TMI Blog2017 (4) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 disallowance of interest during the year on the similar footing be computed at LIBOR + 300 points. We thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prejudice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act . It was submitted by the Ld. A.R that to facilitate the aforesaid process, the assessee as directed by the DRP was only subjected to the obligation of furnishing the details of direct and indirect expenditure with the A.O, on his 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04, dated 03.08.2012, and therein observed that as the assessee was having substantial interest free funds by way of share capital of the company, therefore relying on the judgment of the Hon ble High Court of Bombay in the case of CIT Vs. Reliance 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 (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is having substantial interest free funds which far exceeds the amount of investments made in tax free securities, therein no disallowance of interest under Sec. 14A would be called for in the hands of the assessee. We further find that the aforesaid issue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DRP proceeded with and carried out disallowances as regards the following debit balances of the foreign subsidiaries:- S. No. Name of Subsidiary/Associate Amount outstanding as on 31.03.2006 1. Infrabra Brazil ₹ 1,27,91,537/- 2. Strides 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 af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus in the backdrop of our aforesaid observations herein direct the A.O to compute the disallowance of notional interest on advances given by the assessee to its overseas subsidiaries at LIBOR + 300 points for the year under consideration. We thus in order to facilitate giving effect to our aforesaid directions, therein restore the aforesaid issue to the file of the A.O, who is directed to recompute the disallowance of interest as directed hereinabove. The Ground of appeal no. 2 so raised by the assessee before us is thus partly allowed. 6. That the ld. A.R taking us to the disallowance of ₹ 6,46,24,948/- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt as referred to above no disallowance in terms of section 36(1)(iii) can be made on account of interest attributable to investment/advance made in overseas subsidiary. Another aspect of the issue is whether the advance/investment made is on account of commercial expediency. It is seen from the material placed on record that the assessee had made investment for establishment of the overseas subsidiary to expand its market in other geographical locations. It is not disputed by the Departmental Authorities that as a result of aspect of overseas subsidiary, there is substantial increase in sales in such geographical 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deed have to incur a cost for the capital so received from its parent company, i.e the assessee, therefore a disallowance on notional basis of interest in respect of such overseas investments made by the assessee was justifiably called for in the hands of the assessee, following which directions of the DRP the A.O had carried out a disallowance of ₹ 6,46,24,948/- in the hands of the assessee. We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material produced before us. We find that the assessee had submitted before the lower authorities, as well 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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