2015 (3) TMI 1103 - AT - Income Tax

Disallowance under section 14A - Held that - We note that the total investment comprising the investment in mutual fund and growth schemes / growth mutual funds as well as investment in foreign subsidiaries. The Assessing Officer itself has excluded the investment in foreign subsidiaries because the dividend from the foreign companies is taxable. However the growth mutual fund does not yield any dividend/exempt income therefore the provisions of section 14A would not apply on the investment in growth mutual funds. As regards the disallowance of administrative expenses in respect of the investment yielding exempt income the computation made under Rule 8D cannot exceed the total allocable expenditure for earning the exempt income debited the P&L Account. Accordingly the Assessing Officer is directed to reconsider the disallowance u/s 14A by excluding the investment in the Growth mutual funds scheme and further to earmark and identify the item of expenditure debited by the assessee in the P&L Account which can be allocated in relation to earning the exempt income. TP adjustment in respect of interest on loan given to AE - Held that - We direct the AO/TPO to adopt LIBOR 2% as arm s length interest in respect of loan provided by the assessee to its AE. TP adjustment in respect of cost of guarantee given by the assesse to the bankers for obtaining loan by the wholly owned subsidiary/AE of the assessee - Held that - We direct the AO/TPO to adopt the 0.5% as guarantee commission charges in respect of the guarantee provided by the assessee for obtaining the loan by the AE. Adjustment on account of guarantee commission charges - Held that - Since the guarantee commission is charged for assuming the risk for providing the guarantee to the bank in respect of loan availed by the AE therefore we find merits in the additional plea raised by the assessee that the adjustment on account of guarantee commission charges has to be only in respect of the amount of actual loan availed by the AE during the year. Accordingly we direct the AO/TPO to compute the adjustment by taking into account actual loan amount availed by the AE during the year in this respect. Benefit of tolerance range of /- 5% of the arithmetic mean margin - Held that - Since the arm s length price is adopted as CUP and single price and not as arithmetic mean therefore this additional ground of the assessee is devoid of any merit and hence rejected.

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act.
2. Transfer Pricing adjustment in respect of interest on loan given to Associated Enterprise (AE).
3. Transfer Pricing adjustment in respect of cost of guarantees given to bankers for wholly owned subsidiary AE.

Detailed Analysis:

1. Disallowance under section 14A of the Income-tax Act:

The assessee earned dividend income of Rs. 2,28,52,654/- from investments in shares and mutual funds, claimed exempt from tax. The Assessing Officer disallowed Rs. 32,32,232/- under section 14A by applying Rule 8D, which the CIT(A) upheld. The assessee argued that no direct expenses were incurred for earning the exempt income and that the Assessing Officer did not record satisfaction as required under section 14A(2). The assessee also contended that the investment activities were managed by the Finance Department without separate treasury expenses. The Tribunal noted that the disallowance should exclude investments in mutual funds with growth schemes, as they do not yield exempt income. The Assessing Officer was directed to reconsider the disallowance by excluding such investments and to allocate the expenditure debited in the P&L Account related to earning the exempt income.

2. Transfer Pricing adjustment in respect of interest on loan given to AE:

The assessee provided a loan to its US-based subsidiary, MDGM, charging interest at LIBOR + 2%. The TPO rejected this rate, adopting an average yield rate on BB-rated bonds, resulting in an arm's length interest rate of 17.26% and an adjustment of Rs. 67,56,491/-. The assessee argued that the loan was from internal accruals, incurred no cost, and was to help the AE during financial difficulties, suggesting that LIBOR + 2% was appropriate. The Tribunal, referencing multiple decisions, held that LIBOR + 2% is an appropriate arm's length interest rate for loans provided to AEs and directed the AO/TPO to adopt this rate.

3. Transfer Pricing adjustment in respect of cost of guarantees given to bankers for wholly owned subsidiary AE:

The assessee provided a corporate guarantee of Rs. 59.58 crores to PNC Bank for its subsidiary MDGM, USA. The TPO benchmarked this transaction, adopting a 6% guarantee fee based on the difference between the PLR rate and the bank rate, resulting in an adjustment of Rs. 3,27,68,010/-. The assessee contended that providing a corporate guarantee is not an international transaction and alternatively proposed a 0.5% guarantee fee, referencing several Tribunal decisions. The Tribunal agreed with the alternative plea, directing the AO/TPO to adopt a 0.5% guarantee fee. Additionally, the Tribunal directed that the adjustment should only consider the actual loan amount availed by the AE during the year.

Additional Grounds:

The assessee's additional grounds included the exclusion of investments in growth mutual funds from the disallowance under section 14A and the application of the tolerance range of +/- 5% of the arithmetic mean margin for transfer pricing adjustments. The Tribunal found merit in excluding growth mutual funds from the disallowance calculation under section 14A. However, it rejected the application of the tolerance range of +/- 5% for transfer pricing adjustments, as the arm's length price was determined using the Comparable Uncontrolled Price (CUP) method, not an arithmetic mean.

Conclusion:

The appeal was partly allowed, with directions to reconsider the disallowance under section 14A and to adjust the transfer pricing calculations for interest on loans and guarantee fees as specified. The Tribunal emphasized adherence to established guidelines and precedents in determining arm's length prices and the applicability of section 14A provisions.

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