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2015 (3) TMI 1103 - ITAT MUMBAI

2015 (3) TMI 1103 - ITAT MUMBAI - TMI - Disallowance under section 14A - Held that:- We note that the total investment comprising the investment in mutual fund and growth schemes / growth mutual funds as well as investment in foreign subsidiaries. The Assessing Officer itself has excluded the investment in foreign subsidiaries because the dividend from the foreign companies is taxable. However, the growth mutual fund does not yield any dividend/exempt income, therefore, the provisions of section .....

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the item of expenditure debited by the assessee in the P&L Account which can be allocated in relation to earning the exempt income.

TP adjustment in respect of interest on loan given to AE - Held that:- We direct the AO/TPO to adopt LIBOR +2% as arm's length interest in respect of loan provided by the assessee to its AE.

TP adjustment in respect of cost of guarantee given by the assesse to the bankers for obtaining loan by the wholly owned subsidiary/AE of the assessee - H .....

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antee commission charges has to be only in respect of the amount of actual loan availed by the AE during the year. Accordingly, we direct the AO/TPO to compute the adjustment by taking into account actual loan amount availed by the AE during the year in this respect.

Benefit of tolerance range of +/- 5% of the arithmetic mean margin - Held that:- Since the arm's length price is adopted as CUP and single price and not as arithmetic mean, therefore, this additional ground of the assesse .....

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of ₹ 31,68,315/- Revised Ground 1. in disallowing an amount of ₹ 31 ,68,315/- under section 14A of the Act read with Rule 80 of the Income-tax Rule, 1962 in respect of dividend income, disregarding the suo-moto disallowance of ₹ 63,917 offered by the Appellant and without recording satisfaction under section 14A of the Act; PART II - TRANSFER PRICING GROUNDS: Addition of ₹ 67,56,491 on account of adjustment in respect of interest on loan given to Manugraph DGM (hereinafte .....

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onal transactions of the Appellant; Addition of ₹ 3,27,68,010 on account of adjustment in respect of cost of guarantees given to the bankers for wholly owned subsidiary Manugraph DGM: Revised Grounds 5. in making adjustment of ₹ 3,27,68,010 on account of guarantee executed by the Appellant in favour of overseas bankers in respect of loan taken by its AE from the bankers without appreciating the commercial and economic interest of the Appellant in the AE as well as disregarding the fa .....

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es, 1962, in considering the investments made in mutual funds with growth scheme, income from which is chargeable to tax; Adjustment of ₹ 67,56,491/-in respect of interest on loan given to Manugraph DGM (hereinafter referred as 'AE'): 4. Without prejudice to above, in not providing the benefit of the variation of 5 percent from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act, while making, the adjustment to the value of international transactions of the .....

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the year. 8. Without further prejudice to above, in not providing the benefit of the variation of 5 percent from the arithmetic mean as provided in the proviso to Section 92«2) of the Act, while making the adjustment to the value of international transactions of the Appellant. 3. Ground No. 1 is regarding disallowance u/s 14A of the Act. During the year, the assessee company has earned dividend income of ₹ 2,28,52,654/- from the investments in shares and mutual funds and the same ha .....

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8377; 63,917/- on account of interest expenditure on borrowed fund. However the assessee did not consider the disallowance on account of administrative/general expenses as per Rule 8D(2)(iii). The Ld. Authorized Representative has submitted that the provisions of section 14A are not applicable in the case of the assessee because there was no direct expenses incurred in respect of such income. The Assessing Officer had not given any reason with regard to the satisfaction of the same as required u .....

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d out by the executives of the Finance Department along with handling the accounts, banking and finance activity of the company. The assessee does not have separate treasury department to look after the investment portfolio of the company. He has further submitted that the total investments includes the investment made in the mutual funds with growth scheme which does not yield any dividend income. In support of his contention he has relied upon the decision of this Tribunal in the case of Evere .....

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sessee has earned the dividend income from the investment in shares and mutual funds and also given the working of disallowance u/s 14A on account of interest expenditure, therefore, so far as the disallowance u/s 14A is concerned, it is not the case of the assessee that no expenditure on account of interest expenditure has been incurred. Further the activity of the investment is stated to have been looked after by the Finance Department of the assessee along with the accounts and finance, there .....

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ies because the dividend from the foreign companies is taxable. However, the growth mutual fund does not yield any dividend/exempt income, therefore, the provisions of section 14A would not apply on the investment in growth mutual funds. A similar view was taken by the Co-ordinate Bench of this Tribunal in the case of Everest Kanto Cyliners Ltd. (supra) in para 4 as under:- "4. Before us, the Ld. Authorized Representative of the assessee has submitted that up to the A.Y. 2007-08, the Tribun .....

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n worked out by the Assessing Officer on the total investment which included investment made in the mutual funds with growth scheme does not yield any dividend income. Therefore, the Ld. Authorized Representative has submitted that no fresh investment was made for the A.Y. 2009-10 and accordingly no disallowance can be made on account of interest expenditure u/s 14A of the Income Tax Act. As far as the disallowance of administrative expenses is concerned, he has submitted that out of ₹ 92. .....

