2011 (5) TMI 451 - AT - Income Tax

Disallowance u/s 14A - Addition made by TPO - TDS credit - It was the submission that from the financial results of TTSL clearly showed that it would not be turning the corner into a profit any time in the near future - It was the submission that during the relevant assessment year the assessee did not have any income which did not form part of the total income under the Act and therefore no disallowance by invoking the provisions of section 14A could be made on the assessee - one of the main principles are that section 14A is to prevent claims of deduction of expenditure in relation to income which does not form part of the total income of the assessee - In the present case it is noticed that none of the investments made by the assessee has generated any dividend income which has been claimed by the assessee to be not to form part of the total income - If the assessee does not have any income as falling within the scope of total income during any year the provisions of the Act could not be applied to him A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares - assessee has given the loan to the Associated Enterprises in US dollars - As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate - Decided in favor of the assessee Regarding TDS credit - It was the submission that before the DRP the issue had been raised and the DRP called for a remand report and the remand report was received on 27-8-2010 as per para 16 of its order and the remand report had not been granted for its rebuttal - As it is noticed that the remand report has been received by the DRP on 27-8-2010 and the same has not been granted to the assessee for its rebuttal, this issue is restored to the file of the Assessing Officer for re-adjudication - Appeal is allowed for statistical purpose

Summary

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act, 1961.
2. Addition of Rs. 45,23,817.53 suggested by the Transfer Pricing Officer (TPO) due to the adoption of the prime lending rate instead of the LIBOR rate.
3. Non-grant of Tax Deducted at Source (TDS) credit as claimed by the assessee.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The assessee had initially disallowed an amount under section 14A in its original return but later revised the return to withdraw this disallowance. The Assessing Officer, however, made a disallowance of Rs. 33,86,85,626 under section 14A. The assessee argued that the major portion of the interest disallowed (Rs. 25.18 crores) was not connected to investments in shares but was related to business purposes. The remaining Rs. 8.68 crores was acknowledged to be related to investments in shares. The assessee contended that since it did not receive any dividend income nor claimed any income as exempt, section 14A should not apply. The Tribunal agreed with the assessee, referencing the principle that section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income. Since the assessee did not have any such income, the disallowance under section 14A was not applicable.

2. Addition Suggested by TPO:
The assessee had granted a loan to its subsidiary in Mauritius and charged interest at 6% per annum. The TPO and Assessing Officer contended that the interest rate should be based on the Indian prime lending rate (11.75%) rather than the LIBOR rate, resulting in an addition of Rs. 45,23,817.53. The assessee argued that since the transaction was an international one, the LIBOR rate should apply. The Tribunal agreed with the assessee, stating that for international transactions, the LIBOR rate is appropriate. Since the interest charged by the assessee (6%) was higher than the LIBOR rate (4.42%), no addition was warranted.

3. Non-grant of TDS Credit:
The assessee claimed that the Assessing Officer did not grant the TDS credit as claimed. The Dispute Resolution Panel (DRP) had called for a remand report, which was received but not shared with the assessee for rebuttal. Both parties agreed to restore the issue to the Assessing Officer for re-verification. The Tribunal directed the Assessing Officer to reconsider the issue and provide the assessee with an opportunity to rectify any defects in the TDS certificates.

Conclusion:
The Tribunal ruled in favor of the assessee on the first two issues, disallowing the section 14A adjustment and the addition suggested by the TPO. The third issue regarding the TDS credit was remanded back to the Assessing Officer for re-adjudication. The appeal was allowed for statistical purposes.