2024 (12) TMI 486 - AT - Income Tax

TP Adjustment - addition on the basis of order of the TPO on account of difference in interest charged on loan - TPO in order u/s 92CA(3) disregarded the arm s length price of the international transaction of interest charged on loan @ 11% to 30% and instead imputed notional interest rate of 14% allegedly on the basis of interest charged by third parties in the corporate bond market which was deleted by the CIT(A) - HELD THAT - CIT(A) relied on the decision of Cotton Natural (I) Pvt. Ltd. s case 2015 (3) TMI 1031 - DELHI HIGH COURT wherein, upheld application of Libor rate of interest on foreign currency denominated loan, since, the associated enterprises had paid higher rate of interest @ 11 to 13% than the applicable LIBOR rate at 5.4%. As such, the CIT(A) has rightly deleted the adjustment made by the Assessing Officer on basis of order of TPO on account of difference in the interest rate charged on loan deserves to be upheld. Therefore Ground No.2 of Revenue Appeal is untenable. Addition of commission on providing such corporate guarantee on behalf of its associated enterprise - said adjustment made by the AO/TPO was deleted on the ground that the issue of guarantee does not constitute an international transaction covered u/s 92 - reasons given by Ld. CIT(A) was that assessee had entered into international transaction with its associate enterprises, VDPL wherein assessee had 49.07% equity stake - HELD THAT - Hon ble High Court of Rajsthan in Vaibhav Global Limited 2022 (1) TMI 1369 - RAJASTHAN HIGH COURT followed earlier order 2017 (12) TMI 583 - RAJASTHAN HIGH COURT and upheld order of ITAT dealing the Transfer Pricing Adjustment made in relation to Corporate Guarantee. Reliance in placed in this regard on the decision of the Hon ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT s case 2006 (12) TMI 82 - SUPREME COURT has held that where it is obvious that the holding company has deep interest in its subsidiary and the subsidiary has used the funds borrowed for its business, the loan can ordinarily be considered as given to subsidiary as a measure of commercial expediency and accordingly the interest expense on the funds lent should be allowed as a deductible expense to the company. Therefore, ground No.3 of Department appeal is devoid of merit. Addition u/s 14A - sufficiency of own funds - HELD THAT - Since interest free own funds available with assessee exceeded their investments; investments would be presumed to be made out of assessee's own funds. The assessee company has accumulated sufficient reserves as on March, 2007 and the investments were only Rs. 27,49,93,540 as on March 2007, it is presumed that all investment have been made out of the accumulated profit and no borrowed fund have been utilized for investment in shares. Therefore, no disallowance under section 14A Refer Supreme Court decision in case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT . As such ground of Assessee appeal are sustainable. Addition u/s 40(a) on delayed TDS deposit - HELD THAT - On the basis of decision of Calcutta Export Company s case 2018 (5) TMI 356 - SUPREME COURT deletion made by AO u/s 40(a) as TDS having been deposited on specified time deserves to be upheld. Appeal of the assessee is allowed.

Summary

Issues Involved:

1. Deletion of addition on account of difference in interest charged on loan.
2. Deletion of addition on account of services provided in the form of corporate guarantee.
3. Deletion of addition under Section 14A.
4. Applicability of Rule 8D retrospectively.
5. Disallowance under Section 40(a) due to delayed TDS deposit.

Detailed Analysis:

1. Deletion of Addition on Account of Difference in Interest Charged on Loan:

The Department challenged the deletion of an addition of Rs. 42,16,543/- made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) order regarding the difference in interest charged on a loan. The assessee had granted a loan to its associated enterprise, Virtue Drilling Pvt. Ltd. (VDPL), at an interest rate ranging from 11% to 13%, which was considered at arm's length. The TPO, however, imputed a notional interest rate of 14% based on third-party corporate bond market rates. The CIT(A) deleted this adjustment, relying on the Delhi High Court's decision in "CIT vs. M/s Cotton Natural (I) Pvt. Ltd.," which held that interest rates should be determined by the market rate applicable to the currency in which the loan is repaid. The Tribunal upheld the CIT(A)'s decision, finding the TPO's adjustment untenable.

2. Deletion of Addition on Account of Services Provided in the Form of Corporate Guarantee:

The Department also contested the deletion of an addition of Rs. 3,11,70,093/- related to corporate guarantees provided by the assessee for loans availed by VDPL. The TPO had imputed a notional commission on these guarantees, which was deleted by the CIT(A). The Tribunal upheld the CIT(A)'s decision, referencing the Rajasthan High Court's ruling in "PCIT vs. M/s Vaibhav Global Limited," which supported the deletion of transfer pricing adjustments related to corporate guarantees. The Tribunal noted that the guarantees were closely linked to the transaction of capital work in progress and did not impact the Profit and Loss Account.

3. Deletion of Addition under Section 14A:

The Department challenged the deletion of an addition of Rs. 1,07,30,843/- made under Section 14A. The Tribunal noted that Rule 8D, which provides the method for computing disallowance under Section 14A, was not applicable retrospectively. The Supreme Court in "CIT vs. Essar Teleholdings Limited" and "Maxopp Investment Ltd. vs. CIT" held that Rule 8D applies prospectively from the assessment year 2008-09. The Tribunal found that the AO had wrongly applied Rule 8D retrospectively and without establishing a nexus between the expenditure and exempt income.

4. Applicability of Rule 8D Retrospectively:

The Tribunal reiterated that Rule 8D was intended to operate prospectively, as held by the Supreme Court in "CIT vs. Essar Teleholdings Limited" and "Maxopp Investment Ltd. vs. CIT." The AO's application of Rule 8D for the assessment year 2007-08 was therefore incorrect.

5. Disallowance under Section 40(a) Due to Delayed TDS Deposit:

The Department's appeal against the deletion of a disallowance of Rs. 21,156/- made under Section 40(a) was also dismissed. The Tribunal relied on the Supreme Court's decision in "CIT vs. Calcutta Export Company," which supported the deletion of disallowance where TDS was deposited before the due date for filing the return.

Conclusion:

The Tribunal dismissed the Department's appeal and allowed the assessee's appeal, upholding the CIT(A)'s deletions of additions related to interest on loans, corporate guarantees, and disallowance under Section 14A. The Tribunal confirmed that Rule 8D is not applicable retrospectively and supported the deletion of disallowance under Section 40(a) due to timely TDS deposit.