SUNDARAM FASTENERS LIMITED,CHENNAI vs. DCIT, CHENNAI

This appeal of the assessee is directed against the order of the Assessing Officer, consequent to the direction of the Dispute Resolution Panel, for the assessment year 2010-11.

Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the first issue arises for consideration is with regard to transfer pricing adjustment in respect of the loan given by the assessee to its subsidiary. The Ld.counsel submitted that the Assessing Officer made addition on notional basis in respect of the loan advanced to the Associate Enterprise. The Transfer Pricing Officer found that notional interest should be charged on the loan advanced by the assessee to its subsidiary company by applying LIBOR rate. According to the Ld. counsel, the transaction between the assessee and the subsidiary company is in the nature of inter- corporate loan which was granted to protect the wholly owned subsidiary of the assessee. According to the Ld. counsel, the loan advanced by the assessee to its wholly owned subsidiary is for business purpose. Therefore, the Transfer Pricing Officer as well as the Dispute Resolution Panel committed an error in interpreting the financial relationship between the holding and subsidiary company as a lender and borrower. According to the Ld. counsel, there is no relationship as lender and borrower. The investment made is only for business purpose, therefore, there is no question of charging any interest on notional basis.

On the contrary, Sh. Pathlavath Peerya, the Ld. Departmental Representative, submitted that the loan advanced by the assessee to a UK company was free of interest. In fact, the assessee borrowed loan in India and paying interest. However, the money was diverted to a non-resident company and the expenditure incurred for paying the interest on the borrowed loan is claimed as allowance in computation of income. However, the assessee has not charged any interest on the money advanced to UK company.

We have considered the rival submissions on either side and perused the relevant material available on record. During the year under consideration, the assessee advanced a corporate loan of `13.17 Crores to its Associate Enterprise M/s Cramlington Precision Forge Ltd., a UK company. The assessee has not charged any interest on the said corporate loan extended to the Associate Enterprise. The assessee claimed before the Transfer Pricing Officer and Dispute Resolution Panel that the loan was advanced from the interest-free subsidy funds available with the assessee, therefore, there is no need for charging any interest. The Transfer Pricing Officer, however, found that the Associate Enterprise is located in UK and liable for taxation in UK jurisdiction. Therefore, the profits to the extent of loan advanced to the Associate Enterprise on account of interest-free loan are deemed to have been shifted to foreign jurisdiction. Therefore, the Dispute Resolution Panel found that LIBOR rate of interest has to be applied.

The main object of transfer pricing adjustment provided under the scheme of Income-tax Act is to prevent the assessee from eroding the tax base in one country and shifting the profit to other country. In the case before us, if the assessee has incurred any expenditure on the loan advanced to the Associate Enterprise in UK, then naturally the assessee is shifting the profit earned in India to a foreign jurisdiction by reducing the taxable income in India. In other words, if the assessee borrowed loan in India and the entire borrowed loan or part of the borrowed loan was advanced to the foreign company, without charging any interest, the assessee is reducing the profit in India to the extent of interest paid or payable on the borrowed funds. In case the assessee has surplus interest- free funds after meeting all statutory obligations, including payment of income-tax on the income, then the assessee is open to invest the same in any manner as it likes. Therefore, it needs to be verified whether the assessee has any surplus funds after meeting all statutory liabilities in India. In the case before us, the details of loan borrowed and the details of available surplus funds are not available on record. However, the Revenue claims that borrowed funds were diverted. The assessee claims that surplus funds were available for advancing the corporate loan to the Associate Enterprise. Therefore, this Tribunal is of the considered opinion that the factual situation needs to be verified. In other words, it has to be verified whether the assessee had sufficient surplus funds for advancing the corporate loan to the Associate Enterprise in UK. It has to be verified whether there was any nexus between borrowed funds and advance made by the assessee to the Associate Enterprise in UK. Since such an exercise was not done by the lower authorities, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside. The Assessing Officer is directed to verify the actual surplus funds available with the assessee. It also needs to be verified whether the assessee had borrowed loan and whether there was any nexus between the borrowed loan and advance said to be made by the assessee to the Associate Enterprise in UK. It is open to the Assessing Officer to refer the matter once again to Dispute Resolution Panel in accordance with provisions of the Act. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to re- examine the matter in the light of the observation made above and thereafter decide the issue in accordance with after giving reasonable opportunity to the assessee.

