2018 (4) TMI 862 - AT - Income Tax

Transfer pricing adjustment - loans advanced to AE - applicability of rate - Held that - Hon ble High Court of Bombay in CIT Vs. the Great Eastern Shipping Co. Ltd. 2017 (6) TMI 1207 - BOMBAY HIGH COURT has upheld the action of the Tribunal wherein it was held that arm s length price in the case of loans advanced to AE would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. The action of the assessee in adopting the bank rate prevailing in Australia is correct and the AO erred in adopting the Indian bank rate. The loan amount was given in Australian currency and as per the promissory note the AE has to return the amount in Australian Dollar. Therefore, applying the ratio laid by the Hon ble High Courts discussed above, we hold that there was no necessity of any arm s length adjustment in this case. - Decided in favour of assessee Addition u/s. 14A read with Rule 8D - Held that - Coming to the discussion u/s. 14A read with Rule 8D(2)(iii) the settled position as on date is that only while computing Rule 8D(2)(iii) investments which have yielded dividend should only be taken into account while making the computation under Rule 8D(2)(iii) i.e. investment in dividend bearing scrips only to be taken into for consideration. Therefore, we remand the matter back to the file of AO to decide this issue afresh keeping in mind the aforesaid observation of ours and in accordance to law. The assessee is at liberty to file evidence to substantiate its case as regards the additional ground of strategic investment is concerned. Long Term Capital Gain/loss carry forward against the amount computed by the AO as per the provisions of sections 46, 48 and 49 of the Act - assets incurred or borne by the previous owner - Held that - CIT(A) relying on the Tribunal s decision in the case of Smt. Mina Deogun Vs. ITO reported in (2007 (8) TMI 375 - ITAT CALCUTTA-E ) as well as DCIT Vs. Manjula J Shah 2009 (10) TMI 646 - ITAT MUMBAI which was later upheld by the Hon ble Bombay High Court 2011 (10) TMI 406 - BOMBAY HIGH COURT has decided in favour of the assessee and directed the AO to adopt the figure of long term capital loss to be carried forward to the next year at ₹ 4,56,14,076/- instead of ₹ 3,75,80,707/-. We note that sec. 49 of the Act deals with the manner of computation of the cost of acquisition of capital asset. Sec. 49(1)(iii)(e) of the Act specifically states that where the capital asset has become the property of the assessee by virtue of transfer referred to in clause (vi) of sec. 47 of the Act, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it (and increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be) - the indexation of cost has to be done from the original date when the shares were first acquired by the first previous owner - CIT(A) has rightly adjudicated the issue and has given relief to the assessee - Decided against revenue.

Summary

Issues Involved:
1. Transfer Pricing Adjustment.
2. Proportionate Management Expenses under section 14A.
3. Long Term Capital Gain (Loss) Carry Forward.
4. Computation of Long Term Capital Gain (Loss) and Indexation.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue concerns the determination of the arm's length price for an interest-free loan of AUD 500,000 given by the assessee to its associated enterprise (AE) Technico Pty. Ltd., Australia. The assessee used the Comparable Uncontrolled Price (CUP) method and adopted an 8.91% interest rate, which was the prevailing rate in Australia, resulting in a computed arm's length interest of AUD 44,550 (?15,75,444). The Assessing Officer (AO) disagreed, deeming a 10% interest rate as reasonable, thereby adding ?1,92,731 as further transfer pricing adjustment. The CIT(A) upheld the AO's decision, but the Tribunal found that the interest rate should be based on the currency of the loan, as supported by the Hon'ble Delhi High Court in CIT Vs. Cotton Naturals (I) (P) Ltd. (2015) and the Hon'ble Bombay High Court in CIT Vs. The Great Eastern Shipping Co. Ltd. The Tribunal concluded that the assessee's adoption of the Australian bank rate was correct, directing the deletion of the addition made by the AO.

2. Proportionate Management Expenses under section 14A:
The AO disallowed ?3,29,05,581 under Rule 8D for expenses related to exempt income, which the CIT(A) restricted to ?1,22,79,861, the net amount of expenditure claimed by the assessee. The Tribunal noted that the assessee's income streams included interest, dividend, brokerage, profit on sale of investments, and lease rentals. The Tribunal remanded the matter back to the AO to re-evaluate the disallowance under Rule 8D(2)(iii), excluding strategic investments and considering only investments that yielded dividend income, in line with the principles laid down by the Hon'ble Supreme Court in CIT vs Maxopp Investment Ltd.

3. Long Term Capital Gain (Loss) Carry Forward:
The AO recomputed the long-term capital loss at ?3,75,80,707 instead of ?4,56,14,076 claimed by the assessee, by considering the indexation from the date of amalgamation of the companies. The CIT(A) accepted the assessee's claim, relying on the Tribunal's decision in Smt. Mina Deogun Vs. ITO and the ITAT Special Bench decision in DCIT Vs. Manjula J Shah, which was upheld by the Hon'ble Bombay High Court. The Tribunal confirmed the CIT(A)'s decision, stating that the indexation should be from the original date when the shares were first acquired by the first previous owner.

4. Computation of Long Term Capital Gain (Loss) and Indexation:
The AO's computation of long-term capital loss was based on the date of amalgamation, whereas the assessee argued for indexation from the original acquisition date by the first previous owner. The Tribunal upheld the CIT(A)'s decision, affirming that the indexation should be from the original date of acquisition by the first previous owner, as per the provisions of sections 46, 48, and 49 of the Income Tax Act.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the transfer pricing adjustment and remanded the issue of proportionate management expenses under section 14A back to the AO for re-evaluation. The Tribunal dismissed the revenue's appeal concerning the computation and carry forward of long-term capital loss, confirming the CIT(A)'s decision to adopt the indexation from the original acquisition date by the first previous owner. Both appeals were partly allowed for statistical purposes.