2016 (6) TMI 636 - AT - Income Tax

Transfer pricing Adjustment - Adjustment on account of interest on loans advanced to Associated Enterprise (AE) - Held that - It cannot be open to the transfer pricing authorities to contend that this loan should be treated as a high risk loan on which high interest rate should be charged even within the range of interest rates charged by the Indian banks generally. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and direct the Assessing Officer to delete this arms length price adjustment in respect of interest charged on advances to the Associated Enterprise. See UFO Movies India Ltd Vs ACIT 2016 (2) TMI 196 - ITAT DELHI . Thus we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned arm s length price adjustment in respect of interest on loan advanced to the AE - Decided in favour of assessee Adjustment on account of Corporate Guarantee (CG) given by MIL to overseas bank in favor of its AE - Held that - Being a signatory to the tripartite support agreement, on the facts of this case, does not constitute a corporate guarantee akin to bank guarantee and, even if it could be treated as a corporate guarantee for benchmarking purposes, the corporate guarantee does not constitute an international transaction under section 92 B of the Act. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the arm s length price adjustment is unsustainable in law. We, therefore, direct the Assessing Officer to delete the same.As the basic plea of the assessee has been upheld, we see no need to deal with the alternate pleawhich, given the fact that the assessee has succeeded on the basic plea, is rendered academic and infructuous.- Decided in favour of assessee Disallowance under section 14A - Held that - As decided in assessee s own case in the immediately preceding assessment year since the assessee has earned the dividend income from the investment in shares and mutual funds and also given the working of disallowance u/s 14A on account of interest expenditure, therefore, so far as the disallowance u/s 14A is concerned, it is not the case of the assessee that no expenditure on account of interest expenditure has been incurred. Further the activity of the investment is stated to have been looked after by the Finance Department of the assessee along with the accounts and finance, therefore, there may not be a separate expenditure incurred for the purpose of earning the dividend income. However the expenditure incurred on the activity resulting taxable and non taxable income has to be apportioned as required under provisions of section 14A. We note that the total investment comprising the investment in mutual fund and growth schemes / growth mutual funds as well as investment in foreign subsidiaries. The Assessing Officer itself has excluded the investment in foreign subsidiaries because the dividend from the foreign companies is taxable. However, the growth mutual fund does not yield any dividend/exempt income, therefore, the provisions of section 14A would not apply on the investment in growth mutual funds. As regards the disallowance of administrative expenses in respect of the investment yielding exempt income the computation made under Rule 8D cannot exceed the total allocable expenditure for earning the exempt income debited the P&L Account. Accordingly, the Assessing Officer is directed to reconsider the disallowance u/s 14A by excluding the investment in the Growth mutual funds scheme and further to earmark and identify the item of expenditure debited by the assessee in the P&L Account which can be allocated in relation to earning the exempt income.. We, therefore, remit the matter to the file of the Assessing Officer for computing the disallowance under section 14A r.w.r. 8D in the light of the above directions which will also apply mutatis mutandis to this assessment year as well. Disallowance of expenses incurred on DRUPA exhibition - Held that - Here is a case in which expenditure is incurred in the revenue field, though the occasion for incurring such an expenditure comes only once in four years, and the period of its benefit cannot be ascertained with any reasonable degree of certainty. Unless even the precise period of benefit ca be reasonably ascertained, there cannot be any occasion for spreading over the expenditure over the period of benefit.There are large number of judicial precedents that participation costs in the trade exhibitions are inherently in the nature of revenue expenses, as these are marketing expenses in nature, which are allowed in the year in which the expenses are incurred. We are in considered agreement with this school of thought. Entire expenditure on participation in Drupa 2008 should be allowed as revenue expenditure.- Decided in favour of assessee Disallowance of an amount being reimbursement of expenses incurred by subsidiary of the Appellant - non deduction of tds - Held that - The law in this regard is now well settled in the case of G E Technology Centre Ltd Vs CT 2010 (9) TMI 7 - SUPREME COURT OF INDIA , and unless the payment is shown to have an embedded income, no tax deduction requirements under section 195 come into play. There is nothing on record to show taxability of these payments. The subsidiary does not have a PE in India, and, therefore, the amounts paid to the subsidiary, even if in the nature of the business profits, cannot be brought to tax in India. The payment is not for any services involving a transfer of technology, and, therefore, it cannot be brought to tax as fees for included services. There is no question of the payment being in the nature of royalty . The Assessing Officer has not even made out any case of taxability of the income in question. The disallowance under section 40(a)(i), as made out by the Assessing Officer, is also thus legally unsustainable. Thus the disallowance is devoid of legally sustainable basis - Decided in favour of assessee Disallowance of foreign currency transaction loss under section 43A - Held that - As pointed out by the CIT(A), similar disallowance was confirmed by the DRP for the assessment year 2010-11 which has already come up for scrutiny before a coordinate bench of this Tribunal. On our perusal of the order dated 16th September 2015, however, we did not find any reference to this disallowance. Since it is a factual matter which permeates from year to year, in our considered view, it will be appropriate to take into account the stand taken by the coordinate benches on this issue in the other years, and whether or not the matter has reached finality one way or the other. We, therefore, refrain from making any observations on merits of the matter and remit the matter to the file of the CIT(A) for fresh adjudication in the light of, inter alia, the findings in the other assessment years and such arguments as the assesse may take before him. All issues, including the issue of consistency, the issue of additional depreciation and the impact of ASS 11, are left open. The CIT(A), while so deciding the matter afresh, will give yet another opportunity of hearing to the assessee and shall decide the matter by way of a speaking order, in accordance with the law, on all the points raised by the assessee. Interest under section 234C - Held that - Interest under section 234C is to be levied on the returned income and not the assessed income. See Bombay Gymkhana Ltd Vs ITO 2007 (10) TMI 461 - ITAT MUMBAI

