M/S PUNJAB CHEMICALS & CROP. PROTECTION LTD.,CHANDIGARH V. ADDL. CIT, NEAC DELHI

ITA 127/CHANDI/2021

AI Insights

The case involves M/s Punjab Chemicals and Crop. Protection Ltd., which appealed against the orders of the Additional Commissioner of Income Tax (Addl. CIT) concerning disallowances and adjustments made in the assessment years 2008-09 and 2009-10. The appeals were in the context of transfer pricing adjustments, disallowances of commissions and interest, and other related tax issues. The Tribunal had previously restored some issues to the lower authorities for re-examination, leading to the current appeals. The main legal issues revolved around the proper interpretation and application of sections 14A and 36(1)(iii) of the Income Tax Act, as well as the principles governing transfer pricing adjustments.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 361248 (ITAT-CHANDIGARH)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-05-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2008-2009
• Other Referred Cases: CIT vs. Everest Kento Cylinders Ltd. (58 Taxmann.com 254)
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KUSUM BANSAL LD
• Assessee Lawyers: ANIL KHANNA LD
• Keywords: Set aside; Transfer pricing; International transaction; Depreciation; Earning of tax free income
• Section: 154; 14A

Judgement Text

"1 IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, CHANDIGARH BEFORE HON’BLE SHRI RAJPAL YADAV, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM 1. आयकरअपीलसं./ ITA No.127/CHANDI/2021 (िनधाŊरणवषŊ / Assessment Year: 2008-09) & 2. आयकरअपीलसं./ ITA No.128/CHANDI/2021 (िनधाŊरणवषŊ / Assessment Year: 2009-10) M/s Punjab Chemicals and Crop. Protection Ltd. Milestone-18, Ambala-Kalka Road VPO Bhankharpur, Derabassi Distt. SAS Nagar (Mohali), Punjab 140201 बनाम/ Vs. Addl. CIT NFAC Delhi ̾थायीलेखासं./जीआइआरसं./PAN/GIR No. AAACP-9904-H (अपीलाथŎ/Appellant) : (ŮȑथŎ / Respondent) अपीलाथŎकीओरसे/ Appellant by : Shri Anil Khanna (CA) – Ld. AR ŮȑथŎकीओरसे/Respondent by : Ms. Kusum Bansal (CIT) – Ld. DR सुनवाईकीतारीख/Date of Hearing : 17-03-2025 घोषणाकीतारीख /Date of Pronouncement : 22-05-2025 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1.1 Aforesaid appeals by assessee for Assessment Years (AY) 2008-09 & 2009-10 is in second round of litigation since the appeal was disposed-off by Tribunal vide ITA Nos.60/Chd/2013 & ITA No.100/Chd/2013 common order dated 23-07-2018 for AYs 2008-09 and 2009-10 wherein few of the issues were restored back to lower 2 authorities with certain directions. First, we take up assessee’s appeal for AY 2008-09. 1.2 Pursuant to the aforesaid order of Tribunal, Ld. AO passed draft assessment order on 31-12-2019 which was subjected to assessee’s objections before Ld. DRP vide directions dated 17-11-2020. These directions triggered Ld. TPO’s order dated 19-02-2021 pursuant to which final assessment order was passed by Ld. AO on 27-03-2021 which is in further appeal before us. In the meanwhile, the assessee preferred rectification u/s 154 before Ld. DRP which was disposed-off on 17-02-2023. The rectified directions were carried out by Ld. AO vide order dated 08-05-2023. 1.3 Though the assessee has raised multiple grounds of appeal, however, the grounds as urged by Ld. AR are – (i) Disallowance of Commission Paid to Directors for Rs.35 Lacs; (ii) Disallowance of interest u/s 36(1)(iii) for Rs.201.60 Lacs; (iii) Disallowance u/s 14A for Rs.34.60 Lacs; (iv) Transfer Pricing (TP) adjustment on reimbursement of expenses; (v) Transfer Pricing Adjustment on Corporate Guarantee charges. Having heard rival submissions and upon perusal of case records, these grounds are adjudicated as under. 2. Disallowance of Commission Paid to working directors 2.1 The Tribunal restored this issue back to Ld. AO to verify that the expenditure was an ascertained liability. The Ld. AO rendered a finding that the actual amount of commission was finally determined as per resolution dated 14-06-2008 based on final profits of the assessee-company. Therefore, this was unascertained liability and 3 hence, not allowable to the assessee. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 2.2 We find that the commission was paid to the directors as per employment contractual terms. The assessee has duly deducted tax at source on these payments in this year. The payment has merely been ratified vide resolution dated 14-06-2008. Nevertheless, the liability to pay the same accrued against the assessee for this year only. The fact that the same was quantified subsequently would not materially alter this position. The assessee, following mercantile system of accounting, would be eligible to claim the deduction thereof. We order so. The corresponding grounds stand allowed. 3. Disallowance of interest u/s 36(1)(iii) for Rs.201.60 Lacs 3.1 The Tribunal directed Ld. AO to determine availability of funds, utilization for capital work-in-progress, examine utilization of loans, determine the nexus between loans taken and CWIP and then take a decision in that regard. 