2017 (4) TMI 396 - AT - Income Tax

Disallowance u/s 14A - held that - The issue involved in the present case is squarely covered by the order passed by the Tribunal in the case of the assessee itself for A.Y. 2001-02 and A.Y. 2002-03 wherein the coordinate bench of the Tribunal had held that if an assessee is having substantial interest free funds which far exceeds the amount of investments made in tax free securities therein no disallowance of interest under Sec. 14A would be called for in the hands of the assessee. We further find that the aforesaid issue as averred by the Ld. A.R stands settled and is found to be no more res integra in light of the judgments of the Hon ble jurisdictional High Court in the case of CIT Vs. HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT).Thus in the backdrop of the aforesaid facts read in light of the settled position of law we herein restore the matter to the file of the A.O who is directed to verify the aforesaid contention of the Ld. A.R that the interest free funds by way of share capital reserves and surplus and cash accruals over the years so available with the assessee during the year under consideration far exceeded the amount of investments in the tax free securities and in case the said claim is found to be in order then in light of our aforesaid observations no disallowance with respect to the interest expenditure would be called for in the hands of the assessee under Sec. 14A of the Act . Disallowance of interest on outstanding advances to subsidiary companies - ALP - Held that - Principle of commercial expediency would not come into play and as the assessee had not charged interest on the outstanding receivables from the overseas subsidiaries the ALP of the same had rightly been determined by the A.O/TPO. Having held so we now advert to the rate of interest which is liable to be attributed to such transactions entered into by the assessee with its AE s. We are of the considered view that finding no reason to take a departure from the view taken by the Tribunal in the case of the assessee in the aforesaid preceding years the disallowance of interest during the year on the similar footing be computed at LIBOR 300 points. We thus in the backdrop of our aforesaid observations herein direct the A.O to compute the disallowance of notional interest on advances given by the assessee to its overseas subsidiaries at LIBOR 300 points for the year under consideration. We thus in order to facilitate giving effect to our aforesaid directions therein restore the aforesaid issue to the file of the A.O who is directed to recompute the disallowance of interest as directed hereinabove. Disallowance on notional basis of interest in respect of overseas investments made in its foreign subsidiaries - Held that - The coordinate bench of the Tribunal while disposing of the appeals of the assessee for A.Y 2003-04 and A.Y 2004-05 deleted the disallowance on notional basis of interest in respect of such overseas investments after appreciating the contentions advanced by the assessee on both the issues which had been averred by the assessee in the course of the proceedings for the year under consideration viz. (i). Investments had been made by the assessee out of commercial expediency and wholly and exclusively for the purposes of its business and (ii).The investments were made by the assessee out of its own funds. We thus in the absence of any averment by the Ld. D.R which could go to prove that the facts involved in the case of the assessee were distinguishable as against those for the aforesaid preceding years or could go to dislodge the aforesaid two fold contention of the assessee in support of its contention that no disallowance on notional basis of interest in respect of the overseas investments made by the assessee was called for in the hands of the assessee thus we delete the disallowance made by the A.O. - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income-tax Act.
2. Addition towards Transfer Pricing adjustments under Section 92CA(3) of the Income-tax Act.
3. Disallowance of interest on investments in overseas companies.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act:

The assessee challenged the disallowance of Rs. 94,96,899/- under Section 14A. The DRP had directed the AO to ascertain the proximate connection between the expenditure incurred and the income not forming part of total income. The AO, however, proceeded without establishing this connection and disallowed the amount arbitrarily. The assessee argued that it had sufficient interest-free funds, and no disallowance was warranted. The Tribunal referred to its earlier orders in the assessee’s case for A.Y. 2001-02 and A.Y. 2002-03, and the Bombay High Court judgment in CIT Vs. Reliance Utility and Power Ltd. The Tribunal restored the matter to the AO to verify the availability of interest-free funds and reconsider the disallowance in light of these observations. Additionally, the Tribunal noted that the only dividend income received was Rs. 600/-, which was not part of the investments in the balance sheet, thus possibly negating the need for disallowance under Section 14A as per the Delhi High Court’s judgment in Cheminvest India Vs. CIT. The ground was allowed for statistical purposes.

2. Addition towards Transfer Pricing adjustments under Section 92CA(3):

The AO made an addition of Rs. 29,83,988/- for notional interest on advances to AEs, which was upheld by the DRP. The assessee contended that these were trade advances made out of commercial expediency, citing the Supreme Court’s judgment in S.A. Builders Vs. CIT. The Tribunal noted that similar issues in the assessee’s case for A.Y. 2003-04 and A.Y. 2004-05 had been resolved by applying the LIBOR rate plus 300 points. The Tribunal directed the AO to recompute the disallowance of notional interest at LIBOR + 300 points, restoring the matter to the AO for this purpose. The ground was partly allowed.

3. Disallowance of interest on investments in overseas companies:

The AO disallowed Rs. 6,46,24,948/- on a notional basis towards interest on investments in overseas companies, following DRP’s directions. The assessee argued that the investments were made out of commercial expediency and from its own funds, thus no disallowance was warranted. The Tribunal referred to its consolidated order for A.Y. 2003-04 and A.Y. 2004-05, where it had deleted similar disallowances. The Tribunal found no distinguishing facts for the current year and deleted the disallowance, following the same reasoning. The ground was allowed.

Conclusion:

The appeal was partly allowed, with directions to the AO to reconsider and verify specific aspects of the disallowances and additions made. The Tribunal emphasized the need for adherence to established judicial precedents and proper verification of facts before making disallowances. The order was pronounced in the open court on 31/03/2017.