The next issue arises for consideration is with regard to disallowance made under Section 14A of the Act.

Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee has earned `11,35,049/- as dividend income during the year under consideration. The assessee has not incurred any expenditure for earning the said dividend income.

On the contrary, Sh. Pathlavath Peerya, Ld. Departmental Representative, submitted that Rule 8D of Income-tax Rules, 1962 is mandatory for the assessment year under consideration. The assessee-company invested `2206.57 lakhs in shares/funds as on 31.03.2010 and earned dividend income of `11,35,049/-. The dividend income earned by the assessee was exempted from taxation under Section 10(34) of the Act. However, the assessee has not claimed any expenditure for earning the dividend income which does not form part of total income. Therefore, the Assessing Officer is not satisfied about the claim of the assessee and by following the procedure laid down in Rule 8D, computed the disallowance. The Ld. D.R. further submitted that the assessee is not maintaining any separate books of account for investment in shares/funds. Though the assessee claims that substantial interest- free funds were available, but no material is available on record to show that the interest-free/own funds were used for making the investment. The Ld. D.R. further pointed out that all the funds were in a common pool. Therefore, it is very difficult to segregate the own funds and the borrowed funds. The fact that the assessee borrowed funds on payment of interest is not in dispute. In the absence of any nexus between the own funds and the investment made for earning the exempted income, the Assessing Officer, according to the Ld. D.R., has rightly applied the provisions of Rule 8D. Therefore, the Dispute Resolution Panel has rightly found that disallowance has to be made in respect of the dividend income earned which does not form part of total income.

We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the expenditure incurred by the assessee for earning of income which does not form part of total income cannot be allowed as deduction while computing the total income. In this case, admittedly, the assessee has earned `11,35,049/- as dividend income on the investment of `2206.57 lakhs. Though the assessee claims that the borrowed funds were not used for making investment, the fact remains that the assessee borrowed the funds and the interest-free funds and borrowed funds were put in a common pool. Therefore, it is very difficult to identify which part of the funds was used for making investment for earning dividend income. Moreover, the assessee-company is not in the business of investment. Therefore, it has to necessarily incur certain expenditure on the managerial level for taking decision for investing the funds in a right company.

The next ground of appeal is with regard to expenditure incurred by the assessee on software.

Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee has incurred a sum of `3,33,786/- on software. According to the Ld. counsel, the expenditure was incurred on the software which needs to be renewed and updated by the assessee every year. Therefore, the expenditure incurred by the assessee is in the nature of revenue expenditure.

On the contrary, Sh. Pathlavath Peerya, the Ld. Departmental Representative, submitted that the expenditure claimed by the assessee included fee for software licenses, cost of purchase of application software, annual maintenance contract charges, software development and maintenance charges and cost of upgradation of software. According to the Ld. D.R., the maintenance charges and upgradation charges are revenue expenses. Therefore, it has to be allowed in the year in which it was incurred. In the case of purchase of software licenses, there are two types of licences – one type of license is permanent license and another type of license is annual license. In the case of annual license, the entire license fee is allowable as revenue expenditure in the year in which it was incurred as the use of software is for that year only. However, in the case of permanent license, the use of software is over a period of year, therefore, it gives an enduring benefit to the assessee. The cost of permanent license will be a capital expenditure and the assessee is entitled for depreciation only. The Ld. D.R. further pointed out that in the case of purchase of application software, the Assessing Officer is required to see whether the software is a temporary one or for a long period. If the software is purchased for longer period, it will amount to capital expenditure. In the case before us, according to the Ld. D.R., there are several types of software expenses. Therefore, the Dispute Resolution Panel directed the Assessing Officer to segregate the capital expenditure and those of revenue in nature. Accordingly, the Assessing Officer classified `3,23,270/- as revenue expenditure.

