2018 (8) TMI 1743 - AT - Income Tax

Upward adjustment under arm s length on loan and advance in foreign currency to its 100% foreign subsidiary - assessee had charged interest @5% on the loan from 01/01/2010 onwards - LIBOR rate applicability - Held that - As decided in assessee s own case for earlier AYs it has been consistently held in several decisions by the tribunal that wherever the transaction of loan between the associated enterprises is in foreign currency then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. Therefore the domestic prime lending rate would have no applicability and the international rate LIBOR would come into play. It has therefore been held that LIBOR rate has to be considered while determining the arms length rate of interest in respect of transactions of loan in foreign currency between the associated enterprises. This view has also been accepted in COTTON NATURALS (I) PVT. LTD. VERSUS VS. DCIT CIRCLE 3(1) NEW DELHI 2013 (6) TMI 174 - ITAT DELHI - decided against revenue Disallownace u/s 14A r.w.r. 8D - Held that - As decided in DEPUTY COMMISSIONER OF INCOME-TAX VERSUS ASHISH JHUNJHUNWALA 2013 (6) TMI 545 - ITAT KOLKATA AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of the Rules. While rejecting the claim of the assessee with regard to expenditure or no expenditure in relation to exempted income the AO has to indicate cogent reasons for the same but from the facts of the present case it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at % of the total value. - decided against revenue Delayed deposit of employees contribution toward PF without considering section 2(24)(x) r.w. Section 36(1)(va) - Held that - As the issue is squarely covered by the various judgments of Hon ble High Courts and Tribunals in assessee s case wherein it was held that if the assessee paid the employee s contribution towards Provident Fund within the due date of filing return of income u/s 139(1) of the Act. Then there should not be any disallowance. Since the ld. CIT(A) has allowed the appeal of the assessee by following the ratio laid down in the judgments of Hon ble Calcutta High Court, in the case of CIT Vs. Vijay Shree Limited 2011 (9) TMI 30 - CALCUTTA HIGH COURT we allow the claim of the assessee

Summary

Issues Involved:
1. Upward adjustment in the arm’s length price on account of loan advanced in foreign currency to foreign subsidiary companies.
2. Disallowance made under Section 14A read with Rule 8D of the Income Tax Rules.
3. Addition on account of delayed deposit of employees’ contribution toward Provident Fund (PF).

Detailed Analysis:

1. Upward Adjustment in the Arm’s Length Price on Account of Loan Advanced in Foreign Currency to Foreign Subsidiary Companies:
The primary issue was the upward adjustment made by the Transfer Pricing Officer (TPO) in the arm’s length price of interest on loans advanced by the assessee to its foreign subsidiary in Russia. The TPO had determined an arm’s length interest rate of 19% per annum, leading to a significant upward adjustment. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted this adjustment, reasoning that the interest rate should be based on the London Interbank Offered Rate (LIBOR) plus a reasonable markup, typically around 2%. The CIT(A) noted that the average LIBOR rate was 0.89821667%, and with a 2% markup, the rate would be approximately 2.89826667%, while the assessee had charged 5%, which was above this benchmark. The Tribunal upheld the CIT(A)’s decision, citing precedents where similar adjustments were deleted, emphasizing that international transactions should be evaluated using international commercial principles, specifically the LIBOR rate.

2. Disallowance Made Under Section 14A Read with Rule 8D of the Income Tax Rules:
The second issue pertained to the disallowance under Section 14A read with Rule 8D, which relates to the expenditure incurred in earning exempt income. The CIT(A) restricted the disallowance to the amount already disallowed by the assessee in its return, noting that the Assessing Officer (AO) did not provide cogent reasons for any additional disallowance. The Tribunal upheld the CIT(A)’s decision, referencing a similar case (DCIT vs. Ashis Jhunjhunwala) where the disallowance was restricted due to the lack of additional expenditure incurred by the assessee to earn the tax-free income.

3. Addition on Account of Delayed Deposit of Employees’ Contribution Toward Provident Fund (PF):
The third issue involved the addition made by the AO due to the delayed deposit of employees’ contribution towards PF. The CIT(A) allowed the assessee’s claim, referencing multiple judgments where it was held that deposits made within the due date of filing the return of income under Section 139(1) should not attract disallowance under Section 36(1)(va) read with Section 2(24)(x). The Tribunal upheld the CIT(A)’s decision, noting that the payment was made within the statutory due date for filing the return, in line with the judgment of the Calcutta High Court in the case of CIT Vs. Vijay Shree Limited.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue, affirming the CIT(A)’s decisions on all issues. The Tribunal’s judgment emphasized adherence to established precedents and international commercial principles in transfer pricing cases, reasonable application of disallowances under Section 14A, and the statutory due dates for PF contributions. The Tribunal found no merit in the Revenue’s grounds for appeal and upheld the CIT(A)’s orders in favor of the assessee.