Facts of the Case

The Revenue filed appeals against separate orders passed by the Commissioner of Income Tax (Appeals), Kolkata for Assessment Years 2012-13, 2013-14, 2014-15 and 2015-16 in the case of Eureka Forbes Ltd. The appeals involved multiple issues including treatment of professional and legal fees as capital or revenue expenditure, disallowance under repairs and maintenance, excess depreciation on guest house building, trademark and copyright consultancy expenses, disallowance under Section 14A read with Rule 8D and corresponding MAT adjustment under Section 115JB, as well as transfer pricing adjustments relating to interest on loans advanced to associated enterprises and corporate guarantee fees. There was a delay of 17 days in filing the appeals, which was condoned by the Tribunal.

Issues Involved

Whether professional and legal fees and trademark consultancy expenditure were capital or revenue in nature, whether ad hoc disallowance under repairs and maintenance and depreciation were justified, whether disallowance under Section 14A read with Rule 8D and corresponding adjustment under Section 115JB was sustainable, whether arm’s length interest on loans to associated enterprises should be benchmarked using LIBOR, and whether the corporate guarantee fee rate determined by the TPO was excessive.

Petitioner’s Arguments

The Revenue contended that professional fees and trademark consultancy expenses resulted in enduring benefit and were capital in nature, that excess depreciation and repairs expenses were wrongly allowed, that the CIT(A) erred in restricting disallowance under Section 14A and MAT adjustment under Section 115JB, and that transfer pricing adjustments deleted or restricted by the CIT(A) were erroneous. The Revenue argued that LIBOR was not an appropriate benchmark for determining arm’s length interest and that the corporate guarantee fee rate of 3.6 percent determined by the TPO was justified.

Respondent’s Arguments

The assessee submitted that the professional fees and trademark consultancy expenses were incurred in the ordinary course of business and did not result in acquisition of any capital asset. It was argued that depreciation and repairs were allowable based on facts and evidence on record. With respect to Section 14A, it was contended that only investments yielding exempt income could be considered. On transfer pricing issues, the assessee submitted that LIBOR was the correct benchmark for foreign currency loans to associated enterprises and that corporate guarantee is a shareholder activity warranting a much lower guarantee commission.

Court Order / Findings

The ITAT Kolkata upheld the orders of the CIT(A) across all assessment years. The Tribunal held that the professional fees and trademark consultancy expenses were revenue in nature and did not create any enduring capital asset. It upheld partial relief granted on repairs and maintenance and deletion of excess depreciation disallowance. On Section 14A, the Tribunal agreed that disallowance must be restricted to investments yielding exempt income and that corresponding MAT adjustment under Section 115JB should be limited accordingly. On transfer pricing issues, the Tribunal upheld benchmarking of interest on loans to associated enterprises based on LIBOR and confirmed restriction of corporate guarantee fee to 1 percent, holding that the rate adopted by the TPO was excessive and unsupported by comparable data.

Important Clarification

The Tribunal clarified that expenditure incurred for smooth conduct of business without resulting in acquisition of a capital asset is revenue in nature. Disallowance under Section 14A cannot be made mechanically and must be confined to exempt income-yielding investments. For transfer pricing, international loan transactions must be benchmarked considering currency and market conditions, and corporate guarantees cannot be equated with bank guarantees for determining arm’s length commission.

Final Outcome

All appeals filed by the Revenue for Assessment Years 2012-13, 2013-14, 2014-15 and 2015-16 were dismissed. The orders passed by the Commissioner of Income Tax (Appeals) granting relief to the assessee on all disputed issues were upheld in full.

Source Link - https://itat.gov.in/public/files/upload/1768385924-7xBM9H-1-TO.pdf

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