2016 (8) TMI 163 - HC - Income Tax

Addition on account of Transfer Pricing upward adjustment - pledging of shares fot taking term loan - ITAT deleted the addition - Held that - Assessee was correct in pointing out that though at one stage, the assessee had intended to pledge its shares for guarantee in favour of an AE, however, such transaction did not go through since the RBI permission, which was needed, was not granted. The TPO ventured in the realm of conjectures when he recorded that despite this refusal, the assessee may have gone through with the pledging of shares, but there is nothing on the record to suggest that despite refusal from RBI, assessee pledged the shares. The CIT (Appeals) as well as the Tribunal found that the RBI s letter, placed on record, concerns the same transaction. On both counts thus, there was evidence suggesting that the transaction of assessee pledging its shares fell through for want of RBI permission, no question of law arises Disallowance under Section 14A for interest for earning tax free income - ITAT deleted the addition - Held that - In this respect, the Tribunal noted that the assessee had sufficient interest free funds for investing into tax free investments. The Tribunal, therefore, accepted assessee s version that interest free funds were not diverted for such investment. The Tribunal placed reliance on decision of this Court in case of Commissioner of Income Tax vs. Torrent Power Ltd. 2014 (6) TMI 185 - GUJARAT HIGH COURT . In view of such facts, we do not find any question of law arises.

Summary

Issues:
1. Deletion of addition made on account of Transfer Pricing upward adjustment.
2. Disallowance against the amount made by the Assessing Officer.

Issue 1: Deletion of addition on account of Transfer Pricing upward adjustment:
The appeal raised questions regarding the deletion of an addition of ?3.65 crores made by the Assessing Officer on account of transfer pricing upward adjustment. The Assessing Officer based the addition on the report of the TPO, which highlighted that the assessee's Associated Enterprise (AE) had raised a term loan for which the assessee provided a guarantee by pledging shareholding. The TPO contended that despite RBI's refusal of approval for the share pledge, the guarantee may have proceeded. However, the CIT (Appeals) reversed the decision, stating that the refusal referred to the same transaction, thus no guarantee service was provided. The Tribunal upheld this decision, noting the absence of contrary evidence and no international transaction under Section 92(C) of the Income Tax Act.

Issue 2: Disallowance against the amount made by the Assessing Officer:
The second question related to disallowance under Section 14A of the Act for interest earned on tax-free income. The Tribunal found that the assessee had ample interest-free funds for tax-free investments and accepted that these funds were not diverted for such purposes. Citing the case of Commissioner of Income Tax vs. Torrent Power Ltd., the Tribunal concluded that no question of law arose. Consequently, the Tax appeal was dismissed based on the findings of the CIT (Appeals) and the Tribunal.

In conclusion, the judgment addressed the issues of transfer pricing adjustment and disallowance of interest against tax-free income, with the courts ruling in favor of the assessee based on the evidence presented and legal interpretations applied.