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Income Tax Appellate Tribunal, MUMBAI BENCH “ K”, MUMBAI
ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-55, Mumbai [ In short ‘the CIT(A)’] dated 28/02/2019, for the Assessment Year 2014-15.
The assessee in appeal has assailed Transfer Pricing (TP) adjustment and disallowance made u/s. 14A r.w.r. 8D of the Income Tax Act, 1961 [in short ‘the Act’]. The relevant grounds raised by the assessee in appeal are as under:-
“1.On the facts and in the circumstances of the case and in law, the Hon'ble Commissioner of Income-tax(Appeals) ['CIT(A)'] have erred in confirming the transfer pricing adjustment ofRs.98,08,843/-disregarding the fact that the adjustment was not determined in accordance with provisions of Sections 92C(i) and (2) and consequently not appreciating the fact that none of the conditions set out in Section 92C(3) of the Act are satisfied in the case. The appellant prays that the aforesaid addition confirmed by the Hon'ble CIT(A) be deleted.
2. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the transfer pricing adjustment of Rs. 98,08,843 to the income of the Appellant by rejecting the aggregation approach adopted by the appellant and adopting a transaction-by-transaction benchmarking approach to benchmark Interest on Fixed Deposits(FDs) The appellant prays that the aforesaid addition confirmed by the Hon'ble CIT(A) be deleted.
3. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the Assessing Officer ('AO') in making a disallowance of Rs. 16,80,902 by invoking section 14A of the Income Tax Act, 1961 read with Rule 8D. The appellant prays that the disallowance made by the AO be deleted.”
The brief facts of the case as emanating from records are: The assessee is a wholly owned subsidiary of JP Morgan Services Asia Holdings Ltd. – Mauritius. The assessee is a captive service provider engaged in rendering Back Office Support Services to JP Morgan Group/Associated Enterprises (AEs). During the period relevant to the assessment year under appeal the assessee inter-alia received interest income on fixed deposits (FD) placed with one of its AE JP Morgan Chase Bank NA, Mumbai Branch. The assessee earned interest on fix deposits to the tune of Rs.97.36 crores during the Financial Year 2013-14 relevant to the Assessment Year 2014-15. The assessee applied CUP to benchmark the transaction of interest earned on FDs. The assessee aggregated the transactions of interest earned on FDs being closely linked for the purpose of benchmarking. The Transfer Pricing Officer (TPO) accepted CUP as the most appropriate method but rejected assessee’s approach of aggregation of transaction. Accordingly, TPO analyzed Arms Length rate on transaction by transaction basis and proposed adjustment of Rs.1,23,18,676/- pertaining to interest received on FDs by the assessee.
3.1 On the basis of adjustment proposed by the TPO, the Assessing Officer made addition. Further, the Assessing Officer made disallowance u/s.14A r.w.r. 8D of the Act to the tune of Rs.17,55,902/- as against suo-motu disallowance of Rs.75,000/- made by the assessee. Aggrieved, by the aforesaid additions, the assessee filed appeal before CIT(A). The CIT(A) vide impugned order upheld the findings of TPO /Assessing Officer on the aforesaid issues. Now, the assessee is in second appeal assailing the findings of CIT(A).
Shri Porus Kaka appearing on behalf of the assessee submitted that the assessee has received interest on FDs from its AEs. The fixed deposits have been bifurcated into (i) deposits upto Rs.5 crores; and (ii) deposits amounting to more than Rs.5 crores for the purpose of benchmarking the transaction. The interest on FDs had been received from AEs at the prevalent rate. The ld.Counsel for the assessee referred to the table at page 146 of the paper book wherein details of the FDs above Rs.5.00 crores have been given. The ld.Counsel for the assessee submitted that a perusal of the table would show that the assessee has received interest at a rate comparable to the interest rate offered to the third parties. He pointed that in some of the instances the assessee has received interest higher than the third parties. The main objection of the TPO is against aggregation of the interest for determining arms length rate. The ld.Counsel submitted that the transaction are closely linked, as the FDs are for short period upto three months and therefore, FDs are rolled over. Since, there are large number of FDs it would be difficult to test each and every deposit for arms length rate. Hence, the transactions are clubbed for the purpose of arms length test. The ld.Counsel for the assessee asserted that clubbing of transactions is permissible for determining arms length price of transactions. In support of his contentions he placed reliance on the following decisions:
(i) BarclaysBank PLC vs. Addl. CIT, 100 taxmann.com 476(Mum-Trib); (ii) WNS Global Services Pvt. Ltd. vs. ACIT in A.Y.2006-07 decided on 06/12/2021; (iii)PCIT vs. Mckinsey Knowledge Centre India Pvt. Ltd., Hon'ble’ Delhi High Court in Income Tax Appeal No.146 of 2020 decided on 12/10/2021; and (iv) CIT vs. ESPN Software India Ltd., 399 ITR 554(Del).
