2018 (9) TMI 1909 - AT - Income Tax

Upward adjustment towards Arm s Length interest on loan given to associated enterprises - CIT(A) while determining the ALP of interest on loan given to AE held that (Comparable Uncontrolled Price) CUP is the Most Appropriate Method (MAM) - HELD THAT - The matter is well covered by the general consensus among the Hon ble ITAT Benches that international transactions involving cross- border country loans to AE can be bench marked against LlBOR as also supported by the RBI s circular that a spread ranging from 1 % - 2% over LIBOR is reasonable or advancing loans. Therefore in deciding the matter it is held that an interest rate of LIBOR plus 2% can be held to be Arm s length rate of interest and as for the case at hand the interest charged by the assessee from its AE is higher than LIBOR plus 2% the adjustment made by the ld. TPO in the case is held to be unjustified and not sustainable. Ground No. 1 of the revenue is dismissed. Determination of ALP on corporate guarantee on loans availed by AE - International transaction - HELD THAT - CIT(A) held that the TP Provisions do not apply to the transactions of providing corporate guarantee prior to the amendment brought in by way of an explanation to Section 92B of the Act by Finance Act 2012. Further at page 45 he held that the methodology applied by the TPO in computing the ALP of the transactions was without reasonable and justifiable basis. We find that the findings of the Ld. CIT(A) are in line with the decision of the Kolkata C Bench of the Tribunal in the case of M/s. EIH Ltd. vs. DCIT 2018 (1) TMI 1372 - ITAT KOLKATA - Ground No. 2 of the revenue is dismissed. Disallowance made u/s 14A r.w.r. 8D - excess of own funds - HELD THAT - CIT(A) considered the disallowance u/s 14A r.w.r. 8D(ii) and came to a factual conclusion that the assessee has adequate interest free funds totalling to 49, 367.68 Lakhs to justify the investment of 40.02 Lakhs. He applied the decision of CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT and other decisions and held that no disallowance can be made u/s 14A r.w.r. 8D(ii). Ground No. 3 of the revenue is dismissed. Accrual of income - accrued interest - real income theory application - HELD THAT - The amounts given to three parties namely Smt. Sadhna Bhagwat Ranglal Modi Sons and Durga Prasad Agarwal have become non-realisable. Once these loans have become Non-Performing-Assets and when the realization of the principal itself is uncertain the question of recognizing interest does not arise. CIT(A) in our view rightly applied the real income theory and deleted the addition. We find no infirmity in this action of the ld. CIT(A) and uphold the same. Accordingly Ground No. 4 of the revenue is dismissed.

Summary

Issues Involved:
1. Upward adjustment towards arm’s length interest on loan given to associated enterprise.
2. Determination of arm’s length price (ALP) on corporate guarantee on loans availed by associated enterprise.
3. Disallowance under Section 14A read with Rule 8D.
4. Addition towards accrued interest on loan.

Issue-wise Detailed Analysis:

1. Upward Adjustment towards Arm’s Length Interest on Loan Given to Associated Enterprise:
The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for calculating the arm’s length interest rate on a loan advanced by the assessee to its Associate Enterprise (AE), EuroAsian Ventures FZE. The TPO applied the Comparable Uncontrolled Price (CUP) method and benchmarked the interest rate against local rates, arriving at an arm’s length interest rate of 20.15%, resulting in an upward adjustment of ?6,97,64,000/-. The assessee contended that it had charged 5% interest, which was at arm’s length when benchmarked against the US LIBOR. The CIT(A) determined that the CUP method was appropriate and held that an interest rate of LIBOR plus 2% was reasonable. Since the interest charged by the assessee was higher than LIBOR plus 2%, the adjustment made by the TPO was deemed unjustified. The Tribunal upheld the CIT(A)’s decision, finding no infirmity in the same and dismissing the revenue’s ground.

2. Determination of ALP on Corporate Guarantee on Loans Availed by Associated Enterprise:
The CIT(A) held that the Transfer Pricing (TP) provisions did not apply to transactions of providing corporate guarantees prior to the amendment by the Finance Act, 2012. The CIT(A) also found the TPO’s methodology for computing the ALP of the transactions to be without a reasonable basis. The Tribunal referred to the decision in M/s. EIH Ltd. vs. DCIT, which clarified that the issuance of a corporate guarantee by a parent company to its AE, without any consideration, does not constitute an international transaction under Section 92B(1) of the Act. The Tribunal upheld the CIT(A)’s order, dismissing the revenue’s ground.

3. Disallowance under Section 14A Read with Rule 8D:
The CIT(A) found that the assessee had sufficient interest-free funds amounting to ?49,367.68 Lakhs to justify the investment of ?40.02 Lakhs. Applying the decision in CIT vs. HDFC Bank Ltd. and other relevant decisions, the CIT(A) concluded that no disallowance could be made under Section 14A read with Rule 8D(ii). The Tribunal found no infirmity in the CIT(A)’s finding and upheld the same, dismissing the revenue’s ground.

4. Addition towards Accrued Interest on Loan:
The CIT(A) applied the ‘real income theory’ and deleted the addition of ?9,69,178/- towards accrued interest on loans given to three parties, which had become non-realisable. The CIT(A) reasoned that once the loans had become Non-Performing Assets (NPAs) and the realization of the principal was uncertain, recognizing interest was not warranted. The Tribunal upheld the CIT(A)’s action, finding no infirmity, and dismissed the revenue’s ground.

Conclusion:
The appeal of the revenue was dismissed, with the Tribunal upholding the CIT(A)’s decisions on all four grounds.