3.2 The Ld. AO observed that there was substantial increase in loan funds during the year. The opening CWIP was Rs.3013.21 Lacs whereas closing CWIP stood at Rs.3008.46 Lacs. The assessee’s argument that it had own funds was not accepted by Ld. AO. Finally, taking average interest rate of 12%, Ld. AO disallowed interest of Rs.213.36 Lacs u/s 36(1)(iii) but allowed capitalization of the same. On this, depreciation was allowed for Rs.11.75 Lacs. The Ld. DRP upheld AO’s action against which the assessee is in further appeal before us. 3.3 By drawing our attention to the financial statements of the assessee, Ld. AR has amply demonstrated that the assessee is 4 having mixed funds. In such a case, the presumption would arise in assessee’s favor that interest-free funds were utilized to make the impugned investments in CWIP. The sources and utilization of funds has been kept on Page No.266 of the paper-book for this year. Upon perusal of the same, it could be seen that interest of Rs.147.94 Lacs pertaining to CWIP has already been capitalized by the assessee. Further, the assessee is having sufficient own funds to make further investments in CWIP. The cash profits for this year are Rs.53.73 Crores which are quite sufficient to cover entire CWIP. The Ld. AR has also brought on record a fact that similar issue arose in AY 2007-08 wherein no such addition was made by Ld. AO in the hands of the assessee. On these facts, in our considered opinion, the impugned disallowance as made by Ld. AO is not sustainable on facts. Therefore, we delete the same and allow the corresponding grounds as raised by the assessee. The depreciation as allowed by Ld. AO stand reversed. 4. Disallowance u/s 14A for Rs.34.60 Lacs 4.1 This issue was restored back by Tribunal for fresh consideration in the light of various decisions of Hon’ble Apex Court. The Ld. AO, as per directions of Ld. DRP, excluded overseas investments and computed disallowance of Rs.34.60 Lacs. 4.2 The Ld. AR argued that the exempt income as earned by the assessee during this year is merely Rs.6.74 Lacs and with a view to settle the dispute, the disallowance may be restricted to that extent only. Finding the argument to be an acceptable one, we direct Ld. AO 5 to restrict impugned disallowance to the extent of Rs.6.74 Lacs only. The corresponding grounds stand partly allowed. 5. Transfer Pricing (TP) adjustment of Reimbursement of expenses for Rs.31.73 Lacs 5.1 This issue was restored back by Tribunal to Ld. DRP for fresh consideration with the observation that the fact of incurring of expenditure was not proved. 5.2 In the set aside proceedings, the assessee submitted that the expenditure was incurred by the assessee and the same was charged to AEs on actual basis. There could not be any income from this transaction. The assessee also stated that the same was not in the nature of marketing support services but the same were paid to third- parties and no services were provided by the assessee company. Whatever the service the assessee received from third parties for subsidiary companies was duly charged to respective subsidiary companies. This expenditure was incurred by the assessee as a parent company of its subsidiary entities. However, Ld. DRP held that expenses were incurred for formation of the subsidiary company which were in the nature of expansion of assessee’s business as the assessee and the subsidiary were engaged in same line of business. The expenditure was incurred for promoting the brand of AEs. Accordingly, the addition of mark-up was upheld against which the assessee is in further appeal before us. 5.3 It emerges that the assessee has incurred certain expenditure on behalf of its AEs and the same has been charged to them on actual basis. The adjustment is arising out of computation of mark-up on the 6 same. The impugned expenditure are mostly in the nature of advisory, professional and legal charges which have been paid to third-parties. The same are neither in the nature of marketing support services nor incurred for brand building of its AEs. These charges have been recovered from AEs on actual basis. The expenditure has been incurred by the assessee as a parent company for its subsidiary entities. Since the payments are mere reimbursement in nature, no benefit could be said to have accrued to assessee’s AEs. Therefore, this adjustment stand deleted. The corresponding grounds of assessee’s appeal stand allowed. 6. Transfer Pricing (TP) adjustment of Corporate Guarantee 6.1 The Ld. DRP was directed to pass a speaking order meeting the objections of the assessee. The Ld. DRP held this transaction to be an international transaction and directed Ld. TPO to compute Arm’s Length Price @1.50% which came to Rs.323.52 Lacs. However, this adjustment has subsequently been rectified u/s 154 to Rs.117.85 Lacs vide AO’s order dated 08-05-2023. Aggrieved, the assessee is in further appeal before us. 6.2 We find that revenue has computed corporate guarantee charges @1.5% and made adjustment of Rs.117.85 Lacs in the hands of the assessee. We are of the opinion that by extending this guarantee, the assessee has granted benefit to its AEs and therefore, this transaction would be an international transaction for which Arm’s Length Price is to be computed. Considering various judicial decisions holding the field including the decision of Hon’ble Bombay High Court in CIT vs. Everest Kento Cylinders Ltd. (58 Taxmann.com 254) wherein 7 Hon’ble Court has upheld charging of rate of 0.5% by the assessee, we direct Ld. AO to compute the ALP of these transactions by accepting rate of 0.5%. The corresponding grounds stand partly allowed. 7. No other ground has been urged by Ld. AR before us. The appeal stand partly allowed. 8. Assessment Year 2009-10 In this year, the only issue as urged by the assessee is disallowance of interest u/s 36(1)(iii), disallowance u/s 14A and TP adjustment on Corporate Guarantee Charges. The Tribunal has issued similar directions for this year. The assessment has been reframed on similar lines. Facts and issues being pari-materia the same as in AY 2008-09, our adjudication as contained therein, on all the three issues, would mutatis mutandis apply to this year also. The appeal stands partly allowed accordingly. Conclusion 9. Both the appeal stands partly allowed. Order pronounced on 22-05-2025. Sd/- Sd/- राजपाल यादव मनोज क ुमार अŤवाल (RAJPAL YADAV) (MANOJ KUMAR AGGARWAL) उपाȯƗ/VICE PRESIDENT लेखा सद˟/ ACCOUNTANT MEMBER Dated: आदेश की Ůितिलिप अŤेिषत /Copy of the Order forwarded to : 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3. आयकरआयुƅ/CIT 4. िवभागीयŮितिनिध/DR 8 5. गाडŊफाईल/GF ASSISTANT REGISTRAR ITAT CHANDIGARH "