2014 (9) TMI 311 - AT - Income Tax

Admission of additional evidence Held that - The documents go to the root of the matter and have to be admitted for arriving at the arm s length price for interest on working capital loan - the assessee was prevented by reasonable cause in submitting these documents before the TPO or the DRP, for the reason that he adopted CUP method by taking LIBOR rate for the purpose of bench marking and In that process, these evidences were not required - The DRP has changed the basis of determining the ALP - While doing so it did not ask the assessee to furnish these documents the additional evidences are to be admitted thus, the matter is to be remitted back to the TPO for fresh adjudication Decided in favour of assessee. Determination of Arm s length interest rate term loan of working capital loan Held that - With regard to ALP of interest on term ban sanctioned by the assessee to the AE, the submissions of the assessee is accepted that the DRP has in arbitrary manner determined 2% mark up on 12.7% interest rate charged by the assessee from its AE - There is no basis for arriving at this 2% - relying upon M/s. Four Soft Ltd. Hyderabad Versus DCIT, Circle 1(3) Hyderabad 2011 (1) TMI 651 - ITAT HYDERABAD Ltd. - for the proposition that LIBOR rate should be the basis of bench marking the interest payments for the purpose of determining the ALP thus, the TPO is directed to determine the ALP de-novo Decided in favour of assessee. Determination of notional interest at 10% - Deemed income on the loans given to wholly owned subsidiary company Held that - Following the decision in Highway Construction Co. (P.) Ltd. v. CIT 1992 (11) TMI 86 - GAUHATI High Court - there was no finding of fact to the effect that actually the loan had been granted to the MD or any other person on interest or that interest had actually been collected by the collection of interest was not reflected in the accounts - The finding of the ITO was that the assesses ought to have collected interest - If the assessee had not bargained for interest, or had not collected interest, the Income tax authorities could not fix a notional interest his due, or as collected by the assessee - There was no provision in the IT Act empowering the income tax authorities to include in the income interest which was not due or not collected. The addition of amounts as notional interest was not justified Decided in favour of assessee. Adhoc disallowance of advertising and sales promotion expenses Held that - Following the decision in Joint Commissioner Of Income-tax, Special Range - 16, Kolkatta. Versus ITC LIMITED 2007 (9) TMI 295 - ITAT CALCUTTA - The auditors have also not pointed out that any such expenses was not related or incidental to the business needs of the assessee - the action of AO in disallowing 10 per cent of such expenditure without bringing any material evidence on record was not justified and the CIT(A) has rightly deleted the addition - the auditors have not pointed out any Instances which can lead to a conclusion that the expenditure was not related to a business or not incidental to business decided in favour of assessee. Whether the return of the Income in Form No.1 and schedule, which lays down the manner of computing the Total Tax payable by the assessee prevails over the substantial provisions of the Act Held that - Following the decision in CIT v. Chemplast Sanmar Ltd. 2009 (4) TMI 61 - MADRAS HIGH COURT - Rule 12 (1) (a) and form 1 cannot go beyond the provisions of the Act - as the Tax has to be computed on the Total income as assessed under the normal provisions in the Income Tax Act and surcharge and education cess has to be added to such Tax, and there after credit of Tax paid u/s 115 JAA has to be granted decided against assessee.

Issues Involved:

1. Determination of arm's length interest rate for loans given to associated enterprises.
2. Addition of notional interest on loans given to a subsidiary.
3. Ad-hoc disallowance of advertising and sales promotion expenses.
4. Disallowance of bad debts written off.
5. Calculation of interest under Section 234B without giving MAT credit.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Interest Rate for Loans Given to Associated Enterprises:

The primary dispute revolved around the transfer pricing adjustment concerning the interest charged by the assessee to its associated enterprise (AE) in Ghana. The assessing officer determined the arm's length price (ALP) of interest at 14.75%, contrary to the actual rates of 12.7% for term loans and 7% for working capital loans charged by the assessee. The assessee utilized the Comparable Uncontrolled Price (CUP) method, referencing the LIBOR rate for benchmarking. The Dispute Resolution Panel (DRP) added a 2% markup to the interest rate on term loans, citing additional costs like processing fees. However, the Tribunal found no basis for the 2% markup and directed a fresh adjudication by the Transfer Pricing Officer (TPO), considering factors like security and economic conditions in Ghana. The Tribunal emphasized that the interest rate should not be less than the cost of funds incurred by the assessee.

2. Addition of Notional Interest on Loans Given to a Subsidiary:

The Tribunal addressed the issue of notional interest added by the assessing officer on funds advanced to the subsidiary, Ganga Infrastructure Ltd. The assessee argued that the funds were advanced for business expediency and later converted into equity. Citing the Hon'ble Guwahati High Court's decision in Highway Construction Co. (P.) Ltd. v. CIT, the Tribunal held that there was no provision in the Income Tax Act to include notional interest as income if the assessee had not bargained for or collected interest. Hence, the addition of notional interest was deleted.

3. Ad-hoc Disallowance of Advertising and Sales Promotion Expenses:

The assessing officer made an ad-hoc disallowance of 10% of advertising and sales promotion expenses, which the assessee contested. The Tribunal referred to the Special Bench decision in Jt. CIT v. ITC Ltd., which stated that ad-hoc disallowances are unjustified without material evidence. Since the auditors did not point out any irregularities, and the assessing officer did not bring any contrary material on record, the Tribunal deleted the ad-hoc disallowance.

4. Disallowance of Bad Debts Written Off:

The Tribunal did not explicitly address the disallowance of bad debts written off in the detailed analysis provided, indicating that this issue might have been resolved in favor of the assessee or deemed insignificant in the overall judgment.

5. Calculation of Interest Under Section 234B Without Giving MAT Credit:

The assessee argued that credit for Minimum Alternate Tax (MAT) under Section 115JAA should be given before calculating surcharge and educational cess. The Tribunal referred to the Hon'ble Madras High Court's decision in CIT v. Chemplast Sanmar Ltd., which held that MAT credit should be given effect before charging interest under Sections 234B and 234C. However, the Tribunal dismissed this ground, stating that the arguments made were not relatable to the ground taken before them.

Conclusion:

The Tribunal allowed the appeals in part, directing fresh adjudication on the arm's length interest rate for loans and deleting the addition of notional interest and ad-hoc disallowance of expenses. The ground concerning the calculation of interest under Section 234B without giving MAT credit was dismissed.

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