4.1 In respect of issue raised in ground No.3 relating to disallowance u/s. 14A r.w.r. 8D of the Act, the ld.Counsel submitted that the assessee had made investment in only one Mutual Fund and that too in the preceding Assessment Years. During the period relevant to assessment year under appeal, the assessee has not made any fresh investments. The assessee had received dividend income of Rs.74,26,905/- during the relevant period. The assessee made suo-motu disallowance of Rs.75,000/- u/s. 14A of the Act. The assessee has not incurred any direct expenditure for earning of the exempt income. The assessee had explained all these facts before the Assessing Officer, however, the Assessing Officer brushed aside the submissions made by assessee. The Assessing Officer rejected assessee’s computation of suo-motu disallowance u/s. 14A merely for the reason that the disallowance has not been computed in accordance with the provisions of Rule 8D. The Assessing Officer before recomputing disallowance has not recorded his dissatisfaction as envisaged u/s. 14A(2) of the Act. The Assessing Officer applied Ruled 8D in a mechanical manner without appreciating the facts and manner of disallowance made by the assessee. The ld.Counsel for the assessee submitted that the disallowance computed by the Assessing Officer is thus, liable to be rejected. To buttress his submissions he placed reliance on the following decisions: (i) Maxopp Investment Ltd. vs. CIT, 402 ITR 640(SC) (ii) PCIT vs. Reliance Capital Assets Management Ltd. 400 ITR 217 (Bom) (iii) PCIT vs. Vedanta Ltd., 261 Taxman 179 (Del) (iv) PCIT vs. Bajaj Finance Ltd., 110 taxamann.com 303 (Bom) (v) PCIT vs. Bombay Stock Exchange Ltd. 113 taxmann.com 303 (Bom)
Au contraire, Shri Satya Pinisetty representing the Department vehemently defended the impugned order and prayed for dismissing appeal of the assessee. The ld. Departmental Representative submitted that no basis has been given for fixing rate of interest. In majority of the transactions reflected in the table at page 146 of the paper book, the interest rate given to the third parties is higher than the interest rate offered to the assessee . Therefore, rate of interest is not at arms length rate as claimed by the assessee. The ld. Departmental Representative further submitted that in so far as clubbing is concerned the judgments, relied on by the assessee are distinguishable. When internal CUP is available there is no need for aggregating transactions. In the case of Barclays Bank (supra), the assessee therein had adopted external CUP, whereas in the present case internal CUP is available, therefore, the ratio laid down in the case of Barclays Bank PLC (supra) does not support the case of assessee. The ld. Departmental Representative placed reliance on the decision of Pune Bench in the case of Saertex India Pvt. Ltd. vs. ACIT in for Assessment Year 2007-08 decided on 29/09/2014. The ld. Departmental Representative further contended that the transactions are not inter-linked as the rate of interest is not linked to the earlier rates. The FDs are rolled over not on same as old rate but at a rate determined by the market at the time of renewal. 5.1 In respect of disallowance u/s. 14A of the Act the ld. Departmental Representative submitted that the Assessing Officer has recorded dissatisfaction in accordance with the provisions of section 14A (2) of the Act. The assessee had made disallowance u/s. 14A of the Act merely on estimate without referring to Rule 8D.
Theld.Counsel for the assessee controverting the arguments made by ld. Departmental Representative submitted that there is no internal CUP available as has been contended by the Revenue. In any case, the aggregate interest is within +/- 3% tolerance band, therefore, no adjustment is warranted.
