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2016 (2) TMI 196 - ITAT DELHI

2016 (2) TMI 196 - ITAT DELHI - TMI - Transfer pricing adjustment - advance to subsidiary - addition on interest charged on advances to the subsidiaries - Held that:- It cannot be said that the advance to subsidiary, at 247 basis points above the LIBOR, is not at an armís length price. In any event, once DRP itself states that the Indian banks are charging 250 basis above LIBOR on similar loans, even though this interest rate could reach upto 400 basis points in some cases, there cannot be any g .....

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orities to contend that this loan should be treated as a high risk loan on which high interest rate should 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 armís length price adjustment in respect of interest charged on advances to the subsidiaries.

Disallowance under section 14A - H .....

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e 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 Srivastava JM For The Appellant : Pawan Kumar and Rohit Tiwari For The Respondent : Swati Joshi ORDER Per Pramod Kumar AM: 1. By way of this appeal, the assessee appellant has challenged correctness .....

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377; 74,20,785 in respect of interest charged by the assessee on loan advanced to its subsidiary abroad; second, whether or not the Assessing Officer was justified in making a disallowance of ₹ 38,35,298 under section 14A of Act, and; finally, whether or not the Assessing Officer was justified in disallowance of ₹ 3,98,750, as capital expenditure, in respect of purchase of FWP (fixed wireless phone) equipment. We will take up these three issues one by one. 3. So far as ALP adjustment .....

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s were used by the said to have been used for giving loans to the step down subsidiaries which, in turn, had purchased equipment with the money so received, that given the fact that it s a one off transaction and that the assessee is not lending money in the regular course of business, it can be stated that there is high level of risk borne by you (i.e. the assessee) in this transaction , and since the assessee has not received any principal repayment so far, the belief that this transaction is .....

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urity, 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 propose .....

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s and, therefore, the DRP was of the view that interest rate of 4% above LIBOR would be reasonable for the loans of BB rating for a period of five years . The TPO was, accordingly, directed to recompute the ALP of interest on loan advanced by the assessee by applying interest rate of 4% above LIBOR. On this basis, the TPO computed the interest at an arm s length price of ₹ 3,26,17,723 as against interest charged by the assessee at ₹ 2,51,96,838, and, make an ALP adjustment of ₹ .....

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2013, a copy of which was placed before us at pages 426 and 427 of the paper-book, clearly evidences this factual position. There is also no dispute that the assessee has advanced the loan to the subsidiary at 7% per annum. Clearly, therefore, as long as the comparable uncontrolled price of the US $ denominated lending is less than 247 points (i.e.700-453) above the LIBOR rate, the transaction entered into by the assessee with its subsidiary cannot be said to be at less than arm s length price. .....

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y, in support of LIBOR+100 basis points as ALP, cannot meet any judicial approval. 6. What is important, however, is that even after this stated ALP of LIBOR + 100 basis points, there is still a cushion of further 147 basis points before the interest 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 o .....

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f 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 LIBOR", and then proceeded to adopt this maximum .....

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tions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted. …………………. …………………. 65. That leaves us with third point of difference between the assessee and the TPO and that .....

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anker and nonbanker is to be kept in mind while arriving at the arm's length CUP rate based on bank rates. 7.11 Adjustment for security Usually, bankers extending loans in foreign currency also insist on sufficient security. In this case, no security is offered by the AE. Keeping in view the financial health of the subsidiary, it may not be in a position to offer security. Thus an adjustment is required to be made for not offering a security. This may be computed as the difference between th .....

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ding 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 re .....

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d counsel, pleased to approve the reasoning adopted by the Tribunal. In doing so, Their Lordship observed as follows: 8. The ITAT has also taken note of the fact that two specific comparables of USD borrowings i.e. L&T and Seri Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping g .....

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which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis. 11. This Court is of the opinion that the reasoning of the ITAT on each of the heads which went into the adjustment of ₹10,11786/- is reasonable and justified and does not call for any interference. (Emphasis, by underlining, supplied by us) 9. That was also a case in which the lender parent company was taken as the tested party, the loan was advanced to a .....

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r basis . When such are the views of Their Lordships, it is futile to suggest that the loans advanced by the parents to subsidiary can indeed be taken as BB to D grade investments which refers to, as noted by the TPO himself at page 28 of the order, investments with serious risks of inadequate safety, investments of high risk, investments of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval. 10. Similarly, the DRP s observation to t .....

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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 LIBO .....

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e any good reason for holding that loan advanced to a subsidiary at 247 basis points above the LIBOR rate is not at an arm s length price. That apart, as noted earlier in this order, once Hon b;le Delhi High Court, observes that the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis , it cannot be open to the transfer pricin .....

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to 5, which pertain to the ALP adjustment in respect of interest charged on interest to sib subsidiaries, are thus allowed in the terms indicated above. 13. The next issue in this appeal, in ground no. 6, is with respect to disallowance of ₹ 38,35,298 under section 14A. 14. So far this disallowance is concerned, the relevant material facts are as follows. During the relevant previous year, the assessee had received the e=tax exempt dividend of ₹ 21,47,983. The uncontroverted stand of .....

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t in the case of Godrej &Boyce Mfg Co Ltd Vs DCIT [( )328 ITR 81 (Bom)], the disallowance has to be made in accordance with the said rule, and 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 accorda .....

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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 is to be read down to ensure that only common interest expenses are to be disallowed under rule 8D, and, accordingly, in a situation in which the investments i .....

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e and not expenditure in relation to any taxable income. This object behind Section 14A has to be kept in view while examining Rule 8D (2) (ii). In any event a rule can neither go beyond or restrict the scope of the statutory provision to which it relates. (iv) Rule 8D (2) states that the expenditure in relation to income which is exempt shall be the aggregate of (i) the expenditure attributable to tax exempt income, (ii) and where there is common expenditure which cannot be attributed to either .....

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e investments. Given that Rule 8 D (2) (ii) is concerned with only common interest expenditure i.e. expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income. This is precisely what the ITAT has pointed out in Champion Commercial (supra). There the ITAT said that by not excluding expenditure directly relatable to taxable income, Rule 8D (2) (ii) .....

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h 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 attri .....

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case, the interest disallowable under Rule 8D(2) (ii) will be ₹ 18,000 whereas entire common interest expenditure will only be ₹ 10,000 . (vi) What the ITAT has done in the present case instead is to follow its earlier decision in Champion Commercial (supra) which in turn followed the decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. (supra). The ITAT did not on its own read down rule 8D (2) (ii). Rather, it went by the stand taken by the Revenue before the Bombay .....

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on behalf of the Revenue an explanation has been provided of the rationale underlying Rule 8D. In the written submissions which have been filed by the Addl. Solicitor General it has been stated, with reference to R.8D(2) (ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest th .....

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