written off since the assessee could not recover the interest from subsidiary company. Referring to the order of this Tribunal for the assessment year 2010-11 in the assessee's own case, the Ld.counsel submitted that on identical situation, this Tribunal remitted back the matter to the file of the Assessing Officer.
Therefore, for the year under consideration also, the issue of disallowance of interest may be remitted back to the file of the Assessing Officer.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that interest shall be charged on the amount advanced by the assessee to its subsidiary company in UK. Therefore, the Assessing Officer by applying LIBOR rate of interest, made the addition. The Ld. D.R. further submitted that by advancing the borrowed funds to a non-resident company without charging any interest, the assessee is apparently shifting the taxable income to a foreign jurisdiction. When the assessee claims the interest expenditure in India, while computing the taxable income, the income of the assessee is reduced to the extent interest paid on the borrowed loan which was diverted to the foreign company. Merely because the UK company was said to be 100% subsidiary company of the assessee that cannot be a reason to reduce the taxable liability in India by shifting the taxable income to a foreign jurisdiction. Since the issue was remitted back to the file of the Assessing Officer for the assessment year 2010-11, the Ld. D.R. submitted that for the year under consideration also, the matter may be remitted back to the file of the Assessing Officer.
We have considered the rival submissions on either side and perused the relevant material available on record. For the assessment year 2010-11 also, the assessee-company advanced interest free loan to its wholly owned subsidiary company at UK.
While considering the addition made by the Assessing Officer on the direction of the DRP, this Tribunal found that the matter needs to be re-examined by the DRP and verify the availability of surplus funds with the assessee for the purpose of advancing loan to Associate Enterprise in UK. Since factual situation arises during the year under consideration is similar as that of assessment year 2010-11, this Tribunal is of the considered opinion that the matter needs to be reconsidered in the light of observation made by this Tribunal for assessment year 2010-11. Accordingly, the orders of the lower authorities are set aside and the issue of disallowance of interest on the borrowed loan is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the issue as observed by this Tribunal for assessment year 2010-11 in dated 04.03.2016 and thereafter decide the same in accordance with law after giving a reasonable opportunity to the assessee.
The next ground of appeal is with regard to guarantee commission.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee, submitted that this issue was also covered by the decision of this Tribunal in Redington (India) Limited v. JCIT in dated 07.07.2014. The Ld.counsel further submitted that the very same issue was also adjudicated by Delhi Bench of this Tribunal in Bharti Airtel Ltd. v. ACIT (39 CCH 415). Therefore, the issue is covered in favour of the assessee.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that for the assessment year 2010-11, the DRP by following the order of this Tribunal in Redington (India) Limited (supra), accepted the claim of the assessee. During the year under consideration, the DRP found that the facts are totally different. During the year under consideration, the assessee extended corporate guarantee on behalf of AE CPFL and the actual amount outstanding as on 31.03.2011 was `61,86,647/- as against the balance of `58,55,773/- as on 01.04.2010. The assessee has given fresh bank guarantee of `79,65,761/- in January, 2011 and the actual amount outstanding as on 31.03.2011 was `82,63,097/-. The assessee actually paid commission to the bank for availing this facility. Therefore, it is not a corporate guarantee. Therefore, the DRP directed the TPO to verify the actual commission paid by the assessee work out the arm's length price in respect of the bank guarantee.
We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims that the issue was covered in its favour by the decision of this Tribunal in Redington (India) Limited (supra). However, the Revenue contends that the issue was distinguishable and the assessee has actually paid commission to bank for availing bank guarantee from the bank. It is not known for the earlier assessment year, namely, assessment year 2010-11, in the case of Redington (India) Ltd., whether the assessee has paid actual commission to bank or not. If the assessee has paid commission actually to the bank, then the matter would stand differently. Therefore, as rightly observed by the DRP, the matter needs to be verified whether in the case of Redington (India) Limited (supra), the assessee has paid the commission actually for availing the facility from the bank. Since the exact factual situation is not available on the record, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, the order of the lower authority is modified and the Assessing Officer is directed to refer the matter to TPO once again to find out the actual facts with regard to payment of commission to bank and thereafter decide the issue afresh in accordance with law after giving a reasonable opportunity to the assessee.
The next ground of appeal is with regard to disallowance under Section 14A of the Act.
11. Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee, submitted that the DRP confirmed the disallowance made by the TPO in relation to the income which does not form part of the total income under Section 14A of the Act. In fact, the assessee earned dividend income of `44,34,485/-. According to the Ld. counsel, the paid up capital and reserves and surplus of the assessee as on 31.03.2011 was `55,494.96 lakhs, whereas the investments was `14,236.74 lakhs. Therefore, the assessee has made investments from its own funds. Moreover, the investments made with the subsidiary company have to be excluded. On a query from the Bench, how the investments were said to be made in subsidiary company and what is the shareholding pattern? The Ld.counsel submitted that for the assessment year 2010-11, in the assessee's own case in the matter was remitted back to the file of the Assessing Officer, therefore, this issue also may be remitted back to the file of the Assessing Officer for reconsideration.
We have heard Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative also. The assessee claims that the paid up capital and reserves and surplus was available to the extent of `55,494.96 lakhs as on 31.03.2011 and the investment was only to the extent of `14,236.74 lakhs. Therefore, it has to be presumed that the investment was made from own capital. It is not known whether the paid up capital, reserves and surplus were available with the assessee in liquid cash. The assessee has invested in plant and machinery, therefore, the liquid cash may be available with the assessee. Therefore, the assessee cannot claim in such a situation that the investment was made from the available funds with the assessee. Therefore, it has to be ascertained whether the assessee has any liquid cash on hand on the date of investment.
