2015 (6) TMI 319 - AT - Income Tax

Determining arm s length adjustment in respect of loan given to its wholly owned subsidiaries - Held that - The assessee has given advance to 100% wholly owned foreign subsidiaries on which no interest has been charged. Since the advance was given to its AE without charging interest, the transaction comes under the purview of international transaction requiring adjustment on account of arm s length price u/s 92. It does not matter even if advance is given out of interest free funds available with the assessee. The issue with regard to determining arm s length adjustment in respect of loan given to its wholly owned subsidiaries is covered by the decision of Hon ble jurisdictional High Court in the case of CIT vs. Tata Autocomp Systems Ltd., (2015 (4) TMI 681 - BOMBAY HIGH COURT ) wherein held that the rate of interest was to be determined by applying the Euribor rate of interest i.e. rates prevailing in Europe. Similarly the decision of Tribunal in the case of VVF Ltd. vs. DCIT (2010 (1) TMI 781 - ITAT, Mumbai ) and DCIT vs. Tech Mahindra Ltd. (2011 (6) TMI 140 - ITAT, MUMBAI ) also supports this issue. Respectfully following the above decisions we direct the A.O. to make arm s length adjustment by applying the LIBOR rate of interest. From the record we found that part of loan was subsequently converted into equity. To the extent of loan converted into equity, no transfer pricing adjustment is required with effect to the date of such conversion, in view of decision of Hon ble jurisdictional High Court in the case of Vodafone, 2014 (10) TMI 278 - BOMBAY HIGH COURT . We direct accordingly. Disallowance of interest on amounts spent on acquiring premises at Bharat Diamond Bourse - BDB - Held that - From the record we also found that the assessee had huge amount of interest free funds at its disposal as well and that it is normally rational that owned funds in the form of accumulated undistributed profits are utilized for acquisition of capital assets - particularly an asset which has been under construction for more than a decade. The total non-interest bearing funds available with the assessee as of 31st March 2006 are ₹ 141.56 crores and after excluding the current year s profit, the same are ₹ 123.19 crores. The expenditure on capital assets till the year end is only ₹ 5.77 crores. Hence it would be rational to state that the same has been funded from owned funds. Accordingly we do not find any justification for the disallowance of interest expense as made by lower authorities. - Decided in favour of assessee. Disallowance arising out of purchases from subsidiary company - Held that - From the record we found that the said materials were sold at cost and no profit was made on the same. It was also submitted that even if the assessee follows a FIFO system of valuation, cost of these diamonds would also be worked on a FIFO basis. There was no evidence to show that the sale has actually been done at a higher amount. This issue is also covered by the decision of the Tribunal in assessee s own case for assessment years 2002-03 to 2005-06 as the facts and circumstances of the case during the year under consideration are same, respectfully following the order of Tribunal we do not find any merit in the action of the lower authorities for the disallowance made arising out of the sales to subsidiary company. - Decided in favour of assessee.

Issues Involved:
1. Adjustment towards interest charged to overseas subsidiaries under section 92CA.
2. Disallowance of interest on investment in property at Bharat Diamond Bourse.
3. Disallowance of interest on interest-free advances to subsidiaries.
4. Disallowance arising out of purchases from subsidiary company.
5. Disallowance arising out of sales to subsidiary company.

Detailed Analysis:

1. Adjustment towards interest charged to overseas subsidiaries under section 92CA
The assessee contested the adjustment of Rs. 45,01,303 towards interest that ought to have been charged to its overseas subsidiaries. The assessee argued that the loans given to wholly owned subsidiaries were in the nature of quasi equity and provided external comparables to support its stance. The Tribunal, however, held that the transaction comes under the purview of international transactions requiring adjustment for arm's length price (ALP) under section 92. The Tribunal directed the A.O. to make the adjustment by applying the LIBOR rate of interest, following the jurisdictional High Court's decision in CIT vs. Tata Autocomp Systems Ltd.

2. Disallowance of interest on investment in property at Bharat Diamond Bourse
The assessee argued against the disallowance of interest on the grounds that no specific funds were borrowed for the investment and that it had sufficient non-interest bearing funds. The Tribunal found that the assessee had indeed used its owned funds for the investment and had not capitalized interest in its books. The Tribunal concluded that the proviso to Section 36(1)(iii) did not apply and directed the A.O. to delete the disallowance, referencing the Tribunal's earlier decision in the assessee's own case for previous assessment years.

3. Disallowance of interest on interest-free advances to subsidiaries
The assessee provided interest-free advances to its wholly owned subsidiary, Aditi Diaimpex Trading and Manufacturing Co. Ltd., and argued that these were given out of commercial expediency and sufficient interest-free funds. The Tribunal, referencing the jurisdictional High Court's decision in Reliance Utilities, found that the assessee had sufficient interest-free funds and directed the A.O. to delete the disallowance.

4. Disallowance arising out of purchases from subsidiary company
The assessee purchased jewellery from its subsidiary to meet pending orders and exported it at the same price. The A.O. disallowed the overheads apportioned to these purchases. The Tribunal found that the A.O. failed to show that the price paid was excessive compared to the market price, and deleted the disallowance. This decision was consistent with the Tribunal's earlier rulings in the assessee's own case for previous years.

5. Disallowance arising out of sales to subsidiary company
The assessee sold unused raw materials to its subsidiary at cost without making a profit. The A.O. made an addition equivalent to 2% of the sales price under section 40A(2). The Tribunal found no evidence that the sales were made at a higher amount and noted that the assessee followed the FIFO method of stock valuation. Consequently, the Tribunal deleted the disallowance, following its earlier decision in the assessee's own case for previous years.

Conclusion:
The Tribunal allowed the appeals of the assessee in part, directing the A.O. to make adjustments based on LIBOR for interest on loans to subsidiaries, and to delete disallowances related to interest on investments in Bharat Diamond Bourse, interest-free advances to subsidiaries, and transactions with subsidiary companies. The judgment emphasized adherence to established legal precedents and proper application of tax provisions.

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