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2017 (9) TMI 801 - AT - Income TaxTPA - arms length price adjustment in respect of interest charged on advances to the subsidiaries and corporate guarantee - Held that - Since as per the facts of the present case as well as in view of the above discussions, we find that the assessee has not charged any interest from subsidiaries and therefore, in the absence of any accrual or arise of income form the lending of the money, there was no jurisdiction for invoking the provision of section 92 of the Act. Therefore, we direct the Assessing Officer to delete this arms length price adjustment of ₹ 4,97,120/- in respect of interest charged on advances to the subsidiaries. Issuance of a corporate guarantee may have an influence on the profit, income, loss and asset of an entity, in whose favour the guarantee is issued, but it has, in our understanding, no impact on the same as long as it is issued without a consideration and as long as the guarantee is not invoked by the beneficiary. To treat this phrase as implying a benefit test, will, in our considered view, stretching the things too far. The benefit test, as we see it, does not find place in the statute as yet. Thus as per the facts of this case, does not constitute a corporate guarantee akin to bank guarantee and, even if it could be treated as a corporate guarantee for benchmarking purposes, the corporate guarantee does not constitute an international transaction under section 92B of the Act. - Decided in favour of assessee. Disallowing expenses u/s 14A by invoking Rule 8D (2) (ii) and (iii) - Held that - As perused the material placed on record as well as the orders passed by revenue authorities. Since as per the facts of the present case as well as in view of the above discussions, we hold that since the total interest interest free funds available with the assessee in the form of share capital and reserves alone more than the investments of the assessee and the investment of the assessee was at negligible percentage of interest free funds with the assessee and while relying upon the judgment cited above as well as bearing in mind the entirety of the facts, we direct the Assessing Officer to delete the disallowance of ₹ 12,28,142/- made u/s 14A read with Rule 8D . Accordingly, this ground raised by the assessee is allowed.
Issues Involved:
1. Transfer Pricing Adjustment 2. Disallowance under Section 14A Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: Ground No. 1: The Addl. Commissioner of Income Tax Range 5(2) added ?8,86,684/- to the income of the assessee company based on Transfer Pricing Adjustment under Section 92CA(3) of the IT Act 1961. This adjustment included ?4,97,120/- for interest on an interest-free advance provided by the assessee to its Associated Enterprises (AEs) and ?3,89,564/- as a guarantee commission for a guarantee given on behalf of the AEs. Facts: The assessee, engaged in manufacturing and exporting cut and polished diamonds, had advanced interest-free loans to its subsidiaries in Dubai and South Africa during the financial years 2005-06 and 2006-07. The Transfer Pricing Officer (TPO) computed the Arm’s Length Price (ALP) at 6.57%, resulting in an adjustment of ?5,90,631/- as notional income. The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to apply LIBOR plus 5% as ALP, leading to an addition of ?4,97,120/- to the assessee's income. Arguments by Assessee: The assessee argued that Section 92(1) of the Income-tax Act, 1961, requires the existence of 'income' arising from an international transaction to invoke ALP determination. The assessee cited several judgments, including E.D. Sassoon & Co. Ltd v CIT and CIT v Arihant Avenue & Credit Ltd., to argue that interest-free loans do not result in any income and thus do not warrant ALP adjustments. The assessee also compared the interest-free advances to interest-free loans received from its directors/shareholders, arguing that no adjustment should be made as no interest was paid or charged. Corporate Guarantee: The AO added ?3,89,564/- as guarantee commission income. The assessee contended that the guarantee was a shareholder activity and not an international transaction. Citing cases like Tega Industries Ltd. v. DCIT and Manugraph India Ltd. v. DCIT, the assessee argued that no ALP adjustment should be made for shareholder activities. Tribunal's Decision: The Tribunal held that in the absence of any 'income' from interest-free loans, the provisions of Section 92 do not apply. The AO was directed to delete the ALP adjustment of ?4,97,120/-. Regarding the corporate guarantee, the Tribunal found that it did not constitute an international transaction under Section 92B and directed the AO to delete the adjustment of ?3,89,564/-. Thus, the ground raised by the assessee was allowed. 2. Disallowance under Section 14A: Ground No. 2: The Addl. CIT disallowed ?13,48,071/- under Section 14A by invoking Rule 8D(2)(ii) and (iii). Facts: The assessee earned tax-free income from investments in mutual funds and shares, mostly made in earlier years. The AO made an adjustment of ?13,48,071/- under Section 14A, applying Rule 8D. The DRP directed the AO to verify the interest-free funds available with the assessee and decide the disallowance accordingly. Arguments by Assessee: The assessee argued that the AO did not record any dissatisfaction with the assessee's claim of no expenditure incurred to earn exempt income. Citing cases like Shapporji Pallonji & Co. Ltd. v. DCIT and Godrej and Boyce Mfg. Co. Ltd., the assessee contended that without such satisfaction, no disallowance under Section 14A could be made. The assessee also highlighted that its interest-free funds exceeded the investments, thus no disallowance on account of interest was justified. Tribunal's Decision: The Tribunal noted that the total interest-free funds available with the assessee were significantly higher than the investments. Relying on judgments like CIT v. HDFC Bank and CIT v. Hero Cycles Ltd., the Tribunal directed the AO to delete the disallowance of ?12,28,142/- made under Section 14A read with Rule 8D. Thus, this ground raised by the assessee was allowed. Conclusion: The appeal filed by the assessee was allowed, with the Tribunal directing the deletion of both the Transfer Pricing adjustments and the disallowance under Section 14A.
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