We have heard rival submissions, perused the material on record and considered the decisions on which rival sides have placed reliance. In ground No.1 &2 of appeal, the assessee has assailed TP adjustment in respect of interest on FDs. It is an undisputed fact that the assessee has placed FDs with only one of its AEs i.e. JP Morgan Chase Bank Ltd. On the said FDs the assessee earned interest income. The assessee applied CUP as the most appropriate method to benchmark the transactions and the same has been accepted by the TPO. The only dispute is with regard to aggregation approach followed by assessee to benchmark the transactions of interest on FDs. It is also an accepted fact that assessee has placed FDs for short term which are rolled over/renewed on the rate prevalent at that time. Both sides have drawn our attention to table at pages 146 to 149 of the paper book, wherein details of FDs viz. the date of maturity, rate of interest, rate of interest paid to third party, etc. are tabulated. The contention of the Revenue is that AE has been giving higher rate of interest to non-AE and comparatively less rate of interest is being offered to the assessee. We have closely examined the table. A perusal of the same reveals that there is marginal difference between the rate of interest as offered to the assessee AE vis-à-vis, non-AE. In some of the cases the interest offered to non-AE is marginally high, at the same time there are certain instances where the interest offered to the assessee -AE is marginally higher than the interest paid to non-AE. By and large the rate of interest except for marginal variance is in the same range. For instance on deposits made on 25/04/2013 the assessee is receiving interest @7.05% as against the interest of 7.22% by the non-AEs. On the deposits made on 24/05/2013 the assessee receives interest @ 6.82% as against the interest paid to non-AE at 6.79%. Similarly, there are other instances where there is marginal variance in the rate of interest offered to the assessee and the non- AEs. 7.1 The aggregation of closely linked transactions is allowed under Transfer Pricing mechanism. Rule 10A(d) defines transaction to include a number of closely linked transactions. Even OECD Transfer Pricing guidelines in para 3.9 and 3.11 also favour clubbing of the transactions where the transactions are closely linked or continuous and cannot be evaluated adequately on separate basis. In the present case there are number of transaction of renewal of FDs between assessee and its single AE. The renewal of FDs is continuance process on the same terms and conditions except with marginal variance in the rate of interest. In the facts of the case, we find no error in benchmarking such transactions by following aggregation method.
The assessee in support of aggregation approach has placed reliance on decision rendered in the case of Barclays Bank PLC vs. Addl.CIT (supra). We find that the Co-ordinate Bench of the Tribunal after following various decisions upheld the findings of CIT(A) in following aggregation approach for benchmarking the transactions, wherein the transactions are closely inter linked. The Revenue has placed reliance on the decision rendered in the case of Saertex India Pvt. Ltd.(supra) We find that the aforesaid case is distinguishable on the facts and hence, does not support the cause of Revenue. In the present case, we observe that while aggregating transactions, all the transactions wherein interest rate offered to the assessee is higher as compared to the non-AE, as well as the transactions where interest offered to the assessee is less than the rate offered to the non-AEs are collectively taken into consideration. Since, the number of transactions is voluminous, aggregation approach is the ideal method to benchmark transaction which are identical in nature and are closely linked. We find merit in ground No.1 & 2 of the appeal, hence, the same are allowed and the findings of CIT(A) on the issue are reversed.
In ground No.3 of appeal, the assessee has assailed disallowance made u/s. 14A r.w.r. 8D of the Act without recording dissatisfaction on the suo-motu disallowance made by the assessee. The assessee has earned dividend income of Rs.74,26,905/- and has suo-motu disallowed Rs.75,000/- u/s. 14A of the Act.
The assessee purportedly computed disallowance after apportioning certain operating and administrative cost for earning of the dividend income based on estimated time spent by the persons managing mutual funds. The assessee has not made any fresh investment in mutual funds during the period relevant to assessment year under appeal. Mutual Funds were purchased by the assessee in preceding Assessment Years. The provisions of sub-section (2) to section 14A of the Act envisage that the Assessing Officer shall determine the amount of expenditure incurred in relation to earning of exempt income, in accordance with the method prescribed u/r.8D 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 the present case we find that the Assessing Officer in para 5.2 of the assessment order at the outset rejected assessee’s suo-motu disallowance of Rs.75,000/- for the reasons that the disallowance has not been worked out as per section 14A r.w.r 8D. The Assessing Officer has held suo-motu disallowance made by assessee being arbitrary. There after, the Assessing Officer has made generic comments on the requirements of substantial market research, analysis of market trends, appropriate time for sale of share , etc. of making the investments. In so far as disallowance made by the assessee having regard to the accounts of the assessee, the Assessing Officer is silent. Therefore, we are of considered view that the dissatisfaction recorded by the Assessing Officer in respect of assessee’s suo -motu disallowance u/s. 14A of the Act falls short of the legal requirement as contemplated in sub-section(2) to section 14A of the Act. Although, there is no prescribed format for recording dissatisfaction u/s. 14A(2) of the Act, however, dissatisfaction recorded by the Assessing Officer in whatsoever manner has to meet the mandate of sub-section (2) to section 14A of the Act.
Thus, in view of above we find merit in ground No.3 of the appeal, ergo, the same is allowed. 10. In the result, appeal by the assessee is allowed.
Order pronounced in the open court on Thursday the 05th day of May, 2022.