2016 (5) TMI 166 - AT - Income Tax

Transfer pricing adjustment on account of notional interest on the loans and advances given to the associated enterprises - Held that - We find that this issue had come for consideration before the Tribunal in the assessment years 2007-08 and 2008-09. The Tribunal had taken note of the fact that the assessee had also received loans/advances on which the assessee did not pay interest. For verification the matter was set aside to the Assessing Officer. Following the same reasoning, we also set aside the matter to the file of the Assessing Officer with a direction to decide this issue on similar lines Transfer pricing adjustment towards notional guarantee commission chargeable for the guarantee extended to its associated enterprises - Held that - We find that this issue is permeating through in all the years. This fact has been noted by the Tribunal in its order for the assessment year 2008- 09, vide paragraphs 28 to 31, wherein after referring the Tribunal order in the assessee s own case right from the assessment years 2005-06 to 2007- 08, held that commission chargeable for guarantee commission by the assessee to its associated enterprises should be taken at 0.5 per cent. as the arm s length price. Thus, respectfully following the judicial precedence which is based on the same facts applicable in this year also, we direct the Assessing Officer to take 0.5 per cent. as guarantee commission to be chargeable from associated enterprise in computing the arm s length price. Disallowance under section 40(a)(ia) - Held that - The payee has furnished the return of income under section 139 and has taken into account such sum for computing the income in such return of income and has paid taxes then, the assessee cannot be treated as assessee-in-default within the meaning of section 201(1) and, accordingly, the assessee shall be deemed to have deducted the tax and, accordingly, no disallowance under section 40(a)(ia) can be made. Such a provision has been brought in the statute to curb the mischief and, therefore, it has to be reckoned as curative in nature and should be given retrospective effect. Accordingly, the Assessing Officer is directed to clarify this issue and grant the relief to the assessee. On the second contention also, we agree with the learned counsel that if the assessee has not claimed any such as an expenditure, then there is no question of disallowance under section 40(a)(ia), the Assessing Officer shall also verify this contention and if it is found that no such expenditure has been debited then there is no question of any disallowance under this section. Disallowance under section 14A read with rule 8D - Held that - There is no dispute that all the investments have been made in the subsidiary company as the strategic investment so as to get controlling interest in such subsidiaries. The investment was not made for earning of any dividend income. Besides this, the dividend income itself is ₹ 7,24,508, therefore, disallowance under section 14A cannot be more than the exempt income especially in view of the decision of the hon ble Delhi High Court in the case of Cheminvest Ltd. v. CIT 2015 (9) TMI 238 - DELHI HIGH COURT wherein, the hon ble High Court has held that, if there is no dividend income, then there cannot be any corresponding disallowance. On the same principle, if the dividend income is ₹ 7.24 lakhs, then the disallowance cannot be more than that. Accordingly, we hold that such a huge disallowance of ₹ 2,21,51,600 is uncalled for and therefore, we direct the Assessing Officer to restrict the disallowance to ₹ 7,24,508. - Decided partly in favour of assessee in part

Issues Involved:
1. Jurisdiction of Transfer Pricing proceedings under section 92CA(1).
2. Assessment of income at Rs. 59,66,67,420.
3. Transfer Pricing adjustments and compliance with section 92A(3).
4. Adjustment of Rs. 27,05,83,190 for international license revenue.
5. Adjustment of Rs. 8,02,05,696 for international license revenue assignment.
6. Adjustment of Rs. 4,30,240 for notional interest on loans to associated enterprises.
7. Adjustment of Rs. 1,01,27,900 for notional guarantee commission charges.
8. Disallowance of Rs. 6,92,49,161 under section 40(a)(ia) for non-deduction of TDS.
9. Addition of Rs. 2,23,51,600 under section 14A read with rule 8D.
10. Addition of Rs. 12,33,521 for estimated business expenditure.

Detailed Analysis:

1. Jurisdiction of Transfer Pricing Proceedings:
The assessee contended that the transfer pricing proceedings initiated under section 92CA(1) were without jurisdiction. However, this ground was not pressed by the assessee and was dismissed as not pressed.

2. Assessment of Income:
The assessee challenged the assessment of income at Rs. 59,66,67,420. This issue was tied to the various transfer pricing adjustments and other disallowances contested by the assessee.

3. Transfer Pricing Adjustments Compliance:
The assessee argued that the Transfer Pricing Officer (TPO) failed to follow section 92A(3) provisions, rendering the adjustments invalid. This ground was also not pressed and was dismissed.

4. Adjustment for International License Revenue:
The assessee's ground regarding the adjustment of Rs. 27,05,83,190 was dismissed as infructuous since the Dispute Resolution Panel (DRP) had deleted the addition based on a corrigendum and a previous Tribunal order.

5. Adjustment for License Revenue Assignment:
Similarly, the adjustment of Rs. 8,02,05,696 was dismissed as infructuous due to the DRP's corrigendum deleting the addition following the Tribunal's previous order.

6. Notional Interest on Loans:
The assessee challenged the adjustment of Rs. 4,30,240 for notional interest on loans to associated enterprises. The Tribunal noted that the issue was previously set aside for verification, and following the same reasoning, it was remanded to the Assessing Officer for re-examination.

7. Notional Guarantee Commission Charges:
The assessee contested the adjustment of Rs. 1,01,27,900 for notional guarantee commission charges. The Tribunal directed that the commission should be taken at 0.5% as the arm's length price, following previous Tribunal decisions.

8. Disallowance under Section 40(a)(ia):
The assessee argued against the disallowance of Rs. 6,92,49,161 for non-deduction of TDS on agency commission. The Tribunal held that if the payee had paid taxes on the amount, no disallowance should be made, following the retrospective application of the proviso to section 40(a)(ia). The Assessing Officer was directed to verify this and the claim that the expenditure was not debited to the profit and loss account.

9. Addition under Section 14A:
The assessee challenged the addition of Rs. 2,23,51,600 under section 14A read with rule 8D. The Tribunal held that the disallowance should not exceed the exempt income of Rs. 7,24,508 and directed the Assessing Officer to restrict the disallowance accordingly.

10. Estimated Business Expenditure:
The ground regarding the addition of Rs. 12,33,521 for estimated business expenditure was not pressed and dismissed.

Revenue's Appeal:

1. Interest on Loan to Associated Enterprises:
The Revenue contested the DRP's decision to apply a 12.25% interest rate instead of 14.5%. This issue was remanded to the Assessing Officer for re-examination in line with the Tribunal's earlier directions.

2. Adjustment for Debit Balance:
The Revenue challenged the deletion of the 14.5% adjustment for the debit balance in the associated enterprise's account. The Tribunal upheld the DRP's deletion, following its previous decisions.

3. Commission for Corporate Guarantee:
The Revenue disputed the DRP's reduction of the guarantee commission rate to 1.5% from 3%. The Tribunal upheld the rate of 0.5% as the arm's length price, dismissing the Revenue's ground.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was partly allowed for statistical purposes. The order was pronounced on February 9, 2016.

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