2015 (5) TMI 642 - AT - Income Tax

Disallowance u/s 14A - Held that - It is clear that during the year under consideration, the assessee has not made any fresh investment except a sum of ₹ 13 Lakh in the mutual fund scheme. Out of the total investment of ₹ 92.7 crores, the investment of ₹ 90.52 crores is in the subsidiary and further the investment made in the subsidiaries pertains to the foreign subsidiaries of the assessee to the extent of ₹ 90.43 crores. There is a reduction of overall investment during the year under consideration. Up to the A.Y. 2007-08, the Tribunal has given the finding that the assessee s own fund was sufficient for making the investment and, therefore, no disallowance was called for on account of interest expenditure u/s 14A. There is net reduction in the investment during the year to the extent of ₹ 10 crores despite the fresh investment of ₹ 13 lakhs. Since there is no increase in investment during the year under consideration and even for the A.Y. 2008-09, therefore, in view of the earlier order of this Tribunal for the A.Y. 2006-07 and 2007-08, no disallowance is called for u/s 14A on account of interest expenditure. - Decided in favour of assessee. TP adjustment on guarantee commission - Held that - Following the earlier order of this Tribunal and also considering the internal CUP being the guarantee commission paid by the assessee to the ICICI Bank for obtaining guarantee, we hold that the arm s length guarantee commission in respect of all three transactions of guarantee to its AE at Dubai, China and USA shall be taken at 0.5%. Accordingly, the Assessing Officer is directed to compute the adjustment on account of guarantee commission by taking the arm s length guarantee commission at 0.5%. - Decided partly in favour of assessee. TP adjustment in respect of loan advanced to EKC Dubai and EKC China - Held that - Following the earlier order of this Tribunal in assessee s own case, we hold that the arm s length rate in respect of loan provided to the AE should be LIBOR 2%. Accordingly, the Assessing Officer is directed to recomputed the arm s length rate in respect of the loan transaction to each AE of the assessee by clubbing all the loan transactions of each AE and then compare the interest charged by the assessee with arm s length rate at LIBOR 2%. It appears that as regards the transactions of loan to its AE at China, the said transaction is at arm s length as the as has charged the interest at 7%, therefore, only with respect to the transaction of loan to AE at Dubai are required to be re-computed for the purpose of TP adjustment. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Transfer Pricing (TP) adjustment on guarantee commission.
3. TP adjustment in respect of loans advanced to Associate Enterprises (AEs).

Detailed Analysis:

1. Disallowance under Section 14A:

The assessee earned dividend income of Rs. 2,42,038, which was claimed as exempt under Section 10(33) of the Income Tax Act. The Assessing Officer (AO) requested the working of disallowance under Section 14A, and the assessee submitted a disallowance of Rs. 3,10,601 based on a previous Tribunal decision. However, the AO applied Rule 8D and made a disallowance of Rs. 6,93,102, which included Rs. 4,34,802 for interest expenditure and Rs. 2,58,300 for administrative expenses. The Dispute Resolution Panel (DRP) upheld this disallowance.

The assessee argued that no fresh investment was made during the Assessment Year (AY) 2009-10, and therefore, no disallowance should be made for interest expenditure. For administrative expenses, the assessee contended that most investments were in foreign subsidiaries, which should not attract disallowance under Section 14A. The Tribunal noted that there was no increase in investment during the year and that the majority of investments were in foreign subsidiaries, whose dividend income is taxable. Therefore, the provisions of Section 14A were not applicable to these investments. The Tribunal directed the AO to recompute the disallowance by excluding the investments in foreign subsidiaries.

2. TP Adjustment on Guarantee Commission:

The assessee provided guarantees to its AEs, EKC Dubai and EKC China, and did not charge a guarantee commission to EKC China due to regulatory prohibitions. The AO determined an arm's length guarantee commission and made an adjustment of Rs. 10,57,40,708. The DRP reduced this adjustment and directed the AO to restrict it to Rs. 7,30,80,525.

The assessee argued that it had benchmarked its guarantee commission using the Comparable Uncontrolled Price (CUP) method, citing a similar financial arrangement with YES Bank at 0.5% per annum. The Tribunal, following its earlier decisions, held that the arm's length guarantee commission for all three transactions should be 0.5%. The AO was directed to compute the adjustment accordingly.

3. TP Adjustment in Respect of Loans Advanced to AEs:

The assessee provided loans to its AEs in Dubai and China, charging interest rates of 7% and LIBOR + 1%. The AO determined the arm's length interest rate at 10.25% and made respective additions. The DRP upheld this adjustment.

The assessee contended that the loans were granted from zero-coupon foreign currency convertible bonds, which were interest-free funds. The Tribunal noted that for AY 2008-09, it had held that the arm's length rate should be LIBOR + 2%. The AO was directed to recompute the arm's length rate for the loans by comparing the interest charged with LIBOR + 2%. The Tribunal found that the interest charged to EKC China at 7% was at arm's length, and only the loans to EKC Dubai required recomputation.

Conclusion:

The Tribunal partially allowed the assessee's appeal and dismissed the revenue's appeal. The AO was directed to recompute the disallowances and adjustments as per the Tribunal's directions. The judgment emphasized the application of relevant legal provisions and previous Tribunal decisions in determining the arm's length price and disallowances under Section 14A.