2016 (8) TMI 1417 - AT - Income Tax

Arm's length price of interest at LIBOR 2% - whether it should be higher than LIBOR 2%, because the LIBOR is not the rate of consideration for loan transactions as it differs from country to country - Held that - Referring to Tribunal in assessee company's own case, we direct the Assessing Officer to accept the interest rate charged at LIBOR 1% as an arm's length price. Transfer Pricing Addition in respect of Corporate Guarantee - Held that - Guarantee commission at the rate of 0.5% from its Associate Enterprise can be said to be at arms length. Thus, respectfully following the decision of Tribunal in assessee company s own case, whereby issue were decided in favour of the assessee company. Accordingly, we direct the AO/TPO to compute and charge the guarantee commission at the rate of 0.5% from its Associate Enterprise. Addition on account of adjustment in respect of interest on recharactarising share application money as Loan advanced to Associate Enterprise - Held that - AR for the assessee company stated that the share application money can not be treated as loan amount merely because there is a delay in issuance of shares by the subsidiary in the name of the assessee. The assessee company further stated that the same identical issue is covered by the Hon ble Mumbai Tribunal s order in assessee's own case for A.Y. 2007-08. Share application money can not be treated as loan amount merely because there is a delay in issuance of shares by the subsidiary in the name of the assessee. Addition in respect of interest and finance expenses related to acquisition of shares of foreign subsidiary and disallowance of the same under section 36 (1) (iii) - Held that - Interest expenditure incurred by the assessee is out of commercial exigency of the business and hence should be allowed as business expenditure under section 36 (1) (iii) of the Act, and we accordingly direct the Ld. CIT (A) / AO to delete the addition for A.Y.2008-09. Expenditure towards the foreign travel of its employees for expansion of its business acquired in Canada - Held that - Since the foreign travel expenses are incurred by the assessee company in respect of the visit of its employees to overseas places in pursuance of its acquisition of call centre business in Canada and expanding the business thereof, the same should not be disallowed because all these expenses are related to business purpose and covered under the provisions of section 37 (1), therefore, we do not hesitate to direct the CIT (A) / AO to delete the said addition. In the result, appeal of the assessee is allowed on this ground.

Issues Involved:
1. Addition on account of Interest on Loan to Associate Enterprise (AE) at LIBOR+2%.
2. Transfer Pricing Addition in respect of Corporate Guarantee.
3. Addition on account of adjustment in respect of interest on recharacterizing share application money as Loan advanced to Associate Enterprise.
4. Disallowance of deduction claimed under section 35D.
5. Addition in respect of interest and finance expenses related to acquisition of shares of foreign subsidiary and disallowance under section 36(1)(iii).
6. Addition of foreign travelling expenses related to acquisition of shares of the foreign subsidiary and treating it as capital expenditure.
7. Charging of interest under section 234B.

Detailed Analysis:

1. Addition on account of Interest on Loan to Associate Enterprise (AE) at LIBOR+2%:
The assessee contended that the interest rate should be lower than LIBOR+2% as it was higher than the prevailing CUP and was in the business interest. The department argued for a higher rate than LIBOR+2%. The Transfer Pricing Officer (TPO) initially determined the Arm's Length Price (ALP) at LIBOR+9.65%, later rectified to LIBOR+2%. The CIT(A) used RBI guidelines and set the ALP at LIBOR+2%. The Tribunal, following its own precedent, directed the interest rate to be LIBOR+1% as an arm's length price, aligning with internal CUP.

2. Transfer Pricing Addition in respect of Corporate Guarantee:
The assessee provided a corporate guarantee to DBS Bank for its AE without charging a commission. The AO/TPO suggested a 3.25% charge, which the CIT(A) upheld. The Tribunal referenced its earlier decision, setting the guarantee commission at 0.5%, directing the AO/TPO to compute accordingly.

3. Addition on account of adjustment in respect of interest on recharacterizing share application money as Loan advanced to Associate Enterprise:
The assessee's share application money to its AE was recharacterized as a loan by the AO/TPO, leading to an interest adjustment. The CIT(A) confirmed this for A.Y. 2008-09 but reversed it for A.Y. 2009-10. The Tribunal, citing its previous ruling, held that share application money should not be treated as a loan due to delayed share issuance, directing the deletion of the addition.

4. Disallowance of deduction claimed under section 35D:
The assessee did not press this ground for both assessment years.

5. Addition in respect of interest and finance expenses related to acquisition of shares of foreign subsidiary and disallowance under section 36(1)(iii):
The AO disallowed interest and finance expenses related to acquiring shares in a foreign subsidiary, which the CIT(A) confirmed for A.Y. 2008-09 but reversed for A.Y. 2009-10. The Tribunal found the expenditure commercially expedient and allowable under section 36(1)(iii), directing deletion of the addition for A.Y. 2008-09 and upholding the CIT(A)'s decision for A.Y. 2009-10.

6. Addition of foreign travelling expenses related to acquisition of shares of the foreign subsidiary and treating it as capital expenditure:
The AO disallowed foreign travel expenses, treating them as capital expenditure. The CIT(A) upheld this. The Tribunal, noting the expenses were for business expansion, directed their allowance under section 37(1).

7. Charging of interest under section 234B:
This ground was deemed consequential and required no adjudication.

Conclusion:
The appeals of the revenue were dismissed, while those of the assessee were allowed in part. The Tribunal's decisions were pronounced on 25th August 2016.

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