2020 (1) TMI 781 - AT - Income Tax

TP Adjustment - interest free loan given to its associated enterprise (AE) - arms length rate of interest - HELD THAT- As decided in THE GREAT EASTERN SHIPPING CO. LTD. 2017 (6) TMI 1207 - BOMBAY HIGH COURT 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 d the AO erred in adopting the India bank rate. The loan amount was given in Australia currency as per the promissory note the AE has to return the amount in Australia Dollar. We hold that there was no necessity of ALP adjustment in this case therefore, we direct the deletion of the addition made on this count. Lower authorities have erred in going by the penal interest stipulation in the loan agreement to the corresponding interest benchmark in the overseas market. We go by judicial consistency to delete the impugned identical transfer pricing adjustment(s) Disallowance u/s 14A r.w.r. 8D - assessee has suo moto made the disallowance - HELD THAT - As already come on record that the impugned sec. 14A r.w.s. 8D disallowance has to be computed going by apportionment formula by determining the expenditure incurred for deriving business as well as exempt income. We therefore deem it appropriate to restore the instant administrative expenditure disallowance issue back to the Assessing Officer for computation of administrative expenditure disallowance going by the proportionate formula as per this tribunal s co-ordinate bench s decision MARUTI TRADERS AND INVESTORS VERSUS ACIT, CIRCLE-31, KOLKATA 2019 (1) TMI 258 - ITAT KOLKATA . We reiterate that we are dealing with indirect head of expenditure which not be strictly apportioned between regular business activities for deriving exempt income. We accordingly accept assessee s identical grievance raised in both assessment year(s) for statistical purposes in above terms. Education cess and secondary higher education cess u/s 40(a)(ii) r.w.s. 37(1) - HELD THAT - As decided in Chambal Fertilizers Chemicals Ltd.. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT holds that the relevant statutory provision to this effect as well as the CBDT s Circular issued way back on 18.05.1967 do not include Cess . Learned co-ordinate bench s decision in ITC Ltd. 2018 (11) TMI 1611 - ITAT KOLKATA also decided the very issue in assessee s favour. We therefore decline the Revenue s arguments supporting the impugned disallowance and direct the Assessing Officer to grant necessary relief to the assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment on interest-free loans to overseas associate enterprise.
2. Disallowance under Section 14A read with Rule 8D for administrative expenditure.
3. Allowability of education cess and secondary higher education cess under Section 40(a)(ii) read with Section 37(1) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment on Interest-Free Loans to Overseas Associate Enterprise:
The assessee challenged the correctness of transfer pricing adjustments of ?8,19,134/- and ?6,27,062/- for the assessment years 2010-11 and 2011-12, respectively. These adjustments pertained to interest-free loans of AUD 5,00,000 provided to an overseas associate enterprise, Technico Pty Ltd., Australia. The assessee had adopted the Comparable Uncontrolled Price (CUP) method, using an arm's length interest rate of 8.91% prevailing in Australia during 2008, which was not accepted by the Assessing Officer (AO). The AO instead applied a 10% interest rate based on the loan agreement's penal clause, resulting in additional adjustments. The CIT(A) upheld the AO's decision. However, the Tribunal found that the interest rate should be based on the currency in which the loan was to be repaid (AUD) and not the Indian bank rate. Citing judgments from the Hon'ble Delhi High Court and the Hon'ble Bombay High Court, the Tribunal held that there was no necessity for any arm's length adjustment and directed the deletion of the impugned adjustments.

2. Disallowance Under Section 14A Read with Rule 8D for Administrative Expenditure:
The assessee contested disallowances of ?98,47,788/- and ?34,79,136/- for the assessment years 2010-11 and 2011-12, respectively, relating to administrative expenditure under Section 14A read with Rule 8D. The assessee had derived exempt income from dividends and mutual funds and had made suo motu disallowances. The AO invoked Rule 8D(2)(iii) for administrative expenditure disallowance, which was partially upheld by the CIT(A) with directions to exclude strategic investments and investments not yielding exempt income. The Tribunal noted that a similar issue in the previous assessment year (2009-10) was restored to the AO for fresh computation. Following judicial consistency, the Tribunal restored the issue back to the AO for computation of administrative expenditure disallowance using a proportionate formula, emphasizing that indirect expenditure cannot be strictly apportioned between business activities and deriving exempt income.

3. Allowability of Education Cess and Secondary Higher Education Cess Under Section 40(a)(ii) Read with Section 37(1):
The assessee sought to allow education cess and secondary higher education cess as deductions under Section 40(a)(ii) read with Section 37(1). The Revenue opposed the admission of this additional ground at a belated stage. The Tribunal, referencing the Hon'ble Supreme Court's decision in National Thermal Power Corporation Ltd. and the Tribunal's special bench order in All Cargo Global Logistics Ltd., admitted the additional ground. The Tribunal noted that the relevant statutory provisions and the CBDT’s Circular did not include "Cess". Citing the Hon'ble Rajasthan High Court's judgment in Chembal Fertilizers & Chemicals Ltd. and the Tribunal's decision in ITC Ltd., the Tribunal directed the AO to grant necessary relief to the assessee, allowing the deduction of education cess and secondary higher education cess.

Conclusion:
The Tribunal partly allowed the assessee's appeals, deleting the transfer pricing adjustments, restoring the administrative expenditure disallowance issue for fresh computation, and allowing the deduction of education cess and secondary higher education cess. The order was pronounced in the open court on 17/01/2020.