We have considered the rival submissions on either side and perused the relevant material available on record. As rightly submitted by the Ld. D.R., the assessee’s claim of expenditure included fee for software licenses, cost of application software, annual maintenance contract, software development and maintenance charges. The annual maintenance charges and cost of upgradation charges are held to be revenue in nature by the Dispute Resolution Panel and it has to be allowed in the year in which it was incurred. In respect of software licenses, the DRP found that there are two types of licenses – one is annual license and another one is permanent license. In respect of annual license, the Dispute Resolution Panel found it to be as revenue expenditure and to be allowed in the year in which it was incurred. As far as permanent license is concerned, the Dispute Resolution Panel found that there was enduring benefit to the assessee. When the assessee bought the software permanently, the initial purchase of software has to be on the capital field since the assessee earned the right over the software. Even though it was licensed to use, the license given to the assessee is exclusively for the assessee.

The next issue arises for consideration is with regard to additional depreciation in respect of machinery installed.

Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee claimed additional depreciation on the plant and machinery purchased in the second half of financial year.

On the contrary, Sh. Pathlavath Peerya, the Ld. Departmental Representative, submitted that the additional depreciation has to be allowed in the year in which the machinery was put to use. Since the assessee put to use the machinery for less than 180 days, the Assessing Officer allowed 50% of the additional depreciation, i.e. at the rate of 10%. There is no provision in the Income-tax Act to carry forward the remaining part of depreciation in the subsequent year. Therefore, according to the Ld. D.R., the Dispute Resolution Panel has rightly rejected the claim of the assessee.

We have considered the rival submissions on either side and perused the relevant material available on record. The claim of additional depreciation was considered by the Cochin Bench of this Tribunal in Apollo Tyres Ltd. (supra). After considering the relevant decisions and judgments on the subject, the Cochin Bench found that the assessee is eligible for additional depreciation in the subsequent year since the machinery was put to use for 180 days in the earlier assessment year. In view of the decision of the Cochin Bench of this Tribunal, the assessee is entitled for the balance 10% during the year under consideration. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the balance 10% additional depreciation during the year under consideration.

The next ground of appeal is with regard to recording of total income.

Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the Assessing Officer has wrongly taken the total income at `65,92,20,452/- instead of `62,47,03,090/- as per revised return filed on 22.03.2012.

We have heard Sh. Pathlavath Peerya, the Ld. Departmental Representative also. The mistake in recording the total income has to be verified by the Assessing Officer in the light of the material available on record. If there is any mistake in the total income, this Tribunal is of the considered opinion that the mistake needs to be rectified. Accordingly, this issue is remitted back to the file of the Assessing Officer for reconsideration. The Assessing Officer shall re-examine the matter after giving reasonable opportunity to the assessee, to find out whether there was any error in computing the total income. If there is any error, the Assessing Officer shall rectify the same and record the correct total income.

The next issue is with regard to credit for TDS and TCS.

Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the tax deducted at source as per Form 16A and the tax collection certificate in Form 27D have not been considered properly by the Assessing Officer. According to the Ld. counsel, the assessee claimed TDS and TCS to the extent of `78,91,044/-.

We heard Sh. Pathlavath Peerya, the Ld. Departmental Representative also. The Dispute Resolution Panel directed the Assessing Officer to verify the claim of the assessee with regard to TDS and TCS to allow necessary credit on the basis of the material furnished in support of the claim of the assessee. In view of the right direction given by DRP to the Assessing Officer, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly, the same is confirmed.

In the result, the appeal of the assessee is partly allowed.