2016 (11) TMI 1513 - AT - Income Tax

Appropriate arm s length interest for bench marking the transactions for providing interest free loan to the A.E. - LIBOR 2% as fair rate of interest for the IT s entered into by the assessee with its AE - Held that - While deciding the appeals for the earlier years, the Tribunal while deciding similar issue followed its earlier order for the assessment year 2009 10, and held that LIBOR plus 2% is the appropriate rate of interest for the interest free loan transactions with A.E. The learned Departmental Representative has not brought to our notice any material change in the facts and circumstances in the impugned assessment year to deviate from the view expressed by the Tribunal - Decided in favour of assessee Disallowance u/s 14A - Held that - As decided in assessee s own case Tribunal after considering similar claim made by the assessee, directed the Assessing Officer to examine and not to disallow any expenditure under section 14A if it is found that investment is made in foreign subsidiary. - Decided in favour of assessee Addition of 3% risk premium added to cost of internal borrowing while arriving at ALP of interest rate to compute interest on interest-free advance given by the assessee to its AE - Held that - While deciding the first ground of appeal filed by the assessee we have discussed the facts of the issue under consideration. In our opinion,the AO was not justified in adding 3% risk premium to the cost of borrowing, as held by the DRP. We decide the effective ground of appeal against the AO.

Summary

Issues:
1. Transfer Pricing Adjustment - Addition in Arm's Length Price (ALP)
2. Disallowance under Section 14A of the Act

Transfer Pricing Adjustment - Addition in Arm's Length Price (ALP):
The Assessing Officer (AO) challenged the directions of the Dispute Resolution Panel (DRP) regarding the adjustment in the income of the assessee. The AO found that the assessee, engaged in the business of manufacturing studded jewelry and trading cut and polished diamonds, had entered into International Transactions (ITs). The Transfer Pricing Officer (TPO) made an upward adjustment of ?2.48 Crores in relation to the ITs, leading to the AO passing a draft assessment order. The primary issue in appeal was the addition of ?1.91 Crores in the Arm's Length Price (ALP) due to the provision of an interest-free loan to an overseas entity. The TPO compared the interest rate on loans in Indian currency with loans in foreign currency, leading to the proposed adjustment. The DRP upheld the adjustment, citing that an independent party would not provide an interest-free loan while incurring interest costs, resulting in profit shifting. The DRP directed to adopt the Prime Lending Rate (PLR) of the State Bank of India for the adjustment without any markup, rejecting the 3% risk premium added by the TPO.

Disallowance under Section 14A of the Act:
The second ground of appeal pertained to the disallowance of ?69.44 lakhs under Section 14A of the Act. The AO disallowed the amount, noting that the assessee had made investments without attributing any expenditure incurred for earning tax-exempt income. The DRP upheld the disallowance, emphasizing that even without exempt income, not all expenditure necessarily relates to taxable income. The DRP referred to relevant cases and upheld the disallowance. However, the assessee argued that the disallowance was not applicable as no exempt income was earned during the year, and the investments were made from its own funds, not borrowed funds. The Tribunal, while deciding the appeal for the AY 2011-12, held that no disallowance under Section 14A could be made if no exempt income was earned. The Tribunal directed the AO to reexamine the issue considering the observations made. The Tribunal decided the second ground in favor of the assessee, stating that the facts were identical to the earlier case and the cases cited by the DR were not relevant to the current issue.

In conclusion, the Appellate Tribunal ITAT, Mumbai, in the given judgment, addressed the transfer pricing adjustment issue and the disallowance under Section 14A of the Act. The Tribunal partly allowed the appeal filed by the assessee and dismissed the appeal of the AO. The judgment provided detailed analysis and reasoning for each issue, ensuring a fair and comprehensive decision based on the facts and legal principles presented during the proceedings.