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TMI Blog2017 (4) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed to verify the aforesaid contention of the Ld. A.R that the interest free funds by way of share capital, reserves and surplus and cash accruals over the years, so available with the assessee during the year under consideration, far exceeded the amount of investments in the tax free securities, and in case the said claim is found to be in order, then in light of our aforesaid observations no disallowance with respect to the interest expenditure would be called for in the hands of the assessee under Sec. 14A of the ‘Act’. Disallowance of interest on outstanding advances to subsidiary companies - ALP - Held that:- Principle of commercial expediency would not come into play, and as the assessee had not charged interest on the outstanding receivables from the overseas subsidiaries, the ALP of the same had rightly been determined by the A.O/TPO. Having held so, we now advert to the rate of interest which is liable to be attributed to such transactions entered into by the assessee with its AE’s. We are of the considered view that finding no reason to take a departure from the view taken by the Tribunal in the case of the assessee in the aforesaid preceding years, the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 1. "The Ld. Asst. Commissioner of Income Tax-10(3), Mumbai, hereinafter referred to as the "Assessing Officer", erred in making disallowance of ₹ 94,96,899/- under section 14A of the I-T Act. Your appellant submit that, on the facts and in the circumstances of their case, no such disallowance is called for. Without prejudice to the above, it is submitted that, the disallowance of ₹ 94,96,899/- as made by the Assessing Officer under section 14A is highly excessive and unreasonable. 2. The Assessing Officer erred in making an addition of ₹ 29,83,988/- towards Transfer Pricing adjustments under section 92CA(3) of the I-T Act. Your appellant submit that, on the facts and in the circumstances of their case, no such addition to total income and/or adjustment under section 92CA(3) of the I-T Act is justified. 3. The Assessing Officer erred in disallowing a sum of ₹ 6,46,24,948/- on an estimated basis towards interest in respect of investments in overseas companies. Your appellant submit that, on the facts and in the circumstances of their case, no such disallowance out of interest in respect of overseas investments is called for. Without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own, within a period of 7 days of the receipt of the directions, without waiting for any intimation as regards the same from the A.O. That in the backdrop of the aforesaid facts it was submitted by the Ld. A.R that the A.O failed to effect strict compliance with the directions of the DRP and loosing sight of the fact that the DRP had placed the onus on the A.O to establish the proximity of the direct and the indirect expenditure with the earning of the exempt income, had however proceeded with most arbitrarily and drawn adverse inferences in the hands of the assessee for the reason that the latter had failed to disprove the existence of any proximity between the incurring of the interest expenditure claimed as an expenditure by the assessee in its 'P & Loss a/c' and the earning of the exempt income, by observing as under:- "In respect of the disallowance u/s. 14A, the assessee company has submitted that there is no direct/indirect expenditure directly attributable or which has the proximity with the earning of exempted income. While the contention regarding direct expenditure is found to be based on the facts, the contention regarding indirect expenditure is vague and contradict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance utility and Power Ltd. (2009) 313 ITR 340 (Bom), had held that no disallowance in respect of interest expenditure was called for in the hands of the assessee, by observing as under:- "Coming to the investments in the shares of Dena Bank in financial year 1996-1997 it is observed that the share capital of the company far exceeds the amount of investment in shares as at the end of such financial year. The Hon'ble jurisdictional High Court in the case of CIT v. Reliance Utilities and Power Ltd. [(2009) 313. ITR 340 (Bom)] has held that if there be interest free funds available to the assessee sufficient to meet its investments and at the same time loan has been raised, it can be presumed that the investments were made from interest free funds. While reaching this conclusion the Hon'ble jurisdictional High Court considered the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd Vs. CIT (1997) 224 ITR 627(SC)]. In view of the aforesaid precedent of the Hon'ble jurisdictional High Court, it is apparent that no interest bearing funds can be said to have been deployed by the assessee for the purposes of making investment in the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as averred by the Ld. A.R stands settled and is found to be no more res integra in light of the judgments of the Hon'ble jurisdictional High Court in the case of : CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom) and HDFC Bank Ltd. Vs. DCIT-2(3), Mumbai (CWP no. 1753 of 2016, dated 25.02.2016). Thus in the backdrop of the aforesaid facts read in light of the settled position of law, we herein restore the matter to the file of the A.O, who is directed to verify the aforesaid contention of the Ld. A.R that the interest free funds by way of share capital, reserves and surplus and cash accruals over the