2014 (1) TMI 872 - AT - Income Tax

Interest rate on ALP Held that - The decision in Siva Industries & Holdings Ltd. Versus Assistant Commissioner of Income-tax, Company Circle-VI(4), Chennai 2011 (5) TMI 451 - ITAT, CHENNAI followed - LIBOR rate has to be considered while determining the arm s length interest rate in respect of the transaction between the assessee and the Associated Enterprises thus, no addition on this count is liable to be made in the hands of the assessee Decided in favour of Assessee. Disallowance made u/s 14A r.w.8D of the Act Held that - The decision in Godrej & Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT followed - the provisions of rule 8D are applicable w.e.f. AY. 2008-09. prior to that, reasonable amount has to be deducted - The assessee has voluntarily made dis-allowance to the tune of Rs. 9,12,24,848/- on account of expenditure on interest - The assessee has not made any dis-allowance on management expenses in handling of portfolio - The assessee must have been incurring expenditure in managing portfolio of such a magnitude - the assessee must have spent Rs. 2 Crores in managing the investment portfolios - addition to the tune of Rs. 2 Crores is confirmed Decided partly in favour of Assessee.

Summary

Issues:
1. Determination of Arm's Length Price (ALP) for interest charged on a loan to a subsidiary.
2. Disallowance of expenditure under section 14A r.w.r. 8D.

Analysis:
1. The first issue in this case pertains to the determination of the Arm's Length Price (ALP) for interest charged on a loan given by the assessee to its subsidiary. The Transfer Pricing Officer (TPO) contended that the interest rate of 6% charged by the assessee did not represent the ALP. The TPO determined the ALP at 14% based on opportunity cost. However, the assessee argued that the international rate, specifically the London Inter-bank Offered Rate (LIBOR), should be considered. The Tribunal, in a previous case, held that for international transactions, LIBOR should be used for determining the ALP. As the assessee's interest rate was higher than the LIBOR rate during the relevant period, the addition made by the Assessing Officer was deleted, and the ground of appeal was allowed.

2. The second issue revolves around the disallowance of expenditure under section 14A r.w.r. 8D. The Assessing Officer made an additional disallowance over the voluntary disallowance made by the assessee. The Dispute Resolution Panel (DRP) rejected the objections raised by the assessee. The assessee contended that Rule 8D, applicable from the assessment year 2008-09, should not be applied to the assessment year 2007-08. The Tribunal agreed with the assessee, citing a judgment of the Bombay High Court. However, the Tribunal found that the assessee should have incurred management expenses in handling its investment portfolio. Therefore, an additional disallowance of Rs. 2 Crores was confirmed, partially allowing the ground of appeal raised by the assessee.

In conclusion, the Tribunal partly allowed the appeal of the assessee, ruling in favor of the assessee on the determination of ALP for interest charged on the loan to its subsidiary based on the LIBOR rate. Additionally, the Tribunal confirmed an additional disallowance of Rs. 2 Crores for management expenses related to the investment portfolio, as the assessee had not made any disallowance in this regard.