Summary

Issues Involved:

1. Adjustment of ?1,35,05,896 on account of interest on loans advanced to Associated Enterprise (AE).
2. Adjustment of ?2,31,71,100 on account of Corporate Guarantee (CG) given by MIL to overseas bank in favor of its AE.
3. Disallowance under section 14A of the Act.
4. Disallowance of expenses of ?2,99,79,357 incurred on DRUPA exhibition.
5. Disallowance of an amount of ?1,21,27,829 being reimbursement of expenses incurred by subsidiary of the Appellant.
6. Disallowance of foreign currency transaction loss of ?6,57,75,845 under section 43A of the Act.
7. Levy of interest under section 234B of the Act.
8. Levy of interest under section 234C of the Act.

Issue-wise Detailed Analysis:

1. Adjustment of ?1,35,05,896 on account of interest on loans advanced to Associated Enterprise (AE):

The assessee challenged the adjustment made by the AO/TPO under Section 92CA(3) of the Act. The assessee had granted loans to its AE, MDGM USA, at an interest rate of 5% p.a. based on six months LIBOR + 200 bps. The TPO, however, adopted a rate of 17.22% based on the average yield on unrated bonds for the financial year 2008-09. The Tribunal referenced previous decisions in the assessee's own case for earlier assessment years, where it was held that the interest rate charged should be benchmarked with LIBOR + 2% as Arm's Length. Consequently, the Tribunal directed the AO to delete the impugned arm’s length price adjustment of ?1,35,05,896.

2. Adjustment of ?2,31,71,100 on account of Corporate Guarantee (CG) given by MIL to overseas bank in favor of its AE:

The assessee provided a corporate guarantee to PNC Bank for its AE, MGDM USA. The TPO determined the ALP at 6% and made an adjustment of ?2,31,71,100. The Tribunal noted that in previous assessment years, a coordinate bench had held that the arm’s length price for guarantee commission should be 0.5%. The Tribunal further observed that the issuance of corporate guarantees is a shareholder activity and does not constitute an international transaction under section 92B of the Act. Consequently, the arm’s length price adjustment of ?2,31,71,100 was directed to be deleted.

3. Disallowance under section 14A of the Act:

The issue pertained to the disallowance under section 14A r.w.r. 8D. The Tribunal noted that investments in growth mutual funds, which do not yield any dividend/exempt income, should be excluded from the computation of disallowance. The matter was remitted to the AO for computing the disallowance in light of the directions provided.

4. Disallowance of expenses of ?2,99,79,357 incurred on DRUPA exhibition:

The assessee incurred expenses on participating in the DRUPA exhibition, which occurs once every four years. The AO disallowed 3/4th of the expenses, treating them as capital expenditure. The Tribunal held that the entire expenditure should be allowed as revenue expenditure in the year incurred, as the concept of deferred revenue expenditure is alien to the scheme of Section 37(1). The disallowance of ?2,99,79,357 was directed to be deleted, with a note that if the AO had allowed the deduction spread over subsequent years, the deduction should be withdrawn accordingly.

5. Disallowance of an amount of ?1,21,27,829 being reimbursement of expenses incurred by subsidiary of the Appellant:

The assessee reimbursed its US subsidiary for marketing expenses incurred on its behalf. The AO disallowed the reimbursement on the grounds of non-deduction of tax at source. The Tribunal noted that the payment was a reimbursement without any embedded income and, therefore, not subject to tax deduction at source. The disallowance of ?1,21,27,829 was directed to be deleted.

6. Disallowance of foreign currency transaction loss of ?6,57,75,845 under section 43A of the Act:

The assessee incurred a foreign currency translation loss due to the restatement of loan liability. The AO disallowed the loss under section 43A, treating it as a capital loss. The Tribunal remitted the matter to the CIT(A) for fresh adjudication in light of findings in other assessment years and arguments presented by the assessee.

7. Levy of interest under section 234B of the Act:

The assessee sought consequential relief for the levy of interest under section 234B. The Tribunal allowed the ground to the extent of consequential relief.

8. Levy of interest under section 234C of the Act:

The Tribunal noted that interest under section 234C should be levied on the returned income and not the assessed income, in line with the decisions of coordinate benches. The ground was allowed accordingly.

Conclusion:

The Tribunal allowed the appeal partly, directing the deletion of several disallowances and adjustments, remitting some issues for fresh adjudication, and granting consequential relief for the levy of interest under sections 234B and 234C.