2017 (11) TMI 639 - AT - Income Tax

Addition on account of the International Transaction in the nature of interest on loans granted to Associated Enterprises - contentions of the assessee about non-chargeability of interest is that such AE was running into losses, thereby necessitated the assessee in the capacity of a parent to pump funds - Held that - On a perusal of the financials of the Multination Textile Group Limited, Ld. CIT (A) found that the claim of the assessee was factually incorrect, inasmuch as the dividend payment from AE at 10,20,000 USD is more than the profit earned at 9,78,780 USD meaning thereby that there is no correlation between the profit and the amount of dividend received. Further Ld. TPO rejected this contention of the assessee by placing reliance on the decisions of a coordinate Bench of this Tribunal in Perot Systems TSI (India) Ltd. vs. DCIT (2009 (10) TMI 638 - ITAT DELHI) wherein the contention of the assessee that they have not earned any interest and it was commercially expedite to earn interest free loans was rejected holding that international transactions can not be equated with ordinary business transactions. Thus having regard to the facts and circumstances of the case, we do not find any merit in the argument that no ALP interest could be added on account of the loan advanced to Multination Textile Group Limited, Mauritius. Rate of interest - according to the assessee 6% offered in respect of House of Pearl Fashions Limited, USA is proper, whereas in respect of Multination Textile Group Limited a nominal interest at LIBOR plus 200 basic points may be charged - Held that - There is an inherent inconsistency in the view taken by the TPO because, if at all the ALP interest in so far as the assessee is concerned is the interest rate expected by an Indian lender, then irrespective of the fact of Nor Pearl Knitweard Limited, Bangladesh obtained loan at Bangladesh at any rate less than this expected rate, he should not have accepted. The tested party in the case of Nor Pearl Knitwear Limited, Bangladesh and in the case of other two concerns is the assessee only. In respect of the same tested party the TPO cannot adopt two different yardsticks. Shifting of the testing parties in the same breath is not permissible. We, therefore, in this set of circumstances agree with the Ld. AR that since loans or advances in case of the two other concerns also in foreign currency, and all the three persons stand in the same footing, as such, the same treatment has to be given to them equally. With this view of the matter, we direct the AO to re-compute the ALP of the interest at 6% in respect of House of Pearl Fashions Limited, USA AND Multination Textile Group Limited, Maritius also. These grounds of appeal are allowed in part accordingly. Addition made by making disallowance u/s 14A read with Rule 8D - Held that - In view of this establish principle of law laid down by the Hon ble Jurisdictional High Court in a number of cases including HT Media (2017 (8) TMI 962 - DELHI HIGH COURT) and Godrej & Boyce Manufacturing Company Limited vs. DCIT (2017 (5) TMI 403 - SUPREME COURT OF INDIA), we find that the enhancement of the disallowance made by the AO by invoking Section 14A read with Rule 8D of the Rules is bad and cannot be sustained. We, therefore, direct the AO to delete the same.

Summary

Issues:
1. Addition of interest on loans granted to Associated Enterprises.
2. Disallowance u/s 14A read with Rule 8D of the I.T. Rules.

Issue 1: Addition of interest on loans granted to Associated Enterprises:
The appeal challenged the addition of ?87,23,089 made on account of interest on loans granted to Associated Enterprises (AEs) of the assessee. The assessee extended loans to three AEs in dollar denomination and made investments in quoted shares. The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of the interest transaction with the AEs at ?87,23,089. The Dispute Resolution Panel (DRP) approved the AO's decision, leading to the addition. The assessee argued that the loans were extended for business needs, and interest was not charged to a subsidiary running into losses. However, the CIT (A) and TPO rejected these arguments based on precedents and transfer pricing principles. The tribunal upheld the addition, stating that the ALP interest could be added due to the loans advanced to the subsidiary.

Issue 2: Disallowance u/s 14A read with Rule 8D of the I.T. Rules:
The AO made a disallowance u/s 14A read with Rule 8D without verifying the sufficiency of the suo moto disallowance made by the assessee. The AO applied Rule 8D without recording satisfaction regarding the correctness of the assessee's disallowance. The tribunal, citing legal precedents, including the decision in HT Media Limited vs. PCIT, held that any application of Section 14A read with Rule 8D without the AO's satisfaction on the disallowance's correctness is invalid. Relying on the Godrej & Boyce Manufacturing Company Limited vs. DCIT case, the tribunal directed the AO to delete the disallowance made under Section 14A read with Rule 8D. Consequently, the appeal of the assessee was allowed in part.

In conclusion, the tribunal upheld the addition of interest on loans granted to Associated Enterprises but directed the deletion of the disallowance made under Section 14A read with Rule 8D of the I.T. Rules. The judgment emphasized transfer pricing principles and legal precedents in determining the Arm's Length Price and disallowances under the Income Tax Act, 1961.