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TMI Blog2016 (10) TMI 1264X X X X Extracts X X X X X X X X Extracts X X X X ..... . Seshasayee Paper And Boards Ltd. r [ 1984 (4) TMI 17 - MADRAS HIGH COURT] wherein held that the borrowing has not been made exclusively and wholly for the purpose of earning interest, in which case alone it should be taken as income, which should be deducted from the interest receipts. Also in the case of Pradeep Kar Vs. ACIT [ 2009 (6) TMI 331 - KARNATAKA HIGH COURT] wherein held that dividend income being exempt u/s.10(33) and not assessable to tax, assessee was not entitled to deduction for interest in view of Sec.14A of the Act. Accordingly, this ground of the assessee stands dismissed. TP Adjustment - interest received at 6% p.a. from his wholly owned subsidiary India Telecom Holdings Ltd, Mauritius - HELD THAT:- The similar issue came up for consideration before the Mumbai Bench of Tribunal in the case of DCIT (International Taxation) Vs. Development Bank Of Singapore [ 2013 (8) TMI 175 - ITAT MUMBAI] considering the LIBOR as one comparable uncontrolled interest rate, in our considered opinion is a restricted and narrow approach incapable of acceptance. Since the LIBOR is not a rate in itself at which some bank is willing to borrow or lend, but an average of rates at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these appeals of assessee. The first common ground in all these three assessment years is with regard to disallowance u/s.14A of the Act. 3. The brief facts of the issue are that the AO found that the assessee received an amount of ₹ 1,94,75,000/-(For A.Y.2008-09), ₹ 36,68,430/- (For A.Y.2009-10) and ₹ 47,84,162/- (For A.Y.2010- 11) as dividend income which has been claimed as exempt. Further, the AO noted that the assessee company made investments in the form of shares and mutual funds. Though the assessee company was having secured loan on which, it was paying interest, in addition to incurring finance charges and interest paid to others and also incurred other routine expenditure towards establishment and administration, it has not attributed any portion of interest and other expenditures towards earning of exempt income. Hence, the AO invoked the provisions of the section 14A of the Act on the ground that the investment made by it was in the nature of strategic investment and the AO computed the disallowance u/s.14A r.w.Rule 8D. Aggrieved with the draft assessment order of AO, the assessee carried the appeal before the DRP. 3.1 The main co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles have been shown to emerge from section 14A and the decision in Walfort Share and Stock Brokers P. Ltd.: (a) the mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; (b) section 14A(1) ios enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) the principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business; (d) the basic principle of taxation is to tax net income. This principle applies even for the purposes of section 14A and expenses towards non-taxable income must be excluded; (e) once a proximate cause for disallowance is established which is the relationship of the expenditure with income which does not form part of the total income- a disallowance has to be effected. As per the said decision, one of the main principles are that sec. 14A is to prevent claims of deduction of expenditure in relation to income which does not form part of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the total income as per sec.5 the income should be received or deemed to be received or accrued or arise or deemed to arise any income during the year or accrue or arise to him outside India during the year. A n investment which does not give rise to any income deemed to accrue or arise cannot form part of the total income and therefore cannot form income which does not form part of the total income under the Act. Thus once there is no claim of income which does not form part of the total income under the Act, there cannot be any disallowance in relation to an investment which may or may not give rise to any 0income which does not form part of the total income. In the present case it is noticed thatnone of the investments made by the assessee has generated any dividend income which has been claimed by the assessee ato be not to form part of the total income. In the circumstances, as it is noticed that the assessee does not have any income which does not form part of the total income nor has the assessee made such a claim, we are of the view that no disallowance under sec. 14A can be made on the assessee for the relevant assessment year. This view of ours also finds support from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of ₹ 2,03,752/- made by the Assessing Officer was in order. 8. The Gujarat High Court in the case of CIT Vs.Corrtech Energy Pvt.Ltd.(supra) held as under:- We have given our thoughtful consideration to the facts and the decision relied upon by the Id AR. The Hon'ble Punjab Haryana High Court in the case of CIT vs. Winsome Textile Industries Ltd. reported at (2009) 3191TR 204(P H) has held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. In this case also, the assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Hon'ble High Court of Punjab Haryana in the case of CIT vs. Winsome Textile Industries Ltd. (supra), we her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Assessee Company on borrowed funds amounting to ₹ 241.10 lakhs overlooking the fact that the borrowed funds were used by the AssesseeCompany to invest in the Capital of another Partnership Firm and since profits derived by the AssesseeCompany from a Partnership firm were exempt from tax u/s.10(2A) of the Incometax Act, the interest expense related to such tax free profits is to be disallowed u/s.14A of the Income Tax Act? (B) Whether on the facts and in the circumstance of the case and in law the Hon'ble Tribunal was right in holding that the Assessing Officer cannot consider notional interest on deposit received by the AssesseeCompany while arriving at the fair market value u/s.23(1) (a) of the Income-tax Act? 2. In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed would not arise. 10. Similar view has been taken by the Hon be Punjab Haryana High Court in the case of CIT Vs. M/s. Lakhani Marketing Incl. in ITA No.970 of 2008 dated 2.4.2014. The Hon ble High Court while affirming the decisions of CIT(A) as well as the Tribunal in deleting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B.V. reported in (2005) 3 SOT 810 (Mumbai) and the relevant portion of the order of the Bombay Bench of the Tribunal is reproduced below:- 'Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assesseeand the expenditure relating to that part of income is claimed by the assesseeas deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present casethe entire income is found to be taxable, no disallowance can be made under section 14A of the Act.' 10. Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, since the investments in shares are in the years 1995-96, 1998-99 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001 -02. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. 6.1 Turning to the facts of the case, we find that undisputedly the assessee has made the investment in the shares of M/s Kailash Auto Finance Ltd. in earlier years and in the impugned assessment year the assessee has not earned any tax free income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing authority considered the decision in Rajendra Prasad Moody' s case [1978] 115 ITR 519 (SC) relied upon by the learned counsel and held that it is not applicable to the fact situation. The reasons assigned for such a conclusion in the assessment order are extracted hereunder : The decision is with reference to deduction allowable under section 57(iii) of the Income-tax Act. The decision relates to an assessment year where dividend income was taxable in the hands of the assessee. With the introduction of section 10(33) of the Income-tax Act from the assessment year 1998-99 the position of law in regard to taxability of dividends has been changed since such income becomes a part of income which do not form a part of total income of the assessee. The provisions of section 14A introduced by the Finance Act, 2001, with effect from April 1, 1962, retrospectively bars allowing any expenditure in respect of income which is not includible in the total income. Considering this change in the position of law the deci sion of the Supreme Court relied upon by the assessee does not apply to the assessee' s case. 6. Therefore, the dividend income is exempted f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aft assessment order made an adjustment of ₹ 47,85,606/- towards the interest received at 6% p.a. from his wholly owned subsidiary India Telecom Holdings Ltd, Mauritius based on the TPO s Order dated 28-10-2011. The TPO has noted that the assessee advanced a loan of 45 million US dollars at an interest of 6% p.a. to its wholly owned subsidiary. In the TPO documentation, the bench marking of interest was done under CUP method. The comparable transaction taken by the assessee was the interest on loan from Standard Chartered Bank taken by Avis Venture Ltd(its subsidiary in Mauritius). The interest rate payable by Avis Venture Ltd on the aforesaid loan was at the rate of 1.9% + Libor. The assessee itself stated that the average Libor during the financial year 2007-08 was 4.41 h, therefore, the Arms Length Interest for the transaction of the comparable as stated by the assessee itself was 6.3l%(4.4l% + 1.9%). Therefore, the TPO accordingly has made an adjustment at the rate of 0.31%(6.31- 6%) which worked out to ₹ 47,85,606/-. In the written submissions before the DRP, it was interest rate to be adopted in respect of loan granted to the A.E in foreign currency should be benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividual bbalibor rates are the end-product of a calculation based upon submissions from LIBOR contributor banks, which are then averaged under a `trimmed mean' methodology . Libor rates are calculated for ten currencies and 15 borrowing periods ranging from overnight to one year and are published daily at 11.30 a.m. (London time) by Thomson Reuters. Currently 18 banks contribute to the fixing of the US $ Libor. Modus operandi for calculation of LIBOR is extracted as under : Libor is calculated and published by Thomson Reuters on behalf of the British bankers' Association (BBA). It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking the question, At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am? The BBA throws out the highest 4 and lowest 4 responses, and averages the remaining middle 10, yielding a 23 percent trimmed mean. The average is reported at 11:30 a.m. 13. It c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment in respect of guarantee fee. 13.1. The related grounds raised by assessee in ITA No.1039/Mds./2014 is that the DRP,TPO and the AO had erred in holding that the provisions of the section 92 of the Act would be applicable to the transaction of extending guarantee by the appellant to its AE. 13.2 The related grounds raised by Department in ITA No.1074/Mds./2014 is that the DRP erred in directing the TPO to adopt 1% as guarantee commission rate instead of ₹ 8,24,42,500/- at the rate of 3.5% on outstanding guarantee which was adopted by TPO. 13.3. In assessee s C.O, the related ground is that the TPO had erred in not providing any basis for arriving at 3.5% as ALP commission for issuing corporate guarantee for the subject A.Y.2009-10. 13.4. The related grounds raised by Department in ITA No.706/Mds./2015 is that the DRP held that the action of the TPO s action of determining the ALP at ₹ 3,36,50,000/- is not justified and consequently the proposed upward adjustment of ₹ 3,36,50,000/- is deleted as providing of corporate guarantee will not constitute an international transaction for the purpose of determining the ALP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the subsidiary generates synergies for the assessee. It is in the best interest of the group that the assessee has provided corporate guarantees to its AEs. The learned senior counsel relied on the decision of the ITAT, Delhi Bench, rendered in the case of Bharti Airtel Ltd. v. ACIT (43 taxman.com 150), wherein it has held that providing corporate guarantee does not involve any cost to the assessee and it is not an international transaction , even under the definition of the said term as amended by the Finance Act, 2012, as it does not have any bearing on profits, income, losses or assets of the assessee company. 48. As an alternative contention, the learned senior counsel argued that guarantees are provided to the assessee on behalf of AEs as an integral business activity of the assessee relating to supply of general management and distribution of logistic business, worldwide. Therefore, the transaction must be tested under the combined transaction TNMM approach rather than on a stand-alone basis. The ITAT, Pune Bench in the case of Demag Cranes Components (India) (P.) Ltd. v. DCIT, 56 SOT 187(Pune) and ITAT, Delhi Bench in the case of McCann Erikson India ..... X X X X Extracts X X X X X X X X Extracts X X X X
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