years, so available with the assessee during the year under consideration, far exceeded the amount of investments in the tax free securities, and in case the said claim is found to be in order, then in light of our aforesaid observations no disallowance with respect to the interest expenditure would be called for in the hands of the assessee under Sec. 14A of the 'Act'. Before parting, we may also record another plea of the assessee to the effect that the only dividend income received is ₹ 600/- from shares which as submitted by the Ld. A.R had already been transferred, and as such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rides Latina ₹ 46,39,139/- 3. Solara Mexico ₹ 1,03,35,335/- 4. Cellofarm Ltd. ₹ 13,46,162/- Total ₹ 2,91,12,173/- ,and made an addition of ₹ 29,83,988/- in the hands of the assessee. It was submitted by the Ld. A.R that the issue involving identical facts had been adjudicated by the Tribunal in the assessee's own case for A.Y. 2003-04 and A.Y. 2004-05. The Ld. A.R therein averred that in the backdrop of the observations of the Tribunal arrived at in the case of the assessee for A.Y. 2003- 04 and A.Y. 2004-05, wherein the Tribunal after observing that as the assessee had not charged interest on outstanding receivables from the overseas subsidiaries, arms length price of the same had to be determined, had therein concluded that LIBOR rate plus 300 points would be the appropriate interest rate applicable to the international transactions relating to advancement of interest free loan /extended credit facility to the overseas A.Es. That on the other hand the Ld. D.R heavily relied on the order passed by the A.O under Section 143(3)(ii) r.w.s. 144C(13), and therein submitted that the adjustments of ₹ 29,83,988/-made in respect of the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8/- towards interest on notional basis in respect of investments made by the assessee in overseas companies, therein submitted that the said issue was squarely covered in favor of the assessee by the order passed by the Tribunal in the assesseee's own case for A.Y 2003-04 and AY 2004-05. It was submitted by the Ld. A.R that the Tribunal vide its consolidated order passed in the case of the assessee for the aforesaid years had allowed the interest expenditure under Sec.36(1)(iii) in the hands of the assessee, by observing as under:- "We have considered the submissions of the parties and perused the material available on record. It is evident from the orders of the Departmental Authorities, though the assessee had contended that borrowed funds were utilized for acquiring fixed asset and working capital, whereas, interest free funds available through reserve and surplus and internal accruals were utilized for advance to the subsidiary but the Assessing Officer had rejected such claim of the assessee and disallowed proportionate expenditure from the interest cost alleging utilization of borrowed funds towards investment in shares of foreign subsidiary. It has been brought to our noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l location. Therefore, the contention of the assessee, that overseas subsidiaries are acting as the marketing arms of the assessee cannot be disputed or denied. Moreover, it is seen from the record that the assessee has regular business transactions with overseas subsidiary by supplying raw material, etc, for manufacture of goods. Further, the assessee has also sold finished goods to the A.Es. All these factors clearly establish that there is a business/trade relationship between the assessee and overseas subsidiary. That being the case, it cannot be said that investments made are not wholly and exclusively for the purpose of business. Thus, any interest expenditure attributable to such investment / advance to overseas subsidiary would be allowable under section 36(1)(iii) as it is wholly and exclusively for the purpose of business. As held by the Hon'ble Supreme Court in S.A. Builders (supra) and subsequently reiterated in Hero Cycles Ltd. (supra), commercial expediency has to be seen through the position of a prudent businessman and the Assessing Officer cannot step into the shoes of a businessman to find out the necessity or reasonableness of expenditure incurred. Thus, in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as before us, two fold contentions, as under:- (i). That as the investments had been made by the assessee out of commercial expediency and wholly and exclusively for the purposes of its business, thus no disallowance of interest on notional basis is called for in the hands of the assessee. (ii). Alternatively, the investments having been made by the assessee out of its own funds, therefore no disallowance out of interest expenses on a notional basis could justifiably be made in the hands of the assessee. We have given a thoughtful consideration to the facts of the case and are of the considered view that as observed by us hereinabove, the facts involved in the present case are identical to those which were there before the Tribunal in the case of the assessee for A.Y 2003-04 and A.Y 2004-05. We find that the coordinate bench of the Tribunal while disposing of the appeals of the assessee for the aforementioned preceding years vide its consolidated order dated. 20.04.2016, had deleted the disallowance on notional basis of interest in respect of such overseas investments, after appreciating the contentions advanced by the assessee on both the issues which had been averred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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