9911796707
TMI Blog2016 (2) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be charged even within the range of interest rates charged by the Indian banks generally. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and direct the Assessing Officer to delete this arm’s length price adjustment in respect of interest charged on advances to the subsidiaries. Disallowance under section 14A - Held that:- Having noted the uncontroverted claim of the assessee that borrowed funds are not used in investments yielding the tax exempt in question, we are of the considered view that no part of the interest could be disallowed under rule 8D. The question of allocation of interest could arise only in a situation in which at least a part of borrowed funds are used in investments resulting in tax exempt income. That’s not the case here and none of the authorities even allege that. Accordingly, the disallowance under rule 8D remains restricted to 0.5% of the average value of investments resulting in tax exempt income. The Assessing Officer will, accordingly, recompute the disallowance under section 14A r.w.r. 8 D. - I.T.A. No.: 6321/Del/2012 - - - Dated:- 8-1-2016 - Pramod Kumar AM and Sudhanshu Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is the tested party, the arm s length price of interest will be the prevalent interest rate that could have been earned by the taxpayer by advancing a loan to an unrelated party in India with the same weak financial health as that of the taxpayer s AE . It was also noted that the assessee had given this loan without any security, and that since an unsecured loan like the one advanced by the taxpayer, which is without any guarantee or security, is equivalent to a corporate bond of BB to D category. Based on the average annualised yield information obtained from CRISIL, and an interpolation of this data on the basis of a series of assumptions, the TPO concluded that 17.26% p.a., compounded on monthly basis is a reasonable uncontrolled price for the loan advanced to the subsidiary. Aggrieved by the adjustment proposed on this basis, assessee approached the Dispute Resolution Panel. While the DRP did not approve the action of the TPO in benchmarking the interest on the basis of interest rate on rupee denominated loans, it did not find fault with the findings of the TPPO that the credit rating of the loan given by the assessee to its subsidiary should be considered as BB and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged can be said to more than the arm s length price, and it is an old matter. It is, therefore, worth exploring whether, even within the limitations of somewhat sketchy information available on the facts of this case, the matter can be decided one way or the other rather than sending it back to the TPO for fresh adjudication. 7. While exploring such possibilities, it will be useful to take note of the fact that in the case of Bharti Airtel Limited Vs ACIT [(2014) 161 TTJ 283], and a coordinate bench had deleted a similar ALP adjustment on account of interest amounting to ₹ 10,11,786 wherein the same approach of adopting 400 basis points above the LIBOR as ALP was adopted. While deleting this ALP adjustment, speaking through one of us, the Tribunal had, inter alia, observed as follows: 62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gathered from websites of financial institutions which, according to him, states that, for the foreign currency denominated term loans, the maximum rate of interest is 4% over 6 months LIB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign currency loan, if given to the AE for its credit standing / rating. 66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by underlining, supplied by us now) 8. When the matter was carried in further appeal, this time by the Commissioner, before Hon ble Delhi High Court, Their Lordships were, vide judgment dated 25th February 2015- a copy of which was placed before us by the learned counsel, pleased to approve the reasoning adopted by the Tribunal. In doing so, Their Lordship observed as follows: 8. The IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g interest rate of 2.5% to 5% above the LIBOR/EURIBOR for foreign currency loans is not only devoid of any basis but, as our day to day experience on the bench shows, ex facie incorrect. 11. There are any number of decisions by the coordinate benches which show that the interest rates charged on foreign currency, say US dollars, loans are much lower than the 250 to 500 basis points above the LIBOR having been to be generally applicable rates. For instance, in the cases of Bharti Airtel (supra), which pertains to the assessment years 2007-08 and 2008-09, the comparable cases were taken as 150 basis points above LIBOR and in the range of 140-170 basis points above LIBOR. In contrast to this comparable case, the interest charged in the present case is 247 points above the LIBOR rate. In the case of Siva Industries Holdings Ltd Vs ACIT [(2012) 145 TTJ 497 (Chennai)], dealing with the assessment year 2006-07 and while referring to LIBOR at 4.42, interest rate on advances to subsidiary at 6%, which was thus 158 points above the LIBOR rate, was held to be an arm s length price. In view of these discussions, it cannot be said that the advance to subsidiary, at 247 basis points above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd disallowance for a part of interest in inherent in the said rule. When assessee raised the objection before the SDRP, the DRP held, even after noting that the investments were not made out of borrowed funds, that .the Assessing Officer has not disallowed the entire interest and that he has only made pro-rata disallowance of interest in accordance with the formula set out in rule 8 D . It is in this backdrop that the Assessing Officer proceeded with the disallowance of ₹ 38,35,298. The assessee is aggrieved and is in appeal before us. 15. We have heard the rival contentions, perused the material on record and duly considered the facts of the case, in the light of the applicable legal position. 16 Learned counsel s short submission is that since admittedly the investments are not out of the borrowed funds, no part of the interest expenses can be disallowed under section 14A. In support of this proposition, learned counsel of the assessee relies upon the decision of a coordinate bench of this Tribunal, in the case of ACIT Vs Champion Commercial Co Ltd [(2012) 139 ITD 108 (Kol)] which has held that there is an apparent incongruity in the formula under rule 8D which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read with Section 14A of (1) and (2) of the Act. (v) The following illustration provided by the ITAT in Champion Commercial (supra) demonstrates the incongruity: In the case of A Co. Ltd., total interest expenditure is ₹ 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is ₹ 10,000. Out of the balance ₹ 90,000, the assessee has paid interest of ₹ 80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is not directly attributable to any particular receipt or income is thus only ₹ 10,000. However, in terms of the formula in Rule 8D(2) (ii), allocation of interest which is not directly attributable to any particular income or receipt will be for ₹ 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [i.e. direct interest expenses for tax exempt income] incurred during the previous year . Let us say the assets relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d beyond the scope of its jurisdiction and powers. 17. In view of the above discussions, and having noted the uncontroverted claim of the assessee that borrowed funds are not used in investments yielding the tax exempt in question, we are of the considered view that no part of the interest could be disallowed under rule 8D. The question of allocation of interest could arise only in a situation in which at least a part of borrowed funds are used in investments resulting in tax exempt income. That s not the case here and none of the authorities even allege that. Accordingly, the disallowance under rule 8D remains restricted to 0.5% of the average value of investments resulting in tax exempt income. The Assessing Officer will, accordingly, recompute the disallowance under section 14A r.w.r. 8 D. 18. Ground no. 6 is thus allowed in principle but remitted to the file of the Assessing Officer for recomputation of disallowance. 19. In ground no. 7, the assessee has raised grievance against disallowance of ₹ 3,98,750 on the ground that it is expenditure in the nature of capital expenditure. 20. With the consent of the parties, and in view of the fact that there are no c ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
