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TMI Blog2015 (6) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... 140 - ITAT, MUMBAI ) also supports this issue. Respectfully following the above decisions we direct the A.O. to make arm’s length adjustment by applying the LIBOR rate of interest. From the record we found that part of loan was subsequently converted into equity. To the extent of loan converted into equity, no transfer pricing adjustment is required with effect to the date of such conversion, in view of decision of Hon’ble jurisdictional High Court in the case of Vodafone,[2014 (10) TMI 278 - BOMBAY HIGH COURT]. We direct accordingly. Disallowance of interest on amounts spent on acquiring premises at Bharat Diamond Bourse - BDB - Held that:- From the record we also found that the assessee had huge amount of interest free funds at its disposal as well and that it is normally rational that owned funds in the form of accumulated undistributed profits are utilized for acquisition of capital assets - particularly an asset which has been under construction for more than a decade. The total non-interest bearing funds available with the assessee as of 31st March 2006 are ₹ 141.56 crores and after excluding the current year's profit, the same are ₹ 123.19 crores. The expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided by the appellant. 1.4 without prejudice, the rate of interest used by the A 0 is excessive and needs to be substantially reduced. 2.1 in disallowance of interest assumed to be expended on expansion of the business by investment in property at Bharat Diamond Bourse which was a business asset. 2.2 in not appreciating that no funds had been specifically borrowed for the purpose of making this investment and that hence nothing was disallowable on this account. 2.3 in not appreciating that the appellant had adequate non interest bearing funds available with it and that hence no disallowance of interest was called for. 3.1 in disallowing interest paid to the extent that sums of money were advanced to subsidiary on an interest free basis. 3.2 in not appreciating that the assessee has shown commercial expediency for the said loans. 3.3 in assuming that interest free advance given to subsidiary was given only from the borrowed funds of the company as a whole and in disallowing proportionate interest expense; 4. Rival contentions have been heard and record perused. Facts in brief are that the assessee company is engaged in the business of manufacture of cut an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions applicable only when something has been charged to determine whether the income is under reported. Since there is no charge at all in this case, the transaction is on capital account and cannot be subject matter of Transfer Pricing and for this purpose relied on Bombay HC - Vodafone 386 ITR 1. As per the ld. A.R. the need to charge interest would arise only in a situation where there is a cost to the assessee - for e.g. if a guarantee is given on the back of a guarantee taken by the assessee, the latter has a cost and that has to be in turn at least recovered. In the present case, there is no specific finding that loans are taken for onward lending. 7. The ld. A.R. also invited our attention to the fact that as against aggregate loans to the 3 parties of ₹ 7.50 crores, interest free funds in the form of reserve and surplus at beginning of the year was ₹ 103.16 crores warranting no addition/disallowance on account of interest. For this purpose, reliance was placed on the decision of Hon ble Bombay High Court in the case of Reliance Utilities Ltd. 313 ITR 340. Since there is no cost to the assessee of the funds lent and hence the need to charge an ALP for these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uge political or economic risk. 10. The ld. A.R. relied on the decision of Hon ble jurisdictional High Court in the case of CIT vs. Tata Autocomp Systems Ltd., (IT Appeal No. 1320 of 2012 dated 3-2-2015) wherein it was held that quantum of addition on account of interest is to be made in case of interest free loans given to wholly owned subsidiary as per the rate of interest to be determined on Euribor rate of interest i.e. rates prevailing in Europe. 11. On the other hand, it was argued by the ld. D.R. that giving loans to the Associated Enterprises comes under the definition of international transactions, therefore, non-charging of interest requires adjustment for arriving at ALP in respect of such advances. The ld. D.R. relied on the decision of Tata Autocomp Systems Ltd. vs. ACIT, [2012] 21 Taxmann.com 6 (Mumbai) wherein it was held that transaction of granting interest-free loan by assessee to its AE comes within ambit of international transaction and, thus, such a transaction can be subject-matter of test of arm s length price u/s 92. As per the ld. D.R., while determining arm s length price in international transaction of advancing interest free loans to A.E., fact of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond manufacturing and trading companies in Mumbai. For this purpose, the assessee had made advances to M/s Bharat Diamond Bourse amounting ₹ 5,77,27,OOO/- out of its owned funds i.e. assessee has not borrowed money specifically for the said project and aggregate amount of advances was shown under Capital work-in-progress. While disallowing the interest, the A.O. wrongly observed that the assessee has capitalized interest in its books and was claiming this capitalized interest as a revenue for tax purposes. We find that there is no capitalisation of interest as mentioned by the A O and the assessee has not identified any interest as specifically pertaining to the acquisition of the said asset for accounting purposes and which is being claimed as a deductible for tax purposes. We find that the said Bourse is not being constructed specifically for the assessee and the assessee is only required to pay installments towards cost as and when called for. The process of setting up the Bourse has been going on for a long period of time. The assessee has not borrowed any money specifically for the payment of these installments and hence since there is no capital borrowed for the said ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owned subsidiary named Aditi Diaimpex Trading and Manufacturing Co. Ltd. The assessee had adequate interest free funds at its disposal represented by accumulated profits over the years and no amount was borrowed specifically for the purpose of giving the said loans. From the record we found that Aditi Diaimpex is 100% owned subsidiary of the assessee and is engaged in the same business as the assessee viz. manufacturing of jewellery for exports. Assessee also has trade transactions with it - it purchases jewellery from them to fill orders on hand if such jewellery is not available as a part of its stock. Unused materials are also sold/purchased from the subsidiary. Hence keeping in mind the nature of ownership, the nature of the subsidiary business and the existence of transactions between the assessee and the subsidiary, the loan was given only out of commercial expediency and not otherwise. 18. We have verified the Balance Sheet of the assessee which shows the magnitude of interest free funds available to the assessee. Since the assessee had sufficient interest free funds at its disposal, it is to be assumed that since the assessee is a rational businessman, these loans have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its sister concern more than the price prevailing in the open market for similar goods. Accordingly we do not find any merit in the action of lower authorities, therefore, we delete the disallowance so made by the A.O. Furthermore, similar issue has been decided in favour of the assessee by the Tribunal in assessee s own case in the assessment years 2002-03 to 2005-07 vide order dated 24-09-2014. As the facts and circumstances of the case during the year under consideration are same, respectfully following the decision of Tribunal in assessee s own case, we allow this ground raised by the assessee. 22. The assessee also aggrieved for the disallowance arising out of sales to subsidiary company in both the years under consideration. 23. Facts in brief are that the assessee has sold certain materials aggregating to ₹ 353.17 lakhs to Aditi Diaimpex Trading and Manufacturing Limited, a Wholly Owned subsidiary. These represent unused raw materials and the assessee has made no profit on sale of these diamonds to its subsidiary. Applying the provisions of section 40A(2), the A.O. made addition in respect of sales made to its subsidiary companies equivalent to 2% of the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X
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