Moreover, the caim of subsidiary company also needs to be verified with reference to shareholding pattern of so-called subsidiary company. Since the shareholding patter is not on record, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the issue of disallowance under Section 14A of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter in the light of the material that may be filed by the assessee and thereafter compute the disallowance stipulated under Rule 8D(2) of the Income-tax Rules, 1962.
The next issue arises for consideration is interest free loans granted to subsidiary companies.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee advanced interest free loans to sister concens / subsidiary companies. During the assessment year 2010-11, the DRP itself allowed the claim of the assessee. No disallowance was made in the case of loans advanced to subsidiary companies. According to the Ld. counsel, the assessee had sufficient surplus funds by way of reserves and paid up capital.
Therefore, there cannot be any disallowance. The Ld.counsel also placed his reliance in the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that the case of the assessee for the assessment year 2011-12 is totally different from the assessment year 2010-11. Therefore, the order of the DRP cannot be relied upon during the year under deduction. During this year, the assessee claims that capital and reserves are available with the assessee. However, no details were filed by the assessee before this Tribunal. It is not known whether the investment was made on the commercial expediency as found in the case of S.A.
Builders Ltd. (supra). Therefore, according to the Ld. D.R., the matter needs to be reconsidered.
We have considered the rival submissions on either side and perused the relevant material available on record. Though the assessee claims that sufficient funds by way of capital and reserves were available with the assessee, no material is filed before this Tribunal to substantiate the availability of liquid cash on the date of advance made to the subsidiary company. Moreover, the shareholding pattern of the so-called subsidiary company is also not available on record. In those circumstances, this Tribunal cannot conclude that the advance was made to subsidiary company.
Moreover, the commercial expediency in investing the money was not established by filing necessary material before this Tribunal. In those factual circumstances, giving one more opportunity to the assessee to produce necessary material would not prejudice the interest of the Revenue. Accordingly, the orders of the lower authorities are set aside and the issue of disallowance of interest on the free loans and advances to subsidiary company is remitted back to the file of the Assessing Officer. The Assessing Officer shall re- examine the issue in the light of the material that may be filed by the assessee and thereafter decide the same in accordance with law after giving a reasonable opportunity to the assessee.
The next issue arises for consideration is disallowance of claim of software expenses.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee, submitted that the DRP has disallowed the software expenses.
However, this Tribunal in the assessee's own case for assessment year 2010-11 in remanded back the matter to the file of the Assessing Officer for reconsideration.
We have heard Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative also. As rightly submitted by the Ld.counsel for the assessee, the Tribunal remitted back the matter to the file of the Assessing Officer by directing the DRP to verify the nature of expenditure and thereafter decide the issue. This Tribunal found that if the application software is only for a short period, then it can be treated as revenue expenditure. However, if the application software is for a longer period, then it will have enduring benefit, therefore, it has to be capitalized. Since the facts need to be verified. This Tribunal is of the considered opinion that the matter can be verified by the Assessing Officer. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to verify the nature of expenditure and thereafter decide the issue in accordance with law after giving a reasonable opportunity to the assessee.
The next issue is with regard to disallowance of export commission.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee, submitted that in the assessee's own case for assessment year 2010-11, the DRP allowed the claim of the assessee by placing reliance on the judgment of Madras High Court in CIT v. Faizan Shoes Pvt. Ltd. (367 ITR 155), therefore, there is no reason for disallowing the issue during the year under consideration.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that the DRP for the assessment year 2010-11, has allowed the claim of the assessee by placing reliance on the CBDT circular and the judgment of Madras High Court. Now the CBDT withdrew its circular, therefore, the order of the DRP for assessment year 2010-11 in the assessee's own case may not be applicable to the present case.
According to the Ld. counsel, the matter needs to be re-examined in the light of material on the circular issued by the CBDT.
By way of rejoinder, Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee, submitted that withdrawal of CBDT circular never makes any impact on the interpretation of the provisions of law. In fact, the Madras High Court interpreted the provisions of Income-tax Act without placing any reliance on the CBDT circular, therefore, the law laid down by the Madras High Court is squarely applicable to the facts of the case.
We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the circular issued by the CBDT was withdrawn and the issue in respect of commission paid / payable to the foreign agency.
In the case before us, the provisions of Income-tax Act need to be examined irrespective of the fact whether the circular of the CBDT is withdrawn or not. Therefore, this Tribunal is of the considered opinion that the matter needs to be re-examined by the Assessing Officer. Accordingly, the orders of both the authorities below are set aside and the issue of disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the issue afresh in the light of the provisions of Income-tax Act after considering the withdrawal of circular issued by CBDT and the judgment of Madras High Court in Faizan shoes Pvt. Ltd. (supra) and thereafter decide the issue in accordance with law after giving a reasonable opportunity to the assessee.
The next ground of the appeal is additional depreciation under Section 32(1)(iia) of the Act.
The issue of additional depreciation was examined by this Tribunal in the assessee's own case. This Tribunal found that the assessee is entitled to additional depreciation in the subsequent year since the machinery was put to use for 180 days in the earlier assessment year. The order of this Tribunal in the assessee's own case for assessment year 2010-11 was not before the Assessing Officer. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered in the light of the decision of this Tribunal in the assessee's own case for assessment year 2010-11.
Accordingly, the orders of the authorities below are set aside the issue of additional depreciation is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh in the light of the decision of this Tribunal for assessment year 2010-11 and thereafter decide the issue afresh in accordance with law after giving a reasonable opportunity to the assessee.
The last ground of appeal is with regard to credit for TDS.
We have heard Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee and Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative. The Assessing Officer shall verify the TDS certificates and thereafter give credit in accordance with law after giving a reasonable opportunity to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced on 28th October, 2016 at Chennai.