2019 (9) TMI 920 - HC - Income Tax

TP Adjustment - average rate of interest of 11.30% during the year - series of debentures issued in different years was a separate international transaction and each transaction was required to be benchmarked separately - HELD THAT - Tribunal in the impugned judgment has made certain observations suggesting that the identification of the tested party is imperative while applying other methods from comparison for transfer pricing and not while applying CUP method. Our non-consideration of the revenue s Appeal in the present case, should not be seen as putting our seal on such observations of the tribunal. We keep such question open to be examined in an appropriate case. In the present case, independent of such observations of the tribunal, we find that the conclusions arrive at, are based on evidence on record which conclusions call for no interference. Disallowance u/s 14A computed as per Rule 8D - HELD THAT - The issue is no longer resintigra. The facts are that the assessee had not earned any exempt, income during the year under consideration. As held earlier Delhi High Court which judgment is also followed repeatedly by our Court, in case of Chemvinvest Ltd. Vs. Commissioner of Income Tax 2015 (9) TMI 238 - DELHI HIGH COURT in such a case disallowance of expenditure under section 14A of the Act would not be permissible. The decision of Delhi High Court was carried in the appeal by the revenue. The SLP has been dismissed by the Supreme Court. Addition on account of interest accrued from three parties had become NPA - HELD THAT - As decided in BAJAJ FINANCE LIMITED 2019 (4) TMI 378 - BOMBAY HIGH COURT interest on NPAs cannot be taxed on accrual basis. It was noted that NBFC would be governed by the directions issued by the Reserve Bank of India and RBI directives provided that under certain circumstances, a loan or advance would be treated as NPA. The Court on the real income theory held that such interest would not be taxable.

Summary

Issues Involved:
1. Arm's Length Price (ALP) of interest rate on debentures issued to Associate Enterprises (AEs).
2. Disallowance of expenditure under Section 14A of the Income Tax Act.
3. Taxation of interest on Non-Performing Assets (NPAs) on an accrual basis.

Detailed Analysis:

1. Arm's Length Price (ALP) of Interest Rate on Debentures Issued to Associate Enterprises (AEs):

The primary issue pertains to the assessment year 2010-2011, involving a Non-Banking Finance Company (NBFC) that raised funds through debt instruments from group companies by issuing compulsory convertible debentures (CCDs). The Transfer Pricing Officer (TPO) had made adjustments, arguing that the interest paid by the assessee to its AEs was not at Arm's Length Price (ALP). The Tribunal, however, deleted the addition, emphasizing that the interest rate must be based on economic and market factors affecting Indian currency and not on foreign currency rates such as USD Corporate Bond Rates or LIBOR.

The Tribunal highlighted that the interest rate should be determined based on the currency in which the loan is repaid, aligning with the Delhi High Court's decision in Cotton Naturals P Ltd. The Tribunal also found the assessee's benchmarking analysis, which used data from BSE, to be reliable, concluding that the average interest rate of 11.30% was within the arm's length range. The High Court agreed with the Tribunal's view, noting that the assessee's business involved high-risk investments in financially distressed companies, justifying the interest rates.

2. Disallowance of Expenditure Under Section 14A of the Income Tax Act:

The second issue concerns the disallowance of expenditure under Section 14A of the Income Tax Act when the assessee had not earned any exempt income during the year. The Tribunal, following the Delhi High Court's judgment in Chemvinvest Ltd., held that disallowance under Section 14A would not be permissible in such cases. This view was upheld by the High Court, noting that the Supreme Court had dismissed the Revenue's Special Leave Petition (SLP) against the Delhi High Court's decision.

3. Taxation of Interest on Non-Performing Assets (NPAs) on an Accrual Basis:

The third issue involves the taxation of interest on NPAs on an accrual basis. The Tribunal observed that the assessee, following RBI directives, did not recognize interest on NPAs on an accrual basis but offered it to tax on actual receipt. The High Court referred to its earlier judgment in Bajaj Finance Limited, which held that interest on NPAs would not be chargeable to tax on mere accrual, aligning with the Supreme Court's decision in Southern Technologies Ltd. The Court emphasized that the income from interest on NPAs should be recognized only when it is actually realized, in accordance with RBI guidelines.

Conclusion:

The High Court dismissed the Revenue's appeal, affirming the Tribunal's decisions on all three issues. The Court upheld that the interest rate on debentures issued to AEs should be based on Indian market conditions, disallowance under Section 14A is not permissible without exempt income, and interest on NPAs should be taxed on actual receipt rather than accrual. The Court's rulings were consistent with established legal principles and precedents, ensuring that the assessee's practices aligned with regulatory guidelines and judicial interpretations.