2021 (12) TMI 1248 - AT - Income Tax

Addition u/s 36(1)(iii) - disallowance of interest expenses mainly on the basis that total available interest free funds in the hands of the Assessee as on 31st March, 2015 were less as the Assessee has invested in non-business assets - Assessee do not have available interest-free funds and/or not to the extent of investment then the addition can be made under Section 36(1)(iii) of the Act on account of disallowance of interest expenses - HELD THAT - Hon ble Apex Court in S. A. Builders Ltd. Case 2006 (12) TMI 82 - SUPREME COURT dealt with the identical issue in broader terms and observed that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the Assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. Coming to the contention of the Ld. D R that the Assessee was not having sufficient interest-free funds available to the extent of investment and therefore the addition made under Section 36(1)(iii) of the Act on account of disallowance of interest expenses is liable to be sustained. We find the Hon ble Apex Court in S. A. Builders Ltd. Case (supra) itself dealt with deduction of interest on borrowed funds given to subsidiary company and held that where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the Assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. Even Hon ble Madras High Court in CIT Vs. Spencers Co. Ltd. Co. Ltd. 2014 (2) TMI 237 - MADRAS HIGH COURT and in CIT Vs. Phil Corporation Ltd. Anr. 2011 (6) TMI 187 - BOMBAY HIGH COURT has allowed deduction of interest u/s 36(1)(iii) of the Act, paid on borrowings and overdraft which were utilized for investment in subsidiary company. Hence in view of the aforesaid judgments of the Hon ble High Courts also,the contention of the Ld. DR is untenable. - Decided against revenue. TP Adjustment on account of providing corporate guarantee by the Assessee to its overseas associated enterprises companies - International Transaction or not - treating the interest rate of 1.3% based on average fees charged by State Bank of India - HELD THAT - In identical issue in hand in the case of Pr. CIT Vs. M/s. Redington (India) Ltd. 2020 (12) TMI 516 - MADRAS HIGH COURT and has clearly held that the corporate guarantee is covered within the definition of International Transaction . The Hon ble High Court in the said case has also considered the Explanation introduced in Section 92B of the Act with effect from 1st April, 2002 by the Finance Act (2012) wherein it is clarified that the expression International Transaction shall include guarantee and held the same as retrospective.As per judgment of the Hon ble Madras High Court, the addition can be made qua corporate and bank guarantee . Considering the undisputed fact to the effect that Hon ble Bombay and Madras high Court in the cases referred above held the Corporate Guarantee as International Transaction , we do not find any reason to interfere with the findings of the Ld. Commissioner for partly sustaining the addition under consideration and therefore the same is upheld. Consequently the Appeal of the Assessee is dismissed.

Summary

Issues involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961 for assessment year 2015-16.
2. Transfer Pricing Adjustment on account of providing corporate guarantee to overseas associated enterprises companies.

Issue 1: Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961 for assessment year 2015-16:

The dispute revolved around the Assessing Officer's addition of ?2,18,26,743 under Section 36(1)(iii) of the Act due to disallowance of interest expenses. The basis for this addition was the perceived lack of interest-free funds compared to investments in nonbusiness assets. The Commissioner, however, deleted this addition, prompting the Revenue to appeal. The Department argued that disallowance is justified when interest-free funds are insufficient for investments. On the contrary, the Assessee supported the Commissioner's decision, citing various legal precedents. The Commissioner, after considering arguments from both sides, relied on the principle established by the Supreme Court in S. A. Builders Ltd. Case, emphasizing that the Authorities should view matters from a prudent businessman's perspective. The Commissioner, in line with judicial discipline, directed the deletion of the addition, citing the nexus between investments and business objectives.

Issue 2: Transfer Pricing Adjustment on account of providing corporate guarantee to overseas associated enterprises companies:

The Assessing Officer added ?73,69,830 for Transfer Pricing Adjustment concerning corporate guarantees to overseas associated enterprises. The Assessee challenged this before the Commissioner, arguing that corporate guarantee does not constitute an international transaction under Section 92 of the Act. Despite the Assessee's contention, the Commissioner, guided by the Bombay High Court's judgment in CIT Vs. Everest Kanto Cylinder Ltd., partially upheld the addition, reducing the interest rate to 0.5%. The Assessee appealed this decision but acknowledged the Madras High Court's ruling in Pr. CIT Vs. M/s. Redington (India) Ltd., which classified corporate guarantees as international transactions. The Madras High Court's interpretation of 'International Transaction' to include guarantees was considered retrospective. Given the consistent legal stance on corporate guarantees as international transactions by the Bombay and Madras High Courts, the Commissioner's decision to sustain the partial addition was upheld. Consequently, the Assessee's appeal was dismissed, leading to the dismissal of both cross appeals by the Revenue Department and the Assessee.

This judgment by the Appellate Tribunal ITAT DELHI, delivered by SHRI R. K. PANDA, ACCOUNTANT MEMBER, and SHRI N. K. CHOUDHRY, JUDICIAL MEMBER, provides a detailed analysis of the issues surrounding disallowance of interest expenses and transfer pricing adjustments, offering insights into legal interpretations and precedents governing such matters under the Income Tax Act, 1961.