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2019 (2) TMI 619 - AT - Income TaxTP adjustment in respect of the interest charged on the loans advanced by the assessee to its AEs - assessee had given loans in USD to its AEs - Held that - ALP of the interest charged on the amounts advanced by the assessee to its AEs, viz. (i) ILFS Maritime Offshore PTE Limited; (ii) IL&FS International PTE Limited; and (iii) Elsamex had rightly been benchmarked by the assessee as per LIBOR and EURIBOR rates, and the same could not have been determined as per the Indian rate as had been so taken by the A.O/TPO. We thus direct the A.O/TPO to determine the ALP of the interest charged by the assessee on the amounts advanced to its AEs viz. (i) ILFS Maritime Offshore PTE Limited; and (ii) IL&FS International PTE Limited by taking the LIBOR rates as the basis. Insofar, the amount advanced by the assessee to its AE i.e. Elsamex, the A.O shall take the EURIBOR rates as the basis for benchmarking the interest charged by the assessee on the loan advanced to the said AE. Grounds of Appeal No. 5 to 11 raised by the assessee are allowed in terms of our aforesaid observations. Addition u/s 14A - revised claim of disallowance u/s 14A that was raised by the assessee on the basis of a revised computation of income - Held that - We are in agreement with the view of the A.O that in terms of the ratio of the decision of the Hon ble Supreme Court in the case of Goetz (India) Ltd. 2006 (3) TMI 75 - SUPREME COURT , the A.O was not vested with any jurisdiction to have allowed the revised claim of disallowance under Sec. 14A that was raised by the assessee on the basis of a revised computation of income in the course of the assessment proceedings. We thus are of the considered view that in the backdrop of the aforesaid settled position of law the assessee remained at a liberty to assail the disallowance made under Sec. 14A, as long as such claim was based on the facts available on record. No disallowance u/s 14A is liable to be made if no exempt income is received or receivable by the assessee during the relevant previous year. On the basis of our aforesaid observations we restore the issue to the file of the A.O for readjudicating the issue pertaining to disallowance under Sec. 14A in the hands of the assessee, in terms of our aforesaid observations. Needless to say, the A.O shall during the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its claim that no disallowance under Sec. 14A was liable to be made in its hands.
Issues Involved:
1. Applicability of Section 14A read with Rule 8D for disallowance of administrative expenses. 2. Adjustment to international transactions under Section 92CA(3) of the Income Tax Act, 1961. 3. Determination of the arm's length price (ALP) for interest rates on loans to associated enterprises (AEs). 4. Validity of disallowance under Section 14A in the absence of exempt income. Detailed Analysis: 1. Applicability of Section 14A read with Rule 8D: The assessee argued that the provisions of Section 14A read with Rule 8D are not applicable and no disallowance should be made under these provisions. The CIT(A) had confirmed the disallowance of administrative expenses amounting to ?1,88,87,845/- under Rule 8D(2)(iii). The assessee contended that no administrative expenses were incurred attributable to earning income not chargeable to tax. The CIT(A) observed that investments in Special Purpose Vehicles (SPVs) were integral to the assessee's operations, and some indirect expenses were relatable to the receipt of exempt income, necessitating disallowance under Rule 8D(2)(iii). 2. Adjustment to International Transactions: The assessee challenged the addition of ?11,04,04,539/- made by way of adjustment to the international transaction as per the order of the Deputy Commissioner of Income Tax, Transfer Pricing. The CIT(A) upheld the TP adjustments, relying on the ITAT, Mumbai's decision in Aurionpro Solutions Ltd. Vs. ACIT, which stated that the tested party under Transfer Pricing guidelines was the assessee, and the interest rate should be determined based on what the assessee could have expected to earn in a similar transaction with an unrelated party. 3. Determination of ALP for Interest Rates: The TPO used the CRISIL credit rating scale to determine the ALP of the interest rate at 15.41%, resulting in a shortfall of ?11,04,04,539/-. The assessee contended that the ALP should be benchmarked based on the rate of interest in the country where the loan is received/consumed, citing the Bombay High Court's decision in Tata Autocomp Systems Ltd. The Tribunal agreed, stating that the ALP should be determined using LIBOR and EURIBOR rates, not Indian rates. The A.O/TPO was directed to benchmark the interest charged based on these international rates. 4. Validity of Disallowance under Section 14A in Absence of Exempt Income: The assessee argued that no disallowance under Section 14A was warranted as no exempt dividend income was earned during the year. The Tribunal found merit in this argument, citing the Delhi High Court's decision in Cheminvest Ltd. Vs. CIT, which held that Section 14A does not apply if no exempt income is received or receivable during the relevant year. The Tribunal directed the A.O to re-adjudicate the issue, considering that no disallowance under Section 14A is warranted in the absence of exempt income. Conclusion: The Tribunal allowed the assessee's appeal regarding the TP adjustments and the disallowance under Section 14A in the absence of exempt income. The revenue's appeal was dismissed. The A.O was directed to re-adjudicate the disallowance under Section 14A, providing the assessee an opportunity to substantiate its claim. The order was pronounced on 19/12/2018.
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