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ricted to ₹ 1.13 lakhs." 7. As regards the disallowance of administrative expenses in respect of the investment yielding exempt income the computation made under Rule 8D cannot exceed the total allocable expenditure for earning the exempt income debited the P&L Account. Accordingly, the Assessing Officer is directed to reconsider the disallowance u/s 14A by excluding the investment in the Growth mutual funds scheme and further to earmark and identify the item of expenditure debite .....

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crores. The assessee charged interest for six months at LIBOR +2% on the loan advanced to the AE. The TPO did not accept the arm's length interest at LIBOR plus 2% adopted by the assessee and took the average yield rate on BB rated bond and accordingly arrived at arm's length interest rate at of 17.26%. Accordingly, the TPO proposed the adjustment of ₹ 67,56,491/- on account of difference in ALP and interest charged by the assessed from its AE. The CIT(A) has upheld the ALP adopte .....

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urther contended that the activity of providing loan is in the nature of share holder activity. In support of his contention, he has relied upon para 7.9 of the chapter VII of OECD Transfer Guidelines. Alternatively, the Ld. AR has submitted that the assessee charged the interest from AE at LIBOR+2% which is equivalent to 5% which is at arm's length as held by this Tribunal in series of decisions. He has relied upon the following decisions:- (1) Everest Kanto Cylinder Ltd. (ITA No. 7073/Mum/ .....

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bmitted that the loan was given by the assesssee, therefore, the assessee is the tested party and the rate prevailing in the Indian market should be adopted as arm's length interest for the purpose of loan advanced by the assessee to AE. He has relied upon the order of authorities below. 12. We have considered the rival submissions as well as relevant material record. At the outset, we note that this issue of arm's length interest in respect of the loan provided by the assessee to its AE .....

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internationally recognized rate for benchmarking loans denominated in foreign currency. For this purpose, reliance may be placed on the following decision of the coordinate bench :- i) Great Eastern Shipping Co.Ltd (ITA No 397/M/2012) dated 10 January 2014; ii) Mahindra & Mahindra Limited (ITA No 7999/M/2011) dated 8 June 2012; iii) Hinduja Global Solutions Limited (ITA No 254/M/2013) dated 5 June 2013 iv) Aurionpro Solutions Limited (ITA No 7872/M/2011) dated 12 April 2013; v) Aurobindo Pha .....

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, IT Appeal No. 1495 of 2011 (Hyderabad Tribunal) 12. In light of the above decisions, the rate to be used for undertaking an adjustment should be LlBOR and not the average yield rates considered by the learned TPO. The LlBOR rate for March 2008 was 2.6798%. However the assessee has charged 7% from its AE as per the internal CUP available. Thus, the assessee has charged interest to EKC Dubai and EKC China at the rate higher than existing LlBOR rates. Accordingly, the said transaction of providin .....

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as given corporate guarantee/letter of ₹ 59.58 crores to PNC Bank National Association for the working capital facilities to be availed by its wholly owned subsidiary MDGM, USA/AE. The assessee has not reported this transaction in the TP study report as an International transaction. During the course of transfer pricing assessment proceedings, the TPO proposed to bench mark the transaction of corporate guarantee provided by the assessee to its AE by adopting rate of return for risk bearing .....

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giving corporate guarantee to the bank is not an international transaction . In support of his contention he has relied upon the decision of Delhi Benches of this Tribunal in the case of Bharti Airtel Ltd (ITA No 5816/Del/201Z) dated 11 March 2014. Alternatively, the Ld. AR has submitted that the arm's length guaranteed charges may be taken at 0.5% as held by this Tribunal in number of decisions. He has relied upon the following decisions:- (1) Everest Kanto Cylinder Ltd. (ITA No. 7073/Mum2 .....

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Limited (ITA No. 237/Hyd/2014 dated 31 December 2014 (Mumbai Tribunal). 18. On the other hand, the ld. DR has relied upon the orders of authorities below and submitted that the assessee has undertaken the risk by providing the guarantee for the loan obtained by the AE from the bank, therefore, the differential rate adopted by the TPO is justified. 19. Having considered the rival submissions as well as relevant material on record, we agree with the alternative please of the Ld. AR that the arm&# .....

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ion from AE was held to be quite near to 0.6%, where assessee has paid independently to the ICICI bank and charging of guarantee commission @0.5% from its AE was held to be at arm's length. The precise observation of the bench for the assessment year 2007-08 are as under :- "The universal application of rate of 3 percent for guarantee commission cannot be upheld in every case as it is largely dependent upon the terms and conditions, on which loan has been given, risk undertaken, relatio .....

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ng external comparable by the TPO, cannot be sustained in facts of the present case. We also find that in an independent transaction, the assessee has paid 0.6% guarantee commission to IGIGI Bank India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal GUP and comparing the same with the transaction with the AE. The charging of 0.5% guarantee commission from the AE is quite near to 0.6%, where the assessee has paid independently to